20/03/2014

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 (contd)

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 (contd)

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