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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.

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: large shareholder intervention needs to be regulated to guarantee better small investor protection; but this may increase managerial discretion and scope for abuse. Alternative methods of limiting abuse have yet to be proven effective.

Corporate governance, ownership, takeovers, block holders, boards

Abstract:
This article reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme, on engagements with management in companies targeted by its U.K. Focus Fund (HUKFF). In contrast with most previous studies of activism, we report that the fund executes shareholder activism predominantly through private interventions that would be unobservable in studies purely relying on public information. The fund substantially outperforms benchmarks and we estimate that abnormal returns are largely associated with engagements rather than stock picking. We categorize the engagements and measure their impact on the returns of target companies and the fund. We find that Hermes frequently seeks and achieves significant changes in the company's strategy including refocusing on the core business and returning cash to shareholders, and changes in the executive management including the replacement of the CEO or chairman.

Shareholder activism, institutional investors, real authority

Abstract:
Over the last few years, a series of rulings by the European Court of Justice (ECJ) has opened up the European Union to cross-border mobility in incorporation. In this paper we explore how deregulation and the costs of regulation have affected the location decisions of firms. Using a newly constructed dataset of companies from around the world incorporating in the U.K. between 1997 and 2005 we find a large increase in new incorporations of limited liability firms from E.U. Member States following the ECJ rulings. We find that incorporation costs, in particular minimum capital requirements, and delays in incorporation are significant influences on firms' location decisions. Our results confirm the relevance of price to firms' choice of legal systems. We also report that cross-border incorporation has prompted regulatory competition between E.U. Member States to provide low-cost corporate law to limited liability companies.

Incorporation, entrepreneurship, financial regulation, regulatory competition

Abstract:
We study how deregulation of corporate law affects the decision of entrepreneurs of where to incorporate. Recent rulings by the European Court of Justice (ECJ) have enabled entrepreneurs to select their country of incorporation independently of their real seat. We analyze foreign incorporations in the U.K., where incorporations of limited liability companies can be arranged at low cost. Using data for over 2 million companies from around the world incorporating in the U.K., we find a large increase in cross-country incorporations from E.U. Member States following the ECJ rulings. In line with regulatory cost theories, incorporations are primarily driven by minimum capital requirements and setup costs in home countries. We record widespread use of special incorporation agents to facilitate legal mobility across countries.

Incorporation, costs of regulation, regulatory competition

Abstract:
The European Commission has proposed a Takeover Directive that aims to make the control of European corporations more contestable. The European Parliament and Germany will not adopt the Directive unless it provides for reciprocity in takeovers, limiting access to the articles of contestability to bidders that have adopted contestability themselves. Reciprocity in takeovers is not desirable. It unduly restricts the pool of bidders and reduces the potential benefits of contestable control. Contestable control itself has benefits, but the theoretical and empirical support for neutralising the power of incumbent blockholders and boards is too weak to justify large-scale regulatory intervention. The most powerful instruments for making corporate control contestable are not available in all Member States. The Takeover Directive could put these tools on the menu throughout the European Union, allowing companies that want them to embrace them - and giving institutional investors a chance to push for the hug. The current proposals will not change much, one-way or the other. If anything, they will add another level of complexity and confusion to the prevailing systems of corporate control in Europe.

European takeover directive, break-through rule, reciprocity in takeovers, ownership structure, takeover defenses, voting rights, contestability of corporate control

Abstract:
We first analyze legal provisions relating to corporate transparency in Germany. We show that despite the new securities trading law (WpHG) of 1995, the practical efficacy of disclosure regulation is very low. On the one hand, the formation of business groups involving less regulated legal forms as intermediate layers can substantially reduce transparency. On the other hand, the implementation of the law is not practical and not very effective. We illustrate these arguments using several examples of WpHG filings.

To illustrate the importance of transparency, we show next that German capital markets are dominated by few large firms accounting for most of the market's capitalization and trading volume. Moreover, the concentration of control is very high. First, 85% of all officially listed AGs have a dominant shareholder (controlling more than 25% of the voting rights). Second, few large blockholders control several deciding voting blocks in listed corporations, while the majority controls only one block.

Abstract:
Globalisation and privatisation have created a demand for liquid stock markets in continental Europe. As a result, European companies, blockholders and governments are faced with a corporate governance dilemma. Liquidity requires dispersed share ownership. When control is relinquished in order to obtain more liquidity, a lack of shareholder oversight results. When liquidity is sacrificed in favour of control, stock markets cannot flourish. When liquidity is combined with control, by detaching voting rights from cash-flow rights, monitoring incentives are distorted. When voting power is capped, minorities and insiders are protected. This paper shows how European companies trade off liquidity against control. When liquidity is needed explicitly, for example for stock price index inclusion, a variety of legal devices is used to keep voting power concentrated. From a European perspective it appears vital to add the quest for liquidity, and the possibility of obtaining it while holding 100% of the voting rights, to the corporate governance debate.

Abstract:
Ownership dispersion is a pre-requisite for liquid stock markets, but it entails a collective action problem: individual investors have no incentives to engage in direct monitoring. Legal devices can provide solutions along three dimensions. One, they can concentrate or dilute voting power. Two, they can affect liquidity. Three, they can give the right or wrong monitoring incentives. This paper shows how these devices are used and how they can depress liquidity. Legal constraints aimed at strengthening minority protection can reduce the scope for monitoring, destroy liquidity and even create incentives for minority abuse: for example one-share-one-vote restrictions can encourage the formation of pyramidal holding companies. The search for solutions that concentrate voting power, provide liquidity and protect minorities continues.

Abstract:
The European Association of Securities Dealers (EASD) is an international not-for-profit association of securities-related professionals (bankers, brokers, lawyers, accountants, PR and IR consultants, etc.) intent on creating favourable conditions for an efficient and competitive pan-European equity market, in the first place for growth companies.

One of EASD's specialised committees is the Corporate Governance Committee. In May 2000, it issued its pan-European Corporate Governance Principles and Recommendations as part of a drive to confront the legal, social and cultural differences which confuse investors in Europe's fragmented marketplace and deter investment in companies lacking transparency in this area. EASD's corporate governance guidelines intend to provide a benchmark. They are founded on a comparative study of national and international best practice.

Ten core principles are identified which can be found at the base of any successful corporate system. They address six main issues: the protection of rights and the fair treatment of shareholders; the designation and working of responsible and accountable boards; the duties and prerogatives of management; the provision of adequate and verified information; the appropriate handling of conflicts of interest; the existence of a proper market for corporate control.

The recommendations that follow from the principles are more generally applicable than current national codes essentially geared to their home environment. They can normally be applied anywhere in Europe, while fully respecting national regulatory and social standards. The recommendations are also more specific and market-oriented that other international guidelines. They have a distinctly practical bent designed to facilitate understanding, application and assessment.

Corporate governance, Europe, principles and recommendations

Abstract:
This paper analyses the control of Belgian listed companies. The analysis reveals that control of listed companies in Belgium is highly concentrated. Business groups, holding companies, and voting pacts, play an important role in bringing about this concentration. The main characteristics of the Belgian corporate ownership and equity market can be summarised as follows: (i) few - merely 140 - Belgian companies are listed on the Brussels stock exchange, (ii) there is a high degree of ownership concentration with an average largest direct shareholding of 45%, (iii) holding companies and families, and to a lesser extent industrial companies, are the main investor categories whose share stakes are concentrated into powerful control blocks through business group structures and voting pacts, (iv) control is levered by pyramidal and complex ownership structures and (v) there is a market for share stakes.

corporate ownership; corporate control; corporate governance

Abstract:
Following the Centros, Überseering and Inspire Art decisions of the European Court of Justice (ECJ), a thriving market for incorporations has developed in the European Union. Round-trip incorporation is competing with domestic incorporation. Entrepreneurs can set up a shell company in any EU jurisdiction and branch back to their home country to operate a business. The UK Limited Company (UK Limited) is a popular choice in many countries because it is rapidly and cheaply available online with minimum formalities. We have developed a taxonomy for measuring the cost of Limited round-trip incorporation. The cost of setting up a UK Limited is directly observable in the market while the cost of branching is not. We have run field experiments to measure the cost of branching. Our analysis reveals that despite the ECJ rulings, branching remains costly or impractical in many cases. Incorporation agents play an essential role in overcoming the limitations to branching.

incorporation, costs of regulation, regulatory competition

Abstract:
Corporate governance is one of the most topical and controversial areas of business and finance. This article provides an overview of the questions that it raises and proposed policy responses. It points to the diversity in systems of corporate governance around the world, the apparently paradoxical performance of different systems and an association with different forms of corporate-governance failures. The article discusses a range of proposed remedies including the restructuring of boards, regulation of markets in corporate control and limitations on executive remuneration. It also considers whether the need for harmonized corporate-governance rules can be diminished by freedom of mobility of corporations and competition between legal systems.

Abstract:
This paper uses long-run real price and dividends series to investigate for the German stock market the questions asked of the U.S. market by Shiller (1989). It tries to determine in what periods and to what degree theGerman stock market has also possessed "excess volatility" in the past century. It finds no evidence of excess volatility in the pre-World War I German stock market. By contrast, there is some evidence of excess volatility in the post-World War II German stock market. The role played by the German Grosbanken in the pre-World War I stock market might be the cause of low comparative volatility of German stock indices before 1914.

Abstract:
This article reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme, on engagements with management in companies targeted by its UK Focus Fund. In contrast with most previous studies of activism, we report that the fund executes shareholder activism predominantly through private interventions that would be unobservable in studies purely relying on public information. The fund substantially outperforms benchmarks and we estimate that abnormal returns are largely associated with engagements rather than stock picking.

G32

Abstract:
Finance scholars have produced little evidence of the effectiveness of direct attempts by institutional shareholders to improve corporate performance. What studies we have - focused mainly on the activities of U.S. pension funds - show no clear effect on shareholder returns. But a new study of shareholder activism in the U.K. looks promising.

The subject of the study is a Focus Fund, launched in 1998 by the U.K. investment firm Hermes, whose aim is to identify underperforming companies, propose changes to their managements and boards, and—in contrast to the practices of the best-known U.S. shareholder activists—work mainly behind the scenes with the companies to bring about those changes. In keeping with the more private nature of U.K. activism, which reflects in part the fewer restrictions on communication between companies and their investors than in the U S., the study's method of investigation is also notably different from the methods used in studies of U.S. investors. Four academics were allowed to examine Hermes' records of its engagements with companies, including letters, recordings and transcripts of telephone conversations, and the staff's personal notes and recollections.

Abstract:
This paper summarises the main results of a research project, "Who Controls Corporate Europe?", undertaken by teams of researchers from the various countries investigated, and coordinated by the European Corporate Governance Network in 1996-98. The project relied on a common shareholder voting power disclosure standard adopted by the European Union (comparable to Section 13D-3 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934 in the United States).

The research found a very high degree of concentration of shareholder voting power in Continental Europe relative to the U.K., and even concentration in the U.K. is still considerably higher than in the United States. The size of voting blocks in listed companies reflects particular features of company law, securities regulation and the need for stock market liquidity in the different European Union Member States. Under current European disclosure legislation, the cash-flow stakes associated with a given degree of voting power do not need to be disclosed. The conclusions stress the need for better European disclosure and the need to study the relationship between large controlling shareholders and weak minority shareholders, as well as the relationship between management and dispersed shareholders.

Abstract:
This paper summarises the main results of a research project, "Who Controls Corporate Europe?", undertaken by teams of researchers from the various countries investigated, and coordinated by the European Corporate Governance Network in 1996-98. The project relied on a common shareholder voting power disclosure standard adopted by the European Union (comparable to Section 13D-3 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934 in the United States).

The research found a very high degree of concentration of shareholder voting power in Continental Europe relative to the U.K., and even concentration in the U.K. is still considerably higher than in the United States. The size of voting blocks in listed companies reflects particular features of company law, securities regulation and the need for stock market liquidity in the different European Union Member States. Under current European disclosure legislation, the cash-flow stakes associated with a given degree of voting power do not need to be disclosed. The conclusions stress the need for better European disclosure and the need to study the relationship between large controlling shareholders and weak minority shareholders, as well as the relationship between management and dispersed shareholders.