Chapter 33

GOVERNANCE AND CORPORATE

CONTROL AROUND THE WORLD

Brealey, Myers, and Allen

Principles of Corporate Finance
11th Global Edition
McGraw-Hill Education Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
CHAPTER OVERVIEW

• Financial markets and institutions

• Ownership, control and governance
• Japan model
• German model
• European model

• Shareholders vs. other stakeholders

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33-1 FINANCIAL MARKETS AND INSTITUTIONS
• Corporations raise funds from (1) capital
markets and (2) financial institutions
• In US, UK and many developed countries
capital markets play very important roles
• In other countries, especially emerging and
less developed economies, financial
institutions may be more dominant
• Does it matter whether individuals or
institutions invest in stocks and bonds?

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33-2 OWNERSHIP CONTROL AND GOVERNANCE
• Who owns the corporation?
The stockholders
• Who runs the corporation?
BOD
• Who oversees the corporation?
The management

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OWNERSHIP CONTROL AND GOVERNANCE
• What does stockholders want?
• What are the interests of BOD?
• What are the objectives of Management?
• How to guarantee that management
maximize firm value?
• No guarantee because of agency problems

• In US and UK, the law says managers have

a fiduciary duty to shareholders.
• Is this similar in other countries?
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WHAT IS FIDUCIARY DUTY?

• A fiduciary duty is the highest standard of

care. The person who has a fiduciary
duty is called the fiduciary, and the person
to whom he owes the duty, is typically
referred to as the principal or the
beneficiary. If an individual breaches
the fiduciary duties, he or she would need
to account for the ill-gotten profit. (LII)

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WHAT IS 'CORPORATE GOVERNANCE'
• Corporate governance is the system of rules,
practices and processes by which a company is
directed and controlled. Corporate governance
essentially involves balancing the interests of the
many stakeholders in a company - these include
its shareholders, management, customers,
suppliers, financiers, government and the
community. Since corporate governance also
provides the framework for attaining a company's
objectives, it encompasses practically every
sphere of management, from action plans
and internal controls to performance
measurement and corporate disclosure. 33-7
BREAKING DOWN 'CORPORATE GOVERNANCE'

• Corporate governance became a pressing

issue following the 2002 introduction of the
Sarbanes-Oxley Act in the U.S., which was
ushered in to restore public confidence in
companies and markets after accounting
fraud bankrupted high-profile companies
such as Enron and WorldCom.

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• Most companies strive to have a high level
of corporate governance. These days, it is
not enough for a company to merely be
profitable; it also needs to demonstrate
good corporate citizenship through
environmental awareness, ethical behavior
and sound corporate governance practices.

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MALAYSIAN CODE ON CORPORATE
GOVERNANCE 2012
The Malaysian Code on Corporate Governance
2012 (MCCG 2012) is the first deliverable of
the CG Blueprint and supersedes the
Malaysian Code on Corporate Governance
2007. It sets out broad principles and specific
recommendations on structures and processes
which companies should adopt in making good
corporate governance an integral part of their
business dealings and culture.

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MCCG 2012
• This new code on corporate governance
focuses on clarifying the role of the board in
providing leadership, enhancing board
effectiveness through strengthening its
composition and reinforcing its independence.
It also encourages companies to put in place
corporate disclosure policies that embody
principles of good disclosure. Companies are
encouraged to make public their commitment to
respecting shareholder rights.
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MCGG 2012

• The MCCG 2012 will be effective on 31

December 2012. Listed companies are
required to report on their compliance with
the principles and recommendations of the
MCCG 2012 in their annual reports.
Companies are however encouraged to
make an early transition to the principles
and recommendations elaborated in this
new code.

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MCCG 2915 KEY PRINCIPLES

• https://www.sc.com.my/wp-
content/uploads/eng/html/cg/cg2012.pdf

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33-2 OWNERSHIP CONTROL AND
GOVERNANCE: JAPAN
•Kirietsu
•Japanese Bank Ownership

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JAPAN'S CORPORATE GOVERNANCE SYSTEM –
THE “ZAIBATSU”
• Dates back to the 1600s, termed “zaibatsu”
(meaning “monopoly”).
• Zaibatsu's began as small, family-owned
enterprises to specialize in separate business
needs of the nation.
• As Japan's economy grew, zaibatsu grew to later
form into holding companies and conglomerates
• However, after World War II, many zaibatsus were
broken up and dissolved.

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ZAIBATSU
• A zaibatsu was a large conglomeration of companies
with interlocking ownership. These were primarily
family owned. The big four were Sumitomo, Mitsui,
Mitsubishi, and Yasuda, but there were a host of
smaller zaibatsus. These were not really monopolies
per se, as they seldom dominated one industry.
Rather, each conglomerate was involved in multiple
industries. These conglomerates were able to leverage
their size and economic power into the political realm--
most often through corrupt means – and were one of
the driving forces behind Japanese expansion prior to
World War 2.
• https://www.quora.com/Whats-the-difference-between-a-keiretsu-and-a-zaibatsu 33-16
JAPAN'S CORPORATE GOVERNANCE SYSTEM –
THE KIRETSU
• Kiretsu started after the WWII
• Kiretsu is a “vertical” network of companies,
usually organized around a major bank.
• Structured as either a horizontal or vertical
integration model.
• Cross holdings of each other’s shares.
• Debt financing provided by the main bank.
• Companies in the group help each other
when in financial trouble.
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 JAPAN'S CORPORATE GOVERNANCE SYSTEM –
THE KIRETSU
• Typically, the way a keiretsu works is that a large company,
such as an auto manufacturer, has relations with various parts
suppliers. These parts suppliers in turn have relations with
smaller companies that provide them components. These
relationships may include stock ownership or financing.
However, in many cases it is simply that the companies lower
down the line have only one customer, and they may be
precluded outright by contract from developing business with
other customers. The large company has all the power, and
often seek to increase its profits by demanding that the
smaller company lower its prices or margins. As a result,
many lower-tier companies have been driven into bankruptcy
or have had to lay-off most of their workers while maintaining
the same production schedule.
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OWNERSHIP AND CONTROL IN GERMANY

• Traditionally banks played important roles

in corporate governance – providing loans,
owning equities and proxy voting of shares
held by customers
• But over time, this role has changed. See
the case of Daimler-Benz

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FIGURE 33.5A OWNERSHIP OF
DAIMLER-BENZ, 1990

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FIGURE 33.5B OWNERSHIP OF DAIMLER,
2012

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33-2 OWNERSHIP CONTROL AND
GOVERNANCE
• European BOD
• In Germany, large firms have two boards
– the supervisory board and the
management board
• Half of the supervisory board are elected
by employees, the other half by
shareholders

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33-2 OWNERSHIP CONTROL AND GOVERNANCE

• European BOD
• In France, firms may choose to have a
single board or a two-tier board
• Majority of board members are non-
executive, largely representing
shareholders and financial institutions

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SHAREHOLDERS VS. STAKEHOLDERS
• Should firms be managed in the interest of
shareholders or all stakeholders?
• Stakeholders include: employees, customers,
suppliers, and communities and governments
• US, UK and other “anglo-saxon” countries are
more towards shareholders interest
• But in Germany, employees interest is equally
important
• In Japan, employee and customer’s are equally
important

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FIGURE 33.6A VIEWS OF 378 MANAGERS
FROM FIVE COUNTRIES
Whose company is it?

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FIGURE 33.6B VIEWS OF 378 MANAGERS
FROM FIVE COUNTRIES
Which is more important— job security for
employees or shareholder dividends?

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TABLE 33.1 FAMILY CONTROL IN ASIA

a “Control” means ownership of shares with at least 20% of voting rights. Percentages
controlled by financial institutions or corporations are not reported.
b Percentage of total assets of all sample firms in each country.

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RESEARCH IMPLICATIONS

• Relate governance factors with firm

performance
• Factors influencing governance and
performance
• GLCs versus non-GLCs in terms of
governance and performance
• CG in syariah-compliant vs. non-syariah
compliant firms.

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