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Keeping Good Company: A Study of Corporate Governance in Five Countries

Keeping Good Company: A Study of Corporate Governance in Five Countries by Jonathan Charkham (389 pages, Oxford University Press, 1995)

(originally published by Booz & Company)

Except for the team at the top, and a handful of academics, corporate governance may not be the sexiest of business topics. Jonathan Charkham, a former adviser to the governor of the Bank of England and a member of several boards of directors, acknowledges as much implicitly in the course of his good-humored book, Keeping Good Company: A Study of Corporate Governance in Five Countries. The urgency of actually doing business tends to drive the need for modifying the context in which it is conducted down the list of an executive's priorities. Mr. Charkham's particular interest in corporate governance was sparked by his service on the Cadbury Committee, a blue-ribbon commission, as Americans would say, that looked into financial accountability at British companies during the early 1990's.

The committee's findings are not included here, although its recommendations are. From these recommendations it can be inferred that the group was less than impressed with the governance situation in Britain and with the degree of accountability that it found. Armed with two of the committee's conclusions—that managers must be free to "drive the enterprise forward" and they must be accountable—Mr. Charkham decided to venture abroad to examine governance structures in comparable industrialized economies.

As he discovered, how companies are run is one of those weather-like topics: everyone talks about it but no one does anything. Mr. Charkham's book indicates why. Company structures don't exist by coincidence, he argues; they reflect their national context. Look at a company incorporated in any of his five countries—Japan, Britain, France, the United States and Germany—and you will see the nation's history, beliefs and priorities.

Thus, German companies, which have a two-tiered board system, numerous committees and councils and a relatively open flow of information on finances, operate in the context of memories of hyperinflation between the wars and its terrible political consequences. Americans deal with their fear of concentrated wealth by restricting the ability of banks to take positions in companies, instead financing equity through the stock market. Relationships between board and shareholders or the company and competitors will likely as not be adversarial. Only in the United States are hostile takeovers regarded as a normal form of business discourse. They are virtually unknown elsewhere.

In many countries, there are close links between business and social institutions. The French belief in centralized power, for example, is evident both in the cartel-like organization of companies and in the imperial power of the president "directeur-general," a kind of C.E.O.-cum-regent. The country's corporate system benefits from a network of elite professional schools, filled largely with the upper middle class, an old boys' network "in vitro"; graduates emerge to fill posts in government and industry, sharing the same values and providing a measure of stability and accountability. When the system doesn't work, the Government does not hesitate to intervene.

In Britain, Mr. Charkham complains, companies have been without guidance from both Conservative and Labor Governments since the 1970's. A cultural disdain for manufacturing, in favor of Government service or respectable work in "the City," a feeling that it is "better to make money than things," Mr. Charkham suggests, is at the bottom of Britain's decline relative to other industrial powers—a slide Government has done little to counter.

It is interesting to learn that the Japanese regard litigation as a moral failure rather than a legitimate business practice, as in the United States, but is it useful? Yes and no. As everyone knows by now, the world is growing smaller and smaller all the time. Boundaries between nations are being lowered. The flow of money and deal-making across borders increases the importance of understanding national differences in the accumulation and distribution of wealth. No one lives in isolation.

But, for all Mr. Charkham's emphasis on context, occasionally something seems to be missing. He laments we will never know what Germany might have accomplished if its leaders had not led the country into war twice in the 20th century, as if industry was not a complicit beneficiary. The Japanese, he says, have worked their miracle by treating their people better than other industrial nations do. The Japanese may use their people better but they certainly don't treat them better. Japanese managers—the best graduates of a very good educational system—can expect to work 14-hour days, be posted for years to remote locations, often without their families, and, increasingly, be eased out at 45 or 50 to make way for younger people. With such human capital available, a miracle is the least anyone should expect.

Mr. Charkham is, however, a man with the courage of his convictions. When it comes time to choose the best system, he doesn't waltz down the sociocultural relativist path, allowing the merits of each system in its own context. With qualified enthusiasm, he hands "the Palm," as he calls it, to the German system, for its balancing of accountability, sustained economic power and strong sense of responsibility to the wider society. He puts Japan second, though he is aware there is trouble on the horizon for both Japan and Germany.

Mr. Charkham's frets are reserved for the future of the two countries nearest in their corporate sensibilities, the United States and Britain. The United States appears to be following Britain down the road to decline, Mr. Charkham asserts, not least because its corporate structures encourage cannibal capitalism of the sort that took place during the 1980's. The back of Mr. Charkham's hand, not his palm, goes to the short-term imperative of share price, the sacrifice of equity on the altar of debt, the ruinous strategies companies embraced to "save" themselves from raiders. Mr. Charkham offers the type of analysis and bile one might expect from a member-in-good-standing of the Cadbury Committee.

Much of this will sound familiar to readers who kept up with the news from Wall Street (and from that famous X-shaped desk in Los Angeles) and from London during the last decade. But anyone who was appalled the first time around should be prepared to be re-appalled, if only by the knowledge that other countries manage themselves more sanely. Keeping Good Company does what a good comparative study should do: it makes you realize things don't have to be that way.

Barbara Presley Noble, the former At Work and Business Book Review columnist for The New York Times, has an M.S. in journalism from Columbia University and was a Knight-Bagehot fellow in business and economic journalism at Columbia.
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