conférence internationale eaepe gouverner l'entreprise ... · sir adrian cadbury governance,...

Conférence internationale EAEPE "Gouverner l'entreprise : Propriété, institutions, société "

Au Cnam, Paris - Les 22 et 23 mai 2008

THOMAS CLARKE

"The ownership perspective and beyond: a critique of Anglo-American model of corporate governance"

Varieties of Capitalism?

� Hall, P. and Soskice, D. (2001) Varieties of Capitalism, New York: Oxford University Press.

� The varieties of capitalism approach suggests the interdependency and complementarity of institutions

� Defining feature of European corporate governance is its institutional diversity

� Whether countries of Europe will converge towards a common corporate governance system, or sustain the present diversity ofinstitutions is one of the key issues facing the continent

Varieties of Inequality?

� Transformation towards market based system of corporate governance and shareholder value orientation

� Different pattern and degree of social inequality

� Governance and CEO objectives change

� Structure of industry, employment, skills and reward likely to change

Englander, E. and Kaufman, A. (2004) Executive Compensation, Political Economy and Managerial Control: The Transformation of ManagerialIncentive Structures and Ideology, 1950-2000, George Washington University SMPP Working Paper No.03-01, pp34Robert Boyer (2005) From Shareholder Value to CEO Power: the Paradox of the 1990s, Competition & Change, Vol. 9, No. 1, March 2005 7–47

The Recent Origins of Shareholder Value

Three phases in US corporate governance and strategy –From ‘retain and invest’ to ‘downsize and distribute’:

� 1960s-1970s Managerial Capitalism

� 1980s Market for Corporate Control

� 1990s Shareholder Value[Coffee (2004); Lazonick and O’Sullivan (2000)]

Distribution of Stock Market Holdings by Wealth Class

0.6% 1.7%

7.1%

11.9%

41.9%

36.9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Bottom 40% Middle 20% Next 20% Next 10% Next 9% Top 1%

Source: Economic Policy Institute :The State of Working America 2006-2007

Median CEO Pay in the US 1980- 2001

0

1

2

3

4

5

6

7

8

1980 1983 1986 1989 1992 1995 1998 2001

Med

ian

CE

O p

ay (

$ M

illio

ns)

Salary and bonus Equity-based pay

The level and composition of median CEO pay in the USFrom 1980 to 2001

Source: Hall B. J; 2003.

99%

93%

90%

95%

96%

92%

86%

32%

37%

40% 43

%

49%

54%

58%

60 %

63 % 66

%

Out of Control? Corporate CEO Pay in the United States - The Social and Economic Consequences?

CEO Centrality ?

� Lucian Bebchuk, Martijn Cremers, and Urs Peyer (2007)

� The relationship between CEO centrality – the relative importance of the CEO within the top executive team in terms of ability, contribution, or power – and the value, performance and behavior of public firms.

� Proxy for CEO centrality is the fraction of the aggregate compensation of the top-five executive team captured by the CEO.

� CEO centrality is negatively associated with firm value (as measured by industry-adjusted Tobin's Q). This result is robust to controlling for all standard controls in Q regressions as well as additional controls such as CEO tenure, whether the CEO is a founder or a large owner, and whether the company’s top-five aggregate compensation is high or low relative to peer companies.

CEO Centrality ?

� CEO centrality also has a rich set of relations wit h firms’ behavior and performance. In particular, CEO centrality is corre lated with:

(i) Lower (industry-adjusted) accounting profitabil ity;

(ii) Lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock retu rn accompanying such announcements;

(iii) Higher odds of the CEO’s receiving a "lucky" option grant at the lowest price of the month:

(iv) Greater tendency to reward the CEO for luck du e to positiveindustry-wide shocks;

(v) Lower performance sensitivity of CEO turnover; and

(vi) Lower firm-specific variability of stock retur ns over time.

Imperial CEO?

The Regeneration of Inequality ?

� American business interests have conspired to suborn the state

� The lessons to be drawn from the consequences of the rise of thepolitical power of American business ..are universal

� Inaction by the gatekeepers left the field open to the untrammelled rapacity of imperial CEOs

Sir Adrian CadburyGovernance, March 2008:8

The Transfer of Wealth ?

“History will look back on the 1990s and early 2000sas a time when the principal officers of American

corporations transferred to themselves approximately$1 trillion

or ten per cent of the market value of public exchanges.

This must be the largest peacetime movement of wealthever recorded, and it was accomplished through stealth

that amounted to theft and in a spirit of regulatory permissiveness that certainly rises near to the level of criminal neglect.”

Bob Monks, Corpocracy (2007)

Top Ten US Highest Paid CEOs

Table 1.2 US Top Ten Highest Paid CEOs in 2005 Rank

Company

CEO

Pay (USD )

Market Capitalization (USD Billions)

1 IAC/ Interactive Barry Diller 295 000 000 14 2 Capital One Financial Richard D. Fairbank 249 000 000 18 3 Yahoo Terry S. Semel 230 000 000 47 4 Nabors Industries Eugene M. Isenberg 203 000 000 11 5 Colgate Palmolive Reuben Mark 147 970 000 27 6 Country Wide Financial Angelo R. Mozilo 142 000 000 22 7 Cendant Henry R. Silverman 139 960 000 21 8 KB Home Bruce E. Karatz 135 560 000 6 9 Lehman Brothers Holdings Richard S. Fuld 122 670 000 26 10 Abercrombie & Fitch Michael S. Jeffries 114 000 000 6 Source: Compiled from Sahadi J. (2006); Forbes (2006); Company proxy reports; FT Global 500.

Top Ten Highest Paid Rest of World CEOs

Table 1. 3. Rest of the World Highest paid CEOs in 2004 Rank

Company

CEO

Pay

(USD )

Market Capitalization (USD Billions)

1 UBS Peter Wuffli 6 820 000 95 2 Roche Group Franz Humer 5 569 000 96 3 Banco Santander Central Alfredo Saenz 5 448 000 76 4 BP Lord Browne of Madingley 5 356 000 221 5 Nestle Peter Brabeck-Letmathe 5 165 000 110 6 Glaxo SmithKline Jean-Pierre Garnier 4 688 000 134 7 Nokia Jorma Olilla 4 292 000 72 8 Siemens Group Heinrich von Pierer 3 804 000 70 9 BHP Billiton Charles Goodyear 3 544 000 82 10 Novartis Group Daniel Vasella 3 290 000 124 Notes: Figures on market capitalisation are based on reports as per 31 March 2005. Source: Compiled from Kitchens S. (2004); Forbes (2006) CEO Pay, Company proxy reports, FT Global 500.

Average US Top Ten Ceo Pay vs Rest of World

4.8 million

178 million

0Non US CEOs US CEOs

(2004) Average

Rest of the worldTop ten CEO Pay

(2005) Average

US CEO top ten Pay

4.8 million

178 million

0Non US CEOs US CEOs

(2004) Average

Rest of the worldTop ten CEO Pay

(2005) Average

US CEO top ten Pay

Source: Data compiled from Kitchens S. (2004); Forbes (2006) CEO Pay, Company proxy reports, FT Global 500; Sahadi J. (2006).

Executive Pay as a Percentage of Workers Pay in the US 1990-2004 (S & P 500)

0

100

200

300

400

500

600

1990 92 94 96 98 2000 2002 2004

•Includes salary, bonus, restricted stock, payouts on other long term incentives, andThe value of options exercisedSource: Institute for Policy Studies/ United States for a Fair Economy.

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Average CEO pay 409.2 %

S&P 500 Index

326.6%

296.2%

260.6%

106.7%

4.3%

-9.3%

Corporate Profits

Average worker pay

Minimum wage

Source: Institute For a Fair Economy (2006).

CEO Pay / S & P Index / Profits / Average Pay in US

Comparison of CEO Pay and Average Worker Pay

30,000

100,000

1,000,000

2,500,000

5,000,000

10,000,000

14,010,695

15,000,000

1980 1990 2000 2002

Employee pay US CEO pay Business Week 350 companies

7,400,000

2,814,084

1,392,857

27,946 26,354

Ratio 50 : 1 Ratio 109 : 1

Ratio 525 : 1

Ratio 281 : 1

Source: Adapted from Ertuk, I., et al. (2005)

Top Five US CEOs vsTop Five US Fund Managers CEOs 2005

147.97203

230 249295

500550

840

1400

1500

0

200

400

600

800

1,000

1,200

1,400

1,600

ReubenMark

Eugene MIsenberg

Terry S.Semel

Richard D.Fairbank

Barry Diller Paul TudorJones II

Stev enCohen

GeorgeSoros

T. BoonePickens Jr

JamesSimons

US $ million

Colgate-Palmolive

NaborsIndustries Yahoo

CapitalOne

FinancialIAC /

InteractiveTudor

InvestmentsSAC

CapitalSoros Fund

Management

BPCapital

ManagementRenaissanceTechnologies

Contemporary Dilemma

Instead of Advising, Monitoring and Regulating, Advisors, Monitors and Regulators are often In on the Act

Dick Grasso CEO New York Stock Exchange

“I’m not giving the money back!”

NYSE Annual Profit and CEO’s Annual Compensation(US$ Millions)

0

25

50

75

100

NYSE's profit Grasso's compensation

‘95 ‘96 ‘97 ‘98 ‘99 ‘01 ‘02

Source: NYSE.

‘00

0

25

50

75

100

NYSE's profit Grasso's compensation

‘95 ‘96 ‘97 ‘98 ‘99 ‘01 ‘02

Source: NYSE.

‘00

Source: NYSE Webb Report

Pay of National US Regulators

Eliot Spitzer

Dick Grasso CEO New York Stock Exchange

“Do I have toGive the money back?”

Germany: Dividends Number of Employees and Personnel Expenditure per Employee

0

20

40

60

80

100

120

140

160

180

200

1992 1993 1994 1995 1996 1997 1998

Expenditure per Employee

Employees

Dividends

Net Value Added

Source: Beyer and Hassel (2001)Source: Beyer J. and Hassel Anke (2001)

The Distribution of net value added in large German firms, 1992-4 and 1996-8

+254.5+40.0+30.8-20.4-8.1Change in %

7.82.86.84.378.41996-8

2.22.05.25.485.31992-4

Retained earnings

DividendsGovernmentCreditorsLabour

Source: Beyer J. and Hassel Anke (2001 : 320)

Penetration of Active Share Ownership in Some European Countries

Other countriesRather non-existent

Denmark, France, Germany, NetherlandsDriven by strong small shareholder associations

Denmark, Netherlands, Sweden, Switzerland (Pension funds or institutional investors)

Austria, France, Germany, Italy(Research organisations or fund managers)Greece(Institutional investors)

Driven by a limited number of (but nonetheless powerful) activist players

Ireland, UKEstablished market culture for institutional Investors and many fund managers

COUNTRIESSTATE OF LOCAL ACTIVISM

Sources: Deutsche Bank Corporate Governance Research, TUAC, Eurosif,

THE NEED FORLARGER CAPITAL

Limit of Family owned firm

Creation of the Joint stock corporation

Excessive liability Of the stock-holder

Limited liability of shareholder

Risk diversificationfor individuals

Liquid financial markets

Separation of Ownership andcontrol

THE MANAGERIALCORPORATION:

The leading Organisational form

Emerging weaknesses

Sleepy conglomerate /Productivity slow-downPoor innovation

Twin crisis ofThe growth regimeThe corporation

ACT 1: The Triumph

ACT 2: The demise

1980s /1970s

Mid 20th Century

Early 20th Century

Mid 19th Century

Early 19th Century

Adapted from: Boyer (2005)

Corporate Governance as Shakespearian Tragedy :Act I The Triumph of the Corporation Act II The Crisis of the Managerial Conglomerate

Methods to Realign the interest of

manager and shareholder

Shareholder Value/

value creation

A response to theCrisis of Fordism

FINANCIAL LIBERALISATION

Search for higherreturns

New financial investors(pensions funds)

Rather low return of Managerial corporations

Concern for governance

Adapted from: Boyer (2005:7-47).

Incentive remuneration of executives

Performance related salary Stock options

1990s

1980s

Corporate Governance as Shakespearian Tragedy:Act III Financial Liberalisation, Shareholder Value A nd Stock Options

2002 Sarbanes-Oxley

• Enforces CEO/CFO Sign off on accounts• Financial disclosure• Auditor Independence

Corporate Governance as Shakespearian Tragedy:ACT IV From “Good Governance” to Infectious Greed to Final Downfall

Difficulties inDelivering the Expected ROE

Innovation:New derivatives

SEC

Auditors

Privacy ofRelevant

information

Lobbying forRemovingAny regulation

Expectation of highRate of return

Attractiveness ofnew instruments

Booming stockmarkets

Collusion betweenManagers, auditors And analysts

Speculativebubble

Inflow of Employees and

Uninformedsavings

Corporate financeRuns into itsOwn limit

Cashing of stockOptions bymanagers

Easy exit ofManagers with

Golden parachutes

BankruptcyOf the firm

Loss of confidence in Fairness of financial marketsAnd honesty of executives

Adapted from: Boyer (2005:7-47).

2001

2000

1999

Late 1990s

From “GOOD” GOVERNANCETO INFECTIOUS GREED Creative

accounting

0

10

20

30

40

50

60

70

80

90

100D

ec-

01

Fe

b-0

2

Ap

r-0

2

Jun

-02

Au

g-0

2

Oct

-02

De

c-0

2

Fe

b-0

3

Ap

r-0

3

Jun

-03

Au

g-0

3

Oct

-03

De

c-0

3

Fe

b-0

4

Ap

r-0

4

Jun

-04

Au

g-0

4

Oct

-04

De

c-0

4

Fe

b-0

5

Ap

r-0

5

Jun

-05

BOARD INDEPENDENCE AUDIT COMM COMPENSATION COMM

NOMINATION COMM EXEC SESSION GOVERNANCE GUIDELINES

%

Source: Adapted from Aggarwal and Williamson (2006).

Adoption of NYSE/SEC Rules in US Firms (2001-2005)

Total Number of US Corporation Earnings Restatements 1997-2005

92 102

174201 225

330

514

613

1195

0

92 102

174201 225

330

514

613

1195

01997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Adapted from Coffee J. (2002), Glass, Lewis and Co (2006)

Trends towards globalisation?

� Globalisation of capital markets

� Emergence of new financial intermediaries

� To tap global financial resources require certain governance conditions

� Stronger international competition in product markets

� Mandates de facto convergence of cost structures and firm organisation

� These pressures could impact upon firm behaviour and decision-making

[Nestor and Thompson (OECD 2000)]

Evidence of European Convergence?

AGAINST

� Despite pressures towards adopting Anglo-Saxon standards remains considerable divergence – ‘institutional complementarity thesis’

� Diversity of corporate models at the root of their competitiveness

� Stakeholder model closer to the reality of European social democracy

Evidence of European Convergence?

FOR� Anglo-American logic of corporate governance diffusing beyond

major corporations of DAX 30 in Germany� Not just external forces but internal institutional investors� Management introducing shareholder value incentive systems� Small but significant change in distribution of net value added

towards shareholders� Orientation of firms towards international financial markets� Change in distribution will threaten viability of diversified quality

production

[Reberioux(2002); Cernat 2004); Lane (2003); Jurgens , Naumann and Rupp (2000); Beyer and Hassel (2000)]

Leverage Differentiation?

� Corporate governance systems are embedded in legal traditions, interact in complex ways with other institutional features, and are affected by national political dynamics.

� Longitudinal evidence suggests limited international convergence in governance systems in recent decades.

� Rather than the abandonment of structures that delivered efficiency and prosperity in the past, there is considerable scope for diversity.

� The “one size fits all” approach of convergence advocates is culturally and economically insensitive.

� The dominant form of ownership throughout the world remains familyownership. [Guillen(2000); Rhodes and Apeldoorn (1998); Branso n (2001)]

Multiple Convergence and Divergence

Multiple Convergence of Governance Institutions and Relationships

ANGLOAMERICAN

GERMAN

JAPANESE

Responsibility (Institutional Investors

Stakeholder Communities)

Accountability(Institutional Investors)

STAKEHOLDERS

MARKET

LAW

RE

LAT

ION

SH

IPS

PRINCIPLES

Transparency Disclosure(Regulators/ investors)

RU

LES

ACCOUNTABILITY /WEAK RESPONSIBILITY

REPRESENTATION/STRONG REPRESENTATION

Future Direction of European Corporate Governance?

� The distinctiveness of Europe has produced some of the most valued corporations in the world, together with an excepti onal quality of life in many communities.

� Though Europe has embarked on a process of change i n corporate governance and company law in recent years to integ rate better into international financial and product markets, CEOs h ave not seized control to the same degree, and shareholder value r emains mediated by stakeholder values

� There are important signs that the commitment to Eu ropean institutional diversity, diversified quality produc tion and social cohesion may survive the present transformatory expe rience.

Transcendence of US Model?

Shareholder ValueIn the United States

The Recent Origins of Shareholder Value

Three phases in US corporate governance and strategy –From ‘retain and invest’ to ‘downsize and distribute’:

� 1960s-1970s Managerial Capitalism

� 1980s Market for Corporate Control

� 1990s Shareholder Value[Coffee (2004); Lazonick and O’Sullivan (2000)]

Retain and Invest

�1960s-1970s Managerial Capitalism

– Revenues invested in corporate growth– Conglomerates mitigate the business cycle– Diversified portfolio could cross-subsidise– Maximised sales, profit satisfied rather than maximised– Balanced interests of different constituencies– Shareholders only one interest– Managers intent on increasing own security and reward

Retain and Invest

�Rise of International Competition– Higher skills higher quality overseas competitors– US manufacturing too centralised and lacked innovation

�Agency Theory– Need market for corporate control to discipline management– Rate of return on corporate stock the measure of corporate

performance– The maximisation of shareholder value the driving focus

[Coffee (2004); Lazonick and O’Sullivan (2000)]

Downsize and Distribute I

�1980s Market for Corporate Control

– Shift in Wall St from focus on longer term investment activities(bonds) to stock

– Deregulation of institutions investors (ERISA 1978) permitted investment in equities and junk bonds rather than high grade corporate and government bonds

– Pension funds, insurance companies and savings ( S & L) companies entered the junk bond market

– Unwieldy conglomerates unwound in takeovers and management buyouts

– Takeovers served to ‘disgorge the free cash flow’ from companies (Jensen 1989)

– Managers needed to sell assets to meet new financial obligationsand maintain market value

Downsize and Distribute I

�New Incentives for Managers

– Goal of leveraged buyout firms link management interest to firm’s market value

– Institutional investors encouraged use stock options to increasemanagement sensitivity to the market

– Congress levied punitive tax on executive ‘parachute payments’(1984) and denied a tax deduction to public corporations that paid top executives more than $1 million

– Restriction on cash compensation promoted shift to equity compensation


Downsize and Distribute II

�1990s Shareholder Value

– Institutional investors, deregulatory environment, the longest bull market, and hyperactive analysts and media increased both the sensitivity of managers to their firm’s market price, and their willingness to take risks to increase their stock price

– The median equity-based compensation of top US executives at S & P 500 industrial companies rose from 0 per cent in 1984 to 8per cent in 1990, and to 66% in 2001 (Hall 2003:23)

– In 1991 the SEC relaxed the holding period requirements for stock options if held for six months or longer, meant most executives free to sell stock on the same day they exercised options

– This meant executives could exploit a temporary spike in the price of the firm’s shares and this became the prevailing pattern

Downsize and Distribute II

�High Market Valuations

– Aggressive earnings forecasts drove a firm’s stock price up– Recognising income prematurely, misappropriating it from future

periods– “Advancing the moment of revenue recognition”– Investors, analysts, auditors and other gatekeepers abandon

scepticism in bubble euphoria


Business Orientation and Environment

Germany

Long Term

Strong Manufacturing Base

Bank Equity and Credit Finance

Organic Growth

High Corporate Taxation

Large Owner Managed Firms

More Concerned With Operations

Emphasis on Sales and Volume

UK

Short Term

Weak Manufacturing Base

Short Term Market Equity

Legitimacy of Takeovers

Low Corporate Taxation

Impersonal Ownership Finance

More Concerned With Strategy

Emphasis on Profit and Marketing(Pugh 1991)

Transientowners

Transaction-driven

Fragmentedstakes

OutsideInformation

Valuation-drivenbuy-sellchoices

Owners withlittle influence

United States

Fluid Capital

The External Market: Fluid Capital and Dedicated Capital

Source: Porter, Capital Choices (1992)

Permanentowners

Relationship-driven

Significantstakes

InsideInformation

Valuation doesnot affect

buy-sell choices

Significant over influences

Japan and Germany

Dedicated Capital

The External Market: Fluid Capital and Dedicated Capital

Source: Porter, Capital Choices (1992)

ROI orstock price

Limitedowner-director

Influence

Infrequent topmanagementintervention

Performancebased

compensation

Quantitativecapital

budgeting

Limitedinformation

flow

Strictfinancialcontrols

Non-technicaltop

management

Internal Markets Overview

United StatesMaximise measurable investment returns

Source: Porter, (1992)

Corporateperpetuity

Significantowner-director

On-going topmanagementinvolvement

Salary-orbenefit-basedcompensation

Holistic viewof

company

Extensiveinformation

flow

Non-financialand financial

controls

Technicaltop

management

Internal Markets OverviewJapan and Germany

Secure corporate position

Source: Porter, (1992)

Anglo-Saxon Model (US and UK)Strengths

� Dynamic market orientation� Fluid Capital� Internationalization extensive

Weaknesses� Volatile� Short Termism� Inadequate

Source: Clarke and Bostock, ‘International Corporate Governance’ (1994)

European (Germany)Strengths

�Long-term industrial strategy�Very stable capital�Robust governance procedures

Weaknesses�Internationalization more difficult�Lack of flexibility�Inadequate investment for new industries

Asian Market (Japan)Strengths

�Very long-term industrial strategy�Stable capital�Major overseas investment

Weaknesses�Financial speculation�Secretive Governance Procedures�Weak accountability

Strengths and Weaknesses of Governance Systems

Stakeholder theoryLong termStakeholder valuesIntangible assetsEuropean/AsianKnowledgeRelationshipsInclusiveCorporate citizenship

Agency/stewardship theoryShort TermShareholder valueTangible assetsAnglo-SaxonPropertyTransactionsExclusiveCorporate image

Stakeholders/non-financialPerformance indicators

Shareholders/financialPerformance indicators

Source: Thomas Clarke and Stewart Clegg, Changing Paradigms:The Transformation of Management Knowledge for the 21st CenturyHarperCollins Business 2000

Convergence or Diversity in Corporate Governance?

Two parallel universes of corporate governance have emerged:

� A dispersed ownership model characterized by strong and liquid securities markets, high disclosure standards, high market transparency, and where the market for corporate control is the ultimate disciplining mechanism; and,

� A concentrated ownership model characterized by controlling shareholders, weak securities markets, low transparency and disclosure standards and often a central monitoring role for large banks who have a stake in the company (Coffee 2000; Clarke 2005).


I. Hansmann and Kraakman in an article prophetically entitled The End of History for Corporate Law (2001):

� “Although there remained considerable room for variation in governance practices and in the fine structure of corporate law throughout the twentieth century, the pressures for further convergence are now rapidly growing. Chief among these pressures is the recent dominance of a shareholder-centred ideology of corporate law among the business, government and legal entities in key commercial jurisdictions. There is no longer any serious competitor to the view that corporate law should principally strive to increase long-term shareholder value. This emergent consensus has already profoundly affected corporate governance practices throughout the world. It is only a matter of time before its influence is felt in the reform of corporate law as well”(2001:1).


II. McDonnell (2002) Widening the Lens

� Criteria of corporate governance systems– Efficiency– Equity– Participation

� “The universe of theoretical possibilities is much richer than a dominant strand of the literature suggests, and we are currently far short of the sort of empirical evidence that might help us sort out these possibilities. Most commentators have focused on efficiency to the exclusion of other values. Moreover, even if convergence occurs, there is a possibility that we will not converge on the best system. Even if we converge to the current best system, convergence still may not be desirable” (McDonnell 2002:2).


III. Mark Roe’s (1994;2003) path dependence thesis

� How political forces in America, anxious about the influence of concentrated financial or industrial monopolies, resisted any effort at concentration of ownership or ownership through financial institutions, resulting in dispersed ownership.

� In contrast European social democracy has tended to favour otherstakeholder interests, particularly labour, as a system that promotes welfare among all citizens and attempts to prevent wide disparities.


IV. Jacoby (2001)

“Regulatory policy in the United States had the unintended consequence of pushing U.S. companies in the direction of unrelated diversification, whereas in Germany and Japan it continued on a pre-war trajectory of discouraging mergers in favour of cartels and of promoting corporate growth through internal expansion rather than acquisitions.

In other words, modern regulatory policy in the U.S. produced corporations who relied on markets to acquire ideas and talent, whereas in Germany and Japan it produced corporations whose primary emphasis was onproduction and on the internal generation of ideas through development of human capital and organizational learning.

The implications for corporate governance are straightforward: corporations favour shareholders in the U.S. so as to obtain capital for diversification and acquisitions; they favour managers and employees in the Germany and Japan so as to create internal organizational competencies” (Jacoby 2001:8).


V. La Porta et al (1998; 1999; 2000;2002)

� Extensive international empirical research concerning countries with dispersed and concentrated ownership, which demonstrates differences in the legal protection of shareholders was very influential.

� In many countries without adequate laws guaranteeing dispersed shareholder rights, the only alternative appeared to maintain control through concentrated ownership.

� This leads to the conclusion the law determines the ownership structure and system of corporate finance and governance. Jurisdictions where the law was more protective encouraged the emergence of more dispersed ownership (Pinto 2005:19).


VI. Coffee (2001) concludes that it was market institutions that demanded legal protection rather than the other way around:

� “The cause and effect sequence posited by the La Porta et al thesis may in effect read history backwards. They argue that strong markets require strong mandatory rules as a precondition. Although there is little evidence that strong legal rules encouraged the development of either the New York or London Stock Exchanges (and there is at least some evidence that strong legal rules hindered the growth of the Paris Bourse), the reverse does seem to be true: strong markets do create a demand for stronger legal rules….

� Eventually, as markets have matured across Europe, similar forces have led to the similar creation of European parallels to the SEC. In each case, law appears to be responding to changes in the market, not consciously leading it” (Coffee 2001:6).


VII. Licht (2001) Deep Cultural Causation

“A nation's culture can be perceived as the mother of all path dependencies. Figuratively, it means that a nation's culture might be more persistent than other factors believed to induce path dependence. Substantively, a nation's unique set of cultural values might indeed affect — in a chain of causality — the development of that nation's laws in general and its corporate governance system in particular” (2001:149).


VIII Gordon and Roe (2004) Institutional Complementarities

� “Corporate governance consists not simply of elements but of systems…Transplanting some of the formal elements without regard for theinstitutional complements may lead to serious problems later, and these problems may impede, or reverse, convergence” (Gordon & Roe (2004:6).

� Optimal corporate governance mechanisms are contextual and may vary by industries and activities. Identifying what constitutes good corporate governance practice is complex, and cannot be templated into a single form.

� One needs to identify the strengths and weaknesses in the system but also the underlying conditions which the system is dependant upon (Pinto 2005:31; Maher and Andersson 2000). The institutions that compose the system of corporate governance and complement each other consist not just of the law, finance, and ownership structure.

Convergence AND Diversity in Corporate Governance? I. COMPETING OBJECTIVES

MARKET

SHORT TERM LONG TERM

STAKEHOLDERS

ANGLO -AMERICAN ( Shareholder Value) ?

? (Corporate Social Responsibility)

EUROPEAN

JAPANESE

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