Corporate Governance
Alternative models and convergence
Rethinking CG
By S. Lioukas
Geography of CG Systems
Different governing structures across
countries

rooted in administrative tradition of each country
Broadly there are two models

“Liberal” model
 Capital market oriented, focus on shareholders
 In Aglo- Saxon countries

“Coordinated” model
 Recognizes the interests of other stakeholders
(workers, suppliers, communities, …)
 In Continental Europe mainly
Styles of CG across countries
UK
USA
Capital Market
Orientation
France
Greece
Germany
Japan
Stable Relations
Orientation
Aglo Saxon
Advantages


Flexible flow of
capital investment in
and out
Facilitates
internationalization
Disadvantages

Volatile, unstable

Short-termism
Continental Europe
Advantages


Stable long term
commitment to
capital investment
Creditors protect the
corporation
Disadvantages


Lack of flexibility
More difficult
internationalization
Convergence or divergence?
Tend to converge to the Anglo-Saxon
model


Important for attracting investors
Important for mobilizing capital
Important for international investments


Host country governance may help or hinder
companies’ international strategies &
investment (eg. East Europe countries)
Home country governance affects investments
in other countries
“Desirable” features of CG
Independent BoD


Majority “independent” directors
Min number of non executive directors
Control / supervision of CEO


Separate Chairman / CEO
Appointment committee by independent directors
Audit committees


Majority NE independent directors
Internal auditing reporting to independent NED
Control on Executive Pay


Remuneration committee with independent directors
Disclosure of individual payments
Britain
Board independence
Separate
chairman/
CEO
Audit committee
composition
Executive pay disclosure
Half the board members independent NED
(smaller firms at least 2 independent) + 1
Senior Independent Director
Split
recommende
d
at least 3 (in smaller
companies 2)
independent NED, at
least 1 member financial
experience
Yes
France
Half the board members independent NED
Do either
2/3 independent
Yes - detailed pres of each
executive’s individual comp,
compared with that of the
preceding financial year, broken
down between fixed & variable
components
Germa
ny
Management & Supervisory Board,
Unspecified number of independents in the
SupB (“what it considers adequate”) max 2
ex exec.
Required by
law for larger
companies
1 independent Chairmannot former member of
the Management Board
Yes – the same as France
Italy
Adequate number independent
1 lead independent Director when: (i) the
chairman = CEO,(ii) the office of chairman
is held by the person controlling the issuer
Encourage
At least 3 members. 2
independent – no need of
AC whenhalf the board
members are
independent
Not specified
United
States
A substantial majority independent
Do either
At least 3 members, all
be independent directors
Yes - use the compensation
discussion & analysis (CD&A) to
provide meaningful info
Majority non-executive directors (NEDs), at
Encourage
Indep Vice
Majority of independent
Yes, but collectively
Greece
Comply or explain?
Within the same country there exist
variations

Different models across companies
Differences across companies are accepted
if justified

UK: variations are explained in annual reports
“Comply or explain”: allows some variety

In other countries also
EU Initiatives
Early initiatives


Little activity in member states
EC was activated, but forced to retreat
 Harmonization ambition rejected
Recent initiatives


Massive activity in member states
EC more cautious
 Compatibility rather than harmonization

“Comply or explain” codes rather than universal
standards of regulation
More variety of CG Systems
A system of “cross shareholding” is
intense in some countries



Eg cross holdings by corporations in France
Big families in Asia, Latin America
interlocking networks
High concentration of shareholding
leads to illiquid capital markets

Ownership & control are not frequently
traded
Japanese CG versus USA
USA style
Promoted as universal
best practice
Small BoD to oversee &
monitor management
Boards Committees with
majority of outsiders



Audit Committee
Nominations Committee
Compensations
Committee
Japan style
Dismissed as ineffective
by int. investors
Large BoD to make
better/more informed
strategic decisions
No CG Board
Committees. Instead:


Internal committee for
strategy
Internal committees for
coordination
Japanese CG and management style
USA style
Shareholder oriented


“Your Board…”
Manages the share price
Restructuring through
dismissals

labor flexibility
Stock option schemes
Committee
Japan style
More balanced
stakeholder concerns

Manages relations
Promotes long term
employment

for strategic purposes?
Profit sharing schemes
Japanese CG: does it converge?
After the upheavals of the 1990s and the reforms
that followed employees:


Some weakening of long term employment and age based
promotion
Employees are expressing a greater interest in pay for
performance
But core values are still strong




Average job tenure for certain groups has actually
increased
Loyalty and commitment to firms seems to have increased
among women
Shareholders received increased attention, but as just one
of several stakeholders
Emphasis on employees as stakeholders remains.
The limits to CG (1)
Preoccupation with structural elements


Regulate what you can observe and measure
Neglect of “soft” factors, e.g trust, cooperation,
values
Introduces forms of CG with uncertain
impact on performance

Results are at best inconclusive for several elements
May limit management choice and
entrepreneurship


Aspects previously within the domain of
management become regulations
May limit innovation & risk taking
The limits to CG (2)
Limits the room for self regulation

Companies prefer voluntary self regulation
 A mix of “light” regulation coupled with self
regulation may work better (?)

But will self governance work?
 Mixed experience: few leaders
 Informal control by strong executives,
arrogance and greed may still persist

“Light” versions may work only if wider
representation is secured in Boards
The limits to CG (3)
Elevates “control culture”

Emphasis on controls rather than trust
 Supervision rather than value creation
philosophy in BoD, Committees…

Neglect of internal aspects: E.g
 Values and culture, value based control
 Corporate strategy
Rethinking CG: (1)
More inclusive forms of control:
external and internal


Mutual monitoring, self or industry monitoring
Control through values & norms
 Values of “stewardship” for managers

Use market controls as alternatives to “internal”
CG controls, e.g.
 controls exercised thought the market competition
 or through the market for corporate control (threat of
takeovers)

Use non market controls, such as media pressure,
or government intervention, or name and shame.
Rethinking CG: (2)
Promotion of trust




Promote responsible market contact of
businesses
Open communications & transparency
Assurance of employment security or
personal assistance in case of
redundancies
Social bonds between managers &
employees
Rethinking CG: (3)
Cooptation of employees into
ownership & governance




Large numbers of informed inside
members monitor managers behavior
Devolves initiatives where the knowledge
rests
Representation of employees in General
Assembly and BoD more likely
Revise stock option plans (ESOP)
Rethinking CG: (4)
Promote ideas of corporate
citizenship

Value of creating sustainable value for all
stakeholders
 Challenge the shareholder value ideology



Towards a “company of citizens!”
Voting rights to employees
Human capital as corporate asset
Turning CG into advantage (1)
Smart companies have used CG to their
advantage



Use CG to better control the business
Drive down compliance costs
Built reputation through CG
Exceed formal obligations

Move beyond requirements
Turning CG into advantage (2)
Pepsi Co uses internal auditors in
creative ways:

To make a survey each year of practices
 e.g hiring /evaluating employees,
 assessing risk areas,
 improve procedures,
 evaluating objective setting,
 diagnosis of training needs of financial people…