Although chapter four presents research that questions the assumption that dual one-tier boards are ineffective governance mechanisms, the conventional wisdom of reformers is still dominated by a conflict perspective of board organization. Developments in international corporate governance indicate a growing concern of legislators, regulators and investors with the formal independence of corporate boards in the US and the UK.
The introduction of voluntary codes of best practices and new listing requirements of stock exchanges and the introduction of global corporate governance principles by institutional investors suggest that corporations are increasingly pressured by financial markets in Anglo-Saxon countries to alter the organization of their boards. In addition, pressures on the formal organization of boards of directors can be discerned in continental European countries. Even corporations in the former Soviet Union are confronted with emerging international corporate governance standards through privatization initiatives from the World Bank, the International Finance Corporation (IFC) and other internationally oriented organizations.
As suggested by Maassen and van den Bosch (1997a), pressures from regulators, legislators and investors may stimulate directors to transform the formal organization of their boards into more independent board structures. This chapter further explores this process of board model transformation in listed corporations that operate with one-tier and two-tier boards of directors.
The organization of this chapter is as follows. As observed in chapter two of this research, general models of board involvement recognize external contingencies that may have an impact on the organization and composition of corporate boards. Societal pressures, regulatory systems and ownership patterns - for example - are considered to act as fundamental influences on the role and the organization of corporate boards (Judge, 1989). As indicated above, stock exchanges and institutional investors are increasingly playing a dominant role in the international discussion on board independence. This chapter further identifies the pressures from stock exchanges, legislators and institutional investors on corporate boards of directors. First, paragraph 5.2 briefly reviews the role of stock exchanges in the process of board model transformation and board model convergence. Information on these developments was not easy to obtain from the literature. When available, the literature mainly focuses on developments in the UK where the Cadbury Code and its successors have dominated the corporate governance debate. Much less is known about developments in continental European countries and other financial regions.
To fill in this gap of interest, this study initiated a survey sent to all leading stock exchanges in Europe, North- and South-America and Asia in 1997. This paragraph presents the findings of the survey on the latest developments in listings rules, codes of best practices and other self-regulatory initiatives from stock exchanges that relate to the corporate governance structure of listed corporations. To illustrate the potential impact of legislation on changes in the formal organization of corporate boards, paragraph 5.3 introduces the reader to the latest developments in the draft Fifth Directive on Company Law of the European Union.
Paragraph 5.4 examines the role of institutional investors in the global corporate governance debate. The literature on the role of institutional investors in the corporate governance debate is dominated by studies on shareholder activism in the US. Information on the role of institutional investors in the transformation of boards in other countries was difficult to obtain during the course of this research project.
Initiatives from legislators, regulators, exchanges and investors give rise to the development of a model on the transformation and convergence of one-tier and two-tier boards. This theoretical model is presented in paragraph 5.5. The model is based on assumptions previously developed in chapters three and four of this study. The model generates three propositions on the transformation of board models. These propositions are the building blocs of the convergence hypothesis of this study. The convergence hypothesis suggests that differences between the characteristics of board models may be reduced over time due to pressures from legislators, boardroom reformers, stock exchanges and institutional investors. Paragraph 5.6 presents a summary of this chapter.
In part II of this research, the convergence hypothesis is examined through the exploration of developments in the formal independence of one-tier boards in the US (chapter six) and the UK (chapter seven). Developments in the formal independence of Dutch two-tier boards are investigated in more detail in chapter eight of this study.
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