Transcript SESSION 1 - Amazon Web Services

SESSION 1
Introduction
CYCLES OF CORPORATE
GOVERNANCE
© Prof. Thomas Clarke
Outline
‣Introduction
“Why governance? Why Now?”
‣Cycles of Governance
“Will we ever learn? Or are disasters inevitable?”
‣Theoretical Perspectives
Definitions
‣ “Corporate Governance is the system by which
companies are directed and controlled…”
(Cadbury Report,
UK, 1992)
‣ “Involves a set or relationships between a company’s
management, its board, its shareholders, and other
stakeholders… provides the structure through which
the objectives of the company are set, and the means
of attaining those objectives and monitoring
performance are determined.” (OECD, Principles of Corporate
Governance, 1999; 2004)
A Greater Purpose?
In its broadest sense,
“Corporate governance is concerned with holding the balance
between economic and social goals and between individual
and communal goals”.
The governance framework is there to ‘encourage the efficient
use of resources and equally to require accountability for the
stewardship of those resources’. The aim is to align as nearly
as possible the interests of individuals, of corporations, and of
society. (Cadbury 2004)
Epoch Making Challenges
‣19th C
Entrepreneurship
‣20th C
Management
‣21st C
Governance
(R.I. Tricker circa 1992)
Why governance?, Why now?
“Why Governance?, Why now?”
‣International deregulation of financial markets
‣Increasing scale and activity of corporations
‣Growth of investment institutions
‣Effective monitoring necessary for security of
investments
‣Recognition that governance matters for
accountability, performance and attracting capital.
‣A general trend in society towards openness,
transparency and disclosure.
CYCLES OF GOVERNANCE
Cycles of Governance
‣“Corporate Governance crisis and reform is essentially
cyclical”.
‣“Waves of corporate governance reform and increased
regulation occur during periods of recession, corporate
collapse and re-examination of the viability of regulatory
systems”.
‣“During long periods of expansion, active interest in
governance diminishes, as companies and shareholders
become again more concerned with the generation of wealth,
than in its retention”.
(Clarke, T. (2004).
East Asia : Most affected countries by
the 1997 Financial Crisis
Stock Market Bubbles in US
( Dow Jones 1997-2009)
14,000
12,000
10,000
8,000
Source: Yahoo Finance
5 March 2009
97 98 99 00 01 02 03 04 05 06 07 08 09
Forms of Business Association
Sole Trader
Unincorporated Associations
Limited
Partnerships partnerships
Joint ventures
Associations Co-operatives Chartered
Corporations
Incorporated
under associations
Incorporations Acts
Public
companies
Limited by
shares
Public
Companies
limited by
guarantee
Syndicates
Corporations
created by
special Act of
Parliament
Proprietary
Companies
Limited by
shares
Corporations
Trusts
(Including property
and unit trusts)
Banks and
Insurance
companies
Public
unlimited
companies
Credit
unions,
Permanent
Building Socs,
Friendly Socs.
Unincorporated
Non- profit
organisations
Companies
under The
Corporations Act
Proprietary
Unlimited
companies
No liability
companies
Source: Redmond P. (2005:99)
Determining Factors Influencing to
Decision to Incorporate
‣ Limited Liability
‣ Perpetual Succession
‣ Financing
‣ Cost, Formality and Continuing Obligations
‣ Taxation
Corporate Governance Lifecycle
Maturity Governance
challenges
Public Corporation
(Diffuse Shareholders)
• Maintain alertness
• Board assessment
•Advance value
commitments
Corporate
Development
Public Corporation
(Majority Shareholders)
Growth Governance challenges:
IPO
(Initial Public Offering)
•Risk management
•Develop board directors.
• Engage stakeholders.
Private
Company
Founding
Entrepreneurs
Launch Governance Challenges:
• Raise capital
• Recruit board of directors
• Establish accountability
Source: Clarke T. (2006)
Time
Diversity in Corporate Governance
‣ National, regional and cultural differences
‣ Ownership structure and dispersion
‣ Industry and market environment
‣ Firm size and structure
‣ Life cycle variations : origin & development, technology
& periodic crisis and new directions
OUTSIDER SYSTEMS
PROPERTIES
Ownership
Control
Finance
INSIDER SYSTEMS
Dispersed ownership
Concentrated ownership
Separation of ownership and control
Little incentive for outside investors to
participate in corporate control
Low debt/equity ratio and low ratio of bank
credits to total liabilities
Highly sophisticated and diversified financial
markets
Association of ownership with control
Control by interested parties (banks,
related firms, and employees)
High debt/equity ratio and high ratio of
bank credits to total liabilities
Low level of sophistication and low
opportunities for diversification of financial
markets
Organic growth
Growth
Merger and acquisition
Takeovers
Hostile takeovers that are costly and
antagonistic
Short term
Absence of hostile takeovers
Performance of assets to release shareholder
value
Low commitment of outsider investors to longterm strategies of firms
Competitive strategy, marketing and
profitability priorities
Stewardship of business institution to
achieve long term stakeholder values
Interested parties contribute to strategy,
intervention by outside investors limited to
periods of clear financial failure
Production strategy, operations, quality
and sales volume priorities
Other stakeholders are represented
Orientation
Management
Mission
Business Strategy
Stakeholders
Weaknesses
Interests of other stakeholders are not
represented
Takeovers may create monopolies
Managers may become self-interested
Long term
Insider systems may encourage collusion
Social obligations may slow necessary
restructuring
Domestic Market Capitalization
(WFE 2009)
USD bn
25 000
20 000
40 000
10 000
5 000
0
WFE total (USD bn)
2000
2001
2002
2003
2004
2005
30,956
26,595
22,833
30,627
36,848
40,888
2006
2007
50,650
60,854
2008
32,551
Value of Share Trading
(WFE 2009)
USD bn
70 000
60 000
50 000
40 000
30 000
20 000
10 000
0
WFE total
(USD bn)
2000
2001
2002
2003
2004
2005
2006
2007
56,491
41,834
33,115
33,331
42,267
54,765
70,035
112,969
2008
113,602
CRISIS
QUIS CUSTODIET IPSOS CUSTODES?
Juvenal (A.A. 60-130) Satires vi, 347.
(“Who is to guard the guards
themselves?”)
Influences of Corporate Governance on
Performance
‣Effects the development & functioning of capital markets and
exerts a strong influence on resource allocation.
‣Can impinge upon the development of equity markets, R & D,
innovative activity, entrepreneurship, and the development of an
active SME sector, and thus impinge on economic growth.
‣In transition economies, privatization has raised questions about
the way in which private enterprises should be governed.
“It is thought that poor corporate governance mechanisms in these
countries have proved, in part, to be a major impediment to
improving the competitiveness of firms.” (Maher & Andersson, OECD,
1999)
Six Months in the Life of WorldCom,
Enron, Tyco and Parmalat
-2 Months
-1 Month
1 Month
2 Months
3 Months
4 Months
120
110
100
90
80
70
60
50
40
30
20
10
0
-40
-20
0
20
TRADING DAYS
WorldCom ( Down 86%)
Enron Corp (Down 99%)
Tyco (Down 65%)
Parmalat (Down (96%)
40
60
80
Continuing Crisis in Corporate
Governance
‣ CEO pay
‣
‣
Earnings Misstatements
Agency and double agency dilemmas
EXECUTIVE REWARD
US Top Ten Highest Paid CEOs in 2008
Rank
Company
CEO
Pay (USD )
Market
Capitalization
(USD Bn)
1
Oracle
Lawrence J. Ellison
557 000 000
105.35
2
Occidental Capital
Ray Irani
222 640 000
51.29
3
Hess
John B. Hess
154 580 000
16.24
4
Ultra Petroleum
Michael D. Watford
117 000 000
5.61
5
Chesapeake Energy Corp
Aubrey McClendon
112 460 000
11.70
6
Motorola Inc
Jha Sanjay
91 490 000
14.19
7
EOG Resources
Mark G. Papa
90 470 000
16.08
8
WR Berkley
William R. Berkley
87 480 000
2.02
9
Burlington Santa Fe
Matthew K. Rose
68 620 000
24.61
10
Allegheny Energy
Paul J. Evanson
67 290 000
4.23
Source: Data compiled from Forbes CEO Compensation Report (2008); Yahoo News Executive Compensation 2008. Yahoo Finance 2009
Rest of the World Highest paid CEOs in 2004
Rank
Company
1
(UK) Man Group
2
CEO
Pay
(millions)
Market
Capitalization
(USD Bn)
Peter Clarke
GBP 7.2
437.25
(UK) Royal Bank of Scotland
Fred Goodwin
GBP 7.06
2186.25
3
(FR) Alcatel-Lucent
Patricia Russo
EU 6
3.85
4
(SW) Roche Holding
Franz Humer
SW Fr 11.3
102.93
5
(SP) Banco Santander Central
Alfred Saenz
EU 8.34
69.81
6
(GE) Volkswagen
Martin Winterkorn
EU 6.14
69.12
7
(UK) Royal Dutch Shell
Jeroen Van-der veer
EU 8.78
86.62
8
(FR) Loreal
Jean Paul Agon
EU 3.5
32.29
9
(ITA) FiatSpA
Sergio Marchionne
EU 3.05
9.45
10
(DE) Adidas
Herbert Hainer
EU 3.44
5.13
Source: Compiled from Wall Street Journal: Market Watch “Notable Executive Pay Deals in Europe’, May 2009. and Yahoo Finance 2009
Average CEO Pay in US and Europe
2008 (US$ millions)
178
12.5
US CEOs
EU CEOs
Source: Forbes (2009):CEO Compensation Special Report (2009), Wall Street Journal : Market Watch ‘Notable Executive Pay Deals in Europe’, May 2009; Institute
for Policy Studies: Executive Excess Report 2008.
Top Five US CEOs vs Five US Fund
Managers CEOs 2008 (US$ millions)
Chesapeake
Energy
Ultra
Petroleum
Hess
Occidental
Petroleum
Oracle
Citadel
Investment
Group
Harbinger
Partners
Reinaissance
Technologies
Soros Fund
Mgmt
Source: Compilation from Forbes CEO Compensation 2008 Report; Institute of Policy Studies: Executive Excess 2008.
Paulson &
Co
Total Number of US Corporation
Earnings Re-Statements (1997-2005)
1195
613
514
330
174
92
102
1997
1998
201
225
0
1999
2000
2001
2002
2003
2004
2005
Source: Adapted from Coffee J. (2002), Glass, Lewis and Co (2006)
Full source: Adapted from Coffee Jr J.C. (2002). “Racing Towards the Top: The Impact of Cross-Listings and Stock MarketCompetition on International Corporate Governance”. Columbia
Law Review 107(7):1757-1831; Glass Lewis &Co (2006) Company website.
Source: Adapted from Coffee J. (2002)
THEORIES OF CORPORATE
GOVERNANCE
From Owner Entrepreneur to double
Agency Dilemma
OWNER
Owner Entrepreneur
PRIVATE
COMPANY
SHAREHOLDERS
PUBLIC
COMPANY
Shareholders Delegate Power to the Board of Directors
Double Agency Dilemma
BOARD OF DIRECTORS
Board Delegates Power to Management
MANAGEMENT
Source: Adapted from Blake (1999).
Double Agency Dilemma
COMPANY
SHAREHOLDERS
Shareholders Delegate Power to the Board of Directors
BOARD OF
DIRECTORS
Board Delegates Power to Management
MANAGEMENT
Source:
Adapted from Blake (1999)
Theoretical Perspectives on Boards and
Governance
‣
‣
A multi-theoretical approach is needed for recognizing
the many mechanisms and structures that might
reasonably enhance organizational functioning
From narrow focus of agency theory and transaction
cost theory inspired by financial economics, through
approaches including stewardship, resource
dependency, stakeholder and managerialist
Theoretical Perspectives: CG and Board Role
AGENCY
TRANSACTION
COSTS
ECONOMICS
STEWARDSHIP
RESOURCE
DEPENDENCY
STAKEHOLDER
Reduce
uncertainty;
boundary
spanning;
highlights the
Interdependence
of firms rather
than viewing
them simply in
terms of
management
intentions
Defines firms
as inclusive
multilateral
agreements
between the
enterprise
and multiple
Stakeholders
MANAGERIAL
HEGEMONY
CLASS
HEGEMONY
The board as
a ‘legal
fiction’;
Managerial
control
Perpetuate
elite & class
power;
Corporations
as
exploitative
vehicle for
CORPORATE GOVERNANCE AND BOARD ROLE
Selfinterested
utility
maximizing
motivation
of
individual
actors
Ensure
match
Between
managers
(‘agents’)
and
shareholders.
(‘principals’)
Focus on
governance
needs of
exchange
relations
Concerned
with
mechanisms
which
reduce costs
associated
with
contractual
hazards
Ensure the
Stewardship
of corporate
assets
No inherent
conflict of
Interest
between
Managers/
owners, and
that optimum
governance
structures
allow
coordination
of the
enterprise to
be achieved
Connecting firm
with external
resources help
to reduce
Uncertainty
These relationships constrain
and create the
strategic
possibilities of
the company.
Need to
understand
the
relationship
Between
owners,
Managers
and
The board of
Directors
Accumulation
of wealth and
power
Source: Adapted from Corbet and Mayer (1991); Charkham 1992; Ebster-Grusz and Pugh 1992; and Nunnenkamp (1995)
Theoretical Perspectives: Origin
AGENCY
TRANSACTION
COSTS
ECONOMICS
STEWARDSHIP
RESOURCE
DEPENDENCY
STAKEHOLDER
MANAGERIAL
HEGEMONY
CLASS
HEGEMONY
The board
as
a ‘legal
fiction’;
Managerial
control
Perpetuate
elite and
class
power;
THEORETICAL ORIGIN
Selfinterested
utility
maximizing
motivation
of
individual
actors
Ensure
match
Between
managers
(‘agents’)
and
shareholders.
(‘principals’)
Focus on
governance
needs of
exchange
relations
Concerned
with
mechanisms
which
reduce costs
associated
with
contractual
hazards
Ensure the
Stewardship
of corporate
assets
No inherent
conflict of
Interest
between
Managers/
owners, and
that optimum
governance
structures
allow
coordination
of the
enterprise to
be achieved
Reduce
uncertainty;
boundary
spanning;
highlights the
Interdependence
of firms
rather than
viewing them
simply in term
terms of
management
intentions
Connecting firm
with external
resources help
to reduce
uncertainty
Defines firms
as inclusive
multilateral
agreements
between the
enterprise
and multiple
Stakeholders
These relationships constrain
and create the
strategic
possibilities of
the company.
Need to
understand
the
relationship
Between
owners,
Managers
and
The board of
Directors
Corporations
as
exploitative
vehicle for
Accumulation
of wealth
and
power
Source: Adapted from Corbet and Mayer (1991); Charkham 1992; Ebster-Grusz and Pugh 1992; and Nunnenkamp (1995)
Theoretical Perspectives: Origin, Analysis,
Focus
AGENCY
TRANSACTION
COSTS
ECONOMICS
STEWARDSHIP
RESOURCE
DEPENDENCY
STAKEHOLDER
MANAGERIAL
HEGEMONY
CLASS
HEGEMONY
ORIGIN
Economics
and Finance
Economics
and
Finance
Organization
Studies
Organization
Studies
Politics, Law,
& management
organization
studies
Management
Organizational
Studies
Sociology &
Politics
Transaction
Coordination
Resources
Stakeholders
Management
Corporations
Asset
Specificity
Stewardship
Interdependence
Relationships
Control
Exploitation
ANALYSIS
Individual
FOCUS
Agency costs
Source: Adapted from Corbet and Mayer (1991); Charkham 1992; Ebster-Grusz and Pugh 1992; and Nunnenkamp (1995) Stiles and Taylor 2002