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.
Critical Issues (1 continued)Critical Issues (1 continued)
<<< 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.
Critical Issues (1 continued)Critical Issues (1 continued)
• 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.
Critical Issues (3 continued) Critical Issues (3 continued)
<<< 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.
Critical Issues (3 continued) Critical Issues (3 continued)
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