Chapter 4 Corporate Governance Around The World PDF

due to repeated scandals WHY? not just these companies' internal governance...

due to repeated scandals WHY? not just these companies' internal governance mechanisms failed; auditors, regulators, banks & institutional investors also failed in their roles erosion of investor confidence stagnation in capital market development increased cost of capital CONSEQUENCES WITHOUT REFORM distorted capital allocation undermined trust in capitalism itself 1. strengthening the independence of BODs with more outsiders 2. enhancing the transparency & disclosure standard of financial statements 3. energizing the regulatory & monitoring OBJECTS OF REFORM functions of the SEC (in the US) & stock exchanges the economic, legal & institutional framework in which corporate control & cash flow rights are DEFINITION => in many developing & transition economies, distributed among shareholders, managers & may be necessary to first modernize the legal other stakeholders of the company framework Corporate Goverance how to best protect outside investors from to protect investors by improving the accuracy expropriation by the controlling insiders so that CENTRAL PROBLEM & reliability of corporate disclosure, thereby the former can receive fair returns on their restoring the public's confidence in the integrity investments? of corporate financial reporting accounting regulation jointly owned by a multitude of shareholders protected by limited liability audit committee MAJOR COMPONENTS SOX separation of ownership & management internal control assessment THE SARBANES-OXLEY ACT GENERAL major organizational innovation of vast executive responsibility Corporate Governance Reform economic consequences costly, especially for smaller companies pivotal role in spreading economic growth & capitalism worldwide for last few centuries requires public companies to assess & report on internal controls to the SEC Goverance and the Public ability to spread & share risk among many investors SECTION 404 Corporation US-listed foreign firms also face high compliance costs ability to raise large amount of capital at STRENGHTS relatively low cost some firms list shares elsewhere to avoid these expenses expertise of professional management PUBLIC CORPORATION to address corporate governance problems in potential confict of interest between managers the UK & shareholders 1. BODs of public companies include at least 3 with diffused ownership, most shareholders do THE CADBURY CODE OF BEST PRACTICE WEAKNESSES not have strong incentives to incur the costs of outside (nonexecutive) directors monitoring management 2. positions of CEO and COB be held by 2 different individuals in countries with concentrated ownership, conflicts of interest exist between controlling deposit-taking banks will be banned from shareholders & small outside shareholders proprietary trading VOLKER RULE banned from owning more than a small fraction managers might act in the manager's short- of hedge funds & private equity firms term best interest instead of the shareholder's long-term best interest government can seize & dismantle a large bank in an orderly manner self–interested managers may allow themselves RESOLUTION AUTHORITY to consume exorbitant perquisites (example, if the bank faces impending failure & poses a private jets) systemic risk to the broader financial system managers may steal investors’ funds (example, OTC derivatives trading will move to electronic WHAT? transfer pricing scheme) exchanges DERIVATIVE SECURITIES managers may waste funds by undertaking with contracts settled through central clearing unprofitable projects that benefit themselves houses but not investors THE DODD-FRANK ACT systemically important financial firms will be managers may adopt antitakeover measures to SYSTEMATIC RISK REGULATION identified & monitored ensure personal job security The Agency Problem a new, independent Consumer Financial independent board of directors Protection Bureau will monitor predatory CONSUMER PROTECTION mortgage loans & other loan products incentive contracts the Economic Growth, Regulatory Relief & concentrated ownership Consumer Protection Act accounting transparency weakened the Dodd-Frank Act REMEDIES debt raises asset threshold for application of Dodd– Frank’s enhanced prudential standards from $50 billion to $250 billion, exempting most NEW LAW shareholder activism small and mid–size banks and bank holding companies from stress testing and heightened overseas stock listings risk management requirements market for corporate control banks and bank holding companies with assets of $10 billion or less are exempted from the Volker Rule shareholders have the right to elect the BOD, UNITED STATES which is legally charged with representing the interests of shareholders strong investor protection supports the growth of external capital markets by ensuring fair corporate board is legally charged with returns for investors representing the interest of stakeholders in Board of Directors (BOD) GERMANY general (example: creditors, workers) not just encourages higher securities prices & larger shareholders INVESTOR PROTECTION & CAPITAL MARKETS capital markets weak investor protection can exarcerbate Chapter 4: JAPAN most corporate boards are insider-dominated market declines during financial crises Corporate Capital Markets & Valuation well-developed financial markets, driven by strong investor protection, boost economic Governance Around when professional managers have small equity positions of their own in a company with growth by lowering investment costs the World WHAT? diffused ownership ECONOMIC GROWTH & FINANCIAL enhancing savings they have both power & a motive to engage in DEVELOPMENT self-dealings directing savings to productive investments, Incentive Contracts financial development promotes growth by.... exists to better align the interests of managers fostering capital accumulation with those of investors improving investment efficiency through market WHY? monitoring & signaling HOWEVER, senior executives may abuse incentive contracts by artificially manipulating accounting numbers or by altering investment policies so they can reap enormous personal benefits companies in countries with weak investor protection ofen rely on concentrated WHY? ownership as an alternative to legal safeguards if one or a few large investors own significant shares with superior voting rights portions of the company, they will have a strong incentive to monitor management SCHEMES OF DOMINANT INVESTORS TO GAIN WHAT? pyramidal ownership structures CONTROL large shareholders play a significant interfirm cross-holdings governance role involves large shareholders, often founders or US & UK rare, but common in the rest of the world their families controlling a holding company that owns controlling stakes in successive PYRAMIDAL OWNERSHIP Ownership & Control Pattern Concentrated Ownership GERMANY banks and insurance companies companies CHINA government within groups of companies, such as keiretsu (Japan) & chaebols (South Korea) ASIA & LATIN AMERICA founders & family members EQUITY CROSS-HOLDINGS enable concentration & leveraging of voting JAPAN cross-holdings among keiretsu members rights for control large shareholders may extract disproportionate private benefits when control improving accounting standards reduces exceeds cash flow rights information asymmetry between corporate PRIVATE BENEFITS OF CONTROL insiders & the public weak minority shareholder protections amplify WHAT? this behavior managers may be less tempted to "cook the books" if companies are required to release more accurate accounting information in a Accounting Transparency timely fashion the content of laws protecting investors & the quality of law enforcement differ significantly 1. countries should reform the accounting rules across countries STEPS TO ACHIEVE GREATER TRANSPARANCY 2. companies should have an active & qualified Englisch common law LEGAL SYSTEMS audit committee French civil law most countries commercial legal systems derive LEGAL ORIGINS from these few legal origins activist investors buy company stocks to German civil law influence management Scandinavian civil law may include individuals, pension funds or hedge PURPOSE & TYPES funds UK play important role in promoting shareholder US rights & interests on a global scale Shareholder Activism Canada ENGLISH COMMON LAW Toshiba shareholders, led by foreign activists, EXAMPLE passed a resolution to oust the chairman Australia activist investors increasingly push for changes most influential legal systems with the English EXPANDING FOCUS ON ESG in environmental, social, and governance (ESG) system offering more protection to investors India practices than the French system France parts of Europe conquered by Napoleon companies domiciled in countries with weak FRENCH CIVIL LAW investor protection can bond themselves (Belgium, Italy, Spain...) Law & Corporate Governance WHAT? credibly to better investor protection by listing their stocks in countries with strong investor former colonies of France, The Netherlands & protection Portugal Overseas Stock Listings studies confirm the effects pattern of corporate ownership & valuation EFFECTS OF CROSS-BORDER LISTINGS example: foreign firms listed in the US are development of capital markets CONSEQUENCES OF LAW valued more than those from the same countries that are not listed in the US economic growth measures the extent of legal protections for minority shareholders againt potentially the market for corporate control can serve as a WHAT? DISCIPILINARY EFFECT disciplinary mechanism for managers, improving harmful actions taken by majority shareholders or directors overall company efficiency whether shareholders can vote by mail for persistent poor performance & ineffective PROXY BY MAIL VOTING Market for Corporate Control TRIGGER FOR TAKEOVER internal governance may attract an outsider to board elections initiate a takeover bid whether shareholders are not restricted from SHARES NOT BLOCKED BEFORE MEETING in hostile takeovers, the bidder often presents a selling shares prior to a general meeting HOSTILE TAKEOVER PROCESS tender offer to shareholders at a price significantly higher that the current share price allow (minority) shareholders to allocate all of CUMULATIVE VOTING OR PROPORTIONAL their votes to support a single candidate to the THE ANTIDERECTOR RIGHTS INDEX REPRESENTATION board whether minority shareholders have acces to a mechanism that protects them from unfair OPPRESSED MINORITY MECHANISM practives by majority shareholders whether shareholders have the right of first PREEMPTIVE RIGHTS refusal to purchase new shares the required share percentage that enables shareholders to call a special meeting MINIMUM PERCENTAGE OF SHARE CAPITAL TO CALL AN EXTRAORDINARY GENERAL MEETING the lower, the better the protection