17014126007761000000 Corporate Governance Corporate Governance Principles, policies, and practices FOURTH edition Bob Tricker Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Bob Tricker 2019 The moral rights of the author have been asserted First edition 2009 Second edition 2012 Third edition 2015 Impression: 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization.
Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2019938777 ISBN 978–0–19–880986–9 Printed in Italy by L. Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work. Dedicated to the memory of Gretchen Tricker (1945–2018), wife, mother, free spirit, author, and editor of countless journal articles and books on corporate governance, including this one.
Preface What is new in this edition Since the first edition of this book was published in 2009, corporate governance has grown dramatically in both scope and significance. Each subsequent edition reflected new theoretical insights, changing governance processes, and wider dimensions to the subject. The first edition focused primarily on practices reflected in corporate regulation and corporate governance codes, which called for independent non-executive directors in listed companies, audit committees, remuneration committees, and nomination committees of the main board, the separation of board chair from chief executive officer (CEO), and reporting to shareholders that these requirements had been met. The global financial crisis around 2008 faced some countries with economic collapse; in others companies needed government bail-out or were nationalized.
The crisis focused attention on the culture of some financial institutions, their directors’ cavalier attitudes to growth, and a failure to recognize risk. Changes in company law and regulation followed, which were introduced in the second edition of the book. Now institutional investors increasingly challenged boards; investor relation activities increased in response. Another theme that emerged in the second edition was the need for boards to recognize a responsibility for creating their company’s ethical culture, determining its corporate social responsibility, and integrating economic, social, and environmental factors.
The third edition, in 2015, highlighted some on-going corporate governance concerns, including issues such as ‘aggressive’ tax avoidance strategies, allegedly excessive top management remuneration, corporate responses to whistle blowers who published companies’ shortcomings, and other issues of corporate culture and business ethics. Relations with auditors and their independence, corporate social responsibility, approaches to risk, board diversity (in particular women on boards), and shareholder involvement all arose. It was also increasingly recognized that corporate governance was an important issue, not only in listed companies covered by the corporate governance codes, but in private companies and corporate entities that do not have shareholders. This fourth edition provides a new focus for understanding corporate governance that goes far beyond the emphasis on regulation, rules, and voluntary codes of the first.
The culture of a country, embracing its historical, religious, social, economic, environmental, and legal contexts, determines that country’s approach to corporate governance. Further, the culture of each company, particularly the board-level culture, determines how corporate governance ideas are applied. For the first time, a distinction is drawn between Western and Eastern perceptions of corporate governance. In the West, including the United States, Great Britain and countries in the British Commonwealth, and Continental European countries, corporate governance is perceived as a way to regulate companies and avoid unacceptable behaviour.
In the East, including China, Japan, South Korea, and countries in the Far East influenced by the Chinese diaspora over the years, corporate governance is seen as a means to support the creation of wealth for the benefit of owners, employees, and, ultimately, society. Whereas the West tends to see corporate governance as a means of controlling and regulating companies, China uses it flexibly to benefit the economy, in the interests of the people and the party. A new chapter expands the focus on the governance of corporate entities other than listed companies, which was the focus of all the early corporate governance codes. When the first edition was published, it was widely assumed that globalization and the free movement of executives, money, goods, and services was the way of the future.
Today that is not so clear. In previous editions, one definition of corporate governance was about the way power is exercised over corporate entities in society. But in many Western countries the power and privileges enjoyed by elites, in politics, finance, and business, are being challenged. This so-called ‘populism’ led to the election of President Trump in the United States and the British referendum decision to leave the European Union.
The effect is also being felt in boardrooms, as increasingly active institutional shareholders, and an investigative media, challenge the governance of companies. Confidence in international organizations such as the United Nations, the European Union, the World Bank, and the International Monetary Fund has diminished. International trade agreements have been threatened. For nearly forty years, corporate governance has evolved under the belief that free trade, globalization, and the resultant multinational companies were desirable.
Such assumptions have been challenged. The continuing influence of corporate governance, rooted in Western institutions, influence, and values, can no longer be assumed. Other countries and cultures now have the potential to contribute to corporate governance thinking and practice. Some striking changes to the governance of international companies have occurred during the decade since this book was first published.
Sovereign funds from countries that include some Arab oil states, China, Singapore, and Sweden have acquired significant stakes in some multinational companies. Mergers and acquisitions across national boundaries have seen the ownership and the governance of major companies pass to other jurisdictions. British Airways, for example, is now a subsidiary of a Spanish company. Some American companies have moved their domicile overseas as part of their international tax planning strategy, sometimes by reversing into an overseas company they acquired.
Such changes realign the way companies are governed around the world. This edition maintains an international perspective on the governance of public listed companies, subsidiary companies in corporate groups, family firms, public bodies, and many other types of corporate entity that need to be governed as well as managed. Many of the older cases have been replaced for this edition, although a few of the stalwarts remain, now noted as ‘classic corporate governance cases’. The international spread of cases has been maintained, with many from the USA, the UK, and the rest of the world, including some new cases about corporate governance in China.
Self-test questions are still included at the end of each chapter to reinforce the learning process, but in this edition the answers are included in the online resources. It is nearly fifty years since I began my studies of what I subsequently called corporate governance. Its focus, practices, and significance have changed beyond belief. I hope that readers will continue working to improve the governance of the organizations with which they are involved, and that some will contribute to the further development of this fascinating and vital subject.
Bob Tricker Devon, UK, 2019 Acknowledgements I owe a considerable debt to the many colleagues, researchers, students, regulators, and company directors and chairmen who, over the years, have contributed to my knowledge and understanding of corporate governance. Gratitude is clearly owed to the directors of the ten organizations who supported my original research in the Corporate Policy Group at Nuffield College, Oxford, from 1979 to 1983, which led to the publication of Corporate Governance in 1984. Since the publication of the third edition of this book, I have been working closely with Dr Gregg Li from Hong Kong on Understanding Corporate Governance in China (Hong Kong University Press, 2018). His research in mainland China has greatly increased my knowledge, which is reflected in new material in this edition.
Kate Gilks, my editor, and her colleagues at the Oxford University Press have been a constant source of support, and the anonymous reviewers made suggestions that significantly improved the book. I am grateful to them all. The opportunity to draw material from the websites of companies, regulators, and other institutions is also much appreciated. Chapter 1 has been adapted by permission of the publishers from Corporate Governance, seminal readings in the History of Management Thought series, R.), Ashgate, Aldershot, UK, and Burlington, Vermont, USA, 2000.1) and case studies (Tyco and Robert Maxwell) are based on material that first appeared in The Economist Essential Director, by Bob Tricker, Profile Books, London, 2003, and reproduced with kind permission.
I also acknowledge the approval of Routledge to include some new cases, which appeared in Bob and Gretchen Tricker, Business Ethics—a stakeholder, risk, and governance approach (2014). The Tencent Holdings, Yum China Holdings, and Alibaba case studies and Chapter 13 were adapted from material written by the author for Tricker and Li, Understanding Corporate Governance in China, Hong Kong University Press, 2018. Finally, thanks to my late wife, Gretchen, not only, as so many authors say, for her support during the writing, but for her direct contribution. Being an editor and writer herself, among other things she wrote the centennial history of the Hong Kong Stock Exchange; she undoubtedly added significantly to this edition.
Bob Tricker, 2019 Contents List of case studies List of abbreviations Guide to the book Guide to the online resources Introduction How to use the book Part 1 Principles 1 Corporate Governance: A Frontier Subject All corporate entities need governing Corporate governance is old, only the phrase is new The cultural component of corporate governance Developments in corporate governance in the early 21st century New frontiers for corporate governance Case studies 2 Governance and Management Definitions of corporate governance The scope of corporate governance The significance of constitutions for corporate entities The difference between governance and management The performance and conformance aspects of governance Alternative board structures Board diversity Case studies 3 Theories, Philosophies, and Concepts of Corporate Governance The agency dilemma Agency theory Transaction cost economics Stewardship theory Resource dependency theory Managerial and class hegemony Psychological and organizational perspectives The societal perspective: stakeholder philosophies The cultural component of corporate governance Differing boundaries and levels: systems theory A subject in search of its paradigm Case studies 4 The Governance Partnership: Investors, Companies, and Directors Shareholder rights Shareholder stewardship and activism Shareholder information Different types of director Directors’ legal duties and rights Case studies 5 The Regulatory Framework Legislation, regulation, and corporate governance codes Corporate regulation in the UK Corporate regulation in the USA Corporate regulation in other countries Codes from international agencies Codes from institutional investors Company codes Codes for the non-profit and voluntary sectors The importance of compliance: corporate governance reports Principles or prescription: the governance debate Case studies 6 Models of Corporate Governance How context affects corporate governance Western and Eastern approaches to corporate governance Corporate governance: convergence or differentiation? Institutions necessary for successful corporate governance Case studies Part 2 Policies 7 Functions of the Board What the board does Supervising executive activities Balancing the board’s performance and conformance roles Board committees: functions and authority Delegating board functions to management Corporate transparency Case studies 8 The Governance of Corporate Risk What is corporate risk?