Corporate Governance completo

OECD,

According to CG are procedures and processes according to which an

organization is directed and controlled. CG structure specifies the distribution

of rights and responsibilities among the participants in the organization (BoD,

management, SHL’s, STK’s, …) and gives rules and procedures for decision-

making.

Shareholder Approach.

Shareholder view is based on different theories and assumptions. In the 1980s

one of them was the theory by which the firm should be viewed as a nexus of

contracts. This theory represents the key point of the shareholder view. It

highlights the nature of relationships underlying the firm (managers,

employees, suppliers …) and states that all of these relationships are governed

by contracts that specific what each party has to do and what it should get in

return. Here arises the main assumption: shareholders are different than the

residual claimant.

other stakeholders, since they are considered as SHL’s are

not entitled to a fixed amount but they get what is left over after all

participants received what they’re contractually entitled to receive. In this way,

maximizing SHL’s value will maximize company value.

Another assumption is related to the efficient capital markets hypothesis,

by which share price is considered as a good measure of company value. This

theory can be easily debated since it is proved that such a context cannot be

possible. Despite this, there is evidence that market prices in US stock markets

respond very quickly to good/bad news. On the other hand, there is also

evidence that financial markets go through periods of boom and bust in which

share prices deviate from their underlying fundamental value.

Another basis of the shareholder approach refers to the importance of high

powered incentives assumption, by which directors and managers can be

disciplined by adopting a system of incentives based on performance to align

their own interests to company ones. The main issue is that stock option plans

create skewed incentives since their holders win when share price goes up and

have no loss when it goes down. In such a context, it is obvious that directors

become more attracted to risky decisions [subprime crisis].

The market for corporate control is an important assumption that

disciplines managers since financial markets give possibility for hostile

takeovers and LBO’s by which a company can acquire and better manage an

underperforming company.

Then, an ultimate assumption is that US law supports the shareholders’

supremacy. This is not always true, as it can be stated by looking at the

evidence. The Exxon Valdez case showed that SHL’s may not be protected by

law, since the environmental disaster in Alaska (due to an oil spill out caused

by the impact of a ship hitting a rock) was a clear example of the possibility for

a CEO to take risky decisions that may damage the value of the firm and so the

SHL’s value.

Basically, all assumption behind the shareholder approach can be contradicted.

Stakeholder Approach.

The stakeholder approach refers to the company as an entity that must

simultaneously satisfy interests of all participants who have a stake in the

organization. It is governed by the BoD, which is composed by people whose

objective is to mediate different interests converging to the company. SHL’s are

not considered as the only ones. In publicly traded company this role is

certainly more difficult because of the pressure of financial markets. So, the

company has responsibility to a wider group of stakeholders which are affected

by company’s activities and decisions (employees, customers, suppliers, social

community, competitors, SHL’s, …).

Stakeholder view can be described with the so-called team production

model, by which company is a team where groups of people work together and

it is difficult to agree in advance on everyone contribution and reward. So, each

member doing specific investments can be easily expropriated by other

members. In such a context, the corporation is a separated entity and owns

production assets. Directors have the legal responsibility to act for the

company and they are an institutional mechanism aimed at facilitating trust

among all members by managing trade-offs between them.

Agency Problem. principal-agent problem)

Agency problems (or typically occurs in publicly

traded companies where there is a separation between ownership and control

(US, UK and Anglo-Saxon countries).

An agency relationship is one in which a principal (SHL’s) delegates an agent

(managers) to act in his/her interest. In such a context, it is obvious that agents

may have different views and interests than principals. Agency problems occur

because of human opportunism and behavior to satisfy own interests even

damaging other people. Agency costs are typically 1) monitoring costs - to

control agents - and 2) bonding costs - to convince principals that everything is

fine.

A good CG structure is the one that try to minimize agency costs (preferably

when benefits from this operation exceeds its costs). This can be done with two

categories of tools: 1) incentives – made to align agent/principal interests – and

2) monitoring – such as supervising, internal and external control, analysis.

Keep in mind that CG issues arises in organizations whenever agency problems

exist and transaction costs are such that agency problems cannot be dealt with

through a contract.

It is obvious that without agency problems all participants in the firm can be

instructed to maximize profits or minimize costs. In this case, incentives to

motivate people are not required.

THE BOARD OF DIRECTORS

In US/UK shareholders are dispersed and therefore they delegate control to the

BoD which is influenced by the CEO (on top of the management board). Is

different in the rest of the world since on top of the mgmt. board there is

typically a major shl.

In theory, Board of directors influence positively firm performance as:

- Directors are very competent and expert persons;

- They have the responsibility to take the most important decisions.

In practice, BoD:

- Meet seldom;

- Receive a limited information flow;

- Are dominated by inside directors.

In fact, taking Adam Smith words, Wealth of Nations, 1776: when we delegate

decision power to another person we might have different views, interest. If I

manage my own company I will do my best, when I manage other companies I

don’t.

For this reason, the delegation of power from shareholders (principal) to

managers (agent) and BoD, typically rise the so-called Agency Problem, caused

by different interests and asymmetric information btw parties. The overcome to

this problem bring two types of costs: monitoring cost and bonding cost (the

cost of the agent to convince the principal that everything is fine). The

principal-agent problem refers to UK/US, in other countries we can talk about

principal-principal problem. There exist two tools in order to minimize this

problem: incentives strategies and monitoring. Those are the mains ones but

we can also refer to: active market for corporate control, large block holders

(focus on mgnt compensation), stock plans, directors’ fiduciary duties, internal

and external auditors.

Periodic scandals emphasize inefficiency in boards’ functioning and lead to the

development of good governance code. The most famous is the Cadbury Code

1992 (the “code of best practice”). CG codes are defined as “soft-law” since

company are invited to comply with codes’ recommendations or to explain

their choice (different from “hard law” – corporate law and commercial code –

you have the obligation to comply with it otherwise legal issues arises).

Typically, shl nominates the BoD, which then nominate the top mgmt. the

power is top-down.

Board tasks.

1. Strategic: directors define the mission and the vision of the company,

and contribute to the development of the business. Moreover, they

approve strategic plans.

2. Control: directors usually control the performance and top management

behaviour regarding both the operation and the strategic goals. Usually

the CEO present the numbers (BS, performance forecast…) and directors

should ask questions looking at them in order to check if the CEO is doing

managerial

good. Further, directors must keep an eye to what is called

myopia – the CEO tendency to maximize short run profits even damaging

the long-run profits of the firm (BoD have to balance short and long).

3. Networking: directors contribute to the development of corporate

reputation and prestige, and manage the relationship with shareholders

and other stakeholders.

Board composition.

In order to improve the chance that BoD does well, we have to analyse the

following level:

1. Board size: is related to other variables like the firm size, ownership

structure, industry etc. Moreover, we have to be careful about the risk

which are related to it. Having a too big board can sometimes hide

people, while in too small size boards there can be less opportunity to

exchange different points of view. Typically it is btw 7 (in small

companies) and 15 members (large firms).

2. Type of directors:

a. Chief Executive Officer

b. Inside or executive directors

c. Outside or non-executive directors: they are not the managers and

are divided in:

i. Dependent: they could be biased

ii. Independent: the BoD is required to identify which are those

guy and specific the reason why are they meant to be

independent.

In Italy on average, there are 3 executives (take decisions and manage

the firm) and 8 non-executives’ directors (new competences typically

advisory). Within the non-executive 3 are dependent and 5 independents.

The latter are elected by the majority and then minority of shareholders.

The BoD is the one who decide whether a director is independent or not.

Some studies in Italy underline that some directors named as

independent fail to be as such. Anyway, after 9 years a director is not

considered independent anymore.

3. Diversity: it is a good characteristic for a good board. Difference can be

according to age, nationality, gender…. The most important aspect is the

presence of different professional, functional and industrial backgrounds.

Those are good when BoD has to deal with complicated and difficult

tasks, and different points of view are essential when the decisions to be

taken are complex. Diversity fits the different need of the company. In

Italy, we have diversity gender regulated under the law (about 30% of

female in the board).

Board structure.

1. CEO duality: there is a big discussion about the combination of the role of

the CEO and the Chairman. The big debate rooted upon the trade-off of

having high concentration power or a strong leadership.

a. The CEO has more responsibility about the