Transcript ECONOMIC ANALYSIS OF GLOBAL BUSINESS 2 LECTURE 1 2010 TRENDS IN GLOBAL CORPORATE GOVERNANCE.

ECONOMIC ANALYSIS OF GLOBAL
BUSINESS 2
LECTURE 1 2010
TRENDS IN GLOBAL
CORPORATE GOVERNANCE
GLOBAL CORPORATE
GOVERNANCE
WHY DOES IT MATTER?
• It is concerned with who controls
what, and how well they are doing it
• It is changing, and we need to
understand what is happening
• It affects entire economies,
multinational corporations and small
businesses
CORPORATE GOVERNANCE:
DEFINITION
• “The relationship among various participants
in determining the direction and performance
of corporations” (Monks and Minow, 1995)
• Main participants: shareholders, management,
•
directors
Other participants: employees, customers,
suppliers, creditors, the community: the
stakeholding approach
Global Trends: The Context
• Privatization: $850 billion since 1990
• Liberalization: falling trade barriers,
capital controls
• Technology: mobile money, information
• Globalization
Drivers of Change
• Increased competition: exposing
stagnant performance
• Transition: roll back of the state
• Decline in public funding: from aid to
investment
• Capital exporters: rapid growth in
institutional investment
• Scandals, corruption and collapse
• The ‘invisible’ continent: Kenichi
Ohmae
SOME SCANDALS
• Banks in 1990s Japan
• Equitable Life in the UK
• LTCM, Worldcom and Enron in USA
• Parmalat in Italy
• Defence contracts in France and UK
• The 2008-9 global banking collapse
• …..and they keep on coming!
The Response
• Public reform (codes, listings, company
law, regulation)
• Private sector response
• Demand for global standards (OECD
principles)
• Financial stability forum
• International initiatives (WB – OECD
cooperation)
• International standard setters
• … impact felt in every region
Global Meets Local: the
Variables
– Legal heritage
– Pattern of ownership
– Exposure to international markets
– Business culture and environment
– … one size does not fit all (but fundamental
principles apply)
COMPARING GOVERNANCE
SYSTEMS
• Internationally we can find four main
varieties of governance system:
– market-based
– corporate
– state-guided
– “crony”-based
• Some countries have features of
more than one system
CAPITALISM: alternative
taxonomies - examples
• Market capitalism (USA, UK, Hong
Kong, New Zealand, Canada)
• Corporate/institutional capitalism
(Sweden, Germany, Austria,
Italy,Korea)
• State-guided capitalism (Japan,
France, Iran, Hungary)
• “Crony”capitalism (Russia, Ukraine,
Thailand, Indonesia)
MARKET SYSTEM
• Government avoids intervention
• Preference for low taxation/spending
• Preference for free trade
• Low levels of state asset ownership
• Lower levels of regulation
• Strong capital markets with wide
share ownership; markets agents of
change
CORPORATE SYSTEM
• Government prepared to intervene
• Banks or other institutions own much
of corporate capital
• Financial markets secondary, with
corporate change occurring privately
• Social objectives often important
• Consensual policy-making
STATE-GUIDED SYSTEM
• Strong state, intervening
systematically
• Tendency to trade protection or
mercantilist practices
• Markets qualified by subsidy,
regulation
• Public/private partnership common
• Possibility of large state-owned
sector
“CRONY” SYSTEM
• Close business-government links
• Tendency to monopolistic practices
• Politically-inspired subsidies, trade
restrictions and interventions
• Probably high income differentials
and narrow distribution of wealth
Practice of Governance: UK
• Most shares are held by pension funds,
•
•
•
•
investment funds, and private individuals
Banks usually do not own shares
Almost all big companies are “listed”
Stock market performance of shares
important measure of corporate success
“Hostile” takeovers fairly common
UK: Governance Assessment
• Advantages:
– Fairly open and transparent
– Quick rewards for success and
punishment for failure
– Responsiveness to business
environment
• Disadvantages:
– May encourage “short-termism”
– Mergers and takeovers do not
always work
Practice of Governance: Germany
• Banks have very large
shareholdings in major
corporations
• Long-term (cosy?) relationships
• Other shareholders are
proportionately less important
• Hostile takeovers virtually
unknown (exception:
Vodafone/Mannesman)
German Governance: Assessment
• Advantages:
– Long-term business relationships
– Stability of employment and
production
– Social cohesion?
• Disadvantages:
– Lack of transparency and openness
– Sometimes tolerant of poor
performance
– May be unresponsive to global
change
Practice of Governance:
France
• Shareholding structures more like
Germany than UK
• Close state-business links, and
intervention by the state
• Stock market has become much more
important over last 20 years - state
uses it as a discipline measure
French Governance: Assessment
• Advantages:
– Successful use of state/business
partnerships
– Coordinated approach to industrial
strategy
– Effective use long-term planning
• Disadvantages:
– Conflicts of interest between
business/state
– Sometimes lack of transparency
– Some tolerance of underperformance
Practice of Governance: Russia
• Large industrial groups, some
controlled by the “oligarchs”
• Some very big corporations are
under strong state influence
(e.g.Gazprom)
• Stock market not very transparent
• Many business relationships based
on personal connections,
sometimes crime
Russian Governance:
Assessment
• Advantages:
– If any at all, the avoidance of disorder
• Disadvantages:
– Lack of transparency
– Corruption
– Misallocation of resources
– Excessive arbitrary state intervention
Changes in European
Governance
• Most corporate governance systems
are tending to converge
• Stock markets are becoming more
important, BUT
• Some shareholders becoming more
activist, such as pension funds like
Hermes, some unit trust companies
QUESTIONS AND ISSUES
• Why has Governance come to the
fore in the last 25 years?
• What are “good” governance and
“bad” governance?
• In what ways does governance differ
in the private and public sectors?
• How much difference does it make?