Comparative Corporate Governance

Comparative Corporate Governance http://moodle.hu-berlin.de Kurs : siehe oben Kursschlüssel: Anatomy 1

Comparative Corporate Governance This is not a language class! However: Legalese Specific terminology will be discussed. Questions are welcome! 2

Some Useful Links www.companieshouse.gov.uk www.nyse.com www.corporate-governance-code.de/eng/kodex/indexe/html www.sec.gov (takes you to EDGAR, too) www.findlaw.com www.fsa.gov.uk (takes you to UKLA, too) 3

Reading Material Hopt: Comparative Corporate Governance the State of the Art and International Regulation European Commission: Geen Paper on the EU Corporate Governance Framework Kraakman, Davies, Hansmann, Hertig, Hopt, Kanda, Rock: The Anatomy of Corporate Law. A Comparative and Functional Approach, Oxford 2004 (2th edition 2007) Other material will be distributed by e-mail, photocopy, or Moodle 4

Corporate Governance Corporate Governance is traditionally defined as the system by which companies are directed and controlled and as a set of relationships between a company s management, its board, it s shareholders and stakeholders. (OECD Principles of Corporate Governance; Green book) 5

Corporate Law Corporate Law a) level of the regulation national EU International (OECD) b) Different types of law - hard law acts / statutes - soft law (for ex. OECD-principles) - contractual arrangement Corporate Governance = Corporate Law? 6

From contract to organization 1) A --- loan agreement with --- B - contractual relationship - set of rules > mandatory rules > provisions of the contract / default rules - governance? 2) A, B and C agree to cooperate in order run a small business, for ex. a cleaning service 7

From contract to organization A, B and C agree to cooperate in order to run a small business, for ex. a cleaning service (no employees) - partnership > provisions of the contract / default rules > only few mandatory rules - A B and C act on behalf of the partnership ( Selbstorganschaft ) some kind of organization and cooperation; but not a corporation which elements of a corporation are missing? 8

Core Characteristics of the Business Corporation (Hansmann/Kraakman 2007) Legal personality + Limited liability = Asset Partitioning Centralized management under a board structure Shared ownership by contributors of capital Transferable shares 9

Separation of ownership an control Legal personality in combination with shared ownership Shareholders do not own directly the assets of the corporation residual claimants / ultimate owners (BGH/BVerfG: durch die Mitgliedschaft vermitteltes Anteilseigentum ) Centralized management delegation of the management ( Drittorganschaft ) 10

principle-agent conflict Core tasks of Corporate Governance 1) conflict management / shareholders managements serves its own interests (opportunistic behaviour) neglects (minority) shareholders interests 2) conflict among the shareholders (especially protection of the minority shareholders) 11

principal-agent conflict Foreword of the German Corporate Governance Code (DCGK) The Code presents essential statutory regulations for the management and supervision (governance) of German listed companies and contains internationally and nationally recognized standards for good and responsible governance. 12

Corporate Governance 1) traditional tools of law (see DCGK: Regulation of the management ) - rules or standards, for example 93 AktG The Management Board is responsible for independently managing the enterprise in the interest of the enterprise - accountability, for example 93 II AktG 2) specific tools aiming at the governance of an organization (see DCGK: supervision ) 13

Corporate Governance 1) traditional tools of law 2) specific tools aiming at the governance of an organization 5.1.1 DCGK: The task of the Supervisory Board is to advise regularly and supervise the Management Board in the management of the enterprise. It must be involved in decisions of fundamental importance to the enterprise. 14

Corporate Governance OECD Principles of Corporate Governance: Corporate Governance is traditionally defined as the system by which companies are directed and controlled and as a set of relationships between a company s management, its board, it s shareholders and stakeholders. One key issue of Corporate Governance: Who does what for which purpose? 15

Two-Tier-Board Managing Board Supervisory Board Shareholders Meeting 16

Comparative Corporate Governance The comparative approach identify a conflict / problem (for ex. principal agent-problem management versus shareholders) analyze the different strategies in different jurisdictions (How does supervision of the management work without supervisory board in the US?) compare the different strategies 17

One-Tier-Board Board of Directors Shareholders Meeting 18

The structure of the managing board in the one-tier-system managing directors; CEO at the top ----------------------------------------- non-managing (non-executive) directors independent directors UK Combined Code of Corporate Governance The board should include a balance of executive and nonexecutive directors (and in particular independent non-executive directors) such that no individual or small group of individuals can dominate the board s decision taking. 19

EU-Regulation - EU Law neutral towards the system-issue see for ex. Council regulation 2157/2001/EC on the Statute for a European company) - more important: qualification of non-executive directors and avoiding conflicts of interests see Commission Recommendation 2005/162/EC on the role of non-executive supervisory directors of listed companies and of the committees of the (supervisory) board. 20

EU-Regulation Commission Recommendation 2005/162/EC 4. A sufficient number of independent nonexecutive directors should be elected to the (supervisory) board to ensure that any material conflict of interest involving directors will be properly dealt with. 11.1 The (supervisory) board should ensure that it is composed of members who, as a whole, have the required diversity of knowlegde, judgement and experience to complete their tasks properly. 21

Reminder Corporate Law a) level of the regulation national EU International (OECD) b) Different types of law - hard law regulation - soft law (for ex. OECD-principles, DCGK) - contractual arrangements 22

Control of the annual accounts - obligation to keep the accounts task of the management - problem: principal agent conflict the management cooks the books - obligation to establish an audit committee by the Sarbanes Oxley Act (SOX) / by directive 2006/43/EC 23

www.sec.gov/rules/final/33-8220.htm Under new Exchange Act Rule 10A-3, SROs will be prohibited from listing any security of an issuer that is not in compliance with the following standards : Each member of the audit committee of the issuer must be independent according to specified criteria; The audit committee of each issuer must be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the issuer, and each such registered public accounting firm must report directly to the audit committee; Each audit committee must establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters; Each audit committee must have the authority to engage independent counsel and other advisors, as it determines necessary to carry out its duties; and Each issuer must provide appropriate funding for the audit committee. 24

DIRECTIVE 2006/43/EC of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC (OJ L 157/87) Article 41 Audit committee 1. Each public-interest entity shall have an audit committee. The Member State shall determine whether audit committees are to be composed of non-executive members of the administrative body and/or members of the supervisory body of the audited entity and/or members appointed by the general meeting of shareholders of the audited entity. At least one member of the audit committee shall be independent and shall have competence in accounting and/or auditing. 25

Supervisory board / non-executive directors Audit Committee Management board / Executive directors Shareholders Meeting 26

Relevance of annual accounts for stakeholders Core task of Corporate Governance dealing with conflicts 1) Principal agent conflict shareholders / management 2) conflict among the shareholders 3) Conflicts between the corporation/ shareholders/ managements and stakeholders, especially employees and creditors Example: distribution of assets to shareholders 27

Relevance of annual accounts for stakeholders 6.40 (c) (1) Revised Model Business Corporation Act 501 California Corporations Code - solvency test (or equity insolvency test) Will the corporation after the distribution be able to pay the liabilities? - in combination with a balance sheet test 28

Relevance of annual accounts for stakeholders Second council directive (77/91/EEC) Capital-Directive Art. 15 1 (c) The amount of a distribution to shareholders may not exceed the amount of the profits at the end of the last financial year plus any profits brought forward and sums drawn from reserves available for this purpose, less any losses brought forward and sums placed to reserve in accordance with the law or the statutes. 29

External Audit Board of nonexecutive directors/ Supervisory board Audit Committee Managing directors/ managing board Statutory Auditors Shareholders Meeting 30

Distribution to shareholders Distinguish two issues - Annual accounts determination to which extend distributions to shareholders are possible Approval of the annual accounts ( 172 AktG) - Who decides if the assets will really be distributed or will stay as reserves in the corporation? Use of the annual net income ( 58 AktG) 31

Distribution to shareholders - German model: shareholders meeting, 119 I Nr. 2; 174 I 1 AktG - UK and US: Management Why does in the realm of shareholder value the management decide and not the shareholders meeting? - Task of a comparative study Legal context Economic and social context 32

Alternatives to the voice-strategy (ratification by the shareholders) Internal Corporate Governance - Dismissing of the management - Derivative suits External Corporate Governance - Control by the capital market exit-strategy versus voice-strategy - Market for corporate control 33

Stock market price and distributions with an efficient capital market in the background Annual Accounts: - Assets minus liabilities last year: 100 - Assets minus liabilities this year 120 surplus: 20 Capital market: evaluation of the corporation Stock-Market prize goes up from 100 to 120 Surplus distributed to shareholders Stock-Market prize drops from 120 to 100 Surplus not distributed Shareholder can sell for 120. 34

External Audit Board of nonexecutive directors/ Supervisory board Audit Committee Managing directors/ managing board Statutory Auditors Shareholders Meeting Disclosure; Financial Reporting 35

Core Characteristics of the Listed Business Corporation Legal personality Limited liability Transferable shares exit-strategy Centralized management under a board structure Shared ownership by contributors of capital Financial Reporting External Audit Disclosure + (Windbichler) 36

Other Sources of Corporate Governance Elements (beside Corporate Law) Codes of Conduct ( soft law" Internal Organization Committee Structures Whistle-Blower Protection Reputation Incentive Structures (Capital) Market Pressure lessons of the financial crisis? 37

M.J. Roe, Political Determinants of Corporate Governance, 2004 38

M.J. Roe, Political Determinants of Corporate Governance, 2004 39

M.J. Roe, Political Determinants of Corporate Governance, 2004 40

Ownership structure and the focus of the Corporate Governance debate 1) Principal agent conflict shareholders / management (main focus in the US) 2) conflicts among the shareholders especially: majority plus management versus minority (important focus in the German debate) 3) Conflicts between the corporation/ shareholders/ managements and stakeholders, especially employees and creditors 41

The task of Comparative Corporate Governance Comparing different strategies (capital market pressure exit-strategy versus voice strategy) - Legal context (securities regulation, rights of the single shareholder at the shareholder meeting) - Economic and social context (capitalization of the stock market, ownership-structure, structure and habits of Corporate Finance; trust in the institutions of the capital market) 42

Thank you for your endurance and attendance 43