1. CYCLES OF CORPORATE GOVERNANCE
SESSION 1
Introduction
CYCLES OF CORPORATE GOVERNANCE

2. Outline Cycles of Governance Theoretical Perspectives Introduction
“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 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)

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 C Entrepreneurship
20th C Management
21st C Governance
(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 1997-2009)
14,000
12,000
10,000
8,000 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Yahoo Finance
5 March 2009

12. Forms of Business Association
Sole Trader
Unincorporated Associations
Corporations
Partnerships
Limited
partnerships
Joint ventures
Syndicates
Trusts
(Including property
and unit trusts)
Unincorporated
Non- profit
organisations
Associations
Incorporated
under associations
Incorporations Acts
Co-operatives
Chartered
created by
special Act of
Parliament
Banks and
Insurance
companies
Credit
unions,
Permanent
Building Socs,
Friendly Socs.
Companies
under The
Corporations Act
Public
Limited by
shares
limited by
guarantee
Proprietary
unlimited
Unlimited
No liability
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
Development
Corporate
Founding
Entrepreneurs
Private
Company
IPO
(Initial Public Offering)
Public Corporation
(Majority Shareholders)
(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
Ownership
Dispersed ownership
Concentrated 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
Growth
Merger and acquisition
Organic growth
Takeovers
Hostile takeovers that are costly and antagonistic
Absence of hostile takeovers
Orientation
Short term
Long 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
Weaknesses
Takeovers 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)
2000
2001
2002
2003
2004
2005
2006
2007
2008
25 000
20 000
40 000
5 000
10 000
USD bn
WFE total (USD bn)
30,956
26,595
22,833
30,627
36,848
40,888
50,650
60,854
32,551

18. Value of Share Trading (WFE 2009)
70 000
60 000
50 000
40 000
30 000
20 000
10 000
2000
2001
2002
2003
2004
2005
2006
2007
2008
USD bn
WFE total (USD bn)
56,491
41,834
33,115
33,331
42,267
54,765
70,035
112,969
113,602

19. CRISIS

20. QUIS CUSTODIET IPSOS CUSTODES. Juvenal (A. A. 60-130) Satires vi, 347
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. Six Months in the Life of WorldCom, Enron, Tyco and Parmalat
-40
-20 20 40 60 80
WorldCom ( Down 86%)
Enron Corp (Down 99%)
Tyco (Down 65%)
Parmalat (Down (96%)
-2 Months
-1 Month
1 Month
2 Months
3 Months
4 Months
TRADING DAYS 10 30 50 70 90
100
110
120

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
Rank
Company
CEO
Pay (USD )
Market
Capitalization
(USD Bn) 1
Oracle
Lawrence J. Ellison
105.35 2
Occidental Capital
Ray Irani
51.29 3
Hess
John B. Hess
16.24 4
Ultra Petroleum
Michael D. Watford
5.61 5
Chesapeake Energy Corp
Aubrey McClendon
11.70 6
Motorola Inc
Jha Sanjay
14.19 7
EOG Resources
Mark G. Papa
16.08 8
WR Berkley
William R. Berkley
2.02 9
Burlington Santa Fe
Matthew K. Rose
24.61 10
Allegheny Energy
Paul J. Evanson
4.23
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
Rank
Company
CEO
Pay
(millions)
Market
Capitalization
(USD Bn) 1
(UK) Man Group
Peter Clarke
GBP 7.2
437.25 2
(UK) Royal Bank of Scotland
Fred Goodwin
GBP 7.06 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 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
Hess
Occidental Petroleum
Oracle
Citadel 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 (1997-2005)
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): ; Glass Lewis &Co (2006) Company website.

30. THEORIES OF CORPORATE GOVERNANCE

31. From Owner Entrepreneur to double Agency Dilemma
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).

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

33. 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

34. Theoretical Perspectives: CG and Board Role
AGENCY
TRANSACTION
COSTS
ECONOMICS
STEWARDSHIP
RESOURCE
DEPENDENCY
STAKEHOLDER
MANAGERIAL
HEGEMONY
CLASS
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
contractual
hazards
Ensure the
Stewardship
of corporate
assets
No inherent
conflict of
Interest
between
Managers/
owners, and
that optimum
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
owners,
Managers
The board of
Directors
Perpetuate
elite & class
power;
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)

35. Theoretical Perspectives: Origin
AGENCY
TRANSACTION
COSTS
ECONOMICS
STEWARDSHIP
RESOURCE
DEPENDENCY
STAKEHOLDER
MANAGERIAL
HEGEMONY
CLASS
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
contractual
hazards
Ensure the
Stewardship
of corporate
assets
No inherent
conflict of
Interest
between
Managers/
owners, and
that optimum
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
owners,
Managers
The board of
Directors
Perpetuate
elite and
class
power;
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)

36. Theoretical Perspectives: Origin, Analysis, Focus
AGENCY
TRANSACTION
COSTS
ECONOMICS
STEWARDSHIP
RESOURCE
DEPENDENCY
STAKEHOLDER
MANAGERIAL
HEGEMONY
CLASS
ORIGIN
Economics
and Finance
Economics and
Finance
Organization Studies
Politics, Law,
& management
organization
studies
Management
Organizational
Studies
Sociology &
Politics
ANALYSIS
Individual
Transaction
Coordination
Resources
Stakeholders
Corporations
FOCUS
Agency costs
Asset
Specificity
Stewardship
Interdependence
Relationships
Control
Exploitation
Source: Adapted from Corbet and Mayer (1991); Charkham 1992; Ebster-Grusz and Pugh 1992; and Nunnenkamp (1995) Stiles and Taylor 2002