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Corporate Governance in the US and Europe provides a comprehensive and concise overview of the most recent developments in corporate governance. It is based on a recent joint conference arranged by New York University and the London School of Economics, which brought together eminent academics and practitioners, including Michael Jensen in Finance and Martin Lipton in Law, to discuss the stock market boom-and-bust, and the recent corporate scandals. The book is aimed at practitioners, policy makers and academics who have to deal with corporate governance.



1. Corporate Governance in the US and Europe: Where Are We Now?

During the 1990s, and especially in the second half of that decade, the US economy markedly outperformed that of most European countries and Japan. While the reasons for the acceleration in US productivity growth are disputed, it was widely believed during those years that part of the explanation lay in the depth and vitality of US financial markets. The American financial system, it was thought, ensured that badly managed firms were reorganised or taken over, that entrepreneurs with promising projects had easy access to capital, and that resources were swiftly transferred from slow-growing to fast-growing sectors of the economy. The focus on shareholder value as the principal measure of a company’s performance was seen to be a powerful force for concentrating the minds of managers on making their businesses more efficient and more profitable.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

2. Michael Jensen on Agency Costs of Overvalued Equity

Michael Jensen addressed the agency costs of overvalued equity, a subject that is both in contrast and a complement to his earlier work on the agency costs of just the contrary, undervalued equity. Historically, he has been a strong proponent of the proposition that the maximisation of shareholder value is the objective of the firm, and he still is.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

3. Jonathan Rickford on Corporate Governance Systems — How Much Convergence?

Corporate governance systems have converged to a certain degree across Europe, the US and UK. However, there is not a unified move towards a single set of global corporate governance standards, but rather convergence on selected issues and within regional blocs.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

4. Colin Mayer on Corporate Governance Systems — How Much Convergence?

Competition between states with different corporate governance frameworks could be beneficial, as it enables firms to choose the most appropriate place of incorporation for their business model. Against this background, it is not surprising that difficulties have been encountered in trying to implement a European Takeover Directive. Opposition to it reflects fundamental differences of view about the role of markets in corporate control in promoting capital market efficiency and the rights and obligations of shareholders.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

5. Steven N. Kaplan on the State of US Corporate Boards and Governance: What is Right and Wrong?

Since 1980, the structure and overall performance of US corporate boards appear to have improved in terms of setting executive compensation, monitoring CEOs and independence of top management. The large increase in the equity component of executive compensation has been an important part of this shift as it has significantly increased senior managers’ focus on the creation of shareholder value. US boards, however, have performed less well in a number of key areas, particularly monitoring accounting manipulation and effectively valuing the options granted to senior executives. Recent reforms have had a positive effect on these issues (although they have imposed a substantial increase in compliance costs, particularly in the short term). Boards can still go further in improving executive compensation by restricting the liquidity of options grants and expensing all stock options.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

6. Paul Davies on Boards of Directors: the European Perspective

UK company legislation has traditionally had a paradox at its heart. While it has been highly prescriptive in terms of laying out the residual rights of shareholders, it is silent on the role of the board of directors. This gap has been filled in recent years by the introduction of the combined code on corporate governance. The implications of the code, with its emphasis on the monitoring role of non-executive directors, are to push the UK towards a de facto two-tier board system. Similarly, many European countries are introducing choice, between one- and two-tier boards, as to the optimal board structure.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

7. Martin Lipton on the Role of the Board of Directors

In general, the function of the board of directors is both to help define the strategy of the firm, and to monitor its implementation. However, to balance these sometimes conflicting roles, a collegiate board culture is necessary. An overemphasis on director independence could detract from the board’s ability to function effectively. Maintaining a balance between the roles of monitor and coach, and creating an ethical corporate culture, enables the board to discharge its other duties efficiently, including CEO compensation, succession planning and investor relations. Looking forward, the nature of the board structure continues to evolve, and the rising influence of institutional investors will likely lead to the dismantling of some traditional takeover defences such as staggered boards and poison pills.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

8. Roberta Romano on Institutional Shareholders and Corporate Governance in the US

Public sector funds like CalPERS and NYCERS are the most activist investors in the US. They mainly employ voting initiatives to make their voice heard. However, empirical studies demonstrate that such initiatives have no impact on corporate performance; in cases where funds are entitled to subsidies for their voting initiatives they actually destroy – on average — shareholder value.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

9. Alastair Ross Goobey on Institutional Shareholders and Corporate Governance — a UK Perspective

In the UK, both public and private sector funds are more engaged in pragmatic investor activism as compared to the US, as they do not face the same conflicts of interests. Unlike in the US, British pension fund trustees are legally independent, and are not an extension of the CFO’s office. Dialogues between shareholders and firms take place in the context of the ‘nuclear option’, the right of shareholders of calling an extraordinary general meeting within three weeks with 10 per cent of the votes.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

10. Kevin J. Murphy on Executive Compensation: Is Europe Catching Up with the US, and Should it Do So?

Executive compensation has risen sharply over the last few years in both Europe and the US, although the level of compensation in the US is still considerably higher than in Europe. The steep rise in compensation is driven in part by the ratchet effect induced by more stringent disclosure rules, and in part by inefficiencies in, and governance failure of, the CEO hiring process.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

11. Brian G. M. Main on the Question of Executive Pay

Current executive compensation appears to be structured suboptimally in many ways. This is partly the outcome of the inefficient use of stock options, which are undervalued by both executives and the board; the overreliance on extrinsic versus intrinsic motivation, and structural weaknesses in the compensation negotiation process. In empirical research and in the practical design of compensation, a more holistic approach is needed – one that takes into account the underlying assumptions of design, the prevalent institutional influences, and the psychology of human motivation.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

12. Sean O’Hare on UK Compensation Trends

While the UK is in general following the compensation trends set in the US, its shareholder approval process of top management compensation is less formal and mechanical. In turn, this allows more firm-specific flexibility. Changes to the UK tax law that considerably lower the ceiling on tax-favoured pension arrangements from April 2006 will have an important impact on the compensation structure of UK executives in the near future.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

13. Martin Lipton on the Role of the Corporation in Society

As a corporate lawyer involved in a number of the major takeover battles of the 1980s, Martin Lipton has influenced the jurisprudence of the law regulating mergers and acquisitions. In 1982, he created the ‘poison pill’, a takeover defence mechanism that provided many target firms with the means to withstand some of the more rapacious corporate raiders of that era. Subsequently, Mr Lipton has continued his advocacy of a wider role for the corporation in American society.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

14. David Henderson on Corporate Social Responsibility and the Role of Business Today

Defenders of corporate social responsibility argue that firms should widen their objective to include the society and the environment at large, besides their objective to maximise the return on capital. The argument is that by gaining a better reputation through CSR, firms will improve their longterm advantage. Henderson pointed out that it is not at all clear that firms serve their society better by including a notion of society and environment as a company’s objective. In addition, as these objectives are not developed in a political process, there is the risk of capture by interest groups. This will eventually lead to the misallocation of capital and substantial costs for society.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

15. Krishna G. Palepu on Information and the Regulation of Markets

Despite the importance of audits and mandatory disclosure, recent accounting scandals indicate there is a need to improve the quality. There are major deficiencies on both the supply and the demand side of information, which need to be addressed for the system to function more effectively.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

16. Joshua Ronen on Financial Statement Insurance

It is suggested that financial statement insurance against omissions and misrepresentations can be an effective tool to improve both the quality of audits and financial statements, while reducing the equilibrium amount of losses. By delegating the hiring decision of auditors to the insurance company, the inherent conflict of interest between auditors and the management that hires them will be solved. Both the insurance coverage and premium paid will be publicised. This will work as an effective signal of the quality of audits and should help companies with good financial statements to lower their cost of capital.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

17. Andrei Shleifer asks Is There a Major Problem with Corporate Governance in the United States?

The distinction between civil law and common law countries comes down to the question of who has the ultimate trust of society, lawmakers (legislators) or law enforcers (judges). It is argued that common law, which puts much more trust in law enforcers and gives much greater discretion to the courts, is better placed to protect shareholders, and so fosters the development of efficient capital markets. The current tendency under Sarbanes-Oxley for more prescriptive capital market rules might be counterproductive.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant

18. Luigi Zingales on the Importance of Bad News

It is of central importance, if not a precondition, that bad news is conveyed swiftly and precisely for both effective corporate governance, and the functioning of efficient capital markets. This contrasts starkly with human nature, which prefers to suppress bad news and finds it exceptionally hard to convey.
Geoffrey Owen, Tom Kirchmaier, Jeremy Grant


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