1、14 Corporate Governance Around the World McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-1 Outline lGovernance and the Public Corporation: Key Issues lThe Agency Problem lRemedies for the Agency Problem lLaw and Corporate Governance lConsequences of Law lCo
2、rporate Governance Reform lThe Dodd-Frank Act McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-2 Governance and the Public Corporation: Key Issues lThe public corporation, which is jointly owned by a multitude of shareholders protected with limited liability
3、, is a major organizational innovation of vast economic consequences. lIt is an efficient risk sharing mechanism that allows corporations to raise large amounts of capital. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-3 lA key weakness is the conflict of
4、 interest between managers and shareholders. lIn principle, shareholders elect a board of directors, who in turn hire and fire the managers who actually run the company. lIn reality, management-friendly insiders often dominate the board of directors, with relatively few outside directors who can ind
5、ependently monitor the management. Governance and the Public Corporation: Key Issues McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-4 lIn the case of Enron and other dysfunctional corporations, the boards of directors grossly failed to safeguard shareholde
6、r interests. lFurthermore, with diffused ownership, most shareholders have strong enough incentive to incur the costs of monitoring management themselves. nIts easier to just sell your shares, a.k.a. “The Wall Street Walk.” Governance and the Public Corporation: Key Issues McGraw-Hill/Irwin Copyrigh
7、t 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-5 The Agency Problem lShareholders allocate decision-making authority to the managers. lThats why the managers are hired in the first place. lMany shareholders are not qualified to make complex business decisions. lA shareholder with a
8、 diversified portfolio would not have the time to devote to making the numerous decisions at each of his many companies anyway. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-6 The Agency Problem lHaving short-term control of the firms assets, managers mig
9、ht be tempted to act in the managers short-term best interest instead of the shareholders long-term best interest. nConsumption of lavish benefits is one example. nOutright stealing is another example. uSome Russian oil companies are known to sell oil to manager- owned trading companies at below-mar
10、ket prices. uEven at that, they dont always bother to collect the bills! McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-7 The Agency Problem at Enron lEnron had about 3,500 subsidiaries and affiliates. Many of these were run and partly owned by Enron execu
11、tives. lIn retrospect, conflict of interest should have been an obvious concern. nThe partnerships performed hundreds of millions of dollars of transactions with Enron itself, in some cases buying assets from the company or selling assets to it. lThe problem is this: Where did the executives loyalti
12、es lie? Are they trying to negotiate the best deal for the company that employs them and the shareholders who own the company, or the best deal for the partnership where they had an ownership stake? McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-8 The Agen
13、cy Problem at Enron lThe board of directors claimed that these partnerships with executive ownership allowed the firm to speed up contracting. lTo protect itself in dealings with these partnerships, the company supposedly set up safeguards that required top company officers and the board to review a
14、nd approve deals between Enron and the partnerships. lClearly these safeguards were insufficient. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-9 Remedies for the Agency Problem lIn the U.S., shareholders have the right to elect the board of directors. lI
15、f the board remains independent of management, it can serve as an effective mechanism for curbing the agency problem. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-10 Corporate Boards lThe structure and legal charge of corporate boards vary greatly across
16、 counties. nIn Germany the board is not legally charged with representing the interests of shareholders, but is instead charged with representing the interests of stakeholders (e.g. workers, creditors, etc.). McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-
17、11 Corporate Boards lThe structure and legal charge of corporate boards vary greatly across counties. nIn England, the majority of public companies voluntarily abide by the Code of Best Practice on corporate governance. It recommends that there should be at least three outside directors and that the
18、 board chairman and the CEO should be different individuals. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-12 Corporate Boards lThe structure and legal charge of corporate boards vary greatly across counties. nIn Japan, most corporate boards are insider-d
19、ominated and primarily concerned with the welfare of the keiretsu to which the company belongs. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-13 Incentive Contracts lIt is difficult to design a compensation scheme that gives executives an incentive to wor
20、k hard at increasing shareholder wealth. lAccounting-based schemes are subject to manipulation. nArthur Andersens involvement with the Enron debacle is an egregious example. lExecutive stock options are an increasingly popular form of incentive compatible compensation. McGraw-Hill/Irwin Copyright 20
21、01 by The McGraw-Hill Companies, Inc. All rights reserved. 4-14 Management Ownership McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-15 Concentrated Ownership lAnother way to alleviate the agency problem is to concentrate shareholdings. lIn the United State
22、s and the United Kingdom, concentrated ownership is relatively rare. lElsewhere in the world, however, concentrated ownership is the norm. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-16 Debt lIf managers fail to pay interest and principal to creditors,
23、the company can be forced into bankruptcy and managers may lose their jobs. lBorrowing can have a major disciplinary effect on managers, motivating them to curb private benefits and wasteful investments and trim bloated organizations. lHowever, excessive debt creates its own agency problems. McGraw-
24、Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-17 Overseas Stock Listing lCompanies domiciled in countries with weak investor protection can bond themselves credibly to better investor protection by listing their stocks in countries with strong investor protectio
25、n. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-18 The Market for Corporate Control lIf a management team is really out-of-control, over time the share price will decline. lAt some point, a corporate raider will buy up enough shares to gain control of th
26、e board. lThen the raider either fires the incompetent managers and turns the firm around or he sells everything in sight for the break-up value. lEither way, the old managers are out of a job. lThe threat of this unemployment may keep them in line. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hil
27、l Companies, Inc. All rights reserved. 4-19 Law and Corporate Governance lCommercial legal systems of most countries derive from a relatively few legal origins. nEnglish common law nFrench civil law nGerman civil law nScandinavian civil law lThus the content of law protecting investors rights varies
28、 a great deal across countries. lIt should also be noted that the quality of law enforcement varies a great deal across countries. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-20 Consequences of Law lProtection of investors rights has major economic cons
29、equences. lThese consequences include: nThe pattern of corporate ownership and valuation. nDevelopment of capital markets. nEconomic growth. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-21 Consequences of Law: Italy vs. the United Kingdom lItaly has a Fr
30、ench civil law tradition with weak shareholder protection, whereas the United Kingdom, with its English common law tradition, provides strong investor protection. lIn Italy the three largest shareholders own 58 percent of the company, on average. In the U.K. the three largest shareholders own 19 per
31、cent of the company, on average. nCompany ownership is thus highly concentrated in Italy and more diffuse in the United Kingdom. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-22 lIn addition, as of 1999 only 247 companies are listed on the stock exchange
32、in Italy, whereas 2,292 companies are listed in the United Kingdom. lIn the same year, the stock market capitalization as a proportion of the annual GDP was 71 percent in Italy but 248 percent in the United Kingdom. lThe stark contrast between the two countries suggests that protection of investors
33、has significant economic consequences. Consequences of Law: Italy vs. the United Kingdom McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-23 Ownership and Control lCompanies domiciled in countries with weak investor protection many need to have concentrated
34、ownership as a substitute for legal protection. lThis is not without costs. In companies with concentrated ownership, large shareholders can abuse smaller shareholders. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-24 Pyramidal Ownership Structure lExhibi
35、t 4.6 illustrates the pyramidal ownership structure for Daimler-Benz, a German company, at the beginning of the 1990s. lThe company has three major block holders: Deutsche Bank (28.3 percent), Mercedes- Automobil Holding AG (25.23 percent), and the Kuwait government (14 percent). The remaining 32.37
36、 percent of shares are widely held. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-25 Pyramidal Ownership Structure lThe pyramidal ownership structure illustrated in Exhibit 4.6 makes it possible for large investors to acquire significant control rights wi
37、th relatively small investments. nFor example, Robert Bosch GmbH controls 25 percent of Stella Automobil, which in turn owns 25 percent of Mercedes-Automobil Holding, which controls 25 percent of Daimler-Benz. nAG. Robert Bosch can possibly control up to 25 percent of the voting rights of Daimler-Be
38、nz AG with only 1.56 percent cash flow rights in the company. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-26 Daimler-Benz AG Deutsche Bank Kuwait Government Mercedes- Automobil Holding AG Widely Held Widely Held Stella Automobil Beteiligungsges mbH Ster
39、n Automobil Beteiligungsges mbH Bayerische Landesbank Robert Bosch GmbH Kornet Automobil Beteiligungsges mbH Dresdner Bank 25%25%25%25% 25% 25%50% 28.3%25.23%32.37% 14% Exhibit 4.6 Widely Held McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-27 Pyramidal Own
40、ership Structure lAG. Robert Bosch can control up to 25 percent of the voting rights of Daimler-Benz AG with only securing the cooperation of three other firms. nAt least two of these three: Bayerische Landesbank, Kornet Automobil Beteiligungsges mbH, or Dresdner Bank. nAnd Stern Automobil Beteiligu
41、ngsges mbH. lNot bad for only directly controlling 1.56% of the company. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-28 Capital Markets and Valuation lInvestor protection promotes the development of external capital markets. lWhen investors are assured
42、of receiving fair returns on their funds, they will be willing to pay more for securities. lThus, strong investor protection will be conducive to large capital markets. lWeak investor protection can be a factor in sharp market declines during a financial crisis. McGraw-Hill/Irwin Copyright 2001 by T
43、he McGraw-Hill Companies, Inc. All rights reserved. 4-29 Economic Growth lThe existence of well-developed financial markets, promoted by strong investor protection, may stimulate economic growth by making funds readily available for investment at low cost. lSeveral studies document this link. lFinan
44、cial development can contribute to economic growth in three ways: nIt enhances savings. nIt channels savings toward real investments in productive capacities. nIt enhances the efficiency of investment allocation. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved
45、. 4-30 Corporate Governance Reform lScandal-weary investors around the world are demanding corporate governance reform. lIts not just the companies internal governance mechanisms that failed; auditors, regulators, banks, and institutional investors also failed in their respective roles. lFailure to
46、reform corporate governance will damage investor confidence, stunt the development of capital markets, raise the cost of capital, distort capital allocation, and even shake confidence in the capitalist system itself. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights rese
47、rved. 4-31 The Sarbanes-Oxley Act lMajor components of the Sarbanes-Oxley Act include: nAccounting regulation. nAudit committee. nInternal control assessment. nExecutive responsibility. lMany companies find compliance burdensome, costing millions of dollars. lSome foreign firms have chosen to list t
48、heir shares on the London Stock Exchange instead of U.S. exchanges to avoid costly compliance. McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 4-32 CFA Institute Ethical and Professional Standards of Corporate Governance lThe Board: Is it largely independent?
49、 Are the directors qualified? Do they have access to outside resources? How are they elected? Do any directors have cross-company relationships? lManagement: Do they have a code of ethics? Are there lots of perquisites? How is their compensation structured? McGraw-Hill/Irwin Copyright 2001 by The Mc
50、Graw-Hill Companies, Inc. All rights reserved. 4-33 The Cadbury Code of Best Practice lThe Cadbury Code of Best Practice is an ethical standard, without the force of law. However, the London Stock Exchange requires listed firms to either comply or explain why they cannot. nAbout 90 percent of LSE-li
