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

ECONOMIC ANALYSIS OF GLOBAL ECONOMIC ANALYSIS OF GLOBAL BUSINESS 2BUSINESS 2

LECTURE 1 2010LECTURE 1 2010

TRENDS IN GLOBAL TRENDS IN GLOBAL CORPORATE GOVERNANCECORPORATE GOVERNANCE

GLOBAL CORPORATE GLOBAL CORPORATE GOVERNANCEGOVERNANCE

WHY DOES IT MATTER?WHY DOES IT MATTER?

• It is concerned with who controls It is concerned with who controls what, and how well they are doing itwhat, and how well they are doing it

• It is changing, and we need to It is changing, and we need to understand what is happeningunderstand what is happening

• It affects entire economies, It affects entire economies, multinational corporations and small multinational corporations and small businesses businesses

CORPORATE CORPORATE GOVERNANCE: GOVERNANCE: DEFINITIONDEFINITION• ““The relationship among various The relationship among various

participants in determining the direction participants in determining the direction and performance of corporations” and performance of corporations” (Monks (Monks and Minow, 1995)and Minow, 1995)

• Main participants: shareholders, Main participants: shareholders, management, directorsmanagement, directors

• Other participants: employees, Other participants: employees, customers, suppliers, creditors, the customers, suppliers, creditors, the community: the stakeholding approachcommunity: the stakeholding approach

Global Trends: The ContextGlobal Trends: The Context

• Privatization: $850 billion since Privatization: $850 billion since 19901990

• Liberalization: falling trade Liberalization: falling trade barriers, capital controlsbarriers, capital controls

• Technology: mobile money, Technology: mobile money, informationinformation

• GlobalizationGlobalization

Drivers of ChangeDrivers of Change• Increased competition:Increased competition: exposing exposing

stagnant performancestagnant performance

• Transition:Transition: roll back of the state roll back of the state

• Decline in public funding:Decline in public funding: from from aid to investmentaid to investment

• Capital exporters:Capital exporters: rapid growth in rapid growth in institutional investmentinstitutional investment

• Scandals, corruption and collapseScandals, corruption and collapse

• The ‘invisible’ continent: Kenichi The ‘invisible’ continent: Kenichi OhmaeOhmae

SOME SCANDALSSOME SCANDALS

• Banks in 1990s Japan Banks in 1990s Japan

• Equitable Life in the UKEquitable Life in the UK

• LTCM, Worldcom and Enron in USALTCM, Worldcom and Enron in USA

• Parmalat in ItalyParmalat in Italy

• Defence contracts in France and UKDefence contracts in France and UK

• The 2008-9 global banking collapseThe 2008-9 global banking collapse

• ……..and they keep on coming!..and they keep on coming!

The ResponseThe Response

• Public reform (codes, listings, Public reform (codes, listings, company law, regulation)company law, regulation)

• Private sector response Private sector response • Demand for global standards (OECD Demand for global standards (OECD

principles)principles)• Financial stability forum Financial stability forum • International initiatives (WB – OECD International initiatives (WB – OECD

cooperation)cooperation)• International standard setters International standard setters • … … impact felt in every regionimpact felt in every region

Global Meets Local: the Global Meets Local: the VariablesVariables

– Legal heritageLegal heritage– Pattern of ownershipPattern of ownership– Exposure to international marketsExposure to international markets– Business culture and environment Business culture and environment – … … one size does not fit all (but one size does not fit all (but

fundamental principles apply)fundamental principles apply)

COMPARING COMPARING GOVERNANCE SYSTEMSGOVERNANCE SYSTEMS• Internationally we can find four main Internationally we can find four main

varieties of governance system:varieties of governance system:– market-basedmarket-based– corporatecorporate– state-guidedstate-guided– ““crony”-basedcrony”-based

• Some countries have features of Some countries have features of more than one systemmore than one system

CAPITALISM: alternative CAPITALISM: alternative taxonomies - examples taxonomies - examples • Market capitalism (USA, UK, Hong Market capitalism (USA, UK, Hong

Kong, New Zealand, Canada)Kong, New Zealand, Canada)

• Corporate/institutional capitalism Corporate/institutional capitalism (Sweden, Germany, Austria, (Sweden, Germany, Austria, Italy,Korea)Italy,Korea)

• State-guided capitalism (Japan, State-guided capitalism (Japan, France, Iran, Hungary)France, Iran, Hungary)

• ““Crony”capitalism (Russia, Ukraine, Crony”capitalism (Russia, Ukraine, Thailand, Indonesia)Thailand, Indonesia)

MARKET SYSTEMMARKET SYSTEM

•Government avoids intervention Government avoids intervention

•Preference for low taxation/spendingPreference for low taxation/spending

•Preference for free tradePreference for free trade

•Low levels of state asset ownershipLow levels of state asset ownership

•Lower levels of regulationLower levels of regulation

•Strong capital markets with wide Strong capital markets with wide share ownership; markets agents of share ownership; markets agents of changechange

CORPORATE SYSTEMCORPORATE SYSTEM

• Government prepared to interveneGovernment prepared to intervene

• Banks or other institutions own Banks or other institutions own much of corporate capitalmuch of corporate capital

• Financial markets secondary, with Financial markets secondary, with corporate change occurring corporate change occurring privatelyprivately

• Social objectives often importantSocial objectives often important

• Consensual policy-makingConsensual policy-making

STATE-GUIDED SYSTEMSTATE-GUIDED SYSTEM

• Strong state, intervening Strong state, intervening systematicallysystematically

• Tendency to trade protection or Tendency to trade protection or mercantilist practicesmercantilist practices

• Markets qualified by subsidy, Markets qualified by subsidy, regulationregulation

• Public/private partnership commonPublic/private partnership common

• Possibility of large state-owned sectorPossibility of large state-owned sector

““CRONY” SYSTEMCRONY” SYSTEM

• Close business-government linksClose business-government links

• Tendency to monopolistic practicesTendency to monopolistic practices

• Politically-inspired subsidies, trade Politically-inspired subsidies, trade restrictions and interventionsrestrictions and interventions

• Probably high income differentials Probably high income differentials and narrow distribution of wealthand narrow distribution of wealth

Practice of Governance: UKPractice of Governance: UK

• Most shares are held by pension funds, Most shares are held by pension funds, investment funds, and private individualsinvestment funds, and private individuals

• Banks usually do not own shares Banks usually do not own shares

• Almost all big companies are “listed”Almost all big companies are “listed”

• Stock market performance of shares Stock market performance of shares important measure of corporate successimportant measure of corporate success

• ““Hostile” takeovers fairly commonHostile” takeovers fairly common

UK: Governance AssessmentUK: Governance Assessment

• Advantages:Advantages:– Fairly open and transparentFairly open and transparent– Quick rewards for success and punishment Quick rewards for success and punishment

for failurefor failure– Responsiveness to business environmentResponsiveness to business environment

• Disadvantages:Disadvantages:– May encourage “short-termism”May encourage “short-termism”– Mergers and takeovers do not always workMergers and takeovers do not always work

Practice of Governance: GermanyPractice of Governance: Germany

• Banks have very large Banks have very large shareholdings in major corporationsshareholdings in major corporations

• Long-term (cosy?) relationshipsLong-term (cosy?) relationships

• Other shareholders are Other shareholders are proportionately less importantproportionately less important

• Hostile takeovers virtually unknown Hostile takeovers virtually unknown (exception: Vodafone/Mannesman)(exception: Vodafone/Mannesman)

German Governance: German Governance:

AssessmentAssessment • Advantages:Advantages:

– Long-term business relationshipsLong-term business relationships– Stability of employment and productionStability of employment and production– Social cohesion?Social cohesion?

• Disadvantages:Disadvantages:– Lack of transparency and opennessLack of transparency and openness– Sometimes tolerant of poor performanceSometimes tolerant of poor performance– May be unresponsive to global changeMay be unresponsive to global change

Practice of Governance: Practice of Governance: FranceFrance

• Shareholding structures more Shareholding structures more like Germany than UKlike Germany than UK

• Close state-business links, and Close state-business links, and intervention by the stateintervention by the state

• Stock market has become much Stock market has become much more important over last 20 more important over last 20 years - state uses it as a years - state uses it as a discipline measurediscipline measure

French Governance: French Governance: AssessmentAssessment• Advantages:Advantages:

– Successful use of state/business partnershipsSuccessful use of state/business partnerships– Coordinated approach to industrial strategyCoordinated approach to industrial strategy– Effective use long-term planningEffective use long-term planning

• Disadvantages:Disadvantages:– Conflicts of interest between business/stateConflicts of interest between business/state– Sometimes lack of transparencySometimes lack of transparency– Some tolerance of underperformanceSome tolerance of underperformance

Practice of Governance: Practice of Governance: RussiaRussia

• Large industrial groups, some Large industrial groups, some controlled by the “oligarchs”controlled by the “oligarchs”

• Some very big corporations are under Some very big corporations are under strong state influence (e.g.Gazprom)strong state influence (e.g.Gazprom)

• Stock market not very transparentStock market not very transparent

• Many business relationships based on Many business relationships based on personal connections, sometimes crimepersonal connections, sometimes crime

Russian Governance: Russian Governance: AssessmentAssessment• Advantages:Advantages:

– If any at all, the avoidance of disorderIf any at all, the avoidance of disorder

• Disadvantages:Disadvantages:– Lack of transparencyLack of transparency– CorruptionCorruption– Misallocation of resourcesMisallocation of resources– Excessive arbitrary state interventionExcessive arbitrary state intervention

Changes in European Changes in European GovernanceGovernance

• Most corporate governance Most corporate governance systems are tending to convergesystems are tending to converge

• Stock markets are becoming Stock markets are becoming more important, more important, BUTBUT

• Some shareholders becoming Some shareholders becoming more activist, such as pension more activist, such as pension funds like Hermes, some unit funds like Hermes, some unit trust companiestrust companies

QUESTIONS AND ISSUESQUESTIONS AND ISSUES

• Why has Governance come to the Why has Governance come to the fore in the last 25 years?fore in the last 25 years?

• What are “good” governance and What are “good” governance and “bad” governance?“bad” governance?

• In what ways does governance In what ways does governance differ in the private and public differ in the private and public sectors?sectors?

• How much difference does it make?How much difference does it make?