Prof had asked what real life subjects/topics we would like to study on the last week, since we have finished the theoretical part of class- and I~~ suggested "corporate governance" (as someone super-interested in the corporate world)
He gave a one-week notice for presentations on Corporate Governanc!! ㅡㅡ;; Great,,,, sorry, classmates...didn't know....
So... here is an assessment on corporate governance in the US and Eurpe: taadaaa~~~
CORPORATE GOVERNANCE: AN ASSESSMENT (by BECHT, JENKINSON, and MAYER)
Intro-Questions addressed:
1. How should companies be governed so that they are run efficiently and effectively?
2. In whose interests firms should be run?
Shareholders? | creditors, employees, communities? |
Anglo-American view seeking to maximize the value of shareholder capital | Belief that firms should perform a broader social function |
-tighten regulation and impose stricter standards.
-seek to improve the functioning of markets and enhance their operation.
Ø A critical component is disclosure of information. With good investor information about firms’ governance arrangements and financial performance, it may be desirable to encourage competition between legal systems.
Ø Does competition create competitive deregulation or better forms of regulation?
4. Are fundamental changes required in: the structure and conduct of boards, the role of takeovers and the market, executive remuneration, etc.?
5. Should we be seeking to create active markets in corporate control around the world?
6. How can excesses in executive remuneration be curbed?
7. Should remuneration in Europe to be different from that in the USA?
II. FINANCIAL SYSTEMS
‘Corporate Governance in Emerging Economies’ by Franklin Allen:
The shareholder view | |
firms appropriately allocate resources if they maximize shareholder value. | the law should be directed towards the protection of investor interests as a primary determinant of the performance of financial systems |
-investor protection: includes accounting standards, legal protection, and enforcement)
Firms with the shareholder view | Firms that pursue broader interests | Firms that pursue other interests | |
examples | UK and US firms | Japanese firms | Chinese firms |
emphasis | dividends | Job security over dividends. | Success, $ (?) |
complete markets absence | Performs less well | Performs better | spectacular success |
comments | Market capitalization of GM, Ford, and DaimlerChrysler combined was exceeded by Toyota | preoccupation with job security did not undermine the efficiency of Japanese corporations | Does Investor protection=primary determinant of the performance of financial systems? |
-The emergence of today’s advanced economies does not appear consistent with the investor-protection thesis either. Ex: the development of capital markets in the UK occurred against the background of little investor protection.
‘What Do Firms Disclose and Why? Enforcing Corporate Governance and Transparency in Central and Eastern Europe’ by Erik Berglöf
-considerable variability in disclosure:
l Voluntary disclosure is closely associated with costs, which appear to be more important than the benefits of attracting minority investors and reducing the cost of external finance.
l Mandatory disclosure: widespread violation of rules and a strong country influence on the degree of compliance exist.
l Companies in some countries disclose systematically more than is legally required, while in other countries they disclose less.
high level of compliance | low level of compliance |
Czech and Estonian companies | Lithuanian and Polish companies |
-the overall progress in improving transparency in Central and Eastern Europe has been slow
-strengthening the legal rights of minority investors might be a way of promoting more disclosure.
-Making the rules on disclosure less ambiguous will facilitate private enforcement.
‘A Theory of Corporate Scandals: Why the USA and Europe Differ’ by John Coffee
-despite higher levels of investor protection and legal enforcement in the USA, USA has more corporate scandals than Europe.
-Even the scandals that have afflicted European firms have been associated with the US
-this paradox is due to different patterns of ownership of European and US firms:
US firms | European firms | |
Ownership | widely dispersed among many shareholders | Predominantly concentrated in large shareholders, frequently families. |
structure | managers have their own interests and shareholders individually have little incentive to engage in active monitoring and governance of firms | Shareholders have stronger incentives to engage in active governance but their interests will not be aligned with smaller minority shareholders. |
problems | Managers attempt to manipulate share prices through accounting irregularities to improve their own earnings. | owner managers have a greater incentive to divert assets to their advantage |
Examples | Enron and WorldCom | Parmalat |
policy recommendations | auditor independence | minority shareholders must select their own gatekeepers |
III. COMPETITION BETWEEN SYSTEMS
-Should companies be free to determine their preferred legal form?
competition between legal systems | |
US | Europe |
corporations are free to choose their state of incorporation | limited mobility of corporations across national boundaries |
The advantages of competition between states:
-when firms can choose their regulatory regime, they will opt for the one with less cost
-Regulators will learn from the pattern of inflows and outflows of firms which rules meet a cost–benefit test.
-regulators will seek to maximize the number of regulated firms within their jurisdiction, will react more quickly to regulatory mistakes, and select a different set of rules from monopoly regulators.
-competition in legislation has the same welfare properties that we associate with competition in markets for goods and services.
Ex: Delaware’s supremacy in the corporate charter market and the failure of other states to adopt the institutional sources of Delaware’s success are a reflection of an absence of competition. However, states can compete with Delaware for the business of local incorporations by following a different strategy with respect to their corporation law.
-competition between states is complicated by the presence of the federal government and its role in corporate lawmaking.
USA: 2 parallel systems of corporate lawmaking | |
made at the state level | Washington-made |
interplay between states mindful of each other | Securities Acts Sarbanes–Oxley Act (ensures benefits of regulatory competition between states, concerned with matters that have fallen within the remit of federal legislators) Williams Act (determinant of merger rules and the Securities and Exchange Commission) Anti-trust laws (not a move to pre-empt corporate law but an exercise in eliminating third-party cross-state externalities) |
-freedom of incorporation and reincorporation across member states of the EU becomes more prevalent.
-there are stronger motives for firms to seek to reincorporate in different members states in Europe
-however, the political ramifications of such moves could potentially damaging to the competitive process
-It is not clear whether Europe is on the verge of engaging in a major experiment in corporate mobility and competition, or whether it will be nipped in the bud by political interference.
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