Showing papers on "Corporate governance published in 1999"

The Mechanisms of Governance

Abstract: This book brings together in one place the work of one of our most respected economic theorists, on a field which he has played a large part in originating: the New Institutional Economics. Transaction cost economics, which studies the governance of contractual relations, is the branch of the New Institutional Economics with which Oliver Williamson is especially associated. Transaction cost economics takes issue with one of the fundamental building blocks in microeconomics: the theory of the firm. Whereas orthodox economics describes the firm in technological terms, as a production function, transaction cost economics describes the firm in organizational terms, as a governance structure. Alternative feasible forms of organization--firms, markets, hybrids, bureaus--are examined comparatively. The analytical action resides in the details of transactions and the mechanisms of governance. Transaction cost economics has had a pervasive influence on current economic thought about how and why institutions function as they do, and it has become a practical framework for research in organizations by representatives of a variety of disciplines. Through a transaction cost analysis, The Mechanisms of Governance shows how and why simple contracts give way to complex contracts and internal organization as the hazards of contracting build up. That complicates the study of economic organization, but a richer and more relevant theory of organization is the result. Many testable implications and lessons for public policy accrue to this framework. Applications of both kinds are numerous and growing. Written by one of the leading economic theorists of our time, The Mechanisms of Governance is sure to be an important work for years to come. It will be of interest to scholars and students of economics, organization, management, and law.

Cognition and corporate governance: Understanding boards of directors as strategic decision making groups

Abstract: Recent research developments underscore the need for research on the processes that link board demography with firm performance. In this article we develop a model of board processes by integrating the literature on boards of directors with the literature on group dynamics and workgroup effectiveness. The resulting model illuminates the complexity of board dynamics and paves the way for future empirical research that expands and refines our understanding of what makes boards effective.

Strategy research: governance and competence perspectives

Abstract: Business strategy is a complex subject and is usefully examined from several perspectives. This paper applies the lenses of governance and competence to the study of strategy. Both the governance and the competence perspectives have had the benefit of distinguished antecedents. They have also had to deal with tautological reputations. I begin with the governance perspective, with emphasis on the six key moves through which it has been operationalized. I then examine the competence perspective in these same six respects. Governance challenges the competence perspective to apply itself more assiduously to operationalization, including the need to choose and give definition to one or more units of analysis (of which the ‘routine’ is a promising candidate). The research challenges posed by competence to which governance can and should respond include dynamic transaction costs, learning, and the need to push beyond generic governance to address strategy issues faced by particular firms (with their distinctive strengths and disabilities). A lively research future for these two perspectives, individually and in combination, is projected.Copyright © 1999 John Wiley & Sons, Ltd. Business strategy is an expansive enterprise. Not only do all of the functional areas in the business school relate, but strategy is, by nature, interdisciplinary. All of the social sciences— especially economics and organization theory— plus contract law are implicated. Indeed, in the high technology arena where some of the most difficult strategy issues reside, engineering and the law on intellectual property rights also have a bearing. Of the various approaches to the study of strategy, this paper focuses on the governance and competence perspectives. Both perspectives combine economic reasoning with organization theory. As between these two, the governance

Eclipse of the Public Corporation

Abstract: The publicly held corporation has outlived its usefulness in many sectors of the economy New organizations are emerging Takeovers, leveraged buyouts, and other going-private transactions are manifestations of this change A central source of waste in the public corporation is the conflict between owners and managers over free cash flow This conflict helps explain the prominent role of debt in the new organizations The new organizations' resolution of the conflict explains how they can motivate people and manage resources more effectively than public corporations (HBR McKinsey Award Winner)

The Effects of Corporate Governance and Institutional Ownership Types on Corporate Social Performance

Abstract: The effects of institutional investor types and governance devices on two dimensions of corporate social performance (CSP) were examined. Pension fund equity was positively related to both a people (women and minorities, community, and employee relations) and a product quality (product and environment) dimension of CSP, but mutual and investment bank funds exhibited no direct relationship with CSP. Outside director representation was positively related to both CSP dimensions. Top management equity was positively related to the product quality dimension but unrelated to the people dimension of CSP.

Corporate Citizenship: Cultural Antecedents and Business Benefits

Abstract: The article explores the nature of corporate citizenship and its relevance for marketing practitioners and academic researchers. Specifically, a conceptualization and operationalization of corporate citizenship are first proposed. Then, an empirical investigation conducted in two independent samples examines whether components of an organization’s culture affect the level of commitment to corporate citizenship and whether corporate citizenship is conducive to business benefits. Survey results suggest that market-oriented cultures as well as humanistic cultures lead to proactive corporate citizenship, which in turn is associated with improved levels of employee commitment, customer loyalty, and business performance. The results point to corporate citizenship as a potentially fruitful business practice both in terms of internal and external marketing.

Coping with tragedies of the commons

Abstract: ▪ Abstract Contemporary policy analysis of the governance of common-pool resources is based on three core assumptions: (a) resource users are norm-free maximizers of immediate gains, who will not cooperate to overcome the commons dilemmas they face; (b) designing rules to change incentives of participants is a relatively simple analytical task; and (c) organization itself requires central direction. The chapter shows that these assumptions are a poor foundation for policy analysis. Findings from carefully controlled laboratory experiments that challenge the first assumption are summarized. A different assumption that humans are fallible, boundedly rational, and norm-using is adopted. The complexity of using rules as tools to change the structure of commons dilemmas is then discussed, drawing on extensive research on rules in field settings. Viewing all policies as experiments with a probability of failure, recent research on a different form of general organization—that of complex adaptive systems—is appl...

Aggregating governance indicators

Abstract: In recent years, the growing interest of academics and policymakers in governance has been reflected in the proliferation cross-country indices measuring various aspects of governance. In this paper we explain how a simple variant of an unobserved components model can be used to combine the information from these different sources into aggregate governance indicators. The main advantage of this method is that it allows us to quantify the precision of the both individual sources of governance data as well as the aggregate governance indicators. We will illustrate the methodology by constructing aggregate indicators of bureaucratic quality, rule of law, and graft, for a large sample of 160 countries. Although these aggregate governance indicators are more informative about the level of governance than any individual indicator, the standard errors associated with estimates of governance are still large relative to the units in which governance is measured.

Arrangements for information technology governance: a theory of multiple contingencies

Abstract: A key issue facing information systems researchers and practitioners has been the difficulty in IT governance arrangements refers to the patterns of authority for key IT activities in business firms, including IT infrastructure, IT use, and project management. During the last 20 years, three primary modes of IT governance have become prevalent: centralized, decentralized, and the federal mode. These modes vary in the extent to which corporate IS, divisional IS, and line management are vested with authority for the key IT activities. While a significant volume of research has examined the influence of contingency factors on the choice of a specific mode of IT governance, most of this research has examined the singular effects of the contingency factors. The assumption underlying these studies is as though the organizational contingencies act in isolation in influencing the mode of IT governance. However, in reality, business firms are subject to the pulls and pressures of multiple, rather than singular, contingency forces. Therefore, to acknowledge this reality, this study applies the theory of multiple contingencies to examine how contingency forces influence the mode of IT governance. The theory argues that contingency forces interact with each other by either amplifying, dampening, or overriding their mutual influences on the IT governance mode. Three scenarios of multiple, interacting contingencies are identified: reinforcing, conflicting, and dominating. Each of these scenarios of multiple contingencies is hypothesized to influence a particular mode of IT governance. Utilizing rich data from case studies of eight firms, empirical evidence is presented to support these hypotheses. Implications of the multiple contingencies theory for research and for practice are presented.

The Future as History: The Prospects for Global Convergence in Corporate Governance and Its Implications

Abstract: What forces explain corporate structure and shareholder behavior? For decades this question has gone unasked, as both corporate law scholars and practitioners tacitly accepted the answer given in 1932 by Adolf Berle and Gardiner Means that the separation of ownership and control stemming from ownership fragmentation explained and assured shareholder passivity.' Over this decade, however, corporate law scholars have recognized that this standard answer begs an essential prior question: if ownership fragmentation explains shareholder passivity, what explains ownership fragmentation? Although the Berle and Means model assumed that largescale enterprises could raise sufficient capital to conduct their operations only by attracting a large number of equity investors, contemporary empirical evidence finds that, even at the level of the largest firms, dispersed share ownership is a localized phenomenon, largely limited to the United States and Great Britain. Not only does the latest comparative research demonstrate that concentrated, not dispersed, ownership is the dominant worldwide pattern,2 but in-depth studies of individual countries show that shareholder activism increases in direct proportion to ownership concentration.' As a result, these findings, in turn, suggest that the conventional governance nouns in the United States may be more the product of a path-dependent history than the "natural" result of an inevitable evolution toward greater ef ficiency. Propelling this new inquiry into whether the Berle/Means corporation-with its famous "separation of ownership and control"-is the inevitable and efficient endpoint of economic evolution, or only the artifact of political forces and historical contingencies, is the unavoidable reality of increased global competition in both the product and capital markets. As a result, dispersed and concentrated ownership structures not only differ, but they may be forced to compete. Although scholars have debated the relative merits of these rival models for a decade or more, this prospect of an evolutionary competition-with its implication of a Darwinian "survival of the fittest" struggle-is very new. Ultimately, the issue thus posed is which system will dominate, and why: the stock market centered-system of dispersed ownership first described by Berle and Means, or the blockholder and cross-shareholding systems that now prevail across Europe and Asia? Of course, a clear winner does not necessarily have to emerge. The more one believes that political forces are likely to constrain and override purely economic forces, the more one is likely to expect a more muddled and contextual outcome. Thus, the current debate has two levels that can often become confused: (1) Which system of corporate governance is superior?, and (2) Which set of forces-economic or political-is likely to prove more powerful? To appreciate this distinction, it is useful to understand that the current debate has progressed through several discrete stages. First, beginning eartier in this decade, a provocative new wave of law and economics scholars advanced "political" theories that explained dispersed share ownership in large American corporations as the product of political forces and historical contingencies, not economic efficiency. An undercurrent in this criticism was the theme that political constraints had produced a suboptimal system of corporate governance, with dispersed ownership implying inherently inadequate corporate monitoring. Some of these scholars argued that the Anglo-American pattern of dispersed ownership was clearly inferior to the bank-centered capital markets of Germany and Japan, because the latter enabled corporate executives to manage for the long run, while U.S. managers were allegedly forced to maximize short-term earnings 5 Still, with the burst of the "bubble economy" in Japan, the more recent Asian and Russian financial crises, and notable monitoring failures by German universal banks, the tide of opinion has lately turned against the presumed superiority of banks as monitors. …

The Other Side of the Trade‐Off: The Impact of Risk on Executive Compensation

Abstract: The principal‐agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance, yet the exiting empirical evidence supporting it is quite wea...

A Team Production Theory of Corporate Law

Abstract: A Team Production Theory of Corporate Law^ INTRODUCTION Who owns a corporation? Most economists and legal scholars today seem inclined to answer: Its shareholders do. Contemporary discussions of corporate governance have come to be dominated by the view that public corporations are little more than bundles of assets collectively owned by shareholders (principals) who hire directors and officers (agents) to manage those assets on their behalf.1 This principal-agent model, in turn, has given rise to two recurring themes in the literature: First, that the central economic problem addressed by corporation law is reducing "agency costs" by keeping directors and managers faithful to shareholders' interests; and second, that the primary goal of the public corporation is-or ought to be-maximizing shareholders' wealth. In this Article we take issue with both the prevailing principal-agent model of the public corporation and the shareholder wealth maximization goal that underlies it. Because corporations are fictional entities that can only act through human agents, problems of agent fealty are frequently encountered by those who study and practice corporate law. Yet the public corporation is hardly unique in its use of agents. Other organizational forms, including partnerships, proprietorships, privately-held corporations, and limited liability companies, also routinely do business through hired managers and employees. Thus, while the principal-agent problem may be important in understanding the business firm, we question whether it necessarily provides special insight into the theory of the public corporation. We explore an alternative approach that we believe may go much further in explaining both the distinctive legal doctrines that apply to public corporations and the unique role these business entities have come to play in American economic life: the team production approach. In the economic literature, team production problems are said to arise in situations where a productive activity requires the combined investment and coordinated effort of two or more individuals or groups.2 If the team members' investments are firm-specific (that is, difficult to recover once committed to the project), and if output from the enterprise is nonseparable (meaning that it is difficult to attribute any particular portion of the joint output to any particular member's contribution), serious problems can arise in determining how any economic surpluses generated by team production-any "rents"should be divided. Ex ante sharing rules invite shirking,3 while ex post attempts to divvy up rewards create incentives for opportunistic rent-seeking4 that can erode and even destroy the economic gains that flow from team production. Yet trying to prevent shirking and rent-seeking by defining individual team members' duties and rewards through explicit contracts can be impossibly difficult, especially when the team production process is complex, continuous, or uncertain. While team production problems are less well studied than principal-agent problems, we believe the former may represent a more appropriate basis for understanding the unique economic and legal functions served by the public corporation. Our analysis rests on the observation-generally accepted even by corporate scholars who adhere to the principal-agent model-that shareholders are not the only group that may provide specialized inputs into corporate production.5 Executives, rank-and-file employees, and even creditors or the local community may also make essential contributions and have an interest in an enterprise's success. And in circumstances where it is impossible to draft explicit contracts that deter shirking and rent-seeking among these various corporate "team members" by preallocating rewards and responsibilities, we suggest that the problem may be better left to an institutional substitute for explicit contracts: the law of public corporations. …

Aggregating governance indicators

Abstract: In recent years the growing interest of academics and policymakers in governance has been reflected in the proliferation of cross-country indices measuring various aspects of governance. The authors explain how a simple variant of an unobserved components model can be used to combine the information from these different sources into aggregate governance indicators. The main advantage of this method us that it allows quantification of the precision of both individual sources of governance data and country-specific aggregate governance indicators. The authors illustrate the methodology by constructing aggregate indicators of bureaucratic quality, rule of law, and graft for a sample of 160 countries. Although these aggregate governance indicators are more informative about the level of governance than any single indicator, the standard errors associated with estimates of governance are still large relative to the units in which governance is measured. In light of these margins of error, it is misleading to offer very precise rankings of countries according to their level of governance: small differences in country rankings are unlikely to be statistically - let alone practically - significant. Nevertheless, these aggregate governance indicators are useful because they allow countries to be sorted into broad groupings according to levels of governance, and they can be used to study the causes and consequences of governance in a much larger sample of countries than previously used (see for example the companion paper by the authors,"Governance matters", Policy Research Working Paper no. 2196).

Investor Protection and Corporate Governance

Abstract: Recent research on corporate governance has documented large differences between countries in ownership concentration in publicly traded firms, in the breadth and depth of financial markets, and in the access of firms to external finance. We suggest that there is a common element to the explanations of these differences, namely how well investors, both shareholders and creditors, are protected by law from expropriation by the managers and controlling shareholders of firms. We describe the differences in laws and the effectiveness of their enforcement across countries, summarize the consequences of these differences, and suggest potential strategies of reform of corporate governance. We argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems.

Were the Good Old Days That Good? Changes in Managerial Stock Ownership Since the Great Depression

Abstract: We document that ownership by officers and directors of publicly traded firms is on average higher today than earlier in the century. Managerial ownership has risen from 13 percent for the universe of exchange-listed corporations in 1935, the earliest year for which such data exist, to 21 percent in 1995. We examine in detail the robustness of the increase and explore hypotheses to explain it. Higher managerial ownership has not substituted for alternative corporate governance mechanisms. Lower volatility and greater hedging opportunities associated with the development of financial markets appear to be important factors explaining the increase in managerial ownership. THE SEPARATION OF OWNERSHIP AND CONTROL of firms has generated an enormous literature since the publication of Berle and Means' The Modern Corporation and Private Property (1932). In both academic and public policy circles, there has been much debate about the consequences of "absentee ownership" (Veblen (1923)) and what policies should be undertaken to remedy the situation. Berle and Means warn that the separation of ownership and control "destroys the very foundation on which the economic order of the past three centuries has rested" and assert that the "[d]ispersion in the ownership of separate enterprises . . . has already proceeded far, it is rapidly increasing, and appears to be an inevitable development" of the modern cor

The Political Economy of Corporate Governance

Abstract: The paper analyzes the political decision that determines the degree of investor protection We show that, in some circumstances, entrepreneurs and workers agree to trade low investor protection for high employment protection The feasibility of this "corporatist" agreement depends on the distribution of wealth and on technological factors Otherwise, a "non-corporatist" outcome will occur, featuring high investor protection and low employment protection Therefore, our main prediction is that employment and investor protection is negatively correlated across countries The model also predicts that the frequency of mergers and acquisitions is negatively correlated with employment protection Both predictions are consistent with OECD evidence

Public and private bureaucracies: a transaction cost economics perspectives

Abstract: The public bureaucracy is a puzzle. How is it that an organizational form that is so widely used is also believed to be inefficient—both in relation to a hypothetical ideal and in comparison with private bureaucracies? This article examines public bureaucracy through the lens of transaction cost economics, according to which the public bureaucracy, like other alternative modes of governance, is well suited to some transactions and poorly suited to others. Rather than proceed in a completely general way, I focus on what James Q. Wilson describes as “sovereign transactions,” of which foreign affairs is an example. I ask what it is that distinguishes sovereign transactions, after which I compare the efficacy of public and private bureaucracies for managing such transactions. I conclude that there is an efficiency place for public bureaucracy, but that all modes of governance (markets, hybrids, firms, regulation), of which public bureaucracy is one, need to be kept in their place. I further observe that public bureaucracies are not all of a kind and that differences between them need to be distinguished. The public bureau has had a mixed reputation within economics. At the one extreme is the older and resilient (but increasingly discredited) public finance tradition, where public agencies (and the government to which they report) are treated as “omnipotent, omniscient, and benevolent” instruments (Dixit, 1996:8). 1 The property rights view—that the public agency is a haven for inef

Peace, Power, Righteousness: An Indigenous Manifesto

Abstract: This book challenges the contemporary wisdom on Aboriginal governance. It argues that indigenous peoples must return to their political traditions and use these traditions to educate a new generation of leaders committed to values and the preservation of indigenous nationhood.

The Uncertain Relationship between Board Composition and Firm Performance

Abstract: We survey the evidence on the relationship between board composition and firm performance. Boards of directors of American public companies that have a majority of independent directors behave differently, in a number of ways, than boards without such a majority. Some of these differences appear to increase firm value; others may decrease firm value. Overall, within the range of board compositions present today in large public companies, there is no convincing evidence that greater board independence correlates with greater firm profitability or faster growth. In particular, there is no empirical support for current proposals that firms should have "supermajority-independent boards" with only one or two inside directors. To the contrary, there is some evidence that firms with supermajority-independent boards are less profitable than other firms. This suggests that it may be useful for firms to have a moderate number of inside directors (say three to five on an average-sized eleven member board). We offer some possible explanations for these results, based on board dynamics, the informational advantages possessed by inside (and, often, affiliated) directors, and the value of interaction between different types of directors who bring different strengths to the board. published in 54 Business Lawyer 921-963 (1999) Columbia Law School, Center for Law and Economic Studies Working Paper No. 137 Stanford Law School, John M. Olin Program in Law and Economics Working Paper No. 175 available from the Social Science Research Network Electronic Library at: _______________ * Respectively, Professor of Finance, University of Colorado at Boulder; Professor of Law, Stanford Law School. 1 NATIONAL ASS'N OF CORP. DIRS., REPORT OF THE NACD BLUE RIBBON COMMISSION ON DIRECTOR PROFESSIONALISM 9 (1996). 2 THE BUS. ROUNDTABLE, STATEMENT ON CORPORATE GOVERNANCE 10 (1997). 3 See Adam Bryant, Calpers Draws a Blueprint for its Concept of An Ideal Board, N.Y. TIMES, June 17, 1997, at D5. 2 The Uncertain Relationship Between Board Composition and Firm Performance By Sanjai Bhagat and Bernard Black

Institutional environment and the mechanisms of governance: the impact of intellectual property protection on the structure of inter-firm alliances

Abstract: This study builds on developments in transaction cost economics to examine how institutional environment and transaction (project) characteristics affect governance of inter-firm alliances. The focus is on the choice between equity and contractual alliance forms under differing regimes of intellectual property protection and other national institutional features. Empirical results identify transaction-level characteristics as primary drivers of governance choice in alliances, but intellectual property protection is also a significant factor: firms adopt more hierarchical governance modes when protection is weak. Complete understanding of the structure of inter-firm alliances thus requires a combined focus on the institutional environment and mechanisms of governance.

Banks and Corporate Control in Japan

Abstract: Using a large sample of Japanese firm level data, we find that Japanese banks act primarily in the short term interests of creditors when dealing with firms outside bank groups. Corporate control mechanisms other than bank oversight appear necessary in these firms. When dealing with firms in bank groups, banks may act in the broader interests of a range of stakeholders, including shareholders. However, our findings are also consistent with banks “propping up” troubled bank group firms. We conclude that bank oversight need not lead to value maximizing corporate governance. POOR LIQUIDITY AND CASH F LOW PREDICT banker appointments to the boards of bank group firms; poor share price performance does not. When dealing with firms in bank groups, banks act in the broader interests of a range of stakeholders, including shareholders. Poor stock market performance, job creation, liquidity, and cash f low all predict banker appointments to bank group firms. We argue that Japanese banks’ dual role as creditors and shareholders ~Prowse ~1992!! constrains their incentives to advance shareholders’ interests, especially in firms outside bank groups. Corporate governance mechanisms other than oversight by banks would seem necessary in these firms. Firms outside bank groups undergo sharp downsizing following banker appointments but bank group firms do not, consistent with banks “propping up” weak bank group firms ~Hoshi, Kashyap, and Scharfstein ~1990!!. Entertainment spending falls as cash f low falls in firms outside bank groups, but does not in bank group firms. ~A similar, but statistically insignificant pattern exists in entertainment spending per dollar of sales.! If entertainment expenses represent “perks” consumption, rather than investment in networking, closer bank monitoring may lead to “tighter ships” outside bank

How a Firm's Capabilities Affect Boundary Decisions

Abstract: Determining which business activities to bring inside a firm and which to outsource is a critical strategic decision. Firms that bring in the wrong business activities risk losing strategic focus; those that fail to bring the right business activities within their boundaries risk losing their competitive advantage. A well-developed approach for determining a firm's boundary, called transactions cost economics, specifies the conditions for managing a particular economic exchange within an organizational boundary and the conditions for choosing outsourcing. A popular version of transactions cost economics requires managers to consider a single characteristic of an economic exchange ? its level of transaction-specific investment. Three concepts aid in understanding transactions cost economics as applied to firm boundary decisions: governance (the mechanism through which a firm manages an economic exchange), opportunism (taking unfair advantage of other parties to an exchange), and transaction-specific investment (any investment that is significantly more valuable in one particular exchange than in any alternative exchange). Firms can use governance mechanisms to mitigate the threat of opportunism. Traditional transactions cost economics does not focus on the capabilities of a firm or its potential partners, even though economic exchanges involve (1) cooperating with firms that possess critical capabilities, (2) developing capabilities independently, or (3) acquiring another firm that already possesses needed capabilities. The author describes the conditions under which a firm's decisions on managing its business activities should be affected by its capabilities and those of its partners. When these conditions hold ? conditions particularly common in rapidly evolving high-technology industries ? firms should make boundary decisions that differ significantly from what would be suggested by traditional transactions cost analysis.

International Evidence on the Value of Corporate Diversification

Abstract: The valuation effect of diversification is examined for large samples of firms in Germany, Japan, and the United Kingdom for 1992 and 1994. We find no significant diversification discount in Germany, but a significant diversification discount of 10 percent in Japan and 15 percent in the U.K. Concentrated ownership in the hands of insiders enhances the valuation effect of diversification in Germany, but not in Japan or the U.K. For Japan, only firms with strong links to an industrial group have a diversification discount. These findings suggest that international differences in corporate governance affect the impact of diversification on shareholder wealth.

Strategists on the Board

Abstract: The paper examines the contribution to strategy by chairmen and non-executive directors in large UK companies. The collective label of `part-time board member' is used to refer to individuals performing these roles. The paper asks `how, if at all, do part-time board members influence strategy in UK plc's'?. Using data gathered from interviews with 108 company directors, the paper suggests that part-time board members do not simply ratify decisions made by all-powerful executives. A conceptual model is developed to show that part-time board members are able to influence processes of strategic choice, change and control by shaping both the ideas that form the content of company strategy and the methodologies and processes by which those ideas evolve. Their involvement in strategy is conditioned by factors such as: changing norms about corporate governance; the history and performance of the company; the process and conduct of board meetings and informal dialogue amongst company directors between board meetings.