2. Background
High profile corporate scandals characterised last
decade: all pointed at failure of controlling functions;
Effect of revisiting assumptions upon which Anglo-
American CG had laid its foundations over last 30 years,
all the more after recent financial crisis;
Focus is therefore twofold: governance structure in place
as regards control mechanisms, and rationale behind
decision-making process and corporate objective;
Issue of monitoring managerial conduct is also
consequence of particular ownership structure; different
problem within closely held firms where ownership
pattern gives rise to different manifestations of agency
issues;
3. Historical background
Development of corporations in 19th
century gives rise to issue of
monitoring managerial behaviour;
Industrial boom as main engine behind new ownership model;
gradual separation of ownership and control;
Then shift from partnership to limited liability, with enactment of
company law legislation (JSCA 1844) and then with Salomon case
in 1897;
“Depersonification” of firms’ ownership brought about necessity to
delegate managerial function to body within the firm with expertise
and authority;
Thus emergence of dichotomy of two main functions: providers of
capital vs providers of management;
Clear division of powers between BoD and GM made clear at the
start of 20th
century as shareholders could not interfere with
management once power was vested;
4. Structure of delegation
Delegation as prerequisite of corporate efficiency: essential role of
directors especially in context of dispersed ownership;
Possibility of agency issue within above context since agents
(directors) tend to pursue their own interest, divergent from that of
shareholders (principals),
No clear definition of directorship under English Law, traditionally
office embodies elements of trusteeship and agency (fiduciary
liability found in equity);
Difficult to regulate the other function, the entrepreneurial one:
what limits to risk-taking?
Concept of trust and fiduciary relationship are premise of an
unbalanced relationship (independence from control);
From idea of trust and independence derives also problem of
asymmetric information, complemented by specialisation and
expertise: monopoly of information;
5. Theoretical implications
Once powers are vested in the BoD issue of what criteria
should be adopted in the running of the firm and how
interests of shareholders should be best protected;
Two main approaches traditionally: shareholder and
stakeholder theory;
Former characteristic of Anglo-American economic
models, while latter more diffused in continental Europe
and Asia;
Peculiarity of each approach is reflected in CG
mechanisms and liability rules that characterise each
system (Anglo-American vs continental European) and in
the structures that guarantee balance of powers;
6. Shareholder value
Premised on “contractarian” approach to law developed first after
the great crash of 1929, then in the 1970s, when market turned
away from state control – control should be performed by market;
Firm seen as set of contractual relationships between different
constituencies among which shareholders have primacy because of
risk they bear (residual claimant);
Primacy necessary to channel managerial action in “efficient way”
and to create accountability towards shareholders;
Criticism of driving managers to short-term earnings aimed at
maximising shareholders wealth;
Also firms’ value on stock market do not always reflect actual value;
that may be affected by market fluctuations, by “cooking the books”
or by structured finance transactions (dark side of shareholder
value);
Doubts on efficiency of market mechanisms;
7. Stakeholder value
Pluralistic premise whereby firm encompasses interests
of all those who are affected by its activities: emphasis
on sustainability, long term goals and inclusion of all
constituencies within the firm;
Shareholders seen as just one of the constituencies
taking part to corporate life and therefore equally
regarded in light of decision-making process (German
codetermination);
Criticism centred on efficiency argument since
managers are expected to deal with a number of social
considerations that may distract them from prime
objective of creating wealth;
Also lack of direct system of accountability since
managers are not accountable to a specific group that
performs monitoring activity;
Also lack of possible clear goal;
8. Controlling managerial conduct
Anglo-American CG strongly influenced by shareholder value
principle; clear association with patterns of corporate failures of last
decade: over-reliance on market mechanisms for controlling
managerial behaviours, while liability rules and internal controls
labelled redundant as hindered risk taking;
Traditionally low and rather subjective standards of duty of care and
skill under old CA, until late 80s (IA 1986 and more objective test
applied by courts);
Above all inconsistency of takeovers to perform control function: too
expensive, depend on too many variables, subject to short-term
“empire building” strategies; mostly an ex post remedy but should
not replace internal ex ante remedies;
Stock options also represent controversial mechanism: managerial
power has allowed managers to self arrange schemes,
compromising incentive function;
9. Third way?
ESV endorsed in new CA 2006 represents a partial shift from
traditional Anglo-American CG approach: different stance as
regards objective of the company and corporate accountability;
Together with best interest of shareholders, directors have to focus
on overall success of the company in the long term and in doing so
they have to consider interests of other constituencies;
Doubts however on effective changes of new directors duties
because of enforceability of new s.172 CA, whereby constituencies
other than shareholders would hardly find any remedy;
Directors only have to act in good faith while considering
stakeholders interests in order to discharge their duties; moreover,
shareholders interest prevails in case of conflict with other
constituencies’;
10. Conclusion
Separation of ownership and control, coupled with dispersed
ownership represents root of the problem of monitoring managerial
behaviour;
This issue is mostly absent within closely held ownerships where
agency problem appears in different dimension and control of
managerial conduct is solved by different governance patterns and
structures;
Central argument of failure of market mechanisms to operate a
consistent control over managerial actions: shareholder value
corollaries have weakened internal CG controls and overall financial
supervision, failing therefore to provide a reliable system of
controls;
This has contributed to the trend that has seen managers becoming
effective controllers of corporations, engaging in opportunistic short-
term behaviours and annulling any form of balance of powers.
