Comparing Corporate Governance in Australia and the USA - Case Study Example

Comparing Corporate Governance in Australia and USA Student’s Name: Name of Institution: Instructor’s Name: Course Code: Date of Submission: Introduction At the start of the millennium, a number of scholars argued that corporate governance regimes could only converge, and this was inevitable as much as imminent (Hansmann & Kraakman 2001). This convergence was attributed to a cohesive Anglo-American model of governance. Moreover, Pinto (2005 cited in Hill, 2007) attributed this to the-then high interest in globalization, which was then the basis for a new debate on the international export of US model of corporate governance concepts. However, the debate on convergence/divergence became more complicated in the aftermath of major corporate scandals such as the case of Enron. What emerged is that at the center of these scandals were conflicts of interests, e.g. gatekeeper conflicts and other conflicts related to the structure of packages for executive compensation. As a result of these scandals common jurisdictions of law, e.g. the US and Australia, set up a number of regulatory responses. Despite these moves affirming- to an extent- the hypothesis of convergence, based on common reform themes following the scandals, there still remain significant differences, especially in relation to focus and structure, as well as specific details of the regulatory frameworks. For example, while the Australian reforms emphasized the need to strengthen the participatory rights of shareholders, the US did not (Hill, 2007). Equally, the shape of the reforms influenced subsequent debates on corporate laws that addressed different policy issues in both the US and Australia. Although shared themes that not only necessitated the need for reforms but equally informed them became the basis for certain corporate regulatory similarities between the US and Australia, there are still more notable differences. This paper aims to point out and account for these differences between the Australian and the US corporate governance systems. Discussion The international corporate scandals did elicit a number of regulatory responses in most common jurisdictions of law, such as Australia and the US. These reforms included both legislative reforms as well as changes of governance by self-regulating organizations. At some point, the corporate governance reforms addressed the same governance concerns, especially regarding gatekeeper interest conflicts (Coffee, 2004a). But as it were, the similarities mainly go as far as common needs for change. Hill (2007) reveals that despite influences of globalization, most of the undertaken reforms responded particularly to the internal/local issues. The US’s Sarbanes-Oxley Act 2002, for instance, was based on the Enron scandal (Ribstein 2002). And in Australia, the CLERP 9 Act 2004 is mainly based on the collapse of the HIH Insurance (HIH Royal Commission, 2003). Equally, the post-scandal corporate reforms have been found to bear aspects of the prevailing local political pressures, both in terms of timing as well as evolution (Hill, 2007). In line with this premise, it has been argued that the actual inspiration for the US reforms was the political climate that resulted from the WorldCom scandal, during which the protection of investors became a central political agenda as elections loomed (Langevoort 2006). An unusual bipartisan cooperation saw a smooth and quick passage of the reforms, which then remodeled the allocation of regulatory capacity and ability between US states and the federal law (Chandler & Strine 2003 cited in Langevoort 2006). Thus the defects of the Sarbanes-Oxley Act legislation have largely been attributed to haste, a reason for which Romano (2005) calls the legislation, ‘emergency legislation’ (p. 1528). However, legislations in Australia were given ample time. CLERP 9 Act, for instance, came to force in mid-2004 after extensive public debate and the integration of HIH Royal Commission recommendations, which itself sat for 18 months (HIH Royal Commission, 2003). Unlike the US, processes of reforms were long initiated in Australia before corporate scandals (Ferran, 2005 cited in Hill, 2007). Besides the role of political climate in influencing the reforms, there are also philosophical differences between reforms in the US and Australia, especially regarding reliance on rules and norms. Hill (2007) emphasizes the important regulatory role of norms as embodied within the self-regulatory elements of corporate governance. And Wymeersch (2005) points out the important roles of legal and social contexts in the enforcement of self-regulatory elements. On one hand, the international corporate scandals led to the hardening of norms in Australia. Generally, there has been increasing involvement of stock exchanges in the regulation of corporate governance (Hill, 2007). Since 1996, the Australian Securities Exchange (ASX) had been slightly involved. But following major corporate collapses, this involvement intensified. This was in response to criticism and public pressure, during which Australians questioned the credibility of the ASX as a corporate regulatory body. Accordingly, in 2003, the ASX set up the Principles of Good Corporate Governance and Best Practice Recommendations (ASX Corporate Governance Council, 2003), a more stringent regulatory model that sought for more than just disclosure. For example, the new recommendations called for a strengthened independence and productive isolation of the board from the management (ASX Corporate Governance Council, 2003). According to Hill (2007), there are two traditional reasons why self-regulatory codes are developed by corporations: one, as a response to the absence of governmental regulation in certain areas; and two, as a means to justify such an absence. Hill (2007) in this respect is for the premise that most of the Australian reforms are for the latter reason. These reforms therefore reflect a great preference for flexibility inherent within norm-regulations rather than mandatory legal directives, based on the recognition that failing to put in place adequate enforcement of practices for good governance allows space for onerous government regulations (Humphrey, 2003). Contrary to this, the US reforms reflect ‘juridification’ (Wymeersch, 2005), i.e. a decisive inclination towards rule-based corporate regulation based on mandatory governance framework. For example, the New York Stock Exchange (NYSE) rules for corporate governance put in place a number of mandatory requirements for board structure in accordance with acceptable corporate governance practices, which are stricter than in Australia (Hill, 2006). Equally, the Sarbanes-Oxley Act 2005 imposed a number of new prescriptive rules, which affected the balance of state and federal regulatory powers. Many have described the act as a ‘shadow corporation law’ (Chandler & Strine, 2003 cited in Langevoort 2006), criticizing it for shifting from the conventional US corporate model law, that views state-based law as competitive and facilitative (Romano 2005). More than the reforms in Australia, the Sarbanes-Oxley Act 2002 placed much weight on criminal liability within corporate governance. Some countries in Europe, e.g. Germany and France, adopted certain elements of the Sarbanes-Oxley Act (Enriques, 2003 cited in Hill, 2007). However, Australia, alongside the UK, explicitly rejected the Act’s rule-based approach. As the ASX principles for corporate governance were being introduced, its Managing Director and CEO (cited in Humphrey 2003) openly stated that the ASX intended to avoid elements of the US model. In the end, the dichotomy between norms and rules, which define flexibility and rigidity, is relevant in discussing the issue of regulatory amendment. Emphasis on increased managerial accountability as a means to increase shareholder benefits was also a common theme in most post-corporate scandal reforms. Still, both the US and Australian reforms deviate in the way that they aim to achieve this objective, especially with an emerging dichotomy between boosting shareholders’ participatory rights and protecting shareholders’ interests. The Australian reforms mainly emphasized the need to strengthen the participatory rights of shareholders (McConvill & Bagaric, 2004). The CLERP 9 Act Explanatory Memorandum emphasizes the need to increase shareholder activism and improve their participation and influence. Related to this are the reforms regarding executive remuneration (Hill, 2007). For instance, the CLERP 9 Act provides for increased shareholder participation in issues to do with remuneration by allowing shareholders to approve directors’ report for remuneration during the annual general meeting (Chapple & Christensen, 2005). This is not legally binding. Nonetheless, it gives shareholders greater voice, encourages consultation and flow of information regarding remuneration policies. On the same note, the reform helps check against excessive compensation. On the other hand, the US reforms take a different line of thought. Here, it is the protection of consumer interests that is emphasized (Karmel, 2004), even as the shareholders participatory rights and executive compensation is notably absent. Yet the element of executive compensation is evident in the Enron scandal, as well as other corporate scandal cases. Conflicts of interest are evident in many packages for executive compensation, which instead of aligning the interests of managers and shareholders, often create unfair climate for executives to manage share prices and earnings. Conclusion The main objective in this paper was to compare the corporate governance systems of Australia and the US. In this effort, this paper has shown that irrespective of the common motivations and themes that inspired the reforms, there remain notable differences in their structures, as well as in the specific reform details (Karmel, 2004). These differences are informed by contextual (political, economic, etc) differences between the adopting countries. Thus, the uniqueness of the different national regulatory reforms can be said to be inevitable. On this basis then, the hypothesis that corporate governance is inevitably convergent across border loses ground. Bibliography ASX Corporate Governance Council 2003, Principles of Good Corporate Governance and Best Practice Recommendations, Australian Securities Exchange, Sydney Chapple, L & Christensen, B 2005, ‘The non-binding vote on executive pay: a review of the CLERP 9 reform’, Australian Journal of Corporate Law, vol. 18, no.3, pp. 263-287 Coffee, JC 2004a, ‘Gatekeeper failure and reform: the challenge of fashioning reforms’, Boston University Law Review, vol. 84, no. 2, pp. 301-364 Hansmann, H & Kraakman, R 2001, ‘The end of history for corporate law’, Georgetown Law Journal, vol. 89, no. 2, pp. 439-468 HIH Royal Commission 2003, The failure of HIH insurance: volume I: a corporate collapse and its lessons, Commonwealth of Australia, Canberra Hill, JG 2006, ‘Regulating executive remuneration: international development in the post-scandal era’, European Company Law, vol. 3, no. 3, pp. 64-74 Hill, J 2007, Evolving rules of the game in corporate governance reform, for presentation at ESRC/GOVNET Workshop, Canberra, 14-15 March. Humphrey, R 2003, ‘If not, why not?’, address to the Australian Institute of Company Directors Forum, Sydney, 2 April. Karmel, RS 2004, ‘Should a duty to the corporation be imposed on institutional shareholders?’, Business Lawyer, vol. 60, no. 1, pp. 1-21 McConvill, J & Bagaric, M 2004, ‘Towards mandatory shareholder committees in Australian companies’, Melbourne University Law Review, vol. 28, no. 1, pp. 125-168 Ribstein, LE 2002, ‘Markets vs. regulatory responses to corporate fraud: a critique of the Sarbanes-Oxley Act of 2002’, Journal of Corporation Law, vol. 28, no. 1, pp. 1- 67 Romano, R 2005, ‘The Sarbanes-Oxley Act and the making of quack corporate governance’, Yale Law Journal, vol. 114, no. 7, pp. 1521-1611 Read More