Instructor Manual International Corporate Governance First edition
Marc Goergen
1
Contents Chapters Part I
Pages Introduction to Corporate Governance
5
1.
Defining corporate governance and key theoretical models
6
2.
Corporate control across the world
9
3.
Control versus ownership rights
10
International Corporate Governance
12
4.
Taxonomies of corporate governance systems
13
5.
Incentivising managers and disciplining of badly performing managers
14
6.
Corporate governance, types of financial systems and economic growth
16
7.
Corporate governance regulation in an international context
17
Corporate Governance and Stakeholders
19
8.
Corporate social responsibility and socially responsible investment
20
9.
Debtholders
22
10.
Employee rights and voice across corporate governance systems
23
11.
The role of gatekeepers in corporate governance
25
Improving Corporate Governance
27
12.
Corporate governance in emerging markets
28
13.
Contractual corporate governance
30
14.
Corporate governance in initial public offerings
31
15.
Behavioural biases and corporate governance
33
Part II
Part III
Part IV
3 © Pearson Education Limited 2012
PART I
Introduction to Corporate Governance
5 © Pearson Education Limited 2012
CHAPTER 1
Defining corporate governance and key theoretical models Discussion questions 1. Discuss Andrei Shleifer and Robert Vishny’s definition of corporate governance. What is their rationale for attributing a special status to the providers of finance compared to other corporate stakeholders? Shleifer and Vishny justify the special status of the providers of finance, in particular shareholders, by the fact that while all other stakeholders can easily recuperate their investment in the firm when the firm runs into trouble, shareholders typically lose their investment. In other words, shareholders are the residual claimants and their claims will only be met once the claims of all the other stakeholders have been met. Hence, their claims have the least protection and shareholders face the highest risk of being expropriated by the management. 2. Compare the principal–agent problem of equity with that of debt. The principal–agent problem of equity relates to conflicts of interests between the management and the shareholders. While it is the management’s duty to run the company in the interest of the shareholders, they may prefer to pursue their own objectives. Possible agency costs caused by conflicts between the managers and shareholders include empire building and excessive perquisites. The principal–agent problem of debt concerns conflicts of interests between the shareholders and the debtholders. If the firm is mainly financed by debt and/or close to financial distress, the shareholders may be tempted to gamble with the debtholders’ money by investing in high-risk projects. If these projects are successful, the shareholders will reap most of the payoff as the debtholders’ claims are capped, i.e. at best the debtholders will get their money back including any interest agreed upon. However, if the projects fail, the debtholders will bear most of the costs. While the principal–agent problem of equity is about the firm not being run in ways to maximise shareholder value, the principal–agent problem of debt assumes that shareholders are in control and they may end of expropriating the other providers of finance, i.e. the debtholders. 3. What is the difference between ownership and control? Why do differences between the two matter? Ownership is defined as ownership of cash flow rights whereas control is the ownership of voting rights. A cash flow right gives its holder a pro rata share in the firm’s cash flows or profit, whereas control confers rights such as the right to appoint the members of the board of directors at the annual general shareholders’ meeting. Ownership is not necessarily identical to control as, e.g. some shares do not confer any control rights. It is important to be aware of differences between ownership and control as they determine the types of conflicts of interests that are likely to prevail in particular national corporate governance systems or individual companies.
6 © Pearson Education Limited 2012