Table Of ContentCORPORATE GOVERNANCE, FINANCIAL MARKETS
AND GLOBAL CONVERGENCE
FINANCIAL AND MONETARY POLICY STUDIES
Volume 33
Published on behalf of the
Societe Vniversitaire Europeenne de Recherehes Financieres (SV ERF)
This volume contains selected lectures from those given at the 20th Colloquium
of SUERF, arranged in conjunction with the Robert Triffin-Szirak Foundation
and held in Budapest, Hungary, in May 1997.
The tit/es published in this series are listed at the end of this vo/urne.
Corporate Governance,
Financial Markets
and Global Convergence
Edited by
MORTEN BALLING
Rector, Aarhus School of Business, Aarhus, Denmark
ELIZABETH HENNESSY
Managing Editor, Central Banking, London, United Kingdom
and RICHARD O'BRIEN
Global Business Network, London, United Kingdom
Published on behalf of the Societe Universitaire Europeenne de Recherehes
Financieres (SUERF)
with contributions from
Ana Isobel Fernandez Alvarez Francesco Giavazzi
Si/via G6mez Ans6n Karel Lannoo
Morten Balling Chris Mallin
Fa brizio Barca Colin Mayer
Marco Battaglini Carlos Fernandez Mendez
Hans J. Blommestein Marga Peeters
Tito Boeri Giancarlo Perasso
Wilko Bolt Nicola Pesaresi
Jenny Corbett Luc Renneboog
Guido Ferrarini Arend J. Vermaat
Giovanni Ferri
SPRINGER-SCIENCE+BUSINESS MEDIA, B.V.
Cataloging-in-Publication Data is available from the Library of Congress
ISBN 978-1-4419-4784-0 ISBN 978-1-4757-2633-6 (eBook)
DOI 10.1007/978-1-4757-2633-6
Printed on acid-free paper
All Rights Reserved
© 1998 Springer Science+Business Media Dordrecht
Originally published by Kluwer Academic Publishers in 1998
No part of the material protected by this copyright notice may be reproduced or
utilized in any form or by any means, electronic or mechanical,
inciuding photocopying, recording or by any information storage and
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Table of Contents
Introduction
by Morten Balling
Corporate Governance: A Keynote Speech
by Morten Balling Xl
Chapter I The Effect of Board Size and Composition on
Corporate Performance
by Ana Isabel Fernandez Alvarez, Silvia Gomez Anson and
Carlos Fernandez Mendez 1
Chapter 11 Banks and Corporate Governance in Italy:
A Two-Tier System
by Fabrizio Barca, Giovanni Ferri and Nicola Pesaresi 17
Chapter III The New Financial Landscape and its Impact on
Corporate Governance
by Hans J. Blommestein 41
Chapter IV Privatization and Corporate Governance:
Some Lessons from the Experience of Transitional Economies
by Tito Boeri and Giancarlo Perasso 73
Chapter V Corporate Governance in the Netherlands
by Wilko Bolt and Marga Peeters 89
Chapter VI Changing Corporate Governance in Japan
by Jenny Corbett 113
v
VI Table of Contents
Chapter VII Stock Exchange Governance in the European Union
by Guido Ferrarini 139
Chapter VIII Should We Trust Banks When They Sit on the
Board of Directors?
by Francesco Giavazzi and Marco Battaglini 163
Chapter IX Corporate Governance, West and East: A Synthesis
of the EU Framework in the Perspective of Enlargement
by Karel Lannoo 199
Chapter X The Role of Institutional Investors in the Corporate
Governance of Financial Institutions: The UK Case
by Chris Mallin 217
Chapter XI Corporate Governance, Competition and Performance
by Colin Mayer 235
Chapter XII Shareholding Concentration and Pyramidal
Ownership Structure in Belgium
by Luc Renneboog 263
Chapter XIII Insurance Company Ownership in the Netherlands:
Implications for Corporate Governance and Competition
by Arend J. Vermaat 301
Index 323
In trod uction
MORTEN BALLING
The studies in this volume were presented at a Colloquium in Budapest
arranged by SUERF and the Robert Triffin-Szirak Foundation in May 1997.
All contributions deal with characteristics and trends in corporate governance
systems. The structure of financial markets and institutions has a strong impact
on the ways in which the power to manage corporate resources is allocated.
The relative roles of different types of owners and the legal framework for their
behaviour are changing all over Europe. Financial integration in the European
Union and transition to open market economies in Central and Eastern Europe
have a profound effect on the allocation of influence and on enterprise behavi
our, and so has privatization, which is taking place in almost all European
countries. The present collection of papers gives an impression of how many
interesting corporate governance aspects researchers and practitioners have
to deal with in a world characterized by rapid technological, political and
institutional change.
The first paper in the volume is the text of a keynote speech by Morten
Balling. In the speech, he gives a general survey of the corporate governance
problems to be discussed at the Colloquium. By referring to a so called 'Matrix
of Governance by sector', he points out characteristics and trends in the
interplay between different types of owners of equity and managers of financial
and non-financial companies and institutions.
In the paper by Ana Isabel Fernandez Alvarez, Silvia Gomez Anson and
Carlos Fernandez Mendez, the role played by the board of directors and the
influence of the board on company performance is analysed. The authors use
data from non-financial companies listed on the Madrid Stock Exchange. By
applying aseries of regressions they are able to observe statistically significant
relationships between board size and firm performance. Their analysis indicates
also that outsiders on the board are doing an effective job, which contributes
in a positive way to company performance.
In the paper by Fabrizio Barca, Giovanni Ferri and Nicola Pesaresi, the
corporate governance role played by banks in Italy is analysed. In the first
part of the paper, the authors take a historical perspective in which they discuss
the implications of state ownership and the relatively dose ties between political
vii
M. Balling et al. (eds.). C orporate Got'ernance. Financial Markets and Global C ont'ergence. vii-x
© 1998 Kluwer Academic Publishers.
viii Morten Balling
leaders and managers ofbanks and industrial conglomerates. Later they empha
size the importance of the distinction between large Italian banks, which in
their view have not exercised effective corporate governance and the smaIIer
but much more active local banks. Due to that distinction they find it appro
priate to recommend a two-tier model for understanding the Italian corporate
governance system.
Hans J. Blommestein's paper analyses the impact of structural changes in
financial systems on financial governance channels. He emphasizes in particular
the growing role of institutional investors in the OECD area. These investors
have become major shareholders alm ost everywhere, and from year to year
they tend to be more active. They are very much interested in market Iiquidity,
and their desire to carry out large transactions means that they demand a
market infrastructure characterized by specialized wholesale markets. In gene
ral, the institutional investors support efforts to improve public disclosure
standards and other measures to increase market transparency.
In the paper by Tito Boeri and Giancarlo Perasso a comparison is made
between the privatization methods and experiences of the Czech Republic and
Poland. In the Czech Republic ownership changes were mainly achieved via a
mass privatization scheme, while in Poland there was a strong involvement of
insiders - i.e. managers and employees. The speed of the privatization was
much greater in the Czech Republic, but speed should not be the most impor
tant concern. What really matters is the creation of an effective governance
structure, which makes managers accountable and gives them strong incentives
to be efficient.
In their paper, Wilko Bolt and Marga Peeters analyze the Dutch corporate
governance system. The Dutch economy is one of the most open economies in
the world, and one reflection of this is the very high proportion (40 per cent)
of Dutch shares owned by foreign investors. In addition to this strong represen
tation of foreigners in the ownership structure, statistics show a strong increase
in share holdings by funds and banks. In the paper, the authors summarize an
intense recent discussion concerning proposals to change the Dutch corporate
governance system towards the Anglo-Saxon model with more shareholder
influence.
Jenny Corbett gives in her paper a survey of evidence on the characteristics
of the corporate governance system in Japan. Based on ownership statistics
and other available evidence, she concludes that large institutional shareholders
with concentrated shareholdings have a direct effect on the behaviour of
Japanese firms. Among the large shareholders, banks playa particularly impor
tant governance role. In spite of recent concerns about the health of the banking
sector, the author expects the banks to be at the centre of the Japanese
corporate governance system for so me time to come. The corporate sector has
Introduction ix
for many years been heavily dependent on bank financing, and this situation
has not changed fundamentally.
In his paper on stock exchange governance in the European Union Guido
Ferrarini discusses the relative merits of member and investor ownership and
compares stock exchange regulation in a number of EU countries. Faced with
increasing competition amongst themselves and against other enterprises that
offer transaction services, such as proprietary trading systems, it is essential for
European stock exchanges to improve their efficiency and to generate volume.
Large investments in new information technology are necessary in order to
preserve competitiveness in agIobaI financial market. The implementation of
the ISD has accelerated cross-border transaction activity of member firms and
investors and strengthened the pressure for convergence of national stock
exchange laws in the EU.
In their paper, Francesco Giavazzi and Marco Battaglini look at the role
played by banks in privatization processes. Banks can be involved in such
processes in several ways. They may themselves be the objects of privatization
since in many countries a significant fraction of the banking industry is publicly
owned. This is the case in France, Spain and Italy. But banks can also be
important buyers of the equity of industrial firms sold by the government if
they are allowed to do so. The authors characterize privatizations as a very
good opportunity to set up the right environment for the development of new
financial intermediaries and in general for asound corporate governance
system.
In his paper, Karel Lannoo brings what he calls a European approach to
the corporate governance discussion. The institutional framework in Central
and Eastern European countries is in a process of transition to market systems
with current adaptation of regulatory systems with reference to the EU legisla
tive framework. Institutional shareholdings are growing in almost all European
countries, but there seems to be a need to strengthen the monitoring activity
and governance role played by institutional investors. The portfolios of the
institutions are becoming more and more international, but cross-border go ver
nance remains weak. Maybe European industry should take the initiative to
establish a European-wide Code of Good Practice in Corporate Control.
The role of institutional investors is also the subject of Chris MalIin's paper.
Based on empirical material concerning the structure of ownership of British
financial institutions and on interviews, she concludes that best practice in
corporate governance is generally being followed. The institutional owners of
banks and insurance companies have in general a healthy influence on the
management of these financial firms.
Colin Mayer's paper is an overview of the interrelation between corporate
governance, competition and performance. His stated purpose is to review
what is known about the relation of corporate governance and corporate
