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17 January 2019

ECGI: Universal corporate governance


This paper by authors at the European Corporate Governance Institute addresses questions such as: Are some sets of corporate governance practice universally effective across the world? If some governance practices are not unconditionally applicable, under what conditions are they effective?

Policymakers and investors around the world have been increasingly emphasizing the importance of effective corporate governance systems. Corporate governance refers to the structure of rights and responsibilities among the parties with a stake in the firm. Effective corporate governance uses mechanisms to align the interests of managers and of the company’s shareholders and various stakeholders for them to act responsibly regarding the protection, generation, and distribution of wealth invested in the firm. It has been widely recognized that good corporate governance with regard to shareholder protection can lead to higher shareholder value and more efficient capital allocation, which are in turn associated with better economic outcomes. Despite the widespread recognition and spillover of governance practice, a central issue in this literature is the extent to which “good” governance practices are universal (one size mostly fits all) or instead depend on country and firm characteristics. The latter refers to the interdependencies between organizations and diverse environments which may determine governance effectiveness.

Empirically, to investigate the (non-)existence of a universal corporate governance model, the authors consider a few sets of “good governance” from the perspectives of corporate rules, ownership structure, and investor legal protection. In particular, the authors primarily focus on corporate rules which are more implementable and self-constructed a “global entrenchment index” (Global E-index) as our primary proxy for the (lack of) rule-based governance. The authors then compare it with the governance indices in existing studies (mostly based on US samples for firm-level governance) and the aggregate indices provided by major governance data providers (e.g., ISS Governance and MSCI Governance Metrics).  

Full article



© ECGI


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