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What is the scientific basis for the Action Plan? Discussion by Erik Berglof Stockholm What is the scientific basis for the Action Plan? Discussion by Erik Berglof Stockholm School of Economics, CEPR, and ECGI SITE

What’s going on in ”science”? • Extremely active area of research – New concepts, What’s going on in ”science”? • Extremely active area of research – New concepts, new empirical tools – Real-world pressures • But still gap between research and real world • Early (flawed) research results have had enormous impact, where they probably apply the least – Example: Maximum minority protection SITE

What’s going on in policy? Earlier: • Little activity in member states • Commission What’s going on in policy? Earlier: • Little activity in member states • Commission activism, but forced to retreat – No European Code – Harmonization ambition rejected Now: • Massive activity in member states • Commission cautious activism – Action plan with “comply or explain” national codes – Convergence of codes: stealth harmonization? • Directives • Recommendations – monitor implementation • Corporate Governance Forum SITE

Corporate Governance Conflicts Management Controlling shareholders Minority shareholders SITE Corporate Governance Conflicts Management Controlling shareholders Minority shareholders SITE

Ownership and control in EU 15 (and the United States) SITE Ownership and control in EU 15 (and the United States) SITE

Contestability of control – many mechanisms • • Hostile takeovers Proxy fights Board activity Contestability of control – many mechanisms • • Hostile takeovers Proxy fights Board activity Executive compensation schemes Litigation through courts Bank monitoring Employee monitoring Public opinion and media… SITE

Key tradeoffs • • • Discretion/initiative vs. rules/monitoring Blockholders vs. minority shareholders Blockholders vs. Key tradeoffs • • • Discretion/initiative vs. rules/monitoring Blockholders vs. minority shareholders Blockholders vs. other mechanisms Minority protection vs. takeover activity Friendly/competent vs. independent boards Disclosure vs. cost of listing Harmonization vs. compatibility ”Comply or explain” codes vs. regulation Shareholders vs. stakeholders… SITE

Emerging European Capitalism • Ownership concentration high and increasing – Still owner-management, but changing Emerging European Capitalism • Ownership concentration high and increasing – Still owner-management, but changing – Increasing separation of ownership and control – Corporate groupings and large foreign owners • Bank-orientation of financial system – Investment financed through internal funds (+ FDI) – Markets still limited corporate finance role • Weak enforcement – Adopted massive amounts of law and regulation fast SITE

Ownership and Control in Central and Eastern Europe SITE Ownership and Control in Central and Eastern Europe SITE

Uneven disclosure Website AR 2003 Bulgaria 0. 36 0. 17 0. 42 0. 25 Uneven disclosure Website AR 2003 Bulgaria 0. 36 0. 17 0. 42 0. 25 0. 08 0. 86 32 Czech Rep 0. 91 0. 63 0. 03 0. 74 0. 68 0. 65 0. 00 3. 53 32 Estonia 0. 77 0. 50 0. 00 0. 40 0. 10 0. 50 0. 10 2. 23 11 Hungary 0. 75 0. 57 0. 29 0. 72 0. 61 0. 50 0. 29 2. 71 26 Latvia 0. 91 0. 40 0. 00 0. 20 0. 00 1. 82 11 Lithuania 0. 89 0. 21 0. 03 0. 33 0. 06 0. 00 1. 53 36 Poland 0. 80 0. 30 0. 07 0. 66 0. 54 0. 41 0. 20 2. 51 153 Romania 0. 73 0. 08 0. 03 0. 35 0. 06 0. 34 0. 03 1. 37 43 Slovak Rep 0. 80 0. 75 0. 00 1. 00 0. 50 0. 00 3. 40 5 Slovenia 0. 93 0. 69 0. 06 0. 70 0. 47 0. 61 0. 00 3. 05 21 Total 0. 78 0. 36 0. 07 0. 58 0. 42 0. 40 0. 11 2. 26 370 Country Mgr. Names Board. Names Owners Bylaws Web. Disclosure N CG Section SITE

Uneven enforcement Country Inside. Shares Income Related. Trans Owners CGSection ARDisclosure Enforcement (AR-Discl_dif) Bulgaria Uneven enforcement Country Inside. Shares Income Related. Trans Owners CGSection ARDisclosure Enforcement (AR-Discl_dif) Bulgaria 1. 00 0. 50 1. 00 0. 00 2. 50 -1. 00 Czech Republic 0. 50 1. 00 0. 00 2. 50 0. 31 Estonia 1. 00 0. 50 1. 00 0. 00 2. 50 0. 36 Hungary 0. 00 0. 50 0. 00 1. 00 0. 00 1. 50 0. 13 Latvia 0. 00 0. 50 1. 00 0. 00 1. 50 -0. 06 Lithuania 1. 00 0. 50 1. 00 0. 00 3. 00 -0. 69 Poland 0. 50 0. 00 0. 50 1. 00 0. 00 2. 00 -0. 38 Romania 0. 00 0. 50 1. 00 0. 00 1. 50 -0. 13 Slovak Republic 0. 00 1. 00 0. 50 Slovenia 0. 00 0. 50 1. 00 0. 00 2. 00 -0. 14 Total 0. 50 0. 28 0. 45 1. 00 0. 00 2. 22 -0. 14 SITE

What’s the European Challenge? • Not integrity of markets in EU 15 – Fraud What’s the European Challenge? • Not integrity of markets in EU 15 – Fraud not key problem (possibly in CEEC) • Need to attract international savings – Corporate governance part of solution? • Restructuring in Continental Europe – Corporate governance part of solution? • Enforcement in Emerging Europe – Corporate governance (big) part of solution SITE

Reform corporate governance? • Most directors and executives still consider the level of corporate Reform corporate governance? • Most directors and executives still consider the level of corporate governance to be insufficient (Mc. Kinsey, 2004) – Should the European Commission now move further on the corporate governance agenda? • Not necessarily • Healthy national debates on corporate governance SITE

Suggested Action Plan priorities • Commission should encourage local processes and cross-border learning, but Suggested Action Plan priorities • Commission should encourage local processes and cross-border learning, but refrain from ”stealth” harmonization (at least for now) • EU regulation should focus on obstacles to crossborder flows (and general financial integration) • In new member states, the Commission plays an important role in supporting the emerging systems SITE