part 1

[Audio] We conducted a comprehensive analysis of the current state of corporate governance and control research in finance. We reviewed various studies and articles on the topic and provided key findings and conclusions. We also discussed the challenges and limitations of current research and offered suggestions for future research directions. Our research results can be found in the N-B-E-R Working Paper Series titled Corporate Governance and Control written by Marco Becht Patrick Bolton and Alisa Röell. This paper was published in 2002. We would like to thank several colleagues for their helpful input and comments including Bernardo Bortolotti Mathias Dewatripont Richard Frederick Stu Gillan Peter Gourevitch Milton Harris Gerard Hertig Takeo Hoshi Steve Kaplan Roberta Romano Christian Rydqvist and Scott Verges. The views expressed in this paper are those of the authors and not necessarily those of the National Bureau of Economic Research. The paper is copyright 2002 by Marco Becht Patrick Bolton and Alisa Röell. Short sections of text not exceeding two paragraphs may be quoted without explicit permission provided that full credit including the copyright notice is given to the source..

[Audio] Our research on corporate governance and control in finance identified challenges and limitations in current research. We analyzed the key findings and conclusions and focused on understanding the mechanisms of corporate control legal and regulatory institutions in different countries and the comparative corporate governance literature. Our research enhances understanding of corporate governance and control in finance and anticipates that our recommendations will be beneficial for future research in this field..

[Audio] We conducted a literature review on the current state of corporate governance and control research. Our findings reveal that corporate governance is a critical issue in the global economy and that more research is needed to better understand the complexities of this topic. We believe that our research will contribute to the development of new theories and models that can improve corporate governance practices and enhance the efficiency of financial markets. In conclusion our literature review highlights the importance of corporate governance in the global economy and the need for more research to better understand this topic..

[Audio] We present the findings of our literature survey on the current state of corporate governance and control research in finance. The key findings and conclusions related to board independence composition and working as well as executive compensation and careers will be presented. Board Independence: Board independence is crucial for effective corporate governance. Boards with high levels of independence are better able to make decisions that are in the best interests of the company and its shareholders. However we also noted that many boards still face challenges in achieving true independence. Board Composition: Diversity is key to effective decision-making. Boards with a diverse range of skills and experiences are better able to make informed decisions that benefit the company. Working of Boards: Effective communication and collaboration are essential for successful decision-making. Boards that are well-informed and work together effectively are better able to make decisions that are in the best interests of the company. International Evidence: Best practices for board governance vary across countries but many countries are adopting similar governance structures to improve corporate governance. Executive Compensation and Careers: Well-designed compensation packages are important for attracting and retaining top talent but many compensation packages are not well-designed. We also examined the implicit incentives that exist in compensation packages and found that these can sometimes lead to unintended consequences. Conclusion: Improving board independence composition and working as well as executive compensation and careers is crucial for effective corporate governance. Our findings suggest that companies should focus on achieving true board independence promoting diversity in board composition and improving communication and collaboration among board members. We also discussed the challenges of balancing the interests of multiple constituencies including shareholders employees and debt holders. We found that companies need to strike a balance between these interests in order to achieve long-term success. In our next section we will discuss the limitations and challenges of current research in this area and offer suggestions for future research directions..

[Audio] 168 slides in this presentation.. INTRODUCTION 1 INTRODUCTION At the most basic level a corporate governance problem arises whenever an outside investor wishes to exercise control differently from the manager in charge of the firm. Dispersed ownership magnifies the problem by giving rise to conflicts of interest between the various corporate claimholders and by creating a collective action problem among investors. Most research on corporate governance has been concerned with the resolution of this collective action problem. Five alternative mechanisms may mitigate it: i) partial concentration of ownership and control in the hands of one or a few large investors, ii) hostile takeovers and proxy voting contests, which concentrate ownership and/or voting power temporarily when needed, iii) delegation and concentration of control in the board of directors, iv) alignment of managerial interests with investors through executive compensation contracts, and v) clearly defined fiduciary duties for CEOs together with class-action suits that either block corporate decisions that go against investors’ interests, or seek compensation for past actions that have harmed their interests. In this survey we review the theoretical and empirical research on these five main mechanisms and discuss the main legal and regulatory institutions of corporate governance in different countries. We discuss how different classes of investors and other constituencies can or ought to participate in corporate governance. We also review the comparative corporate governance literature.1 The favoured mechanism for resolving collective action problems among shareholders in most countries appears to be partial ownership and control concentration in the hands of 1 We do not cover the extensive strategy and management literature; see Pettigrew, Thomas and Whittington (2002) for an overview, in particular Davis and Useem (2002). 5/168.

[Audio] We conducted a literature survey of the current state of corporate governance and control research in finance. We reviewed various studies and articles on the topic and provided a comprehensive analysis of the key findings and conclusions. We also discussed the challenges and limitations of current research and offered suggestions for future research directions..

[Audio] This brief sketch will explore the evolution of corporate governance and control research in finance and the challenges that have emerged over the years. The concept of corporate governance has been a topic of interest for centuries with early writers of corporate charters concerned with establishing corporate democracy and limiting the power of corporate plutocrats. However this soon gave way to plutocracy as voting scales were introduced and concentrated ownership and control became the norm. The United States saw two distinct systems of corporate feudalism: the voting trusts and holding companies with voting right restrictions surviving until very recently in Germany and still in use in some European countries. The challenges and limitations of current research and the need for future research directions have been discussed in detail in our previous slide. We hope that our findings have provided a comprehensive analysis of the key findings and conclusions in this area. Thank you for your time..

[Audio] This presentation will discuss the historical origins of corporate governance. We will examine how the concept of corporate governance has evolved over time and how it has impacted the way businesses operate. In the early days of corporate governance during the Gilded Age the captains of industry controlled the majority of votes in vast corporate empires. This allowed them to exert product market power and left ample room for self-dealing. In contrast later managerial corporations were controlled mainly by professional managers and control was effectively separated from ownership. Today the movement for more shareholder democracy challenges corporate governance. This movement known as the corporate Jacksonians is aimed at enforcing a common policy on output and prices. Holding companies are designed to own and vote shares in other companies and they have played a significant role in the development of corporate governance. The Robber Barons of this era also known as the captains of industry were the target of an early anti-trust movement that led to the election of Woodrow Wilson as U-S President in 1912 and the breakup of Standard Oil. This separation of ownership and control sparked a huge public and academic debate about the corporate problem and laid the foundations for some of the world's finest arts collections philanthropic foundations and university endowments..

[Audio] Our research focused on the historical origins of corporate governance and explored the debate surrounding who corporate governance should represent. We found that hostile takeovers might be a more effective way of disciplining management based on the work of Rostow and Manne who argued that the raider persuades shareholders to act as if they were partial owners with a partial owner's responsibility for the election of directors. The debate on whether management should run the corporation solely in the interests of shareholders or whether it should take account of other constituencies has been ongoing since the first writings on corporate governance. Berle argued that corporate powers are powers in trust for shareholders while Dodd argued that businesses should be carried on in a way that safeguards the interests of employees and consumers. These views have led to a corporate Jacksonians movement named after the U S President Andrew Jackson who introduced universal male suffrage and represented minorities labor and progressive reformers. Finally we highlighted the challenges and limitations of current research and offered suggestions for future research directions in the field of corporate governance and control..

[Audio] In the past two decades corporate governance and control have become a prominent topic. We will discuss the key findings and conclusions of our literature survey. We will also discuss the challenges and limitations of current research and provide suggestions for future research directions. In this slide we will discuss why corporate governance has become such a prominent topic in the past two decades. There are several reasons for this including the world-wide wave of privatization pension fund reform and the growth of private savings the takeover wave of the 1980s deregulation and the integration of capital markets the 1998 East Asia crisis which put the spotlight on corporate governance in emerging markets and a series of recent U S scandals and corporate failures that built up but did not surface during the bull market of the late 1990 seconds..

[Audio] 11/168. WHY CORPORATE GOVERNANCE IS SO PROMINENT TODAY Inevitably, the privatisation wave has raised the issue of how the newly privatised corporations should be owned and controlled. In some countries, most notably the U.K., part of the agenda behind the massive privatisation program was to attempt to recreate a form of “shareholder democracy”17 (see Biais and Perotti 2000). In other countries great care was given to ensure the transfer of control to large shareholders. The issues surrounding the choice of privatisation method rekindled interest in governance issues; indeed Shinn (2001) finds that the state’s new role as a public shareholder in privatised corporations has been an important source of impetus for changes in corporate governance practices worldwide. In general, privatisations have boosted the role of stock markets as most OECD sales have been conducted via public offerings, and this has also focused attention on the protection of small shareholders. 3.2 Pension Funds and Active Investors The growth in defined contribution pension plans has channelled an increasing fraction of household savings through mutual and pension funds and has created a constituency of investors that is large and powerful enough to be able to influence corporate governance. Table 1 illustrates how the share of financial assets controlled by institutional investors has steadily grown over the 1990s in OECD countries. It also highlights the disproportionately large institutional holdings in small countries with large financial centres, like Switzerland, the Netherlands and Luxembourg. Institutional investors in the U.S. alone command slightly more than 50% of the total assets under management and 59.7% of total equity investment in the OECD, rising to 60.1% and 76.3% respectively when U.K. institutions are added. A significant proportion is held by pension funds (for U.S. and U.K. based funds, 35.1% and 40.1% of total assets 17 A state-owned and -controlled company is indirectly owned by the citizens via the state, which has a say in the affairs of the company. In a “shareholder democracy” each citizen holds a small share in the widely 11/168.

[Audio] Institutional investors such as pension funds and insurance companies have become more demanding and active in shaping the corporate governance landscape. In the U.S pension funds are required to vote responsibly for their portfolio under E-R-I-S-A regulations leading to the emergence of a service industry that provides voting recommendations and exercises votes on behalf of clients. Japanese institutional investors command a significant portion of total institutional investor assets in the O-E-C-D-. However there are differences in the holdings of institutional investors in various countries. For example institutional investors in the U.S Switzerland and the Netherlands may not be citizens of those countries. Therefore the location of fund managers matters for governance purposes as they make the investment decisions. Ongoing reform of pension systems in Europe and changes in savings patterns are likely to change the landscape of institutional investor holdings in the near future..

[Audio] Corporate governance is an important topic that requires attention from both policymakers and businesses. As we continue to see the growth of global markets it is critical that we have strong corporate governance frameworks in place to ensure that companies operate ethically and transparently..

[Audio] We are introducing a framework that emphasizes the significance of corporate governance in preventing crises and their spread in an interconnected global economy. This framework is backed by international policy-makers. Recent corporate scandals and failures in the U-S have underscored the challenges and limitations of current research on corporate governance. Our framework can offer valuable perspectives on complex issues related to corporate governance and guide future research investigations..

[Audio] Corporate governance is a system of rules practices and procedures that ensures the alignment of the interests of the various stakeholders involved in a business. It is a complex issue as it involves the C-E-O and multiple principals such as shareholders creditors employees and clients. Efficiency is a key concept in corporate governance and there are two closely related criteria for determining this: ex-ante efficiency and ex-post efficiency. Ex-ante efficiency refers to a corporate charter generating the highest possible joint payoff for all parties involved while ex-post efficiency refers to a charter being Pareto efficient meaning that no other charter exists that all parties prefer. However corporate governance can also be seen as a multiprincipal-multi-agent problem where managers and employees are seen as agents for multiple classes of investors. This raises the question of when and how employees should participate in corporate governance which we will discuss in greater detail later in the presentation..

[Audio] Discuss shareholder value and its significance in finance and corporate governance. While shareholder value is a vital criterion it is not identical to Pareto efficiency or surplus maximization. If a company is perceived as a node of complete contracts with all stakeholders and only contracts with shareholders are open-ended maximizing shareholder value is equivalent to economic efficiency. Nevertheless this is not always the case as managerial agency problems can create inefficiencies. To minimize these inefficiencies managers should not solely prioritize shareholder value maximization and should consider multiple stakeholders. Corporate governance norms should be designed to safeguard and advance the interests of shareholders exclusively but managers should be motivated to steer clear of agency problems..

[Audio] Our presentation focuses on corporate governance and control research in finance. We explore the conceptual framework of corporate governance specifically the debate around shareholder value maximization and the role of other constituencies in decision-making. We discuss the arguments in favor of shareholder value maximization as well as the differences across countries in the approach to corporate governance. Our presentation sheds light on the complex and evolving landscape of corporate governance and control research in finance..

[Audio] The literature survey on the current state of corporate governance and control research in finance conducted by reviewing various studies and articles on the topic offers valuable insights into the current state of the field and suggestions for future research directions. The survey discussed the challenges and limitations of current research including Williamson's argument that if it is possible to get better protection by signing debt contracts why not encourage all investors in the firm to take out debt contracts. The survey also highlighted the difficulties with this logic such as the potential costs of financial distress for highly leveraged firms. The survey also discussed the importance of efficient corporate governance rules in minimizing the cost of capital labor and other inputs for corporations and their C-E-O-s-. The survey suggests that it is in the interest of corporations and their C-E-Os to design efficient corporate governance rules since this would maximize the value of their products or services to their clients. In conclusion the literature survey provides valuable insights into the current state of corporate governance research in finance and offers suggestions for future research directions..

[Audio] We conducted a literature survey of the current state of corporate governance and control research in finance. We reviewed various studies and articles on the topic and provided a comprehensive analysis of the key findings and conclusions. Our findings suggest that reputation building is an effective way to establish investor protection. Regulatory intervention is necessary to ensure that inefficient rules are not written. We also discussed the importance of compliance with corporate governance “codes” and the role of courts and corporate law in formulating default rules..