WWW.DIS.XLIBX.INFO
FREE ELECTRONIC LIBRARY - Thesis, dissertations, books
 
<< HOME
CONTACTS



Pages:   || 2 | 3 |

«The Comply-or-Explain Approach for Enforcing Governance Norms Subrata Sarkar Indira Gandhi Institute of Development Research, Mumbai August 2015 ...»

-- [ Page 1 ] --

WP-2015-022

The Comply-or-Explain Approach for Enforcing Governance Norms

Subrata Sarkar

Indira Gandhi Institute of Development Research, Mumbai

August 2015

http://www.igidr.ac.in/pdf/publication/WP-2015-022 .pdf

The Comply-or-Explain Approach for Enforcing Governance Norms

Subrata Sarkar

Indira Gandhi Institute of Development Research (IGIDR)

General Arun Kumar Vaidya Marg

Goregaon (E), Mumbai- 400065, INDIA

Email(corresponding author): ssarkar@igidr.ac.in

Abstract

In recent years the comply-or-explain approach for enforcing corporate governance norms has gained ground in regulatory parlance. The comply-or-explain approach has the advantage of tailoring governance norms to specific characteristics of individual companies which is believed to lead to more efficient corporate governance outcomes compared to the “one size fits all” approach that is often argued to be inherent in the comply-or-else approach. Yet, the effectiveness of the comply-or-explain approach presupposes the existence of many institutional conditions like ownership and control structure of companies, responsibility and transparency of their financial operations, efficiency of stock markets, and ability and incentives of shareholders to assess corporate behavior, all of which could take a long time to evolve and could be challenging especially for emerging economies. This article critically examines the relative advantages of the comply-or-explain approach vis-à-vis the more traditional comply-or-else approach and identifies the specific institutional conditions which are required for its success in achieving effective governance of companies.

Keywords: Corporate governance, strategic behavior, governance norms, enforcement, convergence JEL Code: D22, D82, G34, G38

Acknowledgements:

Forthcoming in Corporate Governance in India: Challenge and Continuity, Indian Institute of Corporate Affairs, Oxford University Press, Publishers. I would like to thank Mrinmoyee Chaterjee for excellent research assistance in preparing this manuscript. The usual disclaimer applies.

The Comply-or-Explain Approach for Enforcing Governance Norms Subrata Sarkar1 (ssarkar@igidr.ac.in) Indira Gandhi Institute of Development Research A.K.Vaidya Marg, Mumbai 400 065, INDIA July, 2015 Abstract In recent years the comply-or-explain approach for enforcingcorporate governance norms has gained ground in regulatory parlance. The comply-or-explain approach has the advantage of tailoring governance norms to specific characteristics of individual companies which is believed to lead to more efficient corporate governance outcomes compared to the “one size fits all” approach that is often argued to be inherent in the comply-or-else approach. Yet, the effectiveness of the comply-or-explain approach presupposes the existence of many institutional conditions like ownership and control structure of companies, responsibility and transparency of their financial operations, efficiency of stock markets, and ability and incentives of shareholders to assess corporate behaviour, all of which could take a long time to evolve and could be challenging especially for emerging economies. This article critically examines the relative advantages of the comply-or-explain approach vis-à-vis the more traditional comply-or-else approach and identifies the specific institutional conditions which are required for its success in achieving effective governance of companies.

JEL Classification Codes: D22, D82, G34, G38

Forthcoming in Corporate Governance in India: Challenge and Continuity, Indian Institute of Corporate Affairs, Oxford University Press, Publishers. I would like to thank Mrinmoyee Chaterjee for excellent research assistance in preparing this manuscript. The usual disclaimer applies.

1.0 Introduction In recent years the comply-or-explain approach for designing and enforcing corporate governance norms has gained ground in regulatory parlance. Under the comply-or-explain approach governance norms are tailored to the specific characteristics of individual companies which is believed to lead to more efficient governance outcomes compared to the presumably “one size fits all” approach that is often argued to be inherent in the comply-or-else approach. A comply-orexplain approach could be particularly important for emerging economies where organization, ownership and control structure of companies are complex and where optimal governance mechanisms that maximize company value are in the process of evolution. Yet, the very same features of emerging economies that increase the attractiveness of the comply-or-explain approach also pose large challenges for implementation. In particular, the complexity of organization, ownership and control structure coupled with lower transparency of operation of companies can put large burden on the regulator to determine what structures are appropriate for good governance and then enforce them strictly. Similarly, the lower efficiency of the stock market and the relative lack of financial expertise on part of the average shareholder can make these complementary mechanisms which are crucial for the success of the comply-or-explain approach, less effective in emerging economies. What then are the relative advantages of the comply-or-explain approach vis-à-vis the more traditional comply-or-else approach and what are the specific institutional conditions which are required for its success in achieving effective governance of companies?





This article is an attempt to answer these questions.

2.0 The Two Approaches and Its Adoption around the World Under the comply-or-else approach the regulators prescribe a set of rules which all companies are required to comply with. These rules are generally introduced through legal statues. If a company does not comply with the rules then the company is liable to be penalized by the regulator.

Penalties could be in the form of fines levied on the corporation or its directors as well as imprisonment of its officers. The comply-or-else approach is often characterized as a ‘one-sizefits-all’ approach since ‘uniform standards’ are prescribed for all companies and non-compliance directly leads to penalties, with the law not going any deeper into the reasons for non-compliance.

In contrast, under the comply-or-explain approach the regulator specifies a set of codes and principles which act as guidelines or norms for all companies. Being recommendatory in nature, compliance is not mandatory. However, in case a company decides to deviate from any specific code or principle it must offer an explanation to the regulator. If the explanation is judged as sufficient, the company is allowed to make the deviation; if not, the company becomes liable to penalties imposed by the regulator. The comply-or-explain approach is perceived to give flexibility to a company to adopt the governance structure that is most appropriate for its operation which in turn is likely to lead to better governance outcomes.

In recent years, another approach called the apply-or-explain approach has gained ground. The apply-or-explain approach is a reformulated version of the comply-or-explain approach. Implicit in the comply-or-explain approach is the fact that a company that has offered an explanation, whether sufficient or insufficient, must have not-complied with some of the stated principles or codes.

Thus, offering of explanation is synonymous with non-compliance. A more appropriate characterization can be achieved by renaming the approach as apply-or-explain. This way, applying the prescribed codes or explaining why they were not applied both become valid ways of compliance This minor change in terminology is believed to help promote the view among shareholders that ‘greater’ attention should be paid to the explanations.

Given these three alternative approaches to regulatory enforcement, what is the extent of their adoption around the world? Table 1 gives the details. It is apparent that most of the major countries around the world are following the comply-or-explain approach for corporate governance. These include the United Kingdom, Australia, Canada, Germany, Hong Kong, Singapore, all OECD2 member countries except for the US (OECD, 2004) and a host of other emerging economies. The two notable exceptions are the US and India which are following the comply-or-else approach. Significantly, the US is a very mature economy with a governance system that has evolved over a large number of years. In contrast, India is a fast growing emerging economy with evolving standards for corporate governance. South Africa is the only country that follows the apply-or-explain approach.

Organization for Economic Co-operation and Development The large scale adoption of the comply-or-explain approach by many countries suggests that it has its own merits. But at the same time, the adoption of the comply-or-else approach by the US and India also raises a valid question of whether the comply-or-else approach could be better under certain institutional conditions. To address this issue it is instructive to understand the merits of the comply-or-explain vis-à-vis the comply-or-else approach and the pillars on which the former concept stands.

3.0 The Structure of the Comply-or-Explain Approach Figure 1 presents the comply-or-explain approach and the comply-or-else approach in a schematic form. It is obvious that in the way that it is structured in theory, the comply-or-explain approach should be at least as good as the comply-or-else approach since the comply-or-else approach is but one node in the comply-or-explain approach. In the comply-or-explain approach, if the regulator choses the codes and principles to be the same as the rules specified under the comply-or-else approach and regards all explanations for deviation as insufficient, then the comply-or-explain approach will reduce to the comply-or-else approach. In addition, the comply-or-explain approach contains one node in which the regulator might allow deviations from the prescribed norms provided the company is able to justify those deviations. It is generally argued that the business conditions for companies vary based on their size and complexity which might make it in-optimal to have a uniform set of rules for all. Thus the comply-or-else approach should dominate the comply-or-else approach in totality. But then, why is the comply-or-explain approach not the only approach that all regulators ought to adopt?

The schematic diagram is now helpful. Looking at the diagram and starting from the end, the superiority of the comply-or-explain approach relies critically on judging the sufficiency of the explanations offered for deviations from the prescribed norms. Allowing a company to depart from the so called ‘one-size-fits all’ or ‘uniform standards’ and letting them adopt a structure that best suits their needs should be always better. But this is assuming that the company, or more specifically its managers, will adopt governance structures that deviate from the specified codes and principles only when doing so is in the best interest of the shareholders. However, if we acknowledge that the agency problem related to governance is an issue, which we must because otherwise the issue of governance becomes moot, then we must also acknowledge that there will be some companies whose managers have incentives to adopt structures that are in their own interest and not that of the shareholders and may therefore offer explanations to support the choice of those inappropriate structures.

The point that managers or insiders may take decisions which are not in the best interest of shareholders is sometimes misunderstood. This observation is interpreted as a commentary on the trustworthiness, ethics and integrity of managers and, in the extreme form, a supposition that managers might embezzle shareholder funds. However, this is simply the recognition of the fact that the actions taken by managers may benefit the shareholders and the managers in different ways and since managers usually make the choice, they might take those actions which are in their relative interest vis-à-vis that of the shareholders. The empirical literature on corporate governance is abound with evidence that managers sometimes do take actions that further their own interest vis-à-vis that of the shareholders, for example by undertaking negative net present value projects only for their personal empire building, or by managing earnings to increase their remuneration (Leuz et al., 2003; Haw et al., 2004). This problem of in-optimal decision is further exacerbated when large shareholders are also the managers of companies, as is characteristic of many emerging economies. In this case, the inside manager cum shareholder can take actions at the expense of the outside minority shareholders. Here too, the empirical literature on governance has produced evidence that expropriation of minority shareholders by dominant insider shareholders do take place (La Porta et al., 1999; La Porta et al., 2000).

The above discussion implies that while some managers may opt to deviate from the specified codes or principles which are in genuine interest of all shareholders, some managers and insiders may like to adopt governance structures that further their own interest at the expense of outside shareholders and then offer explanations to justify those structures. These explanations must then be detected as insufficient under the comply-or-explain approach. The logical question then is to ask who judges the sufficiency of the explanations and how does one decide if an explanation is sufficient or not? The comply-or-explain approach relies on three potentials “judges” to make this determination namely, (i) the shareholder, (ii) the financial market and (iii) the regulator. Let us consider them in turn.

3.1 The “Judges”



Pages:   || 2 | 3 |


Similar works:

«Active@ UNERASER User Guide 1 Active@ UNERASER Guide Copyright © 1999-2013 LSOFT TECHNOLOGIES INC. All rights reserved. No part of this documentation may be reproduced in any form or by any means or used to make any derivative work (such as translation, transformation, or adaptation) without written permission from LSOFT TECHNOLOGIES INC. LSOFT TECHNOLOGIES INC. reserves the right to revise this documentation and to make changes in content from time to time without obligation on the part of...»

«15-3602-cv United States Court of Appeals For the Second Circuit GEOFFREY OSBERG, on behalf of himself and on behalf of all others similarly situated, Plaintiff-Appellee, v. FOOT LOCKER, INC., and Foot Locker Retirement Plan, Defendants-Appellants. On Appeal From The United States District Court for the Southern District of New York No. 07-CV-1358-KBF BRIEF FOR THE AMERICAN BENEFITS COUNCIL, THE ERISA INDUSTRY COMMITTEE, AND THE CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA AS AMICI...»

«Part #681 Revision Date: 8.21.07 Speedometer Calibrator Step-by-Step Installation Manual Table of Contents Section 1 Programming Instructions.................. 2 Diagnostic Trouble Code (DTC) Information... 2-4 Tire Size............................... 4 Rear Gear Ratio......................... 5 Report.................................. 5 Programming.....................»

«Министерство спорта Российской Федерации Федеральное государственное бюджетное образовательное учреждение высшего профессионального образования «Российский государственный университет физической культуры, спорта, молодежи и туризма (ГЦОЛИФК)» ЛЕЧЕБНАЯ ФИЗИЧЕСКАЯ...»

«Generalized Substring Compression Orgad Keller Tsvi Kopelowitz Shir Landau Moshe Lewenstein Bar-Ilan University Ramat-Gan, Israel Abstract In substring compression one is given a text to preprocess so that, upon request, a compressed substring is returned. Generalized substring compression is the same with the following twist. The queries contain an additional context substring (or a collection of context substrings) and the answers are the substring in compressed format, where the context...»

«Joe Cuseo TARGET AREAS FOR DEVELOPMENT OF A COMPREHENSIVE FIRST-YEAR EXPERIENCE PROGRAM TARGET AREA #1. NEW-STUDENT ORIENTATION National data continue to reveal that students are most “at risk” for attrition during their first year of college. New-student orientation may be the only opportunity for institutions to reserve and devote all its campus resources and attention to one class— entering first-year students. Consequently, new-student orientation programs have the potential for...»

«National Youth Fitness Survey (NYFS) Lower Body Muscle Strength Component Procedures Manual July 2012 TABLE OF CONTENTS Chapter Page 1 OVERVIEW OF THE LOWER BODY MUSCLE STRENGTH COMPONENT 1.1 Background 1.2 Purpose 1.3 Exam Overview 1.4 Role of Examiner 2 EQUIPMENT AND SUPPLIES 2.1 Dynamometer 2.1.1 Operating Features 2.1.2 Dynamometer Calibration 2.1.3 Dynamometer Battery Power Check 2.1.4 Dynamometer Force Measurement Settings 2.2 Muscle Strength Testing Chair 2.2.1 Straps 2.3 Supplies 3...»

«1 part Computing Fundamentals UNIT 1 EXPLORING COMPUTERS Overview Chapter 1 Computer Basics Lesson 1-1: What Is a Computer? Lesson 1-2: What Is Computer Hardware? Lesson 1-3: What Is Computer Software? Chapter 1 Explores what a computer is and the differences between hardware and software. Computers have four basic actions and several different components. The chapter introduces these actions in addition to hardware such as primary and secondary storage and peripherals. It also covers the...»

«When an Employee Develops Cancer -One in seven Danes develops cancer before reaching pensionable age Danish Cancer Society When an Employee Develops Cancer is written by Jutta Olgod, Sociologist, The Danish Cancer Society Preben Engelbrekt, Social worker, The Danish Cancer Society Published by: The Danish Cancer Society 2002 We are happy to point out that this brochure has been translated into English on a voluntary and private basis by translators and former translators of the European...»

«1 of 7 LIT 201: World Literature Dr. James Wicks Spring 2015 jwicks@pointloma.edu Section 1 MWF, 2:55-3:50pm, BAC 103 Extension: 2590 Section 2 MWF, 11:00-11:55am, RLC 102 Office: BAC 125 Office Hrs: Tues. 1-5pm & by appointment Catalogue Description A survey of literary classics of the Ancient and Medieval periods including various genres and nations. Includes works by authors such as Homer, Aeschylus, Sophocles, Euripides, Plato, Aristotle, Virgil, and Dante. Required Texts Davis, Paul, et....»

«3 elements that comprise a high quality PKI.and how you can get it for less November 2009 Documentation issue: 2.0 © Copyright 2009 Entrust. All rights reserved. 3 elements that comprise a high quality PKI Entrust is a registered trademark of Entrust, Inc. in the United States and certain other countries. Entrust is a registered trademark of Entrust Limited in Canada. All other company and product names are trademarks or registered trademarks of their respective owners. The material provided...»

«СПЕЦИФИКА ГЕНДЕРНОЙ ИДЕНТИЧНОСТИ МУЖЧИН Л. В. Деркачёва Мурманский институт экономики Санкт-Петербургской академии управления и экономики, г. Мурманск, Россия Summary. The article is devoted to studying the problem of gender-specific. Describes the rules of gender male role. Summarizes the essence of gender conflict. Provides an analysis of the male gender-role...»





 
<<  HOME   |    CONTACTS
2016 www.dis.xlibx.info - Thesis, dissertations, books

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.