Bcu msc cg week 2 international

INTERNATIONAL
CORPORATE GOVERNANCE
Stephen Ong, BSc(Hons) Econs (LSE),
MBA International Business(Bradford)
MBI/MSc Bioprocessing(UCL)
Visiting Fellow, Birmingham City University
Professor, Shenzhen University
stephenongch@gmail.com
MSC ACCOUNTANCY & FINANCE :
CORPORATE GOVERNANCE
& OPERATIONS RISK ANALYSIS AND CONTROL

• Discussion : Maximizing
shareholder-value1
• Corporate Control,
Ownership Rights &
Governance Systems
2
• Case study : AIG3
Today’s Overview

1. Open Discussion :
Maximizing Shareholder Value
Brendan McSweeney, (2008),"Maximizing
shareholder-value: A panacea for economic
growth or a recipe for economic and social
disintegration?", Critical Perspectives on
International Business, Vol. 4 No.1: pp. 55 – 74

1. Open Discussion :
Maximizing Shareholder Value
1. Higher Profits by Cutting costs?
2. Dividend policies
3. Share price reflects firm performance
4. Financing methods

2.1 Corporate Control Across the World
1.Reviews the differences in corporate
control patterns across the world.
2.Corporate control and ownership in the
UK and USA differ markedly from
corporate control and ownership in the
rest of the world - widely held shares vs
concentrated shareholding.
3.Differences in the concentration of
control and types of shareholders.

Learning Outcomes
• By the end of this lecture, you should be able
to:
1.Describe the differences in the levels corporate
control across the world
2.Be aware of differences in the importance of
various types of shareholders across regions and
countries
3.Explain why the Berle-Means hypothesis does
not hold outside the UK and the USA.

Introduction
• The previous lecture mentioned that the
principal–agent model has only limited
applicability.
• The model is based on the Berle-Means premise
of a separation of ownership and control in
stock-exchange listed firms.
• However, this premise is only valid in the UK and
the USA.
• In most the rest of the world, listed corporations
tend to have large shareholders.

Introduction (Continued)
• In what follows, we focus on control rather
than ownership for two reasons
1. Corporate governance is about the distribution
of power within the corporation and this power
depends, among other factors, on the votes held
by various shareholders
2. In most countries, there are disclosure
requirements for the ownership of control rights,
but not for cash flow rights.

The Evolution of Control after the IPO
• Berle and Means hypothesis states that, as
companies grow, they experience a
separation of ownership and control.
• It is this separation which creates conflicts of
interests between the managers and the
owners (the shareholders).
• A first step towards testing the validity of this
hypothesis is to focus on what happens
around the initial public offering (IPO).

(Continued)
• The IPO consists of the firm
– obtaining a listing on a recognised stock
exchange, and
– offering its shares to the public for the first time.
• Comparison of the evolution of control in
German and UK IPOs matched by
– size (market capitalisation), and
– initial control (family control)
over the six years after the IPO. (Goergen
1998)

• Definition of a large shareholder was a
shareholder with at least 25% of the
votes.
• Distinction between
–the pre-IPO or initial shareholder, and
–new large shareholders.
• The remainder was treated as the free
float.
(Continued)

German firms UK firms
Time after
IPO (years)
Initial
share-
holder
s
(%)
Free float
(%)
New large
share-
holders
(%)
Initial
share-
holders
(%)
Free float
(%)
New
large
share-
holders
(%)
Immediatel
y
76.4 22.2 1.5 62.8 37.2 0.1
1 73.7 24.0 2.4 51.4 43.1 5.5
2 69.6 25.0 5.4 47.3 39.5 13.3
3 64.9 25.3 9.8 37.7 36.0 26.4
4 59.4 25.0 15.5 33.6 37.6 28.8
5 50.7 26.3 23.1 31.4 36.5 32.1
6 45.0 24.8 30.2 30.0 40.8 29.2
Goergen (1998), Goergen and Renneboog (2003)
Table 1 – Evolution of control in German and UK IPOs

• The evolution of control is different in the
two countries
– Initial shareholders of German IPOs keep
majority control for 5 years after IPO
– Initial shareholders of UK IPOs lose control 2
years after IPO
– Free float is higher in UK IPOs
– No difference in terms of control held by new
shareholders.
(Continued)

• There is no separation of ownership and
control in Germany.
• German firms also tend to go public later
(about 50 years after their foundation) than
UK firms (about 13 years).
(Continued)

Corporate Control in Western Europe
and the USA
• The first detailed study on Europe was
conducted by the European Corporate
Governance Network (ECGN), the predecessor of
the European Corporate Governance Institute
(ECGI).
• The study was commissioned by the Directorate
General for Industry of the European
Commission.
• The study was published in Barca, F. and M.
Becht (2001), The Control of Corporate Europe,
Oxford: Oxford University Press.

Corporate Control in Western Europe
and the USA (Continued)
• This study focuses on ultimate control
– Control refers to the ownership of voting rights
– Control may be held indirectly.
• There are various ways of defining control
including
– a majority of votes as a majority is required for most
decisions voted at the AGM,
– a supermajority as some decisions require 75% of
the votes (e.g. the approval of a takeover offer), and
– a blocking minority of 25% which is sufficient to
block decisions requiring a supermajority.

Figure 1 – Direct or first-tier control
Family
Holding
Company
A
Holding
Company
B
Quoted
firm
15% 10% 20%
FirsttierSecondtier
?

Figure 2 – Ultimate control
Family
Holding
Company
A
Holding
Company
B
Quoted
firm
100% 51%
15% 10%
20%
FirsttierSecondtier

Table 2 – Distribution of largest shareholders in Europe and the USA

Table 3 – Distribution of control across types of large
shareholders in Europe
Slide 2.20

• Levels of control
– Continental WesternEurope:
• In most firms a majority of votes is held by one shareholder or a
group
• Most firms have a shareholder with a blocking minority
• Potential agency problems between minority shareholders and
large shareholder
– UK and US
• Most firms are widely held
• A coalition of the 3 largest shareholders votes for only 30%
• Potential agency problems between shareholders and
management
Corporate Control in Western Europe and
the USA (Continued)

• Nature of control
– Industrial and holding firms are the major
shareholders in most of Continental Europe
– Institutional shareholders are main shareholders
in the UK and Netherlands
– Family control is important in Continental Europe
– Control by the management is important in the
UK.
the USA (Continued)

– Bank stakes are small:
• They range from 0.4 to 7.2% in most of Continental
Europe
• The exception is France with 16%
• However, figures may underestimate control by banks
– In some countries, customers deposit their shares
with the bank and the bank votes for the shares
– Figures exclude proxy votes
– Proxy votes are the votes from the shares held by
the banks’ customers that the banks exercise on
behalf of their customers.
the USA (Continued)

Corporate Control in Asia
• Asia has its own corporate governance
characteristics.
• In Japan, some firms are part of keiretsus.
• A keiretsu is a group of industrial companies
with close ties to a single banks which acts as
the principal lender to the group.
• The bank is also a shareholder of the group’s
companies and there may be cross-
shareholdings between the group companies.

Corporate Control in Asia (Continued)
• The keiretsus originated from the pre-WWII
zaibatsus.
• Zaibatsus were groups of industrial companies
or conglomerates
– controlled by families via a holding firm at the top of
the group, and
– with a bank as one of the group companies providing
the financing.
• An example of a keiretsu originating from a
zaibatsu is the Mitsubishi group of companies.

• Korea’s industrial landscape is dominated by
chaebols.
• A chaebol is a group of industrial companies
controlled by a family.
• Examples of famous chaebols are Hyundai, LG
and Samsung.
• China started an ambitious programme of
economic reforms in the 1980s giving managers
of state-owned enterprises (SOEs) more power.

• In the early 1990s, China set up the Shenzen
and Shanghai stock exchanges.
• From now on Chinese SOEs were allowed to
issue shares to individual investors.
• Chinese SOEs have complex ownership and
control structures.

• They tend to have 5 major types of shareholders
– the central government,
– legal persons (institutions and founders),
– employees,
– domestic investors (A shares), and
– foreign investors (B and H shares).
• The largest shareholder holds about 43% of the
shares.
• The government is the largest shareholder in
67% of the firms.

• India is dominated by conglomerates or so called
business groups.
• About 60% of the 500 largest firms on the
Bombay Stock Exchange are part of business
groups.
• These are typically controlled by families.
• Control and ownership structures are highly
complex and opaque with ownership pyramids
and cross-holdings.

Figure 6 – Percentage of listed Asian firms with
a 10% shareholder
Source: Claessens et al.
(2000)
Slide 2.30

Country Sample Family State Institution
al
investors
Industrial
companie
s
10% cut-off
Hong Kong 330 64.7 3.7 7.1 23.9
Indonesia 178 68.6 10.2 3.8 16.8
Japan 1,240 13.1 1.1 38.5 5.3
Korea 345 67.9 5.1 3.5 9.2
Malaysia 238 57.5 18.2 12.1 11.2
Philippines 120 42.1 3.6 16.8 35.9
Singapore 221 52.0 23.6 10.8 12.2
Taiwan 141 65.6 3.0 10.4 18.1
Thailand 167 56.5 7.5 12.8 21.1
20% cut-off
Hong Kong 330 66.7 1.4 5.2 19.8
Indonesia 178 71.5 8.2 2.0 13.2
Japan 1,240 9.7 0.8 6.5 3.2
Korea 345 48.4 1.6 0.7 6.1
Malaysia 238 67.2 13.4 2.3 6.7
Philippines 120 44.6 2.1 7.5 26.7
Singapore 221 55.4 23.5 4.1 11.5
Taiwan 141 48.2 2.8 5.3 17.4
Thailand 167 61.6 8 8.6 15.3
Table 4 – Distribution of control across types of large shareholders in Asia
Source: Claessens et al. (2000)
Slide 2.31

Corporate Control in Transitional
Economies
• The former Communist Bloc started its
transition to a market economy in the early
1990s.
• Albeit slightly lower than in Western Europe,
control is also concentrated.
• However, the votes held by the second
largest shareholder can be substantial.

Largest shareholder Second largest shareholder
Country Year
No. of
Companie
s Median Mean
No. of
Companie
s Median
Mean
Czech
Republic 2001 57 52.6 61.1 43 25.3
26.1
Estonia 1999/2000 21 52.6 53.2 18 12.6
14.5
Hungary 2000 64 43.5 44.7 64 18
18.6
Latvia 1999/2000 43 51.3 51 42 7.7
9.6
Lithuania 1999/2000 46 42.2 46.3 34 11.3
16.9
Poland 2000 210 39.5 44.6 210 10.4
15.6
Romania 2000 115 53 53.4 86 16
16.5
Slovakia 1999/2000 34 39.4 43.8 29 18.8
19.1
Slovenia 2000 136 22.3 27.4 136 12.1
13.4
Average 44.04 47.3 14.7
16
Table 5 – Distribution of control across Eastern Europe
Source: Pajuste (2002)
Slide 2.33

Conclusions
• The Berle-Means hypothesis is only upheld
for the UK and the USA.
• The main types of shareholders differ
between the UK-USA and the rest of the
world.

Group Discussion Casestudy : AIG
1. Identify the corporate governance issues
that AIG faced.

2.2 Control vs Ownership Rights
1. Review the various devices that create a
wedge between control and ownership.
2. Differences between control and
ownership as they determine the types of
conflicts of interests that a company and
its stakeholders may be subject to.

Learning Outcomes
• By the end of this lecture, you should be able to:
1. Distinguish ownership from control
2. Explain how to obtain the various combinations of
weak or strong control with dispersed or
concentrated ownership
3. Define security benefits and private benefits of
control
4. Assess the importance and amplitude of private
benefits of control across countries.

Introduction
• While in the UK and the USA most listed
corporations are widely held, in the rest of the
world corporations tend to have large
shareholders with significant control.
• How do these large shareholders manage to stay
in control?
• The short answer is that they leverage control,
i.e. they manage to hold a substantial
percentage of voting rights while holding fewer
cash flow rights.

• We have already seen one way of leveraging
control which is ownership pyramids, but
there are others.
• More generally, we shall analyse the various
combinations of dispersed or concentrated
ownership and weak or strong control.

Combinations of Ownership and
Control
• We shall distinguish between two extremes
for both control and ownership
– strong versus weak control
– concentrated versus dispersed ownership.

Control
Weak Strong
Ownership
Dispersed
Combination A:
weak control
and dispersed
ownership
Combination B:
strong control
and dispersed
ownership
Concentrated
Combination C:
weak control
and
concentrated
ownership
Combination D:
strong control
and concentrated
ownership
Figure 1 – Combinations of control and ownership

Combinations of Ownership and Control
• Dispersed ownership has two major advantages
– increased liquidity resulting in a lower cost of capital,
and
– the exposure to hostile takeovers putting pressure on
managers to perform well.
• Its main disadvantage is the free-rider problem
whereby each individual shareholder refuses to
monitor the management as s/he will bear all
the costs from doing so, but will share the
benefits with all the other shareholders.

Combinations of Ownership and
Control (Continued)
• Concentrated control and ownership also
have a major advantage as there will be a
shareholder with enough power and
sufficient incentives to monitor the
management.
• Its main disadvantage is the danger of
minority shareholder expropriation.

• A priori, we expect
– combination A to apply to most Anglo-American
firms, and
– combination D to most Continental European firms.
• However, due to several mechanisms,
combination D does not apply to most
Continental European firms.
• As a result, combination B prevails outside the
UK and the USA.
Combinations of Ownership and Control
(Continued)

Combination A: Dispersed Ownership
and Weak Control
• Case of most UK and US firms.
• Advantages of liquidity and takeover market.
• Disadvantages of insufficient monitoring.
• Main conflict of interests is between the
management and the shareholders.

Box 1 – The 10 largest shareholders in BT Group Plc in October 2010
Investor Name % Investor Type Country
INVESCO Asset Management Limited 11.02 Investment Managers United Kingdom
BlackRock Investment Management (UK) Ltd. 4.89 Investment Managers United Kingdom
AXA Investment Managers UK Ltd. 4.63 Investment Managers United Kingdom
Legal & General Investment Management Ltd. (UK) 3.99 Investment Managers United Kingdom
Norges Bank Investment Management (NBIM) 3.10 Investment Managers Norway
M & G Investment Management Ltd. 2.08 Investment Managers United Kingdom
Aviva Investors Global Services Limited 1.99 Investment Managers United Kingdom
BlackRock Advisors (UK) Limited 1.76 Investment Managers United Kingdom
State Street Global Advisors (UK) Ltd. 1.36 Investment Managers United Kingdom
Standard Life Investments Ltd. 1.24 Investment Managers United Kingdom
Source: Thomson Financial

Box 2 – The 10 largest shareholders in The Coca Cola Company in October 2010
Investor Name % Investor Type Country
Berkshire Hathaway Inc. 8.66 Investment Managers United States
Vanguard Group, Inc. 3.62 Investment Managers United States
State Street Global Advisors (US) 3.46 Investment Managers United States
BlackRock Institutional Trust Company, N.A. 3.29 Investment Managers United States
Fidelity Management & Research 2.80 Investment Managers United States
Capital World Investors 2.59 Investment Managers United States
SunTrust Bank 2.38 Investment Managers United States
Fayez Sarofim & Co. 0.85 Investment Managers United States
Davis Selected Advisers, L.P. 0.84 Investment Managers United States
Grantham, Mayo, Van Otterloo & Co., L.L.C. 0.83 Investment Managers United States
Source: Thomson Financial
Slide 3.50

Combination B: Dispersed Ownership
and Strong Control
• This combination prevails in most
corporations outside the UK and the USA.
• Active market in the shares.
• There is a controlling shareholder with
enough power to prevent the managers from
expropriating the shareholders.
• However, there is also an increased risk of
minority shareholder expropriation.

Box 3 – Ownership and control of BBS AG
Source: Hoppenstedt Aktienführer 2007
Slide 3.52
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012

Combination C: Concentrated
Ownership and Weak Control
• This is a fairly rare combination.
• It applies to only a few firms across the
world, including German firms with voting
caps.
• Minority shareholders are protected as no
single shareholder is able to dominate.
• Lack of monitoring and low liquidity.

Box 3.4 Voting cap inNestlé SA
Nestlé SA has a provision in its articles of association specifying a voting cap which prevents any
person from voting directly or indirectly for more than 5% of the equity. Under this provision, legal
entities that have links via equity holdings, voting rights, common management or any other form
will be considered as a single shareholder.
Source: Nestlé SA, 2010 corporate governance report

Combination D: Concentrated
Ownership and Control
• This combination creates strong monitoring
incentives.
• However, there is also low liquidity and a
reduced takeover probability.
• Volkswagen AG holds 99% of the shares of
Audi AG.

How to Achieve Dispersed Ownership
and Strong Control
• There are five main ways of achieving this
combination
– ownership pyramids,
– proxy votes,
– voting coalitions,
– dual-class shares, and
– clauses in the articles of association that confer
additional votes to long-term shareholders.
• They all consist of leveraging control, i.e. having
control while holding a lower ownership stake.

Ownership Pyramids
Figure 2 – Simple ownership pyramid

Proxy Votes
• We have already discussed proxy votes held by
banks.
• These proxy votes originate from the shares of
the banks’ customers deposited with the banks.
• However, proxy votes may also be solicited by
– the management, or
– small shareholders seeking the support of the other
shareholders to obtain approval for a motion they
intend to put forward at the shareholders’ meeting.

Box 6 – Proxy votes solicited by the management

Voting Coalitions
• A voting coalition or voting pool consists of
several shareholders agreeing to vote in the
same way.
• In practice, voting coalitions are rare,
especially those that persist in the long term.
• One reason for the infrequency of voting
coalitions may be the costs imposed by
regulation.

Voting Coalitions (Continued)
• The UK City Code on Takeovers requires
shareholders that have acquired a stake of at
least 30% to make a tender offer to the
remaining shareholders.
• The same rule applies to voting coalitions.
• However, there is evidence that in the UK
voting coalitions are formed on an ad hoc
basis to intervene in poorly performing
companies.

Dual-class Shares
• Companies with dual-class shares have two classes of
shares
– a class with voting rights or superior voting rights, and
– a second class with no voting rights or fewer voting rights.
• While non-voting shares have the disadvantage of no
vote, in some countries these shares confer
preferential dividend rights and a higher seniority
(e.g. German preference shares).
• Dual-class shares are issued by some Continental
European firms, but also some American firms.

Box 7 – Ford Motor Company dual-class shares
rcentage of Equity Represented by Class A and Class B Stock
97.9%
2.1%
Class A stock Class B stock
Voting Rights of Class A and Class B Stock
60%
40%
Class A stock Class B stock
Slide 3.64

Ford Motor Company has dual-class shares outstanding. The common stock represents
roughly 97% of the equity (33 / (33 + 1)) and the class B stock 3%. However, the common
stock has only 60% of the votes compared to 40% for class B.
Source: Ford Motor Company – 2009 annual report p.77 & p.150
“The Ford family holds all 71 million shares of the company's Class B stock, along with a
small number of the company's […] common shares. Under rules designed to preserve family
control and drafted when the company went public in 1956, the family holds 40 percent of
the voting power at the company as long as it continues to own at least 60.7 million shares of
the Class B stock [...]”
Source: Keith Brasher (2000), Ford Motor to Pay $10 Billion Dividend and Ensure Family
Control, New York Times, 14 April, Section C, p.1.

Conferring Additional Votes to Long-
term Shareholders
• Many French companies confer additional
voting rights to their long-term shareholders
via a clause in their articles of association.
• Frequently, such clauses are put in place at
the time of the IPO and are also
retrospective.

Box 8 – Double voting rights conferred to long-term shareholders of LVMH SA
Source: LVMH Reference document 2009, Bylaws, p.228; LVMH annual report 2009, p.12

The Consequences of Dispersed
Ownership and Concentrated Control
• Sanford Grossman and Oliver Hart argue that
large stakes create benefits of control.
• There are two types
– security benefits originate from the increase in firm
value due the monitoring of the management and
they are shared by all the shareholders
– private benefits are extracted from the firm by the
large shareholder and are at the expense of the
minority shareholders.
• The latter include tunnelling, transfer pricing,
nepotism and infighting.

The Consequences of Dispersed Ownership and
Concentrated Control (Continued)
• The five main ways of achieving dispersed
ownership with concentrated control all violate
the rule of one-vote one-share.
• The main consequence of violating this rule is
the increase in private benefits of control and
the increased probability of minority
shareholder expropriation.
• While private benefits are difficult to quantify,
there are nevertheless empirical studies that
have tried to do exactly that.

The Consequences of Dispersed
Ownership and Concentrated Control
(Continued)
• The study by Michael Barclay and Clifford
Holderness was one of the first such studies.
• They measure the value of private benefits by
the premium above the market price paid by
the buyer of a block of shares.
• However, Jeffrey Zwiebel argues that one also
needs to take into account the size of the
block changing hands.

Table 1 – Block premiums per country
Notes: The block premium is the difference between the price per share paid for the block and the stock
price two days after the announcement of the transfer of the block divided by the latter price and multiplied
by the proportion of cash flow rights presented by the block.
Source: Dyck and Zingales (2004)
Slide 3.71

Conclusions
• The combination of ownership and control
determines the main potential conflict of
interests.
• Combination A prevails in the UK and the
USA whereas combination B prevails
elsewhere.
• How to achieve combination B and its main
consequence.

2.3 Corporate Governance
Systems
1. Taxonomies of corporate governance
systems.
2. Economics and politics of Global
Capitalism.
3. Hierarchy of systems relating to law and
investor protection; electoral systems; and
political orientation of governments in power.
4. Institutional arrangements and economic
performance.

Learning Outcomes
• By the end of this lecture, you should be able to:
1. Understand the economic and political context
which has enabled global capitalism to rise
2. Critically review the assumptions underlying the
taxonomies from the law and finance literature and
those from the VOC literature
3. Assess the possible limitations of the various
taxonomies as well as the validity of their predictions
4. Explain path dependence and distinguish between
the two types of path dependence.

Introduction
• This lecture reviews the various taxonomies of
corporate governance systems.
• It is important to realise that the various
taxonomies have very different premises.
• The taxonomies from the law and finance
assume that
– individuals maximise their utilities in the presence of
institutions which constrain their behaviour, and
– there is a zero-sum game between improving the
rights of investors and those of workers.

• In contrast, the varieties of capitalism
literature
– focus on the concept of complementarities, and
– do not assume that there is a zero-sum game
between worker and investor rights.

The Rise of Global Capitalism
• In their 1932 book, Adolf Berle and Gardiner
Means identified a new social phenomenon
and major step in the development of
capitalism.
• This was the emergence of a class of
professional managers running firms on
behalf of their owners.
• The first challenge faced by this new
class was the stock market crash of 1929
and the Great Depression of the 1930s.

(Continued)
• The Great Depression gave start to large-scale
government programmes globally to revive the
economy.
• The most famous one was US President Franklin
Delano Roosevelt’s New Deal.
• As a response to the recent failures of its
commercial banks, the USA introduced the
Glass-Steagall Act in 1933.
• The Act introduced a segmentation between
commercial banks and investment banks.

(Continued)
• In summer 1944, the Bretton Woods agreement
created new global economic institutions for the
post-WWII period
– the International Monetary Fund (IMF), and
– the International Bank for Reconstruction and
Development (IBRD) or World Bank.
• It also set up a system of fixed currency
exchange rates.
• At the end of WWII, the USA and the USSR
emerged as the two pillars of political power.

(Continued)
• The post-WWII period saw substantial
improvements in workers’ rights and the
emergence of the welfare state.
• The class of professional managers now faced
a class of blue- and white-collar workers
represented by powerful unions.
• In Germany, the Co-determination system
was put in place consisting of workers
councils and workers board representation.

(Continued)
• During the 1960s, Western
economies experienced
unprecedented economic
growth.
• However, at the beginning of
the 1970s the Bretton woods
system was in crisis
– The USA had a massive trade
deficit due to the Vietnam war
– The deficit was financed by
printing more dollars which
fuelled inflation
– In 1971, President
Nixon put an end to
the convertibility of
the dollar into gold.

(Continued)
• The 1973/4 oil crisis further fuelled inflation.
• By 1976, the Bretton Woods agreement had broken
down and all major currencies were now floating.
• Developed countries were now experiencing
stagflation, i.e. stagnation combined with high
inflation and unemployment, caused by high oil prices
as well as a spiral of wage and price adjustments.
• Few believed that Keynesian economic policies would
be a way out of the crisis.

(Continued)
• The crisis gave rise to neoliberalism as a new
political ideology.
• Neoliberalism is the doctrine that
– markets are better at allocating economic resources,
and
– individuals are better at making economic decisions
than governments.
• The next few decades were to be dominated by
this new doctrine, also called financialisation or
globalisation.

(Continued)
• Financialisation refers to
different, but related
phenomena
– the increasingly important role of
capital markets and the financial
services industry compared to the
manufacturing industry, and
– the process of turning any asset
generating cash flows into a
financial security or a derivative.

(Continued)
• In 1979, the Conservatives won the
elections in the UK and Margaret
Thatcher became Prime Minister.
• In 1980, Ronald Reagan, A
Republican, became the President of
the USA.
• Both engaged in programmes of
market liberalisation and
deregulation.
• Thatcher curbed trade union power
with a succession of laws during the
1980s.
• Trade union membership fell
from roughly 50% to 34% in
1990.

(Continued)
• The UK was the first country in Europe to start
an ambitious programme of privatisation.
• Two of the major aims of the privatisation
programme were
– to widen share ownership, and
– to encourage employee share ownership.
• Other European countries were to follow with
their own privatisation programmes.

(Continued)
• In the USA, Ronald Reagan was a fervent
follower of supply-side economics.
• According to supply-side economics, a
necessary and sufficient condition to achieve
economic growth is to reduce barriers to the
supply side of the economy.
• Reagonomics consisted of keeping inflation
low by controlling the supply of money,
reducing tax and government spending.

(Continued)
• The 1970s and 1980s also saw a wave of
deregulation of the major financial markets.
• On 1 May 1975 (May Day), the US stock
exchanges moved from a system of fixed
commissions to negotiated commissions.
• As a result of this decrease in trading costs
– a lot of foreign companies applied for a cross-listing
in the USA, and
– a major chunk of the trading in their shares moved to
the USA.

(Continued)
• In response to the loss of business to the
USA, the London Stock Exchange underwent
major changes in 1986 (Big Bang).
• The most important change was to remove
minimum commissions on stock trades.
• The 1980s and 1990s also saw the
demutualisation of British building societies.

(Continued)
• In 1985, Mikhail Gorbachev succeeded Leonid
Brezhnev as head of state of the USSR.
• He is famous for
– his glasnost (opening of the USSR), and
– perestroika (economic and political reform) policies.
• During the late 1980s, revolutions swept across
the Communist Bloc resulting in
– the reunification of West and East Germany, and
– the breakdown of the USSR.

(Continued)
• In 1992, the Single European Act
came into effect in the European
Union
– It removed barriers to capital flows
and the movement of EU citizens
within the EU
– It brought about a liberalisation of
financial and labour markets.
• In the USA, the Gramm-Leach-
Bliley Act of 1999 practically
repealed the 1933 Glass-Steagall
Act.
• Banks were now allowed to
conduct both commercial
and investment banking.

First Attempts to Classify
Corporate Governance Systems
• The British economist John Hicks and the
American business historian Alfred Chandler
Jr. were the first to attempt to categorise the
different systems of capitalism.
• Hicks distinguishes between
– market-based economies, and
– bank-based economies.
• The former rely on well developed capital
markets and the issue of publicly traded
securities to finance corporate investments.

Corporate Governance Systems
(Continued)
• Chandler studied the differences between
American, British, German and Japanese
capitalism from a historical perspective.
• Mark Roe highlights the importance of past
regulation to understand differences in
corporate governance across countries.
• In particular, banking regulation has had a major
impact on whether a national economy develops
into a market-based or bank-based system.

• Julian Franks and Colin Mayer have developed a more
nuanced classification which does not just focus on the
sources of financing for corporations.
• They distinguish between insider systems and outsider
systems.
• Insider systems are characterised by
– concentrated control and complex ownership structures,
– managers being monitored and disciplined by the large
shareholder, and
– underdeveloped takeover and stock markets.
• Continental Europe is a representative of this system.
Corporate Governance Systems (Continued)

• Outsider systems are characterised by
– dispersed ownership and control,
– well developed takeover and stock markets,
– managers being disciplined by hostile raiders.
• The UK and the USA are representatives of
the outsider system.

Insider versus Outsider Systems
Insider Outsider
Firms owned
predominantly by inside
shareholders who also
wield control over
management
Large firms controlled by
managers but owned
predominantly by outside
shareholders
System characterised by
little separation of
ownership and control such
that agency problems are
rare
System characterised by
separation of ownership and
control which engenders
significant agency problems
Hostile take-over activity is
rare
Frequent hostile take-overs
acting as a disciplining
mechanism on company
management

Insider Outsider
Concentration of ownership in a
small group of shareholders
(founding family members, other
companies through pyramidal
structures, state ownership)
Dispersed ownership
Excessive control by a small group
of 'insider' shareholders
Moderate control by
a large range of
shareholders
Wealth transfer from minority
shareholders to majority
shareholders
No transfer of wealth
from minority
shareholders to
majority shareholders

Insider Outsider
Weak investor protection in
company law
Strong investor
protection in company
law
Potential for abuse of power
by majority shareholders
Potential for shareholder
democracy
Majority shareholders tend to
have more 'voice' in their
investee companies
Shareholding
characterised more by
'exit' than by 'voice'

• Lucian Bebchuk and Mark Roe formalise how the
past shapes a country’s corporate governance
system.
• They distinguish between two forms of path
dependence
– Structure-driven path dependence is about how
current corporate governance arrangements and
corporate control structures depend on the structures
that were initially in place
– Rule-driven path dependence is about how current
regulation is influenced by the corporate structures
that were initially in place.

• The characteristics of national systems will
tend to persist over time given the structure-
driven and rule-driven path dependences.

Legal Families
• Rafel La Porta, Florencio Lopez-de-Silanes,
Andrei Shleifer and Robert Vishny have started
the law and finance literature.
• Their theory is based on the importance of
property rights, in particular investor protection.
• They argue that in countries where investor
protection is high capital markets are highly
developed.
• Ultimately, the degree of investor protection
drives economic growth.

Legal Families (Continued)
• La Porta et al. distinguish between two broad
legal families, i.e. common law and civil law.
• Common law is case-based law.
• Judges pronounce judgements on the cases
presented to them in a court of law.
• These judgements then create precedents for
other similar future cases.
• Civil law originates from Roman law.
• It relies on extensive codes of law.

• The role of judges is limited to interpreting
the law texts in court.
• La Porta et al. argue that the reliance on
codes of law makes civil law less flexible and
more reactive than common law which can
easily adjust to new ways of managerial
abuses.
• Common law is the law of the UK, the USA
and most of the former colonies of the UK.

• Within the broader family of civil law, La Porta et
al. distinguish between
– French (or Latin) law prevailing in French speaking
and Southern European countries,
– German law prevailing in Germanic countries as well
as China and Japan, and
– Scandinavian law.
• Their antidirector rights index measures how
well shareholders are protected against the
management or the large shareholder.

• Their creditor rights index measures how
creditor rights are protected.
• La Porta et al. find that shareholder
protection and creditor protection are
– highest in common law countries,
– lowest in French law countries, and
– somewhere in between in countries of German
and Scandinavian law.

• They also study the link between
– investor and creditor protection on one side, and
– the size of capital markets on the other side.
• They find that the size of stock markets, as
measured by the number of domestic listed
firms, is
– largest in common law countries,
– smallest in French law countries, and
– somewhere in between in countries of German and
Scandinavian law.

• However, when stock market size is measured by the
value of IPO firms, the relationship with investor
protection is less clear.
• The relationship between creditor protection and the
size of the debt market is also somewhat ambiguous
as German law countries have much larger debt
markets than common law countries.
• Finally, La Porta et al. find a negative link between
investor protection and the concentration of control.

• They conclude that control remains
concentrated in countries with weak
investor protection to avoid expropriation by
the managers.

Political Determinants of
Corporate Governance
• Mark Roe proposed politics and political
ideology as the main driver of corporate
governance.
• Political ideology determines how countries
achieve social peace.
• The Continental European social democracies
have achieved social peace by favouring
employees over investors.
• Layoffs will be relatively hard, unemployment
benefits and unemployment will be high.

Corporate Governance (Continued)
• Managers will less likely focus exclusively on the
maximisation of shareholder value.
• High incentive packages for managers will also be
less common to avoid the envy of other social
classes.
• There will be less takeover activity as takeovers
may generate layoffs.
• In summary, social democracies seek social
equality at the cost of economic efficiency.
• Control will stay concentrated as this is the only
way to keep managers and employees at bay.

• In countries with more conservative
governments, the focus will be on improving
investor rights.
• Given the strong investor rights, ownership
and control will separate.
• Roe tests his prediction on OECD countries
and finds support for it
– Ownership and control are more concentrated
in countries with left-wing governments.

• Marco Pagano and Paolo Volpin propose an
alternative theory based on electoral
systems.
• Their theoretical model is based on three
different types of economic actors
– managers,
– employees, and
– rentiers.

• Managers run the firms on behalf of the rentiers, but
do not themselves own shares.
• Rentiers live off the revues of their investments.
• Both managers and employees prefer weaker investor
rights.
• Weaker investor rights give more power to managers
and facilitate the extraction of private benefits of
control.
• They also provide better job security for employees, in
particular less productive employees.

• While managers and employees have similar
preferences, rentiers are assumed to be a less
homogenous group.
• Pagano and Volpin distinguish between
majoritarian electoral systems and proportional
electoral systems.
• Under a majoritarian system, the political party
with a majority of districts wins the elections.
• Pagano and Volpin assume that the pivotal
district is the district of the rentiers.

• Hence, under a majoritarian system political parties
will cater for the rentiers and focus on improving
investor rights.
• Under a proportional system, the political party that
obtains a majority of votes wins the elections.
• Under the latter, political parties will focus on the
homogenous group of the managers and workers.
• The focus will be on employee rights at the expense of
investor rights.

• Pagano and Volpin test their theory on 21 OECD
countries.
• In line with their predictions, they find that countries
with more proportional voting systems have stronger
employment protection and weaker investor rights.
• However, they only find that the La Porta et al. legal
families only explain the levels of employee rights, but
not those of investor rights.
• They conclude that the proportionality of the electoral
system is better at explaining the level of investor
rights than the legal family.

The Varieties of Capitalism Literature
• So far, the focus has been on the law and finance
literature which argues that the main role of
institutions is to constrain the behaviour of
managers and employees.
• Contrary to La Porta et al. and Pagano and
Volpin, Roe does not advocate the superiority of
one particular system.
• Nevertheless, he also assumes that strong
investor rights cannot coexist with strong
employee protection.

(Continued)
• In contrast, the varieties of capitalism (VOC)
literature does not favour a particular system.
• Peter Hall and David Soskice study a wide range
of questions relating to the distribution of
wealth and the resolution of economic
coordination problems.
• They argue that economic systems are not just
about investments in assets and technologies.
• They are also about investments in human
capital.

• The way economic coordination problems are
solved depends on whether an economy is
– a liberal market economy (LME) or
– a coordinated market economy (CME).
• In LMEs, the coordination mechanism is the
markets.
• Labour markets and markets for assets are
highly flexible and developed.
• Firms tend to invest in highly marketable and
liquid assets.
(Continued)

• There is an emphasis on assets with relatively
short payback periods.
• In-house training of employees is kept to a
minimum to avoid competitors from free-riding
on the firm’s efforts.
• Innovation is mainly of the blue skies nature.
• LMEs tend to excel in highly competitive,
innovative industries as well as low value-added
services industries.
• The UK, the USA and Australia are LMEs.
(Continued)

• CMEs are based on complex networks to coordinate
economic decision making.
• Markets, including labour and capital markets, are
fairly illiquid and inflexible.
• Hence, there is less focus on highly liquid and generic
assets.
• The emphasis tends to be on more specific, less
marketable assets.
• Firms provide more in-house training and powerful
employers associations avoid free-riding.
(Continued)

• High employee protection and inflexible
labour markets provide incentives for
workers to invest in firm-specific skills.
• CMEs tend to do well in industries associated
with incremental innovation such as high
value-added manufacturing.
• France, Germany and Italy are examples of
CMEs.
(Continued)

• The concept of complementarities is key to
the VOC literature.
• Two institutions have complementarities if
their joint existence increases the efficiency
of one or both of them.
• This concept implies that substantially
different sets of institutions may still have
very similar levels of economic output and
wealth creation.
(Continued)

How Do the Various Taxonomies
Perform?
• The first attempts to arrive at taxonomies
consisted of finding commonalities as well as
differences across countries in terms of
corporate governance.
• More recent attempts have been based on
theoretical foundations, generating predictions
as to
– how institutional arrangements come about, and
– how existing institutional arrangements explain
differences in corporate governance and corporate
or economic performance.

How Do the Various Taxonomies
Perform? (Continued)
• A basic criticism of La Porta et al. is its static nature.
• Taken to an extreme, today’s characteristics of the
Italian corporate governance system are mainly due to
what happened in the distant past, starting with the
12 Tables that laid down the foundation of Roman law
in the 5th century BC.
• La Porta et al. justify the static nature of their theory
by the fact that law only changes slowly over time.

• There also exist four more specific critiques of La
Porta et al.
• The first critique has been formulated by Michael
Graff.
• He argues that the La Porta et al. antidirector rights
index includes criteria that are irrelevant whereas
other, relevant criteria have been excluded.
• When the index is adjusted as proposed by Graff,
there is no longer a link between investor protection
and legal origin.
How Do the Various Taxonomies Perform?
(Continued)

• Holger Spamann’s critique is based on errors
of encoding.
• He finds errors for 33 out of the 49 countries
covered by La Porta et al. due to their use of
secondary sources.
• After these errors have been corrected, the
link between legal families and investor
protection no longer exists.
(Continued)

• Amir Licht, Chanan Goldschmidt and Shalom
Schwartz argue that culture is the true driver
behind differences in corporate governance.
• Using survey evidence, they find that countries
that were under British rule are much more
willing to deal with conflicts of interests in a
court of law.
• They find a strong relationship between cultural
attitudes and investor and creditor protection.
(Continued)

• They argue that the persistence of cultural
attitudes may explain why the countries of the
former Communist Bloc have failed to improve
investor protection despite wide-ranging legal
reforms.
• Finally, Julian Franks, Colin Mayer and Stefano
Rossi find that the separation of ownership and
control in the UK can be traced back to the
period before 1930 when investor protection
was still low.
(Continued)

• Franks et al. argue that the proximity of
shareholders to their investee companies via
local stock exchanges acted as a substitute for
strong investor rights.
• There has also been criticism of the simple
version of the VOC literature.
• The dichotomous version has been criticised to
fail to account for the distinct character of
Rhineland economies, the Nordic social
democracies and Southern Europe.
(Continued)

Research into Corporate Governance
Systems Worldwide
• Shleifer and Vishny (1997) surveyed the extant
research into corporate governance, focusing on the
influence of countries' legal systems on corporate
governance
• investor legal protection and ownership
concentration
• High degree of legal investor protection was
necessary to persuade investors to hand their
money over to companies

• Legal systems characterised by low levels of
investor protection were found to be
associated with poorly developed capital
markets
• Without strong investor protection,
management can expropriate shareholders'
funds

La Porta, Lopez-de-Silanes, Shleifer
and Vishny (1997)
• Explained there were three general legal traditions
operating across the globe
• French origin legal system is known to afford the
lowest level of investor protection
• English origin legal system of common law affords
the highest level of investor protection
• German and Scandinavian origin legal systems lie
somewhere in between

La Porta, Lopez-de-Silanes, Shleifer
and Vishny (1998)
• Studied the ownership structure of the ten largest
nonfinancial corporations for a cross-section of 49
countries
• Supported the insider model for many East Asian
economies characterised by a concentration of
ownership, resulting in control of companies being
held predominantly by a small number of owners,
although less so in Japan and South Korea

Moving towards Convergence?
• Corporate governance standardisation is one
way of building confidence in a country's
financial markets and of enticing investors to
risk funds

The OECD Principles
• First OECD Principles (1999)
• Organisation for Economic Co-operation and Development
• The Revised OECD Principles 2004
• OECD has expanded to include 30 members, with the
accession of the Slovak Republic in December 2000
• The OECD Principles (2004) stated that the 1999 principles
provided specific guidance for legislative and regulatory
initiatives in OECD member countries but also in non-member
states
• The 1999 principles have been thoroughly reviewed in order
to take account of recent developments and experiences in
both OECD member and non-member countries

• In reviewing the 1999 principles, the OECD drew on
a the findings of a comprehensive survey of how
member countries addressed a variety of corporate
governance challenges
• The revised principles have maintained the spirit of
a non-binding and principles-based approach, which
recognised the need to adapt implementation to
varying economic, legal and cultural situations
• The need for sound corporate governance systems
at a global level is reinforced in the preamble to the
revised principles,

• "If countries are to reap the full benefits of
the global capital market, and if they are to
attract long-term 'patient' capital, corporate
governance arrangements must be credible,
well understood across borders and adhere
to internationally accepted principles" (OECD,
2004, p.13).

The revised principles cover the
following areas :
• (i) Ensuring the basis for an effective corporate
governance framework;
• (ii) The rights of shareholders and key ownership
functions;
• (iii) The equitable treatment of shareholders;
• (iv) The role of stakeholders;
• (v) Disclosure and transparency; and
• (vi) The responsibilities of the board. It seems that
stakeholders have been given greater weight in the
redrafted version of the principles.

(i) The corporate governance framework should promote transparent and efficient markets, be consistent with the
rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and
enforcement authorities.
(ii) The corporate governance framework should protect and facilitate the exercise of shareholders' rights.
(iii) The corporate governance framework should ensure the equitable treatment of all shareholders, including
minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for
violation of their rights.
(iv) The corporate governance framework should recognise the rights of stakeholders established by law or through
mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth,
jobs, and the sustainability of financially sound enterprises.
(v) The corporate governance framework should ensure that timely and accurate disclosure is made on all material
matters regarding the corporation, including the financial situation, performance, ownership, and governance of the
company.
(vi) The corporate governance framework should ensure the strategic guidance of the company, the effective
monitoring of management by the board, and the board's accountability to the company and the shareholders.

The ICGN Statement on the OECD
Principles
• The International Corporate Governance Network
(ICGN)
• is an international organisation comprising of many
groups interested in corporate governance reform
• OECD (2004) stressed that good standards of
corporate governance are essential if countries are
to attract international investment
• The CalPERS Principles
• CalPERS, the California Public Employees'
Retirement System

The Outcome of Corporate
Governance Convergence
• A 'one size fits all' approach is unrealistic, as "alien
practices cannot be transplanted or imposed"
• Potential for countries to be forced into Anglo-
American style capitalism
• Mayer (2000) argued against corporate governance
convergence suggesting that systems should remain
inherently different so as to promote competition
and take advantage of comparative advantage

Corporate Governance in the European Union:
‘One Size Does Not Fit All'
• EU Commission has adopted attitude towards
corporate governance that, "one size does
not fit all“
• This is based on the belief that it is not
possible to have one set of corporate
governance principles for all European Union
members
• Legal frameworks vary tremendously across
European Union member states.

European Union Countries
• Culture and traditions also have a significant
impact on corporate governance
developments
• In EU countries there is a wide diversity in
legal frameworks, cultures, traditions,
religious beliefs and patterns of corporate
ownership structure

Comply or Explain in EU
• Commission has decided that legislation
should not be the driving force for EU
corporate governance reform
• Harmonising corporate governance across
EU, through legislation, the forced adoption
of a common code, is not a practicale
possibility
• EU Commission has decided to apply the
'comply or explain' approach to corporate
governance

The Important Role of Shareholders
in the EU
• Commission has established that the driving
force for good corporate governance should
be shareholders
• Shareholders are an essential corporate
governance mechanism for holding
companies to account
• They should be fully informed and should act
responsibly by exercising their voting rights

Shareholder Voting Rights in EU
• There are ongoing problems with corporate
governance reform within the EU
• If shareholders are to drive corporate governance
reform, they need to be able to exercise their rights
• There are significant obstacles to cross-border
voting at the moment
• A key issue for the Commission is to facilitate cross-
border voting.

Control-Enhancing Mechanisms and the 'One
Share One Vote' Debate
• Debate surrounding
"One share: One vote“
• Every shareholder SHOULD own one voting
right for every share he/she owns
• This is a core corporate governance principle,
deriving from the established need to treat
all shareholders equally (OECD, 2004).

• In many EU companies the ratio can be ten, twenty,
or even one hundred votes per share, for certain,
privileged shareholders
• The privileged shareholders can be, for example,
founding family members
• Even where shares are sold to other shareholders,
the rights on the new shares are often different
(one share: one vote) such that the founding family
members retain control.

ABI Study (2005)
(See Directions Paper)
• Association of British Insurers (ABI) study examined
application of 'one share one vote' principle in EU
• Examined capital structure of EU companies to
establish what proportion applied the 'one share
one vote' principle
• Findings indicated that 65% of companies applied
'one share one vote', but identified some 'striking'
exceptions to the principle
• Multiple voting rights were found, especially in
France, Sweden and the Netherlands

EU Study 2007
• EU produced an in-depth report on the
proportionality principle:
• "proportionality between ultimate economic risk and
control means that share capital which has an
unlimited right to participate in the profits of the
company or in the residue on liquidation, and only
such share capital, should normally carry control
rights, in proportion to the risk carried. The holders
of these rights to the residual profits and assets of
the company are best equipped to decide on the
affairs of the company as the ultimate effects of their
decisions will be borne by them"

• This study identified a far wider range of
control-enhancing mechanisms which do not
follow the proportionality principle, but
which are used widely throughout member
states
• The findings of the study suggest that a 'one
share one vote' policy would not difficulties
of excessive control by concentrations of
shareholders.

Other control-enhancing mechanisms
include:
• pyramidal structures, available in all the
member states surveyed and used in three-
quarters of them;
• shareholder agreements available in all the
countries surveyed and used in 69% of them,
and;
• cross shareholdings used in 31% of the
countries surveyed

• Although 'one share one vote' has been
advocated by institutional investor
representative organisations, there has been
resistance from the EU corporate community,
who favour investor choice, with
transparency, rather than regulation of dual
share classes, being the essential mechanism
of accountability

Board Structure and Performance in
EU
• EU-wide adoption of good corporate
governance practice with respect to the
appointment of non-executive directors on
corporate boards
• BUT
• definition of independence has been applied
in a 'flexible' manner.
• Most EU member states disclosing
remuneration

Choice of Language for Corporate
Communications
• Which language should be used for the
annual general meeting?
• Which language should corporate disclosures
and documents be presented in?
• How can shareholders exercise informed
votes if they cannot understand the language
in which voting forms are presented?

Commission's approach to dealing with such problems
in corporate governance is as follows:
• 1. Consultation
• 2. Recommendation or directive
• 3. Ex post evaluation
• 4. If recommendations or directives do not deliver
then their usefulness is questionable
• 5. Ex post, if objectives not achieved, what can be
done next?
• An evaluation is necessary after regulation

Corporate Governance in Developing Economies:
The Case of Uganda
• Research into corporate governance in Africa
is in its infancy
• Study by Wanyama (2007) represents the
first attempt to reflect on corporate
governance issues in Uganda
• Issues and conclusions apply to many
developing economies

Wanyama (2007)
• Research aimed:-
• to examine whether principles of corporate
governance have led to significant
improvements in corporate governance in
Ugandan companies
• To discover whether guidelines are enough to
develop good corporate governance, or
whether more is needed.

Wanyama et al. (2007, p.16).
• "… the level of implementation of corporate
governance guidelines in Uganda is poor ….
attributed ….to the lack of an appropriate
framework to support implementation and
enforce compliance with the guidelines"

Factors Impeding Corporate Governance
Improvements in Uganda
• Cultural and social factors:-
• pressure from extended families for financial
support, leading to bribery and corrupt practices
• hierarchical structures (heads of families/ age)
• Sexism
• Tribalism
• Economic factors:-
• tax levels
• Remuneration
• inflation and poverty

Other problems
• Shareholder advocacy (means by which
shareholders can hold boards to account)
was identified as a serious weakness in
Ugandan corporate governance
• Family ownership structures make it difficult
for shareholders to exercise their rights in
Uganda.

A Need for More
Ethical Business Practices
• Unethical conduct significant obstacle to good
corporate governance:-
• sexual harassment of employees;
• fear of whistleblowing
• political and other corporate appointments not
based on merit
• bribery and corruption
• poor accounting disclosures
• lack of ethics among senior corporate employees,
such as integrity, punctuality, honesty and
accountability
• inadequate protection of employees' rights, leading
to exploitation and harassment

Wanyama suggested:
• "… extra resources need to be provided to enable the
legal, regulatory and enforcement agencies to
perform their work adequately, while the governance
framework also needs to take into account the
specific cultural context of Uganda, where respect for
elders and the protection of the family is a major
concern. In addition, the economic policies of the
country need to be scrutinised to ensure that they
foster and nurture good corporate governance
practices in Uganda, most fundamentally by ensuring
that the population … receives a fair wage or living
allowance so that the motivation to cheat or take
bribes is reduced"

Global Convergence of
Corporate Governance
• Involves striking a balance between retaining
individual characteristics of a country and
adopting a market-based, Anglo-Saxon form
of governance
• Involves improving ETHICS in business
• Involves improving corporate governance in
SPIRIT not just by following codes of practice

Conclusions
• The rise of global capitalism.
• First attempts at categorising corporate
governance systems.
• Path dependence.
• The law and finance literature and the hierarchy
of corporate governance systems.
• The VOC literature and the concept of
complementarities.
• Corporate governance convergence

Further Reading
• Solomon, Jill (2010) Corporate Governance and
Accountability 3rd Edition, Wiley, UK. Ch.7-8
• Larcker, David & Tayan, Brian (2011) Corporate Governance
Matters, FT Press/Pearson New Jersey. Ch.2
• Goergen, Marc (2012) International Corporate
Governance, Pearson. Ch.2-7
• Monks, A.G. & Minow, N. (2011) Corporate Governance, 5th
Edition, Wiley. Ch.5
• CIMA - Performance Strategy: Study Text (2011) BPP
Learning Media Ltd. Part B : 3

Ideas for Next Discussion
• Carcello, Joseph V; Hermanson, Dana R; Ye,
Zhongxia (Shelly) (2011) Corporate Governance
Research in Accounting and Auditing: Insights,
Practice Implications, and Future Research
Directions, Auditing30. 3 (Aug 2011): 1-31.

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