Presentation on theme: "CYCLES OF CORPORATE GOVERNANCE"— Presentation transcript:
1CYCLES OF CORPORATE GOVERNANCE SESSION 1IntroductionCYCLES OF CORPORATE GOVERNANCE
2Outline Cycles of Governance Theoretical Perspectives Introduction “Why governance? Why Now?”Cycles of Governance“Will we ever learn? Or are disasters inevitable?”Theoretical Perspectives
3Definitions“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)
4A 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)
5Epoch Making Challenges 19th C Entrepreneurship20th C Management21st C Governance(R.I. Tricker circa 1992)
7“Why Governance?, Why now?” International deregulation of financial marketsIncreasing scale and activity of corporationsGrowth of investment institutionsEffective monitoring necessary for security of investmentsRecognition that governance matters for accountability, performance and attracting capital.A general trend in society towards openness, transparency and disclosure.
9Cycles 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).
10East Asia : Most affected countries by the 1997 Financial Crisis
11Stock Market Bubbles in US ( Dow Jones 1997-2009) 14,00012,00010,0008,00097989900010203040506070809Source: Yahoo Finance5 March 2009
12Forms of Business Association Sole TraderUnincorporated AssociationsCorporationsPartnershipsLimitedpartnershipsJoint venturesSyndicatesTrusts(Including propertyand unit trusts)UnincorporatedNon- profitorganisationsAssociationsIncorporatedunder associationsIncorporations ActsCo-operativesCharteredcreated byspecial Act ofParliamentBanks andInsurancecompaniesCreditunions,PermanentBuilding Socs,Friendly Socs.Companiesunder TheCorporations ActPublicLimited byshareslimited byguaranteeProprietaryunlimitedUnlimitedNo liabilitySource: Redmond P. (2005:99)
13Determining Factors Influencing to Decision to Incorporate Limited LiabilityPerpetual SuccessionFinancingCost, Formality and Continuing ObligationsTaxation
14Corporate Governance Lifecycle Maturity Governance challengesGrowth Governance challenges:Launch Governance Challenges:Maintain alertnessBoard assessmentAdvance valuecommitmentsRisk managementDevelop board directors.Engage stakeholders.Raise capitalRecruit board of directorsEstablish accountabilityTimeDevelopmentCorporateFoundingEntrepreneursPrivateCompanyIPO(Initial Public Offering)Public Corporation(Majority Shareholders)(Diffuse Shareholders)Source: Clarke T. (2006)
15Diversity in Corporate Governance National, regional and cultural differencesOwnership structure and dispersionIndustry and market environmentFirm size and structureLife cycle variations : origin & development, technology & periodic crisis and new directions
16OUTSIDER SYSTEMSINSIDER SYSTEMSPROPERTIESOwnershipDispersed ownershipConcentrated ownershipControlSeparation of ownership and controlLittle incentive for outside investors to participate in corporate controlAssociation of ownership with controlControl by interested parties (banks,related firms, and employees)FinanceLow debt/equity ratio and low ratio of bank credits to total liabilitiesHighly sophisticated and diversified financial marketsHigh debt/equity ratio and high ratio of bank credits to total liabilitiesLow level of sophistication and lowopportunities for diversification of financialmarketsGrowthMerger and acquisitionOrganic growthTakeoversHostile takeovers that are costly and antagonisticAbsence of hostile takeoversOrientationShort termLong termManagement MissionPerformance of assets to release shareholder valueStewardship of business institution to achieve long term stakeholder valuesBusiness StrategyLow commitment of outsider investors to long-term strategies of firmsCompetitive strategy, marketing and profitability prioritiesInterested parties contribute to strategy, intervention by outside investors limited to periods of clear financial failureProduction strategy, operations, quality and sales volume prioritiesStakeholdersInterests of other stakeholders are not representedOther stakeholders are representedWeaknessesTakeovers may create monopoliesManagers may become self-interestedInsider systems may encourage collusionSocial obligations may slow necessary restructuring
20QUIS 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?”)
21Influences 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)
22Six Months in the Life of WorldCom, Enron, Tyco and Parmalat -40-2020406080WorldCom ( Down 86%)Enron Corp (Down 99%)Tyco (Down 65%)Parmalat (Down (96%)-2 Months-1 Month1 Month2 Months3 Months4 MonthsTRADING DAYS1030507090100110120
23Continuing Crisis in Corporate Governance CEO payEarnings MisstatementsAgency and double agency dilemmas
25US Top Ten Highest Paid CEOs in 2008 RankCompanyCEOPay (USD )MarketCapitalization(USD Bn)1OracleLawrence J. Ellison105.352Occidental CapitalRay Irani51.293HessJohn B. Hess16.244Ultra PetroleumMichael D. Watford5.615Chesapeake Energy CorpAubrey McClendon11.706Motorola IncJha Sanjay14.197EOG ResourcesMark G. Papa16.088WR BerkleyWilliam R. Berkley2.029Burlington Santa FeMatthew K. Rose24.6110Allegheny EnergyPaul J. Evanson4.23Source: Data compiled from Forbes CEO Compensation Report (2008); Yahoo News Executive Compensation Yahoo Finance 2009
26Rest of the World Highest paid CEOs in 2004 RankCompanyCEOPay(millions)MarketCapitalization(USD Bn)1(UK) Man GroupPeter ClarkeGBP 7.2437.252(UK) Royal Bank of ScotlandFred GoodwinGBP 7.063(FR) Alcatel-LucentPatricia RussoEU 63.854(SW) Roche HoldingFranz HumerSW Fr 11.3102.935(SP) Banco Santander CentralAlfred SaenzEU 8.3469.816(GE) VolkswagenMartin WinterkornEU 6.1469.127(UK) Royal Dutch ShellJeroen Van-der veerEU 8.7886.628(FR) LorealJean Paul AgonEU 3.532.299(ITA) FiatSpASergio MarchionneEU 3.059.4510(DE) AdidasHerbert HainerEU 3.445.13Source: Compiled from Wall Street Journal: Market Watch “Notable Executive Pay Deals in Europe’, May and Yahoo Finance 2009
27Average 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.
28Top Five US CEOs vs Five US Fund Managers CEOs 2008 (US$ millions) ChesapeakeEnergyUltra PetroleumHessOccidental PetroleumOracleCitadel Investment GroupHarbinger PartnersReinaissance TechnologiesSoros Fund MgmtPaulson & CoSource: Compilation from Forbes CEO Compensation 2008 Report; Institute of Policy Studies: Executive Excess 2008.
29Total 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.
31From Owner Entrepreneur to double Agency Dilemma PRIVATECOMPANYSHAREHOLDERSPUBLICCOMPANYShareholders Delegate Power to the Board of DirectorsDouble Agency DilemmaBOARD OF DIRECTORSBoard Delegates Power to ManagementMANAGEMENTSource: Adapted from Blake (1999).
32Double Agency Dilemma COMPANY SHAREHOLDERS BOARD OF DIRECTORS Shareholders Delegate Power to the Board of DirectorsBOARD OFDIRECTORSBoard Delegates Power to ManagementMANAGEMENTSource: Adapted from Blake (1999)
33Theoretical Perspectives on Boards and Governance A multi-theoretical approach is needed for recognizing the many mechanisms and structures that might reasonably enhance organizational functioningFrom narrow focus of agency theory and transaction cost theory inspired by financial economics, through approaches including stewardship, resource dependency, stakeholder and managerialist
34Theoretical Perspectives: CG and Board Role AGENCYTRANSACTIONCOSTSECONOMICSSTEWARDSHIPRESOURCEDEPENDENCYSTAKEHOLDERMANAGERIALHEGEMONYCLASSCORPORATE GOVERNANCE AND BOARD ROLESelf-interestedutilitymaximizingmotivationofindividualactorsEnsurematchBetweenmanagers(‘agents’)andshareholders.(‘principals’)Focus ongovernanceneeds ofexchangerelationsConcernedwithmechanismswhichreduce costsassociatedcontractualhazardsEnsure theStewardshipof corporateassetsNo inherentconflict ofInterestbetweenManagers/owners, andthat optimumstructuresallowcoordinationof theenterprise tobe achievedReduceuncertainty;boundaryspanning;highlights theInterdependenceof firms ratherthan viewingthem simply interms ofmanagementintentionsConnecting firmwith externalresources helpto reduceUncertaintyDefines firmsas inclusivemultilateralagreementsbetween theenterpriseand multipleStakeholdersThese relation-ships constrainand create thestrategicpossibilities ofthe company.The board asa ‘legalfiction’;ManagerialcontrolNeed tounderstandtherelationshipowners,ManagersThe board ofDirectorsPerpetuateelite & classpower;Corporationsasexploitativevehicle forAccumulationof wealth andpowerSource: Adapted from Corbet and Mayer (1991); Charkham 1992; Ebster-Grusz and Pugh 1992; and Nunnenkamp (1995)