Discussion of Contemporary Issues in Corporate Governance

1
Discussion of Contemporary Issues in Corporate
Governance
Andreas Charitou Professor of Accounting and
Finance University of Cyprus
March, 2007
2
Discussion of Contemporary Issues in Corporate
Governance

• 1. Governance, Diversification and performance
  The Case of Italys Banche Popolari
• By P. Bongini (Univ of Milano) and G. Ferri (Univ
  of Bari)
• 2. Corporate Governance Issues in
  Non-Shareholder Value Financial Institutions A
  case Study of Mutual Building Societies in the UK
• By David Llewellyn, Loughborough University, UK

3
PAPERS UNDER DISCUSSION
Common Characteristics

• Need for improved corporate governance in
  financial institutions

4
Why is there a need for Corporate Governance?
Heeelp
Heeelp
Heeelp
5

• What do we mean with Corporate Governance?
• mechanisms/processes, people, and activities in
  place to help ensure the proper stewardship over
  a companys assets (act in the best interest of
  absentee owners).
• that aim in protecting investors, especially
  small shareholders, creditors and organisations
  with legal interests in companies listed in stock
  exchanges
• These processes include all aspects of firms
  performance, including risk management, internal
  control, financial reporting etc.

6

• Aim of Corporate Governance

• to strengthen the monitoring role of the B of
  Directors,
• to protect small shareholders,
• to adopt greater transparency
• to provide timely information,
• to sufficiently safeguard the independence of
  the Board of Directors in its decision -
  making.

7
LANDMARKS 1929 1999 PROSPERITY GREED!!!!

• Prosperity leads to Greed !!
• Great Depression (1929) and 1999!!!
• US markets dropped by 83 in early 1930s
• Greed leads to bad management, fraud!!!
• Enron, Worldcom, Parmalat
• Latest corporate governance codes
• Sarbanes Oxley (2002, USA)
• Higgs report (2003, UK)
• Cyprus Stock Exchange Gov Code (2002)

8
Two Generations of research on Corporate
Governance

• First Generation
• Examines individual governance mechanisms,
  particularly
• board of directors
• ownership issues.

• Second Generation
• Considers the possible impact of differing legal
  systems on the structure and effectiveness of C.G
  and compares systems among countries.

9
(No Transcript)
10
Discussion of Corporate Governance Contemporary
Issues

• 1. Governance, Diversification and performance
  The Case of Italys Banche Popolari
• By P. Bongini (Univ of Milano) and G. Ferri (Univ
  of Bari)

11
Purpose of the paper

• To shed light on the specific links between
  governance, profit diversification performance
  for Italys Banche Popolari (BPs)
• Uncover whether their cooperative governance is
  becoming ineffective after the BPs recent fast
  growth (via holding groups)

12
Research questions

• RQ.1 What determines BPs lower profit
  volatility?
• e.g. is it determined by specific governance or
  productive specialization (or both?)
• RQ.2 Is BPs cooperative governance which made
  them successful through 140 years still
  effective after the recent MAs?
• e.g. has the rapid growth of large BP groups
  weakened their performance vis-à-vis less dynamic
  BPs and joint-stock banks?

13
Lower profit volatility Testing Board Stability
vs. Income Diversification

• Testing hypothesis profit volatility is mainly
  determined by two concurrent factors
• governance specificity and productive
  specialization
• Sample 211 banks
• Period 1995-1998 (ante recent MAs)

14
Methodology

• Empirical Model Used

StdDev. ROA f(Board Stab., Income Diversif.
Index, Control Variables)
15
Empirical Evidence and Conclusions

• Corporate Governance (more stable boards of
  directors) plays an important role in reducing
  profit volatility (and thus reduce risk) in
  financial institutions.

16
Discussion of Corporate Governance Contemporary
Issues

• 2. Corporate Governance Issues in
  Non-Shareholder Value Financial Institutions A
  case Study of Mutual Building Societies in the UK
• By David Llewellyn, Loughborough University, UK

17
Gov in Non-SV Fin Institutions

• Major objective
• Is there a greater need for improvements in CGOV
  of non Incorporated financial institutions (eg
  Mutual Funds)?
• Why is there a greater need?
• What it needs to be done? Why?
• Are there any differences between Non Inc and
  Incorp firms regarding governance issues?

18
Gov in Non-SV Fin Institutions

• Major Issues raised
• Shareholder value (SV) vs Stakeholder Value
  (STV) Are there any differences?
• Governance
• Agency problems
• Profit maximization
• Code vs Common Law systems
• STV (Mutual Funds) Vs SV
• No tradeable ownership stakes Ownership
  structure and capital structure

19
Conclusions

• Need for improved corporate governance for
  stakeholder protection in financial institutions

20
End