Limits on Convergence in International Corporate Governance Practices

Purpose – The question of whether the corporate governance practices of firms in diverse countries are converging to those of U.S. firms, and the extent of convergence or divergence, is examined. Design/methodology/approach – Company level governance measures of board structure and organization, firm audit attributes, antitakeover defenses, and compensation design attributes of international firms are compared with those of U.S. firms. Findings – We find that the evidence for convergence is more mixed than previously believed, with firms in some nations converging, others essentially static, and a number diverging from U.S. practices. We further determine that country factors such as measures of national economic freedom, increased shareholder rights, and impartial judiciaries help to explain convergence. Greater participation by banks in the national economy is associated with greater divergence from U.S. governance standards. Firm characteristics which are suggestive of a future need for external equity encourage convergence while those which capture the use of leverage or the ability to service additional debt are correlated with greater divergence. Research limitations/implications – This study suggests that inquiry into whether convergence is occurring might be the wrong question to ask. Rather, our findings suggest that the research focus should be shifted toward an inquiry of what specific areas of governance are converging and in what countries or regions. Originality/value – This study helps to describe what constitutes effective corporate governance design for firms worldwide. It provides managers with insights on how governance mechanisms can be tailored to reflect local practices and laws.