MODELS OF CORPORATE GOVERNANCE

Corporate Governance Seminar12th november 2007

Chiara Farolfi, Emanuele Ciani

IntroductionMain problems of abstracting a model of CG

• Companies are multidimentional: different model can apply to one national experience

• Convergence and imitation

Efficiency CONVERGENCE

History Path dependence HETEROGENEITY

Does a “best model” exist?

Presentation outline

1) Models of Corporate Governancei. Insider / Outsiderii. Civil law / Common lawiii. Relationship – based / Arm’s length

2) International comparisoni. Germanyii. United Statesiii. Italyiv. Japan

3) An alternative approach : Cooperatives in Italy

Insider / Outsider (1): ownership and control

(Franks and Mayer, 2001; Becht and Mayer, 2001)

INSIDER OUTSIDER

Equity market few listed company wide market

Share ownership concentrated Dispersed

Voting power high concentration (pyramids, non-voting shares, multiple voting)

low concentration, separation between ownership and control

Main shareholder families, banks, other companies, governement

institutional investors, individual shareholders

Corporate control market low level of takeover high activity in corporate control

market

Information private public

Composition of BoD

large number of directors appointed by the main blockholder presence of outside directors

Control on Management high low

Insider / Outsider (2): efficiency trade-off

Private control bias

Managementor market

control bias

Highblockholder

power

Lowblockholder

power

Lowownership

concentration

Highownership

concentration

from: Becht and Mayer, 2001

Common Law / Civil Law(Morck and Steier 2005, La Porta et. Al 1998)

Common law systems: aim of protecting the weak from the strong

better environment for self-regulation

Common law stronger protection of shareholders

Civil law systems: aim of enforcing the edict of the State.

Civil law low investors’ protection weak public equity markets; high concentration of share ownership

Agency problem shifted: shareholders/ blockholder

private benefit problem

Relationship / Arm's length (1):relationship between the financer and the firm

(Rajan and Zingales, 1998)

Reponses

RELATIONSHIP BASED ARM’S LENGHT

Financier power

“Ensure a return to the financier by granting her some form of power over

the firm being financed”

“The financier is protected by explicit contracts: contracts and associated prices determine the

transactions that are undertaken”

Legal enforcement

Self-enforcing and self-governing: reputation

“Prompt and unbiased enforcement of contracts by courts”

Transparency Needs opacity Production of credible and diffused information

InnovationTends to support incumbents; fear of

outsiders and technological revolution Easier access to finance for new comers

Management

Common education (technical or administrative), or non professional

Long term managers

Rarely foreign-born

Business/financial educationHigh turnover of management

Presence of foreign-born or international experienced individuals

BoDHigh presence of insiders

Representation of stakeholdersActive control of management

Presence of outsiders

Relationship / Arm's length (2)

we can widen these models adding some correlated characteristics (abstracting from Italian, German and Japanese examples, Aguilera and Yip, 2005)

Reponses of countries to the Great Depression:

Europe and Japan period of repression of markets and

massive intervention of government in the allocation of credit.

United States New Deal legislation laid down the foundations for a market – centred system

Glass – Steagall Act (1933)

Presentation outline

1) Models of Corporate Governancei. Insider / Outsiderii. Civil law / Common lawiii. Relationship – based / Arm’s length

2) International comparisoni. Germanyii. United Statesiii. Italyiv. Japan

3) An alternative approach : Cooperatives in Italy

Germany(Becht and Bohmer 2003, Franks and Mayer 2001)

Main businness form Public or private companies limited by shares

Predominant ownership structure

Concentrated ownership: families, other non-financial companies, banksLarge voting block, absence of other voting block

Legal system Civil law

Board structure Dual board system; Employees representatives in the supervisory boardSome directors comes from other companies (i.e. Piëch - Porsche)

Equity market Increasing market capitalisation and corporate debt issues

Take-overLow activity (increasing - i.e. recent overturn of “Volkswagen law”)Little regulation of anti-takeover until 1998 Control and Transparency Law

(KonTraG)

Management Common technical background; few foreign born individuals

StakeholdersCo-determination (i.e. Volkswagen wage freeze in 2004)Banks representation as a result of proxy votes

Improving take over activity (Cioffi 2002) Control and Transparency Law 1998 Fiscal reform 2000 (Steuerreform) “abolished capital gain

taxes on the liquidation of cross-shareholdings”. Volkswagen law overturned on October, the 23rd by

European Court of Justice, (Financial Times, 23/10/2007)

Stakeholder representation: does it lead to empasse?

Volkswagen case; roots in communitarian German culture (Monks and

Minow 2001).

Germany (2)

USA (1)(Monks and Minow 2001, Mallin 2007)

Main businness form

Public companies (stock corporation)

Predominant ownership structure

Institutional investors, financial institutionsDispersed ownership and vote rights: absence of big blockholders

Legal system Common law

Board structure Unitary boardHigh presence of outsiders; however: interlocks

Equity market Well-developed, high rate of market capitalisation to GDP

Take-over High activityDefence from management: poison pills

Management High level of independence; financial background; more foreign born.Agency problem: often CEO/Chairman are the same person; CEOs higly Influence directors nomination

Stakeholders Their protection is mainly guaranteed through contracts and regulation

Answer to the Great Depression

• Glass-Steagall act 1933; Public Utility Company Holding Companies Act 1935

• development of equity market. Agency problem:

Relationship based model at the level of BoD-Management;

Voting with feet?

“My nominating committee is very independent. Sometimes they turn down the names I send them” (Monks and Minow, pg 212)

USA (2)

Italy (1)(Mallin, Bianchi, Bianco, Enriques)

Main business form Limited liability companies, partnership

Predominant ownership structure Non – financial / holding companies, families

Predominant voting structure Voting blocks / shareholders’ agreement

Legal system Civil law

Board structure Unitary + Board of auditors

Equity market Increasing capitalization, derivatives market and corporate debt issues

Take - over Not common, but increasing as a consequence of privatization

Management Long-term managers, rarely foreign born

Stakeholders Trade Unions

Italy (2)(Mallin 2006, Melis, Bianchi, Bianco, Enriques 2001)

• Response to the Great Depression nationalist solution

• No predominant role of financial institutions

• Draghi Law (1998) and Preda Code (1998)

enhancement of minority protection and transparency

Company Act (2004)

A sort of State – family capitalism

Pyramidal structureownership

very limited degree of separation

between ownership and control

Italian structure allows Italian listed companies to choose between a two – tier board structure and the traditional

Japan (1)(Suto and Hashimoto 2006)

Main business form Public limited company

Predominant ownership structureKeiretsu / Predominant role of financial institutions

Legal system Civil law

Board structureDualLarge presence of insider

Equity market Immature capital market

Take - over Strong takeover barriers

Management

“Internalism”: common educational background/ on-the-job training, co-ordination between manager and employees

Stakeholders Society as whole

Japan (2)• Relationship – based system

• Key role of banks

• Keiretsu

• Revision of Commercial Law in 2001 and in 2002

• Commercial Code Revision on Board (2003)

two corporate governance structures: corporate auditors’ system and a committees system

• Case of study: Toyota vs. Sony

Presentation outline

1) Models of Corporate Governancei. Insider / Outsiderii. Civil law / Common lawiii. Relationship – based / Arm’s length

2) International comparisoni. Germanyii. United Statesiii. Italyiv. Japan

3) An alternative approach : Cooperatives in Italy

A different approach: a cooperative model in Italy (1)

• Historical origins: (Zamagni 2006)

• non neutral origin, three different ideals: liberal-Mazziniani, socialists, catholic;

• wide entrenchment through Italy;

• expansion during last years.

% of total companies %of total employees1971 0,48 1,871981 0,67 2,741991 1,08 3,842001 1,22 5,02

Number of cooperatives and cooperatives employee as a percentage of total employee (exluding public institutions)

source: ISTAT, Censuses of industry and the service sector, various years

A cooperative model in Italy (2)

• Cooperative Corporate Law:• mutual interest as cooperative aim;• one head one vote;• democracy and partecipation;• indivisible compulsory fund.

• Problems:• management control (i.e. recent large cooperative

bankruptcy in Argenta);

• how to define and follow cooperative aim in a competitive environment?

Conclusions

1) Different systems around the world are persistent and are developing in different ways

wide range of solutions for a wide range of problems

2) Different models can have similar problems

importance of global discussion of these issues

Thank you foryour attention !!!

References•Aguilera Ruth, Yip George. 2005. Global constraints faces local constraints. Financial Times, 27 may 2005.

•Becht M. and Mayer C. 2001. Introduction in Barca and Becht, 2001.

•Barca Fabrizio, Becht Marco. 2001. The Control of Corporate Europe, Oxford University Press UP

•Cioffi, John W. 2002. Restructuring “Germany Inc.”: The Politics of Company and Takeover Law Reform in Germany and the European Union (April 15, 2002). Institute of European Studies. Political Economy of International Finance. Working Paper PEIF-1

•Franks Julian R, Mayer Colin. 2001. Ownership and control of german corporations, CEPR Discussion Paper Series, No. 2898, July 2001

•Mallin Christine A. 2007. Corporate Governance, Second Edition, Oxford University Press, New York.

•Mallin Christine A. 2006. International Corporate Governance: A Case Study Approach, Edward Elgar Publishing. (Italian Case, cap. 3, Japanese Case, cap. 10)

•Monks R.A.G., Minow N. 2001. Corporate Governance, 2nd edition. Blackwell Publishing.

•Morck Randall K. and Steier Lloyd. 2005. The global history of corporate governance – an introduction, NBER Working Paper No. 11062, January 2005

•Rajan, Raghuram G. Zingales, Luigi. 2003. Banks and Markets: The Changing Character of European Finance (joint with R. Rajan), in European Central Bank 2nd Annual Conference.

•Suto, Megumi and Hashimoto, Motomi. 2006. Will the Japanese corporate governance system survive? Challenges of Toyota and Sony, in Mallin, 2006.

•Zamagni, Vera. 2006. Italy’s cooperatives from marginality to success. XIV International Economic History Congress. Helsinki Finland. 21-25 August 2006.