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Report Information from ProQuest

08 October 2011 05:19

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Document 1 of 1

International corporate governance reform

Noburn, David; Boyd, Brian K; Fox, Mark; Muth, Melinda. European Business Journal12.3 (2000): 116-133.

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Abstract
It is argued that corporate governance is the modern-day equivalent of bloodletting - while intended to restore health, it unintentionally saps the vigor of many firms. Additionally, many of the reform proposals are rooted in conventional wisdom, and completely at odds with a wealth of empirical data. The notion of strategic governance reform is proposed as a remedy.

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Full Text
Headnote Imagine you wake up feeling unwell. Fortunately, being an Imperial College scientist, you have invented a time machine. You program 500 years into the future but inadvertently press the reverse button and travel back to the Middle Ages, You are appalled - best medical advice is based on rhetoric and debate, not on anatomy and empirical evidence. Superstition abounds. Elixirs effervesce. Mountebanks multiply. Consider the parallel with the current debate on corporate governance. We argue that corporate governance reform is the modern-day equivalent of bloodletting - while intended to restore health, it unintentionally saps the vigour of many firms. Additionally, many of the reform proposals are rooted in conventional wisdom, and completely at odds with a wealth of empirical data. We propose the notion of strategic governance re form as a remedy. Introduction While critics have long debated the merits of the corporate board, until recently, this discussion has largely been away from the public eye. In contrast, boards today find themselves scrutinised by regulatory agencies, shareholders and stakeholders, institutional investors, and contingency-fee lawyers. Boards are criticised for their decisions regarding executive pay, diversification, takeover offers, and dividends. Consequently, numerous critics around the globe have demanded wholesale corporate governance reform with the aim of protecting shareholders. Although many such reforms appear sensible, it is unclear what benefits, if any, shareholders would realise. Indeed, in some instances, shareholders may actually suffer as a result of these reforms. In contrast, we propose the notion of strategic governance reform - i.e. how board structures and processes should be designed so as to serve ideally the interests of their constituencies. First, we compare board practices across nations. Second, we discuss factors that have generated interest in governance reforms. Third, we examine the potential pitfalls of unilateral governance reform. A review of empirical research indicates that many of these

reforms may actually be counterproductive. For example, a common theme of many reform initiatives is the recommended separation of CEO and Chairman positions. Not only is hard evidence lacking for this position, but research indicates that separate posts can actually hamper a firm's effectiveness in certain contexts. We identify similar inconsistencies with other recommendations, including board independence and committee structures. Finally, we identify two avenues to address these problems: We initiate a dialogue to better integrate academic and practitioner perspectives on key governance issues. We identify an array of unique governance practices from several countries. Since many of these practices are readily generalisable across cultures, they offer a number of opportunities for `cross-fertilisation' of good governance. Board roles Initially, a cross-national attempt to integrate `best practices' of boards seems doomed to failure - the differences in board composition and practices, unique laws and cultural nuances make this exercise appear both daunting and of limited value. Consider, for example, some of the differences simply between Germany and the UK or US. First, the German economic model places much lower emphasis on the intrinsic value of competition.1 Codetermination is viewed as an asset, and a twotier board system (Mitbestimung) ensures both input and supervision by workers. Equity holdings are also far more concentrated than in the US or UK: the major banks typically control 50-90% of voting shares for even the largest German firms. Because these shares are relatively illiquid, the banks build long-term relationships with their holdings. Historically, such relationship investing has been seen as superior to the US model; however, German banks have recently come under fire for being too complacent.2 Elsewhere, the German model of board behaviour has varying applicability. France, for example, closely resembles the US in that the top executive - the president directeur-general (PDG) is all powerful. However, French culture - reinforced heavily through the grande ecole educational system - emphasises that the duty of leadership is the advancement of French industry and the nation as a whole. Thus, given the blurred distinction between business and government, many executives see themselves as an elite form of civil servant. Codetermination is also present, albeit in a more limited form than in Germany. Governance in the remainder of Europe is equally varied, and is again determined by the nuance of national culture. Hofstede's trail-blazing research demonstrated that, while Europeans are culturally different from Americans or Asians, there is no such thing as a homogeneous European population.3 Given this reality, it should be no surprise that governance practices vary widely by nation. Codetermination, for instance, is a key value in some nations, but not in others. Two-tier boards can also be seen outside Germany, while Swedish workers exercise influence via employeecontrolled pension funds. Similarly, restrictions on certain board interlocks exist in Germany, but not in the UK. The French have their own version of the Japanese keiretsu, where equity stakes and board seats are crossheld across firms. Also, a combined CEO-chair - the norm in the US - is banned in most Nordic countries, and is the exception in the UK. Given this wide variability, it is hardly

surprising that efforts to standardise governance practices among EC members have met fierce resistance and minimal success.4 In Asia, governance and ownership patterns share elements of both European and American models. In principle, the Japanese board mimics the American version but differs markedly in operation. Individual shareholders are virtually powerless and both board and shareholder meetings are often only ceremonial events - indeed, Japanese executives have been known to boast over who has the shortest annual shareholder meeting! Equity stakes are controlled primarily by banks and interlocking ownership across companies - the structure of keiretsu. Japanese boards are also very much dominated by insiders.s Additionally, shareholder requests are typically ignored, and some banks have reportedly withheld proxy votes by prominent foreign investors: T Boone Pickens' failed effort to reform shareholder meetings at Koito Manufacturing is symbolic of the powerlessness of even prominent outside investors in Japan. However, there is growing discontent with Japanese governance: large, bureaucratic boards are seen as a symptom of `big company disease' and a culprit in the nation's current economic malaise. As described in the next section, pressure is mounting to reform governance practices in Japan. Despite the apparent gulf between governance practices across nations, cross-national comparisons agree on two common sets of board priorities, regardless of region: supporting the firm's strategy, and guaranteeing oversight and accountability to shareholders. As we discuss in the next section, a convergence of several trends has jump-started governance reform efforts across the globe. Unfortunately, however, most of these proposals emphasise accountability, and ignore strategic issues. Drivers of governance re form Board crises Peter Drucker once accused American boards of being `the last to know' in every business catastrophe over a half century.6 Fifteen years later, Drucker could be chastised for understatement, and for neglecting to mention that `pet rock' boards are found around the globe. For many, the exemplar of poor governance in the 1990s was General Motors. A mischievous consulting company sent promotional materials to CEOs with the ominous header: `Are you the next Stempel?', referring to the 1992 removal of Bob Stempel as GM's chief executive. While this event drew accolades from some, many shareholders wondered why it took a $15 billion haemorrhage from domestic operations, serious underfunding of its pension fund (another $15 billion) and a downgrade of GM's credit rating to spur any action. The GM board crisis did not reflect uncommon behaviour: financial crises have spurred the departure of top executives and/or board members at many other US firms, including Eastman Kodak, Digital Equipment Corp., WR Grace, Morrison Knudsen, Apple Computer, Borden, American Express, IBM and Westinghouse Electric - the latter three all occurring within a day of each other, making that week a major milestone in the sacking of top management. In retrospect, these boards would seem much more adept at termination than crisis prevention. Similar stories were observed across Europe. In late 1993, the supervisory board at Metallgesellschaft admitted that it was unaware of the firm's near insolvency; at Krupps, directors were in the dark regarding management's hostile bid for Hoesch.

Comparable disasters have emerged at several other German firms, including Bremer Vulkan and Klockner-Humboldt-Deutz. British satisfaction with governance could be summarised with one word: Maxwell. Additionally, efforts to purge CEOs were made at a number of UK firms, including Barclays and Spring Ram. In Asia, stories of board mismanagement were topped only by the prosecution of many Japanese firms including ItoYokada - for making payments to sokaiya, or gangsters. Also, several prominent conglomerates - including Sony, Mazda, Konica and Nomura Securities - have been embarrassed when current and former employees were described as `outsider' directors. Elsewhere in the Pacific, New Zealand firms have begun to face more detailed reporting requirements, and the boards of Australian firms have been linked with poor financial performance and weak internal controls. A prominent example of the latter is the firm AWA: following substantial losses, the directors blamed auditors, while the auditors cross-claimed against the managers. Public reaction Boards in many countries have come under scrutiny for the weak link between executive pay and company performance, director pension plans, and for their adoption of a series of antitakeover amendments that benefit managers at the expense of investors. Boards have also come under fire in countries typically considered safe havens from investor pressure; for example, in Japan the chairmen of Fuji Xerox and Sony have themselves argued for the need for independent directors. Following a 1993 loosening of rules concerning shareholder suits and mounting dissatisfaction with managerial decisions, director liability insurance may be America's next great export to that country. Signs of growing discontent with German boardrooms have surfaced as well: the two-tier system, for instance, has been criticised for being sluggish and unresponsive. Efforts have also been made to rein in the dominant banks, and prominent firms such as Siemens have been recent targets of shareholder suits. Finally, French firms have been singled out for their cosy, keiretsu-style governance practices: the majority of shares traded on the Bourse are part of the verrouillage, where cross-holdings are `parked' at friendly companies. Board seats are similarly shared.7 Investor activism Traditionally, companies have worked within one of two investor models: Anglo and Relationship. In the Anglo model, most equity was held by individual investors. When dissatisfied with management, both individual and institutional owners would do the `Wall Street walk' - i.e. sell their shares and move on. In contrast, equity markets in Germany and Japan have been dominated by a small number of powerful investors who forge longterm relationships with their holdings. Firms following the Anglo model have seen dramatic changes in their relationships with both small and large investors. Umbrella groups - PRO NED in the UK, the Australian Shareholders Association, the United Shareholders of America in the US have been established and, with classic Gallic individualism, a housewife has become the modern-day Joan of Arc for individual French investors. Individual investors have lobbied for board seats, lodged proxy resolutions, and symbolically withheld large numbers of votes at shareholder meetings. Shareholder uprisings surfaced even amongst the typically

staid Swiss investors. The change in relations with large investors has been even more dramatic. During the late 1980s and 1990s, these investor groups developed a curious problem: the magnitude of equity holdings threatened both liquidity and risk of the overall portfolio. So, for example, a CalPERS order to sell their entire General Motors holding might trigger a disastrous sell-off by other investors. Thus, large investors have - albeit reluctantly - begun to resemble their cousins in Germany and Japan, but with a distinctly American flavour. One American cultural icon that holds great appeal for many Europeans and Japanese is the gunslinger of the Old West: the yojimbo who rides into a cowtown, and - without a formal plan or even a steering committee - cleans up town and tallies the dead at the day's end. Pension funds represent the latter-day equivalent of the `man with no name' and, to the chagrin of many executives, fund managers do not eventually ride off into the sunset. Instead, these Clint Eastwood `wannabes' stay put. As the pension funds and other investors have grown now controlling about a third of public equity in the US, and a majority in the UK - so has their involvement in the governance of their holdings. Following a public rebuke of GM succession planning by the California and New York retirement funds, these investors have acquired board seats, demanded private meetings with board members, and sought a voice in strategy formulation decisions. They have been directly responsible for some of the CEO firings mentioned earlier - including Kay Whitmore at Kodak, and the effort to oust Bill Rooney at Spring Ram. Recently, Institutional Shareholder Services has established a database to help funds track how individual directors vote on touchy issues such as greenmail. Although active institutions are primarily American, their actions are felt globally. By 1992, for instance, CalPERS had become the largest single foreign investor in several key international markets taking their governance reform efforts overseas, by initially targeting firms in Japan, the UK, Germany and France. By the year 2000, CalPERS is expected to have a $20 billion commitment to foreign securities. While that number may seem impressive, it should be put in context with forecasts of foreign holdings for all US taxexempt institutions swelling to $1.5 trillion. US and European pensions funds have formed voting blocs to increase their leverage even further. Coordinated through Global Proxy Services Corp., their international activities are subject to fewer rules and scrutiny than activities at home. As examples, these blocs have exerted pressure on voting restrictions in Germany, voted against entire lists of directors in Japan and won private meetings with the management and directors of numerous firms in Europe and Asia. In addition, CalPERS has issued its own `market principles' for Japan. These include three areas for reform: appointment of independent directors, reduction in board size to facilitate decision-making, and appointment of genuinely independent auditors.8 With the exception of Hermes, European investors have taken a much more passive role than their American cousins,9 yet US-style activism is beginning to take root around the world. In late 1996, a group of British investors effected the resignation of Olivetti chairman Carlo Beneditti in response to poor performance and allegations of misconduct in Europe and

Asia. Similarly, in a closely watched test case for Russian shareholder rights, an international group of investors wrested control of the Novolipetsk Metal Works board in Moscow in late 1997. Underfunded Japanese pension plans - whose problems are exacerbated by rapid ageing of their society - have just begun to express an interest in the governance of Nikkei firms. In Korea, dissatisfaction with the Chaebols has sparked the creation of a watchdog shareholder group: the People's Solidarity for Participatory Democracy. The group drew the attention - if not the respect - of the Chaebols after last year's shareholder meeting for Samsung Electronics. Questions about poorly performing Samsung Motors transformed the meeting - a Japanese-style 20-minute formality - into a gruelling 13-hour marathon.10 Market globalisation Many pension and investment funds now scrutinise the activities of foreign firms as their holdings become more diverse geographically. In counterpoint, many firms find themselves venturing beyond national borders in the search for affordable capital - for example, about 500 non-US firms are currently listed on the New York Stock Exchange. However, such listings often impose higher standards of scrutiny or different accounting policies. One example, Daimler-Benz, `discovered' additional pots of money, and stated other `clarifications' in the process of becoming the first German firm to be listed on the NYSE. Given the potential for embarrassment and the disclosure of otherwise proprietary information, other German firms have been reluctant to follow Benz's path. Yet the lure of capital is strong, as demonstrated by Toyota's recent decision to explore listing on the NYSE. The continuing trend towards privatisation - estimated at $150 billion in Western Europe alone in the next five years" - is another facet of market globalisation. Since the capital pools in many of these economies are limited, American funds are a prominent source of cash inflows. Continued cross-border investment means that board and shareholder meetings are increasingly dominated by foreigners. A prime example of this trend is New Zealand: deregulation has made New Zealand firms more competitive and drawn the interest of foreign investors, particularly since the current foreign direct investment policy is quite liberal with few restrictions on capital inflows. Consequently, the proportion of foreign controlled firms has more than doubled in the last decade.12 Regulation The final, and perhaps most crucial, trend is that of regulatory and voluntary scrutiny of public corporations. Several prominent examples of these are noted in Table l, which shows initiatives to range widely in terms of both geography and focus. All, however, share the common goal of making corporate boards more responsive and accountable to shareholders. Key features of these proposals are summarised in Table 2. As noted in this table, most reforms address a combination of board roles and processes. With respect to board roles, the most common recommendation focuses on executive pay, being the most dominant within seven reports. Scrutiny issues also figure prominently, with four proposals each addressing control, reporting, and the evaluation of senior management. In contrast, only three of the proposals recommended corporate strategy as a board role, and only two proposals mentioned financial performance of the firm. For board structures and

processes, the most common issue was the adoption or composition of an audit committee; nominating committees being a close second. Other prominent topics included outsider representation on the board, separation of CEO and Board chair positions, and levels of director pay. The Cadbury Code of Best Practices is the most cited of the reform efforts. While several other British groups developed codes of conduct including the Institutional Shareholders Committee, the Association of British Insurers, and the Solicitors' Property Group - Cadbury drew the most attention as it was the first broad-based set of standards to be adopted by a stock exchange.13 This report focused on mechanisms to improve the accountability of senior managers. The London Stock Exchange subsequently adopted these standards as a condition for listing on the exchange. Consequently, firms must include a section in their annual report describing governance practices, and provide explanations for any noncompliance. While this is the strongest implementation of any set of best practices, firms are not actively penalised for non-compliance - i.e. the only requirement is that firms indicate whether or not they conform to the guidelines. Similar models of best practices have appeared in other countries: the Canadian Dey Report was developed by a special committee for the Toronto Stock Exchange, and the Vienot Report in France was sponsored jointly by the Patronat (the employers federation) and the AFEP (the association of private businesses). The Australian Hilmer report was developed under the auspices of the Sydney Institute. Additionally, the Amsterdam Exchange recently created a code of best practices loosely based on Cadbury and input from member companies, investor and shareholder groups, and outside experts. More recently, the Confederation of Indian Industry has developed a set of guidelines; and a similar effort is underway at the Kuala Lumpur Stock Exchange; in the United Kingdom the Turnbull report advocates risk disclosure. However, compliance with all of these codes is strictly voluntary. The US has seen similar efforts, although none with the visibility of Cadbury. In the late 1980s the Treadway Commission developed a set of best practices for board audit committees. The existence of an audit committee is now required for all major US stock exchanges, although no standards exist regarding their composition or operations. In 1992, the academics Lipton and Lorsch - members of the Competitiveness Policy Council revealed their `modest proposal' to improve corporate governance, the content being similar to the codes of best practices developed in other countries. One of the most recent and disturbing reform initiatives in the US is Proposition 211 in California. Rejected by voters in November 1996, this initiative would have made directors personally liable in shareholder suits and prohibited director and officer (D&O) indemnification. Also in 1996, the National Association of Corporate Directors unveiled suggestions for improving board effectiveness. The recommendations included term limits, caps on board memberships, financial literacy, mandatory equity stakes, and greater involvement by directors. Whilst the US lacks the visibility of a Cadbury proposal, the American Law Institute's proposals were certainly the most contentious. The ALI's Corporate Governance Project had a gestation period of 15 years - more than a decade overdue it produced countless drafts

and yielded 900+ pages of standards. Stating that the Project drew substantial debate and critique is akin to commenting that Pompeii had a few days of `unseasonably warm' weather during AD 79. Early drafts called for mandatory outsider dominated boards, lowered requirements for law-suits, increased personal liability for directors, and replacement of entrepreneurial decision-making with `a checklist of specific functions to be followed by all boards'.14 The final draft of the ALI Principles took a considerably narrower view, focusing on clarifying director duties and responsibilities, such as the duty of due care, the Business Judgement Rule, takeover issues, and related topics. Perhaps most importantly, the Principles addressed a long-standing legal debate by stating that enhancement of `corporate profit and shareholder gains' is a primary objective of the corporation, and hence the board. Still, many have argued that the ALI Principles are fundamentally flawed in that they rely on outside directors - see our subsequent discussion - as the `linchpin' for effective governance.15

Strategic governance reform: an international view It may seem naive to ask `who benefits from these reform initiatives?' since the intended beneficiary of these proposals is the shareholder. Implicit in these proposals, therefore, is the assumption that such changes to governance structures and processes will boost the longterm viability of the firm. But will they? There are two serious problems with current reforms. First, the development of best practices is substantially at odds with academic research. Reform proposals are often rooted in conventional wisdom, ignoring hard data and scientific study. Without sound evidence and analysis, how can investors be sure that reforms will actually deliver better outcomes? Second, the tendency to focus on high profile stories and anecdotes has led to a focus on the wrong issues, or, alternatively, the wrong solutions for valid issues. This undermines efforts to identify opportunities that would create substantial

performance improvements. We believe current efforts to be misguided. Thought needs to be given to innovations and broader application of unique governance practices that can result in tangible benefits for investors. To the detriment of shareholders, conventional wisdom has played a greater role in shaping governance standards than have research findings. For example, any current collapse, scandal, or precipitous drop in third-quarter earnings is linked to the presence of too few

independent directors, lack of an audit committee, or of having a combined CEO chairman. Additionally, efforts to integrate the dominant logic with empirical data are few, and typically rebuffed. One example is Professor Donald Thain's commentary on the Toronto Exchange standards. His critique was similar to ours, noting that a sizeable body of research was available, and contrary to the proposed standards. In response, committee members noted that the report had only `modest ambitions', and that no observer `seriously expected the Dey committee to recommend fundamental changes'. The committee chair, Peter Dey, argued against the inclusion of academic research, as `we recognised the need to produce guidelines within a short period of time and for a relatively low cost and to produce guidelines generally supported by a consensus view, rather than a view qualified by a series of dissents'. Subsequently, Thain characterised the use of `academic research' by members of the Dey Committee as a `derogatory epithet'.16 If governance guidelines are a `prescription' to restore health, then the process more closely resembles medieval versus modern medicine. In reviewing the range of governance practices and reforms around the globe we have identified five broad categories for discussion: Control, Constituent power, Committees, Compensation, and Consequences. Table 3 illustrates the divergence between the current focus of reform efforts and a more strategic view of corporate governance. Making the shift to a strategic view has three steps: Discarding reform elements which have little empirical support (e.g. CEO chairs and nonexecutive directors). Shifting the focus of some topics (e.g. it would be more fruitful to address how CEOs and directors are paid, versus how much). Identifying new areas which should be included. Since governance is a broad and complex area, it is impossible for us to address all of the relevant areas, and in sufficient detail. Consequently, the goal of Table 3 is to provide a framework for a truly strategic dialogue on governance - one which focuses on optimal outcomes versus mimicry and groupthink. Control The dominant academic theme underlying governance reform is agency-theory, which emphasises potential abuses by CEOs and inside directors. In search of mechanisms to hold management accountable for their actions, there are two widely endorsed solutions which have achieved the status of conventional wisdom: that CEO and Chairman positions should be split, and that boards should be dominated by non-executive or independent directors. Yet a review of academic research questions whether these suggestions would help or hurt investors. While most pervasive in the US, combined CEO-chairs - a `dual' structure - appear occasionally in UK, Australian and New Zealand firms, as well as other parts of Europe. Duality has been described as a double-edged sword: while separation of these positions strengthens board scrutiny and CEO accountability, consolidation centralises power and facilitates decision-making, thereby improving leadership and response time in a crisis. Reform efforts advocating the separation of these positions focus on accountability and

depend largely on anecdotal data as evidence. In counterpoint, the research literature reveals a very different scenario: statistical analyses conclude in aggregate that performance is virtually unaffected by this aspect of board composition. Additionally, firms needing strong leadership - e.g. in competitive or lean markets - have substantially higher long-term performance when the same person serves as board chair and CEO. In Europe, where national cultures somewhat mitigate accountability problems, firms with combined CEOchairs have slightly better performance than their counterparts with independent structures.17 Other data indicates that boards often try to balance the needs of leadership and scrutiny. For example, a company could provide appropriate checks for a CEO-chair by staffing key committees with senior and experienced independent directors. Consequently, although CEO-chairs can lead to abuse, they are not universally harmful, nor typically as harmful as described. Unfortunately, none of this research is reflected in the governance reform rhetoric. For example, the Hampel report in the UK has been criticised because it `had not come down definitely against the combining of the chairman/chief executive roles'.18 A similar contradiction is found with outsider dominated boards. While outside members do play a key role on the board, especially through the provision of expertise and crucial linkages to other firms, the value of outsiders in improving accountability is mixed. Several studies have found that the proportion of outsiders - wholly counter to expectations - was associated with a greater likelihood of adverse outcomes, including adoption of golden parachutes and poison pills, higher levels of executive pay, lower levels of R&D spending, and more emphasis on conglomerate diversification.19 Also, most of the prominent corporate crises, such as Guiness Peat Aviation in Ireland and Morrison Knudsen in the US, were firms with outsider dominated boards. Writing in the Harvard Business Review, Michael Jensen concluded that the idea that `outside directors with little or no equity stake in the company could effectively monitor and discipline the managers who selected them has proven hollow at best.'20 Similarly, the Australians Hilmer and Donaldson commented: `At the heart of the proposals to reshape boards is the idea that the independence of board members is critical. The real challenge for boards, however, is not independence but performance ... What research study after research study shows is that board independence seems to have little to do with performance.'21 In contrast, broadened disclosure requirements can offer greater benefits than these structural changes, and at a lower cost. Being held to a higher standard of how and what must be communicated to investors makes the actions of management far more transparent than placing limits on offices held or proportions of directors. Additionally, emphasis on disclosure is more aligned with our strategic model of governance, as its focus is upon effective board process versus structure. Nearly two centuries ago, philosopher Jeremy Bentham argued strongly for the use of publicity and accounting as organisational control systems, noting that it was `an indisputable truth that the more strictly we are watched, the better we behave'.22 The US sets the best practice standard in this area: from the array of required SEC filings, investors can develop a much more detailed portrait of the board than in other nations. Responding to public pressure, in 1993 the SEC began requiring more detailed

disclosure of how and what the board offered the CEO in compensation. Similarly, New Zealand passed the Companies Act 1993, requiring the disclosure of remuneration for each director as well as aggregated information on compensation practices for top executives. Recognising the distinct, and sometimes idiosyncratic, reporting standards across nations, the OECD has recommended development of a common set of disclosure criteria.

Unfortunately, disclosure requirements do not necessarily translate into compliance. A survey of London Stock Exchange firms, for instance, found that only three-quarters of firms were in full or partial compliance with Cadbury guidelines.23 The publication of the 1995 UK Greenbury report catalysed further de facto compliance of the major quoted companies. In Canada, many firms feel pressure to communicate their compliance - or reasons for noncompliance - with the Dey recommendations, even though they are strictly voluntary. In contrast, the Vienot report has had little effect on cross-holding of equity stakes or numbers of board seats held by individual directors in France. Similarly, few Dutch firms have even acknowledged the Amsterdam Exchange standards, let alone made efforts to comply. Thus, we could recommend a `Bentham' approach by adopting Dey on the Toronto Exchange, or by having the New York Exchange require the broader Treadway audit committee guidelines. Alternatively, institutional investors collectively could `request' greater disclosure on key issues especially for holdings outside the US - and use their combined shares as a potentially overt weapon. In response to the power of large institutional investors, some UK commentators have argued that it creates an atmosphere of unfair covert influence that is not available to the small shareholder. The statutory Annual General Meeting frequently exemplified this frustration. Analogous to the popular trans-Atlantic TV programme Gladiators, where enormously strong professionals pretend to compete with less wellendowed contestants - size really does matter. The ritual of corporate democracy is, at best, a farrago and much more likely, a sham. Constituent power

These examples clearly show that the adoption of unilateral board composition standards offers minimal benefit to investors, and possibly even worsens their lot. This is perhaps a more convincing reason why the US has recently enacted rules to bolster the power of large and small investors via shareholder communication and initiatives. Investors want outcomes which they are not getting, and they are ready to take action. The question remains, which action is appropriate, yet no conclusive evidence exists to date that US-style investor activism has been effective. One study examined several hundred proxy proposals initiated during the late 1980s. Although the majority of targeted firms were poor performers, activism even where the outcome was successful - was not linked with any significant performance improvements. Similarly, a comprehensive study of firms targeted by CalPERS found that, despite an improvement in share price, there was no change in operational efficiency, even for the majority of firms which caved in to this activist behemoth.24 Thus, despite a wholesale buy-in on the part of investors and regulators, the benefits of these reform efforts would appear both ephemeral and ethereal. The response of investor groups to this line of inquiry has been interesting. Comments range from denial - citing `hundreds' of unnamed studies to the contrary, to suggestions that research should be ignored since it runs counter to `common sense', or simply that the benefits of activism are just not quantifiable. Indeed, the deputy director of Institutional Shareholder Services commented obliquely that `Good governance goes beyond studies.' More disturbingly, some funds argued that these studies are flawed in that they focus on financial or stock performance as an outcome measure.25 These comments echo the unwillingness of several members of Canada's Dey Committee to consider hard evidence in formulating their `best practices'. Can investors make their influence felt from outside the board, or do they need some other means of participation in governance activities? Consider the example of Apple Computer. A series of strategic missteps, culminating in the disastrous Newton launch, precipitated John Scully's departure as CEO. Shareholders had previously approved the adoption of a stock option proposal; however, Apple's anaemic performance meant that Scully's shares never hit the strike price. To the dismay of investors, Apple made a breakthrough of another kind: by the time of Scully's departure, the board had reprised his options not once, not twice, but a record-setting eight times! Before discarding this example as an aberration, one should note that the Wisconsin pension fund targeted 22 firms for option reprising in 1998 alone. Bill Agee, golden paratrooper extraordinaire, is another example of board largesse gone to excess: at Bendix, the board awarded him and 15 other top executives a parachute only after the Allied takeover had become a fait accompli. Further, the Morrison Knudsen board gave Agee a $2.5 million severance package, despite the absence of any takeover prospect on the horizon under Agee's stewardship as the firm moved to the brink of Chapter 11. The latter sparked 18 shareholder suits, resignation by numerous board members, and the rescinding of much of the severance package. In many such cases, shareholders have only an ex post voice on these matters through lawsuits. Directors' liability is a related area that is typically ignored by reform proposals. Our point here is to emphasise preventive controls versus such ex post solutions. Japan and the US

form the anchor points for the continuum of director litigation, with the best practice lying somewhere in between. Most Japanese firms do not carry director and officer (D&O) liability insurance, simply because such suits are rarely filed. Three factors explain the scarcity of shareholder suits in Japan - a cultural distaste for confrontation in front of strangers; powerful investors who prefer to work with management; and a legal system which makes it both cumbersome and expensive to file lawsuits against corporations, although this barrier is currently being weakened. This is not to say, though, that the Japanese system is perfect: some companies would use these barriers to litigation to ignore legitimate shareholder concerns. In stark contrast to Japanese practice, the US demonstrates ample numbers of lawyers and grounds for suing directors26 - much to the envy of avaricious UK lawyers who are far more constrained by traditions of circumspection and British fair-play. Consequently, both the incidence of shareholder suits and the magnitude of liability insurance premiums have grown dramatically in the US since the 1970s. Between 1991 and 1994 alone there were a total of 319 suits against corporations, with combined settlements in excess of $700 million. The Wyatt Company reported that 1996 was an `all time high' for the incidence of D&O claims, as well as the severity of claims. While Congress has passed legislation to limit frivolous shareholder suits, California recently had a bill before voters which would make directors personally liable in shareholder suits and would also disallow D&O indemnification, following the American Law Institute proposals of 1982. Irrespective of the obvious dollar losses, the pervasiveness of such litigation makes it more difficult to recruit qualified outside directors and encourages risk aversion in the boardroom - a problem accentuated for small and medium-sized firms who lack the prestige and financial resources available to purchase liability insurance for directors. One solution to this issue is to cap awards at a fixed level, such as the total amount of compensation earned by a director or officer from the company during the period in question. Christopher Stone suggests an entirely different tactic. Most directors who serve on boards do so not for the money, but rather for the prestige and status associated with the position. That status often translates to greater power - and compensation - in their own organisation. So, Stone suggests, why not treat ineffective board members like ill-mannered athletes, and place them within a `sin bin' for a season or two? A European alternative to the blame game is to broaden the scope of board-level decisions that must pass shareholder muster. French firms take this to an extreme - their proxy statements tend to be quite long, and solicit approval for mundane matters such as bond issuance. Elsewhere in Europe, shareholders routinely vote on issues such as dividend policies, takeovers, director pay, and even to accept or reject the firm's annual accounts. Similarly, and in direct contrast to the US, Canadian poison pills must meet shareholder approval prior to adoption. Canadian investors have generally passed those provisions which have been introduced yet there is no evidence to suggest that this requirement has increased vulnerability to takeovers.27 The London and New York exchanges might, therefore, consider how similar rules on anti-takeover tools, director pay and pensions, and other `hot-

button' topics might dampen the growth of shareholder litigation. Another option for increasing constituent representation is by providing direct input. The use of advisory and two-tier boards offers a precedent and example. Employee representation on boards of directors - so called `blue collar boards' - is one item noticeably absent from all of the governance reform codes. That absence is doubly noticeable given its visibility in Europe, and increasing frequency in the US. While codetermination is strongest in the two-tier German system, worker representatives are also common in other nations, including Luxembourg, Austria, Sweden, Denmark and India. Workers also appear on the occasional UK and Australian boards, typically nationalised or public sector corporations. France has employee representatives as board observers and Dutch employees have veto rights for director nominees.28 The growth of cross-border acquisitions also raises a number of interesting questions. For instance, what are the governance obligations of the British firm who acquires a German competitor, or vice versa? In the case of Chrysler, Daimler Benz's CEO voluntarily ceded a seat on the supervisory board to the US-based United Auto Workers.29 In comparison, the US experience with employee directors has been minimal: fewer than 2% of US firms have workers serving on the board. Generally, though, such seats are not the result of a highly participative culture but rather some financial crisis. Examples of the latter would include United Auto Workers union representative Douglas Fraser's appointment to the Chrysler board in 1980, and Machinist leader Charles Bryan's appointment to the Eastern board in 1985. In the 1990s, board seats have become increasingly common bargaining chips in mature industries facing broad profitability pressures. As examples, board seats have been offered, or sought, by numerous companies in both the airline and the steel industries. Worker directors are also seen among US firms with ESOP plans. While boards are legally responsible to shareholders, many would argue that the needs of relevant stakeholders must also be met in order to ensure long-term viability. Conversely, abusing or ignoring stakeholders can enable the firm to realise profits only in the short term. Additionally, several surveys of directors indicate attempts to balance both stakeholder and shareholder needs.33 Board input by workers might prove useful for firms where human capital is a strategic resource, or where employee related costs - for example, training and development - consume a significant proportion of the value chain. As many mature economies shift from manufacturing to services enterprises, the potential benefit of this practice is likely to increase. Our final recommendation for constituent involvement concerns the trend of market globalisation. As various national markets become more densely intertwined, firms often find that their `home' market becomes less critical, in terms of both customers and capital. For many companies the shift to a transnational management model means that the single, global manager has been replaced by a team of specialists. What is surprising, though, is that this trend has yet to be mirrored in the boardroom, where national constituencies still rule. The greatest progress in this area has been among UK and US firms, many of which have internationalised their boards through the presence of foreign nationals or interlocks

with offshore firms. Others utilise international advisory boards to provide input to the board and top management. In comparison, foreigners are anathema in Japan, and are rarely seen elsewhere in Europe. Greater board internationalisation could prove invaluable in developing new markets, facilitating cross-border sources of capital, and offer atypical contributions to the German two-tier system of codetermination. Committees While board committees are a prominent feature of many reform proposals, the recommendations themselves are fairly mechanical, often simply advocating the creation of a committee or setting guidelines for its membership. While we concur with the importance of this topic, guidelines which address the function and process of committees would be far more useful. Consider audit committees as a representative example. While some corporate crises or failures are attributable simply to erroneous strategic choices - Rolls Royce or Spring Ram many others result from `creative' accounting, and misuse or illegal use of funds. For example, CEO Bill Agee sold off parts of Morrison Knudsen, the cash from which was aggregated within `funds from ongoing operations', thereby helping to conceal losses in core businesses. In 1996, corporate disclosure and financial reporting issues were the basis for 12% of D&O liability claims, a 50% increase over 1990.31 Potentially, Board audit committees provide powerful scrutiny in maintaining internal control and are considered a main line of defence against fraudulent or improper actions. Audit committees first appeared in the US during the 1930s and are now a common feature in most developed economies. Many US firms implemented audit committees following the Treadway report in 1987 and these are now required on all major US exchanges. Most of the governance reform proposals also endorse audit committees. However, the inherent value of such basic standards is questionable - after all, virtually all of the companies in crisis that we mention had such committees in place at the time. This is an example of a recommendation which is laudable, but insufficient, to ensure adequate outcomes for investors. In contrast to the Treadway guidelines, many firms still have the CEO or other senior managers on the committee, and few enforce codes of company conduct, or communication with shareholders in annual reports. Additionally, the existence of an audit committee does not ensure its activity or vigilance if the information flow is `doctored' or tardy. To remove this constraint, Cadbury 1 recommended that the audit committee be entirely non-executive and empowered to commission reports independent of the executive. One of the authors recently participated in the autopsy of a now defunct firm. Not only were all of the firm's recent profits illusory - an effort to lure new investors - but there was also selfdealing and looting of company funds by management. Losses to investors were in the hundreds of millions. The firm's audit committee - a `blue ribbon' panel of business and community leaders were among the last to know of these problems. Analysis of company documents revealed that the committee had no charter, rarely kept meeting minutes, held infrequent meetings among themselves or with outside auditors, and dismissed reports of auditor opinion, `whistle blowing' by management, SEC concern over accounting practices,

and even Treadway guidelines. The number of committee meetings was also overstated in proxy statements for a period of years. To the outside world, however, an investor may well have concluded that a robust audit committee strengthened legitimacy of reported performance. The SEC has shown a particular interest in such sham or rubber stamp audit committees.32 Not surprisingly, all international governance codes have come out in favour of audit committees. Only one, the Hilmer report, does so in a manner to ensure active committees with the following specific suggestions: All members must be non-executive, or outside directors. The committee chair and a majority of members must be independent - i.e. free of any business or other ties to management which might compromise their effectiveness. The committee should have a written charter outlining its responsibilities. It should meet two to four times annually. Scope should include audit results, audit plans, and proposals relating to internal control. The committee should appoint the external auditor. The committee should conduct regular meetings with external auditors, including meetings without management being present. The Hilmer example illustrates the untapped potential for most reform efforts - to move beyond mechanistic structures and advocate processes that can improve the effectiveness of board committees. Compensation Reform efforts advocate a two-pronged solution for improving CEO pay packages: First, greater effort at curbing the levels of pay. Second, to link pay more tightly with performance. This focus on pay has spurred two main developments in the US: greater adoption of incentive plans and mandatory reporting of pay-for-performance issues in annual statements. We concur with the interest of reform proposals on executive pay but believe that they may mislead investors by concentrating upon mechanics. For example, whereas many firms appear to comply by offering incentive plans, a closer look reveals that many are not utilised while others have been poisoned by extensive option repricing. Additionally, the `right' performance measure can depend substantially on the strategy a firm is pursuing. A better approach is to design incentives that encourage the specific behaviours needed for a CEO to optimally support the firm's strategy.33 While CEO remuneration caused considerable vituperation, many critics have now broadened their focus to include all board directors, and with good reason. Outside the US, levels of director pay and stock option plans are often shrouded in secrecy. Within the US, large investors have complained about excessive perquisites, including lucrative pension plans awarded after just one term of service. Consequently, several of the reform proposals Cadbury, Lipton/Lorsch and Greenbury have pushed for greater disclosure or changes to director remuneration practices. Cadbury, for instance, recommends that neither pensions not stock options be awarded to outside directors. Overall, then, director pay today bears little resemblance to that of a century ago when gold coins were left on board chairs as

tokens of annual service. So, should shareholders be concerned with director compensation practices? Historically, compensation has not been a major factor in the recruitment or retention of outside directors within the United States. Professor Mace, for example, concluded that `Directors accept board memberships, not for the income, but for the opportunity to learn how other companies operate and the prestige value derived from an identification with other impressive firms.'34 Similarly two other academics, Fama and Jensen, argued that busy executives seek directorships to cultivate a reputation for expertise in the analysis and control of broad, organisation-wide issues. They also argued that such reputation building is most credible `when the direct payments to outside directors are small.'35 Yet how can we reconcile this viewpoint with the rapidly growing magnitude of US outside director pay packages? One scenario is that the dynamics of director recruitment are changing, and that firms must now pay more for qualified directors. Alternatively, the substantial increases in director pay may reflect a general trend to subvert or co-opt board members in order to create a `rubber stamp' board. Many CEOs see high levels of director pay as a way to guarantee director loyalty: F. Ross Johnson, for instce, described his approach to compensating directors as `If I'm there for them, they'll be there for me.'36 Concern as to outside directors' remuneration is also voiced within the UK. In December 1996, both the Institute of Directors and the National Association of Pension Funds criticised both aptitude and lack of independence within British remuneration committees. A survey by the Monks Partnership, boardroom pay specialists, provided robust data for this concern when they reported an increase of 25% in outside director pay from that of the previous year. So, how can a firm pay for exceptional directors without unintentionally `buying' a passive board? One strategy recommended for boards in setting CEO pay is to select a low base component, but with a substantial bonus. A counterpart to this for directors is the mix between an annual retainer and per meeting fees. Making much of the director's compensation contingent on meeting fees is likely to facilitate good attendance, and psychologically, reminds the directors of their role, i.e. a source of informed advice at meetings as opposed to a purely figurative role. A related issue concerns pay-for-performance. It is ironic that boards are expected to make a tight pay performance link for the chief executives they monitor, while no such link exists for director pay. In fairness, though, CEO salaries are evaluated annually, while a given director pay system may remain unchanged for several years. The different levels of variance in these two categories mean that it will be more difficult to identify a statistically significant performance link for director rather than CEO remuneration. Implicit in this discussion, of course, is the need for formal evaluation of board performance - a practice absent from five out of six US boardrooms and missing in most of the reform proposals as well. Paying directors with equity is one way to address pay-for-performance issues. Under this system, part or all of outside board member fees would be paid in the form of company stock. Although such equity holdings may represent only a small portion of an outside director's personal wealth, such stock serves as a powerful symbolic reminder of the board's fiduciary

responsibilities. For example, the levels of outside director equity have been linked with numerous positive outcomes, including the levels and composition of CEO pay plans and the avoidance of `golden parachutes' and other anti-takeover tactics. Generally, stock option plans will be much less effective toward this goal than awards of actual stock. A final recommendation is that firms adopt a strategic model of director compensation, as we discussed in the context of executive pay packages. As demonstrated in the UK and the US, the primary factor in setting director pay is firm size. Size alone, however, cannot measure the requirements of, and contributions by, a firm's board. For example, is the business environment simple or complex, stable or changing, a monopoly or heavily competitive? Are directors with the necessary expertise scarce or readily available? Will the board be evaluating many strategic decisions, or none? Rather than focusing on size, director compensation practices should reflect the productivity of the board itself. Additionally, emphasising size may create the wrong incentives for directors. Indeed, several writers have suggested that this practice encourages top executives and board members to pursue mergers and acquisitions which may not be in the firm's best interests. Consequences We end our discussion with the topics of firm strategy and performance. How can it be that these complementary goals are rarely discussed in reform proposals? Only two of the codes - Hilmer and Lipton/Lorsch - specifically mention the supervision of firm performance as a board role. Indeed, Cadbury made a tactical retreat in this area: whilst a draft report of the committee argued that tighter control would improve performance, the final version depicted the code more conservatively as a safety net. Similarly, the highly touted 1994 GM guidelines do not mention strategy or firm performance, except in reference to evaluating the CEO. In contrast, the CEO of Sun, Robert Campbell, has argued that the best governance guidelines can be framed in just six words: `Do what's best for the corporation.' His point is underscored by several surveys of corporate directors, both in the US and abroad, which consistently report support of corporate strategy as the top priority of board members. A closer examination indicates that the performance benefits of several reform elements may well be illusory. First, these reforms place an unbalanced emphasis on the normative roles of the board. Specifically, most reform recommendations focus on improving accountability without acknowledging other board expectations. Consequently, the board's role in support of strategy is often not even acknowledged - notably so in Cadbury and Lipton/Lorsch. In contrast, the Amsterdam Exchange charges the Supervisory Board to assess strategy at least annually. One question which therefore remains unanswered is whether the dual responsibilities - accountability and strategy support - can be achieved concurrently, and with the same board structures. Many business leaders fear that these reforms - by focusing on accountability and ignoring other board duties - will ultimately reduce the effectiveness of many boards. Given the visibility of the Cadbury code in the United Kingdom, it is not surprising that the strongest response to governance reform is among the British business community. Representative of this position is, arguably, the United Kingdom's senior top manager - Lord (formerly Sir Arnold) Weinstock. In his September 1996 retirement speech as

Chairman of GEC, he identified the Cadbury report as creating unnecessary tension in the British boardroom: I don't like non-executives being set against executive directors as Cadbury seems to imply. It destroys the cohesion of the board. They should be supported by non-executives, not held in suspicion by them.37 If directors represent but one facet of the stakeholder constituency, it is all the more concerning that another facet - significant shareholders voice the same concerns regarding governance reform. For example, the UK's largest pension fund, Mercury Asset Management, recommends open rejection to both Cadbury and Greenbury when it is in the `economic interests' of shareholders to do so: We do not believe that blanket implementation of the various codes of practice is necessarily effective or desirable ... the introduction of a code of best practice cannot of itself ensure that companies are managed with competence and integrity and each company needs to be analysed on an individual basis. We have offered examples which clearly demonstrate that the imposition of unilateral board composition standards offers minimal benefit to investors, and possibly even worsens their lot. So, how can we take reform proposals seriously in the light of such a contradiction? To be fully effective, governance reform needs to acknowledge the board's broader role in support of strategy, and that the `optimum' board structure is essentially situational. Additionally, structures themselves may not be the key factor; the crux of corporate governance - whether in the US, UK, or elsewhere - is that structures do not make sensible decisions; people do. Much more attention should be focused on the inherent quality of decisions rather than the mechanisms by which they are made. In support of this perspective, Sir Ronald Hampel, Chairman of ICI Industries and chair of the new Committee on Corporate Governance in the UK (Cadbury 2), hopes to incorporate this broader perspective in the revised code. He recently indicated that the revised recommendations: ... could go both ways ... If you go down the road of making non-executives solely responsible for the vetting of executives - and some things are going that way - then you destroy the unity of the board ... I would like to raise the level of debate to the level of `How do we improve the efficiency of British companies?38 Sir Graham Kirkham - CEO and founder of DFS Furniture recently identified as the top creator of shareholder value in the UK - argues that current reform efforts can even be a hindrance, noting that governance codes may serve as a `smokescreen' for weak performance. For instance, he noted that 8 of the 10 top value-creating firms in the UK do not meet the Greenbury guidelines, and that `some particularly heavy hitters on more orthodox corporate governance guidelines, such as Shell and BAT, are among the worst in terms of value created'.39 Similarly, Burns Philip &Co. was described as a blue chip company with a blue chip board. Yet, they suddenly veered to the edge of collapse. Observers of this Australian firm commented: `In some boardrooms the community-imposed obsession with the forms of good governance has distracted directors from the substantive issue of ensuring viability and performance.' 40

Conclusion The predominant common theme from our review of international corporate governance encapsulates recommendations that essentially are mechanistic and structural. We consider these to be overly simplistic in their emphasis on what is inanimate, for example, Cadbury's strong conclusion as to the separation of the roles of CEO and Chairman, or the mandatory rotation of audit partners to mitigate against cronyism. But what if the individual fulfilled both roles with distinction? What if the audit partner was truly uninfluenced by patronage or by fee income ? Would not then the adoption of inanimate prescription mitigate against all the benefits of longer-term productive relationships? We believe that the behaviour and competencies of directors should be factored in. In other words, reform should be mindful of both inanimate structures and animate implementation. It appears to us that mechanistic solutions have been advanced as an indiscriminant over-reaction to minority human abuse. Since there exists a spectrum of corporate stewardship - both good and bad - why `throw the baby out with the bathwater'? It would, therefore, appear that a Hegelian dialectic has taken over - an antithetical prescription to constrain the minority at the expense of the majority. We believe governance problems today have much less to do with structure, and much more to do with human behaviour. In the words of Patrick Dunne of 3i, Europe's largest development capital company, `Humans are not that different from chimpanzees. Indeed, the patterns of behaviour are often quite similar'.41 How appropriate is the Hobbesian philosophical description of man's life as `nasty, brutish, and short' when juxtaposed with the well-reported conflict within the boardrooms of Cable &Wireless, and at Emap? We believe it essential to factor-in human behaviour strongly in any prescription for international governance reform. Current governance reform efforts, while limited, are a useful first step towards providing better value for investors. We see two main avenues for continued progress. First, a dialogue between governance researchers and policy-makers is absent and is absolutely critical for the creation of any meaningful guidelines. The first steps toward a meaningful dialogue have been set in the Cadbury/London Stock Exchange model encapsulated in the Hampel report: one consequence of public pressure to conform is to encourage discourse as to why firms choose to deviate from the norm. We believe that the inclusion of relevant academic findings will improve the quality of discussion significantly. Second, reform efforts need to align themselves more closely with the needs of investors, mandating that equal attention should be given to ensuring board effectiveness as well as to director accountability. Emphasis on process rather than mechanics is the key element in the reform of international boardrooms. Acknowledgements We would like to thank Bob Hamilton and Mike Hitt for their comments on an earlier draft of this paper. Footnote Endnotes Footnote

1. Charkham J (1994) Keeping Good Company, pp 6-7. New York: Oxford Press. 2. The Economist ( 1994) Watching the boss: A survey of corporate governance. January 29, pp 1-18. 3. Hofstede GH ( 1980) Culture's Consequences. Beverly Hills: Sage. Hofstede G ( 1993 ) Cultural constraints in management theories. Academy of Management Executive 7 (Feb): 81-94. Footnote 4. See, for example, the Fifth Company Law Directive introduced in 1972, and again (in revised form) in 1983, or the proposed Directive on Transfer Bids in 1988. 5. Monks RAG, Minow N ( 1995 ) Corporate Governance. Cambridge: Blackwell Publishers. 6. Drucker PF ( 1981 ) Toward the Next Economics, and Other Essays. New York: Harper &Row. Footnote 7. Monks and Minow, note 5. 8. Viner A ( 1993 ) The coming revolution in Japan's board rooms. Corporate Governance: An International Review l: 112-19. 9. Charkham J ( 1989) Corporate governance and the market for control of companies. Bank of England Panel Paper 25, March, p 7. 10. Australian Financial Review, 9 March 1999. 11. Fanto JA ( 1995 ) The transformation of Footnote French corporate governance and United States institutional investors. Brooklyn Journal of International Law 21: 1-77. 12. Colgate P, Featherstone K (1992) Changing patterns of foreign direct investment in the Pacific region: New Zealand country paper. Wellington: New Zealand Institute of Economic Research. Fox MA, Walker GR (1996) Overseas control of NZSE companies. Companies and Securities Law Journal 14: 324-8. Footnote 13. Stiles P, Taylor B (1993) Benchmarking corporate governance: The impact of the Cadbury Code. Long Range Planning 26(5): 61-71. 14. Hansen C ( 1995 ) A Guide to the American Law Institute Corporate Governance Project. Washington: National Legal Center for the Public Interest. For a comparison of draft AU standards and European governance issues see Norbum D ( 1986) European Boardrooms and the American Law Institute Proposals. European Management Journal 4( 1 ): 51-4. 15. Cox JD ( 1993 ) The ALI, institutionalization, and disclosure: The quest for the outside director's spine. George Washington Law Review 61: 1233-73. Footnote 16. The Winter, 1994 issue of the Ivy Business Quarterly contains several commentaries on Thain's critique of the Toronto Stock Exchange guidelines, as well as a reply by Professor Thain. His original critique appeared in the Autumn 1994 issue.

17. See Boyd BK (1995) CEO duality and firm performance: A contingency model. Strategy Management Journal, 16: 301-312, and Boyd BK, Howard M, Carroll WO ( 1997 ) CEO duality and firm performance: An international comparison. In: H Thomas, D O'Neal and M Ghertman (eds) Strategy, Structure and Style, pp 23-39. Chichester: John Wiley &Sons. 18. Dunlop A (1999) Testing times for corporate governance. Management Accounting 77(4): 24. Footnote 19. See Baysinger BD, Kosnik RD, Turk TA ( 1991 ) Effects of board and ownership structure on corporate R&D strategy. Academy of Management Journal 34: 205-14. Boyd BK ( 1994) Board control and CEO compensation. Strategic Management Journal 15: 335-344. Cochran PL, Wood RA, Jones TB ( 1985 ) The composition of boards of directors Footnote and incidence of golden parachutes. Academy of Management Journal 28: 664-71. Dalton DR, Rechner PL (1989) On the antecedents of corporate severance agreements: An empirical assessment. Journal of Business Ethics 8: 455-62. Loh C ( 1994) The influence of outside directors in the adoption of poison pills. Quarterly Journal of Business and Economics 33 ( 1 ): 3-11. Hill CWL, Snell SA (1988) External control, corporate strategy, and firm performance in research-intensive industries. Strategic Management Journal 9: 577-90. Footnote 20. Jensen MC (1989) The eclipse of the public corporation. Harvard Business Review, October, 61-74. 21. Hilmer FG and Donaldson L (1996) Management Redeemed. Debunking the Fads that Undermine our Corporations, p 153. New York: Free Press. 22. Bentham, 1797, cited in Gallhofer S, Haslam J (1993). Approaching corporate accountability: Fragments from the past. Accounting and Business Research 23: 320-30. 23. Stiles and Taylor, note 13. 24. See Karpoff JM, Malatesta PH, Walkling RA ( 1996) Corporate governance and shareholder initiatives: Empirical evidence. Journal of Financial Economics 42: 365-95, and Smith MP (1996) Shareholder activism by institutional investors: Evidence from CalPERS. Journal of Finance 60: 227-52. 25. Barr PG (1996) Study: Activism has no impact. Pensions and Investments September 30, p 61. Footnote 26. Reinstein A, Callaghan J, Braiotta L (1984) Corporate audit committees: Reducing directors' legal liabilities. Journal of Urban Law 61: 375-87 indicated that at least 133 grounds exist for suing directors for actions they take or fail to take. Additionally, the Chicago Daily Law Bulletin ( 1985 ) noted that there are 267 lawyers for every 100 000 persons in the US, while in Japan the same number of people are served by approximately one lawyer. 27. Sherman HD ( 1991 ) Governance lessons from abroad. Directors &Boards 15(3): 24-8. Footnote

Star MC (1992) US investors flex muscles overseas. Pensions and Investments September 28, p 23. 28. See Stem RN (1988) Participation by representation: Workers on boards of directors in the United States and abroad. Work and Occupations 15: 396-422, and Strauss G (1982) Worker participation in management: An international perspective. Research in Organizational Behavior. Greenwich: JAI Press. Footnote 29. O'Neill HM, Saunders CB, McCarthy AD (1989) Board members, corporate social responsiveness and profitability: Are tradeoffs necessary? Journal of Business Ethics 8: 3537. Wang J, Dewhirst HD ( 1992 ) Boards of directors and stakeholder orientation. Journal of Business Ethics 11: 115-23. 30. Watson Wyatt World-wide (1996) D&O Liability Survey Summary. Chicago: Selfpublished. Footnote 31. White DL (1993) Outside directors under federal securities law: Fraudulent actors or innocent victims? Securities Regulation Law Journal 21: 327. 32. Grossman W, Hoskisson RE (1998) CEO pay at the crossroads of Wall Street and Main: Toward the strategic design of executive compensation. Academy of Management Executive 12( 1 ): 43-57. 33. Monks and Minow, note 5. 34. Mace ML ( 1971 ) Directors: Myth and Reality, p 109. Boston: Harvard Business School Press. 35. Fama EF, Jensen MN (1983) Separation of ownership and control. Journal of Law and Economics 26: 315. Footnote 36. Business Week (6 May 1991) Directors' pay is becoming an issue, too. p 94. 37. Quotes from Weinstock and Mercury are from The Independent (London), 6 September 1996. 38. Financial Times, 23 November 1995. 39. Lanchner D (1996) Tweaking corporate governance in Europe. Global Finance 10(7): 445. Footnote 40. Bartholomeusz S ( 1999) Burns Philip: The lesson is, it's really all about performance. Sydney Morning Herald, 13 March. 41. Management Today, February 1997. AuthorAffiliation David Norburn, Imperial College Management School, London AuthorAffiliation Brian K. Boyd, Department of Management, College of Business, Arizona State University, Tempe, USA Mark Fox, Division of Business and Economics, Indiana University, South Bend, USA AuthorAffiliation

Melinda Muth, Deloitte Touche Tomatsu, Sydney, Australia

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