Corporate Governance
Outside the
United States and United Kingdom
Randall Morck
University of Alberta
Canada
National Bureau of Economic Research
Cambridge MA USA
In Whom We Trust …
Argentina
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Hong Kong
Ireland
Israel
Italy
Japan
Mexico
Netherlands
New Zealand
Norway
Portugal
Singapore
South Korea
Spain
Sweden
Switzerland
United
United States
0%
Wealthy family
10%
20%
30%
40%
50%
60%
Widely held non-financial firm
70%
80%
90%
100%
Widely held financial institution
Family Firms & Corporate Performance
Standard Lecture
Professional
Family
▼
Agency problems
▼
Agency problems
▼
CEO’s career sets
planning horizon?
▲
Legacy issues lead to
long term horizon?
▼
CEO trained at
business school
▲
CEO trained from
infancy by family
▲
Select CEO from
whole gene pool
▼
Select CEO from
blood relatives
▲
Business run as a
business
▼
Family conflicts affect
the business
▲
Junior managers can
become CEO
▼
Junior managers can
never become CEO

Empirical studies
Canada


Chile


Family firms perform worse
India


Family firms perform better
Denmark


Family firms perform worse
Family firms perform better
USA


Mixed evidence, but true family
firms do worse than others
“Definition” issues is some
studies
Billionaire Wealth, by Source, per Dollar of GDP
0
10
20
30
40
50
60
70
80
90
100
110
120
130
South East Asia
Latin America
Western Europe
Israel
Canada
United States
Turkey
Japan
South Africa
India
United Kingdom
Australia
New Money
Old Money
Old and New Money
Political Family
Probably Old Money
140
Table 2
The Cross-Country Relationship Between Economic Growth and Capital
Ownership Structure Controlling for Current per Capita Income, Capital
Investment Rate, and Level of Education
Intercept
2.1
1.43
(..32)
2.2
1.58
(.30)
2.3
1.59
(.27)
2.4
1.65
(.28)
2.5
1.75
(.22)
2.6
1.73
(.26)
2.7
1.86
(.20)
2.8
1.78
(.25)
Log of per capita
GDP: ln(Y/L)
-1.76
(.00)
-1.77
(.00)
-1.80
(.00)
-1.79
(.00)
-1.54
(.00)
-1.66
(.00)
-1.62
(.00)
-1.69
(.00)
Capital Accumulation
Rate: I/K
.210
(.00)
.216
(.00)
.208
(.00)
.214
(.00)
.173
(.00)
.199
(.00)
.178
(.00)
.199
(.00)
Average Total Years
of Education: ln(E)
.238
(.27)
.203
(.35)
.253
(.23)
.214
(.32)
.242
(.24)
.200
(.35)
.259
(.21)
.213
(.32)
Business Entrepreneur
Billionaire Wealth Over
GDP: B/Y
Heir Billionaire Wealth
Over GDP: H/Y
.440
(.00)
.37
(.00)
.42
(.00)
.37
(.00)
.495
(.00)
.382
(.00)
.45
(.00)
.37
(.00)
-.292
(.03)
-.168
(.10)
-.268
(.03)
-.157
(.09)
-.407
(.01)
-.191
(.09)
-.33
(.01)
-.17
(.08)
Definition of “Heir”a
H1
H2
H3
H4
H5
H6
H7
H8
R squared
0.519
0.488
0.531
0.489
0.545
0.491
0.536
0.491
Note: Numbers in parenthesis are two tailed t-test probability levels for rejecting a zero coefficient. Coefficients in
boldface are statistically significant at 90% confidence or more. Sample of 39 countries consists of the countries
listed in Table 1 minus the U.K. and U.S.
a H includes only the wealth of billionaires known positively to be heirs, politicians or politicians’ relations. H
1
2
also includes the wealth of billionaires who are probably heirs. H3 includes H 1 plus fortunes jointly controlled by a
founder and his heirs. H4 includes all the above. H5 through H 8 are analogous to H, H 2, H3 and H 4 but do not
include politician billionaires and their relations.
Old Money Families and
Slow Economic Growth
New Money Entrepreneurs and
Fast Economic Growth
Das Kapital


Internal Contradictions of
Capitalism
Competition



Investment



Firms try to steal each
others’ customers by cutting
prices
Economic profits fall
Why invest if no profit
Investment falls
The inevitable collapse of
capitalism
Karl Marx
The Great Experiment

Political leaders of the 20th
century ran a monumental
economic experiment





Socialism collapsed and
capitalism prospered
Economic profits did not fall
Investment did not fall
Marx was wrong
Why?
Creative Destruction

Innovative firms have no real
competitors


Innovators steal other firms’
customers by offering




For a while …
New, better products
Old products made more
cheaply
Non-innovative firms are
destroyed by innovators
Innovators continue making
profits until more creative
innovators destroy them
Joseph Schumpeter
A Theory of Economic Growth
1914
Corporate Governance

Schumpeter argued that the ultimate purpose of
financial markets is financing creative
destruction

There are two kinds of people
Entrepreneurs
(Ideas, no money)
$
Capitalists
(Money, no ideas)
Australia
Austria
Bangladesh
Barbados
Belgium
Canada
Chile
Colombia
Cyprus
Denmark
Ecuador
Egypt
Finland
France
Germany
Greece
Hong Kong
India
Indonesia
Iran
Ireland
Israel
Italy
Japan
Jordan
Kenya
Korea (South)
Kuwait
Malaysia
Mexico
Morocco
Netherlands
New Zealand
Nigeria
Norway
Pakistan
Panama
Peru
Philippines
Portugal
Singapore
Spain
Sri Lanka
Sweden
Trinidad & Tobago
Tunisia
Turkey
United Kingdom
United States
Venezuela
Zimbabwe
Stock Market Capitalization
Relative to GDP
(1996)
0%
25%
50%
75%
100%
125%
Lies, Damn Lies, and Statistics
The following are all strongly statistically
correlated …
 Economic growth
 New money wealth
 Stock market activity
 Corporate governance
 Puzzle
 If good governance and active stock markets
are so important to economic growth, why do
so many countries opt to do without them?

Culture
There is a strange charm in the
thoughts of a good legacy.
Miguel de Cervantes
1547-1616, Spanish writer
A man who dies rich dies disgraced.
Andrew Carnegie,
American Tycoon
Ability

Intelligence is, at most, only party inherited
Political Rent Seeking
Two sorts of investment
1. Creative destruction
Invest in new factory  profits


After: Country has new factory
Positive externality: Country is richer
2. Political rent-seeking
Invest in politician  profits



After: Politician has a Swiss bank account
Negative externality: Whole country is poorer
Anne Krueger
Stanford University
How fast an economy grows depends on how it sets up the
relative profitability of these two sorts of investment
Regulation

Old money wealthy are better at lobbying for
favorable regulations than at building efficient new
factories?
“As the deer pants for
cooling streams,
so do I pant for regulation.”
Alfred Krupp (1812-87),
heir to the Krupp steel &
armaments businesses
Dynastic Capitalism
Prevalence of Free Market Prices
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
0%
10%
20%
30%
40%
50%
60%
70%
80%
Part of Large Corporate Sector Family Controlled
90%
100%
Dynastic Capitalism
Absence of Bureacratic Red Tape
8
7
6
5
4
3
2
0%
10%
20%
30%
40%
50%
60%
70%
80%
Part of Large Corporate Sector Family Controlled
90%
100%
Financial Reversal



Old money wealthy fear
‘creative destruction’ and
don’t really want an active
stock market?
They lobby for
 Opaque corporations
 Weak governance
standards
Or maybe it’s simpler …
 Ideological confusion?
 Just didn’t think of it?
Transparency & Trust
Source: La Porta et al. (2003)
Governance Standards & Trust
Source: La Porta et al. (2003)
Good Governance Model
Minnesota Mining and Manufacturing
Public Shareholders
Large US and UK firms are:
1. Free-standing

2.
Publicly traded companies do not own stock in each other
Widely held

Corporate managers own very little stock; most stock owned by
“widows and orphans”
Resulting governance (agency) problem
 Hired managers spend “other people’s money” and
so grow careless or self-indulgent
US Solutions?

After Earlier Scandals
The SEC
Dividend taxation
Bankruptcy
Executive stock options
Hostile takeovers

The Current View
Sarbanes Oxley, etc.




Dynastic Capitalism
But large US and UK firms are very atypical
Large firms in most other countries are
1. Organized into business groups

2.
Publicly traded companies control each other
Narrowly held

Wealthy ‘old money’ families control large blocks of stock,
directly or indirectly, and cannot be ignored by hired
managers
This difference is so fundamental to political
economy discussions that people in the USA and
people elsewhere simply fail to comprehend each
other's conceptions of how a free market economy
works
Double-click to re turn to pre vious
page.
HEES
INTERNA TIONA L
BANCORP INC.
Edper Group
36
B.C. PA CIFIC
52.4
35
42.6
DEXLEIGH CORP.
100
Double-click to proce ed to the ne xt
page.
50 A
41
CANADIA N CORP.
SERVICES
71.9
CANADIA N
EXPRESS
12
100
BRL
ENTERPRISES
FT CAPITAL
LIMITED
A LBEMONT
A RTICTIC
PA GURIA N LTD.
100
A MERICA N
RESOURCES
49
CANADIA N
EXPRESS
INVESTMENTS
ENFIELD
100
48.6
COLLINGWOOD
REA L ESTA TE
LESTER & ORPEN
DENNY S
99.8
MORGAN
FINA NCIA L CORP.
A LBEMONT LTD.
100
DUNBA R
INVESTMENT
CORP.
100
49
100
MORGAN
BANCORP INC.
100
51
COMPLEX
A XE CANADA
50
EDPER
HOLDINGS INC.
40
KANANA SKIS
RESORT
REV ELTEK CORP.
48.9
GOLDA LE
A CCEPTA NCE
49.9
100
49
CANADIA N
INTERCONTINENTA
L EQUITIES
54.3
WESTFIELD
MINERA LS
74.2
40
EDPER
ENTERPRISES
LTD.
(HIL CORP. LTD)
19.5
100
23.9
C.J. FOOD
SERVICES
NORTHGATE
EXPLORA TION
OTHER SUB'S IN
HEES INTL.
100
46.7
TA RXIEN
A Governance Map of Chile
Corporate Governance Elsewhere




Wealthy families control firms indirectly, so
they are also basically spending other
people’s money
One wealthy family controls a group of firms,
and can direct one to lose money to help
another
Wealthy families cannot be dislodged from
control, even if the patriarch becomes senile
or the heir is blatantly unqualified
If very few families control most of the large
business sector, weak corporate governance
can become a macroeconomic problem
The Relevance of US Solutions?
Sarbanes-Oxley
 Independent directors
 Independent chair
 Board committees
 Institutional investors
 Proxy fights


Back to basics?
All designed for
Anglo-American
capitalism
Will any of this work
in dynastic
capitalism?

Milgram, Stanley. Obedience to Authority. New
York. Harper and Row. 1974.
Stanley Milgram
Milgram Obedience Experiment
Percent of Subjects still obedient
100
Learner complains of pain
90
Learner pleads to be let out
80
Learner screams and
Refuses to answer
70
60
50
40
Voltage
0
75
150
moderate strong
225
very
strong
300
intense
375
severe
450
XXX
The Importance of Dissent
Percent of Subjects still obedient
100
90
Stranger steps in and expresses
disapproval of the experiment
80
70
0
Voltage
0
75
150
moderate strong
225
very
strong
300
intense
375
severe
450
XXX
Corporate Governance Solutions
Sarbanes-Oxley
 Independent directors
 Independent chair
 Committees
 Institutional investors
 Proxy fights

All encourage
dissent
Can this be done
in dynastic
capitalism?
Globalization?
Canada-US free
trade helped ‘new
money’ firms and
hurt ‘old money’
firms
 Why?

New firms can
sidestep local
regulations?
 New firms can
raise funds
abroad?

Table 10
Cumulative Abnormal Returns of Large Canadian Firms Upon the News
that the Canada-US Free Trade Would Be Ratified by the Canadian
Parliament
Controlling Shareholder
Categories Compared
heirs minus
business entrepreneurs
Mean Differences
Mean Residual Differences
controlling for firm age & sizea
-.0765
-0.0623
(.12)
(.10)
15
23
-.0993
(.03)
15
-0.0729
(.04)
23
heirs minus
widely held
.01347
(.37)
24
.0260
(.26)
37
.00034
(.50)
24
.0188
(.33)
37
heirs minus
all other private sector firms
-.0317
(.22)
61
-.0068
(.42)
61
-.0316
(.23)
61
-.0098
(.39)
61
business entrepreneurs minus
widely held
.1128
(.00)
21
.0989
(0.04)
28
.1328
(.00)
21
.1271
(.02)
28
business entrepreneurs minus
all other private sector
.0802
(.05)
61
.0767
(.05)
61
.0916
(.04)
61
.0857
(0.04)
61
Includes firms in pyramids
no
yes
no
yes
Note: Categories are defined as in Table 3. Subsamples are smaller because we do not have stock returns for all
firms listed in that table. Numbers in parenthesis are probability levels from t-tests. Numbers below them are
sample sizes. Boldface type indicates significance in a one-tailed t-test at 10%. The cumulative abnormal return is
for all trading days from November 10, the date of the first poll questioning the Liberal lead, through to November
21 1988, the first trading day after a surprise Conservative majority government was returned. Cumulative
abnormal returns are returns minus the value weighted returns of all other firms in the 3 digit industry. Using equal
weighting gives similar results.
a This panel contains coefficients and p-levels for 
, a dummy variable set to one if the firm is in subsample 1 and
zero if it is in subsample 2., in the ordinary least squares regression
CAR i  

0 
1 log(agei )  
2 log(salesi)
3
i.
Table 13
Transition Matrix for Large Canadian Firms Relating Controlling
Shareholder Description in 1988 to Controlling Shareholder Description in
1994
1994 controlling sharehol der type
1988 controlling shareholder type
(see left table margin for definitions)
b
c
d
e
f
g
h
i
1
18
4 47 2
1
5
3
4
19
1
2
1
3
2
1
1
1
6
1
1
1
1 42 1
18
Changes
into 1994
Category
1
0
23
3
7
3
4
0
1
1
5
5
4
a
j
a. heir 36
b. business entrepreneur
c. no controlling shareholder (widely held) 4
d. other individual or family
2
e. investment fund
1
f. widely-held Canadian parent firm
g. foreign parent firm
h. government
i. coop
1
j. labor
1
k. bankruptcy
1
3
1
l. acquired
3
1
1
m. unknown
1
1
2
Total in Category for 1988 44 27 53 29 6 14 49 23 0
1
Sample is firms in the 1988 Financial Post 500 for which accounting and ownership data are available.
Bottom Lines
US solutions no good if your problems are
different.
 The basic idea beneath a long sequence of
different reforms in the US, the UK, and other
Western and Asian countries is to encourage
honest dissent. This is more universally useful
than the specifics of e.g. Sarbanes Oxley
 Globalization erodes the power of local elites,
creating a window for genuine reform.
