International Corporate Governance

Defining “Corporate Governance”

 Easterbrook & Fischel (1991)

The corporation and its securities are products in financial

markets to as great an extent as the sewing machines or other
things the firm makes. Just as the founders of a firm have
incentives to make the kinds of sewing machines people want to
buy, they have incentives to create the kind of firm, governance
structure, and securities the customers in capital markets want.

- The organizational efficiency of a corporation is a ‘product’ in

kind.
- The law that determines the organizational efficiency of corpo-
rations in one country is a ‘product’ in kind.
 Gregory: “Corporate Governance”

concerns the relationships between corporate managers, directors

and providers of equity capital.

can encompass the relationship of the corporation to stakeholders

and society.

can encompass the combination of laws, regulations, listing rules and

voluntary private sector practices that enable the corporation to:
• attract capital
• perform efficiently
• achieve the corporate objective
• meet both legal obligations and general societal expectations
 Standard & Poor’s

Corporate governance encompasses the interactions between

a company’s management, its board of directors,
shareholders and other financial stakeholders.

 Professor Black

Good disclosure : good information about the value of a

company’s business
Control of self-dealing : confidence that the company’s
insiders won’t cheat investors out of most or all of the value
of their investment
Value maximization : what institutions can persuade
managers to maximize firm value?
 Cadbury Report (1992)

Corporate governance is the system by which companies are

directed and controlled.

 Shleifer & Vishny

Corporate governance deals with the ways in which suppliers

of finance to corporations assure themselves of getting a
return on their investment. (52 J. Fin. 737 [1997])
 Professor Bainbridge (2012)

Corporate governance.. consists of the

institutional structures, legal rules, and best
practices that determine which body within
the corporation is empowered to make
particular decisions, how the members of
that body are chosen, and the norms that
should guide decision making.
Berle & Means

Adolf Berle & Gardiner Means,

The Modern Corporation and
Private Property (1932)
 Berle & Means Model of the Modern Corporation

 Adolph A. Berle & Gardiner C. Means, The Modern

Corporation and Private Property (1932, revised in 1991)
(“Berle & Means”)

Shaped the image of the modern corporation.

Defined and continues to define corporate law
scholarship.
Still serves the starting point of any corporate
governance-related research and discussions.
 Berle & Means Model of the Modern Corporation

 Berle & Means defined the modern public company (in the
U.S.) as one with

dispersed (not concentrated) ownership;

separation of ownership and control;
control concentrated in the hands of managers; and
professional managers unaccountable to shareholders.
- Costs too high to get involved
- Other shareholders will do it
 Berle & Means defines

the central problem for corporate governance as the

separation of ownership and control; and

the task of corporate law scholarship as the correction of

the negative effects of the separation
Cf. Adam Smith (1776)

The directors of such [joint-stock] companies, however, being the

managers rather of other people’s money than of their own, it
cannot be expected, that they should watch over it with the same
anxious vigilance with which the partners in a private copartnery
frequently watch over their own. Like the stewards of a rich man,
they are apt to consider attention to small matters as not for their
master’s honour, and very easily give themselves a dispensation
from having it. Negligence and profusion, therefore, must always
prevail, more or less, in the management of the affairs of such a
company.
 Professor Bainbridge (2012)

Corporate governance.. consists of the legal

rules that both create and seek to constrain
the principal-agent problem inherent in the
public corporation’s structure.
Recent (Comparative) Studies Question the Empirical Validity of the
Berle & Means Model

In the U.S., there is a significant concentration of

ownership.
- the rise of institutional investors
In other developed economies (Germany and Japan),
there is a higher concentration of ownership.
In developing countries, ownership is heavily
concentrated.
Managers are generally accountable to large
shareholders (controlling minority).
 Three Main Questions

 Who controls the managers of large companies with

dispersed ownership?

 Who controls the controlling shareholder-managers (CMS)

of the companies with concentrated ownership?

 How are the monitors monitored – corporate law vs. other

ways?
 Pyramid

100% A
(individual)

51%

B 49% (investors)

A-1 51%

C 49% (investors)
Illegal Trading
Questionable Contract 51%

D 49% (investors)
Control-Ownership Disparity of the Top 10 Chaebol (as of April 2004)
E. Han Kim & Woochan Kim

Samsung cash flow right

disparity
LG

Hyundai Motors

SK

Hanjin

Hanwha

Hyundai Heavy Industries

Kumho-Asiana

Doosan

Dongbu

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Searching for a Solution – Control of Professional
Managers (in the U.S.)

Shareholders’ meeting?
Fiduciary duty and derivative litigation
Board of directors
Outside directors
Takeovers
Institutional investors
New comparativism (Professor Roe)
Securities law
Government