1. Transparency and conflicts of interest

2. Transparency: The extent to which outsiders can evaluate firms’ operations Depends on Type of information (accounts, governance disclosures, accounting principles). The level of information What the information means to the user of financial statements

3. Factors influencing the level of information: Distribution of costs and benefits of a high information Bargaining power of the various stakeholders The debt/equity ratio: the scrutiny of banks raises the information level Negative information reduces the shareholder value (keeps the transparency at a low level).

4. Interface between investors and management Auditors The boards Analysts Brokers Investment bankers, Hedge funds nad private equity funds

5. Asset management: example of mediators Hedge funds A small stake in a company Launch proxy fights for corporate control Equity funds Majority owners Ownership motivated by a governance arbitrage (delist companies, restructure over a period of 3-7 years and public again)

6. The prime aim Understand conflicts of interests that origin from the intermediaries between the investors and the top managers Extend the standard view in corporate governance from owner-manager relations to encompass the role of multiple players and multiple conflicts A few comments about the regulatory institutions.

7. Intermediation failure: the Enron case The business model of Enron: Founded in 1985 through the merger of two gas pipeline companies 1990, 75 per cent of gas sales were transacted at spot prices rather than through long-term contracts 2001, Enron had become a conglomerate: owned and operated gas pipelines, electricity plants, pulp and paper plants, broadband assets and water plants internationally

8. Theory of intermediation Similar to the contractual approach to corporate governance calls attention to private benefits of misbehaviour Contractual approach: misbehaviour due to properties of transactions and contracts Theory of intermediation: misbehaviour due to difficulties to manage official action and influence.

9. Theory of intermediation…….. Rules and institutions matter: Do not only constrain, but they also enable strategic choices Auditors, investment bankers and analysts develop new business practices from inside institutions Institutional innovations usually contribute to good economic performance, but some players misbehave

10. Theory of intermediation…….. Misbehaviour and cheating are associated with conflicts of interests: arise “when an executive, an officeholder or even an organization encounters a situation where official action or influence has the potential to benefit private interest”

11. Institutions supplement to contracts Need of an institutional theory Innovations in institutions as adaptations to institutions Optimising or maximizing behaviour supplemented with imitative behaviour (“herding”)