Corporate Governance Piero Formica Visiting Professor Faculty of Economics and Business Administration University of Tartu Tartu, 25 October 2002 [email protected]

Corporate GovernanceCorporate Governance

Piero FormicaPiero Formica

Visiting ProfessorVisiting Professor

Faculty of Economics and Business AdministrationFaculty of Economics and Business Administration

University of TartuUniversity of Tartu

Tartu, 25 October 2002Tartu, 25 October [email protected]@bo.nettuno.it

Corporate GovernanceCorporate Governance• Process by which organisations areProcess by which organisations are

• DirectedDirected

• ControlledControlled

• Held to accountHeld to account

• The process encompassesThe process encompasses• AuthorityAuthority

• AccountabilityAccountability

• StewardshipStewardship

• LeadershipLeadership

• DirectionDirection

• ControlControl

Accountability means the requirement of those who in the organisations hold the power to render an account both to their constituencies and themselves and to explain what they are doing and why.

• The set ofThe set of• IncentivesIncentives

• SafeguardsSafeguards

• Dispute resolution processDispute resolution process

Corporate Governance SystemCorporate Governance System

• ShareholdersShareholders

• Contractual partnersContractual partners• EmployeesEmployees

• CustomersCustomers

• SuppliersSuppliers

• creditorscreditors

• Communities andCommunities and

• Societies in which the company operatesSocieties in which the company operates

Those who are involved….Those who are involved….

The corporate structure does affect the corporate governance

HQsHQs

BU

?

ENRONCORPORATE BUREAUCRACYCORPORATE BUREAUCRACY

Decentralisation & fragmentation + tight monitor of the subsidiariesDecentralisation & fragmentation + tight monitor of the subsidiaries

18familist behaviour social distrust

family businessesfounder-entrepreneurs

firms atomisedand distrustful of one another

weak associational lifeentrepreneurial energy

family ownership concentration

kinship groups

? The third generation syndrome - the “Bunddenbrooks” phenomenon

PRIVATELY OWNED, FAMILY-RUN, PRIVATELY OWNED, FAMILY-RUN, SMALL- AND MEDIUM-SIZEDSMALL- AND MEDIUM-SIZED

COMPANYCOMPANY

30%

70%

50%

50%

80%80%

20%

ENTREPRENEURIAL COMPANYENTREPRENEURIAL COMPANY

The type of market economy does affect the type of corporate governance

• Co-ordinate market Co-ordinate market economieseconomies– Interlocking policies and

institutions.– Long term relationships.– Intermediate bodies Intermediate bodies (PPP - PPP -

the agency model >>>the agency model >>>) to regulate relationships, embedded in a culture of corporatism >>>corporatism >>>.

– High taxation and high subsidies.

• Liberal market economiesLiberal market economies– Market mechanism to

regulate relations.

– Free agents in co-opetitionco-opetition.

– Low taxation and low subsidies.

CorporatismCorporatism

<<< Corporatism<<< Corporatism is a rather extreme version is a rather extreme version of the legitimate relationship between of the legitimate relationship between interest groupsinterest groups and government in that it and government in that it tends to restrict the number of interest tends to restrict the number of interest groups involved in the policy processgroups involved in the policy process

(B. G. Peters)(B. G. Peters)

CorporatismCorporatism

<<< Corporatism<<< Corporatism is an arrangement is an arrangement

characterized by a “limited number of characterized by a “limited number of

singular, compulsory, non-competitive,singular, compulsory, non-competitive,

hierarchically ordered and functionallyhierarchically ordered and functionally

differentiated” groups that are given adifferentiated” groups that are given a

virtual license to represent theirvirtual license to represent their

particular area of competence.particular area of competence.

(Definition put forth by P. Schmitter, (Definition put forth by P. Schmitter, quoted by Peters)quoted by Peters)

Forms of corporatism (1)Forms of corporatism (1)“Societal corporatism”

Interest groups are the leading actorInterest groups are the leading actor of policy making (P. Schmitter).

“State corporatism” GovernmentGovernment is the dominant actordominant actor (P. Schmitter).

“Liberal corporatism” or “corporate pluralism” A less formalised relationshipless formalised relationship between interest groups and

government. A more intense negotiationmore intense negotiation among the groups themselves during

the process of policy making (G. Lehmbruch, quoted by Peters).

“Meso-corporatism” or “negotiated economy” Less restrictive variations of the general pattern of relationship

between the public sector and organised, private interests (Peters).

Forms of corporatism (2)Forms of corporatism (2)

““Negotiated corporatism”Negotiated corporatism” • Unaccountable powerUnaccountable power and concerted actionsconcerted actions are shared between

• politicians, • public officials, • former government and party functionaries • and the most activist self-interested parties entrenched on the top of the subsidies’ mountain.

• Symbiotic relationshipsSymbiotic relationships between them impair the efficiency operation of the economy.

Public-Private PartnershipPublic-Private PartnershipThe Agency ModelThe Agency Model

Laissez faireLaissez faire Commanded economyCommanded economy

BUSINESS GOVERNMENT

PPPPPPPublic-Private PartnershipPublic-Private Partnership

““Quasi governmental development agency”Quasi governmental development agency”

Benign neglect

Conflict

CO-OPERATION

PPP….PPP….Aggregation of pressure group interestAggregation of pressure group interest

• Associational activities•Industry associations

•Trade associations

•Professional associations

• Unions

• Consortia of firms

=Collectivist democracy in which public interest adds Collectivist democracy in which public interest adds up to the aggregate of these pressure group interests.up to the aggregate of these pressure group interests.

• A board of plainly independent >>> and independent >>> and autonomous >>>autonomous >>> directors, neither chosen by the chief executive office directly nor through the influence of partisan partisan politicking politicking >>>.

BUT: Political parties with the complicity of

organised economic groups (vested interests) select and appoint the directors >>>.select and appoint the directors >>>.

Critical Issues Critical Issues (1) Independency and Autonomy(1) Independency and Autonomy

<<< The appointment process<<< The appointment process has to has to be open and formalbe open and formal. .

BUT:BUT:

Directors, executives, project co-ordinators are Directors, executives, project co-ordinators are approached informallyapproached informally by by political factionspolitical factions and asked and asked to take the job, being them to take the job, being them drawndrawn almost invariably almost invariably from the ranks of political parties or collateralfrom the ranks of political parties or collateral to them. to them.

Critical Issues (1 continued) Critical Issues (1 continued)

<<< Independence<<< Independence• When directors are on a board they are there precisely as

directors of that company and should not have the interests should not have the interests of any other body in mindof any other body in mind.

• NorNor there should be ties between the directors and the ties between the directors and the managementmanagement.

BUT: Directors hold several appointmentsseveral appointments that are at odds with the

principle of independence. Directors change their positionchange their position into that of managers, and

conversely.

Critical Issues (1 continued)Critical Issues (1 continued)

<<< Autonomy<<< Autonomy• An opponentopponent in the board who can act as a

spokesmanspokesman and “level the playing field” for shareholders who do not agree with management.


<<< Partisan Politicking<<< Partisan Politicking• The tenets of political representation has often

provoked two casualties: A corporate conduct for which inappropriate

links, cosy or collusive arrangements and currying favour with politicians and party functionaries have been the traditional deal-making habit of the agency.

A board too large to be fully efficient, and sometimes lacking in the necessary breadth of skills which are needed.


• Board directors should take responsibilityresponsibility for assigned tasksassigned tasks.

BUT: Directors are often appointed on a part-time a part-time

basebase, which do not allow them much time to attend meetings.

They are not paid enoughnot paid enough to devote proper attention to the job.

Critical Issues Critical Issues (2) Responsibility(2) Responsibility

• Board arrangements should define:• Roles and responsibilities of the chairman and chairman and

the chief executive >>>the chief executive >>>.• Policies concerning the use and the appointment

of non-executive directors.• Formation and role of the audit committee >>>audit committee >>>.

Critical Issues Critical Issues (3) Board Arrangements(3) Board Arrangements

<<< Chairman and the chief executive<<< Chairman and the chief executive What is crucial but it often lacks:

• A clear-cut distinctionA clear-cut distinction of role between the chairmanchairman and the chief executivechief executive

– the chairmanchairman’s job being that of a non-executive who manages the boardmanages the board, and

– the chiefchief executiveexecutive’s one that of running the running the businessbusiness.

• In addition, the boardroom should be enriched with the new blood of a strong independent a strong independent deputy chairmandeputy chairman to act as a counterweightcounterweight to a chairman with a wealth of experience.


<<< Audit committee<<< Audit committee The members of the agency’s auditing panel must be

genuinely independent. The internal auditors more powerful so as they can

withstand the pressure from the boardwithstand the pressure from the board. Auditors must observe ethicalethical as well as technical normsnorms.

BUT: Often, they do not stop rubber-stamping decisionsdo not stop rubber-stamping decisions

taken by the board. Paid consultantsPaid consultants for the agency sit on the audit sit on the audit

committeecommittee.


References

Australian National Audit Office (1999), Principles and Better Practices: Corporate Governance in Commonwealth Authorities and Companies , Canberra, Australian National Audit Office

Guillén, M.F. (2000), Corporate Governance and Globalization: Is There Convergence Across Countries? The Wharton School and Department of Sociology, University of Pennsylvania

Hall, P. A. and Soskice, D. (Editors) (2001), Varieties of Capitalism: the Institutional Foundations of Corporate Advantage, Oxford University Press

Henderson, D. (2001), Anti-liberalism 2000, The Institute of Economic Affairs, London

Joseph, E. and Parkinson, J. (2002), “Confronting the Critics”, New Academy Review, No.1

Koremenos B. and Lynn L. E. ,Jr. (2001), “Leadership of A State Agency: An Analysis Using Game Theory”, The University of Chicago – The Irving B. Harris Graduate School of Public Policy Studies, Working Paper Series: 94.3

Marino, A. M. and Matsusaka, J. G. (2001), Decision Process, Agency Problems and Information: An Economic Analysis of Budget Procedures , University of Southern California, Department of Finance and Business Economics, Working Paper No. 01-05 August (http://www.marshall.usc.edu/web/FBE.cfm?doc_id=1491)

Olson, M. (2000), Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships, Basic Books, New York

Peel, Q. (1999), “A poisoned chalice”, Financial Times, Thursday July 15

Peters, B. G. (2001), The Politics of Bureaucracy, Routledge, London-New York

Posner, R. A. (1995), Overcoming Law, Harvard University Press

Selznick, P. (1966), TVA and the Grass Roots, Harper, New York

Stevens, R. B. and Yamey, B. S. (1965), The Restrictive Practices Court, Weidenfeld and Nicolson, London

The Chartered Institute of Management Accountants (1998), Corporate Governance and Control, London

Wheeler, D. and Sillanpää, M. (1998), The Stakeholder Corporation - a blue print for maximazing stakeholder value, Pitman Publishing, London

Documents

Corporate Governance Piero Formica Visiting Professor Faculty of Economics and Business Administration University of Tartu Tartu, 25 October 2002 [email protected]