ALBERT

Notes: This note discusses a number of key issues developed by the Corporate Governance Project of the American Law Institute (ALI) and published in its report, The Principles of Corporate Governance: Analysis and Recommendations. This examination will focus on the socially and ethically important elements regarding the objective and conduct of the business corporation, and the twin fiduciary duties of care and fair dealing.

Notes: The stakeholder co-operatives formed around the town of Mondragón in the Basque region of Spain have been outstandingly successful on a number of measures in comparison with other forms of firms. The control architecture within and between Mondragón firms contains a number of innovations and lessons for developing the theory and practice of corporate governance. This paper outlines the 38 year evolution of Mondragón structures.The control and incentive architecture of Mondragón firms was custom designed according to the nature of both their activities and their principal stakeholders. The resulting unique control arrangements and outstanding performance supports the hypothesis that the structure of governance is a determinant of sustainable competitive advantages. The evolution of Mondragón firms also illustrates the need to consider corporate architecture as a variable at any one time or over time. The Mondragón experience illustrates how the social research approach of ‘action science’ can be used to create competitive enterprises. The paper recommends this approach for developing the theory and practice of corporate governance.

Notes: This article is based on the IMD Case Study of the same name written by Professor Fred Neubauer and Dr. Marika Taishoff.

Notes: Thomas Clarke and Elaine Monkhouse (eds), 1994 hardback, Rethinking the Company, London: Finance Times/Pitman Publishing.

Notes: This article examines a case of fraud – the Maxwell case – to assess the implications for corporate governance in Britain. The analysis of the case shows how Robert Maxwell was able to avoid the established network of regulations and controls. The authors then make a number of recommendations which suggest how this kind of fraud may be prevented in the future.

Notes: This paper examines the impact of the entry and exit of board of directors on the share price of United Kingdom listed firms. Unlike previous studies in the area, this study distinguishes between the different type of board changes. The results of the study suggest that changes in the composition of management boards affect shareholders wealth. Small but significant positive abnormal returns are experienced on the day of the announcement. The results also indicate that the informational effects of new appointments are perceived differently by the market from resignations from the management board.

Notes: This study describes the survival cases of two local savings banks in Finland during fundamental changes in 1990’s when 90% of the Finnish Savings Bank Group did not survive. Survival is studied through the roles of the non-executive boards and the CEOs in the context of three change periods. Institutional theory is used as a framework in describing and explaining the survival. The cases describe how radical renewals can be made despite dominant actors and generally agreed ways of change in the field. It is suggested that the CEO and the non-executive board of directors were in a key role in changing the future of a local savings bank. Old institutions can die, but the active role of the small banks themselves was decisive; by taking active role they recreated and renewed their organizations (c.f. Greenwood and Hinings 1996).

Notes: This paper examines the financial rewards received by the directors of the listed Water companies in the five years following privatisation. It considers the salaries, the bonus payments, the gains from executive share options, and the increase in pension entitlements. The increase in the level of the financial rewards of directors of Water companies was greater over this period than of directors in other companies. This was partly the result of the comparatively lower levels of salaries prior to privatisation and partly the result of high gains from executive share options. One of the reasons for the high level of gain on options was the underpricing of the initial public offer of shares. From a corporate governance point of view the period following privatisation was unique in terms of the conditions in which the companies were operating. The annual levels of reward for those directors in post five years after privatisation was in line with directors of similar size companies.

Notes: A new theory of organizational change and success has recently been proposed, organizational portfolio theory (Donaldson, 1999). One purpose of this theory is to provide a fresh perspective on the determinants and consequences of board composition. After outlining organizational portfolio theory, this paper suggests some implications of the new theory for understanding the dynamic relationship between board composition and firm performance.

Notes: Kay, Carolyn, Institutional investors and corporate governance: best practices for increasing corporate value

Notes: Boards of directors of large American corporations are marked by a surprising degree of overlap in their memberships. The median Fortune 500 firm interlocked (shared directors) with seven other large firms during the mid-1980s, although this prevalence dropped slightly by the mid-1990s. In contrast to Japan, interlocks among American firms are rarely linked to banking relationships or vertical (buyer-supplier) relationships; rather, they reflect the embeddedness of corporate governance in social structures (e.g., friendship or other ties). Recent empirical research has linked interlocks to almost every important aspect of corporate governance, from executive compensation to strategies for takeovers and defending against takeovers. These findings suggest that proposals for reforming boards of directors through changing incentive structures (e.g., paying directors in equity rather than cash) are likely to have little effect because they misconstrue the role of the board as a social institution.

Notes: This study examines the associations between the characteristics of initial public offering (IPO) firms and the voluntary use of outside directors. Five firm characteristics are examined: inside share ownership, variance of aftermarket returns, operating history, leverage, and firm size. Based on a sample of 110 New Zealand firms which made initial public offerings of equity securities over the period 1983 to 1987, the study finds that greater variance of after-market returns and a lower inside share ownership are associated with a greater proportion of outside directors. In addition, firms without operating histories are likely to use relatively more outside directors. However, leverage and firm size are not significantly related to the proportion of outside directors. Overall, the findings from the study are generally consistent with arguments that firms with greater agency problems are likely to use relatively more outside directors because these directors are perceived to be more effective in mitigating agency problems.

Notes: This paper seeks to identify the determinants of corporate ownership and control that emerge in regulatory environments which do not inhibit the issue of shares with differential voting rights and/or the establishment of pyramid holding companies (which serve exactly the same purpose). [Methodologically, the paper follows the seminal study of the US corporate structure by Demsetz & Lehn (1985).] Such settings tend to produce very concentrated control structures, which contrast sharply with those of the USA, the UK and Australia, where the distribution of shareholder votes in the large public corporations is relatively diffuse. Relatively lenient listing regulations have produced in South Africa a corporate landscape dominated by pyramid holding companies and multilayered diversified corporate groupings. These structures have effectively concentrated the control of most of the large public companies in the hands of a few entrepreneurial families (as well as the two large life insurance mutuals). This setting has enabled us to advance and test hypotheses about control and ownership which would be more difficult to test in a US, UK or Australian setting. Almost all the companies in our sample were found to be under the absolute control of a single identifiable shareholder coalition (usually one or two families) but the underlying percentage shareholding of the controlling group in each company was found to vary dramatically and systematically. We sought to explain that variation and to identify the role of the market as a constraint on the ability of controlling shareholders who wish to dilute their equity stake without surrendering control for the purpose of expanding their companies (without incurring additional debt) and/or diversifying their personal wealth. Demsetz & Lehn had already identified the factors that determine the demand by shareholders for equity dilution but not those constraining their ability to do so. This paper, therefore, attempts to shed light on the way in which principal/agent problems affecting shareholders and managers are resolved when one-share-one-vote is neither enforced nor encouraged by the regulatory environment.

Notes: Executive compensation has recently become the subject of extensive scrutiny by the popular press. However, compensation for corporate directors is one area which has only received little attention or research. The present study combined resource dependence and agency theories with previous research on executive salaries to develop an explanatory model of director compensation. Data were collected from US firms at two points in time to assess the stability of these predictors. Four variables were found to have a significant relationship with director compensation: firm size, firm profitability, equity ownership by directors, and resource richness of the board. However, the explanatory power of these variables appear to decline over time. Practical implications of these results are discussed.

Notes: This article is reproduced from NRI Quarterly Volume 1 No. 3 Winter 1992 and is reprinted by special permission of Nomura Research Institute, Ltd.

Notes: Book Reviwes in The Article:Hilmer, Frederick G.; Strictly Boardroom – the report of an Independent Working Party into Cornorate Governance; Information Australia, Melbourne and The Sydney Institute, Sydney, AustraliaHumphrey, Christopher, Peter Moizer and Stuart Turley; The Audit Expectations Gap in the United Kingdom; The Auditing Research Foundation of the Institute of Chartered Accountants in England and Wales; LondonBosch, Henry; Bosch on Business, Information Australia, Melbourne, Australia, 1992.

Notes: This article examines the structure of boards and its effects on the performance of significant board functions. Composition of boards is measured by size, outside director representation and cognitive, as well as demographic diversity. A firm's environment, strategy, structure and culture, and factors attributed to personal characteristics of board members were viewed as important determinants affecting effectiveness of boards. Most important, decisions on board size and composition involve a trade-off between benefits of diversity and enhanced costs of group development and group decision processes.

Notes: The communication process between publicly-listed companies and their constituents continues to change, often stimulated by the concern of regulators to make markets more efficient. The paper examines six areas where development is occurring within the North American reporting environment: summary reporting, management discussion and analysis, risk and uncertainty, interim reporting, continuous information disclosure, and financial statement reporting. The paper also identifies areas where significant reporting frustrations remain. These areas may signal the direction of financial reporting research and change that will be experienced outside of the North American environment during the next decade.

Notes: A survey ‘Women on the Board of Britain's Top 200 Companies’ published by Ashridge Management Research Group, 1993.

Notes: The debate on whether the roles of CEO and the chairman of the board should be separate continues in both the United States and Britain. The answer must depend largely on what a board does. Here Sir Richard Greenbury, Chairman of the board of Marks and Spencer Plc in the UK provides a personal perspective.

Notes: Book reviewed in this article:Foy, Nancy (1994) Empowering People at Work, Gower, Aldershot.Moms, Charles (1990) The Coming Global Boom.Sorbel, Robert (1993) Dangerous Dreamers – The financial innovators from Charles Merrill to Michael Milken.Piper, T. R., Gentile, M. C. and Daloz Parks, S. (1993) Can Ethics be Taught?Mintzberg, Henry (1994) The Rise and Fall of Strategic Planning.

Notes: This paper presents findings from an in-depth empirical study of the role of boards and their relations with senior managers in four organisations from the public and non-profit sectors. The findings are interpreted using a conceptual framework which sees the outputs of boards as shaped by board inputs, processes and contextual factors, in particular wider institutional pressures. The results indicate that the strategic contribution of boards varies widely and depends on a complex interplay of factors: the system of regulation, sectoral traditions and norms of governance, the way board members are chosen, board members skill and experience, organisational size and status, and the way boards are organised and run. The wider institutional pressures that shape these factors can result in boards facing tensions and trade-offs that can result in their contribution to stragegy being squeezed by other board roles.

Notes: Despite the tremendous importance of transnational firms in the world economy, relatively little is known about the structure of their boards and how they are governed. Four hypotheses, suggested by intuition and the general literature, are examined: that the composition of boards of large transnationals is likely to be substantially different from that of national boards; that boards of transnationals will take a leadership role in dealing with social and economic issues that transcend national boundaries; that boards of subsidiaries of transnationals are playing an increasing role in the general operations of transnationals; and that boards of transnationals will show a larger concern for stakeholders than boards of national firms. On the basis of very limited data it is concluded that all hypotheses are false. Moreover, based on Canadian experience, it is suggested that the strategy of many large transnationals of eliminating the boards of subsidiaries may be a major mistake. Finally, a request is made for anyone wishing to participate in a large research project on the governance of transnational corporations to contact the authors.

Notes: In this paper, we assess the impact of recent reforms in UK corporate governance, focusing specifically on aspects of the reforms which apply to unit trust managers, a major group of institutional investors, and their investee companies. We canvass the views of UK unit trust managers to shed light on three issues: the extent of shareholder activism by UK unit trusts; the extent to which longer and stronger decision and communication links are being forged between investment institutions and their investee companies, and; the emerging controversy over whether or not these recent reforms represent a help or a hindrance for unit trust managers. The empirical findings indicate that unit trusts: are active shareholders, developing and using written voting policy documents; are encouraging the development of longer and stronger links with their investee companies, and; have welcomed corporate governance reforms.

Notes: If the word “stakeholder” were a person, it would just be coming into its prime. Born in 1963, it has accumulated experience in influential positions, and ought to be prepared for some serious responsibility. But what exactly does it offer, and is it ready?This paper tries to show that the stakeholder concept is ready. In the first half, it explains three principles that form the heart of the idea: co-operation, commitment and rich information. Rich information, in particular, is given a new role in interpreting stakeholder theory. The second half of the paper focuses on a practical issue: methods for encouraging co-operation. For fifty years, organizational psychologists at the (UK) Tavistock Institute and the (US) National Training Laboratories have developed methods for changing relations in the workplace. The principles underlying their work are shown to be very close to the principles underlying the stakeholder approach. This means that the stakeholder approach has foundations in an important body of practical scientific experimentation.Lastly, by explaining the principles underlying the idea of stakeholding, this paper fills a gap which has previously prevented the identification of a convincing causal connection between stakeholder policies and business performance.

Notes: The Corporate Governance Committee of the Corporate Governance Forum of Japan, chaired by Mr. Tadao Suzuki, President of the Mercian Corporation, published their final report in May 1998. Their innovative work followed a long period of discussion and stemmed from the original foundation of the Corporate Governance Forum in 1994 by Mr. Kaneo Nakamura of the Industrial Bank of Japan, who invited top business leaders to discuss governance issues.The following extracts from the first two chapters of the report provide some valuable insights into corporate governance perspectives and practices in Japan. The report offers a set of principles which provide a two-step formula for realizing effective corporate governance in Japan –“principles which should be adopted immediately (or as soon as possible after legal reform) are shown as step ‘A’ principles: step ‘B’ principles should be aimed for early in the 21st. century “to illuminate the path toward the global market, but require legal reform on a grand scale.”

Notes: Shareholders can gain effective control over their firm’s management by voting to choose an outside agency to nominate director candidates. This would give the board and management a greater incentive to serve the owners’ interests, resulting in higher productivity of capital, more realistic levels of executive pay, less short-termism, and a moderation of the corporate bloat that tends to necessitate drastic cuts. Such a system would further improve corporate governance in western countries, and provide a much needed “quick fix” for governance problems in Asia.

Notes: The paper takes both an historical and an international perspective on the issue of mutuality and identifies a number of important themes in the current debate on mutuality versus “plc” conversion. The paper accordingly argues that in the short term the problem of excess capacity and the need to reduce capital is an important motive behind the recent spate of conversions. In the long term, however, the greater flexibility and the opportunities to raise additional capital which are associated with public company status are an important impetus behind this debate. In this respect, a number of alternatives to outright conversion which have not been sufficiently debated in the literature are identified and examined. Emphasis is placed on the European and US experience where savings and loans institutions have introduced a number of alternatives to outright flotation. In particular, the various merits and de-merits of mutual holding companies are examined as an alternative to outright conversion.

Notes: Major extracts from the London Stock Exchange report

Notes: Although legally auditors are answerable to shareholders, considerable doubt has been cast on their independence from the directors of the company which is audited. Recently, increasing competition amongst auditors and the growing importance to fee income of non-audit work has been identified as factors which may further erode this assumed independence. Another factor which has been implicit in many studies of auditor independence is the close nature of the relationship between the auditor and the directors of the company. This has been termed the ‘Familiarity Threat’.This article, based on a questionnaire survey of UK finance directors, investigates three aspects of the auditor/director relationship where the ‘Familiarity Threat’ may be present. First is the appointment method and the characteristics which directors consider to be preferable in selecting an auditing firm. Secondly is the duration of the auditors’ appointment and the frequency of contact between the lead partner and the finance director. Finally, is the finance directors’ perception of the nature of the relationship they enjoy with the auditors. For each of these aspects the responses from finance directors from independent public limited companies are compared to those of private companies to ascertain whether the ‘Familiarity Threat’ is more prevalent where certain public responsibilities are not imposed. Where appropriate, the responses are also analysed by the finance directors’ opinions on the probity of non-audit work to ascertain whether this is an important variable as claimed in the literature.The analysis demonstrates that, although present directors are influential in the appointment process and the personal chemistry between the directors and auditors is the most important desirable characteristic, the finance directors of independent public limited companies would appear to be more aware of their responsibilities to shareholders. However, many relationships are long established with over 40% of both private and independent public limited companies in the survey retaining their auditors for over 10 years. As far as frequency of contact is concerned, public limited companies were visited more frequently by their auditors and this was unaffected by finance directors’ opinions on the probity of non-audit work. Finally, approximately 75% of finance directors claimed to enjoy a professional and amicable relationship with their auditors and these responses are unaffected by the type of company or opinions on non-audit work.The article concludes that there is the potential for the ‘Familiarity Threat’ to be present in both private and independent public limited companies, but its influence may be exaggerated particularly in respect of non-audit work. It recommends that if controls are to be introduced to ensure the threat is kept to a minimum it would be best to concentrate on the selection and appointment process and the duration of auditors’ term of office.

Notes: This paper outlines the formal structure of Dutch two-tier boards and compares the formal structure with the reality of board practices of the largest Dutch companies listed at the Amsterdam Stock Exchanges. This comparison questions the supposed independence of two-tier boards.

Notes: The last decade has witnessed a growing debate over corporate governance issues in a number of countries. The debate developed from Anglo-Saxon countries, such as the UK and US, where dispersed share ownership and thriving takeover markets are evident with financial systems referred to by Zysman (1983) as market based. However, the debate now includes countries with credit-based financial systems (Zysman, 1983), such as Germany and Japan, which are characterised by intercompany shareholdings, intercompany directorships and often substantial bank involvement. A question of considerable importance is whether the two systems of corporate governance will converge over time, particularly in the context of increasing globalisation of trade. To contribute to this debate, this paper focuses on corporate governance in Japan, an issue that has been debated with great interest in Japan by businessmen, academia, critics, government, consumers and even the accountants!

Notes: Clauses in company articles giving boards rather than shareholders the power to remove directors, can give either the chairman or chief executive the power to retain their tenure even when performance is less than satisfactory. A power holder can simply remove opposition from a board as soon as it is expressed. When used ruthlessly, such power makes it almost impossible for independent non-executive directors to carry out their most important role of monitoring executive directors and removing non-performers at an early stage. Machiavelli claimed that extension of tenure was a prime cause of Rome’s decline. He argued persuasively for fixed terms, with no variation possible. The prohibition of removal clauses, and the introduction of fixed director terms might well increase corporate performance by preventing continued tenure for those who have failed.

Notes: One aspect of organizational governance is the power to propose issues for consideration in the formal decision process. Consortia composed of autonomous business organizations appear to be a good context for investigating this “proposal authority,” because when a consortium is not too large it tends to be governed by a board of directors on which all the members are represented. This makes it possible to test hypotheses about the effects of the consortium’s internal structure on the rules that govern who may propose issues for decision and how they may do so.We study here the formal rules, given in organizational charters and by-laws, for initiating specific types of decision in 53 consortia in the electric power industry in the USA. Hypotheses are developed from numerous theoretical perspectives, including the institutional, ecological, developmental, structuralist, resource-dependence, economic, and political-economic. We find a fair degree of heterogeneity in the practices of initiative control among these organizations, yet only the familiar structuralist theory is able to predict significantly the variation in these decision rules. This weak result poses interesting problems for future research.

Notes: The purpose of this paper is to provide an insight on the relationship between internal governance and the nature and outcome of UK takeovers. The paper examines the impact of board composition and leadership, managerial ownership and external shareholder control on management’s attitude and eventual outcome of 331 takeover bids. We find the likelihood of a hostile reaction negatively related to the degree of managerial share ownership and positively related to target size. The likelihood of takeover success is positively related to managerial ownership. Consistent with recent research in the US, our study confirms the important role of managerial ownership in the UK takeover process.

Notes: In line with the journal’s editorial policy, this case has been published to provide insights into a real governance situation. All too easily we tend to interpret governance situations in companies around the world in the light of our own experience. We make assumptions about the underlying power base, the behaviour of management, the attitudes of directors, the perceptions of the shareholders on the basis of our own values, beliefs and expectations. In fact, they can be strikingly different.This case describes the governance structure of a leading company in Eastern Europe and describes the information provided by its supervisory board. The case is based on material in the public domain, mainly the 1996 annual report, and is provided without commentary or comment. In future case studies we intend to invite the board chairman or other key players in the case to provide a commentary.

Notes: Stapledon, G.P. (1996) Institutional Shareholders and Corporate Governance.Partnoy, Frank (1997) F.I.A.S.C.O. – blood in the water on Wall Street.

Notes: As a result of the recommendations of the Greenbury Committee on directors remuneration, UK listed companies must now disclose information in the annual report and accounts additional to that required by legislation. Nevertheless this paper shows that a loophole still exists regarding disclosure of specific remuneration packages for each executive director. Remuneration for outside directorships can be paid directly to the director concerned or to the company releasing them. The majority of annual reports remain silent on this matter, but where the director receives the payment there is no legal or listing obligation for its disclosure by the releasing company.

Notes: This paper examines corporate governance in management buy-outs and buy-ins and in particular considers the problems faced by venture capitalists as active investors. Evidence is presented based on large scale surveys and case studies. The study suggests the importance of achieving a balance between the independence of venture capitalists as monitors of management and the need for cooperation in their relationships with managers in buy-outs and buy-ins. The study also questions the adequacy with which financiers as active investors have taken account of the differing attributes of each type of transaction, particularly in relation to access to information and the roles of management. The costs of closely monitoring smaller investments may often exceed the benefits, which helps explain why the greater control found in buy-ins is more likely to be indirect rather than greater board representation. The evidence suggests the need for a flexible approach to governance under which the forms adopted take account of the specific circumstances of a particular enterprise.

Notes: As the 21st century approaches, there are many pressures prompting changes in corporate board behavior. The author characterizes the current responses as TQM (more of the same, only better) or reengineering (transformation). To respond adequately to the reality and complexities of a global economy, the author argues that approaches to both corporate governance and boards are in need of reengineering. Directions for board transformation are illustrated with a new framework based on the orientation and constitution of boards. Five new board configurations and the path of evolution are presented.

Notes: Good Practice for Directors: Standards For The Board Institute of Directors, London. Corporate Goernacne, Robert A. G. Monks and Nell Minow.

Notes: This job is a bed of nails. When I joined I thought I would have the opportunity to put some management principles into practice. But I have had to compromise my principles to be pragmatic. Applying normal management ideas only leads to conflict: I cannot rely on formal authority. It's a risky political situation for me. I stand or fall on my ability to provide leadership.John Wright, executive director of the Loyang Hospice Society in the Philippines, was commenting on his experiences of the first nine months in office.

Notes: The board of directors has so far been neglected in research on the operations of Sino-foreign joint ventures, a subject which has not previously obtained any scholarly attention. This paper analyzes the role of the board in the management of Chinese-Western joint ventures as seen from the expatriate managers' point of view. Qualitative and quantitative data from 33 Sino-Western joint ventures is presented on the composition of the board, the importance attached to different roles of the board, and the way in which the board functions. An attempt is made to explain variations in the role played by the board in different joint ventures. Suggestions are forwarded to Western companies on how to improve the functioning of the board. Ideas for future research are also presented.

Notes: There is currently increasing pressure for the mandatory establishment of audit committees in both the private and public sectors. Audit committees, as presently conceived, cannot adequately manage the conflicts of interest and loyalty to board colleagues which arise from boards processing information which is used to evaluate their own performance. As a complementary approach, this paper examines the use of binary boards in both the private and public sectors for improving the management of conflicts. The origin, development and use of audit committees in the private and public sectors within the US and Australian context is reviewed. Audit Committees are compared with the use of supervisory boards in Europe, and the development in Australia of a corporate senate in the private sector and client (stakeholder) councils in the public sector.The paper notes that audit committees were initially created in the US to protect outside directors in a different context than currently exists in either the US or Australia. While they may also serve the interest of management and auditors, Audit Committees may not protect shareholders and operational stakeholders. The paper concludes that the audit expectation gap could be minimised through management becoming accountable to a Corporate Senate in the private sector, and a Stakeholder Council in the public sector, with the auditor being engaged by and reporting to these bodies.

Notes: Book reviewed in this article:Joan Corkery, Colm Ó Nualláin and Roger Wettenhall, (eds.), Public Enterprise Boards: what they are and what they do; AJPA in collaboration with IASIA, Hong Kong 1994Joan Corkery, Colm Ó Nualláin and Roger Wettenhall, Governance of the Public Enterprise – an African spotlight on the Role of the Board; ECDPM with the Commonwealth Secretariat, August 1994

Notes: Using previous theory and research on responses to organisational decline, this paper extends the literature into the boardroom to predict outside director behaviour. In so doing, this paper refocuses the corporate governance research towards individual outside directors as opposed to the traditional focus on the overall board. We argue that this contextual and individualistic focus on outside directors’ behaviour may yield some new and useful insights into the corporate governance literature as well as refine and extend Hirshman's theory of responses to organisational decline.