To answer this question, we must first define what convergence means in this context. According to Hansmann and Reinier, there are differences between various corporate systems, but the deeper tendency is towards a higher degree of uniformity – convergence – in different developed market jurisdictions around the world. Convergence, in the corporate context, illustrates that corporate systems (the law) and practices (the governance) around the world will increasingly resemble each other.[1]

Convergence is divided into four subcategories: formal, functional, contractual, and hybrid convergence. Formal convergence relates to corporate law and requires legislative action to create similar legal rules for existing corporate governance systems in different jurisdictions, thus altering the structure of those governance systems.[2]

In functional convergence, institutions respond to the demands of a changing environment by producing comparable results, despite different legal rules, without altering the institution’s formal (legal) structure.[3]

In contractual convergence, the gap between formal and functional convergence can be bridged through contractual arrangements. This means that when existing governance institutions lack the flexibility to respond without formal change, and political barriers restrict formal institutional change, contractual arrangements step in to solve the problem.[4]

Hybrid convergence occurs when a company shifts its seat to another country to escape domestic law.[5]

The United Kingdom (UK) adopted the world’s first stewardship code in 2010. The code’s original objective was to motivate institutional investors to become responsible and engaged shareholders. Specifically, the code aimed to incentivize institutional shareholders to act as “good stewards,” using their collective voting rights to exercise control over listed companies. The code was a soft law instrument, designed to mitigate excessive risk-taking and short-termism by corporate management, in order to avoid another financial crisis.[6]

Since the adoption of the UK stewardship code in 2010, several Asian countries have followed suit by establishing stewardship or similar codes. There have been assumptions that the proliferation of such codes in Asia is a clear example of the UK model’s implementation, and thus, a manifestation of corporate governance convergence theory. While it is true that many of these Asian jurisdictions have declared the UK model as an inspiration, and the outlook of their codes appears similar, there are significant differences in the function of stewardship between the UK and most Asian jurisdictions. In some cases, the function of stewardship seems contrary to the UK model.[7]

For example, Singapore’s code was designed to consolidate its successful family and state-controlled corporate governance system. Japan’s stewardship code was designed to reform its traditional, risk-averse, stakeholder-oriented model, moving toward a more shareholder-oriented, profit-maximizing, and less risk-averse system.[8]

Previous examples illustrate the diversity in the function of stewardship codes across Asia and reveal the differences from the UK model, which aimed to encourage institutional shareholders to act as “good stewards” using their collective voting rights to exercise control over listed companies.

The reason for the functional differences between stewardship codes in Asia and the UK is apparent: In Asia, major shareholders typically have de facto control over the corporate governance of most listed companies through their voting rights. Asian corporate controllers are similar to their UK counterparts in that they control the shareholder float in listed companies. However, the nature of controllers in Asia and the UK differs significantly in relation to stewardship: Asian controllers are “rationally engaged shareholders,” whereas UK controllers are “rationally passive” shareholders.[9]

This fundamental difference in controlling shareholder behaviour means that while the UK model was designed to encourage better stewardship, Asian controlling shareholders already fulfil the UK model’s main objective by default. Why has Asia implemented, or at least signaled the implementation of the UK code, even though it does not serve corporate governance there?

Most Asian jurisdictions have adopted the UK code at a formal level but not at a functional level. This means that governments or other market players have a convenient, inexpensive, non-binding, and malleable tool for achieving their own interests. Formal adoption also signals to the rest of the world that these jurisdictions have implemented stewardship codes, signaling good governance.[10] However, this can amount to “greenwashing” on some level, as the signal and reality diverge.

Since the stewardship code is formally implemented (appearing similar on the surface, with similar principles and descriptions), yet superficial, while corporate governance remains significantly local, path-dependent, and divergent in practice, this indicates divergence within convergence. Faux convergence, therefore, refers to superficial convergence in form but divergence in practice.[11]

The stewardship case is one example that illustrates faux convergence in its function and does not exclude the possibility of it occurring in other contexts.

#fauxconvergence #corporategovernance

[1] Douglas Branson. The Very Uncertain Prospect of Global Convergence in Corporate Governance. [HeinOnline Cornel International Law journal 34, 2001] p. 323.

[2] Ibid 1, p. 455.

[3] Gilson, R. (2001). Globalizing corporate governance: convergence of form or function. [American Journal of Comparative Law. 49, p. 329-358] p. 332.

[4] Ibid 4, p. 333, 356.

[5] Rose, P. (2001). EU company law convergence possibilities after Centros. Transnational law and contemporary problems. 11. P. 123.

[6] Koto & Koh & Puzniak. Diversity of Shareholder Stewardship in Asia: Faux Convergence [ Vanderbilt Journal of Transnational Law vol 53, issue  3, May 2020] p. 832.

[7] Ibid 7, p. 833.

[8] Ibid 7, p. 834.

[9] Ibid 7, p. 835.

[10] Ibid 7, p. 836.

[11] Ibid 7, p. 836, 880