corporate governance developments and implications for europe prof. florencio lópez-de-silanes yale...
TRANSCRIPT
Corporate Governance Developments and Implications for Europe
Prof. Florencio López-de-Silanes
Yale University
International Institute for Corporate Governance
Paris, France
October 21st, 2003. © Florencio Lopez-de-Silanes
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© Florencio Lopez-de-Silanes
Conflicts of Interest all Over
Recent experiences (e.g. Ahold in the Netherlands, ABB in Switzerland, Vivendi in France, Sibneft in Russia, SK Telecom in Korea, Enron in the US, or Toyota in Japan) show the need for a better understanding of related-party / self-interested transactions if we are to understand minority shareholder’s protection.
Conflicts of interest arise all over the world and are not exclusive of certain countries.
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© Florencio Lopez-de-Silanes
Outline
I. The Impact of US Corporate Governance scandals on Europe
II. What do we know about Corporate Governance that can help?
1. What aspects should we concentrate on?
2. What about Judicial Enforcement?
III. Challenges ahead
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© Florencio Lopez-de-Silanes
Common Failures of Corporate Governace
Causes of recent Corporate Governance scandals:
1. Bridge of fiduciary duties (duty of loyalty and duty of care)
a. Lack of independence
b. Conflict of interests
2. Insuficient information on accounting and related transactions
a. High rik accounting practices
b. Off-the-books activities
Consequences:
1. Related transactions benefitting directors and controlling shareholders.
2. Excesive diretors’ compensation.
3. Auditors, lawyers, analists and financial intermediaries with divided loyalties.
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The Impact of US Scandals
US scandals generated a large regulatory reaction from all sides (Sarbanes-Oxley Act, NYSE & Nasdaq Regulations, etc..)
The new set of rules has 2 main impacts on Europe:
1. Raised the awareness of the relevance of Corporate Governance: Shown that CG needs to be a continuous reform Lifted the standards in many areas Focused energy in two areas:
Accounting and Auditing Conflicts of Interest, particularly relevant for countries with
concentrated ownership and groups
So, European initiatives have been revitalized or accelerated
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© Florencio Lopez-de-Silanes
The Impact of US Scandals
The new set of rules has 2 main impacts on Europe:
2. De facto Exported regulation for foreign listings in the US markets:
Applies to: Firms with ADRs Firms that file reports under SEC Act (including European
firms filling Form 20-F)
So, close to 1000 non-US firms are affected: 469 non-US firms (185 European) list on NYSE 451 non-US firms (149 European) list on NASDAQ ½ of UK’s FTSE 100 has a secondary listing
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The Impact of US Scandals
Regulatory spill-over is increasingly common in transatlantic arena:
European & US economies are so interwoven that it is difficult for the impact of the law to come to a complete halt at either border
Europe started its own process of reform in 1999 with the Financial Services Action plan towards the integration of EU capital markets:
1. International Accounting Standards Regulation by 2005
2. Prospectus Directive
3. Transparency Obligations Directive
4. Investment Services Directive
5. Market Abuse Directive
6. Takeover Directive
These, as European competition policy has, will also impact US firms
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© Florencio Lopez-de-Silanes
Outline
I. The Impact of US Corporate Governance scandals on Europe.
II. What do we know about Corporate Governance that can help?
1. What aspects should we concentrate on?
2. What about Judicial Enforcement?
III. Challenges ahead
9
© Florencio Lopez-de-Silanes
The Legal Approach to Corporate Governance
The law and its enforcement are key mechanisms of investor protection.
When investors finance firms, they receive rights or powers in exchange. Without an ability to enforce rights, investors might end up with nothing.
Implication: Strong investor protection leads to deeper financial markets & better financing terms for firms.
•Company law•Bankruptcy law•Securities law•Takeover law•Courts & Regulators
•Protect Shareholders & Creditors
•Force timely disclosure of accurate information
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© Florencio Lopez-de-Silanes
Two Views On How Securities Laws May Matter
Two complementary views on why securities laws are beneficial for the development of securities markets.
Private enforcement view. Financial contracts are too costly to enforce when regulated only by contract and tort law.
o Key contribution to standardize contracts (e.g., mandatory disclosure rules) and simplify private litigation (e.g., describing obligations and liabilities of various parties and establishing the burden of the proof).
Public enforcement view. Private incentives to enforce contracts are insufficient (e.g., free-rider problems, development of precedents).
o Key contribution is to create a public enforcer.o Focused and independent from political interference; with powers to
obtain information and impose sanctions on issuers and market participants.
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© Florencio Lopez-de-Silanes
Public Enforcement and Financial Markets
coef = .25253782, (robust) se = .20541086, t = 1.23
Mar
ket
Cap
ital
izat
ion
/ GN
P(a
ll e
lse
equa
l)
Public Enforcement (all else equal)-.534415 .3508
-.530406
.86197
JPN
ZAF
IRL
NGA
PAK
AUT
LKAESP
CHE
NZL
NOR
KOR
CHIEGY
DNK
FIN
MEXZWE
ARG
DEUGRC
BEL
TWA
SWE
ECU
NID
COL
PRTBRAIND
ITA
GBR
URY
IDN
KENTUR
VEN
JORTHA
PERCAN
HKG
USAMYSPHL
ISR
FRA
SGP
AUS
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© Florencio Lopez-de-Silanes
Laws that Facilitate Private Enforcement Deeper Financial Markets
coef = .71131062, (robust) se = .15351288, t = 4.63
Mar
ket
Cap
ital
izat
ion
/ GN
P(a
ll e
lse
equa
l)
Private Enforcement (all else equal)-.383308 .433087
-.530406
.86197
URY
AUT
ECU
ARG
CHI
COL
BRADEU
NOR
VENPAK
SWE
NZL
FRAGRC
EGY
IRLESP
TURZWE
PER
GBR
KEN
FIN
MEX
PRT
HKG
JPN
AUS
ZAF
CHE
NGAITA
ISR
LKA
JOR
IND
BEL
MYS
SGP
TWA
DNKCAN
IDNUSA
THA
NID
KOR
PHL
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© Florencio Lopez-de-Silanes
More Disclosure about Conflicts of Interest Deeper Financial Markets
coef = .58127359, (robust) se = .1376864, t = 4.22
Mar
ket
Cap
ital
izat
ion
/ GN
P(a
ll e
lse
equa
l)
Disclosure Requirements (all else equal)-.49042 .479462
-.530406
.86197
URY
ECU
BRA
AUT
PERVEN
CHI
ESP
GRC
COL
ARG
PRT
NOR
PAK
FIN
ZWE
NZL
SWE
KEN
NID
IRL
DEU
GBR
EGY
JPN
AUS
ISR
DNK
TURBEL
IDNZAF
NGA
HKG
CAN
CHE
FRA
IND
TWA
LKA
USA
MEX
MYSJOR
ITA
KORSGP
PHL THA
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© Florencio Lopez-de-Silanes
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© Florencio Lopez-de-Silanes
Shifting the Burden of Proof to the Accused Deeper Financial Markets
coef = .40931822, (robust) se = .13112176, t = 3.12
Mar
ket
Cap
ital
izat
ion
/ GN
P(a
ll e
lse
equa
l)
Burden of Proof (all else equal)-.351049 .576335
-.530406
.86197
ARG
COLDEU
CHI
AUT
FRA
URY
SWE
NOR
MEX
NZL
PAK
TUREGY
BRA
ECUITAVEN
IRL
HKG
GBR
JOR
CHE
THA
LKA
ZWE
ZAF
NGA
JPN
KEN
GRC
SGP
AUSIND
ESP
MYSFIN
ISR
TWA
PRT
BEL
PER
KOR
USA
CAN
DNK
IDNNID
PHL
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© Florencio Lopez-de-Silanes
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© Florencio Lopez-de-Silanes
Outline
I. The Impact of US Corporate Governance scandals on Europe.
II. What do we know about Corporate Governance that can help?
1. What aspects should we concentrate on?
2. What about Judicial Enforcement?
III. Challenges ahead
18
© Florencio Lopez-de-Silanes
Higher Levels of Court Formalism Longer Duration of Judicial Processes
coef = .31096164, (robust) se = .05177885, t = 6.01
Log
of
Du
rati
on
Formalism (all else equal)-2.41689 2.46151
-3.26529
1.75909
HKGBLZ
ZMB
ZAF
TTO
NZLTCA
UGA
AIA
AUS
GHA
BMU
JAM
MWIMYS
CAN
TURBRB
KEN
MLT
NGATWNZWEGEO
GIBBGD
VNMGRD
VGB
IND
SGP
GBRIRL
DNK
THA
USA
CHNBRA
ANTBELCYM
MCO
TZA
RUSCIV
PAK
JOR
UKRSWE
NOR
JPN
LKAHUN
NLDSWZ
IDNFIN
KOR
VCT
EGY
ISR
CHEFRA
HRV
NAM
LVA
MOZ
DEU
CYP
TUN
AUT
DOM
COL
BWA
LUXCZE
ARE
PRTURY
POL
ROM
KWTGRCSENEST
BGR
LTU
ITA
SLV
SVN
MAR
KAZ
BHR
HNDISLCHL
ECU
PHL
MEX
LBN
BOLCRIPER
GTM
ESP
ARG
PRYPAN
VEN
(all
els
e eq
ual)
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© Florencio Lopez-de-Silanes
Higher Levels of Court Formalism Lower Levels of Legal Fairness and Impartiality in the System
coef = -.41804976, (robust) se = .06001672, t = -6.97
Leg
al S
yste
m is
Fai
r an
d Im
part
ial
-2.38021 2.21613
-1.64229
1.84195
BLZ
ZAF
TTO ZMBCANMYS
SGP
TUR
UGA
GBRGHA
USA
MWI
SWE
KEN
GEO
BRA
ZWETHA
NGA
BGD
FRA
IND
RUS
CHN
HUNDEU
HRV
CIV
UKR
PAK
EGY
TZA
NAM
IDN
PRT
TUN
URY
CZE
ITADOM
BWA
COL
POL
SVNEST
ROM
LTUBGR
CHL
SLV
SEN
MEXKAZ
HND
ECU
PHL
ESP
ARG
CRI
PERGTMBOL
PAN
VEN
Formalism (all else equal)
(all
els
e eq
ual)
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© Florencio Lopez-de-Silanes
Outline
I. The Impact of US Corporate Governance scandals on Europe.
II. What do we know about Corporate Governance that can help?
1. What aspects should we concentrate on?
2. What about Judicial Enforcement?
III. Challenges Ahead
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© Florencio Lopez-de-Silanes
Challenges Ahead
The impact of the US Corporate Governance reforms will spill-over to impact the future of European markets.
The real problem is the fact that capital markets in US and Europe have become global institutions and thus act as transmission belts.
The challenge for Europe is complicated as it is in the middle of transformation, enlargement, and integration of its capital markets.
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© Florencio Lopez-de-Silanes
Challenges Ahead
But more importantly, the evidence raised here suggests that there are 3 essential ingredients for the system to work in the long run:
1. Better investor rights in corporate laws, strong regulation on disclosure and accounting standards.
2. Regulations and laws that facilitate shareholder actions and private enforcement.
3. A well functioning judicial system which allows the functioning of financial markets and business transactions in general.
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© Florencio Lopez-de-Silanes
Appendix
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© Florencio Lopez-de-Silanes
The Rigas of Adelphia
Over $2.5 BillionOver $2.5 Billion co-borrowed by family entities. co-borrowed by family entities. $1.4 B used to buy shares in Adelphia.$1.4 B used to buy shares in Adelphia. $200 M to fund margin call payments on loans
secured by Adelphia securities.
Guaranteed $120 M to Rigas entity controlling Buffalo Sabres hockey team.
$3.5 M in unsecured loans made to Rigas family. $12 M to build golf course next to Rigas’ estate
Use of Adelphia-owned aircraft and apartments without charge for personal purposes.
Adelphia services provided free of charge to Rigas entities, e.g. advertising.
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© Florencio Lopez-de-Silanes
Main Sarbanes-Oxley Requirements Applicable to Foreign Companies Listing in the US
I. Directors and Executive Officers
1. CEO and CFO certification requirements
2. Prohibition on personal loans to executives
3. Code of ethics for senior financial officers
4. Forfeiture of bonuses and profits if accounting restatements
5. Prohibition of Improper influence on Auditor
6. May be barred from serving as officer or director if conduct is unfit
II. Audit Committee
Have an audit committee comprised of independent directors and with someone with financial expertise, etc..
Audit committee hires, oversees & discharges independent auditors Procedure for handling whistle blowers.
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© Florencio Lopez-de-Silanes
Main Sarbanes-Oxley Requirements Applicable to Foreign Companies Listing in the US
III. Auditors1. Prohibition of Audit services if officer worked there 1 year before2. Rotation of audit partner every 5 years certification requirements3. Prohibition to give non-auditing services to the firm4. Public Company Accounting Oversight Board: firms to register / be
subject
IV. Expanded Company Disclosures:
Restrictions on use of pro-forma financial information Disclose all material off-balance sheet transaction Management and Auditor assessment of Internal Controls Real time disclosures
V. Counsel’s Responsibility to report material violations
VI. Criminalization of Misconduct for participants
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© Florencio Lopez-de-Silanes
The Impact of US Scandals
SOX was created to protect US investors, so presumption is for no omission for foreign firms issuing in the US.
This has created a virulent European reaction: 61% European CEOs say they will turn their back to US markets
Porsche did decide not to cross-list in the US Auditing and Legal firms are not pleased “These are US solutions for US problems”
SEC has conceded some ground: Concessions on independence of audit committees Exemption to explain financial information not conforming to
US-GAAP But unlikely SEC will give in much more
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© Florencio Lopez-de-Silanes
Challenges Ahead
The impact of the US Corporate Governance reforms will spill-over to impact the future of the European Union markets.
The real problem is the fact that capital markets in US and Europe have become global institutions and thus act as transmission belts.
The challenges for the EU are more complicated as it is in the middle of the transformation, enlargement, and integration of its capital markets.
The road to an integrated EU capital market by 2006 will require: Agreement on a definition of a public offering for EU EU “passport” for EU issuers across EU markets Unique EU clearing and settlement system Transparency and comparability of financial reporting
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© Florencio Lopez-de-Silanes
coef = 4.7998059, (robust) se = 1.668115, t = 2.88
IPO
s / P
opul
atio
n(a
ll e
lse
equa
l)
Private Enforcement (all else equal)-.396779 .364988
-4.74683
6.34918
URY
ECU
AUTCOL
ARGCHIBRA
VEN
DEU
FRANOR
SWE
PAK
PER
NZL
TUR
AUS
GRC
HKG
KEN
GBR
EGYZWE
ESPPRT
ISR
IRL
FIN
MEXJOR
ITA
SGP
MYS
IND
CHE
NGA
BEL
LKA
CAN
ZAFJPNUSA
TWA
THA
IDN
DNK
NID
KOR
PHL
Private Enforcement More IPOs (Controlling for Public Enforcement)
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© Florencio Lopez-de-Silanes
coef = 2.5366363, (robust) se = .6580322, t = 3.85
Acc
ess
to E
qui
ty(a
ll e
lse
equa
l)
Private Enforcement (all else equal)-.287844 .348567
-1.96349
1.2934
ECUARG
AUT
COL
BRA
CHI
VEN
FRA
DEU
NOR
SWE
TUR
PER
AUS
GRC
NZL
HKG
GBR
PRT
ESP
EGY
ISRIRL
MEX
ZWE
FIN
ITASGP
JOR
MYS
CHECAN
BELIND
THA
USATWA
ZAF
IDN
JPN
DNK
NID
KOR PHL
Private Enforcement Greater Access to Equity (Controlling for Public Enforcement)