Contracts Vs. Institutions Martin Hellwig

Contracts vs. Institutions Martin Hellwig

Discussion: Alan D. Morrison

GCGC, Stockholm, 10th June 2016

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 1/7 Workers Suppliers The extensive form is common knowledge CG is designed ex ante Financier EntrepreneurFirm to maximise surplus CG reﬂects contractual Management Customers gaps and information problems

Information; Control Institutions aect CG

Indirect Direct funding; funding; Bank Direct Market Indirect Systems control; Systems control; Delegated Multiple monitoring. signals.

Atraditionalviewofcorporategovernance

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 2/7 Workers Suppliers The extensive form is common knowledge CG is designed ex ante Financier Firm to maximise surplus CG reﬂects contractual Management Customers gaps and information problems

Information; Control Institutions aect CG

Indirect Direct funding; funding; Bank Direct Market Indirect Systems control; Systems control; Delegated Multiple monitoring. signals.

Atraditionalviewofcorporategovernance

Entrepreneur

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 2/7 Workers Suppliers The extensive form is common knowledge CG is designed ex ante Firm to maximise surplus CG reﬂects contractual Management Customers gaps and information problems

Information; Control Institutions aect CG

Indirect Direct funding; funding; Bank Direct Market Indirect Systems control; Systems control; Delegated Multiple monitoring. signals.

Atraditionalviewofcorporategovernance

Financier Entrepreneur

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 2/7 Workers Suppliers The extensive form is common knowledge CG is designed ex ante Firm to maximise surplus CG reﬂects contractual Management Customers gaps and information problems

Information; Control Institutions aect CG

Indirect Direct funding; funding; Bank Direct Market Indirect Systems control; Systems control; Delegated Multiple monitoring. signals.

Atraditionalviewofcorporategovernance

Financier Entrepreneur

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 2/7 The extensive form is common knowledge CG is designed ex ante Entrepreneur to maximise surplus CG reﬂects contractual gaps and information problems

Information; Control Institutions aect CG

Indirect Direct funding; funding; Bank Direct Market Indirect Systems control; Systems control; Delegated Multiple monitoring. signals.

Atraditionalviewofcorporategovernance

Workers Suppliers

Financier Firm

Management Customers

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 2/7 Entrepreneur

Information; Control Institutions aect CG

Indirect Direct funding; funding; Bank Direct Market Indirect Systems control; Systems control; Delegated Multiple monitoring. signals.

Atraditionalviewofcorporategovernance

Workers Suppliers The extensive form is common knowledge CG is designed ex ante Financier Firm to maximise surplus CG reﬂects contractual Management Customers gaps and information problems

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 2/7 Entrepreneur

Institutions aect CG

Indirect Direct funding; funding; Bank Direct Market Indirect Systems control; Systems control; Delegated Multiple monitoring. signals.

Atraditionalviewofcorporategovernance

Workers Suppliers The extensive form is common knowledge CG is designed ex ante Financier Firm to maximise surplus CG reﬂects contractual Management Customers gaps and information problems

Information; Control

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 2/7 Entrepreneur

Indirect Direct funding; funding; Bank Direct Market Indirect Systems control; Systems control; Delegated Multiple monitoring. signals.

Atraditionalviewofcorporategovernance

Workers Suppliers The extensive form is common knowledge CG is designed ex ante Financier Firm to maximise surplus CG reﬂects contractual Management Customers gaps and information problems

Information; Control Institutions aect CG

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 2/7 Entrepreneur

Direct funding; Market Indirect Systems control; Multiple signals.

Atraditionalviewofcorporategovernance

Workers Suppliers The extensive form is common knowledge CG is designed ex ante Financier Firm to maximise surplus CG reﬂects contractual Management Customers gaps and information problems

Information; Control Institutions aect CG

Indirect funding; Bank Direct Systems control; Delegated monitoring.

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 2/7 Entrepreneur

Atraditionalviewofcorporategovernance

Workers Suppliers The extensive form is common knowledge CG is designed ex ante Financier Firm to maximise surplus CG reﬂects contractual Management Customers gaps and information problems

Information; Control Institutions aect CG

Indirect Direct funding; funding; Bank Direct Market Indirect Systems control; Systems control; Delegated Multiple monitoring. signals.

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 2/7 INSIDER/OUTSIDER POWER STRUGGLE Institutions ﬂuid, endogenous, historical But they matter Job Dispersion = lobbying ability protection ∆

Customers Workers Management

Rules of engagement in- Steers ﬁrm and manages complete, contested, largely Firm power relations historically determined Actively works for control Politicians Financiers Selects and manages Banks insider coalitions Shell for Markets Incumbency power; expedient permanence activity Corporate politics understood in terms The ultimate of existing stake- outsiders holder voting blocks Cross-selling; collateral

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 3/7 INSIDER/OUTSIDER POWER STRUGGLE Institutions ﬂuid, endogenous, historical But they matter Job Dispersion = lobbying ability protection ∆

Management

Rules of engagement in- Steers ﬁrm and manages complete, contested, largely power relations historically determined Actively works for control Selects and manages insider coalitions

Shell for Incumbency power; expedient permanence activity Corporate politics understood in terms The ultimate of existing stake- outsiders holder voting blocks Cross-selling; collateral

Customers Workers

Firm

Politicians Financiers Banks Markets

Management

Steers ﬁrm and manages power relations Actively works for control Selects and manages insider coalitions

Shell for Incumbency power; expedient permanence activity Corporate politics understood in terms The ultimate of existing stake- outsiders holder voting blocks Cross-selling; collateral

Customers Workers

Rules of engagement in- complete, contested, largely Firm historically determined

Politicians Financiers Banks Markets

Shell for expedient activity Corporate politics understood in terms The ultimate of existing stake- outsiders holder voting blocks Cross-selling; collateral

Customers Workers Management

Corporate politics understood in terms The ultimate of existing stake- outsiders holder voting blocks

Job protection

Customers Workers Management

Cross-selling; collateral

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 3/7 Institutions ﬂuid, endogenous, historical But they matter Dispersion = lobbying ability ∆

Corporate politics understood in terms The ultimate of existing stake- outsiders holder voting blocks

INSIDER/OUTSIDER POWER STRUGGLE

Job protection

Customers Workers Management

Cross-selling; collateral

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 3/7 Institutions ﬂuid, endogenous, historical But they matter Dispersion = lobbying ability ∆

Corporate politics understood in terms of existing stake- holder voting blocks

INSIDER/OUTSIDER POWER STRUGGLE

Job protection

Customers Workers Management

The ultimate outsiders Cross-selling; collateral

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 3/7 Corporate politics understood in terms of existing stake- holder voting blocks

INSIDER/OUTSIDER POWER STRUGGLE Institutions ﬂuid, endogenous, historical But they matter Job Dispersion = lobbying ability protection ∆

Customers Workers Management

The ultimate outsiders Cross-selling; collateral

Customers Workers Management

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 3/7 Financing patterns

This story mitigates against share financing Alternative Pecking Order theory: use finance from insiders. Retained funds bank finance bond finance equity finance º º º In large economy returns to investment exceed needs. Finance is therefore about transferring resources from insiders with funds to insiders without them. This was simple when needs were correlated with cash generation; it is harder today. But one can think of firms as delegated investment managers

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 4/7 Politics. Status quo bias from political emphasis upon existing stakeholders. What is the eect? How should we think about it? Management. Not monolithic; internal battle for control is a partial counterbalance to ineciency eects Managerial finance. Models of managerial finance that allow for multiple managers Culture. When the world is too complex and messy to comprehend, cultural devices are ways to frame problems and to understand social situations. Those devices often outlive the problems that generated them. Can we understand some of the governance mechanisms identified in this work in cultural terms? Decay. What happens when outsiders provide finance? Do they attempt to re-set some of the devices designed to disenfranchise them? If so, entrepreneurial finance should look more like the earlier “traditional” view of CG. Can we understand the ways that path dependency sets in, and the ways that managers subvert the original intent of the contract?

Objects of study

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 5/7 Management. Not monolithic; internal battle for control is a partial counterbalance to ineciency eects Managerial finance. Models of managerial finance that allow for multiple managers Culture. When the world is too complex and messy to comprehend, cultural devices are ways to frame problems and to understand social situations. Those devices often outlive the problems that generated them. Can we understand some of the governance mechanisms identified in this work in cultural terms? Decay. What happens when outsiders provide finance? Do they attempt to re-set some of the devices designed to disenfranchise them? If so, entrepreneurial finance should look more like the earlier “traditional” view of CG. Can we understand the ways that path dependency sets in, and the ways that managers subvert the original intent of the contract?

Objects of study

Politics. Status quo bias from political emphasis upon existing stakeholders. What is the eect? How should we think about it?

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 5/7 Managerial finance. Models of managerial finance that allow for multiple managers Culture. When the world is too complex and messy to comprehend, cultural devices are ways to frame problems and to understand social situations. Those devices often outlive the problems that generated them. Can we understand some of the governance mechanisms identified in this work in cultural terms? Decay. What happens when outsiders provide finance? Do they attempt to re-set some of the devices designed to disenfranchise them? If so, entrepreneurial finance should look more like the earlier “traditional” view of CG. Can we understand the ways that path dependency sets in, and the ways that managers subvert the original intent of the contract?

Objects of study

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 5/7 Culture. When the world is too complex and messy to comprehend, cultural devices are ways to frame problems and to understand social situations. Those devices often outlive the problems that generated them. Can we understand some of the governance mechanisms identified in this work in cultural terms? Decay. What happens when outsiders provide finance? Do they attempt to re-set some of the devices designed to disenfranchise them? If so, entrepreneurial finance should look more like the earlier “traditional” view of CG. Can we understand the ways that path dependency sets in, and the ways that managers subvert the original intent of the contract?

Objects of study

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 5/7 Decay. What happens when outsiders provide ﬁnance? Do they attempt to re-set some of the devices designed to disenfranchise them? If so, entrepreneurial ﬁnance should look more like the earlier “traditional” view of CG. Can we understand the ways that path dependency sets in, and the ways that managers subvert the original intent of the contract?

Objects of study

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 5/7 Objects of study

Politics. Status quo bias from political emphasis upon existing stakeholders. What is the eect? How should we think about it? Management. Not monolithic; internal battle for control is a partial counterbalance to ineciency eects Managerial finance. Models of managerial finance that allow for multiple managers Culture. When the world is too complex and messy to comprehend, cultural devices are ways to frame problems and to understand social situations. Those devices often outlive the problems that generated them. Can we understand some of the governance mechanisms identified in this work in cultural terms? Decay. What happens when outsiders provide finance? Do they attempt to re-set some of the devices designed to disenfranchise them? If so, entrepreneurial finance should look more like the earlier “traditional” view of CG. Can we understand the ways that path dependency sets in, and the ways that managers subvert the original intent of the contract?

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 5/7 When does a system whose power relations are path dependent experience strain? What are the eects of technological change that allow us to write better contracts? For example, can we argue that that type of change strengthens outsiders? Does this explain a recent move towards activism? How do political incentives change and, hence, how to institutions change? What is the eect of cross-border expansion upon governance systems that grew up in dierent institutional environments? What are the trade-os between bankers as insiders and outsiders?

Creative destruction

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 6/7 What are the eects of technological change that allow us to write better contracts? For example, can we argue that that type of change strengthens outsiders? Does this explain a recent move towards activism? How do political incentives change and, hence, how to institutions change? What is the eect of cross-border expansion upon governance systems that grew up in dierent institutional environments? What are the trade-os between bankers as insiders and outsiders?

Creative destruction

When does a system whose power relations are path dependent experience strain?

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 6/7 What is the eect of cross-border expansion upon governance systems that grew up in dierent institutional environments? What are the trade-os between bankers as insiders and outsiders?

Creative destruction

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 6/7 What are the trade-os between bankers as insiders and outsiders?

Creative destruction

When does a system whose power relations are path dependent experience strain? What are the eects of technological change that allow us to write better contracts? For example, can we argue that that type of change strengthens outsiders? Does this explain a recent move towards activism? How do political incentives change and, hence, how to institutions change? What is the eect of cross-border expansion upon governance systems that grew up in dierent institutional environments?

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 6/7 Creative destruction

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 6/7 Conclusion

Lucid, thought-provoking and entirely credible papers New avenues of inquiry into institution formation and the political economy of corporate governance The eect of signiﬁcant technological and legal change upon governance a particularly interesting topic

GCGC, 10 June 2016 Martin Hellwig: Contracts vs. Institutions Discussion: Alan D. Morrison 7/7