MODELS OF CORPORATE
GOVERNANCE
Corporate Governance Seminar
12th november 2007
Chiara Farolfi, Emanuele Ciani
Introduction
Main problems of abstracting a model of CG
• Companies are multidimentional: different model
can apply to one national experience
• Convergence and imitation
Efficiency
CONVERGENCE
History
Path dependence
HETEROGENEITY
Does a “best model” exist?
Presentation outline
1) Models of Corporate Governance
i. Insider / Outsider
ii. Civil law / Common law
iii. Relationship – based / Arm’s length
2) International comparison
i. Germany
ii. United States
iii. Italy
iv. Japan
3) An alternative approach : Cooperatives in Italy
Insider / Outsider (1):
ownership and control
(Franks and Mayer, 2001; Becht and Mayer, 2001)
INSIDER
Equity market
Share ownership
OUTSIDER
wide market
Dispersed
low concentration, separation
high concentration (pyramids, nonVoting power
between ownership and
voting shares, multiple voting)
control
families, banks, other companies,
institutional investors,
Main shareholder
governement
individual shareholders
Corporate control
high activity in corporate
low level of takeover
market
control market
Information
private
public
Composition of
BoD
Control on
Management
few listed company
concentrated
large number of directors
presence of outside directors
appointed by the main blockholder
high
low
Insider / Outsider (2):
efficiency trade-off
High
blockholder
power
Private control bias
Management
or market
control bias
Low
blockholder
power
Low
ownership
concentration
from: Becht and Mayer, 2001
High
ownership
concentration
Common Law / Civil Law
(Morck and Steier 2005, La Porta et. Al 1998)
Common law systems: aim of protecting the weak from the strong
better environment for self-regulation
Common law
stronger protection of shareholders
Civil law systems: aim of enforcing the edict of the State.
Civil law
low investors’ protection
weak public
equity markets;
high concentration of
share ownership
Agency problem shifted:
shareholders/ blockholder
private benefit
problem
Relationship / Arm's length (1):
relationship between the financer and the firm
(Rajan and Zingales, 1998)
RELATIONSHIP BASED
Financier
power
Legal
enforcement
Transparency
“The financier is protected by explicit
“Ensure a return to the financier by contracts:
contracts and associated prices
granting her some form of power
determine
the transactions that are
over the firm being financed”
undertaken”
Self-enforcing and self-governing:
“Prompt and unbiased enforcement of
reputation
contracts by courts”
Needs opacity
Reponses
Tends to support incumbents; fear
Innovation
Management
BoD
ARM’S LENGHT
Production of credible and diffused
information
of outsiders and technological
revolution
Common education (technical or
administrative), or non
professional
Long term managers
Rarely foreign-born
Easier access to finance for new comers
High presence of insiders
Representation of stakeholders
Active control of management
Presence of outsiders
Business/financial education
High turnover of management
Presence of foreign-born or international
experienced individuals
Relationship / Arm's length (2)
we can widen these models adding some correlated
characteristics (abstracting from Italian, German and
Japanese examples, Aguilera and Yip, 2005)
Reponses of countries to the Great Depression:

Europe and Japan

United States
period of repression of markets and
massive intervention of government
in the allocation of credit.
New Deal legislation laid down the
foundations for a market – centred system
Glass – Steagall Act (1933)
Presentation outline
1)
Models of Corporate Governance
i. Insider / Outsider
ii. Civil law / Common law
iii. Relationship – based / Arm’s length
2) International comparison
i. Germany
ii. United States
iii. Italy
iv. Japan
3) An alternative approach : Cooperatives in Italy
Germany
(Becht and Bohmer 2003, Franks and Mayer 2001)
Main businness
form
Public or private companies limited by shares
Predominant
ownership
structure
Concentrated ownership: families, other non-financial companies,
banks
Large voting block, absence of other voting block
Legal system
Civil law
Board structure
Dual board system; Employees representatives in the supervisory
board
Some directors comes from other companies (i.e. Piëch - Porsche)
Equity market
Increasing market capitalisation and corporate debt issues
Take-over
Low activity (increasing - i.e. recent overturn of “Volkswagen law”)
Little regulation of anti-takeover until 1998 Control and Transparency
Law (KonTraG)
Management
Common technical background; few foreign born individuals
Stakeholders
Co-determination (i.e. Volkswagen wage freeze in 2004)
Banks representation as a result of proxy votes
Germany (2)


Improving take over activity (Cioffi 2002)
 Control and Transparency Law 1998
 Fiscal reform 2000 (Steuerreform) “abolished capital gain
taxes on the liquidation of cross-shareholdings”.
rd by
 Volkswagen law overturned on October, the 23
European Court of Justice, (Financial Times, 23/10/2007)
Stakeholder representation:
 does it lead to empasse?
 Volkswagen case;
 roots in communitarian German culture (Monks and
Minow 2001).
USA (1)
(Monks and Minow 2001, Mallin 2007)
Main businness Public companies (stock corporation)
form
Predominant
ownership
structure
Institutional investors, financial institutions
Dispersed ownership and vote rights: absence of big
blockholders
Legal system
Common law
Board structure Unitary board
High presence of outsiders; however: interlocks
Equity market
Well-developed, high rate of market capitalisation to GDP
Take-over
High activity
Defence from management: poison pills
Management
High level of independence; financial background; more
foreign born.
Agency problem: often CEO/Chairman are the same
person; CEOs higly Influence directors nomination
Stakeholders
Their protection is mainly guaranteed through contracts
and regulation
USA (2)

Answer to the Great Depression
• Glass-Steagall act 1933; Public Utility Company Holding
Companies Act 1935
• development of equity market.

Agency problem:

Relationship based model at the level of BoD-Management;

Voting with feet?

“My nominating committee is very independent.
Sometimes they turn down the names I send them” (Monks
and Minow, pg 212)
Italy (1)
(Mallin, Bianchi, Bianco, Enriques)
Main business form
Limited liability companies, partnership
Predominant ownership
structure
Non – financial / holding companies,
families
Predominant voting structure
Voting blocks / shareholders’ agreement
Legal system
Civil law
Board structure
Unitary + Board of auditors
Equity market
Increasing capitalization, derivatives
market and corporate debt issues
Take - over
Not common, but increasing as a
consequence of privatization
Management
Long-term managers, rarely foreign born
Stakeholders
Trade Unions
Italy (2)
(Mallin 2006, Melis, Bianchi, Bianco, Enriques 2001)
• Response to the Great Depression
nationalist solution
A sort of State – family capitalism
Pyramidal structure
ownership
very limited degree of separation
between ownership and control
• No predominant role of financial institutions
• Draghi Law (1998) and Preda Code (1998)
enhancement of minority protection and transparency
Company Act (2004)
Italian structure allows Italian listed companies
to choose between a two – tier board structure
and the traditional
Japan (1)
(Suto and Hashimoto 2006)
Main business form
Public limited company
Predominant ownership
structure
Keiretsu / Predominant role of financial
institutions
Legal system
Civil law
Board structure
Dual
Large presence of insider
Equity market
Immature capital market
Take - over
Strong takeover barriers
Management
“Internalism”: common educational
background/ on-the-job training, coordination between manager and
employees
Stakeholders
Society as whole
Japan (2)
• Relationship – based system
• Key role of banks
• Keiretsu
• Revision of Commercial Law in 2001 and in 2002
• Commercial Code Revision on Board (2003)
two corporate governance structures:
corporate auditors’ system and a
committees system
• Case of study: Toyota vs. Sony
Presentation outline
1)
Models of Corporate Governance
i. Insider / Outsider
ii. Civil law / Common law
iii. Relationship – based / Arm’s length
2) International comparison
i. Germany
ii. United States
iii. Italy
iv. Japan
3) An alternative approach :
Cooperatives in Italy
A different approach:
a cooperative model in Italy (1)
Number of cooperatives and cooperatives employee as a
percentage of total employee (exluding public institutions)
1971
1981
1991
2001
% of total companies
0,48
0,67
1,08
1,22
%of total employees
1,87
2,74
3,84
5,02
source: ISTAT, Censuses of industry and the service sector, various years
• Historical origins: (Zamagni 2006)
• non neutral origin, three different ideals: liberalMazziniani, socialists, catholic;
• wide entrenchment through Italy;
• expansion during last years.
A cooperative model in Italy (2)
• Cooperative Corporate Law:
• mutual interest as cooperative aim;
• one head one vote;
• democracy and partecipation;
• indivisible compulsory fund.
• Problems:
• management control (i.e. recent large cooperative
bankruptcy in Argenta);
• how to define and follow cooperative aim in a
competitive environment?
Conclusions
1)
Different systems around the world are persistent and are
developing in different ways
wide range of solutions for a wide range of problems
2)
Different models can have similar problems
importance of global discussion of these issues
Thank you for
your attention !!!
References
•
Aguilera Ruth, Yip George. 2005. Global constraints faces local constraints. Financial Times, 27 may 2005.
•
Becht M. and Mayer C. 2001. Introduction in Barca and Becht, 2001.
•
Barca Fabrizio, Becht Marco. 2001. The Control of Corporate Europe, Oxford University Press UP
• Cioffi, John W. 2002. Restructuring “Germany Inc.”: The Politics of Company and Takeover Law Reform in
Germany and the European Union (April 15, 2002). Institute of European Studies. Political Economy of
International Finance. Working Paper PEIF-1
• Franks Julian R, Mayer Colin. 2001. Ownership and control of german corporations, CEPR Discussion Paper
Series, No. 2898, July 2001
•
Mallin Christine A. 2007. Corporate Governance, Second Edition, Oxford University Press, New York.
• Mallin Christine A. 2006. International Corporate Governance: A Case Study Approach, Edward Elgar
Publishing. (Italian Case, cap. 3, Japanese Case, cap. 10)
•
Monks R.A.G., Minow N. 2001. Corporate Governance, 2nd edition. Blackwell Publishing.
• Morck Randall K. and Steier Lloyd. 2005. The global history of corporate governance – an introduction,
NBER Working Paper No. 11062, January 2005
• Rajan, Raghuram G. Zingales, Luigi. 2003. Banks and Markets: The Changing Character of European
Finance (joint with R. Rajan), in European Central Bank 2nd Annual Conference.
• Suto, Megumi and Hashimoto, Motomi. 2006. Will the Japanese corporate governance system survive?
Challenges of Toyota and Sony, in Mallin, 2006.
• Zamagni, Vera. 2006. Italy’s cooperatives from marginality to success. XIV International Economic History
Congress. Helsinki Finland. 21-25 August 2006.