MODELS OF CORPORATE GOVERNANCE Corporate Governance Seminar 12th november 2007 Chiara Farolfi, Emanuele Ciani

1. MODELS OF CORPORATE GOVERNANCE Corporate Governance Seminar 12th november 2007 Chiara Farolfi, Emanuele Ciani

2. Introduction Main problems of abstracting a model of CG • Companies are multidimentional: different model can apply to one national experience • Convergence and imitation Efficiency CONVERGENCE History Path dependence HETEROGENEITY Does a “best model” exist?

3. Presentation outline • Models of Corporate Governance • Insider / Outsider • Civil law / Common law • Relationship – based / Arm’s length • International comparison • Germany • United States • Italy • Japan • An alternative approach : Cooperatives in Italy

4. Insider / Outsider (1): ownership and control(Franks and Mayer, 2001; Becht and Mayer, 2001)‏

5. High blockholder power Private control bias Management or market control bias Low blockholder power Low ownership concentration High ownership concentration Insider / Outsider (2): efficiency trade-off from: Becht and Mayer, 2001

6. Common Law / Civil Law(Morck and Steier 2005, La Porta et. Al 1998) Common law systems: aim of protecting the weak from the strong better environment for self-regulation Common lawstronger protection of shareholders Civil law systems: aim of enforcing the edict of the State. Civil lawlow investors’ protectionweak publicequity markets; high concentration ofshare ownership Agency problem shifted: shareholders/ blockholder private benefitproblem

7. Relationship / Arm's length (1):relationship between the financer and the firm(Rajan and Zingales, 1998)‏ Reponses

8. Relationship / Arm's length (2) we can widen these models adding some correlated characteristics (abstracting from Italian, German and Japanese examples, Aguilera and Yip, 2005)‏ Reponses of countries to the Great Depression: • Europe and Japan period of repression of markets and massive intervention of government in the allocation of credit. • United States New Deal legislation laid down the foundations for a market – centred system Glass – Steagall Act (1933)

9. Presentation outline • Models of Corporate Governance • Insider / Outsider • Civil law / Common law • Relationship – based / Arm’s length • International comparison • Germany • United States • Italy • Japan • An alternative approach : Cooperatives in Italy

10. Germany(Becht and Bohmer 2003, Franks and Mayer 2001)‏

11. Germany (2) • Improving take over activity (Cioffi 2002) • Control and Transparency Law 1998 • Fiscal reform 2000 (Steuerreform) “abolished capital gain taxes on the liquidation of cross-shareholdings”. • Volkswagen law overturned on October, the 23rd by European Court of Justice, (Financial Times, 23/10/2007) • Stakeholder representation: • does it lead to empasse? • Volkswagen case; • roots in communitarian German culture (Monks and Minow 2001).

12. USA (1)(Monks and Minow 2001, Mallin 2007)

13. USA (2) • Answer to the Great Depression • Glass-Steagall act 1933; Public Utility Company Holding Companies Act 1935 • development of equity market. • Agency problem: • Relationship based model at the level of BoD-Management; • Voting with feet? • “My nominating committee is very independent. Sometimes they turn down the names I send them” (Monks and Minow, pg 212)

14. Italy (1)(Mallin, Bianchi, Bianco, Enriques)

15. Italy (2)(Mallin 2006, Melis, Bianchi, Bianco, Enriques 2001) • Response to the Great Depression nationalist solution • No predominant role of financial institutions • Draghi Law (1998) and Preda Code (1998) enhancement of minority protection and transparency Company Act (2004) A sort of State – family capitalism very limited degree of separation between ownership and control Pyramidal structure ownership Italian structure allows Italian listed companies to choose between a two – tier board structure and the traditional

16. Japan (1)(Suto and Hashimoto 2006)

17. Japan (2) • Relationship – based system • Key role of banks • Keiretsu • Revision of Commercial Law in 2001 and in 2002 • Commercial Code Revision on Board (2003) two corporate governance structures: corporate auditors’ system and a committees system • Case of study: Toyota vs. Sony

18. Presentation outline • Models of Corporate Governance • Insider / Outsider • Civil law / Common law • Relationship – based / Arm’s length • International comparison • Germany • United States • Italy • Japan • An alternative approach : Cooperatives in Italy

19. A different approach: a cooperative model in Italy (1) Number of cooperatives and cooperatives employee as a percentage of total employee (exluding public institutions)‏ • Historical origins: (Zamagni 2006) • non neutral origin, three different ideals: liberal-Mazziniani, socialists, catholic; • wide entrenchment through Italy; • expansion during last years. source: ISTAT, Censuses of industry and the service sector, various years

20. A cooperative model in Italy (2) • Cooperative Corporate Law: • mutual interest as cooperative aim; • one head one vote; • democracy and partecipation; • indivisible compulsory fund. • Problems: • management control (i.e. recent large cooperative bankruptcy in Argenta); • how to define and follow cooperative aim in a competitive environment?

21. Conclusions • Different systems around the world are persistent and are developing in different ways wide range of solutions for a wide range of problems • Different models can have similar problems importance of global discussion of these issues

22. Thank you for your attention !!!

23. References • Aguilera Ruth, Yip George. 2005. Global constraints faces local constraints. Financial Times, 27 may 2005. • Becht M. and Mayer C. 2001. Introduction in Barca and Becht, 2001. • Barca Fabrizio, Becht Marco. 2001. The Control of Corporate Europe, Oxford University Press UP • Cioffi, John W. 2002. Restructuring “Germany Inc.”: The Politics of Company and Takeover Law Reform in Germany and the European Union (April 15, 2002). Institute of European Studies. Political Economy of International Finance. Working Paper PEIF-1 • Franks Julian R, Mayer Colin. 2001. Ownership and control of german corporations, CEPR Discussion Paper Series, No. 2898, July 2001 • Mallin Christine A. 2007. Corporate Governance, Second Edition, Oxford University Press, New York. • Mallin Christine A. 2006. International Corporate Governance: A Case Study Approach, Edward Elgar Publishing. (Italian Case, cap. 3, Japanese Case, cap. 10) • Monks R.A.G., Minow N. 2001. Corporate Governance, 2nd edition. Blackwell Publishing. • Morck Randall K. and Steier Lloyd. 2005. The global history of corporate governance – an introduction, NBER Working Paper No. 11062, January 2005 • Rajan, Raghuram G. Zingales, Luigi. 2003. Banks and Markets: The Changing Character of European Finance (joint with R. Rajan), in European Central Bank 2nd Annual Conference. • Suto, Megumi and Hashimoto, Motomi. 2006. Will the Japanese corporate governance system survive? Challenges of Toyota and Sony, in Mallin, 2006. • Zamagni, Vera. 2006. Italy’s cooperatives from marginality to success. XIV International Economic History Congress. Helsinki Finland. 21-25 August 2006.