Corporate Governance

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Corporate Governance

• Piero Formica
• Visiting Professor
• Faculty of Economics and Business Administration
• University of Tartu

Tartu, 25 October 2002 formica_at_bo.nettuno.it
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Corporate Governance

• Process by which organisations are
• Directed
• Controlled
• Held to account
• The process encompasses
• Authority
• Accountability
• Stewardship
• Leadership
• Direction
• Control

Accountability means the requirement of those
who in the organisations hold the power to
render an account both to their constituencies
and themselves and to explain what they are
doing and why.
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Corporate Governance System

• The set of
• Incentives
• Safeguards
• Dispute resolution process

4
Those who are involved.

• Shareholders
• Contractual partners
• Employees
• Customers
• Suppliers
• creditors
• Communities and
• Societies in which the company operates

5
The corporate structure does affect the corporate
governance
BU
HQs
?
ENRON
CORPORATE BUREAUCRACY Decentralisation
fragmentation tight monitor of the subsidiaries
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PRIVATELY OWNED, FAMILY-RUN, SMALL- AND
MEDIUM-SIZED COMPANY
18
7
ENTREPRENEURIAL COMPANY
30
80
50
70
20
50
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The type of market economy does affect the type
of corporate governance

• Co-ordinate market economies
• Interlocking policies and institutions.
• Long term relationships.
• Intermediate bodies (PPP - the agency model gtgtgt)
  to regulate relationships, embedded in a culture
  of corporatism gtgtgt.
• High taxation and high subsidies.

• Liberal market economies
• Market mechanism to regulate relations.
• Free agents in co-opetition.
• Low taxation and low subsidies.

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Corporatism

• ltltlt Corporatism is a rather extreme version of
  the legitimate relationship between interest
  groups and government in that it tends to
  restrict the number of interest groups involved
  in the policy process
• (B. G. Peters)

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Corporatism

• ltltlt Corporatism is an arrangement
• characterized by a limited number of
• singular, compulsory, non-competitive,
• hierarchically ordered and functionally
• differentiated groups that are given a
• virtual license to represent their
• particular area of competence.
• (Definition put forth by P. Schmitter, quoted by
  Peters)

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Forms of corporatism (1)

• Societal corporatism
• Interest groups are the leading actor of policy
  making (P. Schmitter).
• State corporatism
• Government is the dominant actor (P. Schmitter).
• Liberal corporatism or corporate pluralism
• A less formalised relationship between interest
  groups and government.
• A more intense negotiation among the groups
  themselves during the process of policy making
  (G. Lehmbruch, quoted by Peters).
• Meso-corporatism or negotiated economy
• Less restrictive variations of the general
  pattern of relationship between the public sector
  and organised, private interests (Peters).

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Forms of corporatism (2)

• Negotiated corporatism
• Unaccountable power and concerted actions are
  shared between
• politicians,
• public officials,
• former government and party functionaries
• and the most activist self-interested parties
  entrenched on the top of the subsidies mountain.
  
• Symbiotic relationships between them impair the
  efficiency operation of the economy.

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Public-Private PartnershipThe Agency Model
Laissez faire Commanded economy
BUSINESS GOVERNMENT
Benign neglect
Conflict
CO-OPERATION
PPP Public-Private Partnership Quasi
governmental development agency
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PPP.Aggregation of pressure group interest

• Associational activities
• Industry associations
• Trade associations
• Professional associations
• Unions
• Consortia of firms
• Collectivist democracy in which public interest
  adds up to the aggregate of these pressure group
  interests.

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Critical Issues (1) Independency and Autonomy

• A board of plainly independent gtgtgt and autonomous
  gtgtgt directors, neither chosen by the chief
  executive office directly nor through the
  influence of partisan politicking gtgtgt.
• BUT
• Political parties with the complicity of
  organised economic groups (vested interests)
  select and appoint the directors gtgtgt.

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Critical Issues (1 continued)

• ltltlt The appointment process has to be open and
  formal.
• BUT
• Directors, executives, project co-ordinators are
  approached informally by political factions and
  asked to take the job, being them drawn almost
  invariably from the ranks of political parties or
  collateral to them.

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Critical Issues (1 continued)

• ltltlt Independence
• When directors are on a board they are there
  precisely as directors of that company and should
  not have the interests of any other body in mind.
• Nor there should be ties between the directors
  and the management.
• BUT
• Directors hold several appointments that are at
  odds with the
• principle of independence.
• Directors change their position into that of
  managers, and conversely.

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Critical Issues (1 continued)

• ltltlt Autonomy
• An opponent in the board who can act as a
  spokesman and level the playing field for
  shareholders who do not agree with management.

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Critical Issues (1 continued)

• ltltlt Partisan Politicking
• The tenets of political representation has often
  provoked two casualties
• A corporate conduct for which inappropriate
  links, cosy or collusive arrangements and
  currying favour with politicians and party
  functionaries have been the traditional
  deal-making habit of the agency.
• A board too large to be fully efficient, and
  sometimes lacking in the necessary breadth of
  skills which are needed.

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Critical Issues (2) Responsibility

• Board directors should take responsibility for
  assigned tasks.
• BUT
• Directors are often appointed on a part-time
  base, which do not allow them much time to attend
  meetings.
• They are not paid enough to devote proper
  attention to the job.

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Critical Issues (3) Board Arrangements

• Board arrangements should define
• Roles and responsibilities of the chairman and
  the chief executive gtgtgt.
• Policies concerning the use and the appointment
  of non-executive directors.
• Formation and role of the audit committee gtgtgt.

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Critical Issues (3 continued)

• ltltlt Chairman and the chief executive
• What is crucial but it often lacks
• A clear-cut distinction of role between the
  chairman and the chief executive
• the chairmans job being that of a non-executive
  who manages the board, and
• the chief executives one that of running the
  business.
• In addition, the boardroom should be enriched
  with the new blood of a strong independent deputy
  chairman to act as a counterweight to a chairman
  with a wealth of experience.

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Critical Issues (3 continued)

• ltltlt Audit committee
• The members of the agencys auditing panel must
  be genuinely independent.
• The internal auditors more powerful so as they
  can withstand the pressure from the board.
• Auditors must observe ethical as well as
  technical norms.
• BUT
• Often, they do not stop rubber-stamping
  decisions taken by the board.
• Paid consultants for the agency sit on the audit
  committee.

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