Tag Archives | international

Risk Managers Needed on Audit Committees

Overall, the number of U.S. Foreign Corrupt Practices Act (FCPA) enforcement actions increased by 85% in 2010. Over the course of the year the U.S. Department of Justice brought 48 criminal cases and the SEC filed 26 new actions. The trend has continued in 2011. In February, 2011, Tyson agreed to a $5.2M settlement. A number of other high-profile companies are currently facing FCPA investigations. The SEC has updated its enforcement approach, but most companies have been slow to improve their internal risk management and risk oversight mechanisms. According to GMI, only 6% of the U.S.’s largest publicly traded companies have appointed Audit Committee members who have professional experience in risk management.

Obviously, FCPA investigations and other types of lawsuits represent a significant threat to shareholder value. Publicly traded companies should work to implement strong board-level risk management oversight mechanisms. Otherwise, if liabilities from lawsuits start to pile up, they run the risk that investors will take their money elsewhere.

via How the Battle Against Corporate Bribery Represents a New Risk for Investors – Forbes, 8/12/2011.

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Parasitic Capitalism

The US can print the same money it borrows in. It doesn’t ever have to default as long as it retains this privilege. But its creditors now know that the US can’t be trusted. This is why America’s trusted friend and car pool partner in space, Vladimir Putin, has said Americans, “Are living like parasites off the global economy and their monopoly of the dollar.”

Them used to be fightin’ words. But now they are just words that confirm that we have come the end of the dollar’s reign as the world’s reserve currency. This is pushing up yields on government bonds. And in the long run, it will push up the price of precious metals too, as a reserve monetary asset (money).

via Parasitic Capitalism, The Daily Reckoning, Australia, 8/2/2001.

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Sustainable Development Index Coming to Shanghai Stock Exchange

Last year, the International Finance Corporation (IFC) produced a report, the goal of which was to help the Shanghai Stock Exchange (SSE) improve the quality of sustainability reporting by Chinese companies.

While SSE was “one of the first stock exchanges to issue a directive for companies to publish a sustainability report,” IFC noted, “Existing frameworks provide guidance that is either too vague or too broad.” One way in which stock exchanges can encourage corporate sustainability reporting, IFC found, is by establishing sustainability indexes, as has been done in South Africa and Brazil.

via Shanghai Stock Exchange to Launch Sustainable Development Industry Index.

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Extracurricular Reading

From August 2011 Harper’s Index:

  • Portion of employers who say they conduct criminal-background checks on potential employees: ¾
  • Chance that an American adult has a criminal record: 1 in 4
  • Percentage of applicants offered undergraduate admission to Harvard this year: 6.2
  • Percentage of applicants accepted for employment on McDonanld’s National Hiring day in April: 6.2

From the July/August edition of Resurgence comes a review of Chandran Nair’s Consumptionomics: Asia’s Role in Reshaping Capitalism and Saving the Planet. by Chandran Nair by Ziauddin Sardar.

Rampant consumerism is the great curse of our time. The driving force is “free market Fundamentalism.” Nair thinks China and India will be forces of change, largely for two reasons:

  1. The US model if unsustainable. Corn, which is heavily subsidized, and where farmers pay nothing for the carbon emissions they generate, is an example of a model which assumes Nature has limitless capacity. That model only works when a small proportion of the Continue Reading →
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Video Friday: 6 Degrees Warmer: Mass Extinction?

Will we actually be frightened enough to do something more than install solar panels on our roof, buy a Prius and recycle our garbage?

It doesn’t take an economist to understand the basic economic principle that you can’t grow an asset if you have destroyed the asset base. This fundamental principle seems to make perfect sense to us when we are talking about money, so why do we continually fumble with the equation when it comes to the natural asset base that our economic activity and human welfare depends on? What am I talking about? Well let me explain… (Growing from what?, CSRWire.com, 7/14/2011)

During an ice age, the most probable climate sensitivity is six to eight degrees Continue Reading →

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IFC Integrates Corporate Governance Analysis

The International Finance Corporation (IFC), a member of the World Bank Group, claims to be the first development finance institution to require a systematic corporate governance analysis of every investment transaction as part of its due diligence.

According to their press release, all new IFC investments will be subject to a focused corporate governance analysis during the appraisal process. The depth of IFC’s analysis will depend on the client and project characteristics. For some clients, a simple corporate governance review will be Continue Reading →

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Call for Papers on Institutional Investors & Sustainability

I’m on the editorial advisory board of the Critical Studies on Corporate Responsibility, Governance and Sustainability series of books to be published by Emerald and so am helping them scour the world for contributing authors. The next book in the series will be edited by Dr. Suzanne Young, Associate Professor, La Trobe University, Australia, and Professor Stephen Gates, Audencia Nantes School of Management, France. The topic is Institutional Investors and Corporate Responses: Actors, Power and Responses. How Do Institutional Investors Use Their Power to Promote the Sustainability Agenda?  How Do Corporations Respond?

In many economies, institutional investors such as pension funds hold the largest share of stocks, and as such are the dominant shareholder class.  They are increasingly using their power to bring about a change of corporate Continue Reading →

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InGovern Proxy Analysis Launched in India

A new proxy vote analysis service, InGovern Corporate Governance Platform, allows institutional investors to analyze various companies, follow the agendas of shareholder meetings, exercise votes and collaborate with other investors. Research based on “objective criteria” – Governance Radar – is also embedded into the platform, according to a press release from Bangalore.

This is a part of InGovern’s pioneering efforts at promoting shareholder activism among institutional investors in India.

Global research has shown that there is high correlation between good corporate governance and long term returns on an investment. Shareholder activism is in its infancy in India. The Ministry of Corporate Affairs and SEBI have been prodding institutional investors to exercise their rights as minority shareholders in companies. Investors can hope to get superior investment returns by actively participating in enhancing the corporate governance culture in India.


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India: Class Action, Insider Trading & CSR

Companies Bill 2009 proposes to introduce the concept of class action suits for the first time in India, which would empower investors to sue a company for “oppression and mismanagement” and claim damages.

Among other things, it also proposes to tighten the laws for raising money from the public and seeks to prohibit insider trading by company directors or key managerial personnel by treating such activities as a criminal offense.

Further, the UPA report said that voluntary guidelines on corporate social responsibility were released to promote socially and environmentally responsible business practices in the Indian corporate sector.

via New companies bill to encourage ‘responsible corp behaviour’ – Economic Times, 5/22/2011.

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Handbook on International Corporate Governance

Christine A. Mallin has edited an updated version of her 2006 book by the same title. Contributors are all well respected authorities and include: C.L. Ahmadjian, M. Ararat, L. Cabeza-García, M.J. Conyon, S.B. Dahiya, S. Gaia, J. Gillies, P.-Y. Gomez, S. Gómez-Ansón, M. Huse, R.P.C. Leal, C.A. Mallin, L. McGregor, A. Melis, O. Melitonyan, A. Okumura, J.L. Rasmussen, N. Rathee, M. Rizal Salim, A. Settles, G. Stapledon, T. Talaulicar, O.K. Tam, P. Tamowicz, Á. Telegdy, D. Weir, A.v. Werder, C.P. Yu. Countries covered include Australia, Brazil, China, Germany, Hungary, India, Italy, Japan, Malaysia, Norway, Poland, Russia, South Africa, Spain, Turkey and the UK. Continue Reading →

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EU May Mandate CorpGov Measures

A “say on pay” could be introduced across Europe, along with potential quotas for the number of women in boardrooms, as a result of proposals outlined by the European commission.

British companies have been required to put their remuneration policies to a shareholder vote since 2003 when pharmaceutical company GlaxoSmithKline became the first company to have its pay plan opposed by its investors.

Europe is now asking whether companies across the 27 member states should be forced to put their remuneration policies to a vote by shareholders – and indeed even make disclosure on pay mandatory for both executive and individual directors for the first time in some countries.

The green paper said: “A mismatch between performance and executive directors’ remuneration has also come to light.”

(EC proposes ‘say on pay’ and quotas for women in the boardroom | Business | The Guardian., )
Responses to 25 questions outlined in a green paper are due by July, the commission asked whether companies should be required to “ensure a better gender balance on boards” than the current 12% across the EU.

I found several of the 25 questions equally interesting, including the following:

  • Should the EU seek to ensure that the functions and duties of the chairperson of the board of directors and the chief executive officer are clearly divided?
  • Should recruitment policies be more specific about the profile of directors, including the chairman, to ensure that they have the right skills and that the board is suitably diverse? If so, how could that be best achieved and at what level of governance, i.e. at national, EU or international level?
  • Please point to any existing EU legal rules which, in your view, may contribute to inappropriate short-termism among investors and suggest how these rules could be changed to prevent such behaviour.
  • Are there measures to be taken, and if  so, which ones, as regards the incentive structures for and performance evaluation of asset managers managing long-term institutional investors’ portfolios?
  • Should EU rules require a  certain independence of the asset managers’ governing body, for example from its parent company, or are other (legislative) measures needed to enhance disclosure and management of conflicts of interest?
  • Are there measures to be taken, and is so, which ones, to promote at EU level employee share ownership?

Interested parties are invited to submit their views on the suggestions set out in the
Green Paper. Contributions should be sent to the following address to reach the Commission by 22 July 2011 at the latest: [email protected]. Contributions will be published on the internet.

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Enthusiasm for Free Market Drops

When GlobeScan began tracking views in 2002, four in five Americans (80%) saw the free market as the best economic system for the future–the highest level of support among tracking countries. Support started to fall away in the following years and recovered slightly after the financial crisis in 2007/8, but has plummeted since 2009, falling 15 points in a year so that fewer than three in five (59%) now see free market capitalism as the best system for the future.

GlobeScan Chairman Doug Miller commented: “America is the last place we would have expected to see such a sharp drop in trust in the free enterprise system. This is not good news for business.”

The results mean that a number of the world’s major emerging economies have now matched or overtaken the USA in their enthusiasm for the free market. The Chinese and Brazilians, 67 percent of whom regard the free market system as the best on offer, are now more positive about capitalism than Americans, while enthusiasm in India now equals that in the USA, with 59 percent rating the free market as the best system for the future.

Among the 20 countries polled in both 2009 and 2010, an average of 54 percent today rate the free market economy as the best economic system, unchanged from 2009.

Americans with incomes below $20,000 were particularly likely to have lost faith in the free market over the past year, with their support dropping from 76 percent to 44 percent between 2009 and 2010. American women have also become much less positive, with 52 percent backing the free market in 2010, down from 73 percent in 2009.

via Sharp Drop in American Enthusiasm for Free Market, Poll Shows – World Public Opinion, 4/6/2011.

My guess is that these numbers could easily be reversed with higher taxes on the rich, a more equal distribution of the wealth and of productivity gains, as well as more democratic corporate governance. A free market that allows the vast majority of its population to fail or stagnate, while the wealth of the top 1% soars, is not going to win any popularity contests. What are we waiting for?

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PhD Student Wanted to Research Uk Stewardship Code Implementation

Oxford Brookes University Business School wants to test the proposition that Shareowner Engagement is having an impact. They are looking for a PhD student to investigate the Stewardship Code, which “aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.”

Proposed areas of research include how institutional investors adopt the Code; whether the Code leads to increased shareholder engagement and better governance; whether and how shareholders make use of the information supplied by institutional investors. If I were twenty years younger, I’d be there.

To find out more about the project and to apply, contact either Dr. Sandra Einig or Professor Laura Spira.

via Doctor of Stewardship Wanted « Manifest – The Proxy Voting Agency.

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Rising Concern about China

Public concern is growing about China’s increasing economic power, according to a new global poll conducted for BBC World Service.

Negative views of China’s growing economic power rose–and are now in the majority–in France (up from 31% to 53%), in Canada (up from 37% to 55%), in Germany (up from 44% to 53%), in Italy (up from 47% to 57%) and in the USA (up from 45% to 54%). Negative views also grew significantly in countries such as the United Kingdom (up from 34% to 41%), and Mexico (up from 18% to 43%).

China is expected by many to overtake the USA in economic importance to their country over the next ten years. Asked to rate on a scale of 0 to 10 the importance of their economic relations with the USA, China, and the EU now, and in ten years’ time, people on average give China a score of 6.85, but a score of 7.29 in ten years–more important than the USA and the EU.

The poll suggests that a growing perception of China as acting unfairly is alienating some of its largest trading partners, while its military expansion is being watched by its neighbours with a wary eye.”

via Rising Concern about China’s Increasing Power: Global Poll – World Public Opinion.

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EU Offers Prize for ESG Integration

The overall objective of this call for proposals is to enhance market reward for sustainable and socially responsible enterprises, so facilitating the transition towards a sustainable economy.

The specific objective is to build the capacity of mainstream investment actors to better integrate environmental, social and governance information into their valuations of enterprises. This call for proposals is also an opportunity for the investment community to further align its practices with the expectations of European public policy.  Latest news from DG Enterprise and Industry.

Yes, the European Unions wants to drive ESG into the heart of investing considerations. The deadline for responses is set for May 20. Can anyone imagine the United States offering a prize of over $350,000 to prompt the integration of environmental, social and governance issues into the valuations of mainstream institutional investors? Please let me know when you see it. Hat tip to SHARE newsletter. Don’t miss out; subscribe now.

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Philippine BOVESPA, Race to the Top

The Philippine Stock Exchange Tuesday said it has secured the support of the International Finance Corp. to establish the Maharlika Board, a listing segment for companies to voluntarily commit to corporate governance practices beyond those required by law.

The IFC, the investment arm of the World Bank, is helping the PSE set up the Maharlika Board through IFC’s Global Corporate Governance Forum. (Philippine Bourse Corporate Governance Project Gets World Bank Support)

To the best of my knowledge, Brazil pioneered this approach. In 2000, the Sao Paulo Stock Exchange, BOVESPA launched three new market segments: “the Special Corporate Governance Levels 1 and 2” and the “Novo Mercado,” with each market segment requiring progressively stricter standards of corporate governance. Adoption of this approach around the world could create a race to the top.

Corporate governance is a health check for business, according to Philip Armstrong, head of the Global Corporate Forum of the International Finance Corporation.

In an interview with Business Nightly on Tuesday, Armstrong shared that the Philippines received only $2 billion out of the over $60 billion in foreign direct investments in the region largely because of perception that governance standards here are not as high as in other competing markets. (Corporate governance a health check for business: IFC rep,abs-cbnnews.com, 3/23/2011)

These new efforts could improve that situation.

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Governance After the Financial Crisis

Corporate Governance in the Wake of the Financial Crisis: Selected International Views is a publication of the United Nations Conference on Trade and Development (UNCTAD). It contains commentary and analysis by leading experts from around the world, including the OECD, World Bank, ICGN, IOSCO, The Corporate Library, PRI and others with a forward by Mervyn King. The intent is to inform ongoing reform efforts and document the work of major organizations.

Frankly, I haven’t read it yet but it looks great and you can download all seven chapters from the UNCTAD site. Thanks to Jackie Cook of FundVotes.com for giving me a heads-up through the Social Investment Forum… otherwise I may have missed it.

Highlights are touted as follows:

  • Multilateral and national financial reform efforts have identified specific areas of corporate governance requiring reform at financial institutions. In particular, reform efforts should focus on:
    1. strengthening board oversight of management;
    2. positioning risk management as a key board responsibility, and; Continue Reading →
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Shareowner Rights By Country

Shareowner Rights across the Markets: A Manual for Investors from the CFA Institute compares the rights of shareowners in 10 developed markets and 12 emerging markets in both brief tabular form and through detailed explanation. Each report summarizes current practices, recent developments, legal and regulatory frameworks by jurisdiction, as well as providing helpful references to local organizations and regulators for each country. Download the entire report or by individual country. We’ve also added a link to the International Corporate Governance portion of our Links page so that you can easily find this valuable resource at a later date.

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Financial Sustainability: Restoring Market Stability, Corporate Value & Public Trust (ICGN Mid-Year 2010)

Disclaimer: Given Dodd-Frank, proxy plumbing and all those comments I want to provide the SEC, the report below doesn’t do the ICGN Mid-Year Conference justice.  I wrote this up more than a week later with poor notes and memory. Comments, corrections and substitute photos are solicited.

Sharing Perspectives Across the Atlantic. Phil Angelides, Lord McFall and moderated by David Pitt-Watson.

The Financial Crisis Inquiry Commission will report in December to give an unbiased historical accounting of the causes of financial crisis. It will be out in book form but will also be available through download.

Phil Angelides

$11 trillion in wealth was wiped away. The market took until 1954 to get back to the levels of 1929. Let’s hope this one doesn’t take as long but, more importantly will we learn the lessons necessary to prevent or minimizes future bubbles?

It was a failure of accounting and deregulation. Too many were rewarded based on volume not on performance and their was no continuity in risk (they thought) after all the slicing, dicing and creative complexity.

Lord McFall

Rewards can’t be asymmetric and function properly. This was not a natural storm; the clouds were seeded. Signs were there, such as a 2004 warning from the FBI about a housing fraud epidemic, but they were glossed over. Now, our remaining investment banks are largely trading banks, not focused on generating capital but on gaming the markets. The betting market is much larger than the real economy… with more than 85% of transactions being synthetic.

Dodd-Frank requires the investment banks to hold 5% of the securities they sell but I’m not sure what good that does since that portion of their business is now minor. We need to rethink the role of finance in our economy. Continue Reading →

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Does Corporate Governance Matter to Economic Development?

The editors of Corporate Governance and Development: Reform, Financial Systems and Legal Frameworks (The Crc Series on Competition, Regulation and Development), Thankom Gopinath Arun and John Turner answer with a resounding yes. As they indicate in their introduction,

If finance matters for economic development, then corporate governance must also affect economic development for at least two reasons. First, corporate governance affects how and at what cost firms finance their real investments… Secondly, the quality and nature of corporate governance can affect the structure of the financial system.

If shareowners are poorly protected, finance through bank loans will be more expensive.

This collection of essays provides a broad outline of recent scholarship around the world. Chisari and Ferro suggest that unintended consequences of reforms in Argentina could impinge on consumers. Based on experience in Botswana, Gustavson, Kimani and Ouma also argue reforms originating in Anglo-American models must tailored better when imported to other cultures. Goyer and Rocio also find that corporate governance is mediated by the larger institutional framework in their study of electricity sectors in Britain and Spain.

Other authors focus on corporate governance relative to the banking sector, finding a correlation between debt and poor performance, the need for prudent regulatory reforms for divestiture of government ownership and good governance practices, while two chapters on Bangladesh also argue for strong legal and regulatory institutions to protect minority shareholders, creditors and depositors.

Three additional chapters focus on legal frameworks in Ireland, UK and the EU, as well as more broadly. It is that broader focus of developing a “shareholder protection index,” which I found most interesting. Building on prior work by La Porta and others, Priya P. Lele and Mathias M. Siems construct a much more elaborate index of shareowner rights based on a “leximetric” (quantative measurement of law), rather than econometric approach.

They endeavored to include the variables which best reflect shareowner protections developed in the UK, US, German, France and India over the last 35 years. Aggregate scales for each of these countries trend upward. Shareowner protections have increase, especially in the last five years. On a number of scales, the US comes out at or near the bottom but that doesn’t mean the authors recommend redirecting capital from the US to France, for example. Other aspects, such as financial disclosure, the rule of law and socio-economic attitudes have not bee considered. Neither have factors such as blockholder control and other variables. They didn’t examine whether a better score leads to better governance or economic development but will be examining these questions in the future.

Overall, the volume offers a good cross-section of essays reflecting current scholarship in field of growing importance.

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Review: An Islamic Perspective on Governance

An Islamic Perspective on Governance (New Horizons in Money and Finance) by Zafar Iqbal and Mervyn K. Lewis reads like a carefully constructed dissertation setting forth a theory of justice, taxation, government finance and accountability, governance and corruption grounded in Islam. Indeed, it originated as an academic piece and is unlikely to find the wide audience it deserves in this format. Continue Reading →

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Japan's Example

Will America experience a “lost decade” of economic stagnation like Japan in the 1990s? Will Obama’s strategy of “grow now, ask questions later” to jump-start consumption lead to a sustained uptick or a bigger bubble later? Corporate Governance in the 21st Century: Japan’s Gradual Transformation by Nottage, Wolff and Anderson doesn’t give direct answers, but it provides clues.

Christopher Pokarier argues that Japan is open to being closed. One wonders if Americans will follow the Japanese example and keep savings in cash, rather than mutual funds and stocks. In the 3rd quarter of 2007, capital investments were 11% of Japanese household assets vs. 31% in the US. Cash/savings accounted for 50% in Japan, 13% in the US. Class divisions are hardening and intergenerational transmission of status is increasing.

In the 1980s Japan’s corporate governance system seemed a creditable alternative to the Anglo-American model. Its emphasis on employee welfare, keiretsu interlocks, and bank monitoring provided evidence that independent outside boards weren’t necessarily better… until Japan slumped into a long recession. Massive reforms, many based on shareowner primacy, appear to have moved Japan in the direction of the US. However, the authors represented in this reader see the changes as a more gradual transformation that endures as a unique variety of capitalism. “Everything is changing gradually and in ambiguous directions.”

One example provided is “flexicurity,” a balance between flexibility of working practices (terminate at will) and security of tenure. Wolff concludes lifelong employment was never a Confucian-inspired preference but a tool to ensure the continuity of core employees to meet business needs. Wolff finds the influence of employee stakeholders has been exaggerated and what lifelong employment existed wasn’t progressive but was rooted in inequality and inequality is increasing.

Puchniak’s case study of Japanese banks lending trillions of yen to “zombie” firms at below market rates finds that, contrary to shrinking as the US savings and loan industry did after their period of “creative destruction,” bank influence increased. Banks replaced management and restructured underperforming companies. Primary reliance on banks for financing went from 28% of largest listed companies to 47%.

Matsui’s chapter on closely-held companies or SMEs should find a wide audience in countries where family companies continue to play a large role. He highlights important reforms to company law and judicial decisions aimed at protecting minority shareowners, while maintaining flexibility.

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Corporate Rescue Law

With the growing number of bankruptcies in industries ranging from financial, manufacturing, to retail, what could be more timely than Corporate Rescue Law – an Anglo-American Perspective? Gerard McCormak’s review of practices in the two countries concludes there is more convergence than is generally recognized. the us moving is in a UK direction with regard to disposal of profitable components, rather than carrying on through the bankrupt corporate entity.

Both shareowners and creditors generally come out ahead when debt is restructured privately, rather than through Chapter 11. Such private restructuring is more likely to succeed when commercial banks or other sophisticated investors are involved and is facilitated when debt is concentrated, as through trading by vulture funds who are advantaged by private settlement, rather than going to court, which tends to be a more costly and time-consuming process.

McCormak provides an overview of recent law and legal thought, explaining the fundamental features in both the US and UK, entry routes to changes in corporate control, moratoriums on creditor enforcement actions, mechanisms to address financing difficulties, the role of employees, and restructuring plans themselves.

The US debtor has more rights to formulate a reorganization plan, has more prescriptive rights with regard to dividing creditors into classes, has cram down capability in exceptional circumstances to force acceptance by creditors, and has traditionally focused on getting the corporate vehicle in working order.

However, McCormak finds that a growing number of bankruptcies, at least among larger companies, have been essentially pre-packaged deals involving going-concern sales of company components blessed by the court to ensure conduct that brings the highest price. in contrast, the UK approach largely leaves matters to creditors, respecting the values of “simplicity and economic self-determination.”

Economics Of Corporate Governance and Mergers

This is a wide-ranging reader, with theory and empirical studies, domestic and international well represented. For example, one paper casts doubt on the frequent assertion that common law countries have better shareowner protection than civil law countries. Another examines the role of directors and the question of emphasis (monitoring vs. participants in management). Central to corporate governance are issues of mergers and acquisitions. If internal governance mechanisms are ineffective, which I have argued for decades, hostile takeovers can act as the avenue of last resort to discipline managers, although this all too often comes at the expense of acquiring shareowners.

Stephen Martin looks at five waves of mergers and finds irrational exuberance often plays a crucial role, concluding that although reasons for such waves may vary, results do not generally benefit shareowners. Another paper by Mike Scherer provides evidence that mergers do not generally increase productivity, despite glowing predictions by management. As the editors note, the findings of accounting data contrast sharply with those of the finance literature, short-term stock market event studies. Rises in merger activity are likely attributable to empire building by managers.

Examining Japanese mergers, Hiroyuki Odagiri finds mergers generally hurt relative profitability. A UK study finds that acquisitions, after implementation of the Cadbury Code, experience better long-run returns but the driver remains CEO ownership. Gerhard Clemenz creates a theoretical model to study the impact of vertical mergers between producers and retailers, finding that integrated firms should be better able to monopolize markets and drive up retail prices. A study of 13 indicators on competition for 29 countries finds economic performance best predicted by the degree of competition.

Not all the authors take a shareholder maximization of value view of the firm. Branston, Cowling and Sugden, for example, explore redesign of company laws based on wider membership and creation of more democratic forms. In “Corporate Governance and the Public Interest,” they call for greater participation by the public in strategic decision-making, especially mergers in the financial, IT, and communication sectors. Here, I found convincing arguments that an educated and participatory democracy can only be obtained with a communication revolution, since advertizing revenue now allocates coverage and interest.

The editors conclude that “corporate governance systems that better align shareholders’ and managers’ interests lead to better corporate performance” and “there is an important relationship between corporate governance structures and the quality of firm decision making,” especially with regard to mergers and acquisitions. Since most are suboptimal for both shareowners and society, “the suspicion remains that corporate governance systems and mechanisms are not yet optimal.” Masters of understatement but the volume includes a good collection of important reading and commentary.

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Global Strategy: Creating and Sustaining Advantage Across Borders

Global Strategy: Creating and Sustaining Advantage across Borders (Strategic Management)Global Strategy: Creating and Sustaining Advantage Across Borders  by Andrew Inkpen and Kannan Ramaswamy integrates academic research and case studies to inform readers about global avenues to competition. Political instability, corrpution, inadequate infrastructure, and closely knit ownership structures are addressed. For example, readers are advised that leapfrogging offers the best window for an MNE to bypass poor physical infrastructure – as in widespread diffusion of cell phone use. Direct state ownership often means partnerships must pursue agendas not directly relevant to shareholder wealth maximization. Family control may emphasize profitability over growth. Continue Reading →

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Governance and Risk: Benchmarking Corporate Governance Risks

Governance and RiskGovernance and Risk by George S. Dallas (Editor). This handbook presents the most comprehensive framework for corporate governance as a risk factor that I have ever seen. I have several books on my shelves that compare corporate governance systems in the US, UK, Japan, Germany and France but this one also includes Brazil, China, India, Korea, Russia and Turkey.

I also have plenty of handbooks for directors that describe various duties but Governance and Risk takes the most systematic approach. Each factor is accompanied by instruction, questions, as well as examples of strong and weak profiles. Continue Reading →

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Review: Political Power and Corporate Control

According to Gourevitch and Shinn, “corporate governance – the authority structure of a firm – lies at the heart of the most important issues of society”… such as “who has claim to the cash flow of the firm, who has a say in its strategy and its allocation of resources.”

The corporate governance framework shapes corporate efficiency, employment stability, retirement security, and the endowments of orphanages, hospitals, and universities. “It creates the temptations for cheating and the rewards for honesty, inside the firm and more generally in the body politic.” It “influences social mobility, stability and fluidity… It is no wonder then, that corporate governance provokes conflict. Anything so important will be fought over… like other decisions about authority, corporate governance structures are fundamentally the result of political decisions.” If the authors haven’t hooked you on the importance of corporate governance by these statements on page 3, you aren’t breathing.

I have long argued that creating sustainable wealth and maintaining a free society both require that institutional investors act as mediating structures between the individual and the dominant institutions of our time, the modern corporation. Democratic corporate governance will reduce the corrupting influence of unaccountable power on government and society. At the same time, by transforming corporations into more democratic institutions, institutional investors will instill them with their own values and will unleash the wealth-generating capacity of “human capital.”

The model Gourevitch and Shinn set forth in Political Power and Corporate Control: The New Global Politics of Corporate Governance uses corporate governance as the dependent variable. “The arrow of causation flows from preferences to political institutions to corporate governance outcomes.”

Whose preferences? Key, are those of owners, managers, and workers. How? “To obtain their preferred corporate governance outcome, they have to win in politics” by mobilizing allies outside the firm in systems the authors categorize as largely majoritarian or consensus. A dynamic feedback loop is thus created: “institutions shape policies that influence preferences. At the same time preferences induce institutional arrangements that increase the chances of preserving the policies desired by the preferences.”

Treating the categories of owners, managers, managers and workers as homogeneous blinds us to coalitions. Through an analysis of available datasets, the authors demonstrate that outside owners are more likely to ally with workers to support transparency. Workers seeking to preserve their jobs are more likely to ally with managers; whereas, concern for pension funds motivates transparency and ability to exercise shareholder voice. Firm-centered managers prefer blockholding owners; those seeking maximum pay tend to support minority shareholder protections and vigorous labor markets.

Variation in corporate governance is not necessarily a function of economic stages, technology, or legal framework. Instead, Gourevitch and Shinn provide substantial support for the argument that “corporate governance arises from incentives created by rules and regulations that emerge from a public policy process, reflecting the power of alternative coalitions.”

Although most academic writers and the press emphasize minority shareholder protections, Gourevitch and Shinn emphasize the need to also account for “degrees of coordination,” which shape incentives to concentrate shareholding or sell down to a more diffuse market. These include product-market competition, price and wage mechanisms, labor relations, and social welfare systems. Each coalition seeks to persuade society-at-large to provide public policies in corporate governance that favor their own interests.

Systems shift when economic conditions change in big way. One of their most interesting discussions concerns their assertion that pension funds, which they define to include all forms of deferred compensation plans, may be most important as the next phase unfolds. “To understand the future politics of corporate governance debates, we will have to track fights about pension reform.” “Pension plan regulations may turn out to be the tail that wags the corporate governance dog.”

Defined benefit plans held 27% of all U.S. equities in 1989-95 but fell to 21% more recently. Mutual fund ownership, on the other hand, has climbed from 8% in 1990 to 28%. As more defined benefit plans (often jointly administered with employee or union representatives) are dropped, the future of corporate governance reform may lie with mutual funds. That tail, using the above analogy, seems to wag whenever management speaks.

They are required by law, as fiduciaries, to represent the interests of the investors whose money they oversee, not their own business interests, which may including landing contracts to administer 401(k) plans. Recently, Vanguard, Putnam, and Fidelity voted against shareholder proposals that would require directors standing for election to stay on only if a majority of votes are ”yes.” Clearly, these funds were not voting in the best interest of owners. Mutual funds used to turn over 17% of their portfolio each year (1950-1965) but averaged 91% per year in 1990-2005, prompting John Bogle to remark the “rent-a-stock industry has little reason to care” about good corporate governance.

Gourevitch and Shinn find that “as worker-citizens acquire assets, they develop preferences for shareholder protections, thus adding pressure to the potential for a transparency coalition” and “assets in the hands of institutions that are accountable to their owners are likely to pay more attention to governance than are assets in the hands of autonomous managers.” Perhaps an actual power shift will follow as mutual fund investors demand a role in mutual fund governance and those funds begin to represent their true preferences with corporations. If that happens, we might see a book that looks in reverse, tracing the effects of corporate governance outcomes on political institutions. “Socially responsible investment” will then take on new meaning and dimension.

In the meantime, Gourevitch and Shinn, note enough interesting correlations and observations to make the book must reading for any corporate governance policy analyst, especially those with global concerns. Here is a small sample:

  • Blockholding and minority shareholder protections are negatively correlated.
  • Minority shareholder protections and share price are positively correlated.
  • Blockholding dips after increased minority shareholder protections are likely the result of sales by “new money” entrepreneurs, rather than old money blockholders (who may fear the tax collector).
  • Blockholding may be preferred when uncertainty is high.
  • State-owned enterprises are the most aggressive users of ADRs.
  • Money flows toward firms and countries that provide shareholder protections. “No other group can have quite this direct an effect on the economy…the economic vote of investors counts greatly against the mass of votes in elections.”
  • Where job security is strong, diffusion is weak, and minority shareholder protections are weak.
  • Weak intermediate institutions of finance, investment, pensions and stockmarkets are correlated with little voice for shareholder rights.
  • “The U.S. Securities regulation system assumes that institutional investors and reputational intermediaries are the agents of investors.” “Yet it has become increasingly clear to many observers that these private actors have multiple, complex incentives…”
  • “As much as 10 percent of the total ownership of U.S. public firms was transferred from the existing stockholders to senior managers through stock option grants between 1990 and 2000.”

Their treatment of the definition of corporate governance from various perspectives is also an eye opener. Here’s a flavor of that discussion:

  • Where the political scene is capital versus labor, “the investor coalition defined corporate governance in terms of ‘meeting the challenge of financial globalization,’ adherence to the OECD Principles, fulfilling ‘international standards of governance in the global competition for capital.'”
  • From a labor power position, “blockholders and foreign portfolio investors were castigated as selfish oligarch in league with the heartless IMF and the faceless gnomes of Zurich.”
  • Those favoring the corporatist compromise made much of managers and workers “being in the ‘same boat’ together, of corporate governance choices that ensured that firms ‘served the nation’ in a ‘stable’ economy – with owners dismissed as oligarchs or ‘speculators.'”
  • Countries shifting transparency coalitions and managerism alignment “witnessed predictable invocations of corporate governance that protected ‘the little guy, ‘ the individual investor,’ the widow and orphans,” such as speeches by U.S. SEC commissioners.
  • “Meanwhile across the alignment divide, managers compete to hijack the notion of corporate governance for their own purpose…’building shareholder value.”

Shareholder value is partly about efficiency. But Gourevitch and Shinn raise serious issues about distribution, job security, income inequality, social welfare. Will firms of the future be efficient at creating a healthy environment and general prosperity or efficient at putting money into the pockets of CEOs? Political Power and Corporate Control provides a groundbreaking guide, based on empirical evidence, for anyone concerned with the direction of corporate governance and society.

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Governance and Ownership

Governance and OwnershipGovernance and Ownership (Corporate Governance in the New Global Economy Series), Robert Watson, editor (Edward Elgar, 2005). This is an excellent collection of 20 papers, most published in the late 1990s, enhances our understanding of the relationships between ownership corporate ownership governance. Issues investigated include:

  • diversity of ownership forms and corporate control implications
  • effectiveness of such forms in influencing executives to enhance corporate value
  • role of owners in appointing and removing executives
  • influence of ownership structures on corporate restructuring, mergers and acquisitions
  • motivation of various classes of owners – their ability and willingness to influence corporate decisions

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Review – Investor Capitalism: How Money Managers Are Rewriting The Rules Of Corporate America

Investor Capitalism: How Money Managers Are Changing the Face of Corporate America. Managerial capitalism ascended during the century’s middle decades. “The decisions they made often affected the lives of thousands of people, yet they were seemingly accountable to no one.” The large holdings of institutional investors and the growth of indexing as a major investment strategy have  prevented the ready selling of underperforming companies; investors are now more likely to “speak out than to cash out.” Whereas managerial capitalism tolerated a host of company objectives, Useem argues that under investor capitalism enhancing shareholder value has become paramount. Continue Reading →

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