1. International Finance
Chapter 21:
Corporate Governance: Global Issues

2. What is Corporate Governance?
Defined:
No generally accepted definition!
Bank for International Settlements definition:
"the system of rights, processes, and controls established internally and externally over the management of a business entity with the objective of protecting the interest of all stakeholders".
“Corporate responsiveness” to stakeholders.
Central Issue: How best to protect the interest of stakeholers!

3. Why Should we be concerned about Corporate Governance?
Macro Implications:
Because corporations play a key role in the generation and allocation of a country’s resources.
Micro Implications:
In the increasing world of globalization, firms need to practice good corporate governance so as to:
Continue to attract consumers and workers
Have access to global financial markets!
Historically, corporate governance appears to have been of greater concern among developed country corporations than developing country corporation!
However, globalizations is forcing these developing country corporations to assess their corporate governance structures

4. A Very Broad Definition?
While the Bank for International Settlements definition may seem “too broad” to be practical, but it does convey the reality that different stakeholder groups will focus on different criteria and elements in deciding what makes up good corporate governance as they see it.
shareholders probably attach the greatest importance to maximizing the market value of company shares on a sustained basis.
the general public wants to be sure the corporation treats customers fairly and has sensitivity to its impact - socially, environmentally, fiscally - on the local community.
corporate employees want assurances the company will compensate them properly, provide opportunities for advancement, offer training and career development assistance, and help with their retirement planning

5. U.S. Corporations
All of these responses to stakeholder expectations or needs are examples of some kind of good corporate governance.
They actually appear in some formal statements of corporate government policy by large U.S. business entities like Philip Morris and General Motors.
These companies make the point that "corporate governance" is a fairly elastic concept, with a multitude of practices and guidelines that respond to the concerns of particular groups.

6. What does Good Corporate Governance mean in Practice?
Thus, a company's commitment to good corporate governance probably needs to be response to the diverse concepts surrounding the term. These include
A well-informed, board of directors, with a majority of outside (independent) with the information, resources and the confidence to give proper direction to the CEO and other senior company management.
Transparent organizational structures and business processes, including, to the extent possible, transparency in the corporate decision-making process.
This can be particularly important for officer and director selection and compensation.

7. Corporate Governance in Practice
Integrity of strategies, operating systems, and controls.
a reliable process for management to detect, evaluate, and correct both strategic and operational problems, a sound risk management approach, and a strong internal audit program.
Full, accurate, and timely financial disclosure.
which in the US would mean "in conformity with US Generally Accepted Accounting Principles", and outside the US, disclosure at least up to International Accounting Standards.
A policy and record of "corporate good citizenship" confirming the company's ethical and social awareness.
A strong corporate governance culture, probably formally articulated in a company statement of "what we stand for" and perhaps a code of corporate ethics.
An appropriate level of responsiveness and accountability to shareholders.
in the form of, for example, some access for shareholders to directors, and possibly to senior management, as well as opportunities for meaningful shareholder participation in voting on company policies and director/CEO selection.

8. History of Corporate Governance
The concept of corporate governance began in the US early in the 20th Century when a number of states, most notably Delaware, passed "enabling statutes" known as general corporation laws.
At that time it was recognized that there was a growing disparity between owners of firms and managers of firms.
Issue of agency costs!
These state statutes created a legal framework for stockholders investing in corporations (i.e.- becoming owners) who were finding themselves increasingly separated from the managers of those corporations.

9. Key Element in Early 20th Century Corporate Governance
Boards of directors were important to this process.
It was argued that these boards had fiduciary duties of loyalty and care in the “wise management of the corporation in the best interests of its owners.”
A key element in this was the “independence of directors” from undue influence by interested parties (including managers) at the expense of the corporation's welfare.

10. The Stock Market Crash: 1929
In the aftermath of the stock market crash in 1929, there was a public debate over the inability of shareholders to assure that boards and their appointed managers were in fact operating in the best interests of owners.
Shareholders were seen as “widely dispersed in the United States.”
Most financial market regulation from this time, however, involved improving public disclosure.

11. 1980s!
The decade of the 1980s was characterized by a wave of hostile takeovers, leveraged buyouts, management buyouts, junk bond financing, "poison pills", and the general merger frenzy of those days.
Within this environment, shareholder interests again became an issue.
the corporate governance debate was revived and large institutional investors began to be heard.
Reflected the growing importance of these institutions.

12. 1990s!
In the 1990s, it was primarily these institutional investors in the form of pension and retirement funds - along with the legal, accounting, and consulting professions - who drove the development of concepts of corporate control and accountability.
Their main focus was (and continues to be) on the role of the “independent” board of directors.
Key concept here is “independent.”
Was not always the case, even in the 1990s.

13. Today
We are currently living through a “tidal wave” of interest in the concept and forces of corporate governance.
In the United States, this has much to do with the prominent and increasingly activist role of institutional fund investors as corporate shareholders.
Focus on securing top performance from their investments.
Globally, this aggressive shareholder demand for corporate responsiveness is spilling over into other countries.
American fund managers have diversified their portfolios internationally and set an example for local investors.

14. Global Corporate Governance
However, internationally active financial institutions find themselves particularly challenged by the need to promote a corporate governance.
First, they must work hard to understand, and adapt strategies and operations to a great diversity of national practices, traditions, laws, regulations, and political and market structures.
Second, their possibilities for implementing an American style of "good corporate governance" are often constrained in a given context or a given country by legal, cultural, economic, or even purely logistical factors.

15. Global Variations Separation of ownership and management (control):
Varies widely among countries.
Measured by ownership concentration
Country Average ownership of 3 largest shareholders
United States 20%
United Kingdom 19%
Italy 58%
Germany 48%
Brazil 57%
Mexico 64%
United States and U.K. have a “diverse shareholder base.” In other countries, often founding families control the companies!

16. Concentration of Ownership
If ownership is concentrated, a small number of owners will find it advantageous to monitor managers.
Previous studies suggest that concentration of ownership has a positive impact on a company’s performance.
Agency cost may be reduced as owners and managers become better aligned!

17. Legal Variations
Studies have suggested that many variations in corporate governance from country to country can be attributed to differences in legal systems.
How well investors are protected.
Four main legal systems to consider
English common law
French civil law
German civil law
Scandinavian civil law

18. Common Versus Civil Law
Common Law
Based on precedent, formed by the rulings of independent judges regarding specific disputes.
Originated in U.K. and spread throughout the world through British colonization (as well as independent adoption):
United States, Australia, Canada, India, South Africa, Singapore, New Zealand.
Civil Law
Codification of legal rulings.
Dominates legal systems globally.
France, Germany, Japan, Mexico, China, Latin America,

19. Shareholder Rights
English common law appears to be more protective of private property and investor rights.
English common law tends to offer the strongest protection for investors.
Why?
Historically the “state” has played a greater role in regulating economic activity in civil law countries but a less active role in individual (private property) rights.

20. Law and Ownership Concentration
Issue: Civil law countries generally have greater ownership concentration ratios.
Legal System Average ownership of 3 largest shareholders
English Common 43%
French Civil 54%
Are concentration ratios a response to relatively weak investor protection laws?