Corporate Governance: The Role of Restructuring Transactions

Abstract

The purpose of this essay is to examine and evaluate the corporate restructuring transaction as an innovation in corporate governance, in particular to determine how far it remedies the perceived agency problems associated with management control. In the current debate on governance issues there is a widely articulated view (e.g. Charkham, I994) that the Anglo-American style capital market, with its emphasis on liquidity and the separation of institutional shareholders from the firms they invest in, too. often results in poor managerial accountability and substantial departures from shareholder value maximisation.' It is further suggested that neither of the principal market restraints on managerial behaviour i.e. the managerial labour market and the corporate acquisitions market is particularly effective. The former, which might be expected to reward success and penalise failure (Fama, I980) shows, at best, a very weak average relationship between top executive remuneration and performance (see Conyon et al. in this Forum); whilst.the market for corporate control hypothesis is flawed if managers can deploy effective costly defences, including size, or if errant managers use their discretion to pursue takeover targets.2 Concerns such as these were among those leading to the Cadbury Report (I992), whose code of practice has received widespread adoption in the United Kingdom, and have encouraged others to call for more far-reaching institutional changes. The argument to be advanced here is that the corporate restructuring transaction may be considered as an organic response of Anglo-American capital markets to the governance problems encountered therein. The description 'corporate restructuring transaction' is used here to embrace a range of organisational developments leveraged buy-outs, management buy-outs and buy-ins, leveraged recapitalisations and cash-outs, employee stock ownership plans etc. which involve simultaneous changes in the ownership, financial structure and incentive systems of firms. Changes which typically have the effect of securing: first, a substantial re-unification of share ownership and manager control; second, the partial substitution of various debt instruments for equity in the firm's financial structure; third, the introduction of increased incentives for investors and/or lenders to monitor senior managers; and fourth, the introduction of greater incentives at the peak tier of the managerial