80 zyxwvutsrqponm CORPORATE GOVERNANCE z Competitiveness and Corporate Governance z Shann Turnbull eform of US corporate governance is rec- zyxw R ommended by Porter to make America more competitive than Germany or Japan. In his 1992 report to The Council on Competi- tiveness, Porter recommended closer board involvementwith investors and stakeholders. Williamson has analysed why this can be counter productive. In Europe, supervisory boards provide a basis for ‘relationship investing’ and the involvement of stakeholders to add value. However, they have problems. US investors are currently promoting shareholder com- mittees to improve corporate performance. This essay reviews the inherent defects of unitary boards. The opportunity for improv- ing the efficacy of binary boards is analysed by considering Spanish worker cooperatives and a ’Corporate Senate’ developed in Aus- tralia. The senate is independently elected by only shareholders to take on the roles of audit, compensation and remuneration com- mittees established by unitary boards. The Senate allows equity to be raised at a lower cost because it improves investor protection. Stakeholders can become directors to con- tribute value as their conflicts are mediated by the Senate. The need for supervisory boards in Eastern Europe is particularly acute because investors are exposed to greater jeopardy than those in developed market economies. There are two reasons: firstly, under-developed external regulatory mechanisms and secondly, privat- isation is introducing a greater degree of employee control. The lessons for policy makers are that appropriately structured binary boards can improve competitiveness, self-regulationand cash obtained from privatisation. Corporate law, regulations and stock-exchange listing rules could be simplified. Auditors appointed by supervisory boards would become inde- pendent of management and so better able to protect investors and themselves. The ac- counting profession would obtain an incen- tive to adopt standards which protected investors, rather than management. Senates provide a mechanism for investors and other stakeholders to enhance corporate perform- ance as proposed by Porter to improve com- petitiveness, while avoiding the hazards which concerned Williamson. Introduction Reform of the American system of corporate governance is recommended by Porter (1992). Porter formulated separate recommendations for US policy makers, institutional investors, and corporations. A basic premise was that the ownership structure of industry and its relationship with the financial community affects the comparative international advan- tage of nations. In other words, the success of an economy is dependent upon its system of corporate governance. The objective of Porter’s recommendations was to make the US system superior to either Germany or Japan. A central proposal was to encourage the active involvement of inves- tors, employees, customers, suppliers and the community into the governance of US corporations. This proposal was made in the context of unitary boards found in Anglo- Saxon cultures. The appointment of operational stake- holders to a unitary board compounds con- flicts of interest. Williamson (1985) provides an analysis of how stakeholder directors can reduce performance. However, Williamson recognised the possibility zyx I. . . to invent a governance structure that holders of equity recognise as a safeguard against expropri- ation and egregious mismanagement‘. The purpose of this essay is to determine the type of governance structure required to implement Porters’ recommendations in a Volume 2 Number 2 April zyxwvu 1994 @ Basil Blackwell Ltd. zyxw 1994. 108 Cowley Rd, Oxford OX4 lJF and 238 Main St, Cambridge, MA 02142, USA.