Governance as a Source of Managerial Discipline

National Bank of Belgium Working Paper No. 31

34 Pages Posted: 15 Oct 2010  

Julian R. Franks

London Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Colin Mayer

University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); University of Oxford - Said Business School

Date Written: May 1, 2002

Abstract

Anglo-American stock markets are much larger than their continental counterparts. Does investor protection and governance explain these differences? Using UK data, we examine four different forms of intervention which are suppose to promote good governance: takeovers, independent directors, outside shareholders, and providers of new finance. Which of these "four horses will win the race?". Institutional shareholders remain passive in the face of poor performance. Takeovers are effective in replacing management but are not focussed on poorly performing companies. Independent directors entrench poor performers and do not discipline management; they are advisors not monitors. The only effective mechanism for replacing management of poor performers and the providers of outside finance. When a poor performer needs outside finance, only then are outside shareholders willing to impose management changes. Is governance in Continental Europe more effective? The answer is not obviously so. Indeed in one important respect Germany looks worse. When there are major changes of ownership, the gains accruing to shareholders are much lower than in the UK or US. Moreover, those gains accrue to large German shareholders. Smaller shareholders hardly gain at all. One explanation is that restructuring German companies is more difficult and more costly than in the US or UK.

Suggested Citation

Franks, Julian R. and Mayer, Colin, Governance as a Source of Managerial Discipline (May 1, 2002). National Bank of Belgium Working Paper No. 31. Available at SSRN: https://ssrn.com/abstract=1691990 or http://dx.doi.org/10.2139/ssrn.1691990

Julian R. Franks (Contact Author)

London Business School ( email )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 x3449 (Phone)
+44 20 7724 3317 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Colin Mayer

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288112 (Phone)
+44 1865 288805 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288112 (Phone)
+44 1865 288805 (Fax)

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