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The long-term profit maximization norm and the current

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					THE LONG-TERM PROFIT MAXIMIZATION NORM AND THE CURRENT DEVELOPMENTS IN CORPORATE GOVERNANCE
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 corporation



Structure of this presentation


I. The key corporate decision-makers
II. The increasing role of shareholders in corporate governance 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:
common goal of shareholders?  The multiple goals of all stakeholders?
 The



Corporate law protections against mismanagement?
 Stealing

and shirking

2. Decision-making in a multistakeholder 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:
success and forgoing of long-term objectives  Indefiniteness of „long-term” and the managerial risk averseness




 Short-term

Maximizing profits v maximizing the market value

Solutions


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

management  Executive compensation


 Risk

Alignment with long-term objectives

II. The increasing role of shareholders in corporate governance
1. 2.

Enhancing shareholder rights 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 rights


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 barriers…


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 securities. 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

Country A Country B

Account Provider

Account Provider

?

[…]
Account Provider

Investor

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)
Bottomline


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 cooperation



 

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


				
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