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CORPORATE GOVERNANCE PRACTICES IN DIFFERENT COUNTRIES
1.0 Shareholder vs. Stakeholder Models
1.1 Anglo-American shareholder primacy approach
The Anglo-American shareholder primacy framework is the governance model in which the
interests of shareholders are put ahead of those of other stakeholders and the maximization of
shareholder wealth is the primary and the fundamental purpose of governance practices in
companies (AgunThis model, commonly referred to as the shareholder's model, is anchored by
several legal pieces and governance policies of developed countries such as the United States and
the United Kingdom, where corporate law gives priority to the rights and powers of shareholders
over the rights of other stakeholders (Bhagat & Bolton, 2008). The primary function of this
system is to protect the interests of shareholders, for which the duties of corporate boards are
designed. Assuming the current status of compensation structures, the motives of managers are
concentrated on stock performance, ensuring that the goals of shareholders and managers are
compatible (Aguilera & Jackson, 2010). The shareholder primacy approach determines corporate
management procedures with the aim of giving shareholder value orientation, consequently the
companies prioritize through shareholder payouts, share buybacks, and strategic acquisitions
among other things that greatly enhance shareholder value maximization such as (Blair, 1995).
Supporters claim that the freestanding mechanism contributes to productive resource allocation
as well as managers' accountability to shareholders which, in turn, facilitates a growth of the
corporate performance and betterment of well-being (Friedman, 1970). Although the advocates
of shareholder primacy argue that it ensures the sustainability of the firm through better
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accountability and transparency; However critics claim that in the long run it can lead to short-
termism and become a barrier to employee, customer and the broader community's interests
(Freeman, 1984). While shareholder value maximization approach may be associated with some
negative externalities like income inequality, environmental degradation and erosion of social
trust in corporations, the stakeholder approach creates an opportunity for companies to have a
positive impact as well as a goodwill of their neighbors. Hence, the shareholder primacy model
provides a plausible reason for why shareholders will be increasingly wealthier and the
management more accountable while at the same time raises a big concern on the harms of the
model to the society and the human being; therefore, we need a balance in the approach towards
corporate governance that should consider all stakeholders’ interests (Freeman & Reed, 1983).
1.2 Continental European stakeholder-oriented governance
On the contrary, Continental European stakeholder-oriented governance is joining the global
governance family that will not accept the Anglo-American shareholder primacy model, but will
embrace a broader stakeholder approach that includes employees, customers, suppliers, and the
community (Aguilera & Cazurra, 2009). These models are characterized with the parliamentary
way of rule and corporate governance which is both consensual and takes care of the associated
parties interest ( Bhagat & Bolton, 2008). Countries such as Germany and Sweden, where a
stakeholder-driven-governance dominates, their corporate boards always constitute of
representatives of all stakeholder groups, and so, ensures a continuous and healthy intercourse
with various parties (Aguilera & Jackson, 2010). Continental European stakeholder management
model reverses the image of shareholder management models that is mainly dominant in English
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and American jurisdictions, bringing more focus to the interests and expectations of a wider
range of stakeholders (Aguilera & Cuervo-Cazurro, 2009). This governance model looks for a
collaboration between the employees, customers, suppliers and the community while placing
shareholders as one of the major concern, hence inclusion and sustainability are the principles of
the corporate decision-making process which are emphasized (Bhagat & Bolton, 2008). In
Germany and Sweden, 2 stakeholder-oriented countries, companies’ boards regularly co-opt a
dedicated stakeholder representative, which builds trust and dialogue to create shared success
areas (Aguilera & Jackson, 2010). Although it is not easy for a stakeholder-oriented policy to
strike a balance of interests, proponents claim that it implies more personal responsibility, better
engagement of interested parties, and better resilience of the economy in extraordinary times
(Freeman, Wickert, and Austin, 2010).
1.3 Emerging market variations and influences
The fact that various emerging market equals and imprints are apparent as a part of the
governance landscape may complicate the overall picture, as it takes into account the contexts of
various institutional setups and historical developments (Aguilera & Cuervo-Cazurra, 2009). The
countries like Brazil, China, and India which are currently are still in the process of economic
development and market reforms seem to be having the system of governance with some hybrid
qualities which are also blending the concepts of both Anglo-American and Continental
European models (Bauer, Derwall & Otten, 2007). Elements including state role, legal traditions
and cultural norms define governance practices of new markets. These specific practices are
formed according to the model prevalent in traditional markets (Bhagat, B. & Bolton, P. , 2008).
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The conversion of emerging markets to market economies, particularly as they combine state
intervention with the free-market mechanism, leads to structure of governance that reflects this
foundation (La Porta et al. , 2000). So, in China, the state owned enterprises go side by side with
the private sector to come up with political systems that are like hybrids of state control and
market discipline (Fan & Wong, 2005). In the same manner, Brazil is also affected by dynamics
of both legal regulations and market forces in the area of corporate governance. With corporate
reforms being promoted in the country with respect to improving transparency and accountability
as a result of corporate scandals and investor demands (Claessens et al. , 2000). In India, the
institutional framework is a combination of regulatory changes and household norms and
practices with the family businesses making it an important field of corporate governance
(Chatterjee, 2011). The uniqueness of these institutional settings, across emerging markets, is an
additional factor that governance scholars as weel as investors need to take into account, as they
attempt to comprehend and work on these arenas (Khanna & Palepu, 2000). These problems
should not deter the investors because the prospects of growing and investment markets in
emerging countries become more obvious, leading to more to further enhance and tighten the
governance standards and regulatory frameworks in order to get more capital and build the
economy (Hoskisson et al. , 2000).
1.4 Convergence vs. divergence of governance systems
The question of values and sovereignty has aped many others’ arguments in the debate over
whether global forces assist in a harmonizing sort of governance between nations or national
institutional differences are still seen (Aguilera & Jackson, 2010). In unison, proliferates
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convergent point through globalization, market integration, and transmission of the best
governance patters (Bauer, Derwall, & Otten, 2007). On the other hand, proponents of
divergence bring up the relevance of national institutions, culture, and heritage which lead to
distinct governance institutions that are well suited to the specific historical, social, and cultural
conditions of the individual country (Bhagat & Bolton, 2008). The area either rather is located
amid convergence and divergence, which are currently seen in the globe. A trilateral node of
three nations recognized by the international community has been ruling because of the
globalization and cross-border capital flows that enable the general diffusion of rules and co-
values as well as different national contexts that predicate governance practices (Aguilera &
Jackson, 2010). Legal frameworks, cultural differences, and regulatory environment as some of
the most powerful factors that either increase or change corporate governance arrangements
which makes solo variant to exist over the nations (Bhagat & Bolton, 2008). As a result, the
endurance of national institutions and their own history strengthens the diversity in terms of the
governance systems where countries supplement governance practices depending on their
distinctive backgrounds (Bauer, Dörnwall, & Otten, 2007). Nevertheless, the effect of
globalization is not limited only to divergence and indeed it covers a scope of convergence,
where nations compete to attract investment by following good governance standard operation
(Aguilera & Jackson, 2010). On the other hand, in regard to the contrary between the
convergence-divergence this is not yet a resolved argument since both constraints appear to be at
the present working. The temptation is to tailor-make global governance frameworks so that they
can be used effectively by all nations to facilitate global capital flows yet understandably it needs
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to be done in a manner which pays heed to dissimilarities in governance which exist among
various nations and ensures that their current governance systems remain appropriate to address
their respective challenges.
2.0 Board Structures and Composition
2.1 One-tier vs. two-tier board systems
By looking at whether the organization is a caretaker (single-tier board) or a guardian (two-tier
board) type, the differences between board system structures and practices become obvious. The
one-tier board system prevailing in Anglo-American countries has the same board of directors
situated on its top level, supervising both the strategic and management decisions of the
company (Bushee & Miller, 2012). Integrated approach automates communications and
members’ involvement, contributing to an improved agility and promptness in change of
marketing activities accordingly. Despite their opponents believe that this model does not fulfill
the required conditions of checks and balances which may lead to contacts of interest and
management is not properly controlled (Mallin, 2013). Contrary to the one-tier board system
which is mostly common in countries in the Commonwealth, in the two-tier board system which
is common in Continental European countries like Germany, there are separate supervisory and
management board in which the supervisory boards provides over sight and guidance to the
management board (Chen, Li, & Shapiro,2011). The board of directors is made up of two
separate groups: one handles strategic oversight and the other one is responsible for carrying out
business activities on the day-to-day basis. This dual-board structure is designed to strengthen
corporate governance by separation of strategic management and corporate operations with the
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purpose to prevent managerial entrenchment and to improve accountability of the corporation to
stakeholders (Beyer, 2015). Promoters of the two-tier system declare that the separation of
powers will be serving a greater purpose since there is focus on transparency and accountability
as well as long-term orientation in decision-making (Tricker, 2015). While the proponents of
two-tier model believe that it prevents the bureaucracy and lack of the alignment between the top
and lower level- managers (Dong, 2013), critics opposes this idea that this type of management
is slower in the decision-making activities. Although they differ according to the culture they
belong to, organizationally board structures intend to achieve corporate governance success and
promote interests of shareholders and stakeholders (Tricker, 2015). Additionally, it is the
preference of one-tier or two-tier boards that may be explained as being related to the specific
legal, cultural and historical factors found in a country corporate governance framework (Monks
& Minow, 2011). Thus, the two systems have different pros and cons but as the time goes by,
they form the framework in which the practices of corporate governance across the globe are
shaped.
2.2 Board independence and outside directors
The independence of the board and presence of the external directors are extremely vital in
providing effective corporate governance to the organization and reduce any possible conflict of
interestAudit committee members, being independent directors, the chances of objectivity and
democratization of affairs in the boardroom are enhanced by bringing varied perspectives and
skills (Chen, Li, & Shapiro, 2011). Nevertheless, as much as the capacity of independent
directors matters significantly regarding their capacity to remain independent and challenge
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when it is appropriate, respective. These determinants, which are directly influenced by such
factors as board composition and the range of interlocking direct arrangements, can be revealed
by disclosing more information (Bushee & Miller, 2012). More striking, companies with board
of directors having higher proportion of independent directors are more likely to provide
objective control and decision making (Faleye, Greenhill, Irock, and Baladi, 2011). Moreover,
there is the ability for external directors with business links in specific industry areas to bring
both information and advise to the table (Kiel & Nicholson, 2003). In spite of that, director
independence can be difficult to maintain, but constraints in independent directors can be
declined if there exist relations between them and management (Hermalin & Weisbach, 2003).
Both elements are essential - independence compulsory and good relations with management
valuable,- for the proper governance (Daily et al. , 2003). Such equilibrium means that
independent directors should be active and insightful in performing their governing role while on
the other hand they should also be open and engaging in interactions with management (Johnson,
2010). Additionally, it is possible for the board members to review performance of properties
and director independence from time to time. They can then identify where there is an area to be
improved on in the process to see to it that they are effective as it should be (Yermack, 2004). In
addition to these, having independent board and the presence of the outside directors are
necessary factors of the successful corporate governance because they create transparency,
accountability and stakeholders trust in the governance systems (Fama & Jensen, 1983)
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2.3 Board diversity and gender representation
Board diversity and gender related representation are now so much important as it contributes to
excellence in governance (Dharwadkar, George, and Brandes, 2000). Board diversity provides a
broader spectrum of input from people with different locations, experiences and views, which
gives advantage in addressing complex issues and making sound decisions (Coffee (2016)). In
addition, the issue of gender diversity on boards is not only a transparent matter of gender
equality and social responsibilities, but it also directly bears on financial performance and
reputation (Chen, Li, & Shapiro, 2011). Statistics have shown that companies with high rate of
gender diversity in their boards outperform those whose counters are more gender diverse by a
substantial margin in the areas of profitability and innovation (Carter et al. , 2003). Such
occurrence may be related to the fact that women do not only bring to the boardroom a variety of
skills but also their expertise and perspective which engender the making of robust decision-
making processes and availability of greater resilience when it comes to the business
environment and the constant volatility it is witnessing (Erhardt et al. , 2003). Unsurprisingly,
aspects of boardroom diversity are more and more recognized as having positive effects on a
corporation, while the advance towards gender parity on corporate s boards has been extremely
slow (Adams & Ferreira, 2009). It is thus, a requisite constant efforts be undertaken that help
bridge the gender diversity barriers and create the boardroom that values diversity and its
differences (Catalyst, 2020). Actions like members’ diversity training, unconscious bias
information and communication programs, as well as targeted recruitment can be intended to
direct to a more differentiated group of potential members (Kulik et al. , 2018). Mentoring and
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sponsorship programs can stand these women in a good stead to advance in their professional
career as well as attain leadership positions (Eagly, A. H. , and Carli, L. L. , 2007). Diversifying
the pool of applicants and cultivating a culture of inclusion in the process are significant
milestones which help to accomplish the aims of improving the representation of women in
corporate leadership. Self-awareness, understanding of individual goals and values, resilience,
and effective communication facilitate emotional intelligence.
2.4 Executive compensation and incentive alignment
The Executive compensation and incentive alignment occupies the leading position in the
activities of managers who can optimize the coordination of their interests with the shareholders
and other stakeholders (Dharwadkar, George, & Brandes, 2000). Compensation plans, which link
executive pay to corporate performance, in the form of stock options and productivity-based
bonuses, have been designed to ensure that executives perform accordingly while serving as the
best interests of the organization (Bushee & Miller, 2012). Nevertheless, controversies may arise
regarding the structure and implementation of executive compensation schemes as they are
accused of destroying long-term vision and sense of security all aimed at achieving CEOs' short-
term financial gains without engaging in high-risk strategies (Coffee, 2017). Critics cite a GB
comparison between the lucrative compensation packages, especially those which are linked to
the short-term financial results, and the long-term sustainability. In the end, executives
prioritizing short-term victories over long-term success (Bebchuk & Fried, 2003). Also, the
researches have shown that the excessiveness of executive refinements, specifically, if they are
not linked to workers’ performance, may lead to employees’ demotivation and principal distrust
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of the company (Murphy, 2013). As a consequence of these concerns, regulators and
shareholders have requested for the involvement of executive compensation practices.
Regulators and shareholders require executive compensation practices to be transparent as well
as accountable (Jensen & Murphy, 1990). This is why the compensation committees have to
cover a wider scope than only the achievement of the company performance and consider the
interests of other stakeholders (Faleye et al. , 2011). This has resulted in the use of stricter
performance metrics and programmes of claw back on actual pay that translate to long-term
success of the company and shareholders' interests (Bebchuk & Fried, 2004). However,
businesses also continue research on other strategems of executive compensation, including that
of deferred compensation plans and stock awards with the aim to encourage leadership focus on
sustainable development and value creation (Core, Guay, and Larcker, 2003). No
notwithstanding all these efforts, the quest for a pure alignment of executive pay and company
output is still very hard and keeps on being a setback to the executive pay debate that still carries
on (Bebchuk and Fried 2010).
3.0 Ownership Structures and Investor Rights
3.1 Concentrated vs. dispersed ownership patterns
The difference between highly concentrated and evenly distributed ownership patterns is a factor
that considerably impacts corporate governance effectiveness and the entire array of factors that
underpin it (Doidge, Karolyi, & Stulz, 2007). In stock configurations with concentrated
ownership a small number of the investors who are mostly institutional investors or founding
families controls a large portion of the stock, thus, giving them an important enough influence to
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make the strategic decisions (Gillan & Starks, 2003). This high level of concentration of
ownership can be an indicator of the closer alignment between the interests of the governing
shareholders and that of the firm. Such a situation promotes alignment of the interests of the
parties and a long-term consideration of the values of the firm. They argue that aside from that,
the owners will also be able to possess quick decision-making process and the management of
the strategic initiatives could be done without the consensual-seeking of a larger number of
shareholders (Shleifer & Vishny, 1997). On the other hand, in the case of a dispersed ownership
structure, the shares are belonged to hundreds of shareholders, so the power of shareholders to
shape corporate decision making is done by a large number of shareholders. Consequently, this
spread of ownership (of the business) often means that the separation of the ownership and
control happens, where the managerial decisions (by the managers) may be not always in line
with the interest of the fund holders (Berle & Means, 1932). Thus, distributed ownership
schemes may struggle with the issues of monitoring and controlling the management behavior,
which may give rise to agency problems and conflicts of interest between managers and
investors (Badaro, Ameka and Kotey, 2019). On the other hand, the problem is that scattered
ownership makes it complex for holders to cooperate in order to put outer management under
pressure for their achievements. While this could reduce the agency conflicts within the firms
with the higher levels of dispersed ownership, the corporate governance mechanisms of these
specific firms may experience inefficiencies as they compare to those of the firms with the
concentrated ownership (Demsetz & Lehn, 1985).
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3.2 Family-controlled firms and business groups
As family-owned firms and business networks remain two dominant forms of highly
concentrated owning structures where the founding family or major shareholders have the
control of corporate ownership processes (Gillan and Starks 2003). In family-controlled
companies decision- making is focused on following the traditional values of family, preserving
legacy and to secure sustainability of the company over a long period (Doidge, Karolii, & Stulz
2007). In this respect, concentration on longevity and the company's reputation makes that the
area of strategies is dominated by the interests of the family and the business preservation over
profits in the short-term (Villalonga & Amit, 2006). Positively, the business groups, referred to
by network of entities under same control or ownership, make best of the opportunities by
avoiding overlaps in services through the involvement of common resource and strategic
relationships (Khanna & Palepu, 2000). However, they can also run into such problems as
managing the conflicts of interest and related-party transactions as their decisions focus on
maximizing the stakes of major shares, but the minority shareholders and external stakeholders
are not necessarily considered (Claessens et al. , 2002). As is the case, complex organizational
hierarchies of the business groups may become adverse to the organizations, and information
asymmetries could emerge which is to the disadvantage of the transparency and accountability in
the corporate governance structures. Although they belong to an environment of risks, family-
controlled companies and business groups have a high level of adaptability so that they can run
their business's smoothly even amidst economic downturns and market fluctuations (Bertrand et
al. , 2002). Additionally, the time horizon adopted as well as the desire to preserve the family’s
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wealth and reputation might be the reason for the long-term profitability and value creation
potential of the family-owned companies (Villalonga & Amit, 2006). Nevertheless, setting up
governance systems that are effective to manage the excessive ownership power and digging up
the hindering conflict of interest become challenges for regulators, investors and the corporate
leaders as they need to face with this complicated issue (Claessens et al. , 2002).
3.3 Shareholder activism and voting rights
Shared stockholder activism and power to vote are major tools for toppling the management’s
decisions, collaborating with accountability, and driving changes in the corporate governance
(Goranova & Ryan, 2014). While activist shareholders –including institutional investors, hedge
fund, and pension fund– may operate through various mechanisms such as proxy battles,
shareholder resolution and public campaigns, they still seek to touch the corporate strategies,
board composition and executive compensation. Through exercising their ownership shares,
supportive shareholders intend to hold the manager accountable for his/her acts and actions,
hoping eventually to get a performance from him/her and to develop corporate governance better
(Brav, et al. , 2008). The efficiency of shareholder activism is bound to certain aspects comprised
of the enforcement of law&order, the engagement of institutional investors and the presence of
shareholder-friendly mechanism such as proxy access& cumulative voting rights (Ferrell, Lel
and Renneboog, 2019)Managers are funded by the shareholders and it has been often observed
that in the jurisdictions having large shareholder rights protections and transparent disclosure
requirements activist investors may find it easier to challenge the management and win their
replies in supporting the initiatives shareholders are often disenfranchised, and their
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representation diminished. Also, the adoption of executive pay decision-making by shareholders
and boards through the implementation of say non-pay votes and proxy access provisions is very
significant since it makes shareowners to participate actively in management making and
therefore, hold the board and management to account for their decisions (Ferrell, Lel, &
Renneboog, 2019). Nevertheless, shareholder activism has two-sides of a coin. For instance,
short-term pressure effect, alignment of shareholders' goals, and increased operation costs can be
seen as the challenges. By the same token , if exercised with a long-term stakeholders' value in
mind along with the responsible practice, shareholder activism can become a challenge for future
governance practices and shareholders benefit (Goranova & Ryan, 2014).
3.4 Minority investor protection and legal frameworks
Clarifying and defending the minority investors’ rights and ensuring robust and sufficient legal
framework for the investors in the concentrated and dispersion ownership contexts must be the
priority (Doidge, Karolyi, & Stulz, 2007). The full implementation of such legal guarantees, such
as mandatory disclosures, equal treatment and quick remedies ensure that investors are confident
enough to participate in the market, thus aiding the efficient market to operate (Gillan & Starks,
2003). Specifically, minority investor protection is an issue that investors should pay attention to
in buyout situations, where a controlling shareholder might be confident to overlook the interests
of the minority shareholders (La Porta el al, 2000). In the opposite direction, for the minority
shareholders in the context of firm’s dispersed ownership could encounter difficulty whereas for
monitoring management and hold management accountable for their actions (Shleifer & Vishny,
1997). Hence the strong legal systems are necessary for triggering the setting of the strong
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boundaries between the different rights and responsibilities made to all shareholders without a
matter of ownership (Black, 2001). Though the legal frameworks for safeguarding the minority
investors have been a subject of interest in various countries depending on the legal tradition, the
mechanism of enforcement, and the institutional capabilities, (Goranova & Ryan, 2014) is
among the issues that have been raised to the extent possible. However, for developing countries
these challenges may be even higher in comparison with those to moderate developed countries
in the field of investor protection: their legal institutions and regulatory enforcement are not as
reliable (North, 1990). Strengthening minority investor rights accompanies with various
initiatives involving the augmentation of implementing legal framework and the improvement of
the corporate governance standards as well as the promotion of accountability and transparency
among firms (Doidge and others, 2007). Here are some measures that include making the
disclosure to be mandatory, which increase the shareholder rights, alongside with the strong
enforcement mechanisms that make compliance with corporate governance policies becomes
easy (La Porta et al. , 2000). Also, the effort to improve the education level and the awareness of
investors can be seen as the main tools for the minor investors´ participation in corporate
direction making. Through strengthening the already existing investor protection of the
minorities, countries will enable investors to have confidence, and hence, inflow of foreign
investment and economic flourishing (Gillan & STarks, 2003).
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4.0 Corporate Social Responsibility and Sustainability
4.1 Environmental, social, and governance (ESG) considerations
Environmental, social, and governance (ESG) perceived factors have been viewed as vital
cushions for commerce activities and performances (Ioannou & Serafeim, 2012). Corporately,
environmental and social initiatives are becoming more popularly tracked among investors,
consumers and the other stakeholders, attributing this attention to the long time benefits that such
practices may create. Companies who skillfully integrate ESG (Environmental, Social and
Governance) elements into their business strategies and workings mitigate against risks
regarding environmental and social vulnerabilities, in addition, such an action enhances their
prestige, and facilitates investment and sustainable progress (Haß, Johan, & Müller, 2016).
Therefore, ESG factors are very important because they are playing a key role in investment
decisions at the moment and also in corporate governance frameworks and this, consequently, is
leading to a new way of doing business that it is more responsible and sustainable. As a
consequence companies, especially large ones, are strained more, and they have to disclose their
ESG performance and prove that they comply with responsible business practices (Hasan &
Rahi, 2018). The impact is exacerbated not only by the regulatory action, but also by the
disclosure and transparency initiatives because the policymakers themselves contribute to the
understanding of the importance of ESG factors for risk and performance assessment (Dhaliwal
et al. , 2014). More so, the coalescence of different ESGs ideas with the United Nations
Sustainable Development Goals (SDGs) refers to a frame work that enables companies to push
and align their efforts with the broader societal goals and create global sustainability(United
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Nations, 2015). Companies, through their ESG-oriented decision-making processes and
strategies, can tackle risks, become more resilient, and tap into cutting-edge trends in the
transition towards a holistic and friendly environment, on which we are heading in the next
decades (Scholtens, 2017). This has in turn been accompanied by a rise in ESG investing as
investors increasingly aim to coincide their financial ambitions with values thereby do good
socially and environmentally (Clark et al. , 2015).
4.2 Stakeholder engagement and reporting practices
Stakeholder engagement, communications and reporting process have taken good roles in the
governance structures of companies; through these, they are able to know the diverse problems
they have to solve for the different needs (Ioannou & Serafeim, 2012). Formally creating or
maintaining communication and interactions with parties and stakeholders e. g. employees,
customers, suppliers, and community members would promote transparency, reliability,
openness along with the much-needed understanding (Haxhi & Aguilera, 2017). Hence, a
company will know more about the expectations, variations, and emerging issues of the
stakeholder. Such information could be taken as resource for planning and decision-making and
seeking for sustainability of the long-term perspective in the company (Freeman & Reed, 1983).
Moreover, those disclosure finctions which usually require companies to reveal the performance
on ESG detailedy, provide the stakeholders an encompassing picture about the way they are
affecting the environment and society and gives them power to ask for the accountability what
was the most affected (Haß, Johan, & Müller, 2016). By means of multi-stakeholder-based
governance and communicating whole information, they will be able to reduce the risks and
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damage to reputation properly, set up social accountability and create shared value for all
stakeholders. This ushers the birth of the industry that offer products and services that people and
communities need, which will, in turn, enable business growth organic, and this consequently
gives them competitive advantage (Porter & Kramer, 2011). However, the open disclosure mode
may as well complement the companies' sustainability objectives and supporting the firm
establishment of trust between investors, clients, and other relevant company stakeholders
(Elkington, 1997). Finally, this may require the government to work in bringing investments and
thus a boost in customer loyalty coupled with reputation in the industry (Pels, Haß, & Müller,
2016). The focal point here is the importance of stakeholder engagement both externally and
internally along with the comprehensive reporting systems that determine the ability of the
corporate governance board to devise its future strategies in a way that will enable the companies
to withstand the demands and of different stakeholder communities, develop strong business
models and thus create long term benefits not only for them but also the society at large.
4.3 Corporate ethics and compliance programs
Ethical and inhibition are the key to creating an atmosphere of conduct, integrity, and
accountability within an organization (Kaufmann, Kraay, & Mastruzzi, 2011). Proficient ethics
and compliance programs comprise transparent rules concerning good behavior, put through
mechanisms for reporting wrongdoings, and conduct strict enforcement of the existing policies;
by the end of this process (Haxhi & Aguilera, 2017). Through encouraging ethics, integrity and
reasonable choice making, companies are able to reduce the dangers of lawsuits and reputational
damage, increase happy workers and workplace engagement and build the faith and confidence
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of all their stakeholders (Haß, Johan & Müller, 2016). Such commitment of ethical performance,
however, is not limited to the requirements of law but it is a component of ethical executions in
every part of a business organization (Trevino & Brown, 2004). Furthermore, investing in strong
and prestige ethics a compliance programs shows leadership to the business community ensuring
the security of the sustainable business practices . In businesses which take ethical traits and
honesty seriously, they not only conform to laws but also they act in accordance with principles
that are acceptable for all and treat every stakeholder with respect and dignity (Trevino &
Weaver, 2003). Such high level of collaboration then builds up a culture that is characterized by
openness, accountability, and mutual respect (Hemingway and Maclagan, 2004). Also, ethics and
compliance programs can give a business an edge by diversifying the industry in the marketplace
and by allowing them to attract socially responsible customers and investors (Carroll & Shabana,
2010). As a result, incorporating the ethics into the organizational management systems and the
governance system helps in the integration of the company's goals with the universal societal
values and promotes sustainable development worldwide (Sethi,2005). At its core, ethical
conduct primarily addresses the critical moral and legal issues but in the strategic sense it is
required for building brand image, reputation, and ultimately achieving sustainable growth
(Ferrell & Fraedrich, 1997).
4.4 Role of institutional investors and activists
The role played by institutional investors and activism in corporate governance builds of the
responsive management as well as the positive impact created into companies (Kaufmann,
Kraay, & Mastruzzi, 2011). Institutional investors have the necessary means of management
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representing consulting companies and optimizing the investment owned by governments as well
as the assets under management. These institutional investors work with the companies on ESG
issues, shareholder resolutions, and issues on corporate governance (Ioannou & Serafeim, 2012).
Such a kind of investors can be called engaged investors. They usually want to invest for the
long time and to build up the portfolio, which will enable them to meet the common
sustainability objectives. (Haxhi & Aguilera, 2017). For the same reason, engrossed shareholders
are the major influencers who mount pressure on their corporations to reveal more details, ensure
diversity, and make their businesses sustainable (Haß, Johan, & Müller, 2016). These include,
proxy battles, shareholder resolutions and public campaigns that ultimately put pressure on
corporations’ strategies and processes to change them to better address issues relating to ESG
principles (Goranova and Ryan, 2014). The collective effect of institutional investors and
activists is the leverage of their collective power and influence which can be used in catalysing
the meaningful developments of good governance practices in corporate governance and
contribute, by implication, towards the long term success and resilience of the company’s
longevity. Moreover, there is the additional interaction that happens when the institutional
investors, activists and companies interact to lead to constructive dialogue and collaboration,
which in turn encourages more of corporate accountability and transparency (Elkington, 1997).
This involvement can bring to pass positive situations, where companies are able to face their
ESG problems, to do better, and to the best of all provide more value to the shareholders (Clark
et al. , 2015). Additionally, it is well-known that the expanding influence of institutional
investors and activists books more companies to be precautious by incorporating ESG
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considerations in their business strategies and operations, especially as companies that integrate
sustainability elements are perceived to be more sustainable and hence valued higher by the
market (Scholtens, 2017).
5.0 Regulatory and Institutional Frameworks
5.1 Corporate governance codes and best practices
Compliance with key governance principles and guidelines for board directors and executives is
vital for those corporations that are seeking to have their objects achieved (i. e. trust in decision-
making processes, transparency, and code of ethics). These rules, however, are mainly framed by
such agencies as regulatory bodies as well as industry associations to emphasize the need for the
listed principles, standards, and attitudes for working boards of directors, effective risk
management, and stakeholder engagement. The shareholders of the company are both Team A
and Team B. Therefore, the company needs to meet the minimum requirements from all the
stakeholders including the investors. So this will assure higher confidence among the investors,
less risk and important value for the shareholders hence the stakeholders. Moreover, these codes
become the basis for benchmark in place and also the tool for governing body's performance
assessment so as to ensure that expected improvements and global standards are eventually
reached. By and means of the establishment of their code, companies reveal how they wish to
accomplish the essence of corporate ethics, and the value they intend to provide to the investors
and stakeholders, and sustainable business lives. What is more, another advantage in the
corporations of proper codes of corporate governance are to be mentioned such as the meeting
the regulatory requirements, the improvement of decision-making processes, the main benefits –
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dominance in the market. As for the codes of good corporate governance, they have their most
significance function in assuring accountability and transparency, which are the cornerstones for
a healthy business environment, guaranteed by public confidence and trust. Eventually, corporate
governance codes along with good practices become strong devices which oblige corporations to
develop reliable and robust governance systems to ensure the company’s long-term performance
and ensure the company’s valuation. It is very much important to make clear that these practices
do not just have to be a regulatory requirement but rather they contribute to the building of
strong companies with the ethically-driven nature that can tackle the diverse, complex and
dynamic present global trade scenario. Thus proactiveness of corporations by means of the
adoption of corporate governance codes and best practices will be indicative of the establishment
of responsible organizations willing to discharge ethical acts and meet their growth goals as
demonstrated by sciences like those of La Porta et al. (1998), Li et al. (2015).
5.2 Legal systems and enforcement mechanisms
Both appropriate legal corporate governance bodies and also include a system to monitor a
global law and regulation generally be incorporated in the process (Abeidon, La Porta, Levine, &
Shleifer, 1997). Throughout the corporate governance in a country, a high-quality legal system
which comes when there is institutional contracts creation, protection of property rights and
investors rights has a dual role of encouraging the firms to observe good corporate governance
practices (Li et al. , 2015). However, there are many vital aspects of a law enforcement system
such as regulatory oversight, staff independence or existence of legal enforcement agencies.
They all make it difficult for someone to commit a fraudulent act because in the end these
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lawbreakers will be punished for their actions. Enough or appropriate legal regime and
implementation devices can reduce such risk, which will address the issues of investment
uncertainty and promote growth (Masulis & Mobbs, 2014). For the same reason the government
must undertake the constant task of highlighting the importance and implementation of the legal
frameworks and the needed mechanisms for sanctions enforcement repeatedly to make the
system works with no anachronisms. Noteworthily, law creates a path that is durable for the
country to be trusted and able to attract foreign loans, develop businesses and sustain economic
growth (La Porta et al. , 1997). The third factor awarded is the enforcement of the laws against
entree of any player into the market which makes the playing ground level for all players so as to
avoid the unfair advantages of one player over the other. The government will have to position
itself as a top function aimed at ensuring sustainable economic development, creating innovation
opportunities, and securing the required prosperity of its citizens (Li et al. , 2015). As a result,
the reform aim can be formulated in the following way: "The aim of all reforms shall be to
fortify all institutions, to lift the curtains on legal procedures, and to make justice not only
available but also justified so that business governance in our country is efficient and credible"
(Masulis & Mobbs, 2014).
5.3 Political and cultural influences
One of the ways political and cultural factors will have their effect on how governance will look,
is through affecting the crafting and the designing of corporate governance strategies and
practices (Liang, Renneboog, & Sun, 2015). Political factors constituted by the government
stability, regulations, and public policies create the substructure of the company’s business
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environment (La Porta et al. , 1997). To be completely honest, the political culture, the values,
and expectations from the society shape the overall operations of a public entity, board
engagement, as well as customer relationships (Levit & Malenko, 2016). Companies should have
a clear idea of how political factors, especially unique contexts, shape their governance strategies
in order for them to develop effective strategies to respond to different context changes and
stakeholders’ heterogeneous expectations (Liu et al. , 2015). Amongst other examples countries
that have government intervention in the economy may be a case of companies which should go
through complex legal frameworks and create relationship with regulatory authority to ensure
compliance and less risks of violation (La Porta et al. , 1997). On the same note, in culturally
heterogeneous countries, corporations might need to be more innovative in governance processes
where integration of different views that respect culture is done so as to improve general
effectiveness and stakeholder engagement (Levit & Malenko, 2016). In addition, political and
cultural factors can make different types of shareholder activism to appear, social responsibility
behavior to be unwilling and less emphasization on long-term sustainability formation to be
preferred (Liang, Renneboog, & Sun, 2015). Hence, companies have to take wider socio-political
environment into account and become proactive thereby engaging in conversations with these
stakeholders so as to build up trust in societal and political environment and legitimacy into their
governance practices. Through the platform their governance strategies with the current political
and cultural norms companies create can more strongly affect their ability to be resilient, long
lasting and successful in the complicated global markets.
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5.4 Role of stock exchanges and listing requirements
Listing requirements for stock exchanges and disclosure standards on corporate governance
issues are among the major factors driving transparency and improvement in standards among
listed companies (La Porta et al. , 1998). Regulations for board structuring, disclosure practices
and governance are frequently imposed on exchanges to provide for investor protection and
market integrity standards by them (Liang, et al, 2015). Secondly, the exchanges can motivate
the adoption of good governance practices through projects such as the Governance Initiative
which recognizes well-governed companies, Sustainability Index which rates investors based on
their collective effective allocation, and Investor Education Programs. In this way the stock
exchanges adhere to the highest level of their listing requirements which are set in accordance
with the leading international best practice. In addition, these stock exchanges develop a culture
of corporate governance excellence that enhances the integrity and efficiency of capital markets
(Levit & Malenko, 2016). Moreover, stock exchanges also play a fundamental role in providing
companies with an avenue to tap into capital and raise funds go into businesses which may
require expansion and growth (La Porta et al. , 1998). By doing this investors will be more
confident and the capital flow to the markets. Also it will attract both domestic and international
investors and boost the economy (Liang, Renneboog, & Sun, 2015). Additionally, listings on
good brand reputable stock exchanges are a driver to companies' visibility and reputation thereby
improving equity revenues, valuation and accessibility to a wider range of investor (Masulis and
Mobbs, 2014). Therefore, corporations that are listed on stock exchanges with this system of
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rigorous governance and upheld prerequisite can be seen as more dependable and less risky by
investors which is reflected on their cost of capital and value (Levit & Malenko, 2016).
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