Comparative Corporate Governance: Old and New

RIETI Discussion Paper No …, 2004

Journal of Financial and Quantitative Analysis, 2006

Equity ownership gives labor both a fractional stake in the firm's residual cash flows and a voice in corporate governance. Relative to other firms, labor-controlled publicly-traded firms deviate more from value maximization, invest less in long-term assets, take fewer risks, grow more slowly, create fewer new jobs, and exhibit lower labor and total factor productivity. We therefore propose that labor uses its corporate governance voice to maximize the combined value of its contractual and residual claims, and that this often pushes corporate policies away from, rather than towards, shareholder value maximization.

Business Ethics Quarterly, 2015

SSRN Electronic Journal, 2000

This is the introduction to a forthcoming book (Palgrave, 2005), which is in part the result of a high-level NYU/LSE conference held at LSE in November 2004. All rights remain with the authors. © Owen Kirchmaier Grant 2005. auditors, the adequacy of external regulation -which have been at the centre of the post-Enron debate in the US. Thus in Europe as well as the US corporate governance reform remains high on the agenda, and all parties to the debate -governments, investors, managers, professional advisers -are searching for the right way forward. Why is corporate governance important? Corporate governance can be defined as the set of control mechanisms and institutions which protect the suppliers of capital to a company, particularly suppliers of equity capital, the shareholders, who have only residual protection after all other claimants have been satisfied. Product market competition provides an incentive for managers to deploy capital efficiently, but only effective corporate governance can ensure that interests of shareholders are protected. Weak corporate governance impedes the flow of savings into investment, and increases the risk that corporate assets will be used sub-optimally. In the last few decades the profile of shareholders has shifted from private investors to institutions, principally pension and mutual funds, which aggregate the savings of millions of ordinary citizens. Institutional investors have long been dominant in the UK and US, and are becoming increasingly important in Continental Europe. They have a big role to play in ensuring that the companies in which they hold shares are well governed. But they represent only one of a number of mechanisms, some internal to the company and others external, which can contribute to improved corporate governance. The strength of these mechanisms, and their influence on the way managers of companies behave, vary from country to country, depending on their particular histories, institutional arrangements and ownership structures. These differences are reflected in the different ways in which countries are tackling corporate governance reform. Comparisons are often made between Anglo-American capitalism and the rest, and it is true that the US and the UK do share some common features which distinguish them from most Continental European countries and Japan. But such generalisations obscure important differences on both sides of the divide. For example, British institutional investors tend to be more interventionist than their American counterparts. Hence British boards of directors are more exposed to investor pressure on such issues as the composition of the board, the appointment of new directors, and executive pay. British boards also tend to have a balanced mix of inside and outside members, whereas in the US it is not uncommon for the chief executive (who is usually also the chairman) to be the only full-time manager on the board. As Jonathan Rickford points out in this volume, the British system is in some respects more shareholder friendly than that of the US, not least because of the ability of shareholders to call an Extraordinary General Meeting with 10% of the share capital, and remove the board with a plurality of the votes. That said, the major distinction is between the US/UK and Continental Europe as both operate under distinctly different legal systems. Andrei Shleifer argues that shareholder rights are stronger under the Anglo-American common law tradition than under civil law which prevails in Continental Europe. The principles based concept of the common law system makes it more difficult to circumvent them then the alternative rules based system. As a consequence, common law countries are better of protecting minority shareholders against expropriation and limiting the exploitation of private control benefits by dominant shareholders. Possibly for this reason, the majority of firms in continental Europe are owned by dominant shareholder(s), which together have legal control over the firm. Their strong position naturally extends into the boardroom, leading to the likely capture of the board by its controlling shareholders. For example, of the 13 members of the Parmalat board, the CEO and Chairman was Calisto Tanzi, the founder, and the other 12 were either members of the Tanzi family, employees of Parmalat or business associates of the family. Often, there is also limited or no representation of minority shareholders on the board of directors. In this respect, newly introduced corporate governance codes often only require an "appropriate number" of independent directors. 2 Examples include Germany, where the two-tier board system also faces other problems in relation to discharging its monitoring function. It usually suffers from its large size, inadequacy of information flows, infrequent meetings and in the past the under-developed structure of the board committees. 3 The inclusion of labour representative on the board runs counter to its objective of representing the rights of the suppliers of capital and creating a counter-balance to unions in particular and the interests of labour in general. This conceptual inconsistency of the sizeable labour representation might further weaken the two-tier board structure 4 . Regardless of the one-tier or two-tier board structure, boards in Continental Europe are often weak and as the primary mechanisms for protecting the rights of minority shareholders less effective than their Anglo-American counterparts. Equally, concentrated ownership also 2 For example, the Preda Code in Italy and the Olivenca Code in Spain both require only an "appropriate number" of independent directors on the board. This can be contrasted to the UK where there is a "comply or explain" requirement that at least half the directors on the board be independent. 3 Two tier boards are for example mandatory in Germany, Austria and the Netherlands.

SSRN Electronic Journal, 2000

A financial system can only perform its function of channelling funds from savers to investors if it offers sufficient assurance to the providers of the funds that they will reap the rewards which have been promised to them. To the extent that this assurance is not provided by contracts alone, potential financiers will want to monitor and influence managerial decisions. This is why corporate governance is an essential part of any financial system. It is almost obvious that providers of equity have a genuine interest in the functioning of corporate governance. However, corporate governance encompasses more than investor protection. Similar considerations also apply to other stakeholders who invest their resources in a firm and whose expectations of later receiving an appropriate return on their investment also depend on decisions at the level of the individual firm which would be extremely difficult to anticipate and prescribe in a set of complete contingent contracts. Lenders, especially long-term lenders, are one such group of stakeholders who may also want to play a role in corporate governance; employees, especially those with high skill levels and firm-specific knowledge, are another. The German corporate governance system is different from that of the Anglo-Saxon countries because it foresees the possibility, and even the necessity, to integrate lenders and employees in the governance of large corporations. The German corporate governance system is generally regarded as the standard example of an insider-controlled and stakeholder-oriented system. Moreover, only a few years ago it was a consistent system in the sense of being composed of complementary elements which fit together well. The first objective of this paper is to show why and in which respect these characterisations were once appropriate. However, the past decade has seen a wave of developments in the German corporate governance system, which make it worthwhile and indeed necessary to investigate whether German corporate governance has recently changed in a fundamental way. More specifically one can ask which elements and features of German corporate governance have in fact changed, why they have changed and whether those changes which did occur constitute a structural change which would have converted the old insider-controlled system into an outsider-controlled and shareholder-oriented system and/or would have deprived it of its former consistency. It is the second purpose of this paper to answer these questions.

International journal of corporate governance, 2010

The objective of this article is to examine the extent to which the traditional insider-oriented German corporate government system is approaching the outsider system of the USA. In this context, the economic and legal systems, the capital market, the ownership structure, the board system as well as the executive compensation are considered determinants. Our study results verify on the one hand that the German corporate governance system is taking on Anglo-American features due to the increase in significance of external mechanisms (particularly the market for corporate control). On the other hand, the elements that have been characteristic of the insider system until now (above all strong supervisory board) are being retained. As a result, it must be emphasised that a sustained approach of the German corporate governance system to the Anglo-American outsider system with pronounced internal mechanisms is taking place. This process can be characterised as a partial formal convergence.

Indiana Journal of Global Legal Studies, 2006

This paper engages the concept of transnational law (TL) in a way that goes beyond the by now accustomed usages with regard to the development of legal norms and the observation of legal action across nation-state boundaries, involving both state and nonstate actors. The concept of TL can serve to illustrate a much further-reaching set of developments in norm creation and legal regulation. TL is here understood not only as a body of legal norms, but it is also employed as a methodological approach to illustrate common and shared challenges and responses to legal regulatory systems worldwide. In the case of corporate governance, TL captures the specific regulatory mix of formal, hard, public regulation, on the one hand, and of informal, soft, private regulation, on the othe; that characterizes the contemporary evolution ofcorporate governance norms. Corporate governance norms give testimony of an ongoing search for answers to persisting problems in the organization of the firm, the distribution of power between shareholders, stakeholders, and the firm, as well as the responsibility of the corporation to its environment while-at the same time-reflecting on fundamental changes of the nature of norm creation and legal interpretation. While this approach is likely already to undermine some of the contentions regarding a universal *Canada Research Chair in the Transnational and Comparative Law of Corporate Governance,

Journal of Institutional and Theoretical Economics JITE, 2003

Varieties of capitalism, 2001