Showing papers on "Corporate governance published in 2004"

Corporate Social Responsibility Theories: Mapping the Territory

Abstract: The Corporate Social Responsibility (CSR) field presents not only a landscape of theories but also a proliferation of approaches, which are controversial, complex and unclear. This article tries to clarify the sit- uation, ''mapping the territory'' by classifying the main CSR theories and related approaches in four groups: (1) instrumental theories, in which the corporation is seen as only an instrument for wealth creation, and its social activities are only a means to achieve economic results; (2) political theories, which concern themselves with the power of corporations in society and a responsible use of this power in the political arena; (3) integrative theories, in which the corporation is focused on the satisfaction of social demands; and (4) ethical theories, based on ethical responsibilities of corporations to society. In practice, each CSR theory presents four dimensions related to profits, political performance, social demands and ethical values. The findings suggest the necessity to develop a new theory on the business and society relationship, which should integrate these four dimensions.

Law, Finance, and Economic Growth in China

Abstract: China is an important counterexample to the findings in the law, institutions, finance, and growth literature: neither its legal nor financial system is well developed by existing standards, yet it has one of the fastest growing economies. We examine 3 sectors of the economy: the State Sector (state-owned firms), the Listed Sector (publicly listed firms), and the Private Sector (all other firms with various types of private and local government ownership). The law-finance-growth nexus established by existing literature applies to the State and Listed Sectors: with poor legal protections of minority and outside investors, external markets are weak, and the growth of these firms is slow or negative. However, with arguably poorer applicable legal and financial mechanisms, the Private Sector grows much faster than the State and Listed Sectors, and provides most of the economy's growth. This suggests that there exist effective alternative financing channels and governance mechanisms, such as those based on reputation and relationships, to support this growth.

Private Benefits of Control: An International Comparison

Abstract: We estimate private benefits of control in 39 countries using 393 controlling blocks sales. On average the value of control is 14 percent, but in some countries can be as low as ‐4 percent, in others as high a +65 percent. As predicted by theory, higher private benefits of control are associated with less developed capital markets, more concentrated ownership, and more privately negotiated privatizations. We also analyze what institutions are most important in curbing private benefits. We find evidence for both legal and extra-legal mechanisms. In a multivariate analysis, however, media pressure and tax enforcement seem to be the dominating factors. THE BENEFITS OF CONTROL OVER corporate resources play a central role in modern thinking about finance and corporate governance. From a modeling device (Grossman and Hart (1980)) the idea of private benefits of control has become a centerpiece of the recent literature in corporate finance, both theoretical and empirical. In fact, the main focus of the literature on investor protection and its role in the development of financial markets (La Porta, Lopez-de-Salines, and Shleifer (2000)) is on the amount of private benefits that controlling shareholders extract from companies they run. In spite of the importance of this concept, there are remarkably few estimates of how big these private benefits are, even fewer attempts to document empirically what determines their size, and no direct evidence of their impact on financial development. All of the evidence on this latter point is indirect, based on the (reasonable) assumption that better protection of minority shareholders is correlated with higher financial development via its curbing of private benefits of control (La Porta et al. (1997)). The lack of evidence is no accident. By their very nature, private benefits of control are difficult to observe and even more difficult to quantify in a reliable

Pay without Performance: The Unfulfilled Promise of Executive Compensation

Abstract: This book provides a detailed account of how structural flaws in corporate governance have enabled managers to influence their own pay and produced widespread distortions in pay arrangements. The book also examines how these flaws and distortions can best be addressed. Part I of the book (titled The Official View and its Limits) critically examines the arm's length contracting view, which underlies much of the academic research on executive compensation as well as the law's approach to it. We show that boards have not been operating at arm's length from the executives whose pay they set. While recent reforms can improve matters, they cannot be expected to eliminate significant deviations from arm's length contracting. We also show that the constraints imposed by market forces and shareholders' power to intervene are not tight enough to prevent such deviations. Part II of the book (titled Power and Pay) shows how an understanding of the role of managerial power can help explain executive compensation practices. We provide a framework for assessing whether pay arrangements are a product of managerial influence. We discuss managers' interest in camouflaging the amount and the performance-insensitivity of their pay. Applying our framework, we discuss how managerial influence can help explain, among other things, the evidence on the relationship between managerial pay and managerial power; the use of retirement benefits and other compensation arrangements to provide stealth compensation; and the ability of departing managers to obtain more than their contractual entitlement. Part III of the book (titled Decoupling Pay from Performance) examines how managerial influence has operated to reduce the performance-sensitivity of executive pay. Among other things, we examine the structure of non-equity compensation, the design of conventional option plans, the use of restricted stock grants, and managers' freedom to unload options and shares. Part IV of the book (titled Going Forward) discusses how executive compensation - and corporate governance more generally - can be improved. We examine the extent to which pay arrangements can be improved by adopting board process rules, imposing shareholder approval requirements, and making pay more transparent. We conclude that problems with compensation arrangements cannot be fully addressed without ensuring that directors focus on shareholder interests and operate at arm's length from the executives whose compensation they set. To achieve this result, we argue, it is not sufficient to make directors independent of executives as recent reforms has sought to do; it is also necessary to make directors dependent on shareholders by changing the legal arrangements that insulate boards from shareholders.

Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause

Abstract: Acknowledgments. Introduction. 1. The Case for Doing at Least Some Good. 2. Corporate Social Initiatives: Six Options for Doing Good. 3. Corporate Cause Promotions: Increasing Awareness and Concern for Social Causes. 4. Cause-Related Marketing: Making Contributions to Causes Based on Product Sales. 5. Corporate Social Marketing: Supporting Behavior Change Campaigns. 6. Corporate Philanthropy: Making a Direct Contribution to a Cause. 7. Community Volunteering: Employees Donating Their Time and Talents. 8. Socially Responsible Business Practices: Discretionary Business Practices and Investments to Support Causes. 9. Twenty-five Best Practices for Doing the Most Good for the Company and the Cause. 10. A Marketing Approach to Winning Corporate Funding and Support for Social Initiatives: Ten Recommendations. Notes. Index.

A perspective on regional and global strategies of multinational enterprises

Abstract: Multinational enterprises (MNEs) are the key drivers of globalization, as they foster increased economic interdependence among national markets. The ultimate test to assess whether these MNEs are global themselves is their actual penetration level of markets across the globe, especially in the broad ‘triad’ markets of NAFTA, the European Union and Asia. Yet, data on the activities of the 500 largest MNEs reveal that very few are successful globally. For 320 of the 380 firms for which geographic sales data are available, an average of 80.3% of total sales are in their home region of the triad. This means that many of the world’s largest firms are not global but regionally based, in terms of breadth and depth of market coverage. Globalization, in terms of a balanced geographic distribution of sales across the triad, thus reflects a special, and rather unusual, outcome of doing international business (IB). The regional concentration of sales has important implications for various strands of mainstream IB research, as well as for the broader managerial debate on the design of optimal strategies and governance structures for MNEs. Journal of International Business Studies (2004) 35, 3–18. doi:10.1057/palgrave. jibs.8400073

What Determines Corporate Transparency

Abstract: We investigate corporate transparency, defined as the availability of firmspecific information to those outside publicly traded firms. We conceptualize corporate transparency within a country as output from a multifaceted system whose components collectively produce, gather, validate, and disseminate information. We factor analyze a range of measures capturing countries’ firmspecific information environments, isolating two distinct factors. The first factor, interpreted as financial transparency, captures the intensity and timeliness of financial disclosures, and their interpretation and dissemination by analysts and the media. The second factor, interpreted as governance transparency, captures the intensity of governance disclosures used by outside investors to hold officers and directors accountable. We investigate whether these factors vary with countries’ legal/judicial regimes and political economies. Our main multivariate result is that the governance transparency factor is primarily related to a country’s legal/judicial regime, whereas the financial transparency factor is primarily related to political economy.

IT Governance: How Top Performers Manage IT Decision Rights for Superior Results

Abstract: With its vivid illustrations of the governance systems used by top performers in public and nonprofit sectors, this important book provides the framework and tools necessary to customize an IT governance system.

Pay without Performance, The Unfulfilled Promise of Executive Compensation, Part III: The Decoupling of Pay from Performance

Abstract: This paper contains a draft of Part III of our forthcoming book, Pay without Performance: The Unfulfilled Promise of Executive Compensation (Harvard University Press, September 2004). The book provides a detailed account of how structural flaws in corporate governance have enabled managers to influence their own pay and produced widespread distortions in pay arrangements. The book also examines how these flaws and distortions can best be addressed. Part III of the book examines how managerial influence has operated to reduce the performance-sensitivity of executive pay. Among other things, we examine the structure of non-equity compensation, the design of conventional option plans, the use of restricted stock grants, and managers’ freedom to unload options and shares.

Multi-level governance

Abstract: Contents Acknowledgements Abbreviations and Acronyms Foreword 1. Themes and Issues in Multi-Level Governance PART 1: THEORY 2. Contrasting Visions of Multi-Level Governance 3. Strong Demand, Huge Supply 4. Multi-Level Governance and Multi-Level Meta-Governance 5. Multi-Level Governance and Democracy PART 2: LEVELS 6. Multi-Level Governance and British Politics 7. Multi-Level Governance and the European Union 8. Multi-Level Governance and International Relations PART 3: SECTORS 9. Multi-Level Governance and Environmental Policy 10. Multi-Level Governance and Regional Policy 11. Multi-Level Governance and Economic Policy 12. Multi-Level Governance: Conclusions and Implications Bibliography Index

Board Composition: Balancing Family Influence in S&P 500 Firms

Abstract: Recent research indicates that founding families have substantial stakes in roughly one-third of the largest U.S. companies and, in these firms, control nearly twenty percent of all board seats. Burkart, Panunzi, and Shleifer (2003) suggest that a key element in the desirability of family ownership is the ability to limit the family's expropriation of minority shareholders. Consistent with this notion, we find that the most valuable public firms are those in which independent directors balance family board representation. In contrast, in firms with continued founding family ownership and relatively few independent directors, firm performance is significantly worse than in non-family firms. We also document that moderate family board presence provides substantial benefits to the firm. Additional tests suggest that families often seek to minimize the presence of independent directors, while outside shareholders seek independent director representation. These findings highlight the importance of independent directors in mitigating shareholder-shareholder conflicts and suggest that considering shareholder-shareholder conflicts provides a richer setting in which to explore corporate governance. Note: A list of the firms classified as family and non-family firms is available from the authors.

Corporate Social Responsibility and Financial Performance

Abstract: Corporate Social Responsibility and Financial Performance Haas School of Business University of California at Berkeley Applied Financial Project By: Margarita Tsoutsoura Berkeley, California March, 2004

Good Enough Governance: Poverty Reduction and Reform in Developing Countries

Abstract: The good governance agenda is unrealistically long and growing longer over time. Among the multitude of governance reforms that “must be done” to encourage development and reduce poverty, there is little guidance about what's essential and what's not, what should come first and what should follow, what can be achieved in the short term and what can only be achieved over the longer term, what is feasible and what is not. If more attention is given to sorting out these questions, “good enough governance” may become a more realistic goal for many countries faced with the goal of reducing poverty. Working toward good enough governance means accepting a more nuanced understanding of the evolution of institutions and government capabilities; being explicit about trade-offs and priorities in a world in which all good things cannot be pursued at once; learning about what's working rather than focusing solely on governance gaps; taking the role of government in poverty alleviation seriously; and grounding action in the contextual realities of each country.

Determinants of Board Size and Composition: A Theory of Corporate Boards

Abstract: This paper models the interaction of firm insiders and outsiders on a corporate board and addresses the question of the ideal size and composition the board board. In the model, the board is responsible for monitoring projects and making CEO succession decisions. Inside directors are better informed regarding the quality of firm investment projects, but outsiders can use CEO succession to motivate insiders to reveal their superior information and help the board in implementing higher value projects. The optimal board structure is determined by the tradeoff between maximizing the incentive for insiders to reveal their private information, minimizing the cost to outsiders to verify projects, and maximizing outsiders' ability to reject inferior projects. I show that optimal board size and composition are a function of the directors' and firm's characteristics. I also develop testable implications for the cross-sectional variations in the optimal board structure across firms.

Foreign Aid, Institutions, and Governance in Sub‐Saharan Africa*

Abstract: Introduction More than a decade ago, the World Bank argued that “underlying the litany of Africa’s development problems is a crisis of governance.” Poor quality institutions, weak rule of law, an absence of accountability, tight controls over information, and high levels of corruption still characterize many African states today. Aid levels have been reduced in many parts of Africa during the past decade. Yet in many of the countries with poor governance records, aid continues to contribute a very high percentage of government budgets. This article explores the institutional impact of these high levels of aid and the way that large amounts of aid are delivered. There are many reasons why governance is poor in much of sub-Saharan Africa. Colonialism did little to develop strong, indigenously rooted institutions that could tackle the development demands of modern states. Economic crisis and unsustainable debt, civil wars, and political instability have all taken their toll over the past 2 decades and more. It is difficult to separate the impact of these problems from the possible impact of foreign aid, which is often high in countries that suffer from precisely these problems. Theory provides conflicting guidance here. On the one hand, aid can release governments from binding revenue constraints, enabling them to strengthen domestic institutions and pay higher salaries to civil servants. Aid can provide training and technical assistance to build legal systems and accounting offices. In many countries, aid personnel (sometimes expatriate) manage important government programs, and the infusion of resources and technical assistance can give an important boost to the efficiency and effectiveness of governance, if only in a partial sense. Yet despite these likely benefits, it is also possible that, continued over

Governance Matters III: Governance Indicators for 1996, 1998, 2000, and 2002

Abstract: This article presents estimates of six dimensions of governance for 199 countries and territories for 1996, 1998, 2000, and 2002 developed in the context of an ongoing project to measure governance across countries. Section one describes the data used in developing this round of the governance indicators, which include several new sources. Data sources used in the earlier studies were updated forward to 2002 and backward to 1996, and previously estimated indicators for 1998 and 2000were revised to reflect the new data. The aggregation procedure, described in section two, provides not only estimates of governance for each country but also measures of the precision or reliability of these estimates. Although the new data have improved the precision of the governance indicators, the margins of error remain large relative to the units in which governance is measured, so that comparisons across countries and especially over time should be made with caution.

‘Governance’ as a bridge between disciplines: Cross-disciplinary inspiration regarding shifts in governance and problems of governability, accountability and legitimacy

Abstract: Modern societies have in recent decades seen a destabilization of the traditional governing mechanisms and the advancement of new arrangements of governance. Con- spicuously, this has occurred in the private, semi-private and public spheres, and has involved local, regional, national, transnational and global levels within these spheres. We have wit- nessed changes in the forms and mechanisms of governance by which institutional and orga- nizational societal sectors and spheres are governed, as well as in the location of governance from where command, administration, management and control of societal institutions and spheres are conducted. We have also seen changes in governing capabilities (i.e., the extent to which societal institutions and spheres can, in fact, be steered), as well as in styles of gov- ernance (i.e., the processes of decision making and implementation, including the manner in which the organizations involved relate to each other). These shifts tend to have signifi- cant consequences for the governability, accountability, responsiveness and legitimacy of governance institutions. These developments have been generating a new and important research object for political science (including international relations). One of the crucial features of these developments is that they concern a diversity of sectors. In order to get a thorough understanding of 'shifts in governance', political science needs, and is also likely to adopt, a much stronger multidisciplinary orientation embracing politics, law, public admin- istration, economics and business administration, as well as sociology, geography and history.

Value-Enhancing Capital Budgeting and Firm-specific Stock Return Variation

Abstract: We document a robust cross-sectional positive association across industries between a measure of the economic efficiency of corporate investment and the magnitude of firmspecific variation in stock returns This finding is interesting for two reasons, neither of which is a priori obvious First, it adds further support to the view that firm-specific return variation gauges the extent to which information about the firm is quickly and accurately reflected in share prices Second, it can be interpreted as evidence that more informative stock prices facilitate more efficient corporate investment CORPORATE CAPITAL INVESTMENT should be more efficient where stock prices are more informative Informed stock prices convey meaningful signals to management about the quality of their decisions They also convey meaningful signals to the financial markets about the need to intervene when management decisions are poor Corporate governance mechanisms, such as shareholder lawsuits, executive options, institutional investor pressure, and the market for corporate control, depend on stock prices Where stock prices are more informative, these mechanisms induce better corporate governance—which includes more efficient capital investment decisions Our objective in this paper is to examine empirically whether capital investment decisions are indeed more efficient where stock prices are more informative To do this, we require a measure of the efficiency of investment and a measure of the informativeness of stock prices

The Diffusion of Ideas over Contested Terrain: The (Non)adoption of a Shareholder Value Orientation among German Firms:

Abstract: This study offers a sociopolitical perspective on the international spread of corporate governance models. We unpack the heterogeneity of interests and preferences across and within types of shareholders and senior managers over time in an analysis of the adoption of a shareholder value orientation among contemporary German firms. Using extensive data on more than 100 of the largest publicly traded German companies from 1990 to 2000, we find that the influence of major shareholder groups (e.g., banks, industrial corporations, governments, and families) and senior manager types (differing educational backgrounds and ages) can be clearly observed only after redefining these key actors according to common interests and preferences. We also find evidence that German firms engage in decoupling by espousing but not implementing a shareholder value orientation but show that the presence of more powerful and more committed key actors reduces the likelihood of decoupling. We discuss the implications of our finding...

The ethical, social and environmental reporting‐performance portrayal gap

Abstract: The purpose of this article is twofold. First, it assesses in detail the extent to which corporate reporting on ethical, social and environmental issues reflects corporate performance in case study company Alpha. This “reporting‐performance” portrayal gap is a key measure of the extent to which an organisation is accountable to its stakeholders. Alpha's disclosures concerning its ethical, social and environmental performance for the years 1993 and 1999 were compared with information obtained on Alpha's performance from other sources. Two different pictures of performance emerged leading to the conclusion that, in the case of Alpha, reports do not demonstrate a high level of accountability to key stakeholder groups on ethical, social and environmental issues. Of particular concern is the lack of “completeness” of reporting. Second, the article assesses the potential of recent standards or guidelines developed by the Global Reporting Initiative (GRI) and the Institute of Social and Ethical AccountAbility (AccountAbility) as well as the industry's own “responsible care” initiative to reduce this “reporting‐performance” portrayal gap and improve corporate accountability. The conclusions point to the need for other measures to improve accountability including mandatory reporting guidelines, better developed audit guidelines, a mandatory audit requirement for MNCs and a radical overhaul of corporate governance systems.

Governing by Network: The New Shape of the Public Sector

Abstract: A fundamental, but mostly hidden, transformation is happening in the way public services are being delivered, and in the way local and national governments fulfill their policy goals. Government executives are redefining their core responsibilities away from managing workers and providing services directly to orchestrating networks of public, private, and nonprofit organizations to deliver the services that government once did itself. Authors Stephen Goldsmith and William D. Eggers call this new model "governing by network" and maintain that the new approach is a dramatically different type of endeavor that simply managing divisions of employees. Like any changes of such magnitude, it poses major challenges for those in charge. Faced by a web of relationships and partnerships that increasingly make up modern governance, public managers must grapple with skill-set issues (managing a contract to capture value); technology issues (incompatible information systems); communications issues (one partner in the network, for example, might possess more information than another); and cultural issues (how interplay among varied public, private, and nonprofit sector cultures can create unproductive dissonance). Governing by Network examines for the first time how managers on both sides of the aisle, public and private, are coping with the changes. Drawing from dozens of case studies, as well as established best practices, the authors tell us what works and what doesn't. Here is a clear roadmap for actually governing the networked state for elected officials, business executives, and the broader public.

Remuneration: Where We've Been, How We Got to Here, What Are the Problems, and How to Fix Them

Abstract: Currently, we are in the midst of a reexamination of chief executive officer (CEO) remuneration that has more than the usual amount of energy and substance. While much of the fury over CEO pay has been aimed at executives associated with accounting scandals and collapses in the prices of their company's shares, the controversies over GE CEO Jack Welch and NYSE CEO Richard Grasso signal a watershed. In their cases the competence and performance of both men were unquestioned: the issue seems to be the perception that they received "too much" and that there was inadequate disclosure. We provide, history, analysis and over three dozen recommendations for reforming the system surrounding executive compensation. Section I introduces a conceptual framework for analyzing remuneration and incentives in organizations. We then analyze the agency problems between managers and shareholders and between board members and shareholders, and discuss how well designed pay packages can mitigate the former while well designed corporate governance policies and processes can mitigate the latter. We say "mitigate" because no solutions will eliminate these agency problems completely. Since bad governance can easily lead to value destroying pay practices our discussion includes analyses of corporate governance as well as pay design. Because optimal remuneration policies cannot be designed and managed without consideration of the powerful relations and interactions between the financial markets and the firm, its top-level executives and the board, we devote significant space to these factors. Section II offers a brief history of executive remuneration from 1970 to the present. Section III examines and explains the forces behind the US-led escalation in share options. We argue that boards and managers falsely perceive stock options to be inexpensive because of accounting and cash-flow considerations and, as a result, too many options have been awarded to too many people. Section IV defines and discusses the agency costs of overvalued equity as the source of recent corporate scandals. Agency problems associated with overvalued equity are aggravated when managers have large holdings of stock or options. Because neither the market for corporate control or the usual incentive compensation systems can solve the agency problems of overvalued equity, they must be resolved by corporate governance systems. And few governance systems were strong enough to solve the problems. As the overvalued equity problem illustrates, while remuneration can be a solution to agency problems, it can also be a source of agency problems. Section V discusses several widespread problems with pay processes and practices, and suggests changes in both corporate governance and pay design to mitigate such problems: including problems with the appointment and pay-setting process, problems with equity-based pay plans, and problems with the design of traditional bonus plans. We show how traditional plans encourage managers to ignore the cost of capital, manage earnings in ways that destroy value, and take actions to deceive investors and capital markets. Section VI defines and analyzes a new concept: what we call the Strategic Value Accountability issue. This is the accountability for making the link between strategy formulation and choice and the value consequences of those choices - basically the link between internal managers and external capital markets. The critical importance of this accountability, its assignment, and its implications for performance measurement and remuneration have long been unrecognized and therefore ignored in most organizations. Section VII analyzes the complex relationships between managers, analysts, and the capital market, the incentives firms have to manage earnings to meet or beat analyst forecasts, and shows how managers playing the earnings-management game systematically erode the integrity of their organization and destroy organizational value. We highlight the puzzling equilibrium in this market that seems to suggest collusion between analysts and managers at the expense of investors - an area that is ripe for further research.

Outside directors and firm performance during institutional transitions

Abstract: Do outside directors on corporate boards make a difference in firm performance during institutional transitions? What leads to the practice of appointing outside directors in the absence of legal mandate? This article addresses these two important questions by drawing not only on agency theory, but also resource dependence and institutional theories. Taking advantage of China's institutional transitions, our findings, based on an archival database covering 405 publicly listed firms and 1211 company–years, suggest that outsider directors do make a difference in firm performance, if such performance is measured by sales growth, and that they have little impact on financial performance such as return on equity (ROE). The results also document a bandwagon effect behind the diffusion of the practice of appointing outsiders to corporate boards. The article not only highlights the need to incorporate multiple theories beyond agency theory in corporate governance research, but also generates policy implications in light of the recent trend toward having more outside directors on corporate boards in emerging economies. Copyright © 2004 John Wiley & Sons, Ltd.