1. ECONOMIC ANALYSIS OF GLOBAL BUSINESS 2 LECTURE 1 2010 TRENDS IN GLOBAL CORPORATE GOVERNANCE

2. GLOBAL CORPORATE GOVERNANCE WHY DOES IT MATTER? It is concerned with who controls what, and how well they are doing it It is concerned with who controls what, and how well they are doing it It is changing, and we need to understand what is happening It is changing, and we need to understand what is happening It affects entire economies, multinational corporations and small businesses It affects entire economies, multinational corporations and small businesses

3. CORPORATE GOVERNANCE: DEFINITION The relationship among various participants in determining the direction and performance of corporations (Monks and Minow, 1995) The relationship among various participants in determining the direction and performance of corporations (Monks and Minow, 1995) Main participants: shareholders, management, directors Main participants: shareholders, management, directors Other participants: employees, customers, suppliers, creditors, the community: the stakeholding approach Other participants: employees, customers, suppliers, creditors, the community: the stakeholding approach

4. Global Trends: The Context Privatization: $850 billion since 1990 Privatization: $850 billion since 1990 Liberalization: falling trade barriers, capital controls Liberalization: falling trade barriers, capital controls Technology: mobile money, information Technology: mobile money, information Globalization Globalization

5. Drivers of Change Increased competition: exposing stagnant performance Increased competition: exposing stagnant performance Transition: roll back of the state Transition: roll back of the state Decline in public funding: from aid to investment Decline in public funding: from aid to investment Capital exporters: rapid growth in institutional investment Capital exporters: rapid growth in institutional investment Scandals, corruption and collapse Scandals, corruption and collapse The invisible continent: Kenichi Ohmae The invisible continent: Kenichi Ohmae

6. SOME SCANDALS Banks in 1990s Japan Banks in 1990s Japan Equitable Life in the UK Equitable Life in the UK LTCM, Worldcom and Enron in USA LTCM, Worldcom and Enron in USA Parmalat in Italy Parmalat in Italy Defence contracts in France and UK Defence contracts in France and UK The 2008-9 global banking collapse The 2008-9 global banking collapse …..and they keep on coming! …..and they keep on coming!

7. The Response Public reform (codes, listings, company law, regulation) Public reform (codes, listings, company law, regulation) Private sector response Private sector response Demand for global standards (OECD principles) Demand for global standards (OECD principles) Financial stability forum Financial stability forum International initiatives (WB – OECD cooperation) International initiatives (WB – OECD cooperation) International standard setters International standard setters … impact felt in every region … impact felt in every region

8. Global Meets Local: the Variables –Legal heritage –Pattern of ownership –Exposure to international markets –Business culture and environment –… one size does not fit all (but fundamental principles apply)

9. COMPARING GOVERNANCE SYSTEMS Internationally we can find four main varieties of governance system: Internationally we can find four main varieties of governance system: –market-based –corporate –state-guided –crony-based Some countries have features of more than one system Some countries have features of more than one system

10. CAPITALISM: alternative taxonomies - examples Market capitalism (USA, UK, Hong Kong, New Zealand, Canada) Market capitalism (USA, UK, Hong Kong, New Zealand, Canada) Corporate/institutional capitalism (Sweden, Germany, Austria, Italy,Korea) Corporate/institutional capitalism (Sweden, Germany, Austria, Italy,Korea) State-guided capitalism (Japan, France, Iran, Hungary) State-guided capitalism (Japan, France, Iran, Hungary) Cronycapitalism (Russia, Ukraine, Thailand, Indonesia) Cronycapitalism (Russia, Ukraine, Thailand, Indonesia)

11. MARKET SYSTEM Government avoids intervention Government avoids intervention Preference for low taxation/spending Preference for low taxation/spending Preference for free trade Preference for free trade Low levels of state asset ownership Low levels of state asset ownership Lower levels of regulation Lower levels of regulation Strong capital markets with wide share ownership; markets agents of change Strong capital markets with wide share ownership; markets agents of change

12. CORPORATE SYSTEM Government prepared to intervene Government prepared to intervene Banks or other institutions own much of corporate capital Banks or other institutions own much of corporate capital Financial markets secondary, with corporate change occurring privately Financial markets secondary, with corporate change occurring privately Social objectives often important Social objectives often important Consensual policy-making Consensual policy-making

13. STATE-GUIDED SYSTEM Strong state, intervening systematically Strong state, intervening systematically Tendency to trade protection or mercantilist practices Tendency to trade protection or mercantilist practices Markets qualified by subsidy, regulation Markets qualified by subsidy, regulation Public/private partnership common Public/private partnership common Possibility of large state-owned sector Possibility of large state-owned sector

14. CRONY SYSTEM Close business-government links Close business-government links Tendency to monopolistic practices Tendency to monopolistic practices Politically-inspired subsidies, trade restrictions and interventions Politically-inspired subsidies, trade restrictions and interventions Probably high income differentials and narrow distribution of wealth Probably high income differentials and narrow distribution of wealth

15. Practice of Governance: UK Most shares are held by pension funds, investment funds, and private individuals Most shares are held by pension funds, investment funds, and private individuals Banks usually do not own shares Banks usually do not own shares Almost all big companies are listed Almost all big companies are listed Stock market performance of shares important measure of corporate success Stock market performance of shares important measure of corporate success Hostile takeovers fairly common Hostile takeovers fairly common

16. UK: Governance Assessment Advantages: Advantages: –Fairly open and transparent –Quick rewards for success and punishment for failure –Responsiveness to business environment Disadvantages: Disadvantages: –May encourage short-termism –Mergers and takeovers do not always work

17. Practice of Governance: Germany Banks have very large shareholdings in major corporations Banks have very large shareholdings in major corporations Long-term (cosy?) relationships Long-term (cosy?) relationships Other shareholders are proportionately less important Other shareholders are proportionately less important Hostile takeovers virtually unknown (exception: Vodafone/Mannesman) Hostile takeovers virtually unknown (exception: Vodafone/Mannesman)

18. German Governance: Assessment Advantages: Advantages: –Long-term business relationships –Stability of employment and production –Social cohesion? Disadvantages: Disadvantages: –Lack of transparency and openness –Sometimes tolerant of poor performance –May be unresponsive to global change

19. Practice of Governance: France Shareholding structures more like Germany than UK Shareholding structures more like Germany than UK Close state-business links, and intervention by the state Close state-business links, and intervention by the state Stock market has become much more important over last 20 years - state uses it as a discipline measure Stock market has become much more important over last 20 years - state uses it as a discipline measure

20. French Governance: Assessment Advantages: Advantages: –Successful use of state/business partnerships –Coordinated approach to industrial strategy –Effective use long-term planning Disadvantages: Disadvantages: –Conflicts of interest between business/state –Sometimes lack of transparency –Some tolerance of underperformance

21. Practice of Governance: Russia Large industrial groups, some controlled by the oligarchs Large industrial groups, some controlled by the oligarchs Some very big corporations are under strong state influence (e.g.Gazprom) Some very big corporations are under strong state influence (e.g.Gazprom) Stock market not very transparent Stock market not very transparent Many business relationships based on personal connections, sometimes crime Many business relationships based on personal connections, sometimes crime

22. Russian Governance: Assessment Advantages: Advantages: –If any at all, the avoidance of disorder Disadvantages: Disadvantages: –Lack of transparency –Corruption –Misallocation of resources –Excessive arbitrary state intervention

23. Changes in European Governance Most corporate governance systems are tending to converge Most corporate governance systems are tending to converge Stock markets are becoming more important, BUT Stock markets are becoming more important, BUT Some shareholders becoming more activist, such as pension funds like Hermes, some unit trust companies Some shareholders becoming more activist, such as pension funds like Hermes, some unit trust companies

24. QUESTIONS AND ISSUES Why has Governance come to the fore in the last 25 years? Why has Governance come to the fore in the last 25 years? What are good governance and bad governance? What are good governance and bad governance? In what ways does governance differ in the private and public sectors? In what ways does governance differ in the private and public sectors? How much difference does it make? How much difference does it make?