CHAPTER ONE: CYCLES OF GOVERNANCE
FIGURES AND TABLES
Figure 1.1
The Forms of Business Associations
Sole Trader
Partnerships
Unincorporated Associations
Limited
partnerships
Associations
Co-operatives
Incorporated
under associations
Incorporations Acts
Public
companies
Limited by
shares
Public
Companies
limited by
guarantee
Syndicates
Joint ventures
Chartered
Corporations
Corporations
created by
special Act of
Parliament
Proprietary
Companies
Limited by
shares
Corporations
Trusts
(Including property
and unit trusts)
Banks and
Insurance
companies
Public
unlimited
companies
Credit
unions,
Permanent
Building Socs,
Friendly Socs.
Unincorporated
Non- profit
organisations
Companies
under The
Corporations Act
Proprietary
Unlimited
companies
Source: Redmond P. (2005:99)
Full Source: Redmond P. (2005). “Companies and Securities Law”, Thomson Lawbook, 4 th Edition, Sydney : LBC.
(Professor Paul Redmond from UTS has granted permission).
No liability
companies
Figure 1.2
Corporate Governance Life cycles
Public Corporation
(Diffuse Shareholders)
Public Corporation
(Majority Shareholders)
Corporate
Development
IPO
(Initial Public Offering)
•Risk management
•Develop board directors.
• Engage stakeholders.
Launch Governance Challenges:
• Raise capital
• Recruit board of directors
• Establish accountability
Time
Source: Clarke T. (2006)
Source: Clarke, T., (2006).
• Maintain alertness
• Board assessment
•Advance value
commitments
Growth Governance challenges:
Private
Company
Founding
Entrepreneurs
Maturity
Governance
challenges:
Figure 1.3
Domestic Market Capitalization 2000-2008
USD bn
Americas
25,000
Asia Pacific
Europe-Africa-Middle East
20,000
15,000
10,000
5,000
0
2000
WFE total
(USD bn)
30,956
2001
26,595
2002
22,833
2003
30,627
Source: WFE Statistics: Market Highlights 2008.
2004
36,848
2005
40,888
2006
50,650
2007
60,854
2008
32,551
Figure 1.4
Value of Share Trading 2000-2008
USD bn
Americas
70,000
Asia Pacific
Europe-Africa-Middle East
60,000
50,000
40,000
30,000
20,000
10,000
0
2000
WFE total
(USD bn)
56,491
2001
41,834
2002
33,115
2003
33,331
Source: WFE Statistics: Market Highlights 2008.
2004
2005
2006
2007
2008
42,267
54,765
70,035
112,969
113,602
Figure 1.5
Six Months in the Life of WorldCom, Enron, Tyco and Parmalat
1 Month
-1 Month
-2 Months
4 Months
3 Months
2 Months
120
110
100
90
80
70
60
50
40
30
20
10
0
-40
-20
0
20
TRADING DAYS
WorldCom ( Down 86%)
Enron Corp (Down 99%)
Tyco (Down 65%)
Parmalat (Down (96%)
40
60
80
Figure 1.6
Average CEO Pay in US and Europe 2008 (US $ million)
178
12.5
US CEOs
EU CEOs
Source: Forbes (2009):CEO Compensation Special Report (2009), Wall Street Journal : Market Watch
‘Notable Executive Pay Deals in Europe’, May 2009; Institute for Policy Studies: Executive Excess
Report 2008.
Figure 1.7
Top Five US CEOs vs Top Five US Fund Managers CEOs 2008 (US$ millions)
3700
2800
2500
1700
1500
557
112
117
155
223
Aubrey
McClendon
Michael
Watford
John B. Hess
Ray Irani
Chesapeake Ultra
Energy
Petroleum
Hess
Occidental
Petroleum
Lawrence
Ellison
Oracle
Kenneth
Griffin
Citadel
Investment
Group
Philip
Falcone
James
Simons
George
Soros
Harbinger Reinaissance Soros
Partners Technologies Fund
Mgmt
Source: Compilation from Forbes CEO Compensation 2008 Report; Institute of Policy Studies: Executive Excess 2008.
John Paulson
Pailson &
Co
Figure 1.8
Total Number of US Corporation Earnings Restatements 1997-2005
1195
613
514
330
174
92
102
1997
1998
201
225
0
1999
2000
2001
2002
2003
2004
Source: Adapted from Coffee J. (2002)
Source: Adapted from Coffee J. (2002), Glass, Lewis and Co (2006)
Full source: Adapted from Coffee Jr J.C. (2002). “Racing Towards the Top: The Impact of Cross-Listings and
Stock MarketCompetition on International Corporate Governance”. Columbia Law Review 107(7):1757-1831;
Glass Lewis &Co (2006) Company website.
2005
Figure 1.9 Average CEO to Average Worker Pay Ratio (US) 1990- 2008
866
455
348
269
107 132
516 525
431 411
428
281 301
364
201 195 192 180
199019911992199319941995199619971998199920002001200220032004200520072008
Source: United for a Fair Economy: CEO Pay; Institute for Policy Studies: Executive Excess Report
2008.
Figure 1.10
From Owner Entrepreneur to Double Agency Dilemma
Source: Adapted from Allan Blake, Dynamic Directors, Macmillan Business, 1999, p21, Fig 1.1
Table 1.1
Properties of Insider and Outsider Systems of Corporate Governance
OUTSIDER SYSTEMS
INSIDER SYSTEMS
PROPERTIES
Ownership
Dispersed ownership
Concentrated ownership
Separation of ownership and
control
Association of ownership with control
Control
Little incentive for outside
investors to participate in
corporate control
Finance
Low debt/equity ratio and low
ratio of bank credits to total
liabilities
Control by interested parties (banks,
related firms, and employees)
High debt/equity ratio and high ratio of
bank credits to total liabilities
Highly sophisticated and
diversified financial markets
Low level of sophistication and low
opportunities for diversification of
financial
markets
Growth
Merger and acquisition
Organic growth
Takeovers
Hostile takeovers that are costly
and antagonistic
Absence of hostile takeovers
Orientation
Short term
Long term
Management Mission
Performance of assets to release
shareholder value
Stewardship of business institution to
achieve long term stakeholder values
Low commitment of outsider
investors to long-term strategies
of firms
Interested parties contribute to strategy,
intervention by outside investors limited
to periods of clear financial failure
Competitive strategy, marketing
and profitability priorities
Production strategy, operations, quality
and sales volume priorities
Stakeholders
Interests of other stakeholders are
not represented
Other stakeholders are represented
Weaknesses
Takeovers may create
monopolies
Insider systems may encourage
collusion
Managers may become selfinterested
Social obligations may slow necessary
restructuring
Business Strategy
Source: Adapted from Corbet and Mayer (1991); Charkham 1992; Ebster-Grusz and Pugh 1992; and Nunnenkamp
(1995)
Full Sources: Corbett,J. And Mayer,C.(1991). Financial Reform In Eastern Europe: Progress With The Wrong
Model Oxford Review of Economic Policy Vol. 7: 57-75; Charkham, J. (1992) Corporate Governance: Lessons
From Abroad, European Business Journal, 4,2, 8-16; Ebster-Grusz, D. and Pugh,D.S. (1992) Anglo-German
Business Collaboration, British Academy of Management Conference, Bradford University; Nunnenkampf, P.(1996)
The German model of corporate governance. Basic features, critical issues, and applicability to transition
economies, Working Paper, 713 (Kiel Instituteof World Economics).
Table 1.2
US Top Ten Highest Paid CEOs in 2008
Rank Company
CEO
Pay
(US$ Millions)
Market
Capitalization
(US$ Billion)
1
2
Lawrence J Ellison
Ray Irani
556.98
222.64
105.35
51.29
John B Hess
Michael D Watford
Aubrey McClendon
154.58
116.93
112.46
16.24
5.61
11.70
Jha Sanjay
Mark G. Papa
William R Berkley
Matthew K Rose
91.49
90.47
87.48
68.62
14.19
16.08
2.02
24.61
Paul J Evanson
67.29
4.23
3
4
5
6
7
8
9
10
Oracle
Occidental
Petroleum
Hess
Ultra Petroleum
Chesapeake
Energy Corp
Motorola Inc
EOG Resources
WR Berkley
Burlington
Santa Fe
Allegheny
Energy
Source: Data compiled from Forbes CEO Compensation Report (2008); Yahoo News Executive
Compensation 2008. Yahoo Finance 2009
Table 1. 3.
European Highest paid CEOs in 2008
Rank Company
CEO
Pay
(Millions)
Market
Capitalization
(US$ Billion)
1
2
Peter Clarke
Fred Goodwin
GBP 7.2
GBP 7.06
437.25
2186.25
Patricia Russo
Eu 6.0
3.85
Franz Humer
Sw Francs 11.03
102.93
Alfred Saenz
Eu 8.34
69.81
Martin Winterkorn
Jeroen Van der veer
Eu 6.14
Eu 8.78
69.12
86.62
Jean-Paul Agon
Sergio marchionne
Herbert Hainer
Eu 3.5
EU 3.05
Eu 3.44
32.29
9.45
5.13
3
4
5
6
7
8
9
10
(UK) Man Group
(UK) Royal Bank
of Scotland
(FR) AlcatelLucent
(Sw) Roche
Holding
(Sp) Banco
Santander Central
(Ge) Volkswagen
(UK) Royal Dutch
Shell
(FR) Loreal
(ITA) Fiat SpA
(DE) Adidas
Source: Wall Street Journal: Market Watch “Notable Executive Pay Deals in Europe’, May 2009.
Table 1.1 Properties of Insider and Outsider Systems of Corporate Governance
OUTSIDER SYSTEMS
INSIDER SYSTEMS
PROPERTIES
Ownership
Dispersed ownership
Concentrated ownership
Control
Separation of ownership and
control
Association of ownership with
control
Little incentive for outside
investors to participate in
corporate control
Control by interested parties (banks,
related firms, and employees)
Low debt/equity ratio and low
ratio of bank credits to total
liabilities
High debt/equity ratio and high ratio
of bank credits to total liabilities
Finance
Highly sophisticated and
diversified financial markets
Low level of sophistication and low
opportunities for diversification of
financial
markets
Growth
Merger and acquisition
Organic growth
Takeovers
Hostile takeovers that are
costly and antagonistic
Absence of hostile takeovers
Orientation
Short term
Long term
Management Mission
Performance of assets to
release shareholder value
Stewardship of business institution
to achieve long term stakeholder
values
Low commitment of outsider
investors to long-term
strategies of firms
Interested parties contribute to
strategy, intervention by outside
investors limited to periods of clear
financial failure
Business Strategy
Competitive strategy,
marketing and profitability
priorities
Production strategy, operations,
quality and sales volume priorities
Stakeholders
Interests of other stakeholders
are not represented
Other stakeholders are represented
Weaknesses
Takeovers may create
monopolies
Insider systems may encourage
collusion
Managers may become selfinterested
Social obligations may slow
necessary restructuring
Source: Adapted From: Zahra and Pearce (1989); Stiles and Taylor (2002).