Instructor Manual
International Corporate
Governance
First edition
Marc Goergen
1
, Contents
Chapters Pages
Part I Introduction to Corporate Governance 5
1. Defining corporate governance and key theoretical models 6
2. Corporate control across the world 9
3. Control versus ownership rights 10
Part II International Corporate Governance 12
4. Taxonomies of corporate governance systems 13
5. Incentivising managers and disciplining of badly performing managers 14
6. Corporate governance, types of financial systems and economic growth 16
7. Corporate governance regulation in an international context 17
Part III Corporate Governance and Stakeholders 19
8. Corporate social responsibility and socially responsible investment 20
9. Debtholders 22
10. Employee rights and voice across corporate governance systems 23
11. The role of gatekeepers in corporate governance 25
Part IV Improving Corporate Governance 27
12. Corporate governance in emerging markets 28
13. Contractual corporate governance 30
14. Corporate governance in initial public offerings 31
15. Behavioural biases and corporate governance 33
3
© Pearson Education Limited 2012
, PART I
Introduction to Corporate Governance
5
© Pearson Education Limited 2012
, CHAPTER 1
Defining corporate governance and key
theoretical models
Discussion questions
1. Discuss Andrei Shleifer and Robert Vishny’s definition of corporate governance.
What is their rationale for attributing a special status to the providers of finance
compared to other corporate stakeholders?
Shleifer and Vishny justify the special status of the providers of finance, in particular
shareholders, by the fact that while all other stakeholders can easily recuperate their investment
in the firm when the firm runs into trouble, shareholders typically lose their investment. In other
words, shareholders are the residual claimants and their claims will only be met once the claims
of all the other stakeholders have been met. Hence, their claims have the least protection and
shareholders face the highest risk of being expropriated by the management.
2. Compare the principal–agent problem of equity with that of debt.
The principal–agent problem of equity relates to conflicts of interests between the management
and the shareholders. While it is the management’s duty to run the company in the interest of
the shareholders, they may prefer to pursue their own objectives. Possible agency costs caused
by conflicts between the managers and shareholders include empire building and excessive
perquisites.
The principal–agent problem of debt concerns conflicts of interests between the shareholders
and the debtholders. If the firm is mainly financed by debt and/or close to financial distress, the
shareholders may be tempted to gamble with the debtholders’ money by investing in high-risk
projects. If these projects are successful, the shareholders will reap most of the payoff as the
debtholders’ claims are capped, i.e. at best the debtholders will get their money back including
any interest agreed upon. However, if the projects fail, the debtholders will bear most of the
costs.
While the principal–agent problem of equity is about the firm not being run in ways to maximise
shareholder value, the principal–agent problem of debt assumes that shareholders are in control
and they may end of expropriating the other providers of finance, i.e. the debtholders.
3. What is the difference between ownership and control? Why do differences between
the two matter?
Ownership is defined as ownership of cash flow rights whereas control is the ownership of
voting rights. A cash flow right gives its holder a pro rata share in the firm’s cash flows or profit,
whereas control confers rights such as the right to appoint the members of the board of
directors at the annual general shareholders’ meeting. Ownership is not necessarily identical to
control as, e.g. some shares do not confer any control rights.
It is important to be aware of differences between ownership and control as they determine the
types of conflicts of interests that are likely to prevail in particular national corporate governance
systems or individual companies.
6
© Pearson Education Limited 2012
International Corporate
Governance
First edition
Marc Goergen
1
, Contents
Chapters Pages
Part I Introduction to Corporate Governance 5
1. Defining corporate governance and key theoretical models 6
2. Corporate control across the world 9
3. Control versus ownership rights 10
Part II International Corporate Governance 12
4. Taxonomies of corporate governance systems 13
5. Incentivising managers and disciplining of badly performing managers 14
6. Corporate governance, types of financial systems and economic growth 16
7. Corporate governance regulation in an international context 17
Part III Corporate Governance and Stakeholders 19
8. Corporate social responsibility and socially responsible investment 20
9. Debtholders 22
10. Employee rights and voice across corporate governance systems 23
11. The role of gatekeepers in corporate governance 25
Part IV Improving Corporate Governance 27
12. Corporate governance in emerging markets 28
13. Contractual corporate governance 30
14. Corporate governance in initial public offerings 31
15. Behavioural biases and corporate governance 33
3
© Pearson Education Limited 2012
, PART I
Introduction to Corporate Governance
5
© Pearson Education Limited 2012
, CHAPTER 1
Defining corporate governance and key
theoretical models
Discussion questions
1. Discuss Andrei Shleifer and Robert Vishny’s definition of corporate governance.
What is their rationale for attributing a special status to the providers of finance
compared to other corporate stakeholders?
Shleifer and Vishny justify the special status of the providers of finance, in particular
shareholders, by the fact that while all other stakeholders can easily recuperate their investment
in the firm when the firm runs into trouble, shareholders typically lose their investment. In other
words, shareholders are the residual claimants and their claims will only be met once the claims
of all the other stakeholders have been met. Hence, their claims have the least protection and
shareholders face the highest risk of being expropriated by the management.
2. Compare the principal–agent problem of equity with that of debt.
The principal–agent problem of equity relates to conflicts of interests between the management
and the shareholders. While it is the management’s duty to run the company in the interest of
the shareholders, they may prefer to pursue their own objectives. Possible agency costs caused
by conflicts between the managers and shareholders include empire building and excessive
perquisites.
The principal–agent problem of debt concerns conflicts of interests between the shareholders
and the debtholders. If the firm is mainly financed by debt and/or close to financial distress, the
shareholders may be tempted to gamble with the debtholders’ money by investing in high-risk
projects. If these projects are successful, the shareholders will reap most of the payoff as the
debtholders’ claims are capped, i.e. at best the debtholders will get their money back including
any interest agreed upon. However, if the projects fail, the debtholders will bear most of the
costs.
While the principal–agent problem of equity is about the firm not being run in ways to maximise
shareholder value, the principal–agent problem of debt assumes that shareholders are in control
and they may end of expropriating the other providers of finance, i.e. the debtholders.
3. What is the difference between ownership and control? Why do differences between
the two matter?
Ownership is defined as ownership of cash flow rights whereas control is the ownership of
voting rights. A cash flow right gives its holder a pro rata share in the firm’s cash flows or profit,
whereas control confers rights such as the right to appoint the members of the board of
directors at the annual general shareholders’ meeting. Ownership is not necessarily identical to
control as, e.g. some shares do not confer any control rights.
It is important to be aware of differences between ownership and control as they determine the
types of conflicts of interests that are likely to prevail in particular national corporate governance
systems or individual companies.
6
© Pearson Education Limited 2012
