to download a Special Report of this meeting - The Europaeum

Anglo-American and European Models
Dean at INSEAD and so he has experience which
comes both from an academic perspective and
from that of a practitioner.
It is a great pleasure to be
here today and a great
honour as well to be at
such a distinguished university
with such an extraordinary
group of people and in
particular next to my colleague
Colin Mayer, who is
one of the pillars of the
Professor
Antonio
Borges, Vice
President,
Goldman Sachs,
and Chairman,
European Institute of Corporate
Governance
European Corporate Governance Institute as you
may well know.
Unfortunately, we have very limited time and
this subject is very complex and very serious and
it deserves in-depth study. I will have to brief
and therefore somewhat simplistic – I hope you
will forgive me. I will try to be provocative as
well to generate some discussion and then we
will see how things develop in the debate.
First of all, I will take a relatively short-term
perspective, say five to ten years as opposed to a
hundred years. I hope in one hundred years we
will have all converged to the Anglo-American
model, as Colin was saying, but that may take a
little bit of time so I will take a shorter view. I
will also take a view on how things operate in
practice and the extent to which corporate differences
do have a significant impact on market
efficiency and also on distributive justice.
This is a summary, so I will cover governance
models, myth and reality. This caricature that
there is an Anglo-American model and then
there is the rest of the world. Its not quite like
that. The practice in the US and the practice in
Britain are quite different, with significant implications
for what we are debating here.
Europe is a different world all together, starting
from the ownership patterns that Colin has
already highlighted. The European model is not
necessarily inferior – in many ways it is actually
superior, which is why it has lasted so long and
why people continue to rely on it – but it also
brings considerable problems and there is a concern
about its survival for the future because, as
we move towards what I will boldly call the new
economy, one in which the rules of the game are
not quite the same, the governance model in
Europe may not be the most appropriate.
First of all, the caricature of standard corporate
governance problems: the agency problem,
the distance between shareholders and management,
the temptation of managers to take over
companies as if they were their own and forget
about shareholders. How do you protect against
that You create these model companies, these
single standing companies, meaning that they
are not part of a vast conglomerate or pyramid
system with very confused systems of control.
You have dispersed ownership. They should be
open to takeovers.
Boards should be independent
from management and there should
be a system to protect minorities carefully.
This is the theory. This is the
ideal Anglo-Saxon model.
If we then go to practice we are
actually very far from that and in the
US it is amazing how far we are from
this theory. In fact, we often have
boards dominated by management,
both in the sense of the number of executives
who are on the board relative to non-executives,
but also in the sense that non-executives are
friends of the chairman, chosen by the chairman
and expected to be loyal to the chairman.
The management is usually quite powerful,
with a huge degree of authority in the US tradition.
In particular, the role of the CEO (who is
also chairman in almost every case) is crucial and
most analysts, observers and researchers identify
the results, performance, etc of the company
with the managerial style of the chairman/CEO.
If you talk to US directors, if you talk to US
chairmen certainly, they will say there is no proof
whatsoever that any system is better than this
one.
This is how things are done and they work
well – “please prove to me that by separating the
roles or by making the CEO more accountable to
some other power that this would improve performance:
it does not and therefore we stick to
our rules.”
This is not very close to the model we had in
mind, of shareholder sovereignty represented
well at the board and the board independent
from management and the management fully
accountable for its decisions. How come the US
system works well Because above the all-powerful
chairman/CEO and the formidable management
there is the market, and the market is very
strong indeed. It is a source of constant scrutiny;
market mechanisms exercise a ready sanction
over poor performance and can compel the
removal of the chairman/CEO if performance is
not satisfactory, no matter how powerful he may
be.
In fact, one could argue that in the US, chairman/CEO
tenure is too short, with an average
length of the mandate between two and three
years. I think we would all agree that within two
or three years there is very little you can prove,
and very little you can do. If anything, we should
perhaps claim that there is a bit of market
myopia and that hasty sanctions can get in the
way of a longer-term view.
But there is no question, in my view, that it is
through the market mechanism that some degree
33