Be wary of global governance standards |
The quest for a single set of global governance standards is misguided |
By Lucian Bebchuk/ World Bank officials, shareholder advisers, and financial economists have all made considerable efforts to develop such standards. The notion of a single set of criteria to evaluate the governance of publicly traded firms worldwide is undoubtedly appealing. Both investors and publicly traded firms are operating in increasingly integrated global capital markets. But the quest for a single set of global governance standards is misguided. Yes, over the last decade, there has been growing use of global governance standards, largely developed in the Widely held and controlled companies differ considerably in the governance problems their investors face. In widely held firms, the concern is about opportunism by managers, who exercise de facto control; in controlled firms, the concern is about opportunism by the controlling shareholder at the expense of minority shareholders. Because the basic governance problems in the two types of firms are considerably different, arrangements that benefit investors in widely held firms might be irrelevant or even counterproductive in controlled firms, and vice versa. As a result, applying a single standard for assessing investor protection worldwide is bound to miss the mark with respect to widely held firms, controlled firms, or both. Consider, for example, the Corporate Governance Quotient system, developed by the These arrangements are, indeed, important for investors in widely held firms. When a company has a controlling shareholder, however, control contests are not possible, and the arrangements governing such contests are thus irrelevant. Investors and public officials in countries where controlled companies dominate should stop using global governance standards based on the designers’ experience with widely held firms in the Most obviously, assessments of controlled companies should not give significant weight to arrangements governing contests for corporate control. Similarly, arrangements that make the firm’s board of directors more responsive to the wishes of a majority of shareholders, such as making it easier for shareholders to replace directors, can serve the interests of investors in widely held firms, but are counterproductive for investors in controlled firms. In controlled firms, where the concern is diversion from minority shareholders, making directors even more responsive to the controller will likely make minority investors still more vulnerable. Moreover, in countries that have many controlled firms, close attention should be paid to related-party transactions and to the taking of corporate opportunities – the main ways in which value may be diverted from minority investors in such firms. To address such problems, arrangements that enable a minority of shareholders to veto related party transactions – arrangements which are not warranted in widely held firms – could well be valuable. Finally, when assessing controlled companies, the independence of directors should not be judged largely by looking at the extent to which they are independent of the company on whose board they serve. Rather, considerable attention should be given to their independence from the controlling shareholder. To improve corporate governance and investor protection, public officials and investors in countries whose capital markets are dominated by controlled companies should be wary of global governance standards developed for US companies. They should focus on the special problems of controlled companies and on the rules that would work best for protecting smaller investors in such companies. — Project Syndicate l Lucian Bebchuk is Professor of law, economics, and finance, and Director of the corporate governance programme, at |
I doubt a week has gone by since last summer during which I haven't seen some pundit or other trot out Walter Bagehot's dictum that in the event of a credit crunch, the central bank should lend freely at a penalty rate. More often than not, this is contrasted with the actions of the Federal Reserve, which seems to be lending freely at very low interest rates.
Ben Bernanke, in a speech today, addressed this criticism directly:
What are the terms at which the central bank should lend freely? Bagehot argues that "these loans should only be made at a very high rate of interest". Some modern commentators have rationalized Bagehot's dictum to lend at a high or "penalty" rate as a way to mitigate moral hazard--that is, to help maintain incentives for private-sector banks to provide for adequate liquidity in advance of any crisis. I will return to the issue of moral hazard later. But it is worth pointing out briefly that, in fact, the risk of moral hazard did not appear to be Bagehot's principal motivation for recommending a high rate; rather, he saw it as a tool to dissuade unnecessary borrowing and thus to help protect the Bank of England's own finite store of liquid assets. Today, potential limitations on the central bank's lending capacity are not nearly so pressing an issue as in Bagehot's time, when the central bank's ability to provide liquidity was far more tenuous.
I'm no expert on Walter Bagehot, and in fact I admit I've never read Lombard Street. But I'll trust in Bernanke as an economic historian on this one, unless and until someone else makes a persuasive case that Bagehot's penalty rate really was designed to punish the feckless rather than just to preserve the Bank of England's limited liquidity."
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