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Anglo-American and European Models 34 of accountability exists and that sanctions are exercised. The important point here is that the US system will not work unless there is a very powerful capital market with the resources to mobilise capital to remove a CEO, through takeover if necessary. This must be a sophisticated market that knows how to judge performance and act quickly. Of course, as you can well imagine, this is a requirement that is not so widespread. Many countries cannot rely on that kind of market because it does not exist. But it also shows in my view why the corporate governance scandals in the US were so serious and why the reaction was what it was: if you mislead the market, if you manage to withdraw information or provide the wrong information such that market cannot exercise its scrutiny over management, then the whole system collapses. There is no more control. The whole problem of US governance today is how do we make sure that managers cannot provide wrong information and are forced to disclose everything they should with the right degree of rigour. This is what in my view explains Sarbanes- Oxley and everything that’s related to it: the single-minded focus on guaranteeing that the market has the information its needs to exercise its scrutiny over management. According to US philosophy, if information is available, the market will do its job. When we come to the UK, it is a very different world. I would argue that the UK is the country where corporate governance standards are highest and where in fact we have the most sophisticated and most advanced model, with a great degree of thought on how the board operates and how it can perform its role well. There is a very clear separation between governance and management, which is an important pillar of good governance, and a lot of effort was put in to describing how the board should be chosen. What is the appropriate composition of the board How do we guarantee its independence, and how do we guarantee its independence (not just in name but also in practice) with the idea that you have to provide independent directors with the opportunity to communicate their views and debate among themselves How do we guarantee through board evaluation that the practice is improving How does the board have enough resources to perform its role All of these are extreme refinements of a model that’s been improving over time. These successive improvements have taken things to a point where there is beginning to be a bit of a backlash with people saying, “aren’t we going too far After all, shouldn’t the directors be on the side of the management most of the time to make sure that things go well” I think this is a good sign. It means that things have been pushed as far as they could possibly go, which is reassuring. But clearly this is a more institutional approach. It is an approach according to which you rely on the board to perform its role because you cannot rely on the market, because the market in the UK is not as nearly as powerful as in the US – the market sometimes sanctions companies with lower stock prices and nothing happens. Certain companies, and we can discuss particular cases, are allowed to keep on destroying value for a long time and nothing happens. There are no takeovers. Its takes a long time, four or five six years, before something really happens. Either the board performs this role, or nobody will, which as you can see is very different from the US practice, where there is no question about speed of action. If the board does not work, somebody else who will take care of it – there is no doubt of a swift response. Now if we go to the European case we have a very different story indeed. European corporations are dominated by these so-called reference shareholders, these big block holders who very often have majority control (as Colin Mayer has just shown) but even if they don’t, they do exercise important influence over the company. The main problem, then, is a complete confusion between governance and management. The reference shareholders are on top of the management all the time. Sometimes they are the management, particularly in family firms. The standard problem of governance, the agency problem where management, independent of shareholders, pursues its own interest as opposed to the shareholders’ interest, which is unthinkable in continental Europe. This situation just cannot happen; it doesn’t last thirty seconds. Management and shareholders are often the same and if they are not, everybody knows who is in charge. The main problem here is of course the minorities. What about everybody else What about those who are not reference shareholders Can we develop a proper capital market based on block stockholders only This is a serious problem of incentive incapability, if you will, because everybody will argue people should have an interest in having there shareholders with them, and should have an interest in generating support from shareholders in making sure that everybody is happy and trusts the corporation and so forth. In reality, in the long term this would be fine, but in the short term there are too many incentives and opportunities to take personal advantage of specific decisions at the expense of minorities. This becomes a standard problem across Europe, probably the dominant one.
Anglo-American and European Models Some people say that is how it should be. Some people say, “if these minority investor have put their capital in our companies, they know what they are coming in for. They know we are in control.” They say this very openly and frankly – at least they are truthful about their views. But the reality is that you don’t build a capital market that way. You cannot create the level of trust and confidence that is needed, and this is a serious handicap for many firms which have difficulty with access to capital. In conjunction with this control by a limited number of large block holders, we have across Europe many instances – or even systems – of limitation of shareholder sovereignty, be they golden shares on the part of government, limits on voting rights, pyramid schemes, dual systems of shares, etc. This is from northern Europe to southern Europe, east and west. One share, one vote is the exception rather than the rule and that of course creates a different model and a different approach. So is this good or bad This model has significant advantages. These reference shareholders perform an important role in providing stability, and in particular, commitment to a certain strategy that often has to go beyond short-term cycles. In certain industries in particular this has become extremely beneficial. Managers know with whom they are working – they do not have the same independence that they have in the US, but on the other hand they also know that they have the support of shareholders and if things work well those shareholders will very often provide the commitment and the long-term view which management would otherwise need to move forward. In fact, what we have is this concept of active ownership: I not only own these shares, but I actually get involved in the company and I help my management. To a certain degree I delegate the management of the company but I am there to support, guide, make clear my preferences and stand by them when things become a little rough. There is a line of argument that says this is a caricature of governance, because what happens in these corporations is that you fill up the boards with your cronies, you get friends to hold stock in your company while you hold stock in their company and through these cross-holdings you actually extract yourself from market scrutiny and therefore there is no accountability and no sanctions if things go wrong. Actually some very interesting research that one of our colleagues at ECGI produced shows that the opposite is true. These so-called friendly shareholders very often are the first to turn around and become hostile when things go wrong. They know where their interests lie and interestingly, for example in Germany, sometimes these so-called friendly shareholders and board members are the first to hold hostile positions and to hold them in a clandestine way which is nobody detects until it is too late. They actually become an agent of change, which is quite curious. So what are the challenges of this model Often, it is easy to distort the model, in particular through these limitations of shareholder sovereignty, to protect control and to make sure that whatever happens I do not loose the control of my company and therefore I am not subject to market scrutiny through takeover. This is supposedly beneficial in the longer term, giving time to solve problems and put things back on track, but in fact we know that this often becomes essentially a protectionist system. If you put this together with the tendency of many governments to intervene and to work together with companies to supposedly help them become stronger, you move towards the politicisation of companies which is so easy to detect in particular countries like France, Spain or Italy, and which is far from market discipline. You could also argue that there are serious issues with board authority. Boards very often are pro-forma. They are window dressing. We go there, we sit we listen. Management makes wonderful reports. We ask some questions, they respond, but we know the real decisions are not taken at the board, they are taken in meetings between the management and the dominant shareholders somewhere else – that, again, is not in the interest of minority investors. There are serious concerns about compensation, and finally it is worrying that there is no openness to using market mechanisms as the ultimate source of reward or sanction. If I take this a step further and become even a little more radical, let me talk for a bit about the New Economy: a growth model based on innovation, entrepreneurship and risk-taking, which demands very rapid reallocation of resources. The most important features must be a strong ability to get rid of inefficient uses of resources and to channel resources to whatever new opportunities may exist, some of them quite random really, with some prospect of gain but with very high risk associated with them. This approach, which of course lies behind the extraordinary performance in the US economy that we are now observing, is clearly based on ruthless market discipline. If you don’t keep up with market expectations, after a few quarters you are out. If this kind of performance continues, your company will be taken over and the resources are diverted elsewhere. The knowledge that the takeovers, real or potential, can happen quickly generates a permanent sense of fear and anxiety, where people know they have to be on 35
Page 1 and 2: Restructuring Corporate Governance:
Page 3 and 4: Contents Contents Introduction.....
Page 5 and 6: Introduction this point most clearl
Page 7 and 8: Introduction The Said Business Scho
Page 9 and 10: Welcome context of the Europaeum, w
Page 11 and 12: Institutional Activism talking to o
Page 13 and 14: Institutional Activism associated w
Page 15 and 16: Institutional Activism information
Page 17 and 18: Institutional Activism Ihave been d
Page 19 and 20: Institutional Activism provided sub
Page 21 and 22: Strategies and Balance SESSION II S
Page 23 and 24: Strategies and Balance kets, but we
Page 25 and 26: Strategies and Balance in our exper
Page 27 and 28: Strategies and Balance the non-exec
Page 29 and 30: Strategies and Balance Discussion T
Page 31 and 32: Strategies and Balance Bebchuck sho
Page 33 and 34: Anglo-American and European Models
Page 35: Anglo-American and European Models
Page 47 and 48: Round Table Discussions Round Table
Page 49 and 50: Concluding Remarks Perhaps we shoul
Page 51 and 52: Appendix B APPENDIX B Biographies o
Page 53 and 54: Appendix C APPENDIX C Participating
Page 55 and 56: Appendix D APPENDIX D Profiles of C
Page 59 and 60: The Europaeum Vision As the pace of

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