Presentation is loading. Please wait.

Presentation is loading. Please wait.

© Prof. Thomas Clarke SESSION 1 Introduction CYCLES OF CORPORATE GOVERNANCE.

Similar presentations


Presentation on theme: "© Prof. Thomas Clarke SESSION 1 Introduction CYCLES OF CORPORATE GOVERNANCE."— Presentation transcript:

1 © Prof. Thomas Clarke SESSION 1 Introduction CYCLES OF CORPORATE GOVERNANCE

2 Outline I ntroduction Why governance? Why Now? Cycles of Governance Will we ever learn? Or are disasters inevitable? Theoretical Perspectives

3 Definitions Corporate Governance is the system by which companies are directed and controlled… (Cadbury Report, UK, 1992) Involves a set or relationships between a companys 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)

4 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)

5 Epoch Making Challenges 19th CEntrepreneurship 20thCManagement 21st CGovernance (R.I. Tricker circa 1992)

6 Why governance?, Why now?

7 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.

8 CYCLES OF GOVERNANCE

9 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).

10 East Asia : Most affected countries by the 1997 Financial Crisis

11 Stock Market Bubbles in US ( Dow Jones ) ,000 12,000 10,000 8,000 Source: Yahoo Finance 5 March 2009

12 Forms of Business Association Sole TraderUnincorporated AssociationsCorporations Partnerships Limited partnerships Joint ventures SyndicatesTrusts (Including property and unit trusts) Unincorporated Non- profit organisations Associations Incorporated under associations Incorporations Acts Co-operatives Chartered Corporations created by special Act of Parliament Banks and Insurance companies Credit unions, Permanent Building Socs, Friendly Socs. Companies under The Corporations Act Public companies Limited by shares Public Companies limited by guarantee Proprietary Companies Limited by shares Public unlimited companies Proprietary Unlimited companies No liability companies Source: Redmond P. (2005:99)

13 Determining Factors Influencing to Decision to Incorporate Limited Liability Perpetual Succession Financing Cost, Formality and Continuing Obligations Taxation

14 Corporate Governance Lifecycle Maturity Governance challenges Growth Governance challenges: Launch Governance Challenges: Maintain alertness Board assessment Advance value commitments Risk management Develop board directors. Engage stakeholders. Raise capital Recruit board of directors Establish accountability Time Corporate Development Founding Entrepreneurs Private Company IPO (Initial Public Offering) Public Corporation (Majority Shareholders) Public Corporation (Diffuse Shareholders) Source: Clarke T. (2006)

15 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

16 OUTSIDER SYSTEMS INSIDER SYSTEMS PROPERTIES OwnershipDispersed ownershipConcentrated ownership Control Separation of ownership and control Little incentive for outside investors to participate in corporate control Association of ownership with control Control by interested parties (banks, related firms, and employees) Finance Low debt/equity ratio and low ratio of bank credits to total liabilities Highly sophisticated and diversified financial markets 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 GrowthMerger and acquisitionOrganic growth Takeovers Hostile takeovers that are costly and antagonistic Absence of hostile takeovers OrientationShort termLong term Management Mission Performance of assets to release shareholder value Stewardship of business institution to achieve long term stakeholder values Business Strategy Low commitment of outsider investors to long- term strategies of firms Competitive strategy, marketing and profitability priorities Interested parties contribute to strategy, intervention by outside investors limited to periods of clear financial failure Production strategy, operations, quality and sales volume priorities Stakeholders Interests of other stakeholders are not represented Other stakeholders are represented WeaknessesTakeovers may create monopolies Managers may become self-interested Insider systems may encourage collusion Social obligations may slow necessary restructuring

17 Domestic Market Capitalization (WFE 2009) USD bn WFE total (USD bn)30,95626,59522,83330,62736,84840,88850,65060,85432,551

18 Value of Share Trading (WFE 2009) USD bn WFE total (USD bn) 56,49141,83433,11533,33142,26754,76570,035112,969113,602

19 CRISIS

20 QUIS CUSTODIET IPSOS CUSTODES? Juvenal (A.A ) Satires vi, 347. (Who is to guard the guards themselves?)

21 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)

22 WorldCom ( Down 86%) Enron Corp (Down 99%) Tyco (Down 65%) Parmalat (Down (96%) -2 Months-1 Month1 Month2 Months3 Months4 Months TRADING DAYS Six Months in the Life of WorldCom, Enron, Tyco and Parmalat

23 Continuing Crisis in Corporate Governance CEO pay Earnings Misstatements Agency and double agency dilemmas

24 EXECUTIVE REWARD

25 US Top Ten Highest Paid CEOs in 2008 RankCompanyCEOPay (USD )Market Capitalization (USD Bn) 1OracleLawrence J. Ellison Occidental CapitalRay Irani HessJohn B. Hess Ultra PetroleumMichael D. Watford Chesapeake Energy CorpAubrey McClendon Motorola IncJha Sanjay EOG ResourcesMark G. Papa WR BerkleyWilliam R. Berkley Burlington Santa FeMatthew K. Rose Allegheny EnergyPaul J. Evanson Source: Data compiled from Forbes CEO Compensation Report (2008); Yahoo News Executive Compensation Yahoo Finance 2009

26 Rest of the World Highest paid CEOs in 2004 RankCompanyCEOPay (millions) Market Capitalization (USD Bn) 1(UK) Man GroupPeter ClarkeGBP (UK) Royal Bank of ScotlandFred GoodwinGBP (FR) Alcatel-LucentPatricia RussoEU (SW) Roche HoldingFranz HumerSW Fr (SP) Banco Santander CentralAlfred SaenzEU (GE) VolkswagenMartin WinterkornEU (UK) Royal Dutch ShellJeroen Van-der veerEU (FR) LorealJean Paul AgonEU (ITA) FiatSpASergio MarchionneEU (DE) AdidasHerbert HainerEU Source: Compiled from Wall Street Journal: Market Watch Notable Executive Pay Deals in Europe, May and Yahoo Finance 2009

27 Average CEO Pay in US and Europe 2008 (US$ millions) 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.

28 Top Five US CEOs vs Five US Fund Managers CEOs 2008 (US$ millions) Chesapeake Energy Ultra Petroleum HessOccidental Petroleum OracleCitadel Investment Group Harbinger Partners Reinaissance Technologies Soros Fund Mgmt Paulson & Co Source: Compilation from Forbes CEO Compensation 2008 Report; Institute of Policy Studies: Executive Excess 2008.

29 Total Number of US Corporation Earnings Re-Statements ( ) 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): ; Glass Lewis &Co (2006) Company website.

30 THEORIES OF CORPORATE GOVERNANCE

31 From Owner Entrepreneur to double Agency Dilemma Double Agency Dilemma Owner Entrepreneur PUBLIC COMPANY MANAGEMENT Shareholders Delegate Power to the Board of Directors SHAREHOLDERS Board Delegates Power to Management BOARD OF DIRECTORS OWNER PRIVATE COMPANY Source: Adapted from Blake (1999).

32 Double Agency Dilemma COMPANY SHAREHOLDERS BOARD OF DIRECTORS MANAGEMENT Shareholders Delegate Power to the Board of Directors Board Delegates Power to Management Source:Adapted from Blake (1999)

33 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 on Boards and Governance

34 Theoretical Perspectives: CG and Board Role Source: Adapted from Corbet and Mayer (1991); Charkham 1992; Ebster-Grusz and Pugh 1992; and Nunnenkamp (1995) AGENCYTRANSACTION COSTS ECONOMICS STEWARDSHIPRESOURCE DEPENDENCY STAKEHOLDER MANAGERIAL HEGEMONY CLASS HEGEMONY CORPORATE GOVERNANCE AND BOARD ROLE Self- interested 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 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 relation- ships constrain and create the strategic possibilities of the company. The board as a legal fiction; Managerial control Need to understand the relationship Between owners, Managers and The board of Directors Perpetuate elite & class power; Corporations as exploitative vehicle for Accumulation of wealth and power

35 AGENCYTRANSACTION COSTS ECONOMICS STEWARDSHIP RESOURCE DEPENDENCYSTAKEHOLDER MANAGERIAL HEGEMONY CLASS HEGEMONY THEORETICAL ORIGIN Self- interested 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 relation- ships constrain and create the strategic possibilities of the company. The board as a legal fiction; Managerial control Need to understand the relationship Between owners, Managers and The board of Directors Perpetuate elite and class power; Corporations as exploitative vehicle for Accumulation of wealth and power Theoretical Perspectives: Origin Source: Adapted from Corbet and Mayer (1991); Charkham 1992; Ebster-Grusz and Pugh 1992; and Nunnenkamp (1995)

36 AGENCYTRANSACTION COSTS ECONOMICS STEWARDSHIP RESOURCE DEPENDENCYSTAKEHOLDER MANAGERIAL HEGEMONY CLASS HEGEMONY ORIGIN Economics and Finance Economics and Finance Organization Studies Politics, Law, & management organization studies Management Organizational Studies Sociology & Politics ANALYSIS IndividualTransactionCoordinationResourcesStakeholdersManagementCorporations FOCUS Agency costsAsset Specificity StewardshipInterdependenceRelationshipsControlExploitation Theoretical Perspectives: Origin, Analysis, Focus Source: Adapted from Corbet and Mayer (1991); Charkham 1992; Ebster-Grusz and Pugh 1992; and Nunnenkamp (1995) Stiles and Taylor 2002


Download ppt "© Prof. Thomas Clarke SESSION 1 Introduction CYCLES OF CORPORATE GOVERNANCE."

Similar presentations


Ads by Google