Understanding Corporate Governance in the United States

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Understanding Corporate Governance in the United States

Transcript of Understanding Corporate Governance in the United States

  • Gregory JacksonUnderstanding

    Corporate Governancein the United States

    223

    www.boeckler.dewww.boeckler.de

    Arbeitspapier223Arbeitspapier

    Unternehmensmitbestimmungund Unternehmenssteuerung

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    Arbeitspapier 223

    GregoryJackson

    Understanding Corporate Governance in the United StatesAn Historical and Theoretical Reassessment

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    Jackson, Gregory,Prof.Dr.,ProfessorfrPersonalpolitikanderFreienUniversittBerlin,sowieInternationalResearchFellowCentreforCorporateReputation,OxfordUniversity.ZahlreichePublikationenzudenThemenCorporateGovernance,CorporateSocialResponsibility,MitbestimmungundPersonalmanagementiminternationalenVergleich.

    ImpressumHerausgeber: Hans-Bckler-Stiftung Mitbestimmungs-,Forschungs-undStudienfrderungswerkdesDGB Hans-Bckler-Strae39 40476Dsseldorf Telefon:(0211)7778-175

    Fax: (0211)7778-283 E-Mail:Karsten-Schneider@boeckler.de

    Redaktion: Dr.KarstenSchneider,LeiterdesReferats2derAbteilungForschungsfrderung

    Best.-Nr.: 11223Produktion: SetzkastenGmbH,Dsseldorf

    Dsseldorf,Oktober201018,00

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    Inhaltsverzeichnis

    Kurzfassung.................................................................................................................5

    Preface..........................................................................................................................7

    0 Introduction:UnderstandingCorporateGovernance intheUSA...........................................................................................................9

    1 TheRecentHistoryofU.S.CorporateGovernance,1960-2001...............111.1 ManagerialCapitalism:1960s-1970s...........................................................111.2 InvestorCapitalismandtheDealDecade:1980s........................................131.3 ExecutiveDefenceandtheIdeologyofShareholderValue:the1990s........161.4 Enron:2001.................................................................................................21

    2 TheCrisisoftheShareholderValueParadigm:Post-EnronDebates.......232.1 Limitsofshareholderactivism....................................................................242.2 Limitsofthemarketforcorporatecontrol..................................................262.3 Limitsofboardindependence.....................................................................292.4 Limitsofboardincentives...........................................................................312.5 Limitsofgatekeepersasinformationalintermediaries................................342.6 AbsenceofEmployeeVoice........................................................................352.7 AComplementarySystem?.......................................................................36

    3 Sarbanes-OxleyanditsInfluenceonCorporateGovernance...................393.1 TheInfluenceofSOXandRelatedSECRegulationsonU.S.Firms..........403.1.1 Externalaspects:Disclosure,EarningsManagementandInvestor

    Reactions.....................................................................................................413.1.2 Internalaspects:CorporateBoardsandEmployeeWhistleblowers...........423.1.3 CostsofCompliance....................................................................................453.2 TheInfluenceofSOXonForeignFirms.....................................................463.3 CompliancewithSOXandCompatibilitywithGermanCorporate

    Governance..................................................................................................47

    4 ConclusionandImplicationsforUnderstandingCorporate Governance........................................................................................................ 51

    5 Bibliography.......................................................................................................53

    6 AppendixA:StatisticalTables........................................................................71

    7 AppendixB:TheContrastinUSandUKApproach toTakeoverRegulation.....................................................................................77

    berdieHans-Bckler-Stiftung............................................................................89

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    Kurzfassung

    TheU.S.isoftenseenasbeingtheparadigmaticcaseoftheshareholder-orientedormarket-basedmodeltocorporategovernance,anddescribedintermsofseveralinter-relatedelements:activistinstitutionalinvestors,anopenmarketforcorporatecontrol,independentoutsidedirectorsontheboard,long-termequity-basedcompensationforexecutives, and gatekeeperswhomonitor the process ofmarket disclosure.Howev-er, scandalssurroundingEnrongeneratedcriticismand inducedsubstantialchangesthroughtheSarbanes-Oxley(SOX)legislation.ThisreportreexaminesthehistoryandempiricalevidenceonU.S.corporategovernance,showinghowitsevolutionhasbeenshapedbyanegativeforminstitutionalcomplementaritiesthelimitedeffectivenessofoneelementcreatingexternalitiesorlimitingtheeffectivenessofotherrelatedele-ments,eventuallyleadingtoasystemiccrisis.ThisperspectivehelpsmaketheEnroncasemoreunderstandable,butalsoshowsthelimitedimpactofSOXinfixingthesys-tem.Theimplicationsforthecurrenteconomiccrisisareexplored.

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    Preface

    ThesystemofcorporategovernanceintheUnitedStatesisamovingtarget.AlthoughtheU.S.isoftentakenasakeybenchmarkforshareholder-orientedcorporategovern-anceandsometimesalsoequatedwithamodelforgoodcorporategovernance,inter-nationalaudienceshaveoftenfailedtoappreciatethecontinuousevolutionanddebatesintheU.S.itselfregardingtherealityofcorporategovernanceinpractice.

    ThisreportwascommissionedbytheHans-Bckler-Foundationasanattempttopar-tiallyfill thisgapinordertoprovideamorecompleteviewoftheU.S.debatesandbetterassess the influenceof recentdevelopmentsonEuropeandGermany, inpar-ticular.This taskprovedmore challenging thanwas initially anticipated.While thehistoriclegislativeturning-pointoftheSarbanes-Oxley(SOX)actwasalreadyinplace,empiricalevidenceontheinfluenceofSOXonlybegantoemergeaftertheresearchforthisreportalreadybegan.Thedownpourofnewstudiesalsopresentedapuzzlingpicture,showingimportantaspectsofchangeandcontinuitythatdefiedbothsupport-ersandcriticsofthelegislation.Infollowingthisdevelopment,manypeoplesupportedthisprojectwithadvice,comments,logisticalhelp,andtheirpatience.SeveraldeserveparticularthanksMasahikoAoki,JohnCioffi,NicolaEbert,RonaldGilson,HowardGospel,BruceKogut,RichardMarens,KarstenSchneiderandSigurtVitols.

    Beforethedustofthepost-SOXdebatescouldsettle,U.S.corporategovernancenowfacesanotherhistoriccross-roadsthroughtheonsetofthebankingcrisisandresultingfinancialandeconomiccrisis,whichwasmarkedbythecollapseofLehmanBrothersin2008.Whiletheworkofsocialscientistsseemstoalwaysremainonestepbehindthedevelopmentsoftherealworld,IhopethatthisreporthelpsputthecurrentcrisisintoalongertermperspectiveofhowU.S.corporategovernancehasevolvedbothintermsofa theoretical idealandasamorecomplexsetofpractices.Onceagain,corporategovernancepracticesintheUnitedStatesareopenfordebate,theirfutureupforgrabs,andthemodelremainsincomplete.

    GregoryJackson

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    0 Introduction: Understanding Corporate Governance in the USA

    TheU.S.isoftenseenasbeingtheparadigmaticcaseoftheshareholder-orientedormarket-based approach to corporate governance.Ownership of corporations is dis-persed, but involves high engagement from institutional investors, such as pensionfunds.Corporateboardsaresmall,haveahighproportionofoutsideorindependentmembers,andutilizecommitteestoimproveboardprocesses.Executivepaylinkspaytotopmanagerssalariestoshareholderreturns.Theinternalandexternalaspectsofcorporategovernancearelinkedthroughthemonitoringofgatekeepers,suchasauditfirms, that certify the flow of information frommanagers to capitalmarkets.Andthemarketforcorporatecontrolexertsafinaldisciplineonpoorlyperformingfirms,whofaceaheightenedriskoftakeover.Thesedifferentelementsarealsothoughthavestronginstitutionalcomplementarities,operatingasapositiveandmutuallyreinforc-ingsystemofeffectivecorporategovernance.ThesestylizedcharacteristicsoftheU.S.modelarewidelycitedasbestpracticesorevenaglobalstandardforgoodcorporategovernance.

    ScandalssurroundingEnronandWorldcomfocusedsubstantialcriticismontheU.S.corporategovernance.Somecriticsandscholarsusedtheseeventstomountastrongchallengetotheprevailingwisdomaboutmarket-basedsystemsofcorporategovern-ance(Blair,2003,Bratton,2002).OthersstresstheoverallgoodperformanceoftheU.S.economy,andseetheriseofequity-basedpayformanagersandthestockmarketboomas triggeringshort-termandsometimes illegalbehaviorassideeffectsofabasically sound system (Holmstrom&Kaplan, 2003).Thepolitical reaction, devel-opmentofSarbanesOxley(SOX)legislation,andsubsequentchangesinSEClistingrequirementshavealsoalteredthewayU.S.corporategovernancepracticesoperate.TheconsequencesofSOXhaveremainedhotlydebated.YettheonsetofthesubprimefinancialcrisisandresultingglobaleconomicdownturnhasraisedrenewedquestionsaboutthefundamentaleffectivenessofU.S.corporategovernanceinstitutions.

    The era afterSOXalso greatly increased awareness of the differences between theU.S.andBritishapproachestocorporategovernance.Whilebothareconsideredtobebroadlysimilarshareholder-orientedmodels,theU.S.regulatoryregimeisbasedmuchmoreonhardlawandaregulatorystate,unliketheBritishapproachthatreliesmoreon soft law and self-regulatorymechanisms, such asCodes.The one size fits allapproachofU.S.lawsparkeddebate