Corporate governance

1. ECONOMIC ANALYSIS OF GLOBAL
BUSINESS 2
LECTURE 1 2010
TRENDS IN GLOBAL
CORPORATE GOVERNANCE

2. GLOBAL CORPORATE
GOVERNANCE
WHY DOES IT MATTER?
• It is concerned with who controls
what, and how well they are doing it
• It is changing, and we need to
understand what is happening
• It affects entire economies,
multinational corporations and small
businesses

3. CORPORATE GOVERNANCE:
DEFINITION
• “The relationship among various participants
in determining the direction and performance
of corporations” (Monks and Minow, 1995)
• Main participants: shareholders, management,
directors
• Other participants: employees, customers,
suppliers, creditors, the community: the
stakeholding approach

4. Global Trends: The Context
• Privatization: $850 billion since 1990
• Liberalization: falling trade barriers, capital
controls
• Technology: mobile money, information
• Globalization

5. Drivers of Change
• Increased competition: exposing
stagnant performance
• Transition: roll back of the state
• Decline in public funding: from aid to
investment
• Capital exporters: rapid growth in
institutional investment
• Scandals, corruption and collapse
• The ‘invisible’ continent: Kenichi
Ohmae

6. SOME SCANDALS
• Banks in 1990s Japan
• Equitable Life in the UK
• LTCM, Worldcom and Enron in USA
• Parmalat in Italy
• Defence contracts in France and UK
• The 2008-9 global banking collapse
• …..and they keep on coming!

7. The Response
• Public reform (codes, listings, company
law, regulation)
• Private sector response
• Demand for global standards (OECD
principles)
• Financial stability forum
• International initiatives (WB – OECD
cooperation)
• International standard setters
• … impact felt in every region

8. Global Meets Local: the
Variables
– Legal heritage
– Pattern of ownership
– Exposure to international markets
– Business culture and environment
– … one size does not fit all (but fundamental
principles apply)

9. COMPARING GOVERNANCE
SYSTEMS
• Internationally we can find four main
varieties of governance system:
– market-based
– corporate
– state-guided
– “crony”-based
• Some countries have features of
more than one system

10. CAPITALISM: alternative
taxonomies - examples
• Market capitalism (USA, UK, Hong
Kong, New Zealand, Canada)
• Corporate/institutional capitalism
(Sweden, Germany, Austria,
Italy,Korea)
• State-guided capitalism (Japan,
France, Iran, Hungary)
• “Crony”capitalism (Russia, Ukraine,
Thailand, Indonesia)

11. MARKET SYSTEM
• Government avoids intervention
• Preference for low taxation/spending
• Preference for free trade
• Low levels of state asset ownership
• Lower levels of regulation
• Strong capital markets with wide
share ownership; markets agents of
change

12. CORPORATE SYSTEM
• Government prepared to intervene
• Banks or other institutions own much
of corporate capital
• Financial markets secondary, with
corporate change occurring privately
• Social objectives often important
• Consensual policy-making

13. STATE-GUIDED SYSTEM
• Strong state, intervening
systematically
• Tendency to trade protection or
mercantilist practices
• Markets qualified by subsidy,
regulation
• Public/private partnership common
• Possibility of large state-owned
sector

14. “CRONY” SYSTEM
• Close business-government links
• Tendency to monopolistic practices
• Politically-inspired subsidies, trade
restrictions and interventions
• Probably high income differentials
and narrow distribution of wealth

15. Practice of Governance: UK
• Most shares are held by pension funds,
investment funds, and private individuals
• Banks usually do not own shares
• Almost all big companies are “listed”
• Stock market performance of shares
important measure of corporate success
• “Hostile” takeovers fairly common

16. UK: Governance Assessment
• Advantages:
– Fairly open and transparent
– Quick rewards for success and
punishment for failure
– Responsiveness to business
environment
• Disadvantages:
– May encourage “short-termism”
– Mergers and takeovers do not
always work

17. Practice of Governance: Germany
• Banks have very large
shareholdings in major
corporations
• Long-term (cosy?) relationships
• Other shareholders are
proportionately less important
• Hostile takeovers virtually
unknown (exception:
Vodafone/Mannesman)

18. German Governance: Assessment
• Advantages:
– Long-term business relationships
– Stability of employment and
production
– Social cohesion?
• Disadvantages:
– Lack of transparency and openness
– Sometimes tolerant of poor
performance
– May be unresponsive to global
change

19. Practice of Governance:
France
• Shareholding structures more like
Germany than UK
• Close state-business links, and
intervention by the state
• Stock market has become much more
important over last 20 years - state
uses it as a discipline measure

20. French Governance: Assessment
• Advantages:
– Successful use of state/business
partnerships
– Coordinated approach to industrial
strategy
– Effective use long-term planning
• Disadvantages:
– Conflicts of interest between
business/state
– Sometimes lack of transparency
– Some tolerance of underperformance

21. Practice of Governance: Russia
• Large industrial groups, some
controlled by the “oligarchs”
• Some very big corporations are
under strong state influence
(e.g.Gazprom)
• Stock market not very transparent
• Many business relationships based
on personal connections,
sometimes crime

22. Russian Governance:
Assessment
• Advantages:
– If any at all, the avoidance of disorder
• Disadvantages:
– Lack of transparency
– Corruption
– Misallocation of resources
– Excessive arbitrary state intervention

23. Changes in European
Governance
• Most corporate governance systems
are tending to converge
• Stock markets are becoming more
important, BUT
• Some shareholders becoming more
activist, such as pension funds like
Hermes, some unit trust companies

24. QUESTIONS AND ISSUES
• Why has Governance come to the
fore in the last 25 years?
• What are “good” governance and
“bad” governance?
• In what ways does governance differ
in the private and public sectors?
• How much difference does it make?