OWNERSHIP, CORPORATE GOVERNANCE, SPECIALIZATION AND PERFORMANCE: Interpreting Recent Evidence for OE

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OWNERSHIP, CORPORATE GOVERNANCE, SPECIALIZATION
AND PERFORMANCE Interpreting Recent Evidence
for OECD Countries

• Wendy Carlin, UCL and CEPR
• Presented by Robert Boyer (PSE)
• Conference of Cournot Centre for Economic
  Studies, November 29-30, 2007

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INTRODUCTION

• The starting point assess the relevance of
  Hansmanns statements

Firms, and societies, organized along the
standard shareholder-oriented model seemed to
be outcompeting those that were organized
differently (Hansmann, 2006, p.747)
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• Two definitions of corporate governance
• The system by which companies are controlled in
  order that suppliers of finance can be assured of
  a return of their investment
• (Shleifer, Vishny, 1997 Tirole, 2006)
• The set of procedures and routines that govern
  the functioning of boards of directors, the
  accountability of managers and boards to
  shareholders, the disclosure of financial and
  governance information and the transfers of
  control.
• (Wendy Carlin, 2007, p. 6)

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• Two different views of ownership structures
  (Zingales, 2000)
• Ownership is all about corporate governance and
  finance
• (Alchian, Demsetz, 1972 Jensen, Meckling, 1976
  Grossman, Hart, 1986 Hart, Moore, 1990)
• Ownership is related to the activities of the
  firms which vary across countries
• (Allen, Gale, 2000 Aoki, 1990 2001 Baker
  al., 2002)

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• The synopsis of the presentation
• A survey of the theoretical literature upon the
  two views of corporate governance (I)
• A survey of the existing statistical and
  econometric analyses (II)
• Recent descriptive evidence for advanced
  economies convergence or divergence of
  ownership patterns? (III)
• Some key empirical questions for future research
  (IV)

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I. TWO HYPOTHESES ON CORPORATE GOVERNANCE REFORMS
AND OWNERSHIP CONVERGENCE
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• Ownership is all about corporate governance and
  finance
• Hypothesis 1 Unless inefficient resistance
  intervenes, corporate governance reforms lead to
  convergence in ownership structures and improved
  performance

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Figure 1. The conventional hypothesis
OWNERSHIP
BETTER PERFORMANCE
CONVERGENCE
CORPORATE GOVERNANCE
FINANCING
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• Summing up

Table 1 Comparing two variants of hypothesis 1
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• Ownership is related to the activities of firms,
  which vary across countries
• Hypothesis 2 Corporate governance reforms lead
  to country-specific responses

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Figure 2. Another analysis ownership is related
to activity
SAME GOVERNANCE
DIFFERENT OWNERSHIP
DIFFERENT ACTIVITIES
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• These two hypotheses have different macroeconomic
  implications
• Hypothesis 1 The stakeholder objectives are seen
  as externalities that can be internalised by
  taxation (Blanchard, Tirole, 2004)
• Example Introduction of a lay-off tax
• Hypothesis 2 There is a complementarity between
  a cluster of institutions and the activities of
  firms (Hall, Soskice, 2001)
• Example Bank system, training institutions,
  work councils and high skill specialisation in
  the German economy.

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II. WHAT DOES THE EXISTING EVIDENCE SAY?

• Testing the two hypotheses
• Hypothesis 1 Shareholder oriented economies have
  better governance and performance i.e. an
  absolute advantage
• Hypothesis 2 An association between ownership
  and activities, a comparative advantage

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• A method for detecting shareholder economies

Figure 3. Stock Market Capitalization and the La
Porta et al. Ownership. Concentration Data,
mid-late 1990s
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• Cross-country evidence the first hypothesis
• Contracting institutions but not property rights
  institutions are causal for financial structure
  but not for economic and/or financial
  development (Acemoglu and Johnson, 2005
  Acemoglu, Johnson and Robinson, 2001)
• Financial structure matters but no clear
  domination of one type over other types (Stulz,
  2001)

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• Industry-country evidence the second hypothesis
• A statistically and economically significant
  second order effect of conventional measures of
  development/structure of finance on industry
  growth according to dependence on external
  finance (Rajan, Zingales, 1998)
• 45 countries, 28 industries, 1980-1990
• RD and growth are abnormally high in skill
  intensive industries in countries with highly
  concentrated ownership and countries with higher
  accounting standards (Carlin and Mayer, 2003)
• 14 OECD countries, 28 industries, 1970-1995

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• Family ownership would depress growth in
  industries with high volatilities but it succeeds
  in high skill industries (Michelacci, Schivardi,
  2007)
• 20 OECD economies, 36 industries
• Provisional conclusion The impact of finance on
  growth probably a second order effect relative
  to country and industry averages

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III. IS THERE EVIDENCE OF CONVERGENCE IN
OWNERSHIP PATTERNS?

• A common hint from previous theoretical and
  econometric analyses Doubts about the
  conventional vision convergence of ownership and
  inefficient resistance to reforms
• A systematic review of cross country differences
  and trends in ownership and control

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Table 2. Country shares of world stock market
capitalization (FT Global 500) 1999 and 2007
().

• Stock market capitalization and financial
  structure

• Relative decline of US and UK, emergence of BRIC
  countries, diverging trends in Germany and France

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Table 3. Standard measures of financial
development and financial structure (ratios to
GDP)

• Still a stable or growing intermediation by banks
• A catching up for stock market capitalisation
• Convergence of private bond market in the Euro
  zone

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Table 4. Break-down of market capitalization by
type of shareholder

• Ownership of shares and control of companies

• Diverging trends of foreign ownership declining
  in Germany and Italy, growing in France
• Still family control in Italy and Spainand Sweden

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Figure 4. Share ownership by type of owner,
1994-2004

• No convergence of Continental Europe and
  especially France towards UK

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Table 5. Ultimate Ownership of Publicly Listed
Companies Mid-late 1990s

• UK and Ireland a typical dispersed ownership
• France, Germany dispersed ownership for larger
  firms
• Italy, Spain, Sweden still a significant role of
  family control

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Figure 5. Percentage of the Top 100 Companies in
4 Countries Widely Held,2002

• Nevertheless, control pattern more similar in
  France to Germany and Italy, rather than to UK

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Table 6. Ownership concentration in German listed
companies by industry, 1997 and 2003.

• A stability in the core companies and sectors
• Newcomers and new activities display a different
  pattern

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Figure 6. Portfolio Composition of Institutional
Investors in Four European Countries, 1993 and
2001

• Institutional investors

• Stability in Germany and Italy
• France moves from a continental to a UK pattern

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Figure 7. US Mutual Funds with Foreign Holdings
the Top 3 Destination Countries

• UK is still the main destination of US mutual
  funds
• A slight declining share of France and Germany

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• Private equity
• A boom in private equity investment by US firms
  in Europe 7 billions Euros in 2001 to 26
  billions in 2005.
• The main targets were UK, France and to a minor
  extent Germany
• The result of excessive liquidity and low
  interest rates
• An uncertain impact on ownership change and
  corporate restructuring

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Table 7. Corporate Governance Ratings 2004 in
Parentheses, the Change in the Median Value of
the Index 2000-2004

• Corporate Governance Ratings

• Major differences in takeover defences, minor
  in disclosure

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Figure 8. Measures of Corporate Governance

• UK and Ireland better than Continental Europe
• France different scores due to information
  disclosure
• The German paradox shareholder value but still
  works councils

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• The common trends
• Increased foreign ownership
• Improved corporate governance, especially
  concerning disclosure but not in respect of
  takeover defences.
• But persistent national differences
• Global stock market capitalization became less
  dominated by the standard shareholder-oriented
  model as the share of Anglo-American companies
  fell.
• Insider blockholders strengthened their
  position in core German companies and in Italy.

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• In France increasingly differentiated itself
  from the other continental economies, and
  particularly from Germany.
• o Higher stock market capitalization.
• o Higher foreign and institutional ownership of
  shares lower insider ownership.
• o Stronger engagement by mutual, hedge and
  private equity funds.
• o Higher scores on some measures of corporate
  governance.
• But for the top 100 French companies,
  blockholders remained highly significant.

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• Common changes in external conditions and
  regulatory style
• Greater competition
• Increased liquidity
• ...have prompted differentiated responses both
  to and from firms in different countries.
• In France, foreign investors played an important
  role in introducing increased shareholder value
  orientation.

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• In Italy, block holder control via pyramids was
  replaced by informal and formal shareholder
  coalitions.
• In Germany, activist institutional investors from
  abroad showed limited interest in taking stakes
  in companies.

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Figure 10. Four conceptions of corporate
governance
SHAREHOLDER VALUE 1
SHAREHOLDERS
CORPORATE GOVERNANCE
MANAGERS
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SHAREHOLDER VALUE 2
BLOCKHOLDER
MINORITY INVESTORS
CORPORATE GOVERNANCE
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STAKEHOLDER VALUE German Style
MANAGERS
BANKING SYSTEM
SKILLED WORKERS
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STAKEHOLDER VALUE A general approach
BLOCKHOLDER MINORITY INVESTORS
BANKING SYSTEM
MANAGERS
CORE SKILLED WORKERS
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Table 10 Shareholder value vs Stakeholder value
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CONCLUSION

• C1 Only a fragmentary evidence on ownership
  changes, but the second hypothesis cannot be
  ruled out divergence since ownership is somehow
  related to firms activity

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• C2 Three different configurations
• In Italy, probably inefficient resistance
  since far reaching changes in regulation have
  reproduced pre-existing control patterns with
  poor performance (first hypothesis)
• In Germany, likely efficient adaptation within a
  stable institutional cluster (second hypothesis).
  Cooperation between managers and employees and
  strong performance

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• In France, transition toward a different
  institutional cluster
• Change in regulation prompted greater engagement
  of activist institutional investors (first
  hypothesis).
• This change has been quite uneven across
  activities but has a problematic impact on
  performance (second hypothesis)

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• C3 The need for further research
• Identify complementarities between countries and
  industries (Rajan, Zingales methodology)
• But challenging data requirements in order to
  measure ownership
• Discriminate between the two hypotheses by
  comparing exposed and sheltered sectors
• Detailed comparative country case studies to
  complement econometric approaches

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Many thanks for your attention

• Wendy CARLIN
• Professor of Economics Department of Economics
• University College London Gower St London WC1E
  6BT
• Tel. [phone] - Fax. [phone]
• E-mail w.carlin_at_ucl.ac.uk
•  
•  
•  
•  Robert BOYERCEPREMAP-ENS, CNRS, E.H.E.S.S.48,
  Boulevard Jourdan 75014 PARIS, FranceTél. 
  (33-1) 43 13 62 56 Fax  [phone]
• e-mail  boyer_at_pse.ens.fr
• web site http//www.jourdan.ens.fr/boyer/