Journal of Financial Economics

REF 130 Corporate Governance - New Stakes

A firm is defined as a collective entity, coordinating various stakeholders (shareholders, workers, clients and suppliers). A corporate executive has different responsibilities. He should balance the interests of the various stakeholders, and also build a strategy over the long term. As a consequence, corporate governance should promote certain principles, preserving the rights and duties of the stakeholders. Favoring long term investors, through multiple voting rights for patient, stable shareholders, is one of these principles. Also, board-level representation of the firm various constituencies, including workers, is a serious option. In Veolia, the board of directors includes two worker representatives since 2013; the experience is positive, as they bring their own firm-specific expertise into decision-making. Regarding CEO remuneration, a design that would prioritize a single constituency should be avoided. Finally, there is a need to adapt the articles 1832 and 1833 of the French Civil code that give a legal definition of the corporation. The objective should be to go beyond a narrow definition of corporate responsibility.

As regards governance the coexistence of several legal status (joint-stock companies, cooperatives...) and the composition of boards and powers are specific features of the French situation. In particular, except in the public sector and in recently privatized companies, the employees had nearly no representation on the Board of Directors, at least till the Rebsamen law passed in 2015. More specifically the evolution of governance towards a model taking social and environmental matters into account faces two main obstacles: the managers' representation of their role as agents of stockholders and the quest for short term profits by investors. However investors are increasingly aware that their financial interest lies on a governance extended to stakeholders and integrating social and environmental stakes. Evidence shows that they are beginning to urge companies to act in accordance with these principles. The evolution of the activity of the social rating agencies, including Vigeo, corroborates this movement.

Economic analysis widely considers conventional legal production technologies (hard law), including governmental regulations, statutes, or judge-made law, as ill-suited to the legal needs of heterogenous firms and investors in the field of corporate governance regulation. By contrast, codes of corporate governance can be considered to fall within the scope of soft law. As most of them rely on self-regulation, thus ensuring that the agents to whom codes will apply are also those who have participated in their writing, they are often regarded as providing economic agents with adaptive, flexible rules of corporate governance. Another reason behind their alleged superiority is their reliance on firms' voluntary and optional compliance, based on the comply-or-explain approach. This article aims at challenging this dominant view of codes' superior efficiency to regulate corporate governance. Building on a joint approach by the legal and economic disciplines, it shows that codes imply both a risk of low quality of governance and conformist compliance by firms. Drawing on French recent regulatory reforms in the field of CSR, it argues that co-regulation may provide a promising solution to overcome both the drawbacks associated with self-regulation and regulation by external authorities in the field of corporate governance.

Starting from the Middle-Age, a novel type of corporate governance developed on the banks of Occitanian rivers to manage mills organized as shareholding companies. To address timeless issues created by the separation between ownership and control, these companies find solutions that are often very close to modern ones. Shareholders benefit from limited liability, take major decisions during general assembly meetings, nominate directors and account auditors to look after their interests and put in place monitoring policies. Other aspects are more original such as a policy of no free-cash-flows, directors with annual mandates, and the obligation for a designated shareholder to work for the good of the company. To understand this original governance, the context of the emergence of these companies is first presented.

This article presents the evolution of shareholdings in French listed and non-listed corporations since 1977, with a focus on the beginning of the 21st century, twenty years after the unlocking of the French financial core. We present an original method that combines national balance sheets and FDI statistics published by the Banque de France, and the CPIS coordinated by the IMF in order to give an order of magnitude of the localisation of French corporate owners. We present also numbers on the evolution of ownership of French CAC 40 corporations since 2002. Despite the rise of institutional investors since the late nineties, levels of ownership concentration are very stable. Nevertheless, new activist shareholders (sovereign wealth funds, hedge or private equity funds) are among the first shareholders. Moreover, the stability of the concentration of the five first shareholders, coupled with a decline of the share of the first shareholder, gives more weight to the main blockholders.

Family firms account for a large proportion of listed companies worldwide. The governance mechanisms of family firms deal with the specificities of their agency conflicts. For example, agency conflicts between shareholders and managers can be mitigated when the managers are themselves family members. The costs of agency conflicts between the family blockholding and minority shareholders, related to potential private benefits, can be offset by more effective monitoring, while a specific agency conflict related to relations between the family at large and family shareholders can emerge. The governance mechanisms put in place seem effective, since family firms appear to perform better than non-family firms. But they are also less diversified, less innovative and more sensitive to the social climate in the company. Their financial decisions reflect their shareholders' concern to preserve their control, which involves, in particular, long-term relationships with other stakeholders. This article provides a review of research findings on these topics.

Institutional investors have become leading players in international financial markets, alongside systemic banks. These players offer different financial services and, according to theory, their common function is to reduce the imperfections of markets and ensure the overall adjustment between savings and investment. However, observation indicates that in the real world, the behavior of these players is affected by a short-term bias, which can be explained by their policy of asset management. This behavior contributes to the global imbalance between savings and investment, such that surplus savings cannot contribute to the financing of innovations and production for lack of long-term investors., Institutional investors holding long-term and stable liabilities are unable to focus on a long horizon, longer than economic cycles, because they cannot escape the constraints of market liquidity and volatility. Institutional, regulatory and accounting factors, which should be reformed, appear to contribute to this short-term bias. This situation also suggests that new forms of financial intermediation are necessary, such as those carried out by public development banks and sovereign investment funds which already exist in some countries, such as Germany, Brazil and France.

Based on the French case, this article addresses the question of governance in LBO transactions, i.e. the chain of delegation between Private Equity funds' investors, funds, and target companies. It analyses the incentives and monitoring mechanisms as well as the regulatory framework. The French case highlights that governance in LBOs relies on institutional characteristics affecting the effectiveness of control and monitoring mechanisms. It also provides some evidence that LBO lead to an asymmetry between funds' interests and funds' investors' interests at the expense of investors. Finally, this article shows that LBOs involving PE funds may be more interesting for banks than for acquired companies.

The powerful setup of passive investing in the management of savings by institutional investors has tremendously increased in the last ten years. It is the result of the progressive recognition of financial markets efficiency as well as of the focus on the costs and results of active portfolio management. This evolution triggered worries regarding the monitoring of governance in firms in which these funds invest. However, the worries seem today overestimated since the largest passive investors like Blackrock have realized their social duty and increase the number of their employees in charge of monitoring governance. Nevertheless new governance issues arise with the growth of dual ownership structures in high-tech listed companies, the introduction of artificial intelligence - based monitoring and the huge rise of the Chinese financial markets.

This article examines the role, functioning and composition of corporate boards. It relies on the recent literature in economics, finance and management, and presents the main evolution of French corporate boards (for the SBF120 companies) over the 2007-2015 period. Board studies raise key questions regarding firm performance, governance and accountability. We highlight three main issues. The first concerns board delegation in dedicated sub-committees: while important, it has received little attention so far. The second concerns board composition. The literature has been for a long time focused on board independence; however, there is a growing interest for board diversity (as a way to improve firm performance and/or to integrate various interests in the corporate decision-making process). The third is board gender diversity, as a number of EU member states have in the 2010 decade adopted regulation (hard or soft) to increase female representation.

Board-level employee representation, as a main form of employee involvement, is an element of co-participation: it provides direct and effective powers to all the employees of the firm, through their representatives, without consideration for their income or the shares they may hold. In view of history and geographical extension of board-level employee representation, this form of workers' participation clearly appears as a European model, born in Europe and representing a majority in Europe. Taking into account its many advantages, board-level employee representation may also become a model for the future of Europe.

The huge increase of institutional share ownership - 6% in the 1950's compared to 70% nowadays in the USA - is mainly responsible for the growth of shareholders activism. These shareholders challenge companies on governance matters such as the composition of the Board of Directors, anti take-over measures..., vote against resolutions and propose their own resolutions. Due to regulatory developments and an almost obligation to vote, the big diversified funds are in fact very active shareholders, even when they practice passive investing. Hedge funds also act as activists but in a different way since they acquire substantial stakes in companies in order to change their governance and strategy. Recent research highlight that shareholders activism lead to better long-term performances and in the case of hedge funds, to changes in control, sometimes detrimental to others shareholders. The effects of activism on the other stakeholders are not still well-known.

The highest levels of CEO pay trigger public outrage on a regular basis. A panel of large French listed companies show that these most outrageous levels of pay do not exhibit an upward trend during the 2001-2016 period. On the contrary, the equity-based part of these pays tends to recede since their fair values have been publicly disclosed. On the opposite side, CEO pay rose tremendously in less exposed firms. While public opinion focuses on the highest levels of pay, below-average CEOs catch up with their peers and in the end, they significantly contribute to rising income inequalities. Overall, cash pay rose significantly during the observed period. Market forces, such as pay competitiveness on the market for CEOs and shareholder pressure to increase performance-based components, partly explain rising managerial pays.

Large companies tend to create increasingly large numbers of subsidiaries and the good management of these groups of subsidiaries requires adequate governance practices, ensuring the implementation of the policies decided at the top while respecting the specificities of the subsidiaries. The first question relates to the autonomy of the companies’ “corporate interest”, implying that parent companies have to be respectful of the subsidiaries’ interest in order to avoid the risk of “misappropriation of corporate assets”, and have to set up procedures for related parties transactions. This does impose constraints to the implementation of group policies, but does not prevent it if these policies are not adverse to the subsidiaries’ interests, as in the case of cash pooling agreements. The principle of legal autonomy also implies that each subsidiary has its own governance bodies and the good operation of these bodies must be overseen by the parent company. The directors appointed by the parent company should be carefully trained for these duties, even though it may be a “side product” of their main professional activities, as indeed they may incur personal civil and criminal liabilities. This shows that group governance, although not much dealt with by corporate governance codes and academic research, should be recognized as a key element of good governance.

In this paper, we classify the conflicts of interest concerning the systemic banks into two broad categories: on the one hand, the microeconomic conflicts of interest that undermine the fiduciary responsibility towards bank's customers: on the other hand the macroeconomic conflicts of interest that harm the interest of the society as a whole and feed the collective social mistrust in banks. The basic assumption of this paper states that the financial scandals relating to systemic banks constitute a genuine epidemic which is not an epiphenomenon but rather the symptom of the shortcomings of their governance and of unaddressed conflicts of interest. The understanding of the driving forces leading to a weakening of ethical standards in banking is essential for financial stability and for restoring confidence in the financial system. Moreover it induces major implications for public policy. So, from our point of view economists should have an interest in this field of research.

Banks play an essential role in financing the economy and in society, hence the importance of their governance. In this article we will demonstrate the specificities of bank governance and the stakes involved. Indeed, banks are less transparent than non-financial firms and their business is more complex. Their products have become harder to grasp. The very nature of the risks taken has changed and the speed with which risk changes has clearly accelerated. The crisis has demonstrated the externalities banking activities may bear and the costs that they represent for society. The existence of a lender of last resort may increase moral hazard, especially when dealing with “too big to fail” banks. In the face of these lessons of the crisis, what measures have been taken to reconcile the general interest and the interests of the various stakeholders ? Are these measures adequate ? What proposals can be made for improved bank governance ?

Over the last decade, companies from the banking sector have made the headlines with numerous allegations and record fines totaling several hundred billion Euros. In addition to unethical business practices and failures of internal control systems, large sums of money are withheld from tax authorities, representing 2 to 5% of global GDP. Financial companies are also criticized for the lack of consideration given to environmental and social impacts of their financing and lending operations. Vigeo Eiris' rating of the social responsibility of more than 350 financial institutions around the world confirms that the sector is still struggling to fulfil its compliance obligation, and to prevent ethical and sustainability risks. The average overall rating of banks and financial institutions remains limited (30.8 out of 100), although it is higher than the average score of the 4,000 rated companies across all sectors (24.2 out of 100). The sector appears to be at the crossroads: behind a minority of leaders with innovative commitments and practices, the majority of operators in this sector have difficulty in committing and reporting on their efforts towards sustainability.

The normalisation of US monetary policy undertook in December 2015 with the raise in the Federal funds rates is now entering a new phase characterized by the reduction of the Fed's enormous balance sheet. The Fed is opting for a progressive and predictable reduction of its balance sheet, based by halting reinvest proceeds of maturity bonds. Given the unprecedented nature of a such operation of central bank's reduction of its balance sheet, it is important to analyze in depth the issues related to the Fed's monetary turning. A poorly planned Fed's balance sheet could destabilise all financial markets both in the US and in the rest of world. In order to give a more complete overview of the key issues and challenges of the normalisation of Fed's balance sheet, we have adopted an approach based on an outlook of the US monetary policy. After examining the Fed's balance sheet management at the beginning of the normalisation of US monetary policy, then showing the need to reduce the size of the balance sheet, we are dealing with the central question of determination of the optimal size of the Fed's balance sheet level.

Everywhere national accounts measure precisely the flows of the annual net savings of households. However, nowhere they are able to give the precise allocation of these flows between its three uses: loan reimbursements, real investments and financial investments. In particular, for some two hundred years economists have completely disregarded reimbursements, as well as the potential relationship between credit and the global amount of households' savings. These oblivions have many reasons, including the subordinate status of credit in economic analysis and the real difficulty to compute the “true” reimbursements funded by current savings. The consequences of these oblivions are very important. Without the inclusion of these variables, no acute retrospective study on savings can be undertaken. As regards forecasting, no significant turnaround of the household's savings rate has been foreseen during the last decades, neither its fall in the 80 ‘s - for which the liberalization of credit is largely responsible - nor its rise in several countries just after the subprime crisis at a moment when credit shrank.