Competition for Corporate Charters: Transatlantic Differences Colin Mayer Saïd Business School University of Oxford

The Issues • Run to the top or bottom • Impediments to competition • Externalities • Effective competition • Outcomes – place of incorporation • Share price reactions

70 60 50 40 30 20 10 0

Percentage of Listed Companies Under Majority Control

68 65.7

64.2

56.1

39.4

32.6

26.3

2.4

2 1.7

Austria Belgium Germany Italy NL Spain Sweden UK Nasdaq NYSE

Source : country chapters in Barca and Becht (2001)

Percentage of Voting Blocks Associated With Different Types of Investors in Germany

35% 30% 25% 20% 15% 10% 5% 0% Individuals and Families Trusts & Holding Companies Companies Financial Institutions Government

Porsche AG 100 % Porsche/Piech Family Voting Pool 10 %* Porsche AG Voting Stock Porsche AG Non-Voting 50:50 capital Source : Hoppenstedt Guide 1999; * estimate

ING Groep N.V.

Certificate Holders 100 % capital 0 % votes ING Administratie Kantoor 100 % capital 100 % votes ING Source : Form 20-F

Diversity of Financial Systems • Banks versus markets • Concentrated versus dispersed ownership • Stakeholder versus shareholder • Common versus civil law • Single party versus coalition governments

Differences Particularly Pronounced in Europe • Significance of banks and stock markets • Size of blockholdings • Nature of blockholdings • Anti-takeover devices • Legal and political systems

Causes: Investor Protection • Financial development required for external financing • External financing promotes growth • Investor protection necessary condition for financial development • Therefore, investor protection necessary condition for growth

Evidence from UK • There was financial development without investor protection • There was external financing without investor protection • There wasn’t any more with it • Therefore investor protection was neither a necessary nor sufficient condition for growth

First Caveat on Policy Simple rules don’t work

Consequences: Agency Versus Investor Abuse • Agency problem in dispersed systems • Minority investor abuse in concentrated ownership system

Evidence on Performance in Europe • Bank control limited • Concentrated owners do not exercise control • Independent directors do not intervene • Takeovers do not discipline bad management =>Most conventional wisdom is not accurate

Second Caveat on Harmonization We don’t know much

Systems View • Theory: Different forms of information Different types of control Different degrees of commitment • Evidence Association of different systems with different economic activities

Example 1 • External equity financed and skill dependent industries grow particularly rapidly in countries with good information disclosure • Particularly closely associated with R&D not fixed investment • Relations dependent on stage of economic growth

Example 2 • VC firms are primarily financed by banks in Germany and Japan • Bank financed VC firms invest in later stage activities than individual and corporate funded VC firms

-0.80

Example 3 Patent Specialization: USA and Germany Germany Medic al Tec hnology Information Tec h. Pharmac eutic als Biotec hology Nuc lear Engineering Semic onduc tors Agric ., Food Chem. Mac ro.Chem.,Polymers Telec ommunic ations Surf. Tec h., Coating Optic s Basic Materials Chem. Chemic al Engineering Organic Chemistry Control Systems Spac e Tec h., Weapons Engines, Pumps, Turbs. Mater., Metallurgy Elec tric al Mac hinery Mater. Proc ., Textiles Audiovisual Tec h. Handling Mac hinery Environment Tec h. Mec hanic al Elements Thermal Proc esses Consumer Goods Mac hine Tools Transport Civil Engineering Agric .,Food Proc . Mac h. -0.60

-0.40

-0.20

0.00

USA 0.20

0.40

0.60

0.80

Third Caveat on Harmonization There isn’t a best system Different systems serve different purposes

Effect of Harmonization • Presumes best practice • Standardizes on presumed best practice • Limits variation • Discourages innovation

What is Required?

• Diversity • Experimentation • Innovation

How Should It Be Achieved?

• Choice not harmonization • Enabling not prescriptive regulation • Freedom to choose • Strong disclosure • Harmonization where there are cross-border externalities, as in banking

Arguments Against Freedom to Choose • European playing-field is too unlevel • Distorted by pursuit of private benefits • Need to establish pre-conditions for competition • Competition inimical to systems based on long-term relations • Best system will not emerge through mobility

Perfect Competition and Product Differentiation • Not seeking system that maximizes shareholder value • Difference is that US is competition within a system • Europe is selection between systems • Providing best environment (financial system, labour markets, legal and political system) for diverse corporate activities • Competition and survival of fittest in product markets not corporate form

Justification for Freedom of Mobility • Allows matching of corporate activities with different systems • Exploits not destroys diversity of European systems • Through strong disclosure enhances not detracts from financial integration