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THE LONG-TERM PROFIT MAXIMIZATION NORM AND THE CURRENT DEVELOPMENTS IN CORPORATE GOVERNANCE

THE LONG-TERM PROFIT MAXIMIZATION NORM AND THE CURRENT DEVELOPMENTS IN CORPORATE GOVERNANCE. Agata Waclawik-Wejman Center for Banking Law, Jagiellonian University Cracow IQPC Corporate Governance Summit Dubai - February 9-10, 2009.

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THE LONG-TERM PROFIT MAXIMIZATION NORM AND THE CURRENT DEVELOPMENTS IN CORPORATE GOVERNANCE

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  1. THE LONG-TERM PROFIT MAXIMIZATION NORM AND THE CURRENT DEVELOPMENTS IN CORPORATE GOVERNANCE Agata Waclawik-Wejman Center for Banking Law, Jagiellonian University Cracow IQPC Corporate Governance Summit Dubai - February 9-10, 2009

  2. Re-focusing corporations on long-term objectives – the key issues • What are the binding corporate goals for the corporate decision-making? • The recent developments in corporate governance mechanisms to ensure the long-term success of the corporation

  3. Structure of this presentation • I. The key corporate decision-makers • II. The increasing role of shareholders in corporate governance • III. Other CG actors: auditors, rating agencies

  4. I. The Corporate Decision-Makers • Corporate agents’ (Management/directors/key shareholders) duty to pursue corporate goals • Decision-making in a multi-stakeholder environment • Short-term v. long-term objectives

  5. 1. Corporate Agents’ Duties • Centralized management and the duty to pursue the corporate goals: • The common goal of shareholders? • The multiple goals of all stakeholders? • Corporate law protections against mismanagement? • Stealing and shirking

  6. 2. Decision-making in a multi-stakeholder environment • Shareholders • Financial investors as shareholders • Creditors • Clients • Employees • Environment • Public interest - new: financial stability concerns • Giving back to the society: charitable donations

  7. 3. Short-term v. long-term objectives • Reconciling the conflict: • Short-term success and forgoing of long-term objectives • Indefiniteness of „long-term” and the managerial risk averseness • Maximizing profits v maximizing the market value

  8. Solutions • Designing the decision-making process,including the board’s involvement in: • Strategy • Setting appropriate long-term objectives and interim milestones • Continuous assessment of the management’s performance • Risk management • Executive compensation • Alignment with long-term objectives

  9. II. The increasing role of shareholders in corporate governance • Enhancing shareholder rights • Facilitating the exercise of the existing shareholder rights The Underlying Issues: • Growing institutional ownership • Internationalization of shareholdings • Shareholder passivity/Shareholder activism • The alignment between the economic interest and voting rights • Infrastructural barriers and integration processes

  10. 1. Enhancing Shareholder Rights • General Meetings • European Union: Shareholder Rights Directive 2007/36/EC • Adding items to the GM agenda (Art. 6.1a) • Shareholder Proposals (Art. 6.1b) • Rights to ask questions (Art. 9) • Shareholder approval and communication requirements • Board Appointment/Compensation • Directors’ remuneration • European Union: EU Commission’s Recommendation 2004/913/EC • Strategic decisions • European Union: Takeovers Directive 2004/25/EC

  11. 2. Facilitating the exercise of shareholder rights • The Shareholder Rights Directive 2007/36/EC • The EU initiatives to remove barriers to clearing and settlement of securities transactions

  12. Shareholder Rights Directive removes some barriers… • Equal treatment (Art. 4) • Easier access to GM-relevant information (Art. 5, 14) • Easier access to the GM (Art. 7) • Striking down the personal presence requirement • Exercise of voting rights through proxies and nominees (Artt. 10-11, 13) • Electronic voting (Art. 8) • Voting per mail (Art. 12)

  13. … but the key barriers in cross-border voting in Europe are related to securities infrastucture • Longer chains of intermediaries • Late or missing GM-relevant information • Fragmentation of the securities clearing and settlement infrastructure: non-recognition of cross-border intermediary chains • The last intermediary in the local chain considered the shareholder • Property-system-driven fragmentation • Regulation-driven fragmentation • Uncertainty as to the role of the intermediary • Some consequences: • Application of mandatory bid thresholds to the holdings of the intermediary • Split Voting and Partial Voting not permitted • Non-recognition of proof of shareholdings issued by a foreign intermediary

  14. Intermediated holding systems The modified relations between the issuer and investor • The intermediary system substitutes the “evidentiary system” of certificated securities. • The effect: the investor enters into a legal agreement with its intermediary/account provider to purchase and manage securities. • The issuer – investor relationship is substituted by a set of legal relationships, with various rights and obligations related to the administration of this evidentiary system by the account provider, which: • Facilitate and streamline the process of mass turnover of securities / can channel certain communication between the issuer and the investor, • Are more complex from the legal point of view: the relationships between the issuer and account providers, and between the account providers and the investors /account holders.

  15. Fragmentation and complexity of account provider chains – a simplified scheme Account Provider Issuer Account Provider Country A ? Country B Account Provider […] Account Provider Investor

  16. The EU works on cross-border securities clearing and settlement • The EU identified the fragmentation of the securities clearing and settlement infrastructure as a key barrier to the capital markets integration in Europe • The Giovannini Reports - Barriers: technological, legal and tax • Three expert groups: CESAME, Legal Certainty Group and FISCO • Private sector best practices as the primary solution, subsidiarity of the harmonisation through legislation – the private sector work is still ongoing • Code of Conduct • Target2-Securities

  17. III. Other external monitors in CG • Auditors • Credit rating agencies

  18. Conclusions (I) Bottomline • The key factors of a long-term focus in corporate governance: • The goals • The actors • The process

  19. Conclusions (II) • The corporate governance tools for re-focusing on the long-term success of the corporation: • Corporate Decision-Makers • Focus on the long-term corporate goals and prevent conflict of values/interests • Focus of shareholder interest within the limitations of the multi-stakeholder framework • Ensure a decision making process for the realization of long-term objectives – board cooperation • Shareholders • Growing importance of shareholders as corporate governance actors • Enhancing and facilitating shareholder involvement in key corporate decisions • Identifying and resolving conflicts of interest • The alignment of the economic interests and voting rights • Other corporate governance actors • Auditors, rating agencies:Improving assessment criteria and tools • Identifying and resolving conflicts of interest

  20. Thank you! Agata Waclawik-Wejman agata at wejman.pl Center for Banking Law Jagiellonian University Cracow ul. Bracka 12 31-005 Cracow, Poland Tel./Fax. +48 12 422 09 08

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