Corporate Governance

1. Corporate Governance Piero Formica Visiting Professor Faculty of Economics and Business Administration University of Tartu Tartu, 25 October 2002 formica@bo.nettuno.it

2. Corporate Governance • Process by which organisations are • Directed • Controlled • Held to account • The process encompasses • Authority • Accountability • Stewardship • Leadership • Direction • Control • Accountability means the requirement • of those who in the organisations hold • the power to render an account both to • their constituencies and themselves and • to explain what they are doing and why.

3. Corporate Governance System • The set of • Incentives • Safeguards • Dispute resolution process

4. Those who are involved…. • Shareholders • Contractual partners • Employees • Customers • Suppliers • creditors • Communities and • Societies in which the company operates

5. The corporate structure does affect the corporate governance BU HQs ? ENRON CORPORATE BUREAUCRACY Decentralisation & fragmentation + tight monitor of the subsidiaries

6. PRIVATELY OWNED, FAMILY-RUN, • SMALL- AND MEDIUM-SIZED • COMPANY 18

7. ENTREPRENEURIAL COMPANY 30% 80% 50% 70% 20% 50%

8. Co-ordinate market economies Interlocking policies and institutions. Long term relationships. Intermediate bodies (PPP - the agency model >>>) to regulate relationships, embedded in a culture of corporatism >>>. High taxation and high subsidies. Liberal market economies Market mechanism to regulate relations. Free agents in co-opetition. Low taxation and low subsidies. The type of market economy does affect the type of corporate governance

9. Corporatism <<< Corporatism is a rather extreme version of the legitimate relationship between interest groups and government in that it tends to restrict the number of interest groups involved in the policy process (B. G. Peters)

10. Corporatism <<< Corporatism is an arrangement characterized by a “limited number of singular, compulsory, non-competitive, hierarchically ordered and functionally differentiated” groups that are given a virtual license to represent their particular area of competence. (Definition put forth by P. Schmitter, quoted by Peters)

11. Forms of corporatism (1) “Societal corporatism” • Interest groups are the leading actor of policy making (P. Schmitter). “State corporatism” • Government is the dominant actor (P. Schmitter). “Liberal corporatism” or “corporate pluralism” • A less formalised relationship between interest groups and government. • A more intense negotiation among the groups themselves during the process of policy making (G. Lehmbruch, quoted by Peters). “Meso-corporatism” or “negotiated economy” • Less restrictive variations of the general pattern of relationship between the public sector and organised, private interests (Peters).

12. Forms of corporatism (2) • “Negotiated corporatism” • Unaccountable power and concerted actions are shared between • politicians, • public officials, • former government and party functionaries • and the most activist self-interested parties entrenched on the top of the subsidies’ mountain. • Symbiotic relationships between them impair the efficiency operation of the economy.

13. Public-Private PartnershipThe Agency Model Laissez faire Commanded economy BUSINESS GOVERNMENT Benign neglect Conflict CO-OPERATION PPP Public-Private Partnership “Quasi governmental development agency”

14. PPP….Aggregation of pressure group interest • Associational activities • Industry associations • Trade associations • Professional associations • Unions • Consortia of firms = Collectivist democracy in which public interest adds up to the aggregate of these pressure group interests.

15. Critical Issues (1) Independency and Autonomy • A board of plainlyindependent >>> and autonomous >>>directors, neither chosen by the chief executive office directly nor through the influence ofpartisan politicking >>>. BUT: • Political parties with the complicity of organised economic groups (vested interests) select and appoint the directors >>>.

16. Critical Issues (1 continued) <<< The appointment process has to be open and formal. BUT: • Directors, executives, project co-ordinators are approached informally by political factions and asked to take the job, being them drawn almost invariably from the ranks of political parties or collateral to them.

17. Critical Issues (1 continued) <<< Independence • When directors are on a board they are there precisely as directors of that company and should not have the interests of any other body in mind. • Nor there should be ties between the directors and the management. BUT: • Directors hold several appointments that are at odds with the principle of independence. • Directors change their position into that of managers, and conversely.

18. Critical Issues (1 continued) <<< Autonomy • An opponent in the board who can act as a spokesman and “level the playing field” for shareholders who do not agree with management.

19. Critical Issues (1 continued) <<< Partisan Politicking • The tenets of political representation has often provoked two casualties: • A corporate conduct for which inappropriate links, cosy or collusive arrangements and currying favour with politicians and party functionaries have been the traditional deal-making habit of the agency. • A board too large to be fully efficient, and sometimes lacking in the necessary breadth of skills which are needed.

20. Critical Issues (2) Responsibility • Board directors should take responsibility for assigned tasks. BUT: • Directors are often appointed on a part-time base, which do not allow them much time to attend meetings. • They are not paid enough to devote proper attention to the job.

21. Critical Issues (3) Board Arrangements • Board arrangements should define: • Roles and responsibilities of the chairman and the chief executive >>>. • Policies concerning the use and the appointment of non-executive directors. • Formation and role of the audit committee >>>.

22. Critical Issues (3 continued) <<< Chairman and the chief executive • What is crucial but it often lacks: • A clear-cut distinction of role between the chairman and the chief executive • the chairman’s job being that of a non-executive who manages the board, and • the chiefexecutive’s one that of running the business. • In addition, the boardroom should be enriched with the new blood of a strong independent deputy chairman to act as a counterweight to a chairman with a wealth of experience.

23. Critical Issues (3 continued) <<< Audit committee • The members of the agency’s auditing panel must be genuinely independent. • The internal auditors more powerful so as they can withstand the pressure from the board. • Auditors must observe ethical as well as technical norms. BUT: • Often, they do not stop rubber-stamping decisions taken by the board. • Paid consultants for the agency sit on the audit committee.

24. References • Australian National Audit Office (1999), Principles and Better Practices: Corporate Governance in Commonwealth Authorities and Companies, • Canberra, Australian National Audit Office • Guillén, M.F. (2000), Corporate Governance and Globalization: Is There Convergence Across Countries? The Wharton School and Department • of Sociology, University of Pennsylvania • Hall, P. A. and Soskice, D. (Editors) (2001), Varieties of Capitalism: the Institutional Foundations of Corporate Advantage, Oxford University • Press • Henderson, D. (2001), Anti-liberalism 2000, The Institute of Economic Affairs, London • Joseph, E. and Parkinson, J. (2002), “Confronting the Critics”, New Academy Review, No.1 • Koremenos B. and Lynn L. E. ,Jr. (2001), “Leadership of A State Agency: An Analysis Using Game Theory”, The University of Chicago – The • Irving B. Harris Graduate School of Public Policy Studies, Working Paper Series: 94.3 • Marino, A. M. and Matsusaka, J. G. (2001), Decision Process, Agency Problems and Information: An Economic Analysis of Budget Procedures, • University of Southern California, Department of Finance and Business Economics, Working Paper No. 01-05 August • (http://www.marshall.usc.edu/web/FBE.cfm?doc_id=1491) • Olson, M. (2000), Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships, Basic Books, New York • Peel, Q. (1999), “A poisoned chalice”, Financial Times, Thursday July 15 • Peters, B. G. (2001), The Politics of Bureaucracy, Routledge, London-New York • Posner, R. A. (1995), Overcoming Law, Harvard University Press • Selznick, P. (1966), TVA and the Grass Roots, Harper, New York • Stevens, R. B. and Yamey, B. S. (1965), The Restrictive Practices Court, Weidenfeld and Nicolson, London • The Chartered Institute of Management Accountants (1998), Corporate Governance and Control, London • Wheeler, D. and Sillanpää, M. (1998), The Stakeholder Corporation - a blue print for maximazing stakeholder value, Pitman Publishing, • London