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Corporate Governance
Accountability, Enterprise and
International Comparisons
Edited by
Kevin Keasey
Steve Thompson
and
Mike Wright

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Corporate Governance

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Corporate Governance
Accountability, Enterprise and
International Comparisons
Edited by
Kevin Keasey
Steve Thompson
and
Mike Wright

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Copyright


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John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester,
West Sussex PO19 8SQ, England
Telephone

(+44) 1243 779777

Except
Chapter 9: Governance and Strategic Leadership in Entrepreneurial Firms by C. Daily, P. McDougall, J. Covin and
D. Dalton from Journal of Management, Vol. 28, Issue 3, June, pp. 387–412, 2002, reprinted with permission from
Elsevier.
Chapter 11: Explaining Western Securities Markets by M. Roe from Corporate Governance and Firm Organization,
edited by A. Grandori (2004), reprinted by permission of Oxford University Press.
Chapter 12: International Corporate Governance by D.K. Denis and J.J. McConnell from Journal of Financial and
Quantitative Analysis, 38, 1, March 2003, reprinted with permission from JFQA.
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Library of Congress Cataloguing-in-Publication Data
Corporate governance : accountability, enterprise and international comparisons / [edited by] Kevin Keasey,
Steve Thompson, and Mike Wright.
p. cm.
Includes bibliographical references and index.
ISBN 0-470-87030-3 (Cloth : alk. paper)
1. Corporate governance—Cross-cultural studies. 2. Corporations—Finance—Cross-cultural studies.
I. Keasey, Kevin. II. Thompson, Steve (R. S.) III. Wright, Mike, 1952–
HD2741.C775
338.6—dc22


2005
2004023807

British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN 0-470-87030-3
Typeset in 10/12pt Times and Helvetica by TechBooks, New Delhi, India
Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire
This book is printed on acid-free paper responsibly manufactured from sustainable forestry in which at least two trees
are planted for each one used for paper production.

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Contents
About the contributors

xi

1 Introduction

Kevin Keasey, Steve Thompson and Mike Wright

1

Introduction
Alternative perspectives on corporate governance
Background to corporate governance reform
Governance reforms: the early days
New perspectives from the 1990s
The volume’s contents
Notes
References
2 The Development of Corporate Governance Codes in the UK
Kevin Keasey, Helen Short and Mike Wright
Introduction
Corporate governance in the UK – definitions and framework
The evolution of policy recommendations – from Cadbury to Hampel
The evolution of governance policy – from Combined Code I to Combined Code II
Overview of policy evolution
Conclusion
Notes
References
3 Financial Structure and Corporate Governance
Robert Watson and Mahmoud Ezzamel
Introduction
Capital structure and financial risk
Does capital structure matter?
The agency costs of debt
Employees as residual claimants
Notes

References

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Contents
4 Institutional Shareholders and Corporate Governance in the UK
Helen Short and Kevin Keasey
Introduction
Institutional shareholdings in the UK
General overview of the objectives and incentives of institutions
The willingness and ability of institutions to intervene in the governance of
corporations
Methods of intervention
Governance by institutional shareholders: empirical evidence
Summary and conclusions
Notes
References
5 Boards of Directors and the Role of Non-executive Directors in the
Governance of Corporations
Mahmoud Ezzamel and Robert Watson
Introduction
The corporate form, governance and the board of directors
The UK’s governance by disclosure

Conclusions
Notes
References
6 Executive Pay and UK Corporate Governance
Alistair Bruce and Trevor Buck
Introduction
Executive pay and corporate governance in the UK: an overview
The empirical analysis of executive pay
Executive pay evolution in the UK
Performance indicator(s)
Further discretionary elements in LTIP design
Mix of remuneration components
Disclosure
Conclusions
References
7 Compensation Committees and Executive Compensation:
Evidence from Publicly Traded UK Firms
Rocio Bonet and Martin J. Conyon
Introduction
Compensation committees and executive pay
Prior literature
New data and results
Discussion and conclusion

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Contents
Notes
References
8 The Governance Role of Takeovers
Noel O’Sullivan and Pauline Wong
Introduction
Takeovers and company performance
The likelihood of takeover success
Post-acquisition performance
Management turnover subsequent to takeover
The consequences of takeover failure
Conclusions
References
9 Governance and Strategic Leadership in Entrepreneurial Firms
Catherine M. Dalton, Patricia P. McDougall, Jeffrey G. Covin and Dan R. Dalton
Introduction

Governance and strategic leadership do matter
CEOs/Founders
CEO duality
Top management teams
Boards of directors
Venture capitalists
Discussion: an opportunity lost
Conclusion
References
10 Corporate Governance: The Role of Venture Capitalists and Buy-outs
Mike Wright, Steve Thompson and Andrew Burrows
Introduction
Theoretical issues
Empirical evidence
Conclusions
Notes
References
11 Explaining Western Securities Markets
Mark J. Roe
Introduction
The argument: corporate law as propelling diffuse ownership
Corporate law’s limits
Data: political variables as the strongest predictor of ownership separation
Conclusion: politics and corporate law as explanations for securities markets
Notes
References

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Contents
12 International Corporate Governance
Diane K. Denis and John J. McConnell
Introduction
First generation international corporate governance research
Second generation international corporate governance research
Convergence in corporate governance systems
Conclusion and directions for future research
Notes
References
13 Corporate Governance in Germany
Marc Goergen, Miguel C. Manjon and Luc Renneboog
Introduction

Ownership and control
Internal corporate governance mechanisms
External corporate governance mechanisms
The recent evolution of corporate governance regulation and stock exchange
structures
Conclusion
Notes
References
14 Network Opportunities and Constraints in Japan’s Banking Industry:
A Social Exchange Perspective on Governance
William P. Wan, Robert E. Hoskisson, Hicheon Kim and Daphne Yiu
Introduction
Japan’s main bank system
A social exchange approach to Japan’s banking networks
Opportunities and constraints in Japan’s banking networks
Implications and conclusion
Notes
References
15 Analysing Change in Corporate Governance: The Example of France
Mary O’Sullivan
Introduction
Understanding systems of corporate governance
The ownership and financing of French corporations
Implications for French corporate governance
The role of structure in corporate governance
Conclusion
Notes
References

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16 Ownership and Control of Chinese Public Corporations: A State-dominated
Corporate Governance System
Guy S. Liu and Pei Sun
Introduction
Overview of the Chinese corporate governance system
Ultimate ownership, intermediate shareholding classes, and their relation
to corporate performance
The evolution of ownership and control and its determinants
Concluding remarks
Notes
References

17 Corporate Governance in Transition Economies
Mike Wright, Trevor Buck and Igor Filatotchev
Introduction
Corporate governance and differing privatisation approaches
in transition economies
Corporate governance in transition economies
Post-privatisation governance
Studies of the effects of different ownership and governance forms
Conclusions
Notes
References
Index

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About the contributors
Rocio Bonet

The Wharton School, University of Pennsylvania, 2000 Steinberg Hall Dietrich Hall,
Philadelphia, PA 19104, USA
Rocio Bonet is a PhD candidate in the Management Department at the Wharton School of the
University of Pennsylvania. She received her MSc in Economics, Management and Finance
from the University Pompeu Fabra in Barcelona and her BA in Business Administration from
the University of Zaragoza. She is interested in the study of corporate governance and in
particular in the study of boards of directors and the role of non-executive directors on the
board. Her research interests also include the study of human resource management with
special focus on the importance of company characteristics in shaping career outcomes and
decisions of employees.
Alistair Bruce
Nottingham University Business School, Jubilee Campus, The University of Nottingham,
Nottingham, NG8 1BB, UK
Alistair Bruce is the Director of Nottingham University Business School and Professor of
Decision and Risk Analysis. His current research interests focus on decision making under
uncertainty and in complex environments, market efficiency, and the analysis of executive
remuneration as an element in corporate governance regimes. He has published widely in the
leading economics, management and decision-making journals.
Trevor Buck
Business School, Loughborough University, Loughborough, Leicestershire, LE11 3TU, UK
Trevor Buck is Professor of International Business at Loughborough University Business
School. His main current research is international corporate governance and strategy, including
a project on executive pay involving comparisons between the UK, the US and Germany, with
a £212 000 grant from the ESRC on executive pay and performance. Transition economies are
another strand of this governance research, covering governance and HRM strategies in Russia,
Ukraine and China. Finally, international corporate governance is part of a business history
project that involves applications of institutional theory and translation theories of innovation.
Recent publications include the Academy of Management Journal and Journal of International
Business Studies.


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About the contributors
Andrew Burrows
Nottingham University Business School, Jubilee Campus, The University of Nottingham,
Nottingham, NG8 1BB, UK
Andrew Burrows is Director of the Centre for Management Buy-out Research (CMBOR).
Previously, he worked in the high-performance composites industry, spending many years as
a director of an SME. His research interests are private equity and venture capital, applied to
the management buy-out market in the UK and Europe, particularly public to private buy-outs,
university spin-outs and SME funding and development. He has worked on a number of funded
research projects, had articles published in a number of corporate financial publications and is
a regular conference speaker.
Martin J. Conyon
The Wharton School, University of Pennsylvania, 2000 Steinberg Hall Dietrich Hall,
Philadelphia, PA 19104, USA
Martin J. Conyon is currently a faculty member of the Wharton School, University of
Pennsylvania. He has previously held posts at the Universities of Oxford and Warwick. His
research and writing interests are in applied microeconomics, personnel economics, industrial

organisation and corporate governance. His research can be accessed at his web site: http://
www-management.wharton.upenn.edu/conyon/ and SSRN Author page />author=222606.
Jeffrey G. Covin
Kelley School of Business, Indiana University, Bloomington, IN 47405-1701, USA
Jeffrey G. Covin is the Samuel and Pauline Glaubinger Professor of Entrepreneurship at the
Kelley School of Business, Indiana University. Professor Covin received his PhD in Organisation Studies and Strategic Planning from the University of Pittsburgh. He teaches in the
fields of entrepreneurship, strategic management, and technology management. His current
research interests include the antecedents and consequences of corporate entrepreneurship,
strategic processes and innovation mode choice, decision-making styles that promote firm
performance in various industry contexts, and competitive strategy among high-technology
firms.
Catherine M. Dalton
Kelley School of Business, Indiana University, Bloomington, IN 47405-1701, USA
Catherine M. Dalton is the David H. Jacobs Chair of Strategic Management in the Kelley School
of Business, Indiana University. She also serves as Editor of Business Horizons, Research
Director of the Institute for Corporate Governance and Fellow in the Randall L. Tobias Center
for Leadership Excellence. She received her PhD degree in Strategic Management from the
Kelley School of Business, as well as her MBA and BSBA degrees from Xavier University.
Professor Dalton is an expert in corporate governance, and is widely published in a variety
of academic and practitioner outlets. She serves on the board of directors of Brightpoint,
Inc., where she also serves as Chairperson of the Corporate Governance and Nominating
Committee.
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About the contributors
Dan R. Dalton
Kelley School of Business, Indiana University, Bloomington, IN 47405-1701, USA
Professor Dalton is widely published, with over 250 articles in corporate governance, business
strategy, law, and ethics. Additionally, his work has been frequently featured in the business
and financial press including Business Week, Wall Street Journal, Fortune, Economist, Financial Times, Boston Globe, Chicago Tribune, Los Angeles Times, New York Times, and the
Washington Post. Professor Dalton regularly addresses public, corporate, and industry groups
on corporate governance issues. Dan R. Dalton is the founding Director of the Institute for
Corporate Governance and the Harold A. Poling Chair of Strategic Management in the Kelley
School of Business, Indiana University.
Diane K. Denis
Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907,
USA
Professor Denis is a 1981 MBA graduate of the Cranfield School of Management in the UK
and a 1990 PhD graduate of the University of Michigan. She began her academic career at
Virginia Polytechnic Institute and State University and has been on the Purdue faculty since
1995. She has published numerous empirical corporate finance articles in top finance journals.
Her current research areas include corporate governance, corporate diversification strategy, and
mergers and acquisitions. She teaches corporate finance, mergers and acquisitions, and international finance, primarily at the MBA level, and is a Fellow of Purdue University’s Teaching
Academy.
Mahmoud Ezzamel
Accounting & Finance Division, Cardiff Business School, Cardiff University, Colum Drive,
Office T32, Cardiff, CF10 3EU, UK
Mahmoud Ezzamel, BCom and MCom (Alexandria, Egypt), PhD (Southampton) is Cardiff
Professorial Fellow, prior to holding professorships at Aberystwyth, UMIST and Manchester

Universities. He has published numerous papers in leading journals, including Administrative
Science Quarterly, Academy of Management Journal, Accounting, Organizations and Society,
Organization Studies, Journal of Management Studies, Accounting and Business Research,
and Journal of Business Finance and Accounting. He has also written seven scholarly books
and one book of readings. His main research interests are in the areas of corporate governance,
management accounting and accounting history.
Igor Filatotchev
Department of Management, King’s College London, 150 Stamford Street, London,
SE1 9NN, UK
Igor Filatotchev is Professor of International Strategic Management at King’s College
London. Before coming to King’s in 2004 he held various academic positions in the UK including Bradford University School of Management, Nottingham University Business School,
and Birkbeck College (University of London). He earned his PhD in Economics from the
Institute of World Economy and International Relations (Moscow, the Russian Federation).
His research interests include analysis of resource and strategy roles of corporate governance;
corporate governance life-cycle; and a knowledge-based view on governance development
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About the contributors
in entrepreneurial firms. He has published extensively in the fields of corporate governance

and strategy in journals such as Academy of Management Journal, Academy of Management
Executive, Strategic Management Journal, California Management Review, and Journal of
International Business Studies.
Marc Goergen
The University of Sheffield School of Management, 9 Mappin Street, Sheffield, S1 4DT, UK
Marc Goergen has held posts at the Manchester School of Management (UMIST), the
Manchester School of Accounting & Finance (University of Manchester) and the University of Reading. In 2005, he took up a chair in finance at the University of Sheffield School of
Management. His research interests are corporate governance, initial public offerings, corporate investment models and dividend policy. He has papers published in European Financial
Management, Journal of Corporate Finance, Journal of Business Finance and Accounting,
and Journal of Law, Economics and Organization. He has also written two books on corporate
governance and has contributed chapters to several books. Marc is a fellow of the International Institute of Corporate Governance and Accountability and a Research Associate of the
European Corporate Governance Institute.
Robert E. Hoskisson
Arizona State University, W.P. Carey School of Business, Department of Management, Main
Campus, PO Box 874006, Tempe, AZ 85287-4006, USA
Robert E. Hoskisson is a Professor and W.P. Carey Chair in the Department of Management at
Arizona State University. He received his PhD from the University of California-Irvine. Professor Hoskisson’s research topics focus on corporate governance, acquisitions and divestitures,
international diversification, privatisation and cooperative strategy. He teaches courses in corporate and international strategic management, cooperative strategy, and strategy consulting
among others. Professor Hoskisson has served on several editorial boards for such publications
as Academy of Management Journal (including consulting editor and guest editor of a special
issue), Strategic Management Journal, Journal of Management (including associate editor),
and Organization Science.
Kevin Keasey
Leeds University Business School, The University of Leeds, Leeds, LS2 9JT, UK
Kevin Keasey is Professor of Finance and the Director of the International Institute of Banking
and Financial Services, Leeds University Business School, The University of Leeds. Kevin
is an author of 10 books, monographs and edited volumes on small-firm finance, corporate
governance and financial markets, and is the author of over 75 refereed articles in leading international journals. His research covers a range of disciplinary perspectives and methodologies
from the empirical to the experimental.
Hicheon Kim

Korea University Business School, 1, 5Ga Anam-Dong, Sungbuk-Gu, Seoul, 136-701, Korea
Hicheon Kim is an associate professor of management at Korea University Business School.
He received his PhD from Texas A&M University. His research interests centre on diversification and restructuring, business groups, corporate venturing and innovation, and corporate
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governance. His work appears in journals including Strategic Management Journal, Academy
of Management Journal, and Journal of Management.
Guy S. Liu
Department of Economics and Finance, Brunel University, Uxbridge, Middlesex, UB8 3PH,
UK
Dr Guy S. Liu obtained his PhD at Oxford University, and specialised in economics of industry
with a particular interest in China’s enterprise reform. He is a lecturer at Brunel University and
Professor of Sichuan University in China. He also lectures on Chinese economy and industry
for the visiting MBA/EMBA programme at Oxford University. His research papers have been
published widely in internationally leading journals such as Economic Journal, Journal of
Industrial Economics, and Journal of Comparative Economics etc. He has been invited as a
guest editor of a special issue on China’s economy and enterprise reform for a number of journals including China Economic Review, Economics of Planning, and Corporate Governance –
An International Review. He has also been involved in policy advisory work on Chinese enterprise reform for both the British and Chinese governments. He is a regular commentator on

China’s economic affairs for the BBC and Free Asia.
John J. McConnell
Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907,
USA
John J. McConnell is the Emanuel T. Weiler Distinguished Professor of Management (Finance)
at Purdue University. He received a Bachelor of Arts in Economics from Denison University, an
MBA from the University of Pittsburgh, and a PhD from Purdue University. He has published
extensively in the areas of corporate finance, stock and bond pricing, and derivatives. He was
awarded the Distinguished Scholar Award by the Eastern Finance Association in 2002. He
has served as Associated Editor of Journal of Finance, Journal of Financial and Quantitative
Analysis, Journal of Fixed Income, Financial Management, and AREUEA.
Patricia P. McDougall
Kelley School of Business, Indiana University, Bloomington, IN 47405-1701, USA
Patricia McDougall is the William L. Haeberle Professor of Entrepreneurship and the Interim
Associate Dean of Academics at Indiana University’s Kelley School of Business. Her major research interests include new venture strategies and accelerated internationalisation. In
recognition of their pioneering role in the growing field of international entrepreneurship, she
and her co-author were presented the 2004 JIBS Decade Award for their article on the early
internationalisation of new ventures. The award is given to the article that has had the most
significant impact on international business research during the past decade.
Miguel C. Manjon
Department of Economics, Rovira i Virgili University, Avda. Universitat-1, 43203 Reus
(Tarragona), Spain
Miguel C. Manjon is Associate Professor at the Department of Economics, Rovira i Virgili
University (Spain). He has also held visiting positions at the Netherlands Bureau for Economic Policy Analysis and the Universities of Warwick (UK) and Tilburg (the Netherlands).
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About the contributors
His research interests include corporate ownership, dividend policy and the econometrics of
corporate governance. He has published in Applied Economics, European Journal of Law and
Economics, Journal of Theoretical and Institutional Economics, Small Business Economics,
and others.
Mary O’Sullivan
INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France
Mary O’Sullivan is an Associate Professor of Strategy and Management at INSEAD. She
completed her undergraduate degree in 1988 at University College Dublin, then worked at
McKinsey & Co. in London prior to attending the Harvard Business School where she graduated
from the MBA programme in 1992. O’Sullivan subsequently joined the PhD programme in
Business Economics at Harvard University and took up her appointment with INSEAD in
January 1997. In April 2000 she published a book entitled Contests for Corporate Control
with Oxford University Press, which is a comparative-historical analysis of national systems
of corporate governance. Shortly afterwards she embarked on a major research project on
variety and change in the role of financial systems in national economies which is ongoing.
She is spending the academic year 2004–2005 as a Visiting Associate Professor in the Wharton
School at the University of Pennsylvania.
Noel O’Sullivan
Business School, Loughborough University, Loughborough, Leicestershire, LE11 3TU, UK
Noel O’Sullivan is a Reader in Accounting at Loughborough University Business School.
He has previously held positions as ABI Research Fellow at Nottingham University Business
School and as an Account Executive with C.T. Bowring Insurance Brokers in London. His

main research interest is corporate governance, especially the interrelationship between different governance mechanisms. Recent and current research projects include: the governance
role of takeovers; the use and usefulness of non-executive directors; the holding of multiple
directorships by senior executives; governance in insurance companies; and the governance
role of auditing.
Luc Renneboog
Tilburg University, PO Box 90153, 5000 LE Tilburg, The Netherlands
Luc Renneboog graduated from the Catholic University of Leuven with degrees in management
engineering (MSc) and in philosophy (BA), from the University of Chicago with an MBA,
and from the London Business School with a PhD in financial economics. He is currently
Associate Professor of Finance at Tilburg University and a research fellow of the European
Corporate Governance Institute (Brussels). He held appointments at the University of Leuven
and Oxford University, and visiting appointments at London Business School, European University Institute (Florence), Venice University, CUNEF (Madrid) and HEC (Paris). He has
published in Journal of Financial Intermediation, Journal of Corporate Finance, Journal of
Banking and Finance, Journal of Law, Economics and Organization, Cambridge Journal of
Economics, European Financial Management, and others. His research interests are corporate
finance, corporate governance, dividend policy, insider trading, financial distress, and law and
economics.

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About the contributors
Mark J. Roe
Harvard Law School, Cambridge, MA 02138, USA
Mark J. Roe teaches corporate law and corporate bankruptcy at Harvard Law School. He
wrote Strong Managers, Weak Owners: The Political Roots of American Corporate Finance
(Princeton, 1994) and Political Determinants of Corporate Governance (Oxford, 2003). His
recent articles include Delaware’s Competition, 117 Harvard Law Review 588 (2003); Corporate Law’s Limits, 31 Journal of Legal Studies 233 (2002); Rents and their Corporate
Consequences, 53 Stanford Law Review 1463 (2001); Political Preconditions to Separating
Ownership from Corporate Control, 53 Stanford Law Review 539 (2000).
Helen Short
Leeds University Business School, The University of Leeds, Leeds, LS2 9JT, UK
Dr Helen Short is a senior lecturer in accounting and finance at Leeds University Business
School at the University of Leeds. Her main research interests are in the areas of corporate
governance in the UK, focusing particularly on the role of institutional shareholders and on
the relationships between ownership, corporate governance and firm performance.
Pei Sun
Judge Institute of Management, University of Cambridge, Cambridge, CB2 1AG, UK
Mr Pei Sun obtained his MPhil in economics at Cambridge University, and currently is a PhD
candidate in business economics at Judge Institute of Management of Cambridge University.
His research interests include comparative corporate governance, corporate governance impact
on firm strategy, and enterprise reform in transition and developing economies.
Steve Thompson
Nottingham University Business School, Jubilee Campus, The University of Nottingham,
Nottingham, NG8 1BB, UK
Steve Thompson is currently a professor in Nottingham University Business School, having
previously held positions in economics departments and business schools in the UK, the US
and Ireland. He has published approximately 100 articles in economics and business journals
including Review of Economics and Statistics, European Economic Review, Journal of Monetary Economics, Economica, Journal of Industrial Economics, Strategic Management Journal,
and Journal of Management. His corporate governance research currently concerns the impact

of governance reforms on pay and tenure and the internationalisation of the managerial labour
market.
William P. Wan
Thunderbird, Global Business Department, 15249 59th Avenue, Glendale, AZ 85306-6000,
USA
William P. Wan is an assistant professor of management at Thunderbird, the Garvin School
of International Management. He received his PhD from Texas A&M University. His current
research focuses on product and international diversification strategies, international corporate
governance, and institutional environments and firm strategies. His research articles appear in

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Academy of Management Journal, Strategic Management Journal, Journal of International
Business Studies, Journal of Management, Journal of Management Studies, and Accounting,
Organizations, and Society.
Robert Watson
Durham Business School, University of Durham, Mill Hill Lane, Durham City, DH1 3LB, UK
Robert Watson is currently a professor of Financial Management at the Durham Business

School. Over the past 20 years, he has published many articles in both academic and practitioner
journals on a wide range of issues related to his research into various aspects of governance
and performance, for example remuneration committees and executive pay, utility regulation,
stakeholder performance measures, corporate financing and corporate collapse.
Pauline Wong
Nottingham University Business School, Jubilee Campus, The University of Nottingham,
Nottingham, NG8 1BB, UK
Pauline Wong has held the positions of Director of Administration and Lecturer in Accounting
and Finance at Nottingham University Business School. Previously, she was the Full-time MBA
Programme Manager at Warwick Business School. Her research interests are in the market
for corporate control and corporate governance. She has worked on research projects funded
by Nuffield and the Office of Fair Trading and has published in such journals as Accounting
and Business Research, Journal of Economic Surveys, and Journal of Business Finance and
Accounting.
Mike Wright
Nottingham University Business School, Jubilee Campus, The University of Nottingham,
Nottingham, NG8 1BB, UK
Mike Wright is Professor of Financial Studies and Director of the Centre for Management Buyout Research at Nottingham University Business School. He is a visiting professor at INSEAD,
Erasmus University and University of Siena and an editor of Journal of Management Studies.
He is the author of over 25 books and more than 200 papers in academic journals in the
areas of corporate governance and restructuring, venture capital, management buy-outs and
entrepreneurship.
Daphne Yiu
Department of Management, Chinese University of Hong Kong, Shatin, Hong Kong
Professor Daphne Yiu is an assistant professor at the Department of Management of the
Faculty of Business and Administration, Chinese University of Hong Kong. She received her
PhD from the University of Oklahoma. Her research interests lie in corporate diversification
and international strategies, corporate control and governance systems. Her current research
projects study strategies and inner workings of business groups in China, as well as international
diversification strategies and corporate entrepreneurship in emerging economies.


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Introduction
Kevin Keasey, Steve Thompson and Mike Wright

INTRODUCTION
Corporate governance, a term that scarcely existed before the 1990s, is now universally invoked wherever business and finance are discussed.1 The subject has spawned consultancies,
academic degrees, encyclopaedias, innumerable articles, conferences and speeches. Almost all
the OECD nations are currently revising their corporate governance practices or have recently
done so (OECD, 2003), while the establishment of a viable corporate governance system has
become a priority objective for emergent economies from Latin America to China. In the
midst of so much interest, the underlying issues of the subject are always in danger of being
swamped. Moreover, since ‘good governance’, like ‘fair trade’ and ‘free competition’, is an
abstraction that commands near-universal respect but diverse interpretation, it has also become
the destination board for a bandwagon carrying those who would, in fact, take the corporation
in myriad directions.

Not merely does the term corporate governance carry different interpretations, its analysis
also involves diverse disciplines and approaches. For example, the behaviour of senior managers is variously constrained by legal, regulatory, financial, economic, social, psychological
and political mechanisms which are themselves sometimes substitutes and sometimes complements. Academic researchers, predominantly coming from a single subject background,
will typically explore the operation of merely a subset of these and then in the context of the
priorities of their own discipline. This inevitably means that research on the subject becomes
Balkanised and less accessible.
The quantity and variety of material being produced on corporate governance has forced
us to be selective in compiling this volume. The book aims to bring together scholars from a
variety of backgrounds, particularly accounting and finance, economics and management, to
present a series of overviews of recent research on issues within corporate governance and on
governance developments within particular countries and institutional regimes. Coverage of the
subject has inevitably involved a trade-off between breadth and depth, and in largely restricting
ourselves to these business disciplines we have been mindful of the need for coherence. This
is not to say that other perspectives, perhaps drawing upon social sciences including politics
and sociology, would not have a valid contribution.

Corporate Governance: Accountability, Enterprise and International Comparisons. Edited by K. Keasey,
S. Thompson and M. Wright. c 2005 John Wiley & Sons, Ltd. ISBN 0-470-87030-3

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Corporate Governance
Since corporate governance carries such a wide variety of interpretations, it seems appropriate to begin by setting out the approach generally adopted in the volume. Here it is assumed
that an effective system of corporate governance has two requirements, one micro and one
macro: at the micro level it needs to ensure that the firm, as a productive organisation, functions in pursuit of its objectives. Thus if we follow the traditional Anglo-American conception
of the firm as a device to further the well-being of its owner–shareholders, good governance is
a matter of ensuring that decisions are taken and implemented in pursuit of shareholder value.
Importantly, this involves actions that reconcile the need to protect the downside risk to shareholders (that is, accountability of managers) as well as to encourage managers to take risks to
increase shareholder value (that is, encourage managers to act entrepreneurially (Keasey and
Wright, 1993)). If the purpose of the firm is modified, perhaps to accommodate the interests of
other ‘stakeholders’, including employees, suppliers etc., the objective changes but the need
for mechanisms to further this objective does not.
At the macro level corporate governance, in the words of Federal Reserve Chairman Alan
Greenspan: ‘has evolved to more effectively promote the allocation of the nation’s savings to
its most productive use’.2 Thus in financing corporate activity, whether through equity or debt,
savings are channelled into productive activities, the return on which ultimately determines
national prosperity. The recent US experience with Enron, WorldCom and other failures is
a reminder that if failures at the firm level are sufficiently serious and/or widespread, there
will be a misallocation of funds in the short term and systemic consequences for longer-term
investment if confidence is damaged.3 Similarly, a major problem for transition economies has
been to create governance systems which engender sufficient trust to allow private savers to
supply local entrepreneurs with their funds.4

ALTERNATIVE PERSPECTIVES ON CORPORATE
GOVERNANCE
Whether success at the micro and macro levels is separable is itself very much part of the
debate. It reflects, in particular, the individual’s perception of the nature of governance and the
degree of confidence held in the efficiency and effectiveness of financial markets. We might
broadly distinguish four perspectives in the governance debate: the principal–agent or finance

perspective, the myopic market view, the stakeholder view and the abuse of executive power
critique.5
Those approaching corporate governance issues from a principal–agent or finance perspective, following Jensen and Meckling (1976), see governance arrangements, including the
apparatus of non-executive directors, shareholder voting etc., as devices that the suppliers of
finance require to protect their interests in a world of imperfectly verifiable actions. Jensen
and Meckling (1976) consider the case of a 100% owner–manager considering the sale of
an equity interest to outsiders. As the original owner’s share falls, so does the incentive to
exert effort to generate shareholder wealth. In the absence of any controls on the owner–
manager’s anticipated post-float behaviour, the issue price of outside equity would fall to
reflect the corresponding threat to shareholder wealth. Therefore, with full anticipation of
the consequences of the manager–shareholder relationship the total ex ante cost falls on the
would-be issuer of outside equity, that is, the owner–manager. This generates a corresponding incentive to introduce devices to control and monitor managerial behaviour – that is,

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Introduction
to establish corporate governance arrangements – at least up to the point where the
marginal cost of so doing equals the marginal benefit. On such a view, an efficient capital market will generate effective governance arrangements without the need for external
intervention.

It follows that those adopting this principal–agent perspective tend to see unrestricted capital
and managerial labour (Fama, 1980) markets as the most effective checks on executive malperformance. On such a view, well-functioning capital markets will tend to solve both the microlevel governance problem and, by directing funds to the use of those managers that appear to
offer the best risk–return combinations, ensure compatibility with the macro-level objective
of efficient funds allocation.
Conversely, those who view the capital market as fundamentally flawed and myopic in its
concern for short-term returns, argue that purely private bargaining between a firm’s owners
and the supplier of funds will not produce effective governance. On this view, a myopic stock
market encourages managers to underinvest in long-term projects. Effectively a higher cost of
capital is applied than is strictly economically justifiable, thus screening out many longer-term
investments. This problem is intensified in environments where a hostile takeover threat – see
below – further restricts managerial discretion.
Adherents to the myopic market position unlike, say, supporters of the stakeholder view
do not necessarily question shareholder value maximisation as an objective. What they do
conclude, however, is that in the presence of a myopic capital market there is likely to be a
macro failure of corporate governance in that there will be systematic distortions of investment
in the economy to the detriment of long-run growth. On such a view insulating managers from
stock market pressures will also benefit shareholders in the longer term. Thus some myopic
market critics would endorse the involvement of other stakeholders – for example, employees –
in governance not necessarily to further the interests of the latter themselves, but where these
might have interests that favoured long-term projects.6
Proponents of the stakeholder perspective contend that the traditional Anglo-American
view of the firm’s objectives is too narrow and that it should be extended to embrace the
interests of other groups associated with the firm, including employees, community groups
etc. These stakeholders are considered to have interests that depend, in part, on the continuing
development of the firm. Therefore, a governance process that offers no explicit voice to such
groups is unlikely to take sufficient account of their interests. On this view, it is the firm
objective of unalloyed shareholder value-maximisation that leads primarily to a micro failure
of governance arrangements.
Finally, there is a view that corporate governance reforms should be used to restrict, if
not prevent, the pathologies that arise from the abuse of executive power. Supporters of such

a position may variously hold to shareholder value or stakeholder interests as the optimal
objective for the firm, but they suggest that the pursuit of any such objective may be flawed
if dysfunctional behaviour by senior executives emerges. On such a view executives may be
able to exploit situations that were simply unanticipated or even inconceivable at the time of
share flotation. Governance arrangements can be created to reflect principles of transparency,
representation and a division of responsibility, but there will be a need for a periodic reform
of procedures to reflect evolving circumstances in the firms themselves. While the misuse of
power by the CEO of firm A is primarily a micro failing, perhaps hurting firm A’s shareholders,
bondholders, pensioners or employees, if the As are too big or too numerous the problem
develops into a systemic macro one.

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Corporate Governance

BACKGROUND TO CORPORATE GOVERNANCE
REFORM
In the early 1990s much of the debate on corporate governance concerned the alleged weaknesses of the Anglo-American corporate form (see Charkham, 1994). In economies such as the
USA and UK, with liquid stock markets in which the overwhelming proportion of shares were

held by financial institutions, it was widely assumed that monitoring of managers would be
deficient. Shareholders, whose investments were held in diversified portfolios, were considered
to have weak incentives to involve themselves in information collection and participation in
company AGMs etc. Here the dominant strategy for individually dissatisfied investors was to
utilise the opportunities generated by a liquid stock market and exit. In the face of diffused
shareholder power the divorce of ownership from control, long ago identified by Berle and
Means (1932), was assumed to be the norm. Managers thus had considerable discretion to
further their own interests in ways that included diverting cashflow to preferred investments,
often involving unnecessary diversification or the undertaking of entrenching activities, and in
giving themselves overly generous salary and bonus rewards.
While the takeover threat was always present for underperformers – and probably remained
quite potent for the more egregious examples – the takeover is a blunt and costly instrument
and the probability of being acquired falls with size. Indeed critics pointed to the high apparent
failure rate among takeovers to suggest that the market for corporate control was as much a
part of the problem of inadequate monitoring as it was a solution.7 Value-destroying mergers
were interpreted as evidence of managers furthering their own aspirations for growth at the
expense of the shareholders. Furthermore, in the UK at least, a series of high-profile corporate
failures involving the apparent misuse of executive power by domineering CEOs such as Robert
Maxwell and Asil Nadir pointed to the absence of effective checks and balances.
Nor did the Anglo-American corporate form escape criticism at the macro level. It was
widely noted by its supporters and critics alike that executives were ultimately constrained by
the ease of shareholder exit, employing the term of Hirschman (1970). Dissatisfied shareholders
would sell and if they did so in sufficiently large numbers the share price would fall and the
firm’s assets would ultimately become attractive to some rival group of managers who would
thus bid for them, perhaps via a hostile takeover. Supporters saw this ‘market for corporate
control’ (Manne, 1965) as a key check on managerial malfeasance or incompetence. Critics
complained it engendered perverse incentives. They pointed out that even a poorly performing
target firm’s shareholders could usually expect some recompense for past underperformance
via a bid premium, thus further eroding their incentives to participate in the monitoring of
management. The principal losers appeared to be the target’s senior management, many of

whom would lose their jobs. Critics (for example, Charkham (1994)) argued that such a fear,
coupled with perceived myopia in the capital market, encouraged a short-termist attitude in the
Anglo-American corporate form. This was contrasted with lending-based systems such as those
in Japan and Germany, countries where stakeholder representation is also more pronounced
and where finance is typically supplied by a bank in a long-term relationship with its client
firm.
Thus it was argued that in firms financed by debt and/or retained profits managers could
afford to take a longer-term perspective and invest in physical and human capital without dayto-day concerns about the consequences of share price falls. While this short-termist charge
remained highly contentious, not least because it implied serious capital market inefficiency,8
4