The long-term profit maximization norm and the ... - Transformacje by pptfiles


Agata Waclawik-Wejman
Center for Banking Law, Jagiellonian University Cracow
                                            IQPC Corporate Governance Summit Dubai - February 9-10, 2009
Re-focusing corporations on long-term
objectives – the key issues

   What are the binding corporate goals for the
    corporate decision-making?

   The recent developments in corporate governance
    mechanisms to ensure the long-term success of the
Structure of this presentation

   I. The key corporate decision-makers

   II. The increasing role of shareholders in corporate

   III. Other CG actors: auditors, rating agencies
I. The Corporate Decision-Makers

   Corporate agents’ (Management/directors/key
    shareholders) duty to pursue corporate goals

   Decision-making in a multi-stakeholder environment

   Short-term v. long-term objectives
1. Corporate Agents’ Duties
   Centralized management and the duty to pursue the
    corporate goals:
     The common goal of shareholders?
     The multiple goals of all stakeholders?

   Corporate law protections against mismanagement?
       Stealing   and shirking
2. Decision-making in a multi-
stakeholder environment
   Shareholders
     Financial   investors as shareholders
   Creditors
   Clients
   Employees
   Environment
   Public interest - new: financial stability concerns
   Giving back to the society: charitable donations
3. Short-term v. long-term objectives

   Reconciling the conflict:
     Short-term  success and forgoing of long-term objectives
     Indefiniteness of „long-term” and the managerial risk

   Maximizing profits v maximizing the market value
   Designing the decision-making process, including the
    board’s involvement in:
       Strategy
              Setting appropriate long-term objectives and interim milestones
              Continuous assessment of the management’s performance
       Riskmanagement
       Executive compensation
              Alignment with long-term objectives
II. The increasing role of shareholders in
corporate governance

1.       Enhancing shareholder rights
2.       Facilitating the exercise of the existing
         shareholder rights

The Underlying Issues:
      Growing institutional ownership
      Internationalization of shareholdings
      Shareholder passivity/Shareholder activism
            The alignment between the economic interest and voting rights
        Infrastructural barriers and integration processes
1. Enhancing Shareholder Rights

       General Meetings
                European Union: Shareholder Rights Directive 2007/36/EC
         Adding items to the GM agenda (Art. 6.1a)
         Shareholder Proposals (Art. 6.1b)
         Rights to ask questions (Art. 9)

       Shareholder approval and communication requirements
         Board Appointment/Compensation
            Directors’ remuneration
                European Union: EU Commission’s Recommendation 2004/913/EC

         Strategic decisions
                European Union: Takeovers Directive 2004/25/EC
2. Facilitating the exercise of shareholder

   The Shareholder Rights Directive 2007/36/EC

   The EU initiatives to remove barriers to clearing and
    settlement of securities transactions
Shareholder Rights Directive removes some
   Equal treatment (Art. 4)

   Easier access to GM-relevant information (Art. 5, 14)

   Easier access to the GM (Art. 7)

   Striking down the personal presence requirement
       Exercise of voting rights through proxies and nominees (Artt. 10-11, 13)
       Electronic voting (Art. 8)
       Voting per mail (Art. 12)
    … but the key barriers in cross-border voting in
    Europe are related to securities infrastucture

    Longer chains of intermediaries

    Late or missing GM-relevant information

    Fragmentation of the securities clearing and settlement infrastructure:
     non-recognition of cross-border intermediary chains
        The last intermediary in the local chain considered the shareholder
            Property-system-driven fragmentation
            Regulation-driven fragmentation
        Uncertainty as to the role of the intermediary
        Some consequences:
            Application of mandatory bid thresholds to the holdings of the intermediary
            Split Voting and Partial Voting not permitted
            Non-recognition of proof of shareholdings issued by a foreign intermediary
Intermediated holding systems
The modified relations between the issuer and investor

   The intermediary system substitutes the “evidentiary system” of
    certificated securities.

   The effect: the investor enters into a legal agreement with its
    intermediary/account provider to purchase and manage

   The issuer – investor relationship is substituted by a set of legal
    relationships, with various rights and obligations related to the
    administration of this evidentiary system by the account
    provider, which:
       Facilitate and streamline the process of mass turnover of securities / can channel
        certain communication between the issuer and the investor,

       Are more complex from the legal point of view: the relationships between the
        issuer and account providers, and between the account providers and the
        investors /account holders.
Fragmentation and complexity of account provider
  chains – a simplified scheme

               Account Provider        Issuer

               Account Provider
  Country A

  Country B     Account Provider


                Account Provider

The EU works on cross-border securities
clearing and settlement

   The EU identified the fragmentation of the securities clearing and settlement
    infrastructure as a key barrier to the capital markets integration in Europe
   The Giovannini Reports - Barriers: technological, legal and tax
   Three expert groups: CESAME, Legal Certainty Group and FISCO
   Private sector best practices as the primary solution, subsidiarity of the
    harmonisation through legislation – the private sector work is still ongoing
       Code of Conduct
   Target2-Securities
III. Other external monitors in CG

   Auditors

   Credit rating agencies
Conclusions (I)

   The key factors of a long-term focus in
    corporate governance:

       The goals

       The actors

       The process
Conclusions (II)
   The corporate governance tools for re-focusing on the
    long-term success of the corporation:
       Corporate Decision-Makers
   Focus on the long-term corporate goals and prevent conflict of values/interests
                Focus of shareholder interest within the limitations of the multi-stakeholder framework
                Ensure a decision making process for the realization of long-term objectives – board

       Shareholders
   Growing importance of shareholders as corporate governance actors
   Enhancing and facilitating shareholder involvement in key corporate decisions
   Identifying and resolving conflicts of interest
                The alignment of the economic interests and voting rights

       Other corporate governance actors
   Auditors, rating agencies: Improving assessment criteria and tools
   Identifying and resolving conflicts of interest
       Thank you!

  Agata Waclawik-Wejman
    agata at

    Center for Banking Law
Jagiellonian University Cracow
         ul. Bracka 12
    31-005 Cracow, Poland
 Tel./Fax. +48 12 422 09 08

To top