代写留学生作业Topics in Business Economics (ID-4244M), 2009/10 Lecture 10: Corporate governance
Introduction
In whose interest do (or should) companies operate?
Is there a role for public policy in shaping the internal governance of companies?
Perceived weaknesses in governance:
accountability of directors
lack of information for shareholders
business fraud
concerns over executive pay
1. Introduction
Need for ‘good governance’ widely accepted but what is corporate governance?
‘the system by which companies are directed and controlled’ (Cadbury Committee)
‘the structures, process, cultures and systems that engender the successful operation of organisations’ (Keasey et al. 1997)
Economic perspective: make principal-agent relationship work efficiently
focus on strengthening the role of shareholders as ‘owners’ of firm
Concern that principal-agent relationship not working well → reforms
Modern reform process started in UK (Cadbury Committee, 1991); now a global issue
1.2 Meaning of ‘corporate governance’
Describes the organizational structure at the top of the firm, including:
Top-level incentives
Partitioning of decision rights
Board of directors
Top management
Outside monitors
Shareholders elect a board of directors with primary decision control rights
Shareholder-owners have limited liability
Corporations may establish governance procedures within legal boundaries
1.3 Lecture structure
The principal-agent view
The role for public policy
The reform of corporate governance
Criticisms of reform
Towards an alternative approach
Summary and conclusions
2. Principal-agent view of governance
Separation of ownership and control → incentive problems
Markets often seen as most effective constraints on managers (capital; managerial labour; corporate control)
This approach focuses on rational behaviour; farsightedness
firm’s existing corporate governance structure viewed as outcome of voluntary bargaining process between insiders and outsiders
e.g. Jensen and Meckling’s (1976) model (see lecture 5)
capital market perceives incentive problems and monitoring costs; prices equity accordingly
owner-manager bears cost of dilution (other benefits offset)
2. Principal-agent view of governanceImportant feature of this model, and market-based view of governance, is ex ante anticipation and evaluation of agency problem
Implication is that existing pattern of monitoring and incentives is optimal
Innovations (e.g. share options; leveraged buy-outs) emerged as an efficient response to perceived agency problems
2. Principal-agent view of governance
From this perspective, ex post intervention in private arrangements said to have a negative impact
would distort otherwise efficient outcomes
Basic structure of corporate governance institutions:
board of directors accountable to shareholders
elected non-executive directors
independent auditors
Said to ensure profit maximisation → social welfare maximisation
Limited role for shareholder intervention (‘voice’)
‘exit’ emphasised in liquid stock markets (i.e. selling shares if not satisfied)
3. What role for public policy?
Principal-agent view argues any problems not structural; rational agents arrive at best private solution
Legislation not required; voluntary adoption will occur
Imposed regulations increase running costs of a shareholder-owned firm
would lead to lower flotation price and reduce public offerings
Hence legislative regulation is said to be inefficient
3. What role for public policy?
If there are problems with corporate governance, these arise because of market failures (not structural weakness):
e.g. managerial labour market; market for corporate control
Policy implication: make these markets work better; strengthen shareholder power
BUT we have seen that there may be inherent problems in these markets - market failure may be unavoidable
4. The reform of corporate governance
(see Jones, 2004; Keasey et al, 2005)
Concerns recognised
collapse of companies when annual reports indicated were profitable
lack of transparency of company activity to shareholders
competence of directors
adequacy of board structures and processes
growing business fraud
payments to directors and senior managers unrelated to performance
short-term nature of corporate performance measures
Recommendations and responses focused on addressing weaknesses of shareholder control (see sheet)
5. Criticisms of reform: i) evidence-based
Keasey et al. (2005) note limited success from changes
post-Cadbury Committee, executive pay continued spectacular rise (problem of strong stock-market)
Greenbury recommended move from share-options to ‘long term incentive plans’ (LTIPs)
LTIPs allow for payment of shares (and/or cash) dependent upon benchmarking of firm’s performance against sample of rivals over lengthy period
but evidence suggests (as with share options) have been unsuccessful (see Buck et al., 2003 – see lecture 6)
Weir et al. (2002) examine impact of board structure on company performance, following UK recommendations
Test hypotheses about impact on performance of:
proportion of (independent) non-executive directors (+ve)
same individual has roles of chief executive and chairman (-ve)
presence of (independent) audit committee (+ve)
quality of non-executive non-executives on audit committee (+ve)
Also compare with:
proportion of shares held by external investors (+ve)
threat of takeover (+ve)
(Use Tobin’s Q as measure of performance)
Results
little relationship between board structure and performance (most coefficients insignificant)
some evidence that quality of audit committee members has +ve relationship
market for corporate control has a significant and important impact
Results
little relationship between board structure and performance (most coefficients insignificant)
some evidence that quality of audit committee members has +ve relationship
market for corporate control has a significant and important impact
Anglo-American approach sees corporation as a private institution, defined by the principal-agent relationship
hence narrow focus in corporate governance issues on making the relationship work better; shareholders privileged
e.g. Higgs review of role of non-executive directors suggests ‘promoting closer relations between non-executive directors and major shareholders’
But experience suggests unlikely to occur (managers tend to resist shareholder interventions)
Anglo-American approach sees corporation as a private institution, defined by the principal-agent relationship
hence narrow focus in corporate governance issues on making the relationship work better; shareholders privileged
e.g. Higgs review of role of non-executive directors suggests ‘promoting closer relations between non-executive directors and major shareholders’
But experience suggests unlikely to occur (managers tend to resist shareholder interventions)
Anglo-American approach sees corporation as a private institution, defined by the principal-agent relationship
hence narrow focus in corporate governance issues on making the relationship work better; shareholders privileged
e.g. Higgs review of role of non-executive directors suggests ‘promoting closer relations between non-executive directors and major shareholders’
But experience suggests unlikely to occur (managers tend to resist shareholder interventions)
Branston et al. (2001) have propose a radical alternative view of corporate governance
argue that the goal of corporate governance should be to ensure that corporations act in the ‘public interest’
focus on ‘strategic failure’ in contrast to ‘market failure’ concerns of business economists
Branston et al. (2001) have propose a radical alternative view of corporate governance
argue that the goal of corporate governance should be to ensure that corporations act in the ‘public interest’
focus on ‘strategic failure’ in contrast to ‘market failure’ concerns of business economists
http://www.1daixie.com/liuxueshengzuoye/Branston et al. (2001) have propose a radical alternative view of corporate governance
argue that the goal of corporate governance should be to ensure that corporations act in the ‘public interest’
focus on ‘strategic failure’ in contrast to ‘market failure’ concerns of business economists
from this they develop an alternative view of the firm:
“a firm is the means of co-ordinating production from a centre of strategic decision-making”
Power of control in a corporation is the power to make strategic decisions
Impact of firm depends on who makes strategic decisions
note: not every decision is a strategic one; strategic ones are the most important
Example: Microsoft made a strategic decision to charge PC makers different prices for Windows (helped maintain barriers to entry)
6.1 Strategic failure and the nature of the firm
from this they develop an alternative view of the firm:
“a firm is the means of co-ordinating production from a centre of strategic decision-making”
Power of control in a corporation is the power to make strategic decisions
Impact of firm depends on who makes strategic decisions
note: not every decision is a strategic one; strategic ones are the most important
Example: Microsoft made a strategic decision to charge PC makers different prices for Windows (helped maintain barriers to entry)
Raises question of who governs corporation and on what basis?
Branston et al. argue currently real control is exercised by groups of large shareholders and senior managers/directors (in all economies)
In UK and US, shareholding less concentrated than in Europe
But corporations still maintain relationships with large institutional investors
e.g. Vodafone holds briefing meetings with major institutional shareholders
Raises question of who governs corporation and on what basis?
Branston et al. argue currently real control is exercised by groups of large shareholders and senior managers/directors (in all economies)
In UK and US, shareholding less concentrated than in Europe
But corporations still maintain relationships with large institutional investors
e.g. Vodafone holds briefing meetings with major institutional shareholders
Identifying who governs therefore important:
interests will vary between decision makers and people affected by corporation’s activities
control of a corporation implies ability to determine broad objectives despite resistance from others
Branston et al. argue that policy on corporate governance should recognise the variety of interests in corporation’s activities
failure to consider the public interest → ‘strategic failure’
suggested solution is to democratise governance
Economic theory does have some notion of social impact of private actions:
e.g. market failure leads to reduction in economic welfare
Branston et al. argue this is too narrow a concept of ‘public interest’
fails to consider corporate strategy and its impact on all parties affected
Mechanisms by which differences between actual outcomes and desired outcomes can be tackled:
Exit:
exit is synonymous with market activity (e.g. selling shares; not purchasing from company)
exit is impersonal and indirect → lies behind ‘invisible hand’ view
market-based view of corporate governance focuses on ‘exit’ mechanism
Voice:
voice represents a continuum of involvement
focus on lobbying for improvement
criticism, protest, alternative proposals all forms of voice
recognised to be more ‘messy’ than exit
voice argued to be central to ‘strategic-failure’ view of corporate governance
Mechanisms by which differences between actual outcomes and desired outcomes can be tackled:
Exit:
exit is synonymous with market activity (e.g. selling shares; not purchasing from company)
exit is impersonal and indirect → lies behind ‘invisible hand’ view
market-based view of corporate governance focuses on ‘exit’ mechanism
Voice:
voice represents a continuum of involvement
focus on lobbying for improvement
criticism, protest, alternative proposals all forms of voice
recognised to be more ‘messy’ than exit
voice argued to be central to ‘strategic-failure’ view of corporate governance
Corporate governance issues high on public policy agenda
Principal-agent concerns dominate interpretation and response
market failures seen as central
solution to improve external market discipline
and strengthen shareholders (principals) rights
Limited evidence of success
代写留学生作业More fundamentally some have questioned focus on ownership and therefore whether shareholders’ interests should be privileged
Branston et al. present a critical perspective on current policy towards corporate governance; similar to Kay in questioning current emphasis on the shareholder interest
Suggest a number of policy changes to remedy strategic failure (radical changes, not market solutions)