Robert Uberman, Multinational Corporations (MNCs) 3.

Robert Uberman, Multinational Corporations (MNCs)

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Owners vs managers - „agency problem”Owners vs managers - „agency problem”

• Separation of owners and managers• Hired managers to be less effective

in management than owners• Research made in the US considering 1307

companies covering period 1992-1997 showed that the ones managed by hired professionals could increase their equity by 1871 bln. USD if managed directly by owners

(M. Habib, A. Ljungvist,”Firm Value and (..)”, JofB, Nov., 2005, str. 2054)


„„Agency problem”Agency problem”

• „Agency problem” – conflict of interests between MNCs’ owners (shareholders) and managers

Robert Uberman, Korporacje międzynarodowe

„„Agency problem” – Agency problem” – asymmetric access to asymmetric access to informationinformation

• Growing complexity of MNCs operations and fractioning of shareholdings gives management boards an overwhelming advantage as regarding access to information as well as an ability to interpret them. (Koźmiński, str. 187-204)

– Role of Supervisory Boards (non-executive directors)

– Regulatory role of financial markets– Role of the Law

„„Agency problem” - historyAgency problem” - history

• Adam Smith w „The wealth of nations” stated that: „To buy in one market, in order to sell, with profit (…), to watch over (…) greater and more frequent variation in competition (…) cannot long be expected from the directors of a joint stock company”

• and „It is merely to enable the company to support negligence, profusion and malversation of their own servants”


Source: Adam Smith: „Inquiry into the Cause and Nature of the Wealth of Nations”, Part 10 Harvard Classics, Harvard, 1909, Book V, Part. III, p. 472

„„Agency problem” – presentAgency problem” – present

• Warren Buffet, President and a controlling shareholder of the Berkshire Hathaway stated:„I am a better businessman because I am an investor and a better investor because I am a businessman. If you have a mentality of both, it aids in each field.”

Source: Harvard Business Review, Sept. ‘06, p. 70


Corporate bodies (Shareholders Meetings, Corporate bodies (Shareholders Meetings, Supervisory Boards, Executive Boards) in Supervisory Boards, Executive Boards) in Continental Europe and the USContinental Europe and the US

• Supervisory Board and Executive Board vs Board of Directors

• „Prezes Zarządu” vs CEO i President (Chairman of the Board)

• Institutional environment


Governance structure USA vs continental Governance structure USA vs continental Europe – „Prezes Zarządu” vs CEO and Europe – „Prezes Zarządu” vs CEO and PresidentPresident

• Advantages of merging CEO with Chairman of the Board:– clear responsibility– lean decision making process

• Advantages of merging CEO with Chairman of the Board:– obstacles to controlling functions– overloading with duties

• According to a Spencer Stuart’s report in 61% US MNCs positions of Chairman and CEO were occupied by the same person (2008). Source: FT, 14th Nov. ‘08, p. 16


Separating Chairman and CEO functions in Separating Chairman and CEO functions in USAUSA – – a hardly visible trend a hardly visible trend

• Reaction to 2002 and 2008 financial scandals

• European influence• Usefulness of the separation – UK

experience shows that benefits of such split-up are questionable

Robert F. Felton and Simon C. Y. Wong. „How to separate the roles of chairman and CEO?”, McKinsey Quarterly, 2004, no 4.


Agency problem Agency problem andand corporate governance corporate governance

• Separation of ownership and managerial functions required regulations of their reciprocal relations.

• From the legal and real point of view a relation between managers and a MNC is set by an employment or civil contract

• There is no natural incentive for managers to pursue the best interests of their MNCs as in case of owners


2002 and 2008 greatest scandals2002 and 2008 greatest scandals (1) (1)

• World Com:– reporting false revenues of 11 billions USD, SEC

investigation, – Chapter 11 (near bankruptcy procedure applied),– Renaming to MCI

• Enron:– hiding real indebtness level („parking off shore”

transactions valued at 8,5 billions USD with related parties)– bankruptcy– „destroying” Arthur Andersen LLP – the biggest audit

company of the world– However: „[Enron] was, for all its flaws, an important

trading academy for the industry”.(Izabella Kamińska. „Market for traders is

hottest one of all”, FT, June 1st, 2010)


2002 and 2008 greatest scandals2002 and 2008 greatest scandals (2) (2)

• Parmalat (2003)– Auditor – Deloitte concealed with prosecutors and

submitted to a hefty financial punishment– 4 investment banks: Citigroup, UBS, Deutche Bank

and Morgan Stanley were prosecuted for „stirring the market” (FT, June 14th, 2007)

• Vivendi– In January 2011 r. a Paris court sentenced Messier for 150

th. EUR fine i 3 years delayed prison for presenting false information to investors and financial fraud and his deputy - Bronfman – for 5 mln. EUR fine and 15 months delayed prison for „inside trading”. Colchester Max: Messier, Bronfman fund guilty in Vivendi trial. The Wall Street Journal Europe, 24 January 2011.


„„Corporate governance” reinventedCorporate governance” reinvented

• Independence and responsibility of supervisory boards (non-executive directors)

• Independence and responsibility of committees for nominations and remunerations

• Independence and responsibility of financial auditors

• Clarity, materiality, promptness i and creditworthiness of information provided(NYSE recommendations, August, 2002)


„„Corporate governance” – independence Corporate governance” – independence and responsibility of supervisory boards and responsibility of supervisory boards (non-executive directors)(non-executive directors)

• Independence: lack of financial revenue dependent on Management Board decision (direct or indirect eg. Shares or employment in companies rendering services to a MNC audited)

• Restriction as to number of seats in various boards (to prevent cases like the one of Hans Abs, one time a Deutsche Bank CEO, who held seats in ca. 250 supervisory boards)


„„Corporate governance” – chairs in Corporate governance” – chairs in Supervisory Boards: a (plum) job?Supervisory Boards: a (plum) job?

Lublin Joann S.: Are Executives Overboarded? The Wall Street Journal, March 7th, 2012, page 29


„„Corporate governance” – independence Corporate governance” – independence and responsibility of financial auditorsand responsibility of financial auditors

• An (financial) auditor evaluates financial statements in view of their compliance with a biding law and accounting standards – he/she does not evaluate the company’s overall performance

• An auditor can not simultaneously act on behalf of shareholders and management boards, even in different area (conflict of interests concept)

• For shareholders the auditors renown is key


The role of a reliable financial reportingThe role of a reliable financial reporting

• „The key test of accurate financial reporting is trust”

• „Our (US) markets must retain the integrity and efficiency that has contributed greatly to prosperity of America”

Henry Poulson, US Treasury secretary, FT, May 17, 2007, page 11


Clarity, materiality and up to date financial Clarity, materiality and up to date financial information – key for trust between information – key for trust between managers and shareholders managers and shareholders

• Spirit of Transparency• Culture of Accountability • People of Integrity


(See S. A. di Piazza, R. G. Eccles, Building Public Trust, John Wiley and Sons, New York, 2002), pp. 3-6

Differences in „Corporate Governance” Differences in „Corporate Governance” application between selected countriesapplication between selected countries

Country O-Factor (higher=worse)

Tax-equivalent (%)

Brazil 62 25Chile 36 5China 87 46Czech Republic 71 33Greece 57 22Hong Kong 45 12Hungary 50 17India 64 28Japan 60 25Lithuania 58 23Poland 64 28Russia 84 43Singapore 29 0*Taiwan 61 25Thailand 67 30

United Kingdom 38 7United States 36 5

Badania PriceWaterhauseCoopers cytowane za:Aswath Damodaran, "Information Transparency and Valuation: Can you value whatyou cannot see? " Stern School of Business, January 2002

Germany not included !!!


Robert Uberman, Korporacje międzynarodowe

Corporate Governance implementation in Corporate Governance implementation in the AngloSaxon countries and continental the AngloSaxon countries and continental EuropeEurope

• Differences regarding primary approach to the Enron case on one side and Parmalat/Vivendi cases on the other.

• Difference in applying International Accountig Standards:

– in UK IAS was seen as a product of natural evolution adjusting reporting to the needs of stakeholders;

– In France and Germany it brought a surprising discovery that not tax offices and state administration or banks but owners (shareholders) are ultimate clients of financial reporting.

Nicolas Veron, Breugel Institute, FT, Sept 10, 2007,

„„Corporate governance” – Corporate governance” – Continental Continental Europe vs USAEurope vs USA


Anglo-Saxon countries also struggle to Anglo-Saxon countries also struggle to implement corporate governance rulesimplement corporate governance rules

• In 2008 study made by the Grant Thornton only 125 out of 350 top UK companies claimed to implement governance rules in full. However only 11 of them had fulfilled disclosure requirements of the relevant code.

• On the other side 110 which did not claim compliance provide robust explanations.

• 4% neglected to respond.• Overall numbers were better than in 2006

„due to growing investor pressure and wider stakeholder interest”


(See Ruth Sullivan: „FTSE 350 „slow” on corporate governance”, FT, January the 21st, 2008.

Financial crises 2008 – Germany and Japan Financial crises 2008 – Germany and Japan

• „The collapse of HRE, [..] shows Rheineland finance developed excesses just like those of the Anglo-Saxon world.” James Wilson: Hypo reality, FT May 20, 2009

• The Fall of Hypo Real Estate Group with 393 bln EUR (equal to 14 % GDP of Germany while value of Lehman Brothers’ assets matched only 5 % US GDP) – James Wilson: Hypo reality, FT May 20, 2009

• On the other hand Germany is the only European major economy to avoid deindustrialisation


Financial crises 2008 – Germany banks are Financial crises 2008 – Germany banks are less strong than they seem to beless strong than they seem to be


(See James Wilson, Gerrit Wiesman: Visibility needed, FT, April the 6Th, 2011)

Financial crises 2008 – Sources of Financial crises 2008 – Sources of stabilisationstabilisation

• Peace between major powers – since the end of II WW for the first time in human history majors do have not entered into a direct military conflict one against another

• Battling inflation – since late 70s inflation ceased to be a mojor economic problem

• Globalisation – creating a wide and storng network of multilateral dependences and information channels which allow for a balanced reaction to any crises.

• Fareed Zakaria: The roots of stabiity, Newsweek, Special Edition – Issues 2010.


„„Corporate governance” – is it profitable to Corporate governance” – is it profitable to be implemented?be implemented?

• According to a certain HBR study MNCs subjecting themselves to „corporate governance” brought in the period of 1990-99: 23,3 % in return, while the ones following these rule in a relaxed way brought only 14% (The Exchange, NYSE, June 2003)

• Reasons:– Investros prefer to buy into companies

following „Corporate governance” rules– Such MNCs are simply better managed


Robert Uberman, Multinational Corporations (MNCs) 3.

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