Corporate Governance

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Corporate Governance

• Handout 1

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• A fundamental problem that corporate form of an
  organization faces is that, the ownership and
  management are separated.
• Owners Shareholders
• Management Elected officials

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• Thus, managerss interest do not necessarily
  reflect the owners interest For example,
  Managers may focus on maximizing their personal
  gains while neglecting shareholders interest,
  which is to maximize the firm value.

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• Of course, such a problem has been recognized
  since the corporate form of business was born.
• Thus, there are systems/mechanisms that can solve
  such a conflict of interests between shareholders
  and management.
• Corporate governance
• The systems/mechanisms that alleviate the
  problem of the conflict of interests between
  management and shareholders.

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Some corporate governance mechanisms

• There are several corporate governance mechanisms
  that are present. First, we take a initial look
  at these mechanisms in the US.

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Board of directors (US system)
Shareholders
Board of Directors
Elect
Report
Elect
Shareholders elect the board of directors. The
board, then elects the CEO and other officers.
The board acts as a monitoring system. If the
elected officials do not act on behalf of
shareholders, the board has the right to replace
the management . Thus, the board of director
system can potentially alleviates the conflict of
interests.
Management CEO
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Large shareholders

• Separation of ownership and management is
  particularly a problem since each owner owns only
  a small fraction of the company.
• It is difficult for small shareholders to have
  their opinion heard by the management.
• However, large shareholders, such as pension
  funds, can effectively voice their opinions, thus
  alleviating the problem of the separation of
  ownership and management.
• Thus, the existence of large shareholders can be
  a built-in corporate governance mechanism.

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Market forces as corporate governance mechanism

• If managers pursue only their personal interests,
  and ignore shareholders interest, stock prices
  may decrease.
• If stock prices decrease, this makes the company
  a target for takeover.
• In order to avoid the possibility of a takeover,
  the management would work in the interest of
  shareholders.
• Thus, market forces, such as the possibility of
  takeover, may work as corporate governance
  mechanisms.

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Monetary incentive to managers

• One way to align the interest of management and
  of shareholders is to tie managerial compensation
  to the firm performance.
• Increasing salary with firm performance, and the
  provision of stock option compensation can be a
  corporate governance mechanism.

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• We have listed several possible corporate
  governance mechanisms.
• Whether or not these mechanisms have been working
  well is the topic of discussion for this course.
• The above slides listed the corporate governance
  system in the US.
• How about in Japan? This is also a topic for this
  course.

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Corporate governance in Japan

• Now, we take a initial look at corporate
  governance mechanisms in Japan.
• There are significant differences between the
  system in the US and the system in Japan.

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Board of directors system in Japan
The board of directors (Torishimari Yaku
kai) One of the member of the board is elected
as the president of the company.
Shareholders
Elect

• In Japan, there is no separation between the
  monitoring system and management. In fact, the
  board has the function of both monitoring system
  and management.
• Thus, the board of director cannot function as an
  effective monitor of the management In fact,
  this system is a self-monitoring system.

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• Because of the built-in problem in the board
  system in Japan, some companies began to reform
  the board system in the late 1990s. In
  particular, several companies began to introduce
  US style Chief-Officer System (Shikkou Yakuin
  Seido), where management is separated from the
  Board of directors.
• In this class, we will discuss the nature of this
  board of director system reform in Japan.

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The main bank system

• Although the Japanese board system does not
  ensure effective monitoring system, there has
  been an argument that Japan has its alternative
  corporate governance system, especially the
  so-called Main-Bank system.

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• Many Japanese companies have close ties with
  their main banks. The relationship between a
  company and its main bank is not only through
  lending, but also through cross shareholding or
  receiving a person from the main bank as a member
  of the board of directors.
• Many have argued that main banks monitor and
  discipline the management of borrowing firms,
  thus acting as an alternative corporate
  governance system.
• The nature of main bank system and its
  effectiveness is one of the topic of this course

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The outline of the course

• In this course, we discuss two issues
• Who adopts particular corporate governance
  practices, and the nature of the governance
  system
• Whether these corporate governance systems would
  increase firm performance

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• Module 1 Who adopts corporate governance
  practices/mechanisms, and the nature of the
  practices.
• Board of director system reform in Japan
• Main bank relationship in Japan
• Large shareholders and foreign investors in Japan
• The strength of monetary incentive to top
  management
• Change of management

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• Module 2 Corporate governance and firm
  performance 
• The board of director system reform in Japan and
  the effect of the reform on firm performance
• Effect of management on companys performance
• Main bank relationship in Japan and corporate
  performance
• The existence of large shareholders and corporate
  performance
• The composition of board and firm performance
• Corporate governance index

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• Module 3 Are Top executives overpaid?
• Can we define overpay?
• Some evidence.

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About student presentation

• Each student will make a presentation during the
  semester.
• Materials are mostly from the cases contained in
  the textbook, and will be assigned in advance.
• Presentations will be a group presentations. The
  group size will be about 3 students, depending on
  the size of the class.
• Although I will assign a case to each group,
  students also have the freedom to choose their
  own topics instead. Topics from your own
  countries may be of interest to the class.