INTERNATIONAL FINANCIAL MANAGEMENT - PowerPoint PPT Presentation

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INTERNATIONAL FINANCIAL MANAGEMENT

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Title: INTERNATIONAL FINANCIAL MANAGEMENT


1
INTERNATIONAL FINANCIAL MANAGEMENT
  • Topic
  • Corporate Governance

2
What is Corporate Governance?
  • Defined
  • No generally accepted definition!
  • Bank for International Settlements definition
  • "the system of rights, processes, and controls
    established internally and externally over the
    management of a business entity with the
    objective of protecting the interest of all
    stakeholders".
  • Another possible definition Corporate
    responsiveness to stakeholders.
  • Central Issue How best to protect the interest
    of stakeholders!

3
Why Should we be concerned about Corporate
Governance?
  • Macro Implications
  • Because corporations play a key role in the
    generation and allocation of a countrys
    resources.
  • Micro Implications
  • In the increasing world of globalization, firms
    need to practice good corporate governance so as
    to
  • Continue to attract consumers and workers
  • Have access to global financial markets!
  • Historically, corporate governance appears to
    have been of greater concern among developed
    country corporations than developing country
    corporation!
  • However, globalizations is forcing these
    developing country corporations to assess their
    corporate governance structures

4
A Very Broad Definition?
  • While the Bank for International Settlements
    definition may seem too broad to be practical,
    it does convey the reality that different
    stakeholder groups will focus on different
    criteria and elements in deciding what makes up
    good corporate governance as they see it.
  • shareholders probably attach the greatest
    importance to maximizing the market value of
    company shares on a sustained basis.
  • the general public wants to be sure the
    corporation treats customers fairly and has
    sensitivity to its impact - socially,
    environmentally, fiscally - on the local
    community.
  • corporate employees want assurances the company
    will compensate them properly, provide
    opportunities for advancement, offer training and
    career development assistance, and help with
    their retirement planning

5
U.S. Corporations
  • All of these responses to stakeholder
    expectations or needs are examples of some kind
    of good corporate governance.
  • They actually appear in some formal statements of
    corporate government policy by large U.S.
    business entities like Philip Morris and General
    Motors.
  • These U.S. companies make the point that
    "corporate governance" is a fairly elastic
    concept, with a multitude of practices and
    guidelines that respond to the concerns of
    particular groups.

6
What does Good Corporate Governance mean in
Practice?
  • Thus, a company's commitment to good corporate
    governance probably needs to be responsive to the
    diverse concepts surrounding the term. These
    include
  • A well-informed, board of directors, with a
    majority of outside (independent) with the
    information, resources and the confidence to give
    proper direction to the CEO and other senior
    company management.
  • Transparent organizational structures and
    business processes, including, to the extent
    possible, transparency in the corporate
    decision-making process.
  • This can be particularly important for officer
    and director selection and compensation.

7
Corporate Governance in Practice
  • Integrity of strategies, operating systems, and
    controls.
  • A reliable process for management to detect,
    evaluate, and correct both strategic and
    operational problems, a sound risk management
    approach, and a strong internal audit program.
  • Full, accurate, and timely financial disclosure.
  • Which in the US would mean "in conformity with US
    Generally Accepted Accounting Principles", and
    outside the US, disclosure at least up to
    International Accounting Standards.
  • A policy and record of "corporate good
    citizenship" confirming the company's ethical and
    social awareness.
  • A strong corporate governance culture, probably
    formally articulated in a company statement of
    "what we stand for" and perhaps a code of
    corporate ethics.
  • An appropriate level of responsiveness and
    accountability to shareholders.
  • In the form of, for example, some access for
    shareholders to directors, and possibly to senior
    management, as well as opportunities for
    meaningful shareholder participation in voting on
    company policies and director/CEO selection.

8
History of Corporate Governance in the U.S.
  • The concept of corporate governance began in the
    U.S. early in the 20th Century when a number of
    states, most notably Delaware, passed "enabling
    statutes" known as general corporation laws.
  • At that time it was recognized that there was a
    growing disparity between owners of firms and
    managers of firms.
  • Issue of agency costs!
  • These state statutes created a legal framework
    for stockholders investing in corporations (i.e.-
    becoming owners) who were finding themselves
    increasingly separated from the managers of those
    corporations.

9
Key Element in Early 20th Century Corporate
Governance
  • Boards of directors were important to this
    process.
  • It was argued that these boards had fiduciary
    duties of loyalty and care in the wise
    management of the corporation in the best
    interests of its owners.
  • A key element in this was the independence of
    directors from undue influence by interested
    parties (including managers) at the expense of
    the corporation's welfare.

10
The Stock Market Crash 1929
  • In the aftermath of the stock market crash in
    1929, there was a public debate over the
    inability of shareholders to assure that boards
    and their appointed managers were in fact
    operating in the best interests of owners.
  • Shareholders were seen as widely dispersed in
    the United States.
  • Most financial market regulation from this time,
    however, involved improving public disclosure.

11
1980s
  • The decade of the 1980s was characterized by a
    wave of hostile takeovers, leveraged buyouts,
    management buyouts, junk bond financing, "poison
    pills", and the general merger frenzy of those
    days.
  • Within this environment, shareholder interests
    again became an issue.
  • the corporate governance debate was revived and
    large institutional investors began to be heard.
  • Reflected the growing importance of these
    institutions.

12
1990s
  • In the 1990s, it was primarily these
    institutional investors in the form of pension
    and retirement funds - along with the legal,
    accounting, and consulting professions - who
    drove the development of concepts of corporate
    control and accountability.
  • Their main focus was (and continues to be) on the
    role of the independent board of directors.
  • Key concept here is independent.
  • Was not always the case, even in the 1990s.

13
Today
  • We are currently living through a tidal wave of
    interest in the concept and forces of corporate
    governance.
  • In the United States, this has much to do with
    the prominent and increasingly activist role of
    institutional fund investors as corporate
    shareholders.
  • Focus on securing top performance from their
    investments.
  • Globally, this aggressive shareholder demand for
    corporate responsiveness is spilling over into
    other countries.
  • American fund managers have diversified their
    portfolios internationally and set an example for
    local investors.

14
Global Corporate Governance
  • However, internationally active financial
    institutions find themselves particularly
    challenged by the need to promote corporate
    governance.
  • First, they must work hard to understand, and
    adapt strategies and operations to a great
    diversity of national practices, traditions,
    laws, regulations, and political and market
    structures.
  • Second, their possibilities for implementing an
    American style of "good corporate governance" are
    often constrained in a given context or a given
    country by legal, cultural, economic, or even
    purely logistical factors.

15
Global Variations
  • Separation of ownership and management (control)
  • Varies widely among countries.
  • Measured by ownership concentration
  • Country Average ownership of 3 largest
    shareholders
  • United States 20
  • United Kingdom 19
  • Italy 58
  • Germany 48
  • Brazil 57
  • Mexico 64
  • United States and U.K. have a diverse
    shareholder base. In other countries, often
    founding families control the companies!

16
Concentration of Ownership
  • If ownership is concentrated, a small number of
    owners will find it advantageous to monitor
    managers.
  • This may be the case of countries other than the
    U.S. and the U.K. (see previous slide).
  • Previous studies suggest that concentration of
    ownership has a positive impact on a companys
    performance.
  • Agency cost may be reduced as owners and managers
    become better aligned!

17
Legal Variations
  • Studies have suggested that many variations in
    corporate governance from country to country can
    be attributed to differences in legal systems.
  • Legal systems determine how well investors are
    protected.
  • Four main legal systems to consider
  • English common law
  • French civil law
  • German civil law
  • Scandinavian civil law

18
Common Versus Civil Law
  • Common Law
  • Based on precedent, formed by the rulings of
    independent judges regarding specific disputes.
  • Originated in U.K. and spread throughout the
    world through British colonization (as well as
    independent adoption)
  • United States, Australia, Canada, India, South
    Africa, Singapore, New Zealand.
  • Civil Law
  • Codification of legal rulings.
  • Dominates legal systems globally.
  • France, Germany, Japan, Mexico, China, Latin
    America,

19
Shareholder Rights
  • English common law appears to be more protective
    of private property and investor rights.
  • Conclusion English common law tends to offer the
    strongest protection for investors.
  • Why?
  • Historically the state has played a greater
    role in regulating economic activity in civil law
    countries but a less active role in individual
    (e.g., private property) rights.

20
Law and Ownership Concentration
  • Another Issue Civil law countries generally
    have greater ownership concentration ratios.
  • Legal System Average ownership of 3 largest
    shareholders
  • English Common 43
  • French Civil 54
  • Question Are concentration ratios a response to
    relatively weak investor protection laws?
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