Corporate Governance in the United Kingdom

Past, Present and Future

W. Forbes,L. Hodgkinson

• Editore: Palgrave Pivot
• Anno: 2014
• ISBN:
  9781137451743
• Argomento: Business
• Categoria: Corporate Finance

Recent experience from the global financial crisis suggests that the future of corporate governance will bring radical changes, surprises and challenges. Having said that, it should not be underestimated how much UK corporate governance has changed since the Cadbury Commission in 1992. In this book, William Forbes and Lynn Hodgkinson identify a need to provide a comprehensive analysis of past research concerning UK corporate governance in the light of the recent crisis. Where prior reviews of corporate governance research have to a large extent focused on literature from the USA, this book provides an overview of the development of corporate governance with a focus on literature concerning the UK. It addresses seven major themes: modes of governance; the historical context and codification of corporate governance; nature of ownership; boards; executive remuneration; institutional investors; and the market for corporate control. This review incorporates policy recommendations and changes in practice, and explores implications for companies, financial institutions, corporate governance practice and other stakeholders in the light of the recent crisis. The authors conclude by suggesting future directions for academic research in corporate governance in the light of recent events, where more deep rooted reform may be possible.

1

Introduction

Forbes, William, and Lynn Hodgkinson. Corporate Governance in the United Kingdom: Past, Present and Future. Basingstoke: Palgrave Macmillan, 2015. DOI: 10.1057/9781137451743.0002.

Good governance is a joy to observe in any organization. But to know what it is we must define “good.” While we acknowledge its limitations, we will largely define “good corporate governance” as that which maximizes the long-term value of shareholder interests in the company. The focus on the long-term value implicitly acknowledges the importance of other stakeholders’ interests as no company will survive in the long term if they ignore the interests of customers, employees, suppliers, and the community at large, to name but a few stakeholders. This definition accords with the majority of prevailing orthodoxy of both academic debate and policy discussion. But this objective has not gone, and certainly should not go, unchallenged. Nevertheless we warn readers that our review is a partial one conducted largely from a shareholder wealth maximizing perspective.

A further restriction on the review’s scope is the very high priority we give to UK research on the UK corporate governance perspective. To some degree this is useful in bounding our work to the confines of a fairly brief monograph. But as we point out, taking the UK nation state as the unit of analysis is contentious in an era of European convergence. If, as might be expected, the proposed 2017 “In/Out” referendum results in our remaining as members of the European Union, the pace of European integration will accelerate to make speaking of a UK corporate governance regime seem like an anachronism. We bequeath these problems to later authors.

In terms of authorship, Lynn Hodgkinson initially drafted Chapters 4–6 and 8, and William Forbes initially drafted Chapters 2, 3 and 7. Chapter 9 was jointly written and reflects our research interests and our ongoing joint research which we hope to complete in the years ahead. But we are happy to share in both the glory and the shame readers perceive to be our due.

Our present troubles, as we slowly stagger out of the greatest financial crisis of a generation, give us confidence that the future of corporate governance is full of radical changes, surprises and challenges. But we should not underestimate how much UK corporate governance has changed since the first stirrings of the Cadbury Commission in 1992. We can only hope our monograph gives our readers some perspective on past research concerning UK corporate governance and wish them well in shaping the future of this research tradition.

2

Modes of Governance

Abstract: The UK governance system is often seen as part of the common-law/Anglo-Saxon governance regime we share with our former colonies and the US. While this form of governance is seen as particularly favorable to shareholders’ rights in controlling the corporation, much depends on how avidly and flexibly these rights are enforced. Nor is the governance regimes impact upon corporations truly separable from the structure of ownership and control it reflects or the extent of product market competition that a nation or industry faces.

Forbes, William, and Lynn Hodgkinson. Corporate Governance in the United Kingdom: Past, Present and Future. Basingstoke: Palgrave Macmillan, 2015. DOI: 10.1057/9781137451743.0003.

While the focus of this monograph is UK corporate governance, it is, nevertheless, worth including a discussion of a number of classic papers comparing the UK corporate governance environment with that of other countries. La Porta and co-authors, for example, have written a number of papers drawing out the consequences for investor protection, of both shareholders and bondholders, of precedent-based legal regimes and their various civil/codified law alternatives (e.g., see La Porta et al., 1998, 2008; Johnson et al., 2000; Djankov et al., 2003). These papers set the context for the specific evolution of the UK system which we discuss in greater depth in the next chapter. While common law covers the United States and the United Kingdom, civil law, in three separate forms, covers the rest of Europe. The overall conclusion of these papers is that the common law jurisdictions offer the greatest protection to both shareholders and bondholders, and civil law offers the least protection. La Porta et al. (1998) point out, however, that jurisdictions with poor investor protection typically compensate for the weakness of investors’ legal protection by having more concentrated ownership structures.

Models of evolution of governance systems

La Porta et al. (1998) argue that the prevailing legal regime not only affects financial decisions, but also shapes the extent to which the host government intervenes in the economy, the media and even occupational choice via conscription. They comment further that legal rights and their enforcement appear to operate as complements with common law nations offering investors more protective rights and enforcing those rights more assiduously. In particular the peculiarities of national history and culture affect the enforcement and acceptance of governance regimes.

Armour et al. (2009) have confirmed the importance of legal origins for the primacy of shareholder rights using a panel dataset (including the United Kingdom, the United States, France and Germany) over the decade 1995–2005, but they also report some evidence of convergence in favor of greater protection of shareholder rights. The authors interpret this as evidence in favor of a “weak form” legal origins hypothesis in which legal origins is simply one of a set of joint determinants of the degree to which shareholder interests are given primacy by national governance arrangements.

Convergence to a single global model of corporate law, as predicted by Hansmann and Kraakman (2001), can most probably be dismissed as a pipedream. In reality an intermingling of corporate law traditions has been the norm of legal development. Looking back on the evolution of corporate law in the United Kingdom, the United States, France, Germany, China and Japan, Siems (2010, p. 23) concludes that “there was already a certain congruency from the outset, followed by a sometimes diverging, wavelike development.” And it appears one of those waves has recently crashed over us with the stresses of the sovereign debt crisis. Yet substantial global legislation already exists to constrain any separate development of UK governance. One element of this is the OECD Principles of Corporate Governance developed between 1996 and 1998, with a revised version issued in 2004. The harmonization of accounting standards through the work of International Organisation of Security Commissions (IOSCO) initially and that of the International Accouting Srandards Board (IASB) more recently reinforces this trend. So it makes sense to discuss UK governance in isolation, while acknowledging the practical implementation of that tradition is increasingly hedged around by developments elsewhere.

Even if the legal system of a nation greatly affects its governance arrangements, this may be due to some other political or economic trends that shaped the legal system. Roe (2006) points out that while neither the United States nor the United Kingdom has suffered defeat and occupation by a foreign power for many years, nearly every civil law country, France, Germany and Sweden, for example, Roe sees the political consequence of the devastation of war as a key inhibitor of the respect for private property and the private resolution of disputes that facilitates common law settlements. What matters is the level of commitment to a free, well-functioning security market and not the exact legal structure presiding over it.

The precise origins of the difference between common law and civil law jurisdictions is now rather lost in the sands of time. But Glaeser and Shleifer (2002) argue that in the 12th century a strong English king felt able to devolve dispute resolution largely to a jury of a subject’s peers whereas in France, where the king’s hold on the country was far less secure, competing barons feared each other’s rapacious intentions more than the power of the sovereign him[her]self. As Glaeser and Shleifer state, “People demand a dictatorship when they fear the dictator less than they fear each other” (2002, p1196). Consequently, since some initial point of separation in the 12th century, divergent developments of governance structures were set in place in the United Kingdom where common law took root and in France where civil law emerged. But the importance of this fundamental distinction in national modes of governance must lie in the difference they currently make to national economic development, as opposed to remaining simply a curiosity in legal history.

Glaeser and Shleifer (2004) trace out the endogenous relation between economic growth and “good,” especially democratic, governance and argue that most empirical metrics of good governance used in the growth literature do not capture true constraints on the executive’s choice and may instead capture good, or bad, choices by the executive in managing economic growth. They conclude that above average educational attainment predicts economic growth better than any good governance proxy can. La Porta et al. (1998, p. 1141) similarly find that investor protection is enhanced as national income rises regardless of the legal origins of the national laws. Overall they conclude the evidence supports the view that economic growth, and the progressive acquisition of human capital it engenders, gives rise to solid, democratic, government and not vice-versa.

Djankov et al. (2003) build a theoretical framework to evaluate the trade-off societies must make between the competing threats of disorder and dictatorship in the social control of business in particular. They see state control as evolving along a trajectory from simply the recognition and enforcement of contracts over private property at one liberal extreme, through state adjudicated litigation, state regulation and finally collective state ownership, or Communism, at the other illiberal extreme. Beck et al. (2003) suggest two mechanisms for the law to induce greater economic dynamism:

political channels by which the common law privileges private dispute resolution within an adversarial system whose central purpose is to maintain the integrity and consistent enforcement of private property rights; and

adaptability mechanisms that give the common law system greater flexibility to evolve as a self-sustaining “grown order” in Hayekian (1978) (terms, as opposed to a “made order” imposed by some transient ruling elite).

Beck et al. (2003), using a sample of 115 countries, examine the relative contribution of political channels and mechanisms of adaptability to the degree of financial development in each sample nation. Their results stress the centrality of a legal system’s ability to facilitate change as an enabler of an active market in financial securities.

While La Porta and colleagues have focused on legal origin, Stultz and Williamson (2003) suggest that culture, and in particular religion, might explain differences between investor protection afforded within a country. They, for example, suggest that Catholic countries are particularly weak in protecting creditors’ rights, as compared to predominantly Protestant nations, where investors’ rights are stronger and more vigilantly enforced.

While the ability to privately enforce one’s rights in the courts is the major benefit claimed for the common law system, this right may be more apparent than real. Armour et al. (2009) find that in both the United Kingdom and the United States very few directors ever face a private prosecution and in reality worry more about actions by regulators, such as the takeover panel or investment activists. While directors in the United States face somewhat higher risks of litigation, the probability of being held accountable in court remains low. Armour et al. further find that in the years 2004–2006 only 1.1% of NASDAQ, NYSE constituent companies attracted legal suits not dismissed by the courts.

While most academic discussion of the divergence between highly concentrated/weak investor protection (in continental Europe) and dispersed/strong investor protection regimes (in the United States/United Kingdom) has concentrated on legal structures, Franks et al. (2008) find little evidence to support this view. They point out that before the 1948 Companies Act there was almost no legal protection of minority shareholders’ rights in the United Kingdom, and the dispersed nature of shareholder ownership had already taken grip. This suggests the presence of some other causative mechanism explaining both the national legal settlement and the observed dispersion of ownership and control.

Ownership and control have been the inseparable twins of national governance settlements ever since Berle and Means’s (1932) classic statement of how the separation of ownership and control induces an agency problem in the modern corporation. While large differences in modes of both ownership and control are observed today, these do not always indicate radically different histories as work on the comparative development of German and British stocks markets show. Using a specially constructed database on the funding of German enterprises in the years 1860–1950 Franks et al. (2008) are able to substantially revise received wisdom about how German corporations are funded. Their analysis uncovers the fact that in the latter part of the 19th century (1860 onward) the primary difference between Britain and Germany was not the level of activity in rapidly developing stock markets, or the amount or proportion of equity funding raised. Rather, they argue, the primary difference between early British and German equity funding was in the uses to...

Indice dei contenuti

• Cover
• Title
• 1  Introduction
• 2  Modes of Governance
• 3  Historical Context and Codification of Corporate Governance
• 4  Nature of Ownership
• 5  Boards
• 6  Executive Remuneration
• 7  Institutional Investors
• 8  The Market for Corporate Control
• 9  Future Directions
• Index