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Global Corporate Governance

Global Corporate Governance

Donald H. Chew
Stuart L. Gillan
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  • Book Info
    Global Corporate Governance
    Book Description:

    Effective corporate governance, or the set of controls and incentives that drive top management, originates both outside and inside the firm and assures investors who hope to commit their capital. Essential when buying stocks in one's own country, effective corporate governance is even more important abroad, where information can be less reliable and investor influence (or protection) more limited.

    In this collection of articles from the Journal of Applied Corporate Finance, more than thirty leading scholars and practitioners discuss the possibilities and limitations of global corporate finance and governance systems, whether in Europe and North America or in the emerging markets of Israel, India, Korea, and South Africa. Essays discuss the political roots of American corporate finance; the structural and financial variations between international corporations; control premiums and the effectiveness of corporate governance systems; debt, folklore, and cross-country differences in financial structures; the driving forces behind the East Asian Financial Crisis of 1997; corporate ownership and control in India, Germany, France, and the United Kingdom; financial and economic lessons of Italy's privatization program; changes in Korean corporate governance; sovereign wealth funds; and the new organization of Canadian business trusts. A special roundtable discussion addresses shareholder activism in the U.K.

    eISBN: 978-0-231-51997-7
    Subjects: Finance, Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Introduction
    (pp. ix-xxii)

    Until fairly recently, European companies were producing handsome stock returns, and companies in emerging markets were doing even better. Much of the explanation had to do with the economic cycle. After seeing their sales and profits fall during the worldwide recession at the start of this decade, European and Latin American and Asian companies all began to benefit from the general improvements in the global economy. But another, perhaps equally important, part of the story was the gradual strengthening of their corporate governance systems—a movement that, having been launched in the United States and the U.K. in the 1990s,...

  4. Part I: Governance, Markets, and Law

    • CHAPTER 1 The Limits of Financial Globalization
      (pp. 3-16)

      The last 60 years have seen a dramatic change in world financial markets. At the end of World War II, the capital markets of most countries were separated from one another by barriers of various kinds. For instance, many countries prohibited their investors from owning foreign securities or obtaining the foreign currency to purchase them. But since 1945, many countries have sharply reduced such barriers to cross-border trade in financial assets, giving rise to a development that is often called “financial globalization.”

      According to most economists, the globalization of financial markets is expected to have major economic benefits. In theory,...

    • CHAPTER 2 The Political Roots of American Corporate Finance
      (pp. 17-40)
      MARK J. ROE

      In 1990, two of General Motors’s largest institutional shareholders, unhappy with the company’s declining market share and profits during the 1980s, sought to talk to GM’s leaders about a successor to the retiring CEO. GM’s senior managers rebuffed the shareholders. They could do that because the two large stockholders each owned less than 1% of the company’s stock.

      How such a corporate ownership structure—many shareholders with small percentage holdings and, until recently, little voice in governance—came to be the dominant form of large business enterprise in the U.S. is usually understood as a purely economic story, one of...

    • CHAPTER 3 International Corporate Differences: Markets or Law?
      (pp. 41-51)

      Strong managers, weak owners: The Political Roots of American Corporate Finance is a constructive response to the fallacy that whatever is, is best. Many of us whose scholarly interests center around corporate law and finance have verged on, if not committed, this fallacy, though usually unintentionally. Many economic studies show that what is, is not best. Statutes are among the worst offenders; many are designed to transfer wealth, and they reduce it in the process. Institutions of corporate law and governance can be flawed for the same reason. Still, we must understand that American corporate structure has evolved through long...

    • CHAPTER 4 Explaining Differences in the Quality of Governance among Companies: Evidence from Emerging Markets
      (pp. 52-70)

      The dot-com meltdowns, along with the recent wave of governance scandals and large corporate bankruptcies around the world, have moved corporate governance to the center of investors’ and policymakers’ radar screens. The progressive globalization of capital and product markets has put increased pressure on companies to practice better governance, regardless of their location on the world map.

      Recent studies show that good governance yields higher returns for shareholders, suggesting that efforts to improve governance can be worth the cost.¹ But, along with mounting evidence of the value-increasing effects of better governance, the research also shows that companies around the globe...

  5. Part II: Cross-Country Evidence on Governance Effectiveness and the Cost of Capital

    • CHAPTER 5 Control Premiums and the Effectiveness of Corporate Governance Systems
      (pp. 73-105)

      The last decade has witnessed a tremendous increase of interest in corporate governance, which in turn has triggered a search for the key elements of an effective governance system. To evaluate the effectiveness of different corporate governance systems, it is necessary to develop an objective measure of effective corporate governance. The main gauge used by most economists and policy makers—the size of a nation’s equity market—is generally considered too indirect to provide a useful guide for analysis or reform. In this chapter, we begin by summarizing the findings of our published research that presents a more direct measure...

    • CHAPTER 6 Globalization, Corporate Finance, and the Cost of Capital
      (pp. 106-134)

      When Malaysia imposed its restrictions on capital flows last year, the world financial community was stunned. Yet, for many years after World War II, such capital controls would have seemed quite normal. After the war, almost all countries had tight controls on currency conversion, which meant that outside investors could invest in foreign markets only if they could get access to often-scarce foreign currencies. In addition, most countries also had explicit restrictions on foreign investment. Some countries prohibited their own citizens from buying foreign shares. In many cases, foreign investors were forbidden to buy local shares. And in countries where...

    • CHAPTER 7 Which Capitalism? Lessons from the East Asian Crisis
      (pp. 135-148)

      Just a few years ago, it was fashionable to decry the shortsightedness of the American financial system, the widely alleged tendency of U.S. financial markets to ignore longer-term corporate prospects while focusing on quarterly earnings reports. There were repeated calls for the U.S. to adopt new laws that would permit financiers to take a longer view of their investments, and to move toward the more relationship-based investing model that prevails in Japan.¹

      It is amazing what a banking crisis or two will do to popular fashion. Now the talk is all about the virtues of “the market,” the importance of...

  6. Part III: Country-Specific Evidence on Ownership and Governance Structure

    • CHAPTER 8 Corporate Governance in India
      (pp. 151-176)

      One of the major economic developments of this decade has been the recent take-off of India, with growth rates averaging in excess of 8% for the past four years, a stock market that has more than tripled in as many years, and a steady inflow of foreign investment. In 2006, total equity issuance reached $19.2 billion in India, up 22% from the year before. Indian companies were also among the world’s most active issuers of depositary receipts in the first half of 2006, accounting for one in three new issues globally. Debt issuance reached an all-time high of $13.7 billion,...

    • CHAPTER 9 The Financial and Economic Lessons of Italy’s Privatization Program
      (pp. 177-195)

      In July 2005, the Italian Ministry of Economics and Finance executed a $4.9 billion share offering of a 9.3% stake in the electric utility company ENEL, which dropped the state’s direct holdings in the company to 20%. Four months later, the state-controlled airline Alitalia launched a major reorganization—which involved splitting the company into two separate parts—along with a rights issue that raised $1.25 billion and resulted in the state’s holdings dropping below 50% for the first time ever. These two transactions culminated a twelve-year privatization program comprising some 75 major deals that raised over $125 billion, the most...

    • CHAPTER 10 Changes in Korean Corporate Governance: A Response to Crisis
      (pp. 196-215)

      A decade has passed since the outbreak of the Korean financial crisis in November 1997. One of the fundamental causes of the crisis was widespread corporate value destruction, especially among the family-controlled business groups known as “chaebol.” Before the crisis, these business groups routinely pursued growth and market share at the expense of profitability and shareholder value. For some of the chaebol, size added to their political influence, which could be used to tilt the playing field in their favor. Being bigger also meant better access to external financing and lower borrowing costs, thanks in part to the “too big...

    • CHAPTER 11 The Ownership Structure, Governance, and Performance of French Companies: Corporate Control and the Politics of Finance
      (pp. 216-238)

      In France, as in most countries in continental Europe, the concept of corporate governance as a means of promoting shareholder value was not really taken in earnest until the early 1990s. The growth of interest in value-oriented governance at the beginning of the last decade can be traced to the wave of financial scandals and general economic turmoil in those years, a combination that was again in evidence at the start of the new millennium. In this sense, the French focus on corporate governance can be viewed as a response to crisis. But even if the crisis that gave rise...

    • CHAPTER 12 Corporate Ownership and Control in the U.K., Germany, and France
      (pp. 239-262)

      Differences among national financial systems have been a subject of continuing debate for well over a century. The primary distinction drawn by economists has been that between “bank-based” and “market-based” systems.¹ In the stylized description of bank-based systems, companies raise most of their external finance from banks that have close, long-term relationships with their corporate customers. By contrast, the market-based systems of the U.K. and the U.S. are characterized by arm’s-length relationships between corporations and investors, who are said to be concerned primarily about short-term returns.

      While these distinctions cannot be dismissed, they have proved to be difficult to formulate...

  7. Part IV: The Role of Active Investors

    • CHAPTER 13 London Business School Roundtable on Shareholder Activism in the U.K. CENTER FOR CORPORATE GOVERNANCE, LONDON, FEBRUARY 9, 2006
      (pp. 265-293)

      Laura Tyson: Good evening, I’m Laura Tyson, Dean of the London Business School, and it’s my pleasure to welcome you to this event. We have a very important topic: shareholder activism in the U.K. I also want to note that this is the inaugural event for the new London Business School Center for Corporate Governance. I’ve worked very hard with many people in this room—particularly with the inspired leadership of Professor Julian Franks and Paul Coombes—to launch this Center, which has been made possible by generous support from Oracle, Freshfields, and Prudential. Let me also mention that to...

    • CHAPTER 14 Leveraged Buyouts in the U.K. and Continental Europe: Retrospect and Prospect
      (pp. 294-326)

      Buyout markets in the U.K. and continental Europe have developed substantially over the past 25 years. The European market appears to be entering its third period of significant growth, following the waves of buyouts during the latter halves of the 1980s and 1990s. In recent years, successive records have been set in terms of both individual deal size and the total market value of transactions in a given year. In 1997, for example, the U.K. market broke the £10 billion barrier for the first time. Only three years later, in 2000, more than £20 billion worth of deals were completed....

    • CHAPTER 15 Sovereign Wealth Funds: A Growing Global Force in Corporate Finance
      (pp. 327-346)

      Sovereign wealth funds (SWFs) are government-created investment vehicles that are typically funded by commodity export revenues or the transfer of assets directly from official foreign-exchange reserves. In some cases, government budget surpluses and pension surpluses have also been transferred into SWFs.

      With an estimated $3 trillion of assets that are projected to more than double over the next five years, SWFs are attracting considerable attention in financial markets and in capitals around the world. Understanding these funds can be challenging because of the vast diversity of objectives, investment philosophies, and political and economic ambitions. Compounding the difficulty, the funds themselves...

  8. About the Contributors
    (pp. 347-350)
  9. Index
    (pp. 351-370)