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Michelle_Michy
03Mechanisms_2014.pptIBU5GW
Governance
in a Globalising World
Week 3
Mechanisms of governance
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This week
Understanding CG models and mechanisms
Cases:
Conrad Black
ISS
Individual assignment workshop
Shareholders vote
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A unitary board with committees
the board
audit and risk
occ. health and safety
remuneration
nominations
social responsibility
non-executive director
executive director
Combining Chairman and
Managing Director Roles
Not recommended because:-
Chairman manages Board, MD manages the business;
Difficult to be objective about management performance;
Role to be played in Boardroom?
Too much power in one person;
Two minds better than one;
Under pressure, management demands take precedence over governance;
Too much work for one person.
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Ch.3 Mechanisms of Corporate Governance
Thomsen, S., Conyon, M., 2012, Corporate Governance; Mechanisms and Systems, McGraw Hill.
Introduction
Corporate governance mechanisms aims to:
Ensure that managers work in the best interest of the shareholders (as a collective)
Minimise agency problems/costs
Set frameworks for contractual relationships
In the end, construct a sound economy
There exist a wide variety of governance mechanisms, externally and internally
Governance mechanisms
| Informal governance | Ownership |
| Social norms | Blockholders |
| Reputation/trust | Shareholder activism (monitoring) |
| Codes | Takeovers |
| Regulation | Stakeholder pressure |
| Corporate law | Monitoring by creditors |
| Auditors | |
| Boards | Analysts |
| Competition | |
| Incentive schemes |
Social norms
Social norms: not being the Economic Man – acting in the best interests of the shareholders
Stewardship: solves governance problems to the extent that shareholders agree with your moral actions
Do we have an agency problem in firms where the manager behaves well, if the shareholders prefers an immoral behaviour?
Trust and reputation
Reputation
Managerial work market: good reputation crucial for the professionalised manager’s chances of being employed
And to advance a career, i.e. be offered managerial positions in larger/more valuable firms
Importance of reputation diminishes with internationalization as your actions are more anonymous when taken in foreign markets
Trust and reputation
| PLAYER 2 The stakeholder | |||
| Cooperation | Opportunisms | ||
| PLAYER 1 The manager | Cooperation | Joint optimum Both players win | Player 2 wins at player 1’s expense |
| Opportunism | Players 1 wins at player 2’s expense | Worst case Both players lose |
Company law
Property rights
Contractual law
Crime law
Fraud
Corruption
Etc
Corporate law
Shareholder rights – investor protection
Transparency requirements
Auditing requirements
Etc
Institutional elements, courts etc.
A legal world map
Civil law
Common law
Customary law
Religious law
Common and civil law
Unknown
Common Law vs. Civil Law
Common Law
Civil Law
Based on judicial opinions
Interpretations considered more are a guide
Laws might be altered over a single ruling
Laws are acquired over time
Flexible and rich (every case has its solution)
Based on codes and principles rooted in the Roman empire
Updates of legal codes only through legislation
Codes = literally followed
Judges rule based on previous interpretations of law
Stable, but reluctant and slow-moving (same solution for every case)
Controlling owners
Higher incentives to monitor management
Often larger ability to monitor management
No free rider problems
Owner-management aligns the interest of principals and agents
Solves moral hazard problems
Risks of controlling investors
May have other incentives than profit maximizing
Extraction of private benefits
More risk averse
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World’s Largest Family Firms and % of Family Control
Source: Pearl and Kristies (2009, spring)
| Sales Rank | Company | Percentage of family control |
| 1 | Wal-Mart | Walton family owns 41% |
| 2 | Toyota Motor Corp | Toyota family owns 2% |
| 3 | Ford Motor Co. | Ford family owns approximately 40% of voting shares |
| 4 | Koch Industries | Koch family owns 84% of America’s largest private company |
| 5 | Samsung | Lee family controls 22% |
| 6 | ArcelorMittal | Mittal family owns approximately 50% of the world’s largest steel company |
| 7 | Banco Santander | Botin family owns 2.5% |
| 8 | PSA Peugeot Citroen | Peugeot family holds 42% of voting shares |
| 9 | Cargill | Cargill and MacMillan families own 85% of the 104 year old firm |
| 10 | SK Group | Chey family controls 71 affiliated firms |
There is a great diveristy in how they are conceptualized… is Santander a Family firm??
Ana Botin
ArcelorMittal – steel , 룩셈부르크
Banco Stntander – 방고산테르 , 스페인 세계적인 은행
푸조 – 유럽
Cargill – america , 식품
4- america
3-asia
3-Erope
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SAMSUNG’s Family Feuds – Part 1
Source: Reuters, http://www.reuters.com/article/2012/05/29/us-samsung-lawsuit-idUSBRE84S18V20120529
Byung Chul Lee (Founder)
Maeng Hee Lee (1st Son)
Kun Hee Lee (3rd Son)
Whistle blow
Saccarine Smuggling
Chairman
Chang Hee Lee (2nd Son)
Comenzó como una compañía exclusivamente de exportaciones en el año 1938
Samsung Electronics, fundada en 1969, es el miembro más grande del Grupo Samsung,
Lee Kun-Hee succeeded his father as a group chairperson in 1997
Saccharine smuggling - 1966
Chang Hee Lee sent to jail (basically, founder Lee Byung Chul should've went but Chang Hee Lee took the blame instead.. mafioso style) - 1968 ~ 1969
Chang Hee Lee sends an anonymous letter to then colonel Chun (who later becomes president via coup d'etat in 1980) - early 1970s
Lee Byung Chul (founder of Samsung) finds out about anonymous letter and decides to give his business to Lee Kun Hee (current unofficial "head" of Samsung) instead of Chang Hee Lee or Maeng Hee Lee - 1970s
Lee Maeng Hee writes a book detailing all the smuggling/white-collar crimes commited by Samsung during the 1960s and 1970s - 1987
Lee Maeng Hee becomes CEO of his own company, cheil fertilizer - 1993
What happen to the whisl blower? Why there is a US map? Did he moved to the US?
I'm not sure why there is a U.S map. Change Hee Lee just got out of jail and started his own business.
Do you know if Samsung still is owned by family business today?
This is a difficult question. Officially, Samsung group exists as several independent companies with its own CEO, shareholders etc. But many people believe that de facto control is in the hands of Lee Kun Hee and his family although they do not, by no means, hold enough shares to be that influential. The Lee family basically control two companies: Samsung Everland and Samsung Life Insurance. These two companies then hold substantial share in all the technically "independent" samsung companies (e.g., samsung electronics, samsung techwin). This is also why Lee Maeng Hee et al are trying to get a share in Samsung Life Insurance through the court, which is key to the de facto control that Lee Kun hee and his family exerts over Samsung.
As I mentioned in the previous email, Lee Kun Hee and his family one the court case very recently so the feud is over with Lee Kun Hee victorious.
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SAMSUNG’s Family Feuds – Part 2
Chairman
Kun Hee Lee
Jae Yong Lee
(1st Son, COO Samsung Electronics)
Maeng Hee Lee
Lawsuit
Jae Hyun Lee
(1st Son, Chairman, CJ)
Source: http://www.businessweek.com/articles/2012-06-06/samsungs-family-feud#p2
- Only Son
- Education
- BA in East Asian History at
Seoul National University
- MBA in Keio University in Tokyo
- Doctoral degree from
Harvard Business School
- Training
- Many low-profile positions
- Recent promotion to COO
Jae Yong Lee
- Only son
- Japanese lessons
- history degree in SNU
- 2 years MBA in Keio
- Doctoral degree in Harvard Business School
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Example
Parmalat SpA is a multinational Italian dairy and food corporation.
Having become the leading global company in the production of long-life milk using the ultra-high-temperature (UHT) process
The company collapsed in 2003 with a €14 billion ($20bn) hole in its accounts in what remains Europe's biggest bankruptcy
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Example
Parmalat – Europe’s Enron
Run by charismatic Calisto Tanzi
Creates fictitious sales
e.g., double counts sales
e.g., fictitious subsidiaries
Has dubious loans treated as equity
Fake Bank of America account worth 5 billion dollars by using forgery documents.
Why did Tanzi do this?
To finance other loss-making business of his family
Shareholder activism
Monitoring
- activity at general meetings
- proxy voting
- private negotiations with management
- shareholder proposals
- open debates / public announcements
- exit
Interest alignment
Shareholder activism
Jana Partners and Ontario Teacher's Pension Plan two minority shareholders met with McGraw-Hill management and its board of directors to discuss a plan to break the company into four units.
"McGraw-Hill enjoys an open dialogue with its many shareholders and often gets insights from those discussions."
Takeovers
Threat of being taken over is a powerful governance mechanism
Severely damages the reputation of managers
However, seldom seen in practice as most firms employ takeover defenses
Poison pills
Empirical evidence that takeovers improve firm performance and that barriers to hostile takeovers reduce it
The board
Elected by shareholders to perform monitoring duties
Motivating managers (incentives)
Sanctions (risk of being fired)
Arguments that boards matter more in dispersed firms
Critical point: the quality of boards depend on the election process and shareholder competence to elect the right directors
Incentive systems
Interest alignment
Stock options and grants (rewards for future performance)
Motivation of managers
Bonuses (rewards for past performance)
Highly dependent on design
What can the managers control?
Stocks: risk that decision which would maximise profit in the long run might not be taken as they harm the share price in a shorter run
Creditors and capital structure
If companies need to borrow, creditors can exercise influence on the firm by making demands on board composition, management, capital structure etc as conditions for lending
Monitoring by creditors
Capital structure essential
High and low levels of debt are associated with higher risks of bankruptcy, financial distress and creditor-shareholder conflicts
Weight agency problems against risk of bankruptcy and conflicts of interest between creditors and shareholders
Auditors
Auditors are elected by shareholders to audit the firm on behalf of the investors. The aim is to:
Ensure correct information about the state of the firm
Not water-proof as auditors are dependent on management for information
From a shareholder perspective: is more information better? Annual reports have grown extensively over the years, now often reaching 150 pages. Does this add value?
Can auditors be considered a new layer in the agency relationship model?
Analysts
Analysts aim to help outside investors understand the firm
Particularly valuable to shareholders with limited resources and/or competence
Risk: analysts issue too many recommendations to buy, in order to stimulate market trade
Rating agencies have also been criticised for being too optimistic in times of crisis
Analysts exist despite strong fundamentals since the efficient market hypothesis indicates that all relevant information is already available at the market
Competition
Competition fundamentally corrects for inefficiencies in the market-based system
Bad management will at one point lead to higher costs, loss of competitiveness, slower growth, bankruptcy etc.
Works well in the long run, however not enough for shareholders who cannot accept underperformance for substantial time periods until the market has gotten it right
