Corporate Governance cas

Corporate governance

Why study governance?

-Failure of companies

-Loneliness

-Efficiency

-Stakeholders

1. Definitions and Evolution of the cultural and legal environment

• Way of sharing the power between management and shareholders.

• Corporate governance is a set of legal, regulatory or practical provisions defining the scope of the power and responsibilities of those responsible for directing the company sustainably. Directing the company means taking and controlling the decisions that have a decisive effect on its soundness and sustainable performance.

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3 types of shareholders: speculative, sleeping, active

1. The history of share ownership in continental Europe

From 1850 to 1930 :

1/ Company : private sphere

• Private property
• Family shareholders
• Middle age vocabulary

2/ Governance mode: Paternalism

• Statistically and ideologically dominant
• Scté en commandite par action
• Authority legitimacy : Traditional society

From 1930 to 1970

1/ Paternalism legitimacy erodes …

• 4 constraints:

• Demographic
• Organisational
• Financial
• Political

2/ Governance of “experts”

• The emergence of technocracy
• Marginalization of shareholders
• Anonymity
• Technocracy self evaluation

Since 1970  

1/ Mutations and revolutions in the USA

1. The increase of the need for financing

• Diversification of pension funds

• Huge increase pf the capital markets: the capitalization of NY increases from 600 to 17000 billions dollars between 70 and 2000

b-   The huge increase of the number of shareholders

• Mass saving world wide phenomenon:

• about 80 milion direct s

c-   The implication of Financial institutional intermediaries

• Big investors
• Emergence of lobby groups
• Knowledge is shared : Legitimacy of the manager decreases

d-  Technocracy = way to embezzle a part of the profit of the companies to increase the profit of the executive management

e-   Political approach: Put some “government” into companies and first reforms:

• More information, more transparency for the shareholders
• More control on Presidents, their pay, remuneration and decisions
• Mo

2/ Internal extension

Big increase of financial needs :

• Diversification of US investors in Europe
• Parallel importation of the democratization of corporate governance

Essentially reactive, emotive, post scandal : disproportionate and inadequate

• Maxwell case

Comparaison of US/UK culture vs continental culture : France, Germany, Italy, Spain…

A company:

USA : market based system

Before 1929: pre-eminence of banks

1933: - Glass steagall Act : separation between traditional banks

Consequences:         Preeminence of financial markets

        Stress on financial performance

        Stress on management

• Stock options
• Class actions (lawyers)
• Take over bids
• Proxy fights

Examples: - 1956 : The solid gold Cadillac  - 1987 : Wall Street

USA: From self regulation to “soft law” and “hard” law?

• Scandals
• Political pressure

• Enron 2002 / Sarbanes Oxley Act SOX
• Subprimes 2010 : Dodd Franck Act

• Board: independence, nomination, evaluation, transparency, call for experts, personal accountability
• Audit committee: accounts, internal control
• Ethics: loyalty, due diligence, whistleblowing

• 2013: “ Benefit corporation”: positive impact on society and environment

Europe: From “hard” law to “soft law” and self regulation

• Compliance vs intelligence
• Inadequate for small businesses
• Nobody understands anything anymore
• Too much transparency kills pertinent information
• A challenge for democracy?

• White collar crimes?
• Greed
• Experts vs ordinary people
• General mistrust of finance, banks…

OECD Current membership

What should a CEO expect from a board? (Enron, K. Lay speech, 1999)

Few French figures

• 72% of companies have a single shareholder (either a physical person or another company)
• 2900 000 companies have from 0 to 50 employees (more than half of them has none: self employment, craftsman)
• 27 600 companies have from 50 to 249
• 4600 comp 250 and 5000 employees
• 700 listed companies- average float: 20%
• Market capitalization below 1 billion euros

• 85% of companies in a number
• 4% of total French capitalization
• 2% of exchanges

3 different types of actors

1. The shareholder – The sovereign power

They guarantee the continuity of the company as its highest authority validating the direction of the company and granting legitimacy to those who make the decisions regarding it

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