The past decade has given rise to a growing debate over the relative efficiency of different national economic systems. There are two basic corporate finance and governance systems that predominate in todays developed economies. One is the Anglo-American market based model, with widely dispersed shareholders and a fairly vigorous corporate control market. The other is the Japanese and German relationship based system, with its large bank and intercorporate holdings (and conspicuous absence of takeovers). Given the increasing globalization of business, which of these two systems can be expected to prevail over time? Or will the most valuable aspects of each
be blended into a single new system? The story now being told by economists and management experts — one that this book attempts to present — is a complicated one. Here is a sampling of the arguments: Corporate strategist Michael Porter states that the U.S. system of allocating capital both within and across companies appears to be failing because of both capital market and internal pressures on U.S. companies to underinvest in the relatively intangible assets that contribute to corporate capabilities. In contrast to Porter, financial economist Michael Jensen maintains that the most formidable challenge now facing the U.S. economy — and, indeed, the economies of all
industrialized nations — is the corporate overinvestment problem, a problem that was addressed in the U.S. by the leveraged restructuring of the 1980s. Nobel-Prize economist Merton Miller answers both Porters concern about U.S. underinvestment and Jensens pessimism about U.S. control systems with a classic defense of the shareholder-value principle. Corporate strategist C.K. Prahalad, unconvinced by the arguments of both Miller and Jensen, challenges the wisdom of corporate Americas commitment to maximizing shareholder value. In a roundtable discussion, Prahalad debates with shareholder value advocate Bennett Stewart about the effects of shareholder primacy in the U.S. and its absence in
Japan. Studies in International Corporate Finance and Governance Systems consists of 27 articles (and two roundtable discussions) written by academic and management experts in the fields of corporate finance and governance. Given its commitment to translating outstanding academic research into relatively plain English for practicing businessmen, this book should prove especially useful for corporate executives as well as students in MBA and executive development programs.
Readership: Courses in corporate finance and management where an emphasis is given to corporate governance; appropriate for (some)
undergraduate, MBA, and Executive Development courses. May be a supplement in corporate finance or management courses, or the main text in specific courses on corporate governance.
Donald Chew, Executive Vice President, Stern Stewart Management Company
I. INTRODUCTION 1
1: by Michael Porter, Harvard Business School: CAPITAL CHOICES: CHANGING THE WAY AMERICA INVESTS IN INDUSTRY,
2: Michael Jensen: THE MODERN INDUSTRIAL REVOLUTION, EXIT, AND THE FAILURE OF INTERNAL CONTROL SYSTEMS,
3: Merton H. Miller: IS AMERICAN CORPORATE GOVERNANCE FATALLY FLAWED?
4: C. K. Prahalad, University of Michigan: CORPORATE GOVERNANCE OR CORPORATE VALUE ADDED?: RETHINKING THE PRIMACY OF SHAREHOLDER VALUE
5: CONTINENTAL BANK ROUNDTABLE ON GLOBAL COMPETITION IN THE '90s
Moderated by Bennett Stewart. Panelists: C. K. Prahalad, University of Michigan; Charles Clough, CEO, Wyle Laboratories; Dennis Eck, CEO, The Vons Companies; Frank Perna, CEO, Magnetek; Edward Thompson, CFO, Amdahl Corporation; and Len Williams, CEO, MacFrugal's.
II. THE U.S.
Corporate Restructuring: The 1980s
6: Gordon Donaldson, Harvard Business School: THE CORPORATE RESTRUCTURING OF THE 19802—AND ITS IMPORT FOR THE 1990S
7: by Andrei Shleifer, Harvard Business School and Robert Vishny, University of Chicago: THE TAKEOVER WAVE OF THE 1980s
8: by Amar Bhide, Harvard Business School: REVERSING CORPORATE DIVERSIFICATION
9: by Renso Caporali, CEO, Grumman Corp.: MANAGING FOR SHAREHOLDERS IN A SHRINKING INDUSTRY: THE CASE OF GRUMMAN,
10: by George Baker and Karen Wruck, Harvard Business School: CORPORATE GOVERNANCE LESSONS FROM A MIDDLE MARKET LBO: THE CASE OF OM SCOTT,
11: by Steven Kaplan, University of Chicago: THE STAYING POWER OF LBOs,
Relationship Investing: The 1990s
12: John Pound, Harvard University: RAIDERS, TARGETS, AND POLITICS: THE HISTORY AND FUTURE OF AMERICAN CORPORATE CONTROL
13: by Bernard S. Black, Columbia Law School: INSTITUTIONAL INVESTORS AND CORPORATE GOVERNANCE: THE CASE FOR INSTITUTIONAL VOICE
14: by Mark Roe, olumbia University: MUTUAL FUNDS IN THE BOARDROOM
15: by Ronald J. Gilson, Stanford University and Columbia University: REGULATING THE EQUITY COMPONENT OF CAPITAL STRUCTURE: THE SEC'S RESPONSE TO THE ONE SHARE-ONE VOTE CONTROVERSY,
16: by John Pound, Harvard University and Walter Skowronski, Lockheed Corp.: BUILDING RELATIONSHIPS WITH MAJOR SHAREHOLDERS: A CASE STUDY OF LOCKHEED
17: STERN STEWART ROUNDTABLE ON RELATIONSHIP INVESTING AND SHAREHOLDER COMMUNICATION
Panelists: Basil Anderson, Scott Paper Co.; Carolyn Brancato, Columbia Law School; Geoffrey Colvin, Fortune; Judith Dobrzynski, Business Week; Alex Lehmann; Nell Minow, The Lens Fund; Krishna Palepu, Harvard University; Edward Reagan, New York State Comptroller; Joseph Shelton, OLC Corp.; Derek Smith, Equifax Inc.; Eugene Vesell, Oppenheimer Capital; Jerold Zimmerman, University of Rochester Moderated by Joel Stern and Bennett Stewart.
JAPAN (AND GERMANY)
18: by Carl Kester, Harvard Business School: GOVERNANCE, CONTRACTING, AND INVESTMENT HORIZONS: A LOOK AND JAPAN AND GERMANY
19: by Joichi AOI, Chairman, Toshiba Corporation: TO WHOM DOES THE COMPANY BELONG?: A NEW MANAGEMENT MISSION FOR THE INFORMATION AGE,
20: by Steven Kaplan, University of Chicago: CORPORATE GOVERNANCE AND CORPORATE PERFORMANCE,
21: by Carl Kester Harvard Business School: THE HIDDEN COSTS OF JAPANESE SUCCESS,
22: by Howard Sherman and Bruce Babcock, Institutional Shareholder Services: REDRESSING STRUCTURAL IMBALANCES IN JAPANESE CORPORATE GOVERANCE: AN INTERNATIONAL PERSPECTIVE,
IV. EUROPE (AND SOUTH AFRICA)
23: Julian Franks London Business School and Colin Mayer Oxford University: CORPORATE OWNERSHIP STRUCTURE IN THE U.K., FRANCE, AND GERMANY,
24: Graham Barr, Jos Gerson, and Brian Kantor, University of Cape Town: SHAREHOLDERS AS AGENTS AND PRINCIPALS: THE CASE FOR SOUTH AFRICA'S CORPORATE GOVERNANCE SYSTEM,
25: by Mike Wright and Ken Robbie, University of Nottingham and Steve Thompson, University of Manchester: CORPORATE RESTRUCTURING, BUY-OUTS, AND MANAGERIAL EQUITY: THE EUROPEAN DIMENSION,
26: Christopher Bland, LWT; Manfred Klein Benckiser; Henri Blanchet and Christian Moretti, Dynaction: PERSPECTIVES ON RESTRUCTURING IN EUROPE: INTERVIEWS WITH FOUR EUROPEAN EXECUTIVES,
27: THE ECONOMIC IMPORT OF EUROPE 1992, by Alan C. Shapiro, University of Southern California
28: by Howard Sherman, Institutional Shareholder Services: CORPORATE GOVERNANCE CHANGES MAKE INROADS IN EUROPE
V. EVA: A NEW APPROACH TO CORPORATE GOVERNANCE
29: by Joel Stern, Bennett Stewart, and Donald Chew, Stern Stewart & Co.: THE EVA FINANCIAL MANAGEMENT SYSTEM,
30: by Stephen O'Byrne Stern Stewart & Co.: TOTAL COMPENSATION STRATEGY,