INTERNATIONALCORPORATE GOVERNANCEStephen Ong, BSc(Hons) Econs (LSE),MBA International Business(Bradford)MBI/MSc Bioprocessing(UCL)Visiting Fellow, Birmingham City UniversityProfessor, Shenzhen Universitystephenongch@gmail.comMSC ACCOUNTANCY & FINANCE :CORPORATE GOVERNANCE& OPERATIONS RISK ANALYSIS AND CONTROL
• Discussion : Maximizingshareholder-value1• Corporate Control,Ownership Rights &Governance Systems2• Case study : AIG3Today’s Overview
1. Open Discussion :Maximizing Shareholder ValueBrendan McSweeney, (2008),"Maximizingshareholder-value: A panacea for economicgrowth or a recipe for economic and socialdisintegration?", Critical Perspectives onInternational Business, Vol. 4 No.1: pp. 55 – 74
2.1 Corporate Control Across the World1.Reviews the differences in corporatecontrol patterns across the world.2.Corporate control and ownership in theUK and USA differ markedly fromcorporate control and ownership in therest of the world - widely held shares vsconcentrated shareholding.3.Differences in the concentration ofcontrol and types of shareholders.
Learning Outcomes• By the end of this lecture, you should be ableto:1.Describe the differences in the levels corporatecontrol across the world2.Be aware of differences in the importance ofvarious types of shareholders across regions andcountries3.Explain why the Berle-Means hypothesis doesnot hold outside the UK and the USA.
Introduction• The previous lecture mentioned that theprincipal–agent model has only limitedapplicability.• The model is based on the Berle-Means premiseof a separation of ownership and control instock-exchange listed firms.• However, this premise is only valid in the UK andthe USA.• In most the rest of the world, listed corporationstend to have large shareholders.
Introduction (Continued)• In what follows, we focus on control ratherthan ownership for two reasons1. Corporate governance is about the distributionof power within the corporation and this powerdepends, among other factors, on the votes heldby various shareholders2. In most countries, there are disclosurerequirements for the ownership of control rights,but not for cash flow rights.
The Evolution of Control after the IPO• Berle and Means hypothesis states that, ascompanies grow, they experience aseparation of ownership and control.• It is this separation which creates conflicts ofinterests between the managers and theowners (the shareholders).• A first step towards testing the validity of thishypothesis is to focus on what happensaround the initial public offering (IPO).
The Evolution of Control after the IPO(Continued)• The IPO consists of the firm– obtaining a listing on a recognised stockexchange, and– offering its shares to the public for the first time.• Comparison of the evolution of control inGerman and UK IPOs matched by– size (market capitalisation), and– initial control (family control)over the six years after the IPO. (Goergen1998)
• Definition of a large shareholder was ashareholder with at least 25% of thevotes.• Distinction between–the pre-IPO or initial shareholder, and–new large shareholders.• The remainder was treated as the freefloat.The Evolution of Control after the IPO(Continued)
German firms UK firmsTime afterIPO (years)Initialshare-holders(%)Free float(%)New largeshare-holders(%)Initialshare-holders(%)Free float(%)Newlargeshare-holders(%)Immediately76.4 22.2 1.5 62.8 37.2 0.11 73.7 24.0 2.4 51.4 43.1 5.52 69.6 25.0 5.4 47.3 39.5 13.33 64.9 25.3 9.8 37.7 36.0 26.44 59.4 25.0 15.5 33.6 37.6 28.85 50.7 26.3 23.1 31.4 36.5 32.16 45.0 24.8 30.2 30.0 40.8 29.2Goergen (1998), Goergen and Renneboog (2003)Table 1 – Evolution of control in German and UK IPOs
• The evolution of control is different in thetwo countries– Initial shareholders of German IPOs keepmajority control for 5 years after IPO– Initial shareholders of UK IPOs lose control 2years after IPO– Free float is higher in UK IPOs– No difference in terms of control held by newshareholders.The Evolution of Control after the IPO(Continued)
• There is no separation of ownership andcontrol in Germany.• German firms also tend to go public later(about 50 years after their foundation) thanUK firms (about 13 years).The Evolution of Control after the IPO(Continued)
Corporate Control in Western Europeand the USA• The first detailed study on Europe wasconducted by the European CorporateGovernance Network (ECGN), the predecessor ofthe European Corporate Governance Institute(ECGI).• The study was commissioned by the DirectorateGeneral for Industry of the EuropeanCommission.• The study was published in Barca, F. and M.Becht (2001), The Control of Corporate Europe,Oxford: Oxford University Press.
Corporate Control in Western Europeand the USA (Continued)• This study focuses on ultimate control– Control refers to the ownership of voting rights– Control may be held indirectly.• There are various ways of defining controlincluding– a majority of votes as a majority is required for mostdecisions voted at the AGM,– a supermajority as some decisions require 75% ofthe votes (e.g. the approval of a takeover offer), and– a blocking minority of 25% which is sufficient toblock decisions requiring a supermajority.
Figure 1 – Direct or first-tier controlFamilyHoldingCompanyAHoldingCompanyBQuotedfirm15% 10% 20%FirsttierSecondtier?
Table 2 – Distribution of largest shareholders in Europe and the USA
Table 3 – Distribution of control across types of largeshareholders in EuropeSlide 2.20
• Levels of control– Continental WesternEurope:• In most firms a majority of votes is held by one shareholder or agroup• Most firms have a shareholder with a blocking minority• Potential agency problems between minority shareholders andlarge shareholder– UK and US• Most firms are widely held• A coalition of the 3 largest shareholders votes for only 30%• Potential agency problems between shareholders andmanagementCorporate Control in Western Europe andthe USA (Continued)
• Nature of control– Industrial and holding firms are the majorshareholders in most of Continental Europe– Institutional shareholders are main shareholdersin the UK and Netherlands– Family control is important in Continental Europe– Control by the management is important in theUK.Corporate Control in Western Europe andthe USA (Continued)
– Bank stakes are small:• They range from 0.4 to 7.2% in most of ContinentalEurope• The exception is France with 16%• However, figures may underestimate control by banks– In some countries, customers deposit their shareswith the bank and the bank votes for the shares– Figures exclude proxy votes– Proxy votes are the votes from the shares held bythe banks’ customers that the banks exercise onbehalf of their customers.Corporate Control in Western Europe andthe USA (Continued)
Corporate Control in Asia• Asia has its own corporate governancecharacteristics.• In Japan, some firms are part of keiretsus.• A keiretsu is a group of industrial companieswith close ties to a single banks which acts asthe principal lender to the group.• The bank is also a shareholder of the group’scompanies and there may be cross-shareholdings between the group companies.
Corporate Control in Asia (Continued)• The keiretsus originated from the pre-WWIIzaibatsus.• Zaibatsus were groups of industrial companiesor conglomerates– controlled by families via a holding firm at the top ofthe group, and– with a bank as one of the group companies providingthe financing.• An example of a keiretsu originating from azaibatsu is the Mitsubishi group of companies.
• Korea’s industrial landscape is dominated bychaebols.• A chaebol is a group of industrial companiescontrolled by a family.• Examples of famous chaebols are Hyundai, LGand Samsung.• China started an ambitious programme ofeconomic reforms in the 1980s giving managersof state-owned enterprises (SOEs) more power.Corporate Control in Asia (Continued)
• In the early 1990s, China set up the Shenzenand Shanghai stock exchanges.• From now on Chinese SOEs were allowed toissue shares to individual investors.• Chinese SOEs have complex ownership andcontrol structures.Corporate Control in Asia (Continued)
• They tend to have 5 major types of shareholders– the central government,– legal persons (institutions and founders),– employees,– domestic investors (A shares), and– foreign investors (B and H shares).• The largest shareholder holds about 43% of theshares.• The government is the largest shareholder in67% of the firms.Corporate Control in Asia (Continued)
• India is dominated by conglomerates or so calledbusiness groups.• About 60% of the 500 largest firms on theBombay Stock Exchange are part of businessgroups.• These are typically controlled by families.• Control and ownership structures are highlycomplex and opaque with ownership pyramidsand cross-holdings.Corporate Control in Asia (Continued)
Figure 6 – Percentage of listed Asian firms witha 10% shareholderSource: Claessens et al.(2000)Slide 2.30
Country Sample Family State InstitutionalinvestorsIndustrialcompanies10% cut-offHong Kong 330 64.7 3.7 7.1 23.9Indonesia 178 68.6 10.2 3.8 16.8Japan 1,240 13.1 1.1 38.5 5.3Korea 345 67.9 5.1 3.5 9.2Malaysia 238 57.5 18.2 12.1 11.2Philippines 120 42.1 3.6 16.8 35.9Singapore 221 52.0 23.6 10.8 12.2Taiwan 141 65.6 3.0 10.4 18.1Thailand 167 56.5 7.5 12.8 21.120% cut-offHong Kong 330 66.7 1.4 5.2 19.8Indonesia 178 71.5 8.2 2.0 13.2Japan 1,240 9.7 0.8 6.5 3.2Korea 345 48.4 1.6 0.7 6.1Malaysia 238 67.2 13.4 2.3 6.7Philippines 120 44.6 2.1 7.5 26.7Singapore 221 55.4 23.5 4.1 11.5Taiwan 141 48.2 2.8 5.3 17.4Thailand 167 61.6 8 8.6 15.3Table 4 – Distribution of control across types of large shareholders in AsiaSource: Claessens et al. (2000)Slide 2.31
Corporate Control in TransitionalEconomies• The former Communist Bloc started itstransition to a market economy in the early1990s.• Albeit slightly lower than in Western Europe,control is also concentrated.• However, the votes held by the secondlargest shareholder can be substantial.
Largest shareholder Second largest shareholderCountry YearNo. ofCompanies Median MeanNo. ofCompanies MedianMeanCzechRepublic 2001 57 52.6 61.1 43 25.326.1Estonia 1999/2000 21 52.6 53.2 18 12.614.5Hungary 2000 64 43.5 44.7 64 1818.6Latvia 1999/2000 43 51.3 51 42 7.79.6Lithuania 1999/2000 46 42.2 46.3 34 11.316.9Poland 2000 210 39.5 44.6 210 10.415.6Romania 2000 115 53 53.4 86 1616.5Slovakia 1999/2000 34 39.4 43.8 29 18.819.1Slovenia 2000 136 22.3 27.4 136 12.113.4Average 44.04 47.3 14.716Table 5 – Distribution of control across Eastern EuropeSource: Pajuste (2002)Slide 2.33
Conclusions• The Berle-Means hypothesis is only upheldfor the UK and the USA.• The main types of shareholders differbetween the UK-USA and the rest of theworld.
Group Discussion Casestudy : AIG1. Identify the corporate governance issuesthat AIG faced.
2.2 Control vs Ownership Rights1. Review the various devices that create awedge between control and ownership.2. Differences between control andownership as they determine the types ofconflicts of interests that a company andits stakeholders may be subject to.
Learning Outcomes• By the end of this lecture, you should be able to:1. Distinguish ownership from control2. Explain how to obtain the various combinations ofweak or strong control with dispersed orconcentrated ownership3. Define security benefits and private benefits ofcontrol4. Assess the importance and amplitude of privatebenefits of control across countries.
Introduction• While in the UK and the USA most listedcorporations are widely held, in the rest of theworld corporations tend to have largeshareholders with significant control.• How do these large shareholders manage to stayin control?• The short answer is that they leverage control,i.e. they manage to hold a substantialpercentage of voting rights while holding fewercash flow rights.
Introduction (Continued)• We have already seen one way of leveragingcontrol which is ownership pyramids, butthere are others.• More generally, we shall analyse the variouscombinations of dispersed or concentratedownership and weak or strong control.
Combinations of Ownership andControl• We shall distinguish between two extremesfor both control and ownership– strong versus weak control– concentrated versus dispersed ownership.
ControlWeak StrongOwnershipDispersedCombination A:weak controland dispersedownershipCombination B:strong controland dispersedownershipConcentratedCombination C:weak controlandconcentratedownershipCombination D:strong controland concentratedownershipFigure 1 – Combinations of control and ownership
Combinations of Ownership and Control• Dispersed ownership has two major advantages– increased liquidity resulting in a lower cost of capital,and– the exposure to hostile takeovers putting pressure onmanagers to perform well.• Its main disadvantage is the free-rider problemwhereby each individual shareholder refuses tomonitor the management as s/he will bear allthe costs from doing so, but will share thebenefits with all the other shareholders.
Combinations of Ownership andControl (Continued)• Concentrated control and ownership alsohave a major advantage as there will be ashareholder with enough power andsufficient incentives to monitor themanagement.• Its main disadvantage is the danger ofminority shareholder expropriation.
• A priori, we expect– combination A to apply to most Anglo-Americanfirms, and– combination D to most Continental European firms.• However, due to several mechanisms,combination D does not apply to mostContinental European firms.• As a result, combination B prevails outside theUK and the USA.Combinations of Ownership and Control(Continued)
Combination A: Dispersed Ownershipand Weak Control• Case of most UK and US firms.• Advantages of liquidity and takeover market.• Disadvantages of insufficient monitoring.• Main conflict of interests is between themanagement and the shareholders.
Box 1 – The 10 largest shareholders in BT Group Plc in October 2010Investor Name % Investor Type CountryINVESCO Asset Management Limited 11.02 Investment Managers United KingdomBlackRock Investment Management (UK) Ltd. 4.89 Investment Managers United KingdomAXA Investment Managers UK Ltd. 4.63 Investment Managers United KingdomLegal & General Investment Management Ltd. (UK) 3.99 Investment Managers United KingdomNorges Bank Investment Management (NBIM) 3.10 Investment Managers NorwayM & G Investment Management Ltd. 2.08 Investment Managers United KingdomAviva Investors Global Services Limited 1.99 Investment Managers United KingdomBlackRock Advisors (UK) Limited 1.76 Investment Managers United KingdomState Street Global Advisors (UK) Ltd. 1.36 Investment Managers United KingdomStandard Life Investments Ltd. 1.24 Investment Managers United KingdomSource: Thomson Financial
Box 2 – The 10 largest shareholders in The Coca Cola Company in October 2010Investor Name % Investor Type CountryBerkshire Hathaway Inc. 8.66 Investment Managers United StatesVanguard Group, Inc. 3.62 Investment Managers United StatesState Street Global Advisors (US) 3.46 Investment Managers United StatesBlackRock Institutional Trust Company, N.A. 3.29 Investment Managers United StatesFidelity Management & Research 2.80 Investment Managers United StatesCapital World Investors 2.59 Investment Managers United StatesSunTrust Bank 2.38 Investment Managers United StatesFayez Sarofim & Co. 0.85 Investment Managers United StatesDavis Selected Advisers, L.P. 0.84 Investment Managers United StatesGrantham, Mayo, Van Otterloo & Co., L.L.C. 0.83 Investment Managers United StatesSource: Thomson FinancialSlide 3.50
Combination B: Dispersed Ownershipand Strong Control• This combination prevails in mostcorporations outside the UK and the USA.• Active market in the shares.• There is a controlling shareholder withenough power to prevent the managers fromexpropriating the shareholders.• However, there is also an increased risk ofminority shareholder expropriation.
Combination C: ConcentratedOwnership and Weak Control• This is a fairly rare combination.• It applies to only a few firms across theworld, including German firms with votingcaps.• Minority shareholders are protected as nosingle shareholder is able to dominate.• Lack of monitoring and low liquidity.
Box 3.4 Voting cap inNestlé SANestlé SA has a provision in its articles of association specifying a voting cap which prevents anyperson from voting directly or indirectly for more than 5% of the equity. Under this provision, legalentities that have links via equity holdings, voting rights, common management or any other formwill be considered as a single shareholder.Source: Nestlé SA, 2010 corporate governance report
Combination D: ConcentratedOwnership and Control• This combination creates strong monitoringincentives.• However, there is also low liquidity and areduced takeover probability.• Volkswagen AG holds 99% of the shares ofAudi AG.
How to Achieve Dispersed Ownershipand Strong Control• There are five main ways of achieving thiscombination– ownership pyramids,– proxy votes,– voting coalitions,– dual-class shares, and– clauses in the articles of association that conferadditional votes to long-term shareholders.• They all consist of leveraging control, i.e. havingcontrol while holding a lower ownership stake.
Proxy Votes• We have already discussed proxy votes held bybanks.• These proxy votes originate from the shares ofthe banks’ customers deposited with the banks.• However, proxy votes may also be solicited by– the management, or– small shareholders seeking the support of the othershareholders to obtain approval for a motion theyintend to put forward at the shareholders’ meeting.
Box 6 – Proxy votes solicited by the management
Voting Coalitions• A voting coalition or voting pool consists ofseveral shareholders agreeing to vote in thesame way.• In practice, voting coalitions are rare,especially those that persist in the long term.• One reason for the infrequency of votingcoalitions may be the costs imposed byregulation.
Voting Coalitions (Continued)• The UK City Code on Takeovers requiresshareholders that have acquired a stake of atleast 30% to make a tender offer to theremaining shareholders.• The same rule applies to voting coalitions.• However, there is evidence that in the UKvoting coalitions are formed on an ad hocbasis to intervene in poorly performingcompanies.
Dual-class Shares• Companies with dual-class shares have two classes ofshares– a class with voting rights or superior voting rights, and– a second class with no voting rights or fewer voting rights.• While non-voting shares have the disadvantage of novote, in some countries these shares conferpreferential dividend rights and a higher seniority(e.g. German preference shares).• Dual-class shares are issued by some ContinentalEuropean firms, but also some American firms.
Box 7 – Ford Motor Company dual-class sharesrcentage of Equity Represented by Class A and Class B Stock97.9%2.1%Class A stock Class B stockVoting Rights of Class A and Class B Stock60%40%Class A stock Class B stockSlide 3.64
Ford Motor Company has dual-class shares outstanding. The common stock representsroughly 97% of the equity (33 / (33 + 1)) and the class B stock 3%. However, the commonstock has only 60% of the votes compared to 40% for class B.Source: Ford Motor Company – 2009 annual report p.77 & p.150“The Ford family holds all 71 million shares of the companys Class B stock, along with asmall number of the companys […] common shares. Under rules designed to preserve familycontrol and drafted when the company went public in 1956, the family holds 40 percent ofthe voting power at the company as long as it continues to own at least 60.7 million shares ofthe Class B stock [...]”Source: Keith Brasher (2000), Ford Motor to Pay $10 Billion Dividend and Ensure FamilyControl, New York Times, 14 April, Section C, p.1.
Conferring Additional Votes to Long-term Shareholders• Many French companies confer additionalvoting rights to their long-term shareholdersvia a clause in their articles of association.• Frequently, such clauses are put in place atthe time of the IPO and are alsoretrospective.
Box 8 – Double voting rights conferred to long-term shareholders of LVMH SASource: LVMH Reference document 2009, Bylaws, p.228; LVMH annual report 2009, p.12
The Consequences of DispersedOwnership and Concentrated Control• Sanford Grossman and Oliver Hart argue thatlarge stakes create benefits of control.• There are two types– security benefits originate from the increase in firmvalue due the monitoring of the management andthey are shared by all the shareholders– private benefits are extracted from the firm by thelarge shareholder and are at the expense of theminority shareholders.• The latter include tunnelling, transfer pricing,nepotism and infighting.
The Consequences of Dispersed Ownership andConcentrated Control (Continued)• The five main ways of achieving dispersedownership with concentrated control all violatethe rule of one-vote one-share.• The main consequence of violating this rule isthe increase in private benefits of control andthe increased probability of minorityshareholder expropriation.• While private benefits are difficult to quantify,there are nevertheless empirical studies thathave tried to do exactly that.
The Consequences of DispersedOwnership and Concentrated Control(Continued)• The study by Michael Barclay and CliffordHolderness was one of the first such studies.• They measure the value of private benefits bythe premium above the market price paid bythe buyer of a block of shares.• However, Jeffrey Zwiebel argues that one alsoneeds to take into account the size of theblock changing hands.
Table 1 – Block premiums per countryNotes: The block premium is the difference between the price per share paid for the block and the stockprice two days after the announcement of the transfer of the block divided by the latter price and multipliedby the proportion of cash flow rights presented by the block.Source: Dyck and Zingales (2004)Slide 3.71
Conclusions• The combination of ownership and controldetermines the main potential conflict ofinterests.• Combination A prevails in the UK and theUSA whereas combination B prevailselsewhere.• How to achieve combination B and its mainconsequence.
2.3 Corporate GovernanceSystems1. Taxonomies of corporate governancesystems.2. Economics and politics of GlobalCapitalism.3. Hierarchy of systems relating to law andinvestor protection; electoral systems; andpolitical orientation of governments in power.4. Institutional arrangements and economicperformance.
Learning Outcomes• By the end of this lecture, you should be able to:1. Understand the economic and political contextwhich has enabled global capitalism to rise2. Critically review the assumptions underlying thetaxonomies from the law and finance literature andthose from the VOC literature3. Assess the possible limitations of the varioustaxonomies as well as the validity of their predictions4. Explain path dependence and distinguish betweenthe two types of path dependence.
Introduction• This lecture reviews the various taxonomies ofcorporate governance systems.• It is important to realise that the varioustaxonomies have very different premises.• The taxonomies from the law and financeassume that– individuals maximise their utilities in the presence ofinstitutions which constrain their behaviour, and– there is a zero-sum game between improving therights of investors and those of workers.
Introduction (Continued)• In contrast, the varieties of capitalismliterature– focus on the concept of complementarities, and– do not assume that there is a zero-sum gamebetween worker and investor rights.
The Rise of Global Capitalism• In their 1932 book, Adolf Berle and GardinerMeans identified a new social phenomenonand major step in the development ofcapitalism.• This was the emergence of a class ofprofessional managers running firms onbehalf of their owners.• The first challenge faced by this newclass was the stock market crash of 1929and the Great Depression of the 1930s.
The Rise of Global Capitalism(Continued)• The Great Depression gave start to large-scalegovernment programmes globally to revive theeconomy.• The most famous one was US President FranklinDelano Roosevelt’s New Deal.• As a response to the recent failures of itscommercial banks, the USA introduced theGlass-Steagall Act in 1933.• The Act introduced a segmentation betweencommercial banks and investment banks.
The Rise of Global Capitalism(Continued)• In summer 1944, the Bretton Woods agreementcreated new global economic institutions for thepost-WWII period– the International Monetary Fund (IMF), and– the International Bank for Reconstruction andDevelopment (IBRD) or World Bank.• It also set up a system of fixed currencyexchange rates.• At the end of WWII, the USA and the USSRemerged as the two pillars of political power.
The Rise of Global Capitalism(Continued)• The post-WWII period saw substantialimprovements in workers’ rights and theemergence of the welfare state.• The class of professional managers now faceda class of blue- and white-collar workersrepresented by powerful unions.• In Germany, the Co-determination systemwas put in place consisting of workerscouncils and workers board representation.
The Rise of Global Capitalism(Continued)• During the 1960s, Westerneconomies experiencedunprecedented economicgrowth.• However, at the beginning ofthe 1970s the Bretton woodssystem was in crisis– The USA had a massive tradedeficit due to the Vietnam war– The deficit was financed byprinting more dollars whichfuelled inflation– In 1971, PresidentNixon put an end tothe convertibility ofthe dollar into gold.
The Rise of Global Capitalism(Continued)• The 1973/4 oil crisis further fuelled inflation.• By 1976, the Bretton Woods agreement had brokendown and all major currencies were now floating.• Developed countries were now experiencingstagflation, i.e. stagnation combined with highinflation and unemployment, caused by high oil pricesas well as a spiral of wage and price adjustments.• Few believed that Keynesian economic policies wouldbe a way out of the crisis.
The Rise of Global Capitalism(Continued)• The crisis gave rise to neoliberalism as a newpolitical ideology.• Neoliberalism is the doctrine that– markets are better at allocating economic resources,and– individuals are better at making economic decisionsthan governments.• The next few decades were to be dominated bythis new doctrine, also called financialisation orglobalisation.
The Rise of Global Capitalism(Continued)• Financialisation refers todifferent, but relatedphenomena– the increasingly important role ofcapital markets and the financialservices industry compared to themanufacturing industry, and– the process of turning any assetgenerating cash flows into afinancial security or a derivative.
The Rise of Global Capitalism(Continued)• In 1979, the Conservatives won theelections in the UK and MargaretThatcher became Prime Minister.• In 1980, Ronald Reagan, ARepublican, became the President ofthe USA.• Both engaged in programmes ofmarket liberalisation andderegulation.• Thatcher curbed trade union powerwith a succession of laws during the1980s.• Trade union membership fellfrom roughly 50% to 34% in1990.
The Rise of Global Capitalism(Continued)• The UK was the first country in Europe to startan ambitious programme of privatisation.• Two of the major aims of the privatisationprogramme were– to widen share ownership, and– to encourage employee share ownership.• Other European countries were to follow withtheir own privatisation programmes.
The Rise of Global Capitalism(Continued)• In the USA, Ronald Reagan was a ferventfollower of supply-side economics.• According to supply-side economics, anecessary and sufficient condition to achieveeconomic growth is to reduce barriers to thesupply side of the economy.• Reagonomics consisted of keeping inflationlow by controlling the supply of money,reducing tax and government spending.
The Rise of Global Capitalism(Continued)• The 1970s and 1980s also saw a wave ofderegulation of the major financial markets.• On 1 May 1975 (May Day), the US stockexchanges moved from a system of fixedcommissions to negotiated commissions.• As a result of this decrease in trading costs– a lot of foreign companies applied for a cross-listingin the USA, and– a major chunk of the trading in their shares moved tothe USA.
The Rise of Global Capitalism(Continued)• In response to the loss of business to theUSA, the London Stock Exchange underwentmajor changes in 1986 (Big Bang).• The most important change was to removeminimum commissions on stock trades.• The 1980s and 1990s also saw thedemutualisation of British building societies.
The Rise of Global Capitalism(Continued)• In 1985, Mikhail Gorbachev succeeded LeonidBrezhnev as head of state of the USSR.• He is famous for– his glasnost (opening of the USSR), and– perestroika (economic and political reform) policies.• During the late 1980s, revolutions swept acrossthe Communist Bloc resulting in– the reunification of West and East Germany, and– the breakdown of the USSR.
The Rise of Global Capitalism(Continued)• In 1992, the Single European Actcame into effect in the EuropeanUnion– It removed barriers to capital flowsand the movement of EU citizenswithin the EU– It brought about a liberalisation offinancial and labour markets.• In the USA, the Gramm-Leach-Bliley Act of 1999 practicallyrepealed the 1933 Glass-SteagallAct.• Banks were now allowed toconduct both commercialand investment banking.
First Attempts to ClassifyCorporate Governance Systems• The British economist John Hicks and theAmerican business historian Alfred ChandlerJr. were the first to attempt to categorise thedifferent systems of capitalism.• Hicks distinguishes between– market-based economies, and– bank-based economies.• The former rely on well developed capitalmarkets and the issue of publicly tradedsecurities to finance corporate investments.
First Attempts to ClassifyCorporate Governance Systems(Continued)• Chandler studied the differences betweenAmerican, British, German and Japanesecapitalism from a historical perspective.• Mark Roe highlights the importance of pastregulation to understand differences incorporate governance across countries.• In particular, banking regulation has had a majorimpact on whether a national economy developsinto a market-based or bank-based system.
• Julian Franks and Colin Mayer have developed a morenuanced classification which does not just focus on thesources of financing for corporations.• They distinguish between insider systems and outsidersystems.• Insider systems are characterised by– concentrated control and complex ownership structures,– managers being monitored and disciplined by the largeshareholder, and– underdeveloped takeover and stock markets.• Continental Europe is a representative of this system.First Attempts to ClassifyCorporate Governance Systems (Continued)
• Outsider systems are characterised by– dispersed ownership and control,– well developed takeover and stock markets,– managers being disciplined by hostile raiders.• The UK and the USA are representatives ofthe outsider system.First Attempts to ClassifyCorporate Governance Systems (Continued)
Insider versus Outsider SystemsInsider OutsiderFirms ownedpredominantly by insideshareholders who alsowield control overmanagementLarge firms controlled bymanagers but ownedpredominantly by outsideshareholdersSystem characterised bylittle separation ofownership and control suchthat agency problems arerareSystem characterised byseparation of ownership andcontrol which engenderssignificant agency problemsHostile take-over activity israreFrequent hostile take-oversacting as a discipliningmechanism on companymanagement
Insider versus Outsider SystemsInsider OutsiderConcentration of ownership in asmall group of shareholders(founding family members, othercompanies through pyramidalstructures, state ownership)Dispersed ownershipExcessive control by a small groupof insider shareholdersModerate control bya large range ofshareholdersWealth transfer from minorityshareholders to majorityshareholdersNo transfer of wealthfrom minorityshareholders tomajority shareholders
Insider versus Outsider SystemsInsider OutsiderWeak investor protection incompany lawStrong investorprotection in companylawPotential for abuse of powerby majority shareholdersPotential for shareholderdemocracyMajority shareholders tend tohave more voice in theirinvestee companiesShareholdingcharacterised more byexit than by voice
• Lucian Bebchuk and Mark Roe formalise how thepast shapes a country’s corporate governancesystem.• They distinguish between two forms of pathdependence– Structure-driven path dependence is about howcurrent corporate governance arrangements andcorporate control structures depend on the structuresthat were initially in place– Rule-driven path dependence is about how currentregulation is influenced by the corporate structuresthat were initially in place.First Attempts to ClassifyCorporate Governance Systems (Continued)
• The characteristics of national systems willtend to persist over time given the structure-driven and rule-driven path dependences.First Attempts to ClassifyCorporate Governance Systems (Continued)
Legal Families• Rafel La Porta, Florencio Lopez-de-Silanes,Andrei Shleifer and Robert Vishny have startedthe law and finance literature.• Their theory is based on the importance ofproperty rights, in particular investor protection.• They argue that in countries where investorprotection is high capital markets are highlydeveloped.• Ultimately, the degree of investor protectiondrives economic growth.
Legal Families (Continued)• La Porta et al. distinguish between two broadlegal families, i.e. common law and civil law.• Common law is case-based law.• Judges pronounce judgements on the casespresented to them in a court of law.• These judgements then create precedents forother similar future cases.• Civil law originates from Roman law.• It relies on extensive codes of law.
• The role of judges is limited to interpretingthe law texts in court.• La Porta et al. argue that the reliance oncodes of law makes civil law less flexible andmore reactive than common law which caneasily adjust to new ways of managerialabuses.• Common law is the law of the UK, the USAand most of the former colonies of the UK.Legal Families (Continued)
• Within the broader family of civil law, La Porta etal. distinguish between– French (or Latin) law prevailing in French speakingand Southern European countries,– German law prevailing in Germanic countries as wellas China and Japan, and– Scandinavian law.• Their antidirector rights index measures howwell shareholders are protected against themanagement or the large shareholder.Legal Families (Continued)
• Their creditor rights index measures howcreditor rights are protected.• La Porta et al. find that shareholderprotection and creditor protection are– highest in common law countries,– lowest in French law countries, and– somewhere in between in countries of Germanand Scandinavian law.Legal Families (Continued)
• They also study the link between– investor and creditor protection on one side, and– the size of capital markets on the other side.• They find that the size of stock markets, asmeasured by the number of domestic listedfirms, is– largest in common law countries,– smallest in French law countries, and– somewhere in between in countries of German andScandinavian law.Legal Families (Continued)
• However, when stock market size is measured by thevalue of IPO firms, the relationship with investorprotection is less clear.• The relationship between creditor protection and thesize of the debt market is also somewhat ambiguousas German law countries have much larger debtmarkets than common law countries.• Finally, La Porta et al. find a negative link betweeninvestor protection and the concentration of control.Legal Families (Continued)
• They conclude that control remainsconcentrated in countries with weakinvestor protection to avoid expropriation bythe managers.Legal Families (Continued)
Political Determinants ofCorporate Governance• Mark Roe proposed politics and politicalideology as the main driver of corporategovernance.• Political ideology determines how countriesachieve social peace.• The Continental European social democracieshave achieved social peace by favouringemployees over investors.• Layoffs will be relatively hard, unemploymentbenefits and unemployment will be high.
Political Determinants ofCorporate Governance (Continued)• Managers will less likely focus exclusively on themaximisation of shareholder value.• High incentive packages for managers will also beless common to avoid the envy of other socialclasses.• There will be less takeover activity as takeoversmay generate layoffs.• In summary, social democracies seek socialequality at the cost of economic efficiency.• Control will stay concentrated as this is the onlyway to keep managers and employees at bay.
• In countries with more conservativegovernments, the focus will be on improvinginvestor rights.• Given the strong investor rights, ownershipand control will separate.• Roe tests his prediction on OECD countriesand finds support for it– Ownership and control are more concentratedin countries with left-wing governments.Political Determinants ofCorporate Governance (Continued)
• Marco Pagano and Paolo Volpin propose analternative theory based on electoralsystems.• Their theoretical model is based on threedifferent types of economic actors– managers,– employees, and– rentiers.Political Determinants ofCorporate Governance (Continued)
• Managers run the firms on behalf of the rentiers, butdo not themselves own shares.• Rentiers live off the revues of their investments.• Both managers and employees prefer weaker investorrights.• Weaker investor rights give more power to managersand facilitate the extraction of private benefits ofcontrol.• They also provide better job security for employees, inparticular less productive employees.Political Determinants ofCorporate Governance (Continued)
• While managers and employees have similarpreferences, rentiers are assumed to be a lesshomogenous group.• Pagano and Volpin distinguish betweenmajoritarian electoral systems and proportionalelectoral systems.• Under a majoritarian system, the political partywith a majority of districts wins the elections.• Pagano and Volpin assume that the pivotaldistrict is the district of the rentiers.Political Determinants ofCorporate Governance (Continued)
• Hence, under a majoritarian system political partieswill cater for the rentiers and focus on improvinginvestor rights.• Under a proportional system, the political party thatobtains a majority of votes wins the elections.• Under the latter, political parties will focus on thehomogenous group of the managers and workers.• The focus will be on employee rights at the expense ofinvestor rights.Political Determinants ofCorporate Governance (Continued)
• Pagano and Volpin test their theory on 21 OECDcountries.• In line with their predictions, they find that countrieswith more proportional voting systems have strongeremployment protection and weaker investor rights.• However, they only find that the La Porta et al. legalfamilies only explain the levels of employee rights, butnot those of investor rights.• They conclude that the proportionality of the electoralsystem is better at explaining the level of investorrights than the legal family.Political Determinants ofCorporate Governance (Continued)
The Varieties of Capitalism Literature• So far, the focus has been on the law and financeliterature which argues that the main role ofinstitutions is to constrain the behaviour ofmanagers and employees.• Contrary to La Porta et al. and Pagano andVolpin, Roe does not advocate the superiority ofone particular system.• Nevertheless, he also assumes that stronginvestor rights cannot coexist with strongemployee protection.
The Varieties of Capitalism Literature(Continued)• In contrast, the varieties of capitalism (VOC)literature does not favour a particular system.• Peter Hall and David Soskice study a wide rangeof questions relating to the distribution ofwealth and the resolution of economiccoordination problems.• They argue that economic systems are not justabout investments in assets and technologies.• They are also about investments in humancapital.
• The way economic coordination problems aresolved depends on whether an economy is– a liberal market economy (LME) or– a coordinated market economy (CME).• In LMEs, the coordination mechanism is themarkets.• Labour markets and markets for assets arehighly flexible and developed.• Firms tend to invest in highly marketable andliquid assets.The Varieties of Capitalism Literature(Continued)
• There is an emphasis on assets with relativelyshort payback periods.• In-house training of employees is kept to aminimum to avoid competitors from free-ridingon the firm’s efforts.• Innovation is mainly of the blue skies nature.• LMEs tend to excel in highly competitive,innovative industries as well as low value-addedservices industries.• The UK, the USA and Australia are LMEs.The Varieties of Capitalism Literature(Continued)
• CMEs are based on complex networks to coordinateeconomic decision making.• Markets, including labour and capital markets, arefairly illiquid and inflexible.• Hence, there is less focus on highly liquid and genericassets.• The emphasis tends to be on more specific, lessmarketable assets.• Firms provide more in-house training and powerfulemployers associations avoid free-riding.The Varieties of Capitalism Literature(Continued)
• High employee protection and inflexiblelabour markets provide incentives forworkers to invest in firm-specific skills.• CMEs tend to do well in industries associatedwith incremental innovation such as highvalue-added manufacturing.• France, Germany and Italy are examples ofCMEs.The Varieties of Capitalism Literature(Continued)
• The concept of complementarities is key tothe VOC literature.• Two institutions have complementarities iftheir joint existence increases the efficiencyof one or both of them.• This concept implies that substantiallydifferent sets of institutions may still havevery similar levels of economic output andwealth creation.The Varieties of Capitalism Literature(Continued)
How Do the Various TaxonomiesPerform?• The first attempts to arrive at taxonomiesconsisted of finding commonalities as well asdifferences across countries in terms ofcorporate governance.• More recent attempts have been based ontheoretical foundations, generating predictionsas to– how institutional arrangements come about, and– how existing institutional arrangements explaindifferences in corporate governance and corporateor economic performance.
How Do the Various TaxonomiesPerform? (Continued)• A basic criticism of La Porta et al. is its static nature.• Taken to an extreme, today’s characteristics of theItalian corporate governance system are mainly due towhat happened in the distant past, starting with the12 Tables that laid down the foundation of Roman lawin the 5th century BC.• La Porta et al. justify the static nature of their theoryby the fact that law only changes slowly over time.
• There also exist four more specific critiques of LaPorta et al.• The first critique has been formulated by MichaelGraff.• He argues that the La Porta et al. antidirector rightsindex includes criteria that are irrelevant whereasother, relevant criteria have been excluded.• When the index is adjusted as proposed by Graff,there is no longer a link between investor protectionand legal origin.How Do the Various Taxonomies Perform?(Continued)
• Holger Spamann’s critique is based on errorsof encoding.• He finds errors for 33 out of the 49 countriescovered by La Porta et al. due to their use ofsecondary sources.• After these errors have been corrected, thelink between legal families and investorprotection no longer exists.How Do the Various Taxonomies Perform?(Continued)
• Amir Licht, Chanan Goldschmidt and ShalomSchwartz argue that culture is the true driverbehind differences in corporate governance.• Using survey evidence, they find that countriesthat were under British rule are much morewilling to deal with conflicts of interests in acourt of law.• They find a strong relationship between culturalattitudes and investor and creditor protection.How Do the Various Taxonomies Perform?(Continued)
• They argue that the persistence of culturalattitudes may explain why the countries of theformer Communist Bloc have failed to improveinvestor protection despite wide-ranging legalreforms.• Finally, Julian Franks, Colin Mayer and StefanoRossi find that the separation of ownership andcontrol in the UK can be traced back to theperiod before 1930 when investor protectionwas still low.How Do the Various Taxonomies Perform?(Continued)
• Franks et al. argue that the proximity ofshareholders to their investee companies vialocal stock exchanges acted as a substitute forstrong investor rights.• There has also been criticism of the simpleversion of the VOC literature.• The dichotomous version has been criticised tofail to account for the distinct character ofRhineland economies, the Nordic socialdemocracies and Southern Europe.How Do the Various Taxonomies Perform?(Continued)
Research into Corporate GovernanceSystems Worldwide• Shleifer and Vishny (1997) surveyed the extantresearch into corporate governance, focusing on theinfluence of countries legal systems on corporategovernance• investor legal protection and ownershipconcentration• High degree of legal investor protection wasnecessary to persuade investors to hand theirmoney over to companies
• Legal systems characterised by low levels ofinvestor protection were found to beassociated with poorly developed capitalmarkets• Without strong investor protection,management can expropriate shareholdersfunds
La Porta, Lopez-de-Silanes, Shleiferand Vishny (1997)• Explained there were three general legal traditionsoperating across the globe• French origin legal system is known to afford thelowest level of investor protection• English origin legal system of common law affordsthe highest level of investor protection• German and Scandinavian origin legal systems liesomewhere in between
La Porta, Lopez-de-Silanes, Shleiferand Vishny (1998)• Studied the ownership structure of the ten largestnonfinancial corporations for a cross-section of 49countries• Supported the insider model for many East Asianeconomies characterised by a concentration ofownership, resulting in control of companies beingheld predominantly by a small number of owners,although less so in Japan and South Korea
Moving towards Convergence?• Corporate governance standardisation is oneway of building confidence in a countrysfinancial markets and of enticing investors torisk funds
The OECD Principles• First OECD Principles (1999)• Organisation for Economic Co-operation and Development• The Revised OECD Principles 2004• OECD has expanded to include 30 members, with theaccession of the Slovak Republic in December 2000• The OECD Principles (2004) stated that the 1999 principlesprovided specific guidance for legislative and regulatoryinitiatives in OECD member countries but also in non-memberstates• The 1999 principles have been thoroughly reviewed in orderto take account of recent developments and experiences inboth OECD member and non-member countries
• In reviewing the 1999 principles, the OECD drew ona the findings of a comprehensive survey of howmember countries addressed a variety of corporategovernance challenges• The revised principles have maintained the spirit ofa non-binding and principles-based approach, whichrecognised the need to adapt implementation tovarying economic, legal and cultural situations• The need for sound corporate governance systemsat a global level is reinforced in the preamble to therevised principles,
• "If countries are to reap the full benefits ofthe global capital market, and if they are toattract long-term patient capital, corporategovernance arrangements must be credible,well understood across borders and adhereto internationally accepted principles" (OECD,2004, p.13).
The revised principles cover thefollowing areas :• (i) Ensuring the basis for an effective corporategovernance framework;• (ii) The rights of shareholders and key ownershipfunctions;• (iii) The equitable treatment of shareholders;• (iv) The role of stakeholders;• (v) Disclosure and transparency; and• (vi) The responsibilities of the board. It seems thatstakeholders have been given greater weight in theredrafted version of the principles.
(i) The corporate governance framework should promote transparent and efficient markets, be consistent with therule of law and clearly articulate the division of responsibilities among different supervisory, regulatory andenforcement authorities.(ii) The corporate governance framework should protect and facilitate the exercise of shareholders rights.(iii) The corporate governance framework should ensure the equitable treatment of all shareholders, includingminority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress forviolation of their rights.(iv) The corporate governance framework should recognise the rights of stakeholders established by law or throughmutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth,jobs, and the sustainability of financially sound enterprises.(v) The corporate governance framework should ensure that timely and accurate disclosure is made on all materialmatters regarding the corporation, including the financial situation, performance, ownership, and governance of thecompany.(vi) The corporate governance framework should ensure the strategic guidance of the company, the effectivemonitoring of management by the board, and the boards accountability to the company and the shareholders.
The ICGN Statement on the OECDPrinciples• The International Corporate Governance Network(ICGN)• is an international organisation comprising of manygroups interested in corporate governance reform• OECD (2004) stressed that good standards ofcorporate governance are essential if countries areto attract international investment• The CalPERS Principles• CalPERS, the California Public EmployeesRetirement System
The Outcome of CorporateGovernance Convergence• A one size fits all approach is unrealistic, as "alienpractices cannot be transplanted or imposed"• Potential for countries to be forced into Anglo-American style capitalism• Mayer (2000) argued against corporate governanceconvergence suggesting that systems should remaininherently different so as to promote competitionand take advantage of comparative advantage
Corporate Governance in the European Union:‘One Size Does Not Fit All• EU Commission has adopted attitude towardscorporate governance that, "one size doesnot fit all“• This is based on the belief that it is notpossible to have one set of corporategovernance principles for all European Unionmembers• Legal frameworks vary tremendously acrossEuropean Union member states.
European Union Countries• Culture and traditions also have a significantimpact on corporate governancedevelopments• In EU countries there is a wide diversity inlegal frameworks, cultures, traditions,religious beliefs and patterns of corporateownership structure
Comply or Explain in EU• Commission has decided that legislationshould not be the driving force for EUcorporate governance reform• Harmonising corporate governance acrossEU, through legislation, the forced adoptionof a common code, is not a practicalepossibility• EU Commission has decided to apply thecomply or explain approach to corporategovernance
The Important Role of Shareholdersin the EU• Commission has established that the drivingforce for good corporate governance shouldbe shareholders• Shareholders are an essential corporategovernance mechanism for holdingcompanies to account• They should be fully informed and should actresponsibly by exercising their voting rights
Shareholder Voting Rights in EU• There are ongoing problems with corporategovernance reform within the EU• If shareholders are to drive corporate governancereform, they need to be able to exercise their rights• There are significant obstacles to cross-bordervoting at the moment• A key issue for the Commission is to facilitate cross-border voting.
Control-Enhancing Mechanisms and the OneShare One Vote Debate• Debate surrounding"One share: One vote“• Every shareholder SHOULD own one votingright for every share he/she owns• This is a core corporate governance principle,deriving from the established need to treatall shareholders equally (OECD, 2004).
• In many EU companies the ratio can be ten, twenty,or even one hundred votes per share, for certain,privileged shareholders• The privileged shareholders can be, for example,founding family members• Even where shares are sold to other shareholders,the rights on the new shares are often different(one share: one vote) such that the founding familymembers retain control.
ABI Study (2005)(See Directions Paper)• Association of British Insurers (ABI) study examinedapplication of one share one vote principle in EU• Examined capital structure of EU companies toestablish what proportion applied the one shareone vote principle• Findings indicated that 65% of companies appliedone share one vote, but identified some strikingexceptions to the principle• Multiple voting rights were found, especially inFrance, Sweden and the Netherlands
EU Study 2007• EU produced an in-depth report on theproportionality principle:• "proportionality between ultimate economic risk andcontrol means that share capital which has anunlimited right to participate in the profits of thecompany or in the residue on liquidation, and onlysuch share capital, should normally carry controlrights, in proportion to the risk carried. The holdersof these rights to the residual profits and assets ofthe company are best equipped to decide on theaffairs of the company as the ultimate effects of theirdecisions will be borne by them"
• This study identified a far wider range ofcontrol-enhancing mechanisms which do notfollow the proportionality principle, butwhich are used widely throughout memberstates• The findings of the study suggest that a oneshare one vote policy would not difficultiesof excessive control by concentrations ofshareholders.
Other control-enhancing mechanismsinclude:• pyramidal structures, available in all themember states surveyed and used in three-quarters of them;• shareholder agreements available in all thecountries surveyed and used in 69% of them,and;• cross shareholdings used in 31% of thecountries surveyed
• Although one share one vote has beenadvocated by institutional investorrepresentative organisations, there has beenresistance from the EU corporate community,who favour investor choice, withtransparency, rather than regulation of dualshare classes, being the essential mechanismof accountability
Board Structure and Performance inEU• EU-wide adoption of good corporategovernance practice with respect to theappointment of non-executive directors oncorporate boards• BUT• definition of independence has been appliedin a flexible manner.• Most EU member states disclosingremuneration
Choice of Language for CorporateCommunications• Which language should be used for theannual general meeting?• Which language should corporate disclosuresand documents be presented in?• How can shareholders exercise informedvotes if they cannot understand the languagein which voting forms are presented?
Commissions approach to dealing with such problemsin corporate governance is as follows:• 1. Consultation• 2. Recommendation or directive• 3. Ex post evaluation• 4. If recommendations or directives do not deliverthen their usefulness is questionable• 5. Ex post, if objectives not achieved, what can bedone next?• An evaluation is necessary after regulation
Corporate Governance in Developing Economies:The Case of Uganda• Research into corporate governance in Africais in its infancy• Study by Wanyama (2007) represents thefirst attempt to reflect on corporategovernance issues in Uganda• Issues and conclusions apply to manydeveloping economies
Wanyama (2007)• Research aimed:-• to examine whether principles of corporategovernance have led to significantimprovements in corporate governance inUgandan companies• To discover whether guidelines are enough todevelop good corporate governance, orwhether more is needed.
Wanyama et al. (2007, p.16).• "… the level of implementation of corporategovernance guidelines in Uganda is poor ….attributed ….to the lack of an appropriateframework to support implementation andenforce compliance with the guidelines"
Factors Impeding Corporate GovernanceImprovements in Uganda• Cultural and social factors:-• pressure from extended families for financialsupport, leading to bribery and corrupt practices• hierarchical structures (heads of families/ age)• Sexism• Tribalism• Economic factors:-• tax levels• Remuneration• inflation and poverty
Other problems• Shareholder advocacy (means by whichshareholders can hold boards to account)was identified as a serious weakness inUgandan corporate governance• Family ownership structures make it difficultfor shareholders to exercise their rights inUganda.
A Need for MoreEthical Business Practices• Unethical conduct significant obstacle to goodcorporate governance:-• sexual harassment of employees;• fear of whistleblowing• political and other corporate appointments notbased on merit• bribery and corruption• poor accounting disclosures• lack of ethics among senior corporate employees,such as integrity, punctuality, honesty andaccountability• inadequate protection of employees rights, leadingto exploitation and harassment
Wanyama suggested:• "… extra resources need to be provided to enable thelegal, regulatory and enforcement agencies toperform their work adequately, while the governanceframework also needs to take into account thespecific cultural context of Uganda, where respect forelders and the protection of the family is a majorconcern. In addition, the economic policies of thecountry need to be scrutinised to ensure that theyfoster and nurture good corporate governancepractices in Uganda, most fundamentally by ensuringthat the population … receives a fair wage or livingallowance so that the motivation to cheat or takebribes is reduced"
Global Convergence ofCorporate Governance• Involves striking a balance between retainingindividual characteristics of a country andadopting a market-based, Anglo-Saxon formof governance• Involves improving ETHICS in business• Involves improving corporate governance inSPIRIT not just by following codes of practice
Conclusions• The rise of global capitalism.• First attempts at categorising corporategovernance systems.• Path dependence.• The law and finance literature and the hierarchyof corporate governance systems.• The VOC literature and the concept ofcomplementarities.• Corporate governance convergence
Further Reading• Solomon, Jill (2010) Corporate Governance andAccountability 3rd Edition, Wiley, UK. Ch.7-8• Larcker, David & Tayan, Brian (2011) Corporate GovernanceMatters, FT Press/Pearson New Jersey. Ch.2• Goergen, Marc (2012) International CorporateGovernance, Pearson. Ch.2-7• Monks, A.G. & Minow, N. (2011) Corporate Governance, 5thEdition, Wiley. Ch.5• CIMA - Performance Strategy: Study Text (2011) BPPLearning Media Ltd. Part B : 3
Ideas for Next Discussion• Carcello, Joseph V; Hermanson, Dana R; Ye,Zhongxia (Shelly) (2011) Corporate GovernanceResearch in Accounting and Auditing: Insights,Practice Implications, and Future ResearchDirections, Auditing30. 3 (Aug 2011): 1-31.