American Corporate Governance System Research Articles

Toward Fair Gainsharing and a Quality Workplace for Employees: How a Reconceived Compensation Committee Might Help Make Corporations More Responsible Employers and Restore Faith in American Capitalism

In the three decades after World War II, workers and stockholders shared equitably in the nation’s growing wealth. But, during the last several decades, this fair gainsharing has diminished as the power of the stock market, in the form of institutional investors, has grown, and the comparative voice and leverage of workers has declined. As a result of these and other factors, a much greater share of the gains from increased corporate profitability and productivity has gone to stockholders and top management, on the one hand, and much less to employees, on the other. Contributing to this divide has been a push to tie top management pay to total stockholder return and to create incentives for management to deliver returns to stockholders, even if that requires decreasing the share that the workers primarily responsible for corporate success get. The resulting economic insecurity and inequality have caused demands for serious change in corporate governance to give greater weight to the interests of workers. In this Essay, we focus on one practical way to move toward that worthy end: reconceiving the compensation committee. That is, a reconceived compensation committee would focus on the company’s entire workforce, not just senior management, and have the responsibility for overseeing management’s implementation of an effective system to compensate workers fairly, ensuring they receive a fair share when corporate productivity and profitability increases, and analyzing what allocation of compensation within the company’s workforce will provide the most motivation to encourage corporate success. To accomplish this, compensation committees would be expected to understand the nation’s, the industry’s, and the company’s traditional gainsharing practices among workers, stockholders, and top management and develop and implement a corporate strategy to ensure that gainsharing is equitable. By doing so, compensation committees will also be able to more rationally set top executive compensation and establish metrics for top management and key personnel involved in gatekeeping functions that are tied to good EESG practices and not just to stock price. And the reconceived compensation committee should also be the committee charged with compliance and EESG responsibilities in the areas most important to workers, including not just worker pay and benefits, but also safety, racial and gender equality, sexual harassment and inclusion, and training and promotion policies. Not only that, the reconceived compensation committee should monitor company practices in its supply chain to ensure that the company’s adopted policies regarding fair treatment of workers extend to those workers who work for company contractors. By this evolutionary means that builds on the existing American corporate governance system, important strides can be taken toward making our capitalist system work better for the people most critical to its success: workers.

Toward Fair and Sustainable Capitalism: A Comprehensive Proposal to Help American Workers, Restore Fair Gainsharing Between Employees and Shareholders, and Increase American Competitiveness by Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth and Encouraging Investments in America’s Future

To promote fair and sustainable capitalism and help business and labor work together to build an American economy that works for all, this paper presents a comprehensive proposal to reform the American corporate governance system by aligning the incentives of those who control large U.S. corporations with the interests of working Americans who must put their hard-earned savings in mutual funds in their 401(k) and 529 plans. The proposal would achieve this through a series of measured, coherent changes to current laws and regulations, including: requiring not just operating companies, but institutional investors, to give appropriate consideration to and make fair disclosure of their policies regarding EESG issues, emphasizing “Employees” and not just Environmental, Social, and Governance” factors; giving workers more leverage by requiring all societally-important companies to have board level committees charged with ensuring fair treatment of employees, authorizing companies to use European-style works’ councils to increase employee voice, and reforming labor laws to make it easier for workers to join a union and bargain for fair wages and working conditions; reforming the corporate election system so that voting occurs on a more rational, periodic, and thoughtful basis supportive of sustainable business practices and long-term investment; improving the tax system to encourage sustainable, long-term investment and discourage speculation, with the resulting proceeds being used to revitalize and green America’s infrastructure, tackle climate change, invest in American workers’ skills, transition workers from carbon-intensive industries to jobs in the clean energy sector; and taking other measures, such as reform of corporate political spending and forced arbitration, to level the playing field for workers, consumers, and ordinary investors.

Globalization of monitoring practices: The case of American influences on the dismissal risk of European CEOs

This study examines globalization of monitoring practices by focusing on how American (U.S.) influences on European firms impact the dismissal risk for these firms’ CEOs. Specifically, we argue that the stronger short term orientation of the American corporate governance system increase the dismissal performance sensitivity faced by European CEOs, indirectly and directly. The former materializes via European firms cross-listing on U.S. exchanges, the latter results from European firms hiring U.S. independent board members. Both influences are expected to result in increased dismissal performance sensitivity. Based on data from the 250 largest European publicly traded firms we find a significant increase in the dismissal sensitivity of poorly performing companies with American board members and a support for migration of American executive pay practice. However, no significant increase in dismissal performance sensitivity was identified from U.S. cross-listing. In line with our agency theory based prediction, this indicates an institutional contagion driven by the presence of U.S. board members on European corporate boards. To policy makers the message is that internationalization of boards should not be banned or restricted, since it provides owners with more options to influence the corporate governance of the firm.

Globalization of Monitoring Practices: The Case of American Influences on the Dismissal Risk of European CEOS

This study examines globalization of monitoring practices by focusing on how American (U.S.) influences on European firms impact the dismissal risk for these firms' CEOs. Specifically, we argue that the stronger short term orientation of the American corporate governance system increase the dismissal performance sensitivity faced by European CEOs, indirectly and directly. The former materializes via European firms cross-listing on U.S. exchanges, the latter results from European firms hiring U.S. independent board members. Both influences are expected to result in increased dismissal performance sensitivity. Based on data from the 250 largest European publicly traded firms we find a significant increase in the dismissal sensitivity of poorly performing companies with American board members and a support for migration of American executive pay practice. However, no significant increase in dismissal performance sensitivity was identified from U.S. cross-listing. In line with our agency theory based prediction, this indicates an institutional contagion driven by the presence of U.S. board members on European corporate boards. To policy makers the message is that internationalization of boards should not be banned or restricted, since it provides owners with more options to influence the corporate governance of the firm.

Institutional Transplant and American Corporate Governance: The Case of Ferodyn

This paper examines the relationship between employment relations and American corporate governance using the case of Ferodyn*. In response to difficult industry conditions and sagging performance, American-owned Landis* Steel Corporation and Japanese-owned Daiichi* Steel Corporation jointly financed and built Ferodyn, a state-of-the-art high quality steel finishing facility. Although the joint venture was extremely successful in terms of quality, productivity and industrial relations, it came under severe stress from both external and internal pressures. Ferodyn’s success was moderated by the market in that it was never able to extract a price premium for the quality of steel it produced. At the same time, pressures in the form of corporate governance and the parent / subsidiary relationship were substantial. Institutional investor demands for improvements in short run shareholder value ultimately resulted in the sale of Landis to Maxi-metal*, a global steel conglomerate, committed to a strategy of minimising costs. In this case, the organ transplant provides a useful metaphor: Ferodyn was like a strong and healthy ‘organ transplant’ in a weak and ailing corporate ‘body.’ So long as there were buffers in place to protect it from rejection by its host, Ferodyn could prosper, giving rise to exceptionally high labour standards and quality of life for its employees. In effect, the American system of corporate governance and the nature of power relations in the corporation created antigens that weakened both Landis’s ability to support the joint venture and Ferodyn’s ability to survive in an alien and hostile corporate, industry and macro-economic environment. * Ferodyn, Landis, Daiichi and Maxi-metal are fictitious names.

Is Shareholder Capitalism a Defunct Model for Financing Development?

Shareholder capitalism, and the American system of corporate governance that serves as its operating system, has been held out as a model of economic development for emerging markets for the past generation. This article unpacks the origins of this model within the US and argues that the model has had at best mixed success outside the US. Moreover, the fallout from the two financial bubbles of the early 21st century suggests that shareholder capitalism may not work as advertised even within the US. In the wake of the financial crisis, wise policymakers will draw on a diversity of models rather than hewing to the ‘one best way.’

Globalization of Corporate Governance: The American Influence on Dismissal Performance Sensitivity of European CEOs

This study examines how globalization of corporate governance practices influence the risk of European CEOs being dismissed. We argue that the harsh monitoring of the American corporate governance system spills over to the rest of the world as a result of this globalization. We focus on direct and indirect American influence on the dismissal performance sensitivity among the 250 largest European publicly listed firms. The indirect influence is assumed to materialize via European firms cross-listing on U.S. exchanges, whereas the direct influence is assumed to appear as a result of European firms hiring of American independent board members. Both sources of influence are hypothesized to result in increased dismissal performance sensitivity. The empirical results show a significant increase in the dismissal sensitivity in poorly performing companies with American board membership whereas no significant increase is found from cross-listing in the U.S.

The New Federalism of the American Corporate Governance System: Preliminary Reflections of Two Residents of One Small State

The year 2002 was a tumultuous one for the American system of corporate governance. High-profile scandals at large firms propelled reform initiatives from both Congress (in the form of the Sarbanes-Oxley Act) and the major stock exchanges (in the form of new listing standards and rules). These reforms - what we call the 2002 Reforms - include provisions that regulate the internal affairs of public corporations. As a result, the Reforms represent a challenge to the existing division of responsibilities among the federal government, the stock exchanges, and the states, in which the states have been given the primary role in articulating and enforcing substantive principles of corporation law governing the internal affairs of corporations and the responsibility of directors to stockholders. In fact, the 2002 Reforms can be viewed as creating a shadow corporation law that has a prescriptive quality at odds with the corporate law system in place in states like Delaware.In this essay, we examine some of the more interesting ways in which the 2002 Reforms will affect state corporation law and the traditional policy domain of states. Although many aspects of the Reforms hold promise as guarantors of greater corporate integrity, other elements are less obviously useful. We discuss some of our initial impressions of the Reforms, both pro and con, and highlight some of the more interesting policy implications of the Reforms for state corporate law.We conclude by counseling state policymakers to be active participants in the process of breathing life into the Reforms and in addressing the crisis in corporate confidence that arose in 2002. If states assume these responsibilities with vigor, we have confidence that the existing division of responsibilities among the federal government, the stock exchanges, and the states will persist. Because that division has, on balance, served investors and the public well, it should not be lightly abandoned.

Markets, Corporate Governance and Creative Work Systems: the Case of Ferodyn

This paper examines the difficulties associated with implementing and maintaining a ‘creative,’ human-resource based work system in a market-based system of corporate governance using the case of Ferodyn.* In response to difficult industry conditions and sagging performance, American-owned Landis* Steel Corporation and Japanese-owned Daiichi* Steel Corporation jointly financed and built Ferodyn, a state-of-the-art high quality steel finishing facility. Although the joint venture was extremely successful in terms of quality, productivity and industrial relations, it came under severe stress from both external and internal pressures. Institutional investor demands for improvements in short run shareholder value ultimately resulted in the sale of Landis to Maxi-metal*, a global steel conglomerate, committed to a strategy of cost minimisation. In effect, the American system of corporate governance and the nature of power relations in the corporation served to weaken both Landis and Daiichi’s ability to support the joint venture and Ferodyn’s ability to survive in a hostile corporate, industry and macro-economic environment.

The New Federalism of the American Corporate Governance System: Preliminary Reflections of Two Residents of One Small State

The year 2002 was a tumultuous one for the American system of corporate governance. High-profile scandals at large firms propelled reform initiatives from both Congress (in the form of the Sarbanes-Oxley Act) and the major stock exchanges (in the form of new listing standards and rules). These reforms - what we call the 2002 Reforms - include provisions that regulate the internal affairs of public corporations. As a result, the Reforms represent a challenge to the existing division of responsibilities among the federal government, the stock exchanges, and the states, in which the states have been given the primary role in articulating and enforcing substantive principles of corporation law governing the internal affairs of corporations and the responsibility of directors to stockholders. In fact, the 2002 Reforms can be viewed as creating a shadow corporation law that has a prescriptive quality at odds with the corporate law system in place in states like Delaware.In this essay, we examine some of the more interesting ways in which the 2002 Reforms will affect state corporation law and the traditional policy domain of states. Although many aspects of the Reforms hold promise as guarantors of greater corporate integrity, other elements are less obviously useful. We discuss some of our initial impressions of the Reforms, both pro and con, and highlight some of the more interesting policy implications of the Reforms for state corporate law.We conclude by counseling state policymakers to be active participants in the process of breathing life into the Reforms and in addressing the crisis in corporate confidence that arose in 2002. If states assume these responsibilities with vigor, we have confidence that the existing division of responsibilities among the federal government, the stock exchanges, and the states will persist. Because that division has, on balance, served investors and the public well, it should not be lightly abandoned.

The Politics of Corporate Control and the Future of Shareholder Activism in the United States

Over the past eleven years, activists – particularly public pension funds such as the California Employees Retirement System (CalPERS) – are credited with prompting boards to roust underperforming management at some of the largest US corporations, and they have pushed for reforms in areas ranging from compensation to corporate strategy. Evidence for shareholders’ increased interest in corporate governance is clear. In the 1984–5 proxy season, shareholder resolutions totaled 275, and the average vote was 5.74%; by 1991–2, resolutions and the average vote on them had climbed to 487 and 24.06%, respectively. In 1992, shareholders were also successful in pushing through regulatory changes that gave them the right to communicate with each other outside the management–dominated proxy system.After 11 years of shareholder activism, where does the movement stand today? Understanding the development of the shareholder–rights movement, the prospects for governance reform, and the future evolution of the movement requires a sophisticated understanding of how the politics of corporate control is accomplished and, in particular, the important role that social structure plays. In this article, we suggest that social movement theory, which sociologists have used to explain collective action by groups ranging from the Civil Rights movement to Mothers Against Drunk Driving, provides a useful tool for analysing owner–management conflicts, and in particular, the recent rise of the shareholder–rights movement in the United States. After briefly discussing the traditional economic view of corporate governance and its shortcomings, we argue that more–or–less organized politics is an essential ingredient of the American system of corporate governance. We then present a social movement framework to explain the rise in investor activism. We conclude by continuing our application of this framework to examine the maturation of this movement and to assess its future, in part by comparing it to other contemporary, confrontational movements.

CAPITAL CHOICES: CHANGING THE WAY AMERICA INVESTS IN INDUSTRY

The Project on Capital Choices, sponsored by the Harvard Business School and the Council on Competitiveness, initially set out to determine the extent to which the competitiveness of American industry is being undermined by a short time horizon. The project has since evolved into a broader examination of how private capital is allocated in the United States, Japan, and Germany and an assessment of the relative effectiveness of the American corporate governance system. Eighteen research papers were prepared by 25 prominent scholars in a wide range of disciplines. Professor Porter's paper, from which the following article is excerpted, develops an overall framework for understanding national investment systems and their consequences, drawing on the project papers and his own research. The complete paper is available through the Council on Competitiveness. A book containing all the project papers will be published by the Harvard Business School Press.