THE LONG-TERM PROFIT MAXIMIZATION NORM AND THE CURRENT DEVELOPMENTS IN CORPORATE GOVERNANCEAgata Waclawik-WejmanCenter for Banking Law, Jagiellonian University Cracow

IQPC Corporate Governance Summit Dubai - February 9-10, 2009

Re-focusing corporations on long-term objectives – the key issues

What are the binding corporate goals for the corporate decision-making?

The recent developments in corporate governance mechanisms to ensure the long-term success of the corporation

Structure of this presentation

I. The key corporate decision-makers

II. The increasing role of shareholders in corporate governance

III. Other CG actors: auditors, rating agencies

I. The Corporate Decision-Makers

Corporate agents’ (Management/directors/key shareholders) duty to pursue corporate goals

Decision-making in a multi-stakeholder environment

Short-term v. long-term objectives

1. Corporate Agents’ Duties

Centralized management and the duty to pursue the corporate goals: The common goal of shareholders? The multiple goals of all stakeholders?

Corporate law protections against mismanagement?

Stealing and shirking

2. Decision-making in a multi-stakeholder environment Shareholders

Financial investors as shareholders Creditors Clients Employees Environment Public interest - new: financial stability

concerns Giving back to the society: charitable

donations

3. Short-term v. long-term objectives

Reconciling the conflict: Short-term success and forgoing of long-

term objectives Indefiniteness of „long-term” and the

managerial risk averseness

Maximizing profits v maximizing the market value

Solutions

Designing the decision-making process, including the board’s involvement in:

Strategy Setting appropriate long-term objectives and

interim milestones Continuous assessment of the management’s

performance Risk management Executive compensation

Alignment with long-term objectives

II. The increasing role of shareholders in corporate governance

1. Enhancing shareholder rights2. Facilitating the exercise of the existing

shareholder rights

The Underlying Issues: Growing institutional ownership Internationalization of shareholdings Shareholder passivity/Shareholder activism

The alignment between the economic interest and voting rights

Infrastructural barriers and integration processes

1. Enhancing Shareholder Rights

General Meetings European Union: Shareholder Rights Directive 2007/36/EC

Adding items to the GM agenda (Art. 6.1a) Shareholder Proposals (Art. 6.1b) Rights to ask questions (Art. 9)

Shareholder approval and communication requirements

Board Appointment/Compensation Directors’ remuneration

European Union: EU Commission’s Recommendation 2004/913/EC

Strategic decisions European Union: Takeovers Directive 2004/25/EC

2. Facilitating the exercise of shareholder rights

The Shareholder Rights Directive 2007/36/EC

The EU initiatives to remove barriers to clearing and settlement of securities transactions

Shareholder Rights Directive removes some barriers… Equal treatment (Art. 4)

Easier access to GM-relevant information (Art. 5, 14)

Easier access to the GM (Art. 7)

Striking down the personal presence requirement Exercise of voting rights through proxies and nominees

(Artt. 10-11, 13) Electronic voting (Art. 8) Voting per mail (Art. 12)

… but the key barriers in cross-border voting in Europe are related to securities infrastucture

Longer chains of intermediaries

Late or missing GM-relevant information

Fragmentation of the securities clearing and settlement infrastructure: non-recognition of cross-border intermediary chains The last intermediary in the local chain considered the

shareholder Property-system-driven fragmentation Regulation-driven fragmentation

Uncertainty as to the role of the intermediary Some consequences:

Application of mandatory bid thresholds to the holdings of the intermediary

Split Voting and Partial Voting not permitted Non-recognition of proof of shareholdings issued by a foreign

intermediary

Intermediated holding systems The modified relations between the issuer and investor

The intermediary system substitutes the “evidentiary system” of certificated securities.

The effect: the investor enters into a legal agreement with its intermediary/account provider to purchase and manage securities.

The issuer – investor relationship is substituted by a set of legal relationships, with various rights and obligations related to the administration of this evidentiary system by the account provider, which:

Facilitate and streamline the process of mass turnover of securities / can channel certain communication between the issuer and the investor,

Are more complex from the legal point of view: the relationships between the issuer and account providers, and between the account providers and the investors /account holders.

Fragmentation and complexity of account provider chains – a simplified scheme

Issuer

Account Provider

Country B

Country A

Account Provider

Account Provider

Account Provider

Investor

[…]

?

The EU works on cross-border securities clearing and settlement

The EU identified the fragmentation of the securities clearing and settlement infrastructure as a key barrier to the capital markets integration in Europe

The Giovannini Reports - Barriers: technological, legal and tax

Three expert groups: CESAME, Legal Certainty Group and FISCO

Private sector best practices as the primary solution, subsidiarity of the harmonisation through legislation – the private sector work is still ongoing Code of Conduct

Target2-Securities

III. Other external monitors in CG

Auditors

Credit rating agencies

Conclusions (I)

Bottomline The key factors of a long-term focus

in corporate governance:

The goals

The actors

The process

Conclusions (II) The corporate governance tools for re-focusing on

the long-term success of the corporation: Corporate Decision-Makers

Focus on the long-term corporate goals and prevent conflict of values/interests

Focus of shareholder interest within the limitations of the multi-stakeholder framework

Ensure a decision making process for the realization of long-term objectives – board cooperation

Shareholders Growing importance of shareholders as corporate governance actors Enhancing and facilitating shareholder involvement in key corporate

decisions Identifying and resolving conflicts of interest

The alignment of the economic interests and voting rights

Other corporate governance actors Auditors, rating agencies: Improving assessment criteria and tools Identifying and resolving conflicts of interest

Thank you!

Agata Waclawik-Wejmanagata at wejman.pl

Center for Banking LawJagiellonian University Cracow

ul. Bracka 1231-005 Cracow, Poland

Tel./Fax. +48 12 422 09 08