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IBU5GW

Governance

in a Globalising World

Week 4

International governance

This week

• A very brief look at a small number of

governance models

• Submit assignments to me at end of class

– Please ensure that a signed cover sheet is

attached

• Submit group registrations at end of class

Ch.4 International

Corporate Governance

Thomsen, S., Conyon, M., 2012,

Corporate Governance; Mechanisms and Systems, McGraw Hill.

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Introduction

• The use of corporate governance

mechanisms vary across the world

• Two main systems: Anglo-Saxon and

Continental European

– Highly-simplified dichotomy

• Countries are characterised by nation-

specific features

Theoretical context: a taxonomy

• Corporate governance system = a set of

mechanisms, practices, institutions, and rules in use in a given context

• Stable over long periods of time

• Can be classified over several dimensions

– Government vs. private ownership

– Market- vs. bank based systems

– Dispersed vs. concentrated ownership

– Stakeholder- vs. shareholder systems

– Legal systems (common law vs. civil law)

Two Types of Systems

• Insider-dominated systems – publicly listed companies owned and controlled by a small number of

major shareholders – e.g. France, Germany, Japan.

• Outsider-dominated systems – large firms controlled by managers but owned by outside

shareholders – e.g. Australia, UK, USA

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Insider-Dominated Systems

• Shareholders are family, banks or government.

• Advantages – management and shareholder interests aligned; hostile takeovers rare; shareholders have a strong

voice.

• Disadvantages – abuse of power, little transparency, misuse of funds, lack of knowledge by minority shareholders,

excessive control by small group of shareholders, weak investor

protection in law.

Outsider-Dominated Systems

• Separation of control and ownership

• Advantages – management actions accountable to shareholders, transparency, shareholders vote, strong investor

protection in law.

• Disadvantages – managers not always work for shareholder interests, hostile takeovers, shareholders not loyal

can sell shares anytime

Substitution and complementarity

• Complementarities: mechanisms that support and reinforce each other

• Substitution: replaces each other

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Why systems?

• Formal institutions crucial

• Law and politics are particularly important to

explain the rise of a corporate governance

system

• Rationale is that these factors have deep and

lasting impact on corporate governance

• The influence of politics is explained by rent

seeking by competing institutions, which

may block changes in corporate governance

International systems

(a comparison)

International systems (cont’d)

� Market-based � Based on savings by individuals

� Allocation occurs because individuals view certain firms as “safe bets”, i.e. most efficient firms attract capital

� System has costs as monitoring eats resources. Regulators therefore try to shift these costs away from investors

� Stakeholder systems � Employees, banks etc plays a more significant role

� Bank based systems � Allocation occurs through banks who monitor management

� Banks either lend investment capital or buy shares

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Two Tier Board Structure

• Two separate Boards =

– Management Board; specific business dealings;

executive management of the business.

– Supervisory Board; shareholders and employees

“supervising management.”

• France, Germany.

Two-tier board example

Dual board structure, DVB Bank, Germany

Country models: US and UK

� Shareholder value (and rights) prevail � Relies on market mechanisms for monitoring � Strong investor protection � Strong dispersion of ownership � Strong managerial power � Large executive compensation packages � Institutional investors dominate � Commercial banks prohibited from taking large

positions in non-financial companies � Common law system � One-tier boards

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Country models: Japan

• Cross shareholdings

• Cohesive corporate group (Keiretsu system)

• Main bank system

• Government regulations limiting competition

• One-tier boards

Country models: France

� Public governance system, large influence by the government

� High ownership concentration � Families dominate � Companies can choose between one-tier and two-

tier boards � Vast majority employ one-tier board structure

� Duality allowed � Employee representation non-existent as French

unions historically have been unwilling to assume this responsibility

Country models: Germany

• Bank based system

– Stock purchases are made through a bank

• Banks are allowed to make large investments in direct

stock and even control some of the largest German

corporations

• German banks, however, do not appear to provide

more credit than do American banks to U firms

• Employ codetermination to a large extent, practiced

both on board level and management level

• Two-tier boards

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Country models: Scandinavia

• Stakeholder system

• Employees and banks influential

• Codetermination employed, as employees can

elect up to 1/3 of the directors for the board

• Two-tier boards

• High frequency of family and cooperative

ownership

• Partly attributable to the scarcity of large

corporations and industry effects

Convergence

� Corporate governance is stable in the short run but sometimes changes over longer time periods

� Argued that the US/UK model “had won” and that European models were converging

� Possible to argue in the opposite direction � Ownership concentration increased in the US during the

90s

� Non-executive directors has increasingly separated management and control

� Banks have been allowed to assume a more prominent role in the US

Convergence (cont’d)

� Three mechanisms of convergence

1. Logic – arguments for the superiority of one model

2. Example – of competitive success of one model

3. Demonstrated competitive advantages

� Also exist powerful forces that block convergence � Private benefits for majority shareholders

� Limitations on ownership by financial institutions

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Summary

• Systems differ because different mechanisms

are employed and shape the way governance is

practiced

– Market mechanisms vs. control mechanisms

– Executive pay vs. social sanctions

– Stakeholders integrated or kept at a distance

Next week

• Corporate social responsibility