Ⅳ. TAKEOVERS
✿ Not only regulatory competition between different countries but collusion can
lead to the convergence of corporate-governance systems.
Ø Marc Goergen, Marina Martynova, and Luc Renneboog: assess whether takeover regulation in European countries has converged de jure with takeover regulation in the UK and the US.
Ø Through nine elements of takeover regulation they show the predicted effect on minority shareholder protection, and ownership structures with marked differences between the widely held and the blockholder systems.
Ø Goergen et al.: conclude that the de jure convergence of takeover rules is no evidence of de facto convergence, because the same rule has different implications when applied in different governance contexts.
➨ Such convergence has two features:
1. Individual member states adopted it voluntarily.(not as a result of regulatory competition)
2. Convergence did not occur through collusion.(No agreement could be reached at the European level.)
Ⅴ. Corporate Boards
✿ Discussions about board reform
Ø The Start: Jay Lorsch’s influential Pawns or Potentates(1989) ; calling for strengthening the role of outside directors in the USA.
Ø UK: the Cadbury Committee; advocating independent directors & the separation of the role of chairman and CEO.
Ø Gerard Hertig: ①classifies board reforms into three categories;
(ⅰ)reforms that constrain board discretion, mainly by making boards more
susceptible to shareholder power, but also by giving more power to
auditors and other gatekeepers
ⅱ)reforms that reinforce board independence
Ø ⅲ)reforms that change director incentives, by increasing reputation and
liability risk.
②worries about ’one-size-fits-all’ problem: Market forces
oblige companies to standardize, albeit the one-size-fits-all
approach imposes a cost.
③Boards must fulfill multiple objectives(monitoring &
formulating strategy, advising, etc). Reformers have put too
much emphasis on monitoring.
④Much of the reform process has been capture by
institutional investors, who themselves do not take the
board medicine they prescribe.
➨ ∴ 1. Boards reforms should be less detailed and more principle based.
2. Interest groups should be kept out of board reform as much as possible.
3. Minimum standards should be reduced to an absolute minimum, thus avoiding the one-size-fits-all problem.
4. Board-reform issues that have been ignored so far should be addressed. Ex) the boards of institutional investment vehicles
5. Board reform should be complemented with ‘market oriented implementation mechanisms’. Ex) direct shareholder participation in board election or ex post intervention through the courts
Ⅵ. Executive Remuneration
✿ The issue of executive pay has become one of the key indicators of the ultimate performance of a corporate-governance system.
✿ Findings of Lucian Bebchuk and Yaniv Grinstein
1. Executive pay only relates to a few individuals whose salaries are very small relative to overall company profits.
2. However, the total compensation of the top-five executives has been increasing significantly, even though such growth is not much related to changes on the size, performance, or industrial mix of firms.
3. The growth in total compensation has been driven by increased allocations of stock and options, but cash compensations has been increasing as well.
➨ These findings suggest significant changes in the market for executives, however, we should be cautious before drawing inferences about corporate governance, because the causes of the rise in executive compensation in the USA is complex.
✿ Then, how about the EU?
- Guido Ferrarini and Niamh Moloney: find clear divergences between the blockholding and dispersed-ownership models.
Ø In general, countries with more dispersed share ownership tend to employ more high-powered, equity-based compensation contracts.
Cf) Large blockholders should have adequate incentive and ability to monitor the performance of managers directly, without the need to write high-powered incentive contracts.
Ø Effective governance in all systems relies to a great extent on effective disclosure, and greater harmonization on disclosure would be beneficial.
(Disclosure is emerging as a key corporate-governance mechanism in the EU.)
Ø However, they caution against interventions to harmonize board structures and to increase the power of the ‘shareholder voice’.
Ⅶ. Conclusions
1. A one-size-fits-all thesis of corporate-governance rules is not appropriate; Different types of corporate-governance rules are required.
2. While corporate-governance rules emphasize monitoring and supervision, they may undermine the degree to which boards are able to perform their strategic and innovative functions.
3. An area of a large measure of agreement for regulation: “disclosure of information and transparency” ; In order to promote participation by outside investors and efficient operation of economies, high level of disclosure of information and transparency is necessary.
4. An contentious area: “takeovers & executive remuneration” ;
① Takeovers: the least successful area of corporate legislation in Europe, and there is no immediate prospect of resolution.
② Executive remuneration: The extent of the problem may vary between European corporations(dominated by large shareholders) and those in the USA(with dispersed shareholders).
∴ Large shareholders in Europe: ➨better placed to control the remuneration of
their executives than dispersed shareholders
in the USA.
➨better positioned to engage in wealth
transfers to their own advantage at the
expense of minority shareholders.
5. Policy should be directed towards facilitating diversity in systems by allowing firms to choose their preferred arrangements and encouraging competition between systems.
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