Corporate Governance cas

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Different names: shareholders, partners, coop member, member of a mutual organization (bank…)

- The recognition of their sovereignty is recent

- 5 types of shareholders:

- Families (not stable: divorce,…)

- The general public

- Employees

- Institutional investors

- The state (in many OECD countries the state remains an important owner of large firms operating in key sections, including energy, utilities and infrastructure)

- How to intervene? Act, sleep, .. or speculate.

The real modern issue: the battle between two types of capitalist owners

- The shareholders: own the K for a long time. They have a strategy of increasing their assets (economic logic)

- The investors: own the capital for an uncertain time. They have a portfolio strategy (financial logic)

- The top managers- the executive power

- They define strategies and implement operational decisions to direct the company within the framework of the powers granted by the sovereign power.

- They ensure that executive power is exercised in compliance with the general interest of the company, its soundness and sustainable performance

- Different names/ corporate officers, members of the board of directors, members of the supervisory board, consultants,…

- The directors _ the supervisory power

- The board of directors or the supervisory board and the (facultative) committees : audit, remuneration, nomination… Or the “strategic” committee in smaller non quoted companies

- The auditors

- The works council, the unions

- + Eventually, other regulators

[pic 3]

Proposals for “reasonable” corporate governance

- Why “reasonable”?

- Intelligent

- Efficient

- Sustainable

Spirit must prevail over the letter

Reason must prevail over procedure

- Clarification of powers : who is responsible for what? => Avoid overlaps

- Vigilance to anticipate any failure of governance: can they be foreseen? => Safeguard mechanisms

- Efficiency to enable genuine responsibility => (small) number of procedures

Example: 5 points to watch for the executive power

- Does the “top manager” have the right skills?

- Is the “top manager” isolated?

- Is there somebody to say “no” to the “top manager”?

- Can the top managers compensation seriously influence their decisions?

- Are there arrangements for the succession of the top management?

Example: 5 points to watch for the supervisory power

- Does supervisory power overlap with executive power?

- Are “directors” carrying out their supervisory duties effectively?

- Do the “directors” have the materiel means to fulfil their mission?

- Do the “directors” have the right skills?

- Can the work conditions of the “directors” create bias and affect their independence of judgement?

Average composition of a board :

2000 m 6 CEO + CFO + 1 and 2 shareholders family + 2 inde

3000 m 8

14

Example: 5 points to watch for the sovereign power

- Are the shareholders informed or the foreseeable risks that might threaten the sustainability of the company?

- Do the shareholders really choose the directors?

- Do the shareholders take part in vote? (intelligible?)

- Is there the risk of depriving minority shareholders of their rights?

- Is the development of share ownership properly managed ? (rival factions, size, number of “shareholders”)

5 systems of governance

1. Closed Entrepreneurial Autocracy

- Characteristics: The executive controls 100% OF K

- Type: Companies run by an entrepreneur

- Risks: Absence of supervision, notably in regard to the way the manager’s powers evolve, his isolation and succession - Break in cohesion in the event of opening up the capital

- Recommendations: - Minimize the formal obligations of governance – Encourage flexible structures allowing supervisory power to be increased especially at 3 key periods: creation, 10y of existence, transmission – Anticipate the fragmentation of share ownership and the appearance of minority shareholders – even if they are family

2. Disclosed entrepreneurial autocracy

- Characteristics : The executive controls the majority of the capital but there are minority shareholders

- Type: Unlisted privately or family owned companies with fragmented family branches (in agreement or disagreement) – Companies with minority external capital investors - Listed privately- or family- owned companies with a small float

- Risk: Lack of supervision: competence isolation succession as in 1st system – Depriving minority shareholders of their rights because they have no means to supervise – Unstable governance dur