2. • Discussion: Family Groups
and agency problems
1
• Regulators & Gatekeepers
• Anti-trust & Regulation
2
•Case Discussion: The
Microsoft Anti-trust Case3
Today’s Overview
3. 1. Open Discussion
• Morck, Randall and Yeung, Bernard (2003)
Agency problems in large Family Business
Groups, Entrepreneurship: Theory and
Practice, Summer 2003. Vol. 27, No. 4: pp.
367 – 382
5. Learning Outcomes
• By the end of this lecture, you should be able to:
1. Evaluate the role of gatekeepers in ensuring that companies
are run in the interest of their shareholders and other
stakeholders
2. Critically assess the independence of gatekeepers – such as
auditors and credit-rating agencies – vis-à-vis their client
firms
3. Gauge the effectiveness of gatekeepers in preventing
corporate fraud
4. Evaluate the danger of capture of gatekeepers by the
economic actors they are supposed to supervise
5. Evaluate the relationship between stakeholders and
regulators.
6. Judge the existing empirical evidence as to whether
regulation acts a substitute or a complement for corporate
governance.
6. The role of Regulators & Gatekeepers
• While regulators are gradually reinforcing the importance
of gatekeepers such as auditors and credit rating
agencies to ensure that companies are well governed, the
Enron scandal and the recent bank failures suggest that
gatekeepers often lack the necessary degree of
independence, judgment, competence and power to
prevent corporate fraud and failure.
• What is the role of gatekeepers in corporate governance?
Such gatekeepers include among others stock-market
listing authorities, auditors, credit-rating agencies and
bank regulators.
• The role of corporate governance in regulated industries,
including the financial sector.
7. Introduction
• Gatekeepers play an important role in
corporate governance as they provide
monitoring and certification services.
• However, the various tend to suffer from a
lack of incentives or conflicts of interests.
• Hence, it is unlikely that investors will be able
to rely on a single type of gatekeeper.
• We will also look at industry regulation and
whether it acts as substitute or complement
for corporate governance.
8. The Role and Duties of Gatekeepers
• John Coffee defines the role of gatekeepers as
“assess*ing] and vouch[ing] for the corporate
client’s own statements about itself or a specific
transaction”.
• Gatekeepers may be particularly important in
corporate governance systems where there is a
lack of shareholder monitoring.
• They may also play a role ion corporate
governance systems with large shareholders as
there may be a need to monitor related-party
transactions.
9. The Role and Duties of Gatekeepers
(Continued)
• Gatekeepers include
– auditors,
– investment banks,
– lawyers,
– financial analysts,
– credit rating agencies,
– corporate governance rating agencies,
– commercial banks and other creditors,
– insurers of directors’ and officers’ liability (D&O
insurers)
– stock markets, and
– securities exchange regulators.
10. • Reinier Kraakman argues that gatekeepers
should only be made liable if the primary
sources of liability prove to be insufficient.
• Third-party liability is justified if the
gatekeeper is connected in such a way with
the firm that this connection creates some
responsibility in case the firm fails.
• However, gatekeeper liability also raises three
issues.
The Role and Duties of
Gatekeepers (Continued)
11. 1. It may be very difficult for the gatekeeper to
discharge the legal duties.
2. The gatekeeper may have insufficient
incentives to fulfil its legal duties and may even
be tempted to collude with the firm.
3. Enforcement of gatekeeper liability may be
difficult as it depends
– not only on the type of gatekeeper and nature of its
legal duties, but
– also on the degree of culpability.
The Role and Duties of
Gatekeepers (Continued)
12. • Hence, gatekeeper liability may be complex and
difficult to enforce.
• The question arises as to whether there is a
need to regulate gatekeepers given that they put
their reputational capital at stake when dealing
with clients.
• The spectacular failures of Enron and Worldcom
in the USA have renewed in gatekeeper liability
and in particular auditor liability.
The Role and Duties of
Gatekeepers (Continued)
13. • The risk of losing the gatekeepers’ losing their
reputational capital has done little to prevent
corporate failures and conflicts of interests.
• One of the main features of the Enron case
was that its auditor, Arthur Andersen,
ignored irregularities in the firm’s accounting
practices to avoid the loss of lucrative
consulting income.
The Role and Duties of
Gatekeepers (Continued)
14. • John Coffee blames the failure of Enron on
– the commodification of auditing services,
– the auditor’s capture by its client, and
– the lack of competition among auditors.
• Capture refers to the influence the client may
have over its gatekeeper and may push the
latter to serve the interests of the client
rather than preventing malpractice.
The Role and Duties of
Gatekeepers (Continued)
15. • The lack of competition may reduce the risk of
reputational damage caused by client failure,
calling for regulation.
• Another type of gatekeeper that failed to police
Enron were financial analysts that kept on
issuing buy recommendations, fuelling stock
price increases.
• Other countries such as the Netherlands and
Italy have had their own Enron-style corporate
failures.
The Role and Duties of
Gatekeepers (Continued)
16. • The Parmalat debacle in Italy can be
blamed on its auditor and financial
analysts, but also its creditors.
• The recent subprime mortgage crisis can
be blamed on the failure of another
gatekeeper, i.e. credit rating agencies.
• Regulators have responded by
reinforcing the role and duties of
gatekeepers.
The Role and Duties of
Gatekeepers (Continued)
17. The Ideal Attributes of a Gatekeeper
• A gatekeeper should have the following seven
attributes
1. It should be independent of the firms it is to
supervise
2. It should have access to the information required
to carry out its duties
3. It should not be subject to major conflicts of
interests
4. It should have the necessary skills, in particular the
necessary judgment and competence, to perform
its duties
5. It should also have the right incentives.
18. The Ideal Attributes of a Gatekeeper
(Continued)
6. It should have enough power to force its
supervisees to disclose any information it
requires to fulfil its duties and to force
them to put a stop to malpractice and
wrong-doing. It should also have the
power and authority to penalise
supervisees that fail to meet its requests.
7. It should provide meaningful and reliable
third-party certification to investors and
other users.
19. Types of Gatekeepers and Limitations
to their Role
• Recent corporate governance reforms have put a
lot of emphasis on auditors as gatekeepers.
• However, the efficiency of auditors may be
severely limited for at least two reasons
1. Auditors rely on the information they are provided
with by the company
2. Auditors may suffer from conflicts of interests.
• However, auditors are likely to have the
necessary power via e.g. the issue of qualified
audit reports.
20. Types of Gatekeepers and Limitations
to their Role (Continued)
• Investment bankers are also likely
gatekeepers given
– the close relationships they have with
companies, and
– the information they collect via the provision of
services such as underwriting and consultancy.
• Both the theoretical and empirical literature
suggest that they are third-party certifiers.
21. However, the subprime mortgage crisis suggest
at least two reasons why investment bankers
may not be credible gatekeepers.
1. Investment banks may be subject to
conflicts of interests because of client
capture or because of internal conflicts of
interests.
2. Investment banks are strong lobbying
groups that have been successful in keeping
regulation of their activities at bay.
Types of Gatekeepers and Limitations
to their Role (Continued)
22. • Lawyers come in two versions
– in-house legal counsels, and
– outside lawyers dealing with particular or one-off
transactions of the firm.
• In-house counsels are likely to be well informed
about the firm’s processes and dealings.
• However, they may be too close to the firm and
suffer from capture and behavioural biases.
• In contrast, outside lawyers may not have
enough information on the firm to detect
wrong-doing.
Types of Gatekeepers and Limitations
to their Role (Continued)
23. • Financial analysts study the firm’s
fundamentals and the forecast these for the
near future.
• They issue buy, sell or hold recommendations
based on these forecasts.
• However, financial analysts may suffer from
conflicts of interests as they may be part of
the same investment that is also
underwriting the firm’s new equity issue.
• They may also be suffer from behavioural
biases.
Types of Gatekeepers and Limitations
to their Role (Continued)
24. • Credit rating agencies rate the credit worthiness
of debt securities such as government and
corporate bonds.
• However, credit rating agencies are paid by the
issuers themselves and issuers may be shopping
around for the highest possible rating.
• Credit rating agencies have also been accused of
failing to predict the
– Asian crisis of 1997, and
– to be at least partly responsible for the subprime
mortgage crisis.
Types of Gatekeepers and Limitations
to their Role (Continued)
25. • Similar to the auditing industry, the credit rating
industry is highly concentrated and some
dispute as to whether there is any danger of
reputational loss.
• Corporate governance ratings agencies are still
a fairly recent phenomenon, but developing fast.
• Corporate governance ratings agencies include
– Deminor,
– Standard & Poor’s, and
– Governance Metrics International (GMI).
Types of Gatekeepers and Limitations
to their Role (Continued)
26. • These ratings have some use for interest
parties, but they also have their limitations.
• Typically, the indices are in the form of
counters which are incremented by a value of
one if a particular corporate governance
device is present.
• Hence, there is no detailed assessment about
the conflicts of interests that are likely to
prevail in a given firm.
Types of Gatekeepers and Limitations
to their Role (Continued)
27. • Commercial banks and other creditors may
also act as gatekeepers.
• Similar to (large) shareholders, it is in the
interests of banks and other debtholders to
monitor corporate managers.
• However, large debtholders, via their close
relationship with the firm and the
information they collect, may acquire a
monopoly position.
Types of Gatekeepers and Limitations
to their Role (Continued)
28. • Information about the directors’ and
officers’ liability (D&O) insurance
taken out by the firm may act as a
powerful signal.
• The insured amount as well as the
reputation of the insurer may
provide valuable information to the
market as to the risk investors face.
Types of Gatekeepers and Limitations
to their Role (Continued)
29. • Stock markets are another important
gatekeeper.
• They impose entry requirements on firms
seeking a stock-market listing as well as
ongoing obligations on already listed firms.
• For example, the London Stock Exchange
(LSE) imposes the UK Corporate Governance
Code on the firms that are listed on it.
• Stock markets are frequently organised into
segments that enable investors to distinguish
between safer, mature firms and riskier firms.
Types of Gatekeepers and Limitations
to their Role (Continued)
30. • Securities exchange regulators, such as the
SEC in the USA, are likely to play an
important role given the lack of
independence and incentives as well as the
conflicts of interests other gatekeepers may
suffer from.
• James Fanto argues that the SEC should be
the ultimate gatekeeper and perform much
closer monitoring of corporations similar to
the regulator in the banking industry.
Types of Gatekeepers and Limitations
to their Role (Continued)
31. • However, this would then require the
securities exchange regulator to monitor
all sorts of areas of corporate
governance for which other gatekeepers
may have greater competence.
• Another limitation to its role as ultimate
gatekeeper is that typically the law
provides judicial immunity to the
regulator.
Types of Gatekeepers and Limitations
to their Role (Continued)
32. • Hence given all of the above lacks of
desirable attributes, investors and other
stakeholders may have to rely on a range of
corporate gatekeepers rather than a single
gatekeeper.
Types of Gatekeepers and Limitations
to their Role (Continued)
33. Is Industry Regulation a Substitute for
Corporate Governance?
• David Becher and Melissa Frye argue that
industry regulation as to the very least an
indirect impact on corporate governance.
• However, a priori it is not clear whether
regulation is a substitute or complement for
corporate governance.
• On one hand, regulation may be a substitute
given that the regulator monitors the firms.
• On the other hand, industry regulators
frequently push for improvements in corporate
governance.
34. Is Industry Regulation a Substitute for
Corporate Governance? (Continued)
• The existing empirical evidence is also
inconclusive
• Studies on the effects of the 1980s and 1990s.
deregulation in the US banking industry suggest
that
– there was an increase in CEO stock ownership,
– there was an increase in the importance of variable
pay,
– but the overall effect on executive compensation was
relatively small.
• A likely reason for these changes was the
increase in competition caused by the
deregulation.
35. • Paul Joskow et al. find that US CEOs earn
significantly less in regulated industries.
• Pay is lowest in those industries where there is
price regulation.
• Joskow et al. propose two reasons for this
1. As a result of political pressure, regulation may
keep salaries low to prevent public outrage
2. Regulation may have an indirect effect on
executive pay by reducing managerial
discretion and the returns from good
management.
Is Industry Regulation a Substitute for
Corporate Governance? (Continued)
36. • Joskow et al. also find that pay is lowest in
those industries with a single state regulator
rather than multiple regulators.
• They conclude that this is evidence that the
first, direct effect of regulation on pay
dominates.
• All of the above studies suggest that regulation
is a substitute for corporate governance.
• Other studies suggest that regulation is a
complement.
Is Industry Regulation a Substitute for
Corporate Governance? (Continued)
37. • For example, Charles Hadlock et al. find that CEO
turnover in regulated industries is at least as
sensitive to performance as in unregulated
industries.
• Joel Houston and Christopher James argue that
the reason why CEO stock holdings and option-
based pay are lower in banks is the fewer
investment opportunities rather than regulation.
• There is also consistent evidence that firms from
regulated industries have higher proportions of
independent directors.
Is Industry Regulation a Substitute for
Corporate Governance? (Continued)
38. Conclusions
• The role of gatekeepers in corporate
governance.
• Corporate governance and industry
regulation.
43. What are stakeholders looking for?
• Profits/Surpluses
• Goods/Services – quality, price,
availability
• Responsiveness and understanding
• Ethical values
• Reliability
• Sustainability – long term
reliability
• Acceptance of social responsibility
• Green agenda
Therefore assurances and this
leads to confidence/
reputation
44. UK External regulators
EU?
Government?
Bank of England?
Financial Services Authority (FSA)?
Financial Reporting Council?
Charities Commission
Government Departments?
Government Agencies – OFCOM,
OFSTED
Information Commissioner
Institutional Groups – insurance and
pensions?
Professional bodies?
45. Meaning and impact of regulation
• Expectations and standards (must do’s)
- Compliance
- Guidance
• Manner
- Inspection
- Light touch
- Self regulation but report for desk top
review
• Impact
- Success/failure - intervention?
- Forced closure/merger
- Pressure on whole organisation
- responsibility to ease
46. Relationship between
stakeholders and regulators
• Fundamental source of assurance
• Does it work?
- banking crisis
- corporate failures
- government sector issues
– IT contracts,
– Mid Staffs Trust
– Rural Payments Agency
Conclusion variable and depends upon
approach.
47. Relationships
Stakeholders, Regulators and Internal Audit
• Again should be fundamental
• But
- knowledge and understanding of role
- confidence in ability
- issues on scope of work and fit to regulator need
- IA responsibility to organisation – or is it IPPF
2440,2600?
• Effective alignment should be through Governance
Statement if appropriate evidence exists to
demonstrate reliability.
48. Solution and Summary
• Good corporate governance
- Board role
- 3 lines of defence
• Effective risk management
- Appetite transferred into policy and procedures
- Embedded throughout the organisation
• Underpinned by Controls Assurance Framework
• Aligned with effective internal audit in
compliance with professional standards
50. Overview
• Introduction
• Antitrust law
• Enforcement of the antitrust laws
• Antitrust thought
• Examples of the differences in antitrust thought
• Compliance
• The politics of antitrust
56. Antitrust in Europe
• At first glance, the antitrust laws of the European Union are quite
similar to those of the United States. Article 101 of the Treaty of
the European Community concerns restraints of trade, much like
Section 1 of the Sherman Act.
• Article 102, which focuses on abuses of market power by
dominant firms, is similar in many ways to Section 2 of the
Sherman Act.
• Finally, with respect to mergers, the European Merger Control
Act is similar in spirit to Section 7 of the Clayton Act.
• Nevertheless, there remain a number of procedural and
substantive differences between antitrust laws in Europe and the
United States. Merger evaluations typically are conducted more
quickly in Europe.
• Antitrust enforcement has grown rapidly through the world in the
past decade, including China.
57. Practices Subject to Antitrust
Scrutiny
• Horizontal practice - Involves
activities in the same industry
–For example, a merger is horizontal if
the two firms operate in the same
industry
• Vertical practice - Involve firms in a
supply arrangement or a channel of
distribution
58. Exemptions to Antitrust Laws
• Economic activities of labour unions
• Agricultural cooperatives
• Certain activities of industries
• Joint export trading activities
• Partial exemptions for:
–Joint research and development
ventures
–Baseball
59. Government Enforcement of the
Antitrust Laws
• Department of Justice (DOJ) and
Federal Trade Commission (FTC)
have the authority to enforce
Sherman and Clayton Acts
• Only the FTC can enforce the
Federal Trade Commission Act
60. Private Enforcement of the
Antitrust Laws
• Most antitrust cases are the
result of private lawsuits
–Filed by competitors and
dealers
• Treble damages are provided by
the Clayton Act
61. Per Se Violations and the Rule of Reason
• The courts have held that:
–There are some sufficiently egregious acts
that on the face of it violate the antitrust laws
• These acts are said to be per se illegal
• The only defense allowed is that the defendant
did not commit the act
• In contrast, other cases are considered by
the courts under a rule of reason
–A restraint of trade is illegal if it is
unreasonable
62. Antitrust Thought
• The structural approach
(structure-conduct-performance)
• The Chicago school
• The new IO approach
63. The Structural Approach
• Performance of markets as
determined by the conduct of
market participants
–Largely determined by the
structure of the market, such as:
•Number of competitors
•Barriers to entry
64. The Chicago School
• Views the objective of antitrust policy as
economic efficiency
– May be understood in its simplest form as:
• The maximization of producers’ plus consumers’ surplus
• Skeptical about the nature and scope of barriers
to entry
• Views collusion among firms as unsustainable
– Sustainable when there is government protection
• Views competition as the best means of
achieving efficiency
65. The New IO Approach
• Rejects the static equilibrium approach
taken by the Chicago school
–Focuses on the opportunities for strategic
behaviour not initially considered by the
Chicago School
• Concerned with:
–Potential for anticompetitive behaviour in
markets characterized by network
externalities
–Where compatibility and standardization are
required
66. Examples of the Differences in
Antitrust Thought
Vertical arrangements
Predatory pricing and entry deterrence
Collusion and price fixing
Mergers and merger guidelines
68. The Politics of Antitrust
• Antitrust policy has important distributive as
well as efficiency consequences for firms and
consumers
• Most proposed changes in the antitrust laws
fail because of:
– The intensity of the ensuing politics
– The complexity of the issues
• Manifests itself in legislative action seeking
exemptions or providing for affirmative
defenses in antitrust lawsuits
69. Cases - Price Fixing in the Airways
• Crude oil prices increased rapidly
in the 2004–2006 period, and the
increase in fuel costs placed a
burden on airlines
• Airlines began to add “fuel
surcharges” to air fares, adding a
new instrument of price
competition
• Competition Act of 1998 -
provides immunity to firms that
reveal illegal competitive
activities
• The objective of the leniency policy
was to provide an incentive to
disclose wrongdoing
71. Cases - The Microsoft Antitrust Case
• The U.S. Department of Justice (DOJ) together
with 19 state attorneys general filed an
antitrust action against Microsoft Corporation
under Sections 1 and 2 of the Sherman Act
(the Act)
72. Cases - The Microsoft Antitrust Case
• The DOJ specifically alleged four
violations of the Act:
1. Microsoft engaged in “unlawful exclusive
dealing and other exclusionary
agreements”
2. Microsoft engaged in “unlawful tying”
3. Microsoft illegally maintained its
monopoly of the PC operating systems
market
4. Microsoft attempted to monopolize the
Internet
73. REGULATION : Overview
• Introduction
• Periods of regulatory change
• The constitutional basis for regulation
• Regulatory commissions and agencies
• Delegation, rule making, due process, and discretion
• The nonmarket environment of regulatory agencies
• Explanations for regulation
• Market imperfections
• The political economy of regulation
• A nonmarket theory of regulation
• Cost-of-service regulation
• Deregulation
74. Introduction
• Regulation takes place through a
public process that is relatively open
and allows participation by
interested parties
• Regulatory decisions and rule-
making proceedings are extremely
important to many firms, industries,
and interest groups
75. Set of Interventions
1. Controlling prices
2. Setting floor prices
3. Ensuring equal opportunity
4. Regularizing employment
practices
5. Specifying qualifications
6. Providing for solvency
7. Controlling the number of
market participants
8. Limiting ownership
9. Requiring premarketing
approval
10. Ensuring product safety
11. Mandating product
characteristics and technology
12. Establishing service territories
13. Establishing performance
standards
14. Controlling toxic emissions and
other pollutants
15. Specifying industry boundaries
16. Allocating public resources
17. Establishing technical standards
18. Controlling unfair international
trade practices
19. Providing information
20. Rationing common pool
resources
21. Protecting consumers
22. Controlling risks
76. Periods of Regulatory Change
• Four major periods of regulatory
change
–Populist era (late 1800s)
–Progressive era and the New Deal
–Social regulation (began in the
1960s)
–Economic deregulation (began in
the 1970s)
77. The Constitutional Basis for Regulation
• The U.S. Constitution not only provides
the authority for regulation
–It also limits its application
• Many legal principles of regulation in
the United States have come from court
decisions that draw on the common law
• The Fifth and Fourteenth Amendments
place limits on regulation
79. Delegation, Rule Making, Due
Process, and Discretion
• Article I, Section 1 of the Constitution grants
Congress the sole power to enact laws
– Does not authorize Congress to delegate
policymaking to agencies
• Congress enacted the Administrative
Procedure Act (APA) of 1946 to:
– Provide for public notice and comment prior to
agency action
• Agencies adopt their own rule-making procedures in
a manner consistent with the APA
80. Delegation, Rule Making, Due
Process, and Discretion
• The APA grants parties right to sue for judicial
review of an agency action
– A basis for that review is failure to follow the
procedures required for an action
• Under the framework of procedural due process
• The APA requires:
– Agency actions not be “arbitrary, capricious, an
abuse of discretion, or otherwise not in
accordance with law”
• The courts review regulatory actions for
whether they are arbitrary or capricious
82. Explanations For Regulation
• Two theories to explain where
regulation is and is not imposed:
–Theory of market
imperfections
–Political theory
83. Market Imperfections
• Natural monopoly
• Externalities
• Public goods
• Asymmetric information
• Moral hazard
• Government imperfections
84. Natural Monopoly
• A monopoly is natural if one firm
can produce a given set of goods
at lower cost than can any larger
number of firms
• Results when costs are
decreasing in the scale of output
or in the scope of the set of
goods a firm produces
86. Types of Externalities
• Pecuniary externality
–Present when the actions of one economic
agent affect other economic agents
through changes in the prices of goods
and services
• Nonpecuniary externality
–Occurs when an action of one economic
agent directly affects the preferences or
production opportunities of another
economic agent
87. Public Good
•One whose consumption
by one person does not
reduce its availability for
others
88. Asymmetric Information
• If people have different (private)
information at the time they act,
markets may not perform
efficiently, even when there are
advantageous trades that could be
made
• Adverse selection - Occurs when
sellers have incomplete information
about customers
89. Moral Hazard
• Refers to inefficient actions
induced by policy instruments
that cause people not to bear
the full consequences of their
actions
90. Government Imperfections
• Market imperfections warrant
government regulation
–Only a necessary condition for
regulation to improve
economic efficiency
91. Capture Theory
• Predicts that
regulation initially will
be found where there
are market
imperfections and
over time will evolve
to serve the interests
of the regulated
industry
92. Rent-Seeking Theory
• Regulation not
established to
address market
imperfections
–Instead, it is
established to
benefit politically
effective interests
93. Fairness
• Regulation used to
accomplish fairness goals
• Can involve policies such
as:
–Lifeline rates for
telephone service for
low-income people
–The provision of aid
such as food stamps
94. Other Public Purposes: Media
Ownership Rules
• Regulation also used for other
public purposes
95. Preemption
• A major regulation issue is
whether a decision by a federal
regulatory agency preempts
lawsuits in state courts
96. Political Economy Theory
• Views regulation as shaped by
market imperfections,
institutions and their
officeholders, and the
nonmarket action of private
interests
99. Cases - Enron Power Marketing,
Inc., and the California Market
• Enron Power Marketing (EPM)
deployed an array of electricity
trading strategies to take advantage
of imperfections in the design of the
market for power in California
• The Enron board of directors waived
attorney–client privileges and
confidentiality rights and turned the
memos over to the Federal Energy
Regulatory Commission (FERC)
100. Core Readings
• Solomon, Jill (2010) Corporate Governance and
Accountability 3rd Edition, Wiley, UK. Ch.4-5
• Goergen, Marc (2012) International Corporate
Governance, Pearson. Ch.5, 9-10
• Larker & Tayan (2011) Ch.3-5,12
• Monks & Minow (2011) Ch.2 & 3
• Johnson, Scholes & Whittington(2008) Ch.4
• CIMA - Performance Strategy: Study Text (2011) BPP
Learning Media Ltd. Part B : 5-6
• Baron, David P.(2013) Business and its environment,
7th Edition, Pearson
101. Additional Readings (1)
• Byrd, J. W. and Hickman, K. A. (1992) ‘Do outside directors monitor
managers?’, Journal of Financial Economics, 32, 195–221.
• Donaldson, L. and Davies, J. H. (1994) ‘Boards and company
performance—Research challenges the conventional wisdom’,
Corporate Governance: An International Review, 2(3), July, 151–160.
• Peel, M. and O’Donnell, E. (1995) ‘Board structure, corporate
performance and auditor independence’, Corporate Governance: An
International Review, 3(4), October, 207–217.
• Milliken, F. J. and L. L. Martins (1996) "Searching for Common
Threads: Understanding the Multiple Effects of Diversity in
Organisational Groups", Academy of Management Review, 21,
pp.402-433.
• Core, J. E., Holthausen, R. W. and Larcker, D. F. (1999) ‘Corporate
governance, chief executive officer compensation, and firm
performance’, Journal of Financial Economics, 51, 371–406.
• Thompson, S. (2005) "The Impact of Corporate Governance
Reforms on the Remuneration of Executives in the UK", Corporate
Governance: An International Review, Vol.13, No.1, January, pp.19-
25.
102. Additional Readings (2)
• Berle, A. and Means, G. (1932) The Modern Corporation and Private Property, New York.
• Monks, R. A. G. (1994) ‘Tomorrow’s corporation’, Corporate Governance: An International Review, 2(3),
July, 125–130.
• Nesbitt, S. L. (1994) ‘Long-term rewards from shareholder activism: A study of the “CalPERS effect”’,
Journal of Applied Corporate Finance, 6, 75–80.
• Stapledon, G. P. (1995) ‘Exercise of voting rights by institutional shareholders in the UK’, Corporate
Governance: An International Review, 3(3), 144–155.
• Stapledon, G. P. (1996) Institutional Shareholders and Corporate Governance, Clarendon Press, Oxford.
• Smith, M. P. (1996) ‘Shareholder activism by institutional investors: Evidence from CalPERS’, Journal of
Finance, 51(1), March, 227–252.
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103. Next Week’s Ideas for Discussion
• Foo Nin Ho, Wang Hui-Ming Deanna and
Vitell, Scott J.(2012) A Global Analysis of
Corporate Social Performance:
• The Effects of Cultural and Geographic
Environments, Journal of Business Ethics,
2012:107: pp.423–433
Antitrust policy had its origins in the populist movement of the 1870s when a number of states enacted statutes to regulate economic activity and control the exercise of economic power.
These acts are broadly worded, employing such terms as monopolize, restraint of trade, and unfair practices. This has required the courts to interpret the acts in the context of the specifics of individual cases. Antitrust law is both statutory and interpretive.Subject of politics as interest groups, politicians, and public policy specialists attempt to influence the law.
Horizontal arrangements include monopolization, predatory pricing, price fixing, bid rigging, the allocation of customers, and group boycotts.The concern with horizontal arrangements is that they may increase market power, leading to lessened competition and higher prices.Vertical practices include the allocation of territories by a manufacturer among distributors or retailers, refusals to deal, exclusive dealing arrangements, resale price maintenance, reciprocal arrangements, and tying. Include the merger of a manufacturer and a supplier or distributor.
Their dual enforcement responsibilities led the DOJ and the FTC to reach an interagency liaison agreement in 1948. As a result of the agreement, cases are allocated primarily by industry and secondarily by the nature of the complaint.The Hart-Scott-Rodino Antitrust Improvements Act of 1976 amended Section 7 of the Clayton Act to enhance the enforcement of the antitrust laws pertaining to monopolization and restraint of trade through mergers.The 1974 Antitrust Procedures and Penalties Act classified as felonies violations such as price fixing and increased the allowable fines. Fines against corporations can be as high as $10 million per count in criminal cases.The Robinson-Patman Act prohibits price discrimination not justified by cost differences in serving customers.
Most antitrust lawsuits are brought under the Sherman Act, and cases pertaining to vertical arrangements represent a somewhat higher percent of the total than those pertaining to horizontal practices.The treble damages provision of the Clayton Act provides strong incentives for a private party to file an antitrust lawsuit. If a suit is filed against a firm by the DOJ, private parties often follow with private lawsuits. Treble damages are controversial. Their proponents argue that they provide an important incentive for private enforcement. Critics contend that treble damages provide an incentive to challenge the practices of competitors.
Per se violations are presumed to be unreasonable.The rule of reason was needed because much of the language of the antitrust laws is too sweeping and a literal interpretation would be harmful to competition and efficiency.A defendant has two defenses under a rule of reason.The first is the same as under a per se rule—the defendant did not commit the act in question. The second is that, although the defendant committed the act, it was not unreasonable to do so.
Views economic power as a function of the number of firms in the industry or their market shares. The smaller the number of firms, the more likely they are to restrict output to raise prices and worsen the performance of a market.
Does not conclude that conduct such as vertical arrangements should be legal. Concludes that vertical arrangements could be pro-competitive rather than anticompetitive.They should not be per se illegal but rather should be considered under a rule of reason.
The new IO perspective:Acknowledges that competition with only a few firms can be efficient in a one-time encounter.Recognizes that repeated encounters provide an opportunity for implicit collusion. Collusion is more likely the better each firm can monitor the actions of their competitors.Focuses on the objectives of static and dynamic efficiency.
Vertical arrangementsIn reasoning about vertical arrangements, the Chicago school distinguished between interbrand and intrabrand competition. Intrabrand competition refers to competition between sellers of the same brand, as in the case of two Toyota dealers competing against each other. Those dealers also compete against the sellers of other makes of automobiles—interbrand competition. If interbrand competition is vigorous so that a manufacturer does not have horizontal market power, restrictions on intrabrand competition will have little impact on the efficiency of the market.Predatory pricing and entry deterrenceThe traditional perspective on predatory pricing is that a firm can drive a competitor out of a market by cutting prices below the competitor’s costs. Collusion and price fixingAll schools of thought agree that collusion and horizontal price fixing are anticompetitive, and the DOJ has vigorously prosecuted price fixing and obtained large fines, criminal convictions, and prison sentences for those found guilty.The structural perspective on collusion and price fixing is that firms will collude when possible, so tight antitrust supervision is necessary.Mergers and merger guidelinesMergers can create horizontal market power or restrain competition in supply or distribution channels.Mergers can yield cost efficiencies and synergies that benefit consumers. Mergers can also remove ineffective management and eliminate inefficient cross-subsidization of one line of business by another.
Firms provide training and guidance to employees who may encounter situations in which antitrust concerns are present.A firm may find itself in a situation in which a contemplated practice falls in an area in which the antitrust laws and the court decisions interpreting them are unclear or changing. In addition to seeking the advice of counsel, the firm should examine whether the purpose of its practice is anticompetitive.
Government regulation can be traced to the 1100s when the English monarchy began to contract with private parties for the provision of services.
Regulatory agencies are of two basic formsIndependent commissionsExecutive branch agencies
Regulatory agencies operate in a complex environment, and “independent” regulatory commissions are subject to a variety of influences.
Theory of market imperfectionsPredicts that regulation will be instituted to correct market imperfections.Political theoryPredicts that interest groups seek regulation to serve their interests.
The classical theory of natural monopoly predicts that a monopolist will restrict its output, raising its price above marginal cost. The restriction of output causes economic inefficiency.This inefficiency is referred to as a deadweight loss (DWL), since an opportunity to achieve economic gains is forgone.
These externalities result in a divergence of private costs from social costs.Economic inefficiency results unless agents take into account the full social costs of their activities. Externalities provide an efficiency rationale for regulation to align private and social costs.
When a person consumes a private good such as an apple, it is not available for consumption by others. When a person consumes a good such as national defense or a radio broadcast, the amount of the good available for consumption by others is not diminished.
Regulation is one response to moral hazard problems, but regulation can also cause moral hazard problems, making the regulation itself less effective. The principal means of dealing with market hazard is to structure incentives.Moral hazard can be addressed by monitoring the behavior of individuals. Moral hazard is reduced by breaking the link between cost increases and the prices charged for services.
Fairness can also be sought in cases in which consumers do not or cannot easily take precautions.
The Federal Communications Commission (FCC) has been fearful that concentrations of ownership in the news media might stifle the full reporting of news or restrict the diversity of views expressed.
Preemption has attracted considerable nonmarket action as firms have sought to obtain explicit language in new legislation to provide preemption, and other interest groups such as trial lawyers and consumer groups have opposed such language.
Redistribution and cross-subsidizationRegulation can be used to redistribute income through cross-subsidization of one customer class by another.Cross-subsidization occurs when one group of customers pays more and another group pays less than the cost of providing their service.Inefficiency results on both sides of the cross-subsidization.Cross-subsidization is a common feature of the economic regulation of industries.Accomplishing through regulation what cannot be accomplished through legislationOrganized labor is one of the core constituencies of the Democratic Party.Unions collect dues from members that can be used to fund political activity, including advertisements, campaign workers, and campaign contribution almost all of which goes to Democrats.
This cost-of-service regulatory system has been blamed for inducing high costs and slowing the introduction of new technology in telecommunications.