The Global History of Corporate Governance An Introduction Randall K. Morck and Lloyd Steier Zhu Guangyao

To Whom Dare We Entrust Corporate Governance? Capitalism is a variegated collection of economics systems Purpose of this volume Two features of corporate governance Does It Matter? Shareholder Capitalism Family Capitalism Bank Capitalism State Capitalism Hoarding gold and silver coins Conclusion Two Emerging Points & Further Reading Structure

A general overview of Capitalism a variegated collection of economic system In AmericaIn much of the rest of the world What is capitalismIndependent corporations compete for customers Immensely wealthy families control great corporations, even gov. CompetitionMonopolies are illegalCompetition is a mirage Equity Structure1)Dispersed, 2)most shareholders are disorganized and powerless, 3)institutional investors give them voice louder 1)concentrated, 2) wealthy families are powerful and control great corporation, 3) few firms are genuinely independent ManagementCEO (use or abuse their considerable powers in accordance with their individual political social and economic beliefs) Professional management (hired to help, subservient to family dynasties that jealously safeguard their power) high cost To Whom Dare We Entrust Corporate Governance?

Purposes of this volume: Two Questions To Whom Dare We Entrust Corporate Governance? how capitalism came to mean, and to be, such different things in different parts of the world How did some economies come to entrust the governance to a handful of old moneyed families, while others place their faith in professional CEOs?

To Whom Dare We Entrust Corporate Governance? Two features of corporate governance 1.corporate governance is entrusted to very different sorts of people and constrained by very different institutions IndividualWealthy FamilyBankState

La Porta et al.(1999): Mexico: British: Argentina: America: Israel, Hong Kong, Sweden: Claessens, Djankov, and Lang(2000), Khanna and Rivkin(2001) To Whom Dare We Entrust Corporate Governance?

Two features of corporate governance 2. the pyramidal business group magnifies the economic importance of this difference enough to create genuinely different economic systems structures that permit tiny elites to control the greater parts of the corporate sectors Single Co. Apex shareholder(wealthy family) Listed Co. …… To Whom Dare We Entrust Corporate Governance?

Does It Matter? Shareholder Capitalism Family Capitalism Bank Capitalism State Capitalism Hoarding gold and silver coins conclusion

Capital is allocated to firms that can use it well and is kept away from firms that are likely to waste it Practiced in the United Kingdom and United States Entrusted to CEOs and other professional managers Cost: monitoring cost. How to solve: disclosure, management pay, prohibitions Problems: good managers are penalized and poor ones rewarded if investors get things wrong, and this seems to happen with some regularity. Shareholder Capitalism Does It Matter?

investors are deeply mistrustful of most companies and prefer to invest to persons of good reputation The most common system (Japan, Korea etc.) Entrusted to wealthiest few families provide investors with fewer legal rights Problems: governance can deteriorate if the families grows inept, conservative. So they tend to keep the status, keep shareholder rights weak so that the upstarts cannot compete for public investors’ saving. Family Capitalism Does It Matter?

Investors put money in a bank, the bank then lends the money to companies to buy factories, machinery, and technologies. Germany, Japan, Korea Entrusted to bankers, bankers intervene the governance of firms Problems: if a few key banks are themselves misgoverned, the ramifications are much worse and can create problems across all the firms that depend on that bank for capital. Bank Capitalism Does It Matter?

Paying taxes and letting the state provide capital to businesses China Entrusted to public officials Problems: intractable governance problems arise if the public officials have inadequate ability or knowledge to make such decisions or if they skew decisions to benefit politically favored persons or groups. State Capitalism Does It Matter?

only option left if people mistrust all above Problems: company must grow using its earnings alone, which is economically inefficient, difficult for impecunious entrepreneurs Hoarding gold and silver coins Does It Matter?

conclusion No country is a pure example of any of these flavors of capitalism Different variant clearly have different relative importance Each arise from different circumstances, operate in different ways, and bring different sets of issues to the fore Does It Matter?

Look Back: Four Capitalism CapitalismShareholder Capitalism Family CapitalismBank CapitalismState Capitalism ConceptCapital is allocated to firms that can use it well and is kept away from firms that are likely to waste it Investors are deeply mistrustful of most companies and prefer to invest to persons of good reputation Investors put money in a bank, the bank then lends the money to companies to buy raw materials Paying taxes and letting the state provide capital to businesses CountriesUS, UKMexico, Japan, Korea Germany, Japan, Korea China EntrusteeCEOswealthiest few families BankersPublic Officials ProblemsCannot truly reflect the skills of managers Solid, rigidify, conservative Bankers may misgovern Public officers may inept or selfish

Two Emerging Points raised by Prof. Shen Tendency State Capitalism (China) Hong Kong Family capital ratio is decreasing Trust Funds and IPOs are increasing

Further Reading State capitalism in China Of emperors and kings -China’s state-owned enterprises are on the march, Nov 12 th e/ # Criticized the state capitalism, especially aimed at China

State capitalism in China, the economist, Nov. 12 th 2011 Main Points: The Chinese government has quietly obstructed market forces The great power of State-owned Assets Supervision and Administration Commission (SASAC) Genuinely independent firms are starved of formal credit, so they rely on China’s shadow banking system Studies show state-owned firms maybe inefficient and not well-managed Main Reason: state firms must pursue state’s aims However, SASAC still deserves some praise(running management-training courses, establishing codes of conduct…) Further Reading