Corporate Governance Debate Research Articles

Guest editorial: Historical perspectives on corporate governance debate and introduction to the special issue on corporate governance and sustainability

PurposeThe purpose of this study is the development of an integrated framework between corporate governance and sustainability, based on the advancements within the field of contemporary governance leading to a renewed focus on sustainable development.Design/methodology/approachIn this paper, the authors provide succinct summary of the evolution of corporate governance over the past century from an historical perspective: starting with the early work of Berle and Means – which focuses on the legal separation of ownership and control – and the subsequent challenges within this framework – all the way to analyzing the major impact of Nobel Laureate Milton Freidman’s work on corporate goals and governance. The authors' approach identifies the key transformation of corporate goals and corporate goals' paradigm shift in progression and focus within corporate houses over time, including how these are approached in the present day by integrating the concept of primacy of all stakeholders. The authors relate this to contemporary developments in the Business Round table and the United Nations’ adoption of the 2030 Agenda for Sustainable Development Goals. The authors also identify specific corporate governance themes within global economic forums, as well as the critical interlinkages needed by all global corporations to achieve sustainable growth.FindingsThe primary objectives of the corporate governance themes adopted by global economic forums this decade are in the best interest of all stakeholders – including customers, employees, regulators, local communities, and shareholders. This applies both during periods of relative stability and during crises. A review of the good corporate governance relies on internal mechanisms such as the structure of a board and incentives for management, and on external mechanisms such as institutions that demand accountability. All these mechanisms are important as the mechanisms form the core of how (and for whom) corporations generate value. Ultimately, optimal corporate governance can help deliver both economic gains and societies that value all.Practical implicationsWith globalization, the public has higher expectations from corporate CEOs than in the past. Corporate leaders have the ultimate responsibility for creating an organizational culture that supports trust and ensures that corporate leaders' management and employees embody and act on the stated values and mission of their organization. Areas of increased social expectations that require the attention of boards of directors include diversity, transparency, equal opportunity, and eliminating all forms of harassment.Originality/valueThis study identifies a viable agenda for global corporations based on concurrent developments to achieve sustainable development and growth. The recent related research work is also presented.

Director tenure and contribution to board task performance: A time and contingency perspective

Director tenure is a topic of great interest in the corporate governance debate. Researchers try to assess the effects of tenure on director contribution, board effectiveness and firm performance. Regulators, corporations, and institutional investors advocate for term limits for outside directors to reduce the risks of impaired governance. Despite the burgeoning interest, there is lack of consensus on the mechanisms shaping directors' contributions over time. We argue that next to the ‘loss of independence’ and ‘knowledge acquisition’ hypotheses, respectively predicting a negative and positive effect of tenure on task performance, socio-cognitive and behavioral approaches elucidate the way in which directors' contributions rise and decline with time. Using a multiple case study approach, we document wide variability in directors' contributions at similar levels of tenure. We find this is due to a series of contingencies including whether directors are novice or experienced, the frequency and nature of board interactions, and the relative power of a director. This variability is particularly clear in longer serving directors for whom we find polarizing results: while some grow stale in the saddle, others sustain high levels of contribution despite extreme tenures. The latter finding is at odds with agency-based assumptions and general predictions from the literature. Overall, our study offers a tentative explanation as to why setting an ‘ideal’ tenure for outside directors has proven so difficult and encourages boards and policy makers to consider the influence of director-level features as well as board dynamics in shaping directors' contributions.

Theory, Evidence, and Policy on Dual-Class Shares: A Country-Specific Response to a Global Debate

Dual-class shares have become one of the most controversial issues in today’s capital markets and corporate governance debates. In the past years, academics, regulators, policymakers and stock exchanges from all over the world have been discussing whether companies should be allowed to go public with dual-class shares and, if so, which restrictions should be imposed. After analysing the regulatory approach to dual-class shares existing in several jurisdictions around the world, this article shows that countries seem to have adopted three primary models to deal with dual-class share structures: (i) the imposition of bans traditionally existing in the United Kingdom, Australia and several jurisdictions in Asia, Europe and Latin America; (ii) the permissive model allowing dual-class structures without any significant restrictions, as it happens in the United States, Sweden, and the Netherlands; and (iii) the restrictive approach implemented in Singapore, Hong Kong, Canada, India and Mainland China. It will be argued that, despite the global nature of the debate on dual-class shares, regulators should be careful when analysing foreign studies and approaches since the optimal regulatory model to deal with dual-class shares depends on a variety of local factors. Namely, this article argues that, in countries with sophisticated markets and regulators, strong legal protection for minority investors, and low private benefits of control, regulators should allow companies to go public with dual-class shares with no restrictions or minor regulatory intervention. By contrast, in countries without sophisticated markets and regulators, high private benefits of control, and weak legal protection for minority investors, dual-class shares should be prohibited or subject to higher restrictions. Finally, intermediate solutions should be adopted for countries with mixed features. Therefore, the key question to be addressed from a policy perspective is not whether companies should be allowed to go public with dual-class shares, as many authors and regulators have been discussing in the past years, but whether dual-class class shares should be allowed and, if so, under which conditions, taking into account the particular features of a country.

Editorial: Scientific, managerial and political debate in corporate governance and sustainability

The articles published in this issue address interesting corporate governance and sustainability-related topics, by focusing on key themes that are currently at the centre of the scientific, managerial, and political debate. The contributions included in this issue outline a stimulating picture in terms of theoretical constructs and empirical research approaches adopted by the authors, and share a common file rouge since they are grounded on the relationship between non-financial disclosure and firm performance and the role of the governance in fostering transparency and sustainability-oriented strategies in a complex and adverse scenario.

Passive Investing and Corporate Governance: A Law and Economics Analysis

An important debate in corporate governance is whether passive funds — a term that includes ETFs and index funds — have incentives to provide adequate oversight of their portfolio companies. One set of scholars contends that agency cost problems likely thwart passive fund stewardship for several reasons. First, passive funds suffer from an acute collective action problem because any investment in improving the performance of a company will benefit all funds that track the index equally, while only the activist fund will incur the costs. Indeed, these scholars point out that investments in stewardship are particularly costly for the passive fund portfolio manager, which lacks the firm-specific information necessary to participate in governance in a beneficial way. Second, passive fund portfolio managers may have inadequate incentives to invest in beneficial stewardship because they capture only a small fraction of the gains. And third and finally, passive fund portfolio managers have ample incentive to be excessively deferential to management, who are often their clients. These scholars conclude that because of these flawed incentives, the rise of passive investing portends economic harm and justifies wide-ranging regulatory intervention — from incentivizing passive fund stewardship, to restricting passive fund voting rights. Another set of scholars contend that passive fund stewardship is likely to be as good as, if not better than, stewardship by other investors. They contend that passive funds compete for investor dollars not just against other passive funds, but also against actively managed mutual funds. This competition provides an incentive for passive funds to invest in stewardship that will attract asset inflows. In addition, the large size of the institutional investors that offer passive funds affords them economies of scale and scope in stewardship. And because these large institutional investors have massive stakes in portfolio companies, capturing even a small fraction of any gain will substantially increase their take home pay, providing an incentive to be engaged for a small number of material votes that occur each year. These scholars contend — in the words of Adam Smith, and later, Jack Bogle — that the invisible hand is all that is needed. This is a chapter from the forthcoming Encyclopedia of Law and Economics (Adam Badawi, ed., 2nd edition 2020).

Transnational Corporate Governance: The State of the Art and Twenty-First Century Challenges

This chapter explores corporate governance as a subfield of corporate law, which was traditionally embedded in a country’s legal-economic culture and to a large degree reflective of historically grown structures of industrial development, corporate ownership and specific levels of market regulation. Mirroring the rise in importance of the idea of shareholder wealth maximization as a firm’s definitive performance measure, corporate governance rules have been aimed at meeting the ‘market expectations’ of investors who could inject as well as remove crucial financial assets into their countries’ corporate actors with the ease of a mouse click. In this context, corporate governance began to push against and, increasingly, grow beyond the confines of nationally specific cultures and historical experiences of corporate law, to become, instead, a hotly contested, transnational regulatory field of competing visions of firms’ institutional and normative infrastructure in search of creating the most advantageous conditions to attract capital in volatile markets. This shift occurred at the same time that regulatory transformations in Western post-industrial societies since the early 1980s had begun to significantly shift public service provision and state-organized frameworks for old age security guarantees, access to health services or education to the sphere of the market. Today’s corporate governance laboratory is a transnational force field, fought over by a host of different state and non-state actors, including national governments as well as international organizations such as the United Nations or the OECD, but also by private actors such as institutional investors, ranging from banks to hedge funds as well as semi-public expert committees, think tanks and consultancies. Meanwhile, following, on the one hand, the two financial land-mark crises in 2001 and 2008/09 and, on the other, the simultaneously growing pressure on corporations from human rights, gender equality and environmental groups, the corporate governance debate again appears to be shifting. This time, the diversity of issues discussed under the corporate governance rubric points towards a wider and more comprehensive engagement with the firm’s purpose and functions, but also with its societal obligations and responsibilities as part of a wider, more broad-based, critical engagement with capitalism. Given the crucial role of firms as the residual claimants of a wide-ranging retreat of the state from its role in guaranteeing and providing a wide range of social functions, corporate governance is a telling mirror for the transformation of public and private power in our age and its transnational nature has to address the twenty-first century challenges unfolding in a globally intensifying, competitive economy of intertwined markets, sourcing streams and distribution patterns on a planetary scale.

One-Tier Model and List of Candidates from the Outgoing Board: Better Corporate Governance for Italian Market or Just Xenophilia?

The superiority of the one-tier board model, over others, has recently been argued in Italy by a study published by the Research Center of Consob, the Italian Stock Exchange Authority by bringing forward two main arguments: i) the need to simplify and rationalize the system of internal controls for listed companies; and ii) the need to foster competitiveness of Italian listed companies in order to attract foreign capital by encouraging standardization and convergence, as the one-tier board model is the most common in the world. Some important Italian listed companies have recently switched their board model to the one-tier, in particular, by providing justification of a need to attract foreign investment since institutional investors prefer the one-tier board, being the model they know better. Another recent trend in Italian corporate governance is the amendment of bylaws by certain companies, allocating power to the outgoing board to file its own list of candidates to renew the board of directors. This is actually the rule in many jurisdictions, but it has not been the case under Italian law, where the right to file one or more lists of candidates for in the event of board renewal, is expressly granted to shareholders. Also, in this case, some important Italian listed companies have recently amended their bylaws to introduce such power by explaining that this is common practice in other jurisdictions and therefore it is favored by foreign institutional investors. Based on these two issues – that are at the core of the most recent Italian corporate governance debate and practice – the research questions of this paper are: 1. Do institutional investors really prefer the one-tier board in Italian investee companies? 2. Do institutional investors show preference with reference to the power to file a list of candidates? After having examined the theoretical background, also under the legal perspective of both corporate governance set of rules, institutional investors’ actual preferences regarding structure of the board of directors and power to file a list of candidates in case of renewal of the board will be explored and final considerations will be drawn. Providing an answer to these questions seems particularly important in both academic and practitioner fields as some important Italian listed companies started to adopt or to think whether adopting one or both of the above-mentioned rules with general support in the public opinion. After the Introduction, Section 6.2 compares the traditional model and the other two models of corporate governance in Italy, and deals with the main features of the recent trends in Italian corporate governance. Subsequently, we review the applicable theory and main literature in section 6.3. We present our methodology in Section 6.4. Finally, we present the results of the analysis in section 6.5 and provide concluding discussions and comments in the last two sections.

Should Shareholders Be Rewarded for Loyalty? European Experiments on the Wedge Between Tenured Voting and Takeover Law

Corporate law reveals its democratic background when it comes to the general meetings of shareholders, finding, on both sides of the Atlantic, its most tangible expression in the “one share, one vote” principle. While, in the political landscape, the “one person, one vote” standard is absolute dogma and weighting votes according to people’s preferences and interests has never proved feasible, in the corporate scenario the one share, one vote principle is constantly challenged by the incentives of companies and their shareholders to shape corporate rights according to specific needs. In this respect, some legislators (specifically in France and Italy) have provided mechanisms that allow more loyal shareholders to increase their voting power. Tenured voting (or time-phased voting rights) should be analyzed in light of the modern corporate governance debate, which calls for a stronger role for long-term investors. However, the other side of the coin should be considered: the increase in voting rights broadens the range of control-enhancing mechanisms, although specific sunset clauses (whether provided for by law or voluntarily opted in by companies) may restore the one share, one vote rule. The analysis suggests that the mechanism based on tenured voting is more transparent and potentially less stable than other common control-enhancing mechanisms and deserves to be considered in the debate. At the EU level, the possibility left to the Member States of weighting shareholders’ voting power according to their long-term interests, leads to legislative fragmentation across Europe. Specifically, in Italy, the adoption of tenured voting coupled with a tradition of ownership concentration sharply empowers controlling shareholders. At the same time, European takeover regulation plays an exogenous role in indirectly selecting the companies that adopt time-phased voting rights. The final result is completely mistrusted, as tenured voting rights disappoint their expectations and are rarely used to meet a true need of long termism. The paper describes the paradox that emerges when tenured voting rights interact with the core principles of the EU financial market law system, and it offers various ways to alleviate this difficult coexistence.

The managerial power approach: Is it testable?

The central hypothesis of the managerial power approach (MPA) states that power is the main driver of executive compensation. The positive impact of power on compensation is allegedly demonstrated by a large number of empirical studies. We argue that the hypothesis of a positive impact of power on pay is not falsifiable empirically. The MPA is thus not testable. Empirical studies in this vein can only be interpreted as validation procedures for the empirical power measures employed. We suggest a new theoretical framework for research on the power-compensation relationship. This framework can be used to identify valid power measures empirically. The arguments presented in our paper allow for a reassessment of the role of power in the corporate governance debate.

Nomination Committees and Corporate Governance: Lessons from Sweden and the UK

While corporate boards, audit committees and remuneration committees have been subject to extensive analysis and research, one of the most important elements of corporate governance has been largely disregarded: the nomination committee. This paper suggests that the nomination committee (NC) should be a primary focus of attention in corporate governance debates. The reason is that, if companies make the right initial appointments of board of directors then much else follows; if they do not then no other aspect of corporate governance – monitoring, measurement or incentives – can fully rectify the damage. Thus, the legitimacy of the NC in the eyes of the shareholder community and the trust received from minority shareholders is pivotal to the empowerment of the board. This is especially true in the context of institutional investors. The paper draws on examples from the UK and Swedish model of the nomination committee. Whereas UK has an internal committee and a mainly dispersed shareholder base; Sweden by contrast, has an external committee and a block-holder governance regime. The article elaborates on the differences and their implication for the efficacy of the NC. Arguing that there appears to be merits, but also critique, of both systems, the article ends reasoning that the way forward might be to combine elements of them. For example, some of the board positions could be nominated by external and other by internal committees. Alternatively, all appointments could be by internal committee as in the UK but with some external shareholder representation and, within both models, collaboration between external and internal parties can be encouraged to ensure the nomination of a cohesive team of directors.

Defensive Tactics and Optimal Search: A Simulation Approach

The appropriate division of authority between a company’s board and its shareholders has been the central issue in the corporate governance debate for decades. This issue presents most vividly for defensive tactics: the extent to which the board of a potential acquisition target is allowed to prevent the shareholders from responding directly to a hostile bid. In the US today, the board’s power is extensive; control largely lies with the board. Normative evaluations of current law face two obstacles. First, defensive tactics raise the social welfare question whether, or to what extent, these tactics deter ex ante efficient takeovers. This question cannot be answered empirically because the econometrician can observe bids but cannot observe deterred bids. The social welfare issue is also difficult to resolve using current analytical techniques because the market for corporate control is unusually complex: in it, financial and strategic buyers search for mismanaged companies or synergy targets; and some synergy targets search for acquirers. Turning to targets, the question which defensive tactics level maximizes shareholder welfare also is difficult to answer because of the qualitative nature of defensive tactics: Is a poison pill more or less privately efficient than a staggered board? What are the welfare consequences of combining a pill with a staggered board or a supermajority voting requirement? In this paper, we write a search equilibrium model of the market for corporate control and solve it by simulating plausible parameters for the variables of interest. Because we specify the number of ex ante efficient acquisitions that could be made, we can estimate market efficiency – the ratio of made matches to good matches – under legal regimes that are more or less friendly to defensive tactics. Also, we argue that the common metric among defensive tactics is time: the ability of various tactics to delay bid completion and thus reduce bidder, and thereby increase target, returns. We have two important results: First, strong defensive tactics reduce market efficiency significantly. Our simulations suggest that approximately a $100 billion in deal value is lost each year in consequence of these tactics. Simulations are only suggestive and our simulated model likely overstates the welfare loss. Nevertheless, the result that defensive tactics cause economically significant welfare losses would stand even if our magnitude estimate is halved. Second, the defensive tactics level that maximizes target shareholder welfare is materially higher than the level that maximizes social welfare. These results also support a methodological claim: equilibrium analysis can illuminate regulatory issues regarding the market for corporate control.

Corporate Governance and Corporate Social Responsibility of Multinational Enterprises and Transnational Law The FIFA Case

Transnational law is a fertile ground for the development of corporate governance and corporate social responsibility (CSR) worldwide, where multinational enterprises (MNEs) have a central position. The private governance system involving MNEs entails two roles: as object and as subject of transnational law. Such a framework is presented herein against the case analysis of Federation Internationale de Football Association (FIFA) and the World Cup tournaments. With this purpose in mind, this paper explores the governance structure of FIFA and the steps of the World Cup bidding process and certain facts of interest related to the Brazil, Russia and Qatar World Cups. This study engaged into a functional approach to the problem if FIFA could be deemed a MNE; FIFA was considered in a broad sense, involving both its MNE and public natures. The global regulation of MNE’s corporate governance is formed mainly by soft law instruments, and their governance model encompasses the shareholders’ primacy versus the stakeholders’ principle traditional corporate governance debate. Hence, this paper describes two material instruments for CSR regulation: the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights (UNGP) against FIFA’s activities. Finally, FIFA’s accountability is further analysed in view of the level of power the entity has over the international community, pointing out an enforcement system comprised mainly by monitoring, surveillance and disclosure.

Corporate Governance, Shareholder Proposals, and Engagement between Managers and Owners

In the corporate governance area, few regulations have greater importance than Rule 14a-8. Put in place in 1942, the provision requires companies to include in their proxy statements proposals properly submitted by shareholders. Phrased in precatory language, proposals typically advise rather than command. Rule 14a-8, therefore, provides a cost effective mechanism for obtaining the collective views of shareholders on the designated matters. The rule did not always play such a central role in the governance process. For the first four decades following adoption, proposals did not receive significant support. Through 1981, only two were approved by a majority of the votes cast. Unsurprisingly, therefore, management often viewed the provision as a soapbox used by “special interest” investors to air issues of little importance to most shareholders. As institutional investors became more active and various regulatory restrictions were lifted, however, Rule 14a-8 assumed a more central role in the governance debate. The rule emerged as an important component of the engagement process between owners and managers. Proposals uniquely provide companies with insight into the collective views of shareholders. Moreover, support for proposals can be assessed over time, allowing managers to better understand the evolution in shareholder attitudes. Proposals also result in increased communications between long-term shareholders and directors, an important development in an era of activist investors. Despite the role of the rule in the engagement process, calls have arisen for additional restrictions that would effectively eliminate use for most shareholders. Characterizing the provision as “dominated by a limited number of individuals” who have pursued “special interests” that “have no rational relationship to the creation of shareholder value”, critics have argued for, among other things, a dramatic increase in the ownership thresholds and holding periods. Similarly, asserting that proposals contain “general social issues” that “rarely garner meaningful shareholder support”, they have sought changes designed to limit these types of submissions. These descriptions do not accurately characterize the state of the shareholder proposal process. Moreover, the calls for additional restrictions cannot be explained as a consequence of an increase in the use of the rule. The number of proposals submitted in recent years are commensurate with earlier periods. Nor is the opposition explainable by the costs associated with proposals. The actual cost of distribution has likely gone down, particularly with the advent of electronic distribution of proxy statements and other technology enabled changes. The expenses associated with the no action process are readily controllable and, in any event, the number of requests have declined from earlier periods. What has changed, however, has been an increase in shareholder support for proposals. While proposals are advisory, they can and do affect the decision making process inside the boardroom. Those favoring significant restrictions on the use of the rule would, presumably, prefer to avoid this type of influence by denying shareholders the right to collectively speak on relevant issues. In addition to conflicting with a board’s fiduciary obligations, the approach will also generate significant unintended consequences. Denying access to Rule 14a-8 will not lessen interest in the relevant issues. It will, however, interfere with the engagement process between owners and managers and force shareholders to pursue other avenues of influence, whether litigation, public campaigns, or broad based regulatory reform. Rule 14a-8 could use some updating, as the student articles published in this edition of the law review forcefully demonstrate. Most of the needed revisions can be implemented through interpretive changes issued by the staff of the Division of Corporation Finance. The interpretations would allow the rule to function more effectively and better reflect the provision’s current position in the corporate governance debate. Current proposals designed to significantly reduce the number of proposals, however, would have the opposite effect. This paper is an introduction to an issue of the online edition of the University of Denver Sturm College. The issue includes articles written by students on all important aspects of Rule 14a-8. This issue is the second of three and includes seven student articles. The articles in this issue address the exclusions for personal grievances (Rule 14a-8(i)(4)) and for the absence of power/authority (Rule 14a-8(i)(6)). In addition, the issue includes articles on disclosure of the identity of the proponent (Rule 14a-8(l)), the evidence needed to establish shareholder eligibility (Rule 14a-8(b)), the number of proposals that can be submitted to a single company (Rule 14a-8(c)), and the time period for submitting proposals to the company (Rule 14a-8(e). For the first issue, see “The Shareholder Proposals Rule and the SEC”. A third issue is anticipated in 2018.

Corporate governance effectiveness along the entrepreneurial process of a family firm: the role of private equity

This paper was motivated by the increasing interest in the corporate governance debate on how effective structure and processes may influence entrepreneurial transitions. Along the entrepreneurial process, little research to date has investigated the exit in the context of entrepreneurial family firms. Previous literature has considered the exit mainly as a failure for entrepreneurial families, but when uncertainties arise this choice may enable ownership transitions, thus facilitating survival and long term strategies. Among the exit options, a private equity buyout may balance the family’s wealth protection and the firm’s future growth. However, which family specific characteristics and strategic needs may affect the exit option still remains a neglected topic. Drawing on corporate governance literature and recent research addressing entrepreneurship in family firms, this paper investigates, by a single case study, the bridging role of private equity buyout for going through entrepreneurial transitions. Findings suggest that a private equity buyout is a governance mechanism that may sustain an entrepreneurial transition by realigning family interests and goals. It may also allow the family commitment for improving organizational capabilities required by an entrepreneurial transition.

Shareholder Wealth vs. Stakeholder Interests? Evidence from Code Compliance Under the German Corporate Governance Code

In order to better differentiate the drivers of corporations' actions, in particular shareholder wealth and stakeholder interests, the paper explores the significance of the comply or explain-principle and its underlying enforcement mechanisms more generally. Against this background, compliance rates with specific provisions may shed a light on companies' reasons for following the code. An analysis of these rates at the example of distinct provisions of the German Corporate Governance Code is therefore entered into. In light of the current corporate governance debate and the legitimacy problems that are raised, among the code provisions that exemplify these questions very well are those regulating incentive pay, severance pay caps, and age limits for supervisory board members. Their analysis will lay a basis for an answer to the question about what motivates companies to comply with the code. The motivation then paves the way to arrive at a further specification of the determinants of the regulatory evolution of the Code and the range of stakeholders and their concerns that enter into it.

Bridge Over Troubled Water: Corporate Law Reform for Life-Cycle Based Governance and Reporting

In spite of all the business initiatives using a sustainability language status quo remains very much unchanged: ‘business as usual’ continues, and is a very certain path towards a very uncertain future. The dire status as regards the convergence of environmental crises facing global society is encapsulated in the concept of ‘planetary boundaries’, first identified in the ground-breaking article by Rockstrom et al. in 2009, and updated and re-affirmed by Steffen et al. in 2015. Planetary boundaries define global sustainability criteria for critical environmental processes that regulate the stability of the life-support systems on Earth, defining nine parameters of the earth system to indicate a safe operating space for humanity. According to Steffen et al., human production and consumption is placing us in increasing or high risk in relation to at least four of the boundaries: climate change, biosphere integrity (genetic diversity, with uncertainty concerning the boundary for functional diversity), land system change, and biogeochemical cycles (phosphorus and nitrogen). The grand challenge of sustainability lies in securing the social foundation for humanity now and in the future, while staying within the planetary boundaries; in Kate Raworth’s words: achieving a safe and just operating space for humanity. Business contribution to meeting this grand challenge is vital. This paper concentrates on the contribution of the dominant legal form of business: the company. The paper first discusses why we are in this situation of corporate unsustainability: why has neither the mainstream corporate governance debate nor the more progressive CSR movement provided helpful answers? The answer lies in the perception of the nature of the company and of the role of regulation that informs these two alternative streams (Section 2), where the social norm of shareholder primacy dominates and where law, and notably company law, to a great extent has been ignored. This is also true of the business and human rights movement, although its innovative approach has the potential for contributing to breaking down barriers between social norms and law.The paper continues with discussing the role of the law, arguably the most powerful tool for society to implement the social norms that society on a high political level agree on: where and how has law failed in ensuring that companies create value in an environmentally, socially and economically sustainable way? That section concludes with an identification of the main barrier to sustainable business: the social norm of shareholder primacy that has taken over the discretionary space company law has given corporate decision makers, and the explanatory power of this recognition for the failure of the most favoured legislative tool for sustainability: reporting (Section 3). Legislative efforts at promoting sustainable business through reporting requirements risk continued failure because of the chasm between the perceived role and duty of the board and by extension management, and what boards and management are asked to report on.The recognition of the chasm between the perceived role and duty of the board and management, and the reporting requirements, helps identify a possible solution (Section 4). The research-based corporate law reform proposal presented here has the potential of being a ‘bridge over troubled water’, spanning this chasm and giving content to the new ‘non-financial’ reporting requirements of the EU. Section 5 concludes.

Convergence and divergence in corporate governance

PurposeWhether corporate governance systems and practices are converging to the Anglo-American shareholder-value-oriented model or continue to diverge from this model and maintain their idiosyncrasies has been controversially debated among scholars in a variety of academic disciplines. The purpose of this paper is to review, critique and integrate the disparate positions in the convergence-divergence debate in corporate governance and to suggest promising directions for future research.Design/methodology/approachThe author constructs a theoretical framework in which convergence and divergence dynamics are conceptualized as simultaneous processes of institutional change and continuity. This framework takes into account the influence of economic market forces, social embeddedness and cultural forces in shaping corporate governance at the national and the firm levels and provides a holistic and integrative perspective on the extant literature in the convergence-divergence debate.FindingsThe literature review does not support either the predictions of convergence advocates or the predictions of divergence advocates. Instead, the paper finds that convergence and divergence dynamics can coexist and lead to increasing heterogeneity in corporate governance arrangements of firms within and between corporate governance systems. This finding adds complexity to the debate and opens room for interesting research directions.Originality/valueThe paper offers a comprehensive review of the topic and draws from literature in financial economics, comparative law, economic sociology, international business, political science and strategic management. Most importantly, the paper offers a multi-theoretical framework that allows for an integration of the divergent perspectives presented in the literature.

Teaching Corporate Governance in Uzbekistan

Though corporate governance (CG) debates have been highly focused in the press recently and even in research, very few universities in Uzbekistan offer courses on CG. In this paper we attempt to analyze teaching models for corporate governance, and we will show some challenges in designing and teaching CG.

Protecting Shareholders from Themselves: The SEC and Restrictions on Shareholder Voting Rights

Corporate governance and the relationship between managers and owners has undergone rapid evolution in recent years. As part of this process, shareholders have obtained greater ability to influence the behavior of the board of directors. In seeking to exert influence, shareholders often do so through the proxy process. The proxy process provides shareholders with a cost effective method of voting without having to physically attend the shareholder meeting. The proxy rules, which are administered by the Securities and Exchange Commission (“SEC”), were drafted in an earlier era when shareholders were less involved in the governance process. As a result, the rules are one-sided and do not adequately reflect the interests of shareholders. The proxy rules contain a number of restrictions and limitations that reduce the voting rights of shareholders. This article examines an example of this phenomena. Under the rules, the execution of a proxy card results in an involuntary transfer of voting authority from shareholders to management in connection with any proposal that comes up at the meeting but does not otherwise appear in the proxy statement. The effect of this transfer is to ensure that any proposal made at the meeting will be defeated. At the same time, the SEC has interpreted the proxy rules to allow companies to omit certain types of proposals from the proxy statement. Proposals can be omitted that address the rotation, ratification or qualification of the outside auditor, issues of significant importance to shareholders. To raise these matters, therefore, shareholders must do so at the meeting. At the same time, however, the proxy rules, through the involuntary transfer of voting rights, ensure that the proposals will be defeated. The article makes the case for a reevaluation of the proxy rules to better reflect the current state of the corporate governance debate. At a minimum, this means repealing restrictions in the rules that limit or reduce the voting rights of shareholders. The article suggests a number of changes to the proxy rules that are needed to accomplish this goal.

Comparative Corporate Governance: Old and New

The most fundamental comparative corporate governance debates have often focused on two issues. The first one concerns ownership structure: Why are large corporations in some corporate governance system owned by a multitude of disempowered shareholders, thus effectively giving management free rein? Why are corporations typically governed by a controlling shareholder or a coalition of controlling shareholders in other systems? The second issue is the role of other ‘constituencies’ of the corporation besides shareholders, of which labor is most central to the debate. Some jurisdictions explicitly give labor an influential voice in corporate affairs, whereas in others its influence is developed through factual power or unintended consequences of legislation. This chapter explores the interactions between firm ownership and labor, focusing on the United States on the one hand and Continental Europe, particularly Germany, on the other. It distinguishes between ‘old’ and ‘new’ comparative corporate governance, the former referring to the dichotomy studied by scholars of comparative corporate law up to the early 2000s. Recent changes, heralded by intermediated, but widespread share ownership are leading us to a new equilibrium whose contours have only begun to emerge. Over the past decades, outside investors have gained power both in the United States and in Continental Europe. However, neither in the US nor in Continental Europe has the traditional corporate governance system been completely superseded by a new one. The US remains to a large extent manager-centric. Continental Europe retains powerful large shareholders, and labor as an independent force has remained more important than in the United States. Outside institutional investors – sometimes from the US – have become a player to be reckoned with, thus adding an additional layer of complexity to the system.