FINANCE, LAW AND MARKETS: THE INSTITUTIONAL ELEMENTS OF CORPORATE GOVERNANCE

1. SESSION 3 FINANCE, LAW AND MARKETS: THE INSTITUTIONAL ELEMENTS OF CORPORATE GOVERNANCE

2. Outline • Origins and development of different corporate governance systems. • The critical influence of finance, law and markets in sustaining alternative corporate governance values, structures and practices. • Distinctiveness and viability of market and relationship based systems of governance. • Impact of the new emerging force in corporate governance represented by the increasing vastness of the institutional investors

3. The Distribution of Outstanding Listed Equity Among Different Categories of Shareholders Note: Due to rounding, these figures may not add up to the total. Pension Funds in Japan are managed by trust banks and Insurance companies. Division between banks and insurance companies are estimated. No data available on the extend to which mutual funds own shares. Security Australian figures are for the end of September1996. Source: OECD (2004), “ Corporate Governance a Survey of OECD Countries”

4. 10 year compound Annual growth rate 67.4 18% 21% 39.1 US$ Trillions 22.7 17.0 13% % of Total Financial Assets 27% 20% 22% 32% Trends in Financial Assets of Institutional Investors (1998-2007)

5. The Evolution of Corporate Governance Forms and Democratic Governance (Gomez & Korine 2003)

6. Separation of Ownership and Control • Almost complete ownership control • Majority control • Control through a legal device without majority of ownership • Minority control • Management control

7. Revised Berle and Means Model of Ownership and Control Source: Adapted from Blair M. (1995).

8. The Development of Law and Regulation Law influencing conduct of corporate governance: • Financial markets regulation (securities law) • Corporate law • Labour law The US legal structure in order to achieve market liquidity and shareholder value with highly developed securities market law: • The SEC regulates the capital market • Corporate law is developed by the independent states

9. The Development of Law and Regulation The European approach: • Less emphasis on capital markets, which have traditionally been less important in this system • Favours internal regulation of the firm • Corporate and labour law plays a much greater role • The controlling interests of majority shareholders protect management from capital market fluctuations.

10. Bank, Majority and Market Based Finance • Market for corporate control • Majority group control • Hostile takeovers

11. Number of Takeovers by Region 252 US Other EU 15 Ex UK Canada UK Total Australia (252) Under the Thomson Financial Data (TFSD) definition a tender offer that was recommended by board of the target company to its shareholders Source: Becht, Bolton and Roell (2002).

12. Number of Takeovers by Region 253 US EU 15 UK Total AUST Canada EX UK Other Source: Becht, Bolton and Roell (2002). (253) Under the TFSD definition a tender offer that was initially rejected by the board of the target company.

13. Corporate Governance Regimes Source: Aglietta M. and Breton R. (2001).

14. Corporate Governance Alternative Systems Sources: Adapted from Keenan J. and Aggestam M.(2001); and Clarke T. and Bostock R. (1994)

15. Reputational Intermediaries for Sound Corporate Governance (Apreda 2003)

16. Reputational Intermediaries for Sound Corporate Governance • Good accounting and auditing rules • Accounting review of self dealing transactions • Civil liability risk for accountants • An institution with competence and independence to write accounting rules • Sophisticated accounting profession Accountants • Securities lawyers to ensure issuers abide by the law and rules of disclosure • Civil discovery rules and class action procedure to protect minority rights • Liability risk • Lawyers review of self-dealing transactions Lawyers • Sophisticated banking profession to investigate the issuers of securities • Civil liability risk for investment bankers Investment bankers • Rating agencies that furnish not only credit-risk rating but also country-risk ratings • worldwide • Venture capital funds that allow new enterprises to be financed and monitored, • and also provide them with reputational capital • Public regulators like central banks and securities exchange commissions • Self regulatory organizations (SRO), either voluntary or mandatory, subject to • regulatory oversight • Corporate monitoring firms (Latham, 1999) Other Reputational Intermediaries

17. How Efficient are the various Methods of Controlling Managers? Source: Inspired by Bebchuk & Fried (2003)

18. Pension Funds and Life Insurance Assets (selected OECD Economies 2003-2004) Source: OECD Recent Trends in Institutional Investors Statistics: Gonnard,et.al. (2008).

19. Pension Fund Allocation Around the World

20. Institutional Investor Concern for CG High Life Assurers Pension Funds Importance of Corporate Governance Low Mutual Funds Private investors Hedge Funds None Time Horizons YEARS Source: Morley Fund Management (2003).

21. Monitoring Activities by Institutional Investors Source: ACGA 2005

22. Investment Fund Managers Role in Corporate Governance Source: The Mays Report (2003).

23. Number of CG Proposals per year Source: Monks, R et al (2004).

24. Resolutions Not Supported By AMP Capital Investors July –December 2005 Source: AMP Capital Investors’ Corporate Governance (2006).

25. Regulatory Regulatory Regulatory ATO ATO APRA APRA ASIC ASIC Master Master Master Asset Asset Trusts Trusts Trusts Consultants Consultants Investors Investors Investors Institutions Institutions Institutions Trustees Trustees Trustees ASA ASA AIST AIST IFSA IFSA AFA AFA CMSF CMSF ASFA ASFA Insurance Insurance Insurance Financial Financial Financial Companies Companies Companies FPA FPA AIMR AIMR Markets Markets Markets IAA IAA ASX ASX AFMA AFMA SIA SIA The Complex Governance and RegulatoryRelationships of the Institutional Investors Source: UTS Centre for Corporate Governance 2002