High levels of external control in the UK could be due to differences in bankruptcy procedures in the UK and US. UK bankruptcy is credit orientated system which has high liquidations and closures, the US runs a debit orientated system. The lasting implication of this means less protection of owners and managers in the UK compared to the US.
Regulatory rules, in particular the issuance of dual classes of shares, contributes to the differences in forms of corporate governance and control across countries. Some countries have minimum ratios of votes that different classes of shares may take to each other e.g. in Denmark, class B shares cannot have less than one tenth of the voting rights of class A shares. Only about one percent of companies in the UK have dual class shares and four per cent in the US – German and Japanese firms also have low proportions Rydqvist while 75% of quoted firms in Denmark have dual class shares, a trend which is mirrored throughout Scandinavia, Israel and Italy. Dual class shares could be related to the threat of takeover as dual class shares may be viewed as a form of defense as well as a tool to extract higher bids from acquiring companies.
In Germany voting right restriction are employed and limit the maximum proportion of votes that any one shareholder can cast, irrespective of how many shares they possess. This can be a considerable hurdle that hostile takeover find difficult to overcome. If there was an attempt to create one single system of corporate governance and limiting dual class shares to a proportion of issued capital and discouraging voting right restrictions were conditions, it would have the effect of permitting predators access to new markets just as takeovers in the UK allow acquiring companies to fulfill their corporate strategies.
Control through supervisory boards are dependent upon a stable ownership structure which discourages hostile outside acquisitions.
Most countries do not need hostile takeovers. If we look at industrial groupings, particularly in Japan where they are most formally organized, we will observe that the groupings are sustained by interrelated shareholdings e.g. the Mitsubishi Group: 18% of the shares in Mitsubishi bank, 25% of the shares in Mitsubishi Corporation and 17% of shares in Mitsubishi heavy industries are cross shareholdings by the three companies.
Nearly all shareholdings in the UK is held by pension funds and life assurance companies on behalf of private investors
There are concentrated shareholdings in Continential Europe and Japan but not in the UK and US Franks and Mayer 1992a found that in the 200 largest German companies almost 90% have at least one shareholder with a stake of at least 25% of issued equity. There is no equivalent figure in the UK, as no single shareholder holds in excess of 10% of issued equity. This creates a case for stewardship and an incentive for the shareholders to have an active role in the company due to the large investment at stake.
Continential European and Japanese capital markets are criticized for preventing free access of ownership and control to overseas purchasers. Continental Europe continues to suffer from poor disclosure, and ill-treatment of minority investors remains only too common. Japan continues to labour under a governance structure wholly unsuited to the realities of the modern global economy. It needs systemic reform
The rules by which a takeover bid takes place – The thirteenth directive on Company law and the statute for a European economy. Companies are free to place limits on the number of votes that could be cast by any individual shareholder. (dual class equity?)
Insider systems the ownership of individual firms is concentrated in a small number of other firms, banks and families or inside the firm itself. The firm may be family owned as is commonplace in countries such as Italy, Sweden and Germany. Cross shareholdings between firms are commonplace, particularly in Japan where firms operate in a network structure and have large stakes in each other. Reputation of firm is at stake of the firm – board members are members of many boards Benefits of this include decisions being taken which are in the interest of all the effected parties, this is particularly a consideration in cases where it is difficult for formal arrangements i.e. contracts to be made, maybe because it is difficult and costly to document all eventualities.
Concentrated shareholdings may encourage better management – incentive to monitor and control corporations. When German firms come to the stock market they are backed by German banks – who put their names and therefore reputation to the long term prospects of the public offering – it is thought that banks would only do this if they were convinced there is a well proven track record and therefore it is a good investment for them.
In France the government owns a lot of companies and ‘golden shares’ exist which can decide the fate of a company.
In insider systems of corporate governance senior management are free from the pressure to massage share price to a high level which enables them to devote scarce management time and investment to the company’s long term needs. The downside of this is there are no cash injections from the public and firms tend to be reliant upon banks or the families that own them, often meaning they have more limited options.
Outsider systems, such as the UK and US ownership is dispersed among a large number of individual and institutional investors meaning that control is outside of the firm. There are many advantages to this method of corporate governance, anyone with a good idea can access capital from the outside market through listing on the stock exchange and trading its shares. Transparency is another large advantage, investors require information on an ongoing basis, which often takes place via open communication i.e. the financial press and public documents which are open to scrutiny. However, on the other side of the coin the objective of outside investors is to maximize profit, which may be to the detriment of the firm i.e. dominant investors such as insurance companies are trying to maximize their returns so only hold a short term interest in the firm, their purchasing decisions are made upon the basis of the firms share price. The owners of the firm recruit the managers. It is therefore the managements responsibility to please the shareholders(owners). As the shareholders main concern is the current share price, managers in outside systems of corporate governance have to base their decisions upon short term interests. As a result strategic thinking, R & D and training are under developed. With the recent wave of new technology easy access to sources of outside capital was a very important factor (dot coms sold part of the firm, transferring ownership and becoming rich in the process, but society at large benefited – internet. Money was driving force)
Portfolio diversification at expense of corporate governance? Are takeovers a response to inappropriate structures of ownership and control. Outsider system does not encourage the creation of implicit contracts. The shortcomings of governance in outsider systems can be seen through high pay packets taken home by senior executives
Different systems are better suited to different activities” Jenkinson and Mayer
More hostile takeovers
New management accounting techniques enabled a method of synthesizing managerial activity, which enabled owners to delegate control to managers. This was done through the introduction of ROCE or return on capital employed, an accounting ratio, which allowed owners to control what managers do through the means of one simple piece of information. Shareholders do not need to know how managers are achieving high ROCE, so long as they are achieving it. This enables managers to get on with their job of managing the firm and helping it develop and grow.
In exchange for a certificate of incorporation, a corporation was obligated to obey all laws, to serve the common good, and to cause no harm. government regulation, while often necessary, is inherently inefficient when unaccompanied by a culture of self-policing. Ownership based governance is likely to reduce the corrupting influence of unaccountable power on government. At the same time, by transforming corporations into more democratic institutions, institutional investors can unleash the wealth-generating capacity of "human capital" which is based in the skills and knowledge of corporate employees. But 2002 provided vivid evidence that shows issues of corporate governance are very much still around through companies like Enron, WorldCom and Tyco that poor corporate governance destroys companies, and impoverishes shareholders and employees. The response of the US government to these scandals has been to pass the most far reaching laws on corporate accountability for 70 years. The US has a very direct impact on the rest of the world economies. Even in the UK – most observers’ candidate for the best governed market – the government was sufficiently rattled by the events in the US to establish an enquiry into the effectiveness of non-executive directors, and into the independence of audit committees.
Recently, there’s been a school of thought that has encouraged institutional investors to play a more active role in corporate governance. Jenkinson and Mayer raise the question of why exactly should managers of institutional funds be any better at administering non-financial enterprises than the managers of those enterprises themselves and why similar problems do not afflict the funds themselves. These questions have no clear answer. If we examine the UK market for corporate control, we would see that in 1997 institutional investors owned 75% of the British stock market by value –Geoffrey Jones. The key problem with this is institutions have tended to view shares as short term investment vehicles and therefore do not accept the role that shareholders have to play. The wide dispersion of shares leaves little incentive for a shareholder to devote much time and attention to the monitoring and control of a company. Individual shareholders will often have a portfolio to reduce the risk associated with investment.
Regulation can affect the way in which companies are owned, the manner in which they are controlled and the way changes in ownership and control occur….Last year’s Myners review of institutional investment showed that the UK’s largest shareholders are insufficiently activist. It concluded that industry conflicts conspired against a greater level of intervention, and recommended that the government introduce legislation requiring funds and their managers to engage with portfolio companies where it was in beneficiaries’ best interests. The Institutional Shareholders’ Committee (ISC), an informal network of the four main bodies representing institutional investors (The Association of British Insurers, The Association of Investment Trust Companies, The Investment Management Association and the National Association of Pension Funds) drafted a code, setting out a five-part framework for an effective policy on activism, which it will urge its members to adopt. The code says companies should: Maintain and publish statements of their policies in respect of active engagement with the companies in which they invest; Monitor the performance of and maintain an appropriate dialogue with those companies; Intervene where necessary; Evaluate the impact of their policies; and In the case of investment managers, report back to the clients on whose behalf they invest
Numerous institutions say they are active but provide no guidance as to the circumstances under which they will intervene or how they go about it. The ISC code calls for institutions to develop a clear, public policy on activism.The UK government welcomed the ISC code and made clear that if increased activism doesn’t occur voluntarily, it will reconsider the legislative stick
Cadbury believes authoritative guidance coupled with genuine commitment to improve practice, can have a dramatic effect on standards. By contrast, the legislative approach of the US (where private sector funds are required to be activist where it is beneficiaries’ best interests) has done nothing to make most funds more interventionist.
The Code is unlikely to lead to a great increase in the number of dramatic episodes as few institutions have the resources or experience to requisition EGMs, force directors out, or push for wholesale shifts in strategy. This kind of ‘hard core’ activism will probably be left to the dedicated funds, as there are only a limited number of opportunities for aggressive intervention.
The code is likely to prompt a greater incidence of low level activism , voting levels will increase, as will votes against management; there will be more letters flying between institutions and company chairmen, and more meetings; non-executive directors will find themselves playing a greater role in talking to the company’s major investors about its governance.
What distinction do these differences make? Is it necessary to harmonize corporate governance across countries? What benefits would really occur??
In exchange for a certificate of incorporation, a corporation was obligated to obey all laws, to serve the common good, and to cause no harm.
Markets have understood that their reputation for either good or poor governance can have a decisive impact on the market's overall credibility and the ability to attract capital.
Positive developments are also taking place on the micro level. Entrepreneurs have emerged to answer investors’ new-found hunger for governance analysis. A whole new line of governance businesses have opened to provide both investors and companies with a rating of their governance practice.
Anecdotal evidence also suggests that directors world-wide are revisiting their responsibilities and liabilities, and are taking a new interest in the cause of professional development.
REF
www.governance.co.uk
Jones,G Corporate Governance and British Industry 1999 ESKA
Jenkinson and Mayer The assessment:corporate governance and corporate control, Oxford review of economic policy, vol 8 no 3
Keasey and Wright, Issues in corporate accountability and governance, Accounting and business research, 1993
