NBER WORKING PAPER SERIES CORPORATE GOVERNANCE AND CONTROL Marco Becht Patrick Bolton Alisa Röell Working Paper 9371 http://www.nber.org/papers/w9371 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2002 Literature survey prepared for the Handbook of the Economics of Finance, edited by George Constantinides, Milton Harris and René Stulz, North-Holland (2002). We are grateful to Bernardo Bortolotti, Mathias Dewatripont, Richard Frederick, Stu Gillan, Peter Gourevitch, Milton Harris, Gerard Hertig, Takeo Hoshi, Steve Kaplan, Roberta Romano, Christian Rydqvist and Scott Verges for helpful input and comments.The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. © 2002 by Marco Becht, Patrick Bolton, and Alisa Röell. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Corporate Governance and Control Marco Becht, Patrick Bolton, and Alisa Röell NBER Working Paper No. 9371 December 2002 JEL No. G32, G34 ABSTRACT Corporate governance is concerned with the resolution of collective action problems among dispersed investors and the reconciliation of conflicts of interest between various corporate claimholders. In this survey we review the theoretical and empirical research on the main mechanisms of corporate control, discuss the main legal and regulatory institutions in different countries, and examine the comparative corporate governance literature. A fundamental dilemma of corporate governance emerges from this overview: regulation of large shareholder intervention may provide better protection to small shareholders; but such regulations may increase managerial discretion and scope for abuse. Marco Becht Patrick Bolton ECARES, Université Libre de Bruxelles Department of Economics CP 114 001 Fisher Hall Avenue F. D. Roosevelt 50 Princeton University 1050 Brussels Princeton, NJ 08544-1021 Belgium and NBER [email protected] [email protected] Alisa Röell Bendheim Center for Finance Princeton University 26 Prospect Avenue Princeton, NJ 08540-5296 [email protected] TABLE OF CONTENTS 1 INTRODUCTION...................................................................................................................... 5 2 HISTORICAL ORIGINS: A BRIEF SKETCH ......................................................................... 6 2.1 HOW REPRESENTATIVE IS CORPORATE GOVERNMENT?......................................................................7 2.2 WHOM SHOULD CORPORATE GOVERNMENT REPRESENT?..................................................................9 3 WHY CORPORATE GOVERNANCE IS SO PROMINENT TODAY .................................10 3.1 THE WORLD-WIDE PRIVATISATION WAVE ..........................................................................................10 3.2 PENSION FUNDS AND ACTIVE INVESTORS ..........................................................................................11 3.3 MERGERS AND TAKEOVERS...................................................................................................................12 3.4 DEREGULATION AND CAPITAL MARKET INTEGRATION...................................................................13 3.5 THE 1998 RUSSIA/EAST ASIA/BRAZIL CRISIS .....................................................................................13 3.6 SCANDALS AND FAILURES AT MAJOR U.S. CORPORATIONS..............................................................14 4 CONCEPTUAL FRAMEWORK...............................................................................................14 4.1 AGENCY AND CONTRACTING................................................................................................................14 4.2 EX-ANTE AND EX-POST EFFICIENCY ..................................................................................................15 4.3 SHAREHOLDER VALUE............................................................................................................................16 4.4 INCOMPLETE CONTRACTS AND MULTIPLE CONSTITUENCIES..........................................................16 4.5 WHY DO WE NEED REGULATION?......................................................................................................19 4.6 DISPERSED OWNERSHIP .........................................................................................................................20 4.7 SUMMARY AND CONCLUSION ................................................................................................................21 5 MODELS ....................................................................................................................................24 5.1 TAKEOVER MODELS ................................................................................................................................24 5.2 BLOCKHOLDER MODELS.........................................................................................................................31 5.3 DELEGATED MONITORING AND LARGE CREDITORS........................................................................38 5.4 BOARD MODELS .......................................................................................................................................41 5.5 EXECUTIVE COMPENSATION MODELS ..................................................................................................45 5.6 MULTI-CONSTITUENCY MODELS ...........................................................................................................48 6 COMPARATIVE PERSPECTIVES AND DEBATES.............................................................57 6.1 COMPARATIVE SYSTEMS .........................................................................................................................59 6.2 VIEWS EXPRESSED IN CORPORATE GOVERNANCE PRINCIPLES AND CODES ................................65 6.3 OTHER VIEWS ..........................................................................................................................................67 7 EMPIRICAL EVIDENCE AND PRACTICE..........................................................................68 7.1 TAKEOVERS ..............................................................................................................................................69 7.1.1 Incidence of Hostile Takeovers..............................................................................................................70 7.1.2 Correction of inefficiencies .....................................................................................................................72 7.1.3 Redistribution......................................................................................................................................73 7.1.4 Takeover defences.................................................................................................................................73 7.1.5 One-share-one-vote...............................................................................................................................76 7.1.6 Hostile Stakes and Block Sales............................................................................................................77 7.1.7 Conclusion and unresolved issues ..........................................................................................................77 7.2 LARGE INVESTORS...................................................................................................................................78 7.2.1 Ownership Dispersion and Voting Control...........................................................................................80 7.2.2 Ownership, Voting Control and Corporate Performance........................................................................83 7.2.3 Share blocks and stock market liquidity...............................................................................................86 7.2.4 Banks.................................................................................................................................................87 7.3 MINORITY SHAREHOLDER ACTION ......................................................................................................89 7.3.1 Proxy Fights .......................................................................................................................................89 7.3.2 Shareholder Activism...........................................................................................................................90 7.3.3 Shareholder Suits.................................................................................................................................92 7.4 BOARDS .....................................................................................................................................................94 7.4.1 Institutional Differences .......................................................................................................................94 7.4.2 Board Independence..............................................................................................................................95 7.4.3 Board Composition..............................................................................................................................96 7.4.4 Working of Boards..............................................................................................................................96