THE GLOBALISATION OF CORPORATE GOVERNANCE? IRRESISTIBLE MARKETS MEET - - PowerPoint PPT Presentation

THOMAS CLARKE

THE GLOBALISATION OF CORPORATE GOVERNANCE?

IRRESISTIBLE MARKETS MEET IMMOVABLE INSTITUTIONS NEW ZEALAND GOVERNANCE CENTRE

AUCKLAND UNIVERSITY 15 AUGUST 2008

Outline: Globalisation of Corporate Governance? p

Why Globalisation of Corporate Governance? Increasing Scale and Activity of International Equity M k Markets Inflation of CEO Pay in United States Theories of Convergence of Governance Institutions Possible Alternative Directions For Governance Di it Diversity

Why Globalisation of Governance? Why Now? y y

International deregulation of financial markets Continued growth and deepening of global capital markets: equities Continued growth and deepening of global capital markets: equities, debt securities, bank deposits, and other assets Growth of investment institutions, particularly Anglo-American institutional investors balancing portfolios with international investments Effective monitoring necessary for security of investments Effective monitoring necessary for security of investments Recognition that governance matters for accountability, performance and attracting capital A general trend in society towards openness, transparency and disclosure

What is Globalisation?

“An international economy links distinct national markets; A global economy fuses national markets into a coherent whole’ into a coherent whole

(Kobrin 2002: 7).

Convergence or Diversity in Corporate Governance? in Corporate Governance?

Two parallel universes of corporate governance historically emerged: A di d hi d l h t i d b t d li id A dispersed ownership model characterized by strong and liquid securities markets, high disclosure standards, high market transparency, and where the market for corporate control is the ultimate disciplining mechanism; and, A concentrated ownership model characterized by controlling A concentrated ownership model characterized by controlling shareholders, weak securities markets, low transparency and disclosure standards and often a central monitoring role for large b k h h t k i th (C ff 2000 Cl k 2005) banks who have a stake in the company (Coffee 2000; Clarke 2005).

Who is going to win? g g

IRRESISTIBLE MARKETS?

Increasing Scale and Activity Increasing Scale and Activity

• f International Equity Markets

Market Capitalisation of Regional Stock Exchanges

Domestic Market Capitalisation 1990

• 2004

p 18 000 20 000 12 000 14 000 16 000 8 000 10 000 12 000

USD bn

4 000 6 000 2 000 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

AMERICAS EUROPE-AFRICA-MIDDLE EAST ASIA-PACIFIC

Source: World Federation of Exchanges, Annual Report 2005: 51.

Value of Share Trading of Regional Stock Exchanges

40 000 Value of Share Trading 1990

• 2

004 35 000 40 000 25 000 30 000 15 000 20 000

USD bn

5 000 10 000 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

AMERICAS EUROPE-AFRICA-MIDDLE EAST ASIA-PACIFIC

Source: World Federation of Exchanges, Annual Report 2005: 55.

Domestic Equity Market Capitalization in USD q y p

Source: World Federation of Exchanges 2008

Domestic Equity Market Capitalization q y p

Source: World Federation of Exchanges 2008

Recent evolution of Share Trading Value in USD g

Source: World Federation of Exchanges 2008

Share Trading Value g

Source: World Federation of Exchanges 2008

Investments Flows- New Capital Raised by Shares p y

Source: World Federation of Exchanges 2008

New Listings in Major Markets g j

700 600 700

London SE Number of Companies

500 300 400

Toronto SE

200

Nasdaq Australian SE

100

NYSE Tokyo SE Deutsche Borse

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: World Federation of Exchanges 2008

US Investors Holdings of Non-US Equities g q

2050

15% 15%

US$ Billions

1550

13% 13%

1050

9% 11% 9% 11%

550

7% 9% 7% 9%

50

3% 5% 3% 5%

• 450

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

3% 3%

$ Billions % of All Equity Holdings

Source: Federal Reserve Board Flow of Funds

NYSE Overview Statistics

Average daily volume Global market Year volume (Millions of shares) Global market capitalization ($T) Companies listed Percent turnover Seat prices 2005 1,582 $20.80 2,779 102% $2,600,000 2004 1,457 $19.80 2,768 99% $1,515,000 2003 1,398 $17.30 2,750 99% $1,500,000 2002 1,441 $13.40 2,783 105% $2,550,000 , $ , $ , , 2001 1,240 $16.00 2,798 94% $2,300,000 2000 1,042 $17.10 2,862 88% $1,700,000 1999 809 $16 80 3 025 78% $2 300 000 1999 809 $16.80 3,025 78% $2,300,000 1998 674 $14.00 3,114 76% $2,000,000 1997 527 $11.80 3,047 69% $1,750,000 1996 412 $9 20 2 907 63% $1 450 000 1996 412 $9.20 2,907 63% $1,450,000 1990 157 1,774 46% $430,000 1980 45 1,570 36% $275,000 1970 12 1,351 19% $320,000 1960 3 1,143 12% $162,000

Source: NYSE 2006

Inflation of CEO Pay in United States Inflation of CEO Pay in United States

Median CEO Pay in the US 1980- 2001 y

The level and composition of median CEO pay in the US

8

From 1980 to 2001

6 7 illions)

% 63 % 66 %

3 4 5 ian CEO pay ($ M

Salary and bonus Equity-based pay % % 54% 58% 60

1 2 Med

99% 93% 90% 95% 96% 92% 86%

32%

37% 40% 43% 49%

1980 1983 1986 1989 1992 1995 1998 2001

9

Source: Hall B. J; 2003.

Executive Pay as a Percentage of Workers Pay in the US 1990-2004 (S & P 500) ( )

500 600 400 200 300 100 1990 92 94 96 98 2000 2002 2004

• Includes salary, bonus, restricted stock, payouts on other long term incentives, and

The value of options exercised Source: Institute for Policy Studies/ United States for a Fair Economy.

Top Ten US Highest Paid CEOs p g

Table 1.2 US Top Ten Highest Paid CEOs in 2005 Company CEO Pay (USD ) Market Capitalization Rank p y y ( ) p (USD Billions) 1 IAC/ Interactive Barry Diller 295 000 000 14 2 Capital One Financial Richard D. Fairbank 249 000 000 18 3 Yahoo Terry S. Semel 230 000 000 47 y 4 Nabors Industries Eugene M. Isenberg 203 000 000 11 5 Colgate Palmolive Reuben Mark 147 970 000 27 6 Country Wide Financial Angelo R. Mozilo 142 000 000 22 7 Cendant Henry R. Silverman 139 960 000 21 y 8 KB Home Bruce E. Karatz 135 560 000 6 9 Lehman Brothers Holdings Richard S. Fuld 122 670 000 26 10 Abercrombie & Fitch Michael S. Jeffries 114 000 000 6 Source: Compiled from Sahadi J. (2006); Forbes (2006); Company proxy reports; FT Global 500.

Top Ten Paid Rest of World CEOs p

Table 1. 3. Rest of the World Highest paid CEOs in 2004 Rank Company CEO Pay (USD ) Market Capitalization (USD Billions) Rank (USD ) (USD Billions) 1 UBS Peter Wuffli 6 820 000 95 2 Roche Group Franz Humer 5 569 000 96 3 Banco Santander Central Alfredo Saenz 5 448 000 76 4 BP Lord Browne of Madingley 5 356 000 221 4 BP Lord Browne of Madingley 5 356 000 221 5 Nestle Peter Brabeck-Letmathe 5 165 000 110 6 Glaxo SmithKline Jean-Pierre Garnier 4 688 000 134 7 Nokia Jorma Olilla 4 292 000 72 8 Siemens Group Heinrich von Pierer 3 804 000 70 9 BHP Billiton Charles Goodyear 3 544 000 82 10 Novartis Group Daniel Vasella 3 290 000 124

Notes: Figures on market capitalisation are based on reports as per 31 March 2005.

Source: Compiled from Kitchens S. (2004); Forbes (2006) CEO Pay, Company proxy reports, FT Global 500.

Average US Top Ten Ceo Pay vs Rest of World g p y

178 million

(2005) Average US CEO top ten Pay

178 million

(2005) Average US CEO top ten Pay

4 8 illi

(2004) Average Rest of the world Top ten CEO Pay

4 8 illi

(2004) Average Rest of the world Top ten CEO Pay

4.8 million

Non US CEOs US CEOs

4.8 million

Non US CEOs US CEOs

Source: Data compiled from Kitchens S. (2004); Forbes (2006) CEO Pay, Company proxy reports, FT Global 500; Sahadi J. (2006).

Top Five US CEOs vs Top Five US Hedge Fund Managers CEOs 2005 Top Five US Hedge Fund Managers CEOs 2005

US $ million

1400 1500

1,400 1,600 US $ million 1,000 1,200

840

600 800 ,

203 230 249 295 500 550

400 600

147.97 203

200

Reuben Eugene M Terry S. Richard D. Barry Diller Paul Tudor Stev en George

• T. Boone

James Mark Isenberg Semel Fairbank Jones II Cohen Soros Pickens Jr Simons

Colgate- Palmolive Nabors Industries Yahoo Capital One Financial IAC / Interactive Tudor Investments SAC Capital Soros Fund Management BP Capital Management Renaissance Technologies

CEO Pay / S & P Index / Profits / Average Pay i US

450%

in US

350% 400%

Average CEO pay

409.2 % 326.6% 250% 300%

S&P 500 Index

296.2% 260.6% 150% 200%

Index

106.7% 50% 100% 106.7% 4 3%

Corporate Profits Average worker pay

• 50%

0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 4.3%

• 9.3%

Minimum wage

Source: Institute For a Fair Economy (2006).

Different Views on Company Orientation p y

Trends towards globalisation? Irresistible Markets Irresistible Markets

Globalisation of capital markets Emergence of new financial intermediaries To tap global financial resources require certain governance conditions Stronger international competition in product markets Mandates de facto convergence of cost structures and firm

• rganisation
• rganisation

These pressures could impact upon firm behaviour and decision- making

[Nestor and Thompson (OECD 2000)]

Evidence of European Convergence? p g

FOR Anglo American logic of corporate governance diffusing beyond Anglo-American logic of corporate governance diffusing beyond major corporations of DAX 30 in Germany Not just external forces but internal institutional investors Not just external forces but internal institutional investors Management introducing shareholder value incentive systems Small but significant change in distribution of net value added towards shareholders Orientation of firms towards international financial markets

[Reberioux(2002); Cernat (2004); Lane (2003); Jurgens, Naumann and Rupp (2000); Beyer and Hassel (2000)]

Evidence of European Convergence? p g

AGAINST Despite pressures towards adopting Anglo-Saxon standards remains considerable divergence – ‘institutional complementarity thesis’ Diversity of corporate models at the root of their competitiveness Change in distribution will threaten viability of diversified quality g y q y production Stakeholder model closer to the reality of European social democracy y p y

[Reberioux(2002); Cernat (2004); Lane (2003); Jurgens, Naumann and Rupp (2000); Beyer and Hassel (2000)]

IMMOVABLE INSTITUTIONS?

Theories of Convergence and Diversity

• f Governance Institutions

Convergence or Diversity in Corporate Governance? in Corporate Governance?

I

Hansmann and Kraakman in an article prophetically entitled The End

• I. Hansmann and Kraakman in an article prophetically entitled The End
• f History for Corporate Law (2001):

“Although there remained considerable room for variation in Although there remained considerable room for variation in governance practices and in the fine structure of corporate law throughout the twentieth century, the pressures for further idl i Chi f th convergence are now rapidly growing. Chief among these pressures is the recent dominance of a shareholder-centred ideology of corporate law among the business, government and legal entities in key commercial jurisdictions. There is no longer any serious competitor to the view that corporate There is no longer any serious competitor to the view that corporate law should principally strive to increase long-term shareholder value. This emergent consensus has already profoundly affected corporate governance practices throughout the world It is only a matter of time governance practices throughout the world. It is only a matter of time before its influence is felt in the reform of corporate law as well” (2001:1).

Convergence or Diversity in Corporate Governance? in Corporate Governance?

• II. McDonnell (2002) Widening the Lens

Criteria of corporate governance systems Criteria of corporate governance systems – Efficiency – Equity – Participation “The universe of theoretical possibilities is much richer than a The universe of theoretical possibilities is much richer than a dominant strand of the literature suggests, and we are currently far short of the sort of empirical evidence that might help us sort out these

• possibilities. Most commentators have focused on efficiency to the

p y exclusion of other values. Moreover, even if convergence occurs, there is a possibility that we will not converge on the best system. Even if we converge to the current best system, convergence still may g y g y not be desirable” (McDonnell 2002:2).

Convergence or Diversity in Corporate Governance? in Corporate Governance?

III. Mark Roe’s (1994;2003) path dependence thesis How political forces in America, anxious about the influence of concentrated financial or industrial monopolies, resisted any effort at concentration of ownership or ownership through financial concentration of ownership or ownership through financial institutions, resulting in dispersed ownership. In contrast European social democracy has tended to favour other stakeholder interests, particularly labour, as a system that promotes welfare among all citizens and attempts to prevent wide disparities. g p p p

Convergence or Diversity in Corporate Governance? in Corporate Governance?

IV. Jacoby (2001) “Regulatory policy in the United States had the unintended consequence of pushing U.S. companies in the direction of unrelated diversification whereas in Germany and Japan it unrelated diversification, whereas in Germany and Japan it continued on a pre-war trajectory of discouraging mergers in favour

• f cartels and of promoting corporate growth through internal

expansion rather than acquisitions. p q In other words, modern regulatory policy in the U.S. produced corporations who relied on markets to acquire ideas and talent, p q , whereas in Germany and Japan it produced corporations whose primary emphasis was on production and on the internal generation of ideas through development of human capital and

• rganizational learning
• rganizational learning.

The implications for corporate governance are straightforward: corporations favour shareholders in the U S so as to obtain capital corporations favour shareholders in the U.S. so as to obtain capital for diversification and acquisitions; they favour managers and employees in the Germany and Japan so as to create internal

• rganizational competencies” (Jacoby 2001:8).

Convergence or Diversity in Corporate Governance? in Corporate Governance?

V. La Porta et al (1998; 1999; 2000;2002) V. La Porta et al (1998; 1999; 2000;2002)

• Extensive international empirical research concerning countries

p g with dispersed and concentrated ownership, which demonstrates differences in the legal protection of shareholders was very influential.

• In many countries without adequate laws guaranteeing dispersed

shareholder rights, the only alternative appeared to maintain shareholder rights, the only alternative appeared to maintain control through concentrated ownership.

• This leads to the conclusion the law determines the ownership
• This leads to the conclusion the law determines the ownership

structure and system of corporate finance and governance. Jurisdictions where the law was more protective encouraged the emergence of more dispersed ownership (Pinto 2005:19) emergence of more dispersed ownership (Pinto 2005:19).

Convergence or Diversity in Corporate Governance? in Corporate Governance?

• VI. Coffee (2001) concludes that it was market institutions

that demanded legal protection rather than the other way around:

“The cause and effect sequence posited by the La Porta et al thesis may in effect read history backwards They argue that strong markets may in effect read history backwards. They argue that strong markets require strong mandatory rules as a precondition. Although there is little evidence that strong legal rules encouraged the development of either the New York or London Stock Exchanges (and there is at least id th t t l l l hi d d th th f th P i some evidence that strong legal rules hindered the growth of the Paris Bourse), the reverse does seem to be true: strong markets do create a demand for stronger legal rules…. Eventually, as markets have matured across Europe, similar forces have led to the similar creation of European parallels to the SEC. In each case law appears to be responding to changes in the market each case, law appears to be responding to changes in the market, not consciously leading it” (Coffee 2001:6).

Convergence or Diversity in Corporate Governance? in Corporate Governance?

VII. Licht (2001) Deep Cultural Causation “A nation's culture can be perceived as the mother of all path

• dependencies. Figuratively, it means that a nation's culture might

be more persistent than other factors believed to induce path p p

• dependence. Substantively, a nation's unique set of cultural values

might indeed affect — in a chain of causality — the development of that nation's laws in general and its corporate governance system that nation s laws in general and its corporate governance system in particular” (2001:149).

Convergence or Diversity in Corporate Governance? in Corporate Governance?

VIII Gordon and Roe (2004) Institutional Complementarities “Corporate governance consists not simply of elements but of systems…Transplanting some of the formal elements without regard for the institutional complements may lead to serious problems later and the institutional complements may lead to serious problems later, and these problems may impede, or reverse, convergence” (Gordon & Roe (2004:6). Optimal corporate governance mechanisms are contextual and may vary by industries and activities. Identifying what constitutes good corporate governance practice is complex and cannot be templated corporate governance practice is complex, and cannot be templated into a single form. One needs to identify the strengths and weaknesses in the system but also the underlying conditions which the system is dependant upon (Pinto 2005:31; Maher and Andersson 2000). The institutions that th t f t d l t h compose the system of corporate governance and complement each

• ther consist not just of the law, finance, and ownership structure.

Possible Alternative Directions Possible Alternative Directions For Governance Diversity

Multiple Convergence of Governance Institutions and Relationships and Relationships

MARKET

LAW ANGLO-AMERICAN Responsibility (Institutional Investors

ONSHIPS

Shareholder Value (Capital Markets) ANGLO AMERICAN (Institutional Investors Stakeholder Communities)

RELATIO

Accountability (I tit ti l I t ) ( p ) (Institutional Investors) GERMAN JAPANESE PRINCIPLES Transparency Disclosure (R l t / I t ) ACCOUNTABILITY / WEAK RESPONSIBILITY REPRESENTATION / STRONG RESPONSIBILITY (Regulators / Investors)

STAKEHOLDERS

Corporate Governance Convergence: Alternative Directions Directions

INSTITUTIONS

DIVISIBLE INDIVISIBLE GLOBAL CROSS CHICAGO SCHOOL

NCE

STRONG REFERENCE CHICAGO SCHOOL

( UNIVERSAL MARKET

NVERGEN

( U S BASED SYSTEM) ( UNITARY SYSTEM )

CON

NATIONAL CROSS REFERENCE INSTITUTIONAL COMPLEMENTARITY WEAK

( IMPROVED VARIETY OF GOVERNANCE SYSTEMS) ( VIABLE DISTINCTIVE GOVERNANCE SYSTEMS)

ACCOUNTABILITY / WEAK RESPONSIBILITY REPRESENTATION / STRONG RESPONSIBILITY

Source: Adapted from Bratton and McCahery, 1993: 30.

Leverage Differentiation? g

Corporate governance systems are embedded in legal traditions, p g y g interact in complex ways with other institutional features, and are affected by national political dynamics. Longitudinal evidence suggests limited international convergence in governance systems in recent decades. Rather than the abandonment of structures that delivered efficiency and prosperity in the past, there is considerable scope for diversity. The “one size fits all” approach of convergence advocates is culturally and economically insensitive. The dominant form of ownership throughout the world remains family

• wnership.

[Guillen(2000); Rhodes and Apeldoorn (1998); Branson (2001)]

• wnership.

[Guillen(2000); Rhodes and Apeldoorn (1998); Branson (2001)]

CCG Website: www.ccg.uts.edu.au g