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Alternative models and convergence Rethinking CG

Explore alternative governance structures across countries & the impact on investments and strategies. Analyze Anglo-Saxon vs. Continental Europe models, desirable CG features, and regulatory challenges. Investigate Japanese CG evolution & the limits of structural oversight.

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Alternative models and convergence Rethinking CG

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  1. Corporate Governance Alternative models and convergenceRethinking CG By S. Lioukas

  2. Geography of CG Systems • Different governing structures across countries • rooted in administrative tradition of each country • Broadly there are two models • “Liberal” model • Capital market oriented, focus on shareholders • In Aglo- Saxon countries • “Coordinated” model • Recognizes the interests of other stakeholders (workers, suppliers, communities, …) • In Continental Europe mainly

  3. Styles of CG across countries France Germany Japan UK USA Greece Capital Market Orientation Stable Relations Orientation

  4. Advantages Flexible flow of capital investment in and out Facilitates internationalization Disadvantages Volatile, unstable Short-termism Aglo Saxon

  5. Advantages Stable long term commitment to capital investment Creditors protect the corporation Disadvantages Lack of flexibility More difficult internationalization Continental Europe

  6. Convergence or divergence? • Tend to converge to the Anglo-Saxon model • Important for attracting investors • Important for mobilizing capital • Important for international investments • Host country governance may help or hinder companies’ international strategies & investment (eg. East Europe countries) • Home country governance affects investments in other countries

  7. “Desirable” features of CG • Independent BoD • Majority “independent” directors • Min number of non executive directors • Control / supervision of CEO • Separate Chairman / CEO • Appointment committee by independent directors • Audit committees • Majority NE independent directors • Internal auditing reporting to independent NED • Control on Executive Pay • Remuneration committee with independent directors • Disclosure of individual payments

  8. Comply or explain? • Within the same country there exist variations • Different models across companies • Differences across companies are accepted if justified • UK: variations are explained in annual reports • “Comply or explain”: allows some variety • In other countries also

  9. EU Initiatives • Early initiatives • Little activity in member states • EC was activated, but forced to retreat • Harmonization ambition rejected • Recent initiatives • Massive activity in member states • EC more cautious • Compatibility rather than harmonization • “Comply or explain” codes rather than universal standards of regulation

  10. More variety of CG Systems • A system of “cross shareholding” is intense in some countries • Eg cross holdings by corporations in France • Big families in Asia, Latin America • interlocking networks • High concentration of shareholding leads to illiquid capital markets • Ownership & control are not frequently traded

  11. USA style Promoted as universal best practice Small BoD to oversee & monitor management Boards Committees with majority of outsiders Audit Committee Nominations Committee Compensations Committee Japan style Dismissed as ineffective by int. investors Large BoD to make better/more informed strategic decisions No CG Board Committees. Instead: Internal committee for strategy Internal committees for coordination Japanese CG versus USA

  12. USA style Shareholder oriented “Your Board…” Manages the share price Restructuring through dismissals labor flexibility Stock option schemes Committee Japan style More balanced stakeholder concerns Manages relations Promotes long term employment for strategic purposes? Profit sharing schemes Japanese CG and management style

  13. Japanese CG: does it converge? • After the upheavals of the 1990s and the reforms that followed employees: • Some weakening of long term employment and age based promotion • Employees are expressing a greater interest in pay for performance • But core values are still strong • Average job tenure for certain groups has actually increased • Loyalty and commitment to firms seems to have increased among women • Shareholders received increased attention, but as just one of several stakeholders • Emphasis on employees as stakeholders remains.

  14. The limits to CG (1) • Preoccupation with structural elements • Regulate what you can observe and measure • Neglect of “soft” factors, e.g trust, cooperation, values • Introduces forms of CG with uncertain impact on performance • Results are at best inconclusive for several elements • May limit management choice and entrepreneurship • Aspects previously within the domain of management become regulations • May limit innovation & risk taking

  15. The limits to CG (2) • Limits the room for self regulation • Companies prefer voluntary self regulation • A mix of “light” regulation coupled with self regulation may work better (?) • But will self governance work? • Mixed experience: few leaders • Informal control by strong executives, arrogance and greed may still persist • “Light” versions may work only if wider representation is secured in Boards

  16. The limits to CG (3) • Elevates “control culture” • Emphasis on controls rather than trust • Supervision rather than value creation philosophy in BoD, Committees… • Neglect of internal aspects: E.g • Values and culture, value based control • Corporate strategy

  17. Rethinking CG: (1) • More inclusive forms of control: external and internal • Mutual monitoring, self or industry monitoring • Control through values & norms • Values of “stewardship” for managers • Use market controls as alternatives to “internal” CG controls, e.g. • controls exercised thought the market competition • or through the market for corporate control (threat of takeovers) • Use non market controls, such as media pressure, or government intervention, or name and shame.

  18. Rethinking CG: (2) • Promotion of trust • Promote responsible market contact of businesses • Open communications & transparency • Assurance of employment security or personal assistance in case of redundancies • Social bonds between managers & employees

  19. Rethinking CG: (3) • Cooptation of employees into ownership & governance • Large numbers of informed inside members monitor managers behavior • Devolves initiatives where the knowledge rests • Representation of employees in General Assembly and BoD more likely • Revise stock option plans (ESOP)

  20. Rethinking CG: (4) • Promote ideas of corporate citizenship • Value of creating sustainable value for all stakeholders • Challenge the shareholder value ideology • Towards a “company of citizens!” • Voting rights to employees • Human capital as corporate asset

  21. Turning CG into advantage (1) • Smart companies have used CG to their advantage • Use CG to better control the business • Drive down compliance costs • Built reputation through CG • Exceed formal obligations • Move beyond requirements

  22. Turning CG into advantage (2) • Pepsi Co uses internal auditors in creative ways: • To make a survey each year of practices • e.g hiring /evaluating employees, • assessing risk areas, • improve procedures, • evaluating objective setting, • diagnosis of training needs of financial people…

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