Markus Berndt. Global Differences in Corporate Governance Systems

Transcription

1 Markus Berndt Global Differences in Corporate Governance Systems

2 GABLER EDITION WISSENSCHAFT Okonomische Analyse des Rechts Herausgegeben von Professor Dr. Peter Behrens Professor Dr. Manfred Holler Professor Dr. Claus Ott Professor Dr. Hans-Bernd Schafer (schriftftihrend) Professor Dr. Rainer Walz Universitat Hamburg, Fachbereich Rechtswissenschaft II Die okonomische Analyse des Rechts untersucht Rechtsnormen auf ihre gesellschaftlichen Foigewirkungen und bedient sich dabei des methodischen Instrumentariums der Wirtschaftswissenschaften, insbesondere der Mikrookonomie, der Neuen Institutionen- und Konstitutionenokonomie. Sie ist ein interdisziplini:ires Forschungsgebiet, in dem sowohl Rechtswissenschaftler als auch Wirtschaftswissenschaftler ti:itig sind und das zu wesentlichen neuen Erkenntnissen tiber Funktion und Wirkungen von Rechtsnormen gefilhrt hat. Die Schriftenreihe enthi:ilt Monographien zu verschiedenen Rechtsgebieten und Rechtsentwicklungen. Sie behandelt Fragestellungen aus den Bereichen Wirtschaftsrecht, Vertragsrecht, Haftungsrecht, Sachenrecht und verwaltungsrechtliche Regulierung.

3 Markus Berndt Global Differences in Corporate Governance Systems Theory and Implications for Reforms With a Foreword by Prof. Reinier H. Kraakman Deutscher Universitats-Verlag

4 Die Deutsche Bibliothek - CIP-Einheitsaufnahme Ein Titeldatensatz fur diese Publikation ist bei Der Deutschen Bibliothek erhiiltlich Dissertation Universitiit Hamburg, Auflage August 2002 Aile Rechte vorbehalten Deutscher Universitats-Verlag GmbH, Wiesbaden 2002 Lektorat: Brigitte Siegel! Sabine Scholler Der Deutsche Universitats-Verlag ist ein Unternehmen der Fachverlagsgruppe BertelsmannSpringer. Das Werk einschlieblich aller seiner Teile ist urheberrechtlich geschutzt. Jede Verwertung auberhalb der engen Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verla.9s unzulassig und strafbar. Das gilt insbesondere fur Vervielfaltigungen, Ubersetzungen, Mikroverfilmungen und die Einspeicherung und Verarbeitung in elektronischen Systemen. Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in diesem Werk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme, dass solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei zu betrachten waren und daher von jedermann benutzt werden durften. Umschlaggestaltung: Regine Zimmer, Dipl.-Designerin, Frankfurt/Main Gedruckt auf saurefreiem und chlorfrei gebleichtem Papier ISBN-13: : / e-isbn-13:

5 Foreword This book is a wide-ranging contribution to international scholarship on corporate governance systems. Dr. Markus Berndt draws on the empirical and theoretical literature on corporate governance, game theory, corporate finance, and legal scholarship to offer a comprehensive account of the origins and possible evolution of the differing systems of corporate governance that characterize the U.K and U.S. on the one hand ("outsider systems" with widely-held companies) and much of Continental Europe on the other ("insider systems" dominated by controlling shareholders). After summarizing the empirical literature on differences in corporate ownership structure, capital markets, and legal regulation between the outsider and insider systems of corporate governance, Dr. Berndt offers a novel account of how these systems arise in the first instance. Much recent U.S. literature in finance and corporate law assumes the efficiency of widely-held companies capitalized by liquid equity markets, and explains the survival of insider systems as an artifact of poor legal protection for minority shareholders. On this view, insider systems persist because corporate insiders would otherwise extract prohibitive rents. By contrast, Dr. Berndt builds on models of reputation to offer an efficiency-based account of the rise insider systems. Without deciding a priori which is the more efficient system, then, Dr. Berndt traces the network effects of both of these systems on corporate law, securities law, and the capital markets. In these chapters of the Book, legal scholars can find, inter alia, a novel theory of how certain features of Continental European company law, such as mandatory preemption rights and restrictions on share repurchases, are adapted to a system insider governance, while flexible company law and strong mandatory disclosure rules are adapted to outsider governance. Dr. Berndt next offers an account of how governance systems evolve as the liquidity of capital markets increases. Here, again, the formal model is rooted in game theory, while the implications of the analysis are of direct relevance to the comparative analysis of corporate governance. In particular, Dr. Berndt argues that more liquidity in the capital market increases the efficiency of outsider governance systems in a straightforward fashion, while more efficiency has both positive and negative effects on the relative efficiency of insider governance systems. A variety of implications for corporate governance follow. For example, a relatively high quality of corporate law is a prerequisite for open governance; without it, open governance is extremely inefficient. By contrast, however, more integrated capital markets enhance the attractiveness of outsider governance as long as there are no serious obstacles to the operation of the market for corporate control. A final chapter of the Book offers a general analysis of integration of competing standards in accounting methodologies and corporate governance rules between jurisdictions. While this analysis, which is also developed with a game theoretic model, differs from Dr. v

6 Berndt's exploration of insider and outsider governance systems, it is nonetheless closely related to his earlier discussion and carries important legal implications. Within Dr. Brendt's relatively simple analytical framework, there are predictable circumstances in which convergence of standards will not occur despite a convergence of capital markets, and there are even circumstances in which convergence may occur on the less efficient of two competing sets standards. This Book will be of great interest to legal scholars of comparative corporate governance and corporate and securities law, as well as to economists who investigate network effects, the evolution of capital markets, and the important linkages between corporate governance institutions and the capital markets. Reinier Kraakman Ezra Ripley Thayer Professor of Law Harvard Law School VI

7 Preface This publication adds to the theoretical understanding of the economic analysis of the law of corporations. The governance of corporations, resulting from both private contractual arrangements and the law, varies significantly between different jurisdictions. Dissatisfaction with the existing theories to explain these differences motivated this research. The dissertation is an attempt to come up with a coherent theoretical framework that is able to explain the observed differences in corporate governance. It pulls together existing theories and provides new theoretical foundations whenever there is a perceived gap in the current theoretical understanding of corporate governance. I would like to make use of this preface to thank the people and institutions that made this research possible. I would like to thank Hans-Bernd Schafer for his tremendous dedication to setting up and shaping the Hamburg Ph.D. program in Law and Economics that is unique in Europe. I thank Manfred Holler and Klaus Hopt for their valuable advice, thought provoking discussions, and their thorough supervision of this dissertation. I thank John Coates, Oliver Hart, Florencio Lopez-de-Silanes, Reinier Kraakman, Katharina Pistor, Marc Roe, Andrei Shleifer, and Volker Simmering for helpful comments, stimulating discussions, and encouragement. I gratefully acknowledge support by the German National Research Foundation (DFG), the German Academic Exchange Service (DAAD), and the John M. Olin Center for Law, Economics, and Business at Harvard Law School. Last but not least, I thank Natascha Berndt for her patience, encouragement, and support. Markus Berndt VII

8 Table of Contents Foreword Preface List of Tables List of Figures List of Variables 1. Introduction 2. Differences in Corporate Governance Systems V VII XIII XV XVII 2.1 Components of a Corporate Governance System - Scope of the Analysis Empirical Evidence Concentration of Control Ownership Capital Markets Legislation Summary - Stylized Facts Recent Developments Explanations for the Evolution of Different Systems Potential Influences on Corporate Governance Technology Financial Institutions Legal Tradition Labor Relations Property Rights and Interventionism Explanations for the Persistence of Different Systems Remaining Questions Political Economy Network Effects Analytical Framework Purpose of Corporate Governance Shared Purpose Main Agency Problems of the Different Corporate Governance Strategies The Role of Institutions and Law Market Response Potential Market Failures Legislative Intervention 4. Dispersed Control - the Outsider System 4.1 Takeover Market and the Agency Costs of Dispersed Control 4.2 Institutional Innovation IX

9 4.3 A Case for Mandatory Disclosure Benefits and Costs of Disclosure Model Implications Concentrated Control- the Insider System Differences with Dispersed Control Modeling the Reputation Mechanism of Concentrated Control Setup Sequential Equilibrium Sketch of Proof Properties of the Sequential Equilibrium 5.3 Implications Corporate Governance without Control Consequences for the Institutional Design Legislative Intervention Need for Legislative Intervention? Preemptive Rights and Shareholder Approval to Authorized Capital Increases Network Effects via Capital Markets Influence of Corporate Governance on Capital Market Liquidity The Influence of Capital Market Liquidity on Corporate Governance The Effects on the Costs of Capital of Dispersed Control The Effects on the Costs of Capital of Concentrated Control Resulting Network Effects Evolutionary Model Intention and Structure Setup Players Strategies of Corporate Control Capital Markets Legislative Strategies Structure of the Model 7.3 Control Strategy Firms' Payoffs Decision Process Cost of Capital Strategy Choice Equilibria 7.4 Legislation and Financial System The Legislator's Payoffs Strategy Choice Financial System x

10 8. Implications for Corporate Governance Reforms Sequencing of Reforms Influence of the Overall Quality of Law on the Autonomous Costs of Capital Influence of the Overall Quality of Law on the Corporate Governance System Introduction of Mandatory One-Share-One-Vote Provisions Proposed Sequencing of Reforms Hysteresis ofinefficient Systems Social Welfare Inherent Coordination Problems Effect of Capital Market Integration Scope of the Analysis Modeling Capital Market Integration Implications An Outlook on Privatization Strategies Basic Idea Auction to One Investor Mass Privatization Detrimental Minority Control Privatization 9. The Influence of Coordination Benefits on Corporate Governance and Accounting Standards Objective of this Chapter Intention of the Chapter Remaining Puzzles Why a new Model? Setup One Country Two Countries 9.3 Equilibria 9.4 Social Welfare 9.5 Implications of the Coordination Model Sticky Variety Standardization with the Wrong Standard 10. Conclusion Appendix: Difference between Entry-Inducement and Entry-Deterrence A Theoretical Note References XI

11 List of Tables Table I Crossholdings in Some Major Economies, Table 2 Comparison of Ownership Concentration in Some Major Economies 9 Table 3 Different Identities of Controllers, Table 4 Capital Markets in Some Major Economies, Table 5 Legal Differences in Some Countries 12 Table 6 Two Types of Financial Systems - Stylized Facts 13 Table 7 The LLSV Antidirector Index 17 Table 8 Possible Values for the Dummy Variable "Preemptive Rights" 17 Table 9 An Alternative Minority Protection Index 18 Table 10 Agency Problems resulting from Information Asymmetries and their Relevance in Corporate Finance 23 Table 11 Strategies of the Outsider and the Greedy Insider in Equilibrium 49 Table 12 Possible Interpretation of the Legislative Strategy Set L 78 Table 13 Potential Stable Equilibria 117 Table 14 Sequential Equilibria in the two Different Games 132 XIII

12 List of Figures Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Disperse Formal Control Rights (Strategy D) Simple Example of a Pyramidal Corporate Structure Concentrate Formal Control Rights (Strategy C) Exogenous Influences on Corporate Governance The Influence of Politics, Roe {I 994) The Influence oflegal Tradition, LLSV (I 997, 1998), LLS (l999) Persistence due to Political Rent Seeking, Roe and Bebchuk (l999) Figure 8 Network Effects in a Financial System 21 Figure 9 Asymmetric Information as a Source of Principal Agent Problems 22 Figure 10 Variety of Agency Problems in a Firm 25 Figure 11 Main Agency Problems of Dispersed Control (Strategy D) 26 Figure 12 Main Weakness of Concentrated Control (Strategy D) 27 Figure 13 Legal Influences on Corporate Governance 30 Figure 14 The Costs of a Takeover Determining the Agency Costs of Dispersed Control 33 Figure 15 Privately vs. Socially Optimal Levels of Disclosure 40 Figure 16 The Prisoners' Dilemma of Disc10sure 41 Figure 17 Insider Corporate Governance Game 45 Figure 18 One Stage of the Sequential Insider Corporate Governance Game with Incomplete Information 46 Figure 19 Sequence of Events in one Stage 48 Figure 20 Total Expected Payoffs at n=n* Figure 21 Influence of the Insider's Length of Commitment N on the Required Probability p of the Insider Being Honest 59 Figure 22 Influence of the Greedy Insider's Exploitation Possibilities a on the Required Probability p of the Insider Being Honest 60 Figure 23 Network Effects of Corporate Governance via Capital Markets (An Overall Aggravating Effect of Increased Liquidity on the Costs of Capital of Concentrated Control Assumed) 73 Figure 24 Network Effects of Corporate Governance via Capital Markets (An Overall Mitigating Effect oflncreased Liquidity on the Costs of Capital of Concentrated Control Assumed) 74 Figure 25 Structure of the Basic Model 79 Figure 26 Costs of Capital under Different Legal Regimes 83 Figure 27 The Efficacy of Legal Intervention Depending on Firms' Corporate Governance XV

13 Figure 28 The Evolution of Financial Systems 90 Figure 29 The Influence of the Quality of Law on the Autonomous Costs of Capital 93 Figure 30 The Influence ofa weak Overall Quality of Law on the Financial System 94 Figure 31 The Influence of Mandatory One-Share-On-Vote 95 Figure 32 The Effect of an Increase in the Overall Quality of Law on the Financial System 96 Figure 33 Social Welfare Functions 97 Figure 34 The Effects of Capital Market Integration on Developed Countries 99 Figure 35 Possible Harmful Effects of Capital Market Integration on Countries with Low Overall Quality of Law 102 Figure 36 Market Standardization of Accounting practices in One Country 110 Figure 37 Simplitying Assumption Regarding the Behavior of the Firms in the two Countries 113 Figure 38 Market Standardization of Accounting practices in two Disintegrated Countries 114 Figure 39 Market Standardization of Accounting practices in two Completely Integrated Countries 115 Figure 40 Critical Experience Benefits in the Bigger Country for the Occurrence of "Wrong" Standardization by Market Forces. 125 Figure 41 The Entry-Deterrence Game by Kreps and Wilson (1982) l31 Figure 42 Temporal Evolution of the Entry-Inducement Endgame Figure 43 Temporal Evolution of the Entry-Deterrence Endgame l35 l34 XVI

14 List of Variables All Chapters: C corporate governance strategy of concentrated control COCs costs of capital resulting from corporate governance strategy S D corporate governance strategy of dispersed control rs regulation aimed at the mitigation of costs of capital resulting from strategy S Rs rigidity costs resulting from regulation rs S corporate governance strategy Section The Takeover Market: B private benefits of management e effort of the management P value of a firm attributed to public shareholders T takeover costs V value of a firm Section Mandatory Disclosure: b(x) gross benefits of disclosure x BDi firm i's net benefits of disclosure c(x) private costs of disclosure x k(x) social costs of disclosure x S(Xi) profit shift from firm i to other firms when firm i discloses Xi Xi amount of disclosure provided by firm 1 Section Modeling the Reputation Mechanism: a exploitation possibilities of the rational insider N length of the insider's involvement p initial probability of the insider being honest pn updated beliefs of the outsiders at stage n regarding p RIns payoff of the rational insider ROuts payoff of the outsider Yn (mixed) strategy of the rational insider at stage n Zn (mixed) strategy of the outsider at stage n XVII

15 Chapter 7 - Evolutionary Model: As as BDi Bs bs COCs cocs 8 L L A MCs Ms ms Ns ns OCs Autonomous costs of capital under strategy S Log of autonomous costs of capital under strategy S Net benefits of disclosure to firm I Beneficial direct effects of regulation rs on costs of capital under strategy S Log of beneficial direct effects of rs on costs of capital under strategy S Costs of capital when control is allocated according to strategy S Log of costs of capital when control is allocated according to strategy S Fraction of firms under dispersed control", degree of capital market liquidity Euler's natural base", Player representing the shareholders of firm I Costs-and-benefits-function oflegal intervention Index referring to one of n similar firms Legislator Strategy of regulatory intervention chosen by the legislator Capital market liquidity Mitigating effect of regulation rs on the costs of capital under strategy S Market effects of regulation rs on costs of capital under strategy S Log of market effects of regulation rs on costs of capital under strategy S Autonomous network effects on the costs of capital under strategy S Log of autonomous network effects on the costs of capital under strategy S Original costs of capital under strategy S when no mitigating rules are in place Regulation aimed at the mitigation of costs of capital resulting from strategy S Rigidity costs resulting from regulation rs Strategy of control allocation chosen by the owners of firm I Utilitarian social welfare Chapter 9 - The Influence of Coordination Benefits on Corporate Governance and Accounting Standards: ei Experience benefits if firms from country i use their domestic standard Si 0) Degree of integration <P Overall fraction of firms using Sl <Pi Fraction of firms in country i using Sl Si Corporate governance or accounting standard pertaining to country i (J Relative size of country 1 Vik W Payoff that the use of Si generates for a firm from country k Utilitarian social welfare XVIII