EL OMARI SENY KAN - When governance best practices cause conflict.pdf

8/14/2019 EL OMARI SENY KAN - When governance best practices cause conflict.pdf

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When governance best practices cause conflict: Governance conflict,

internal management andshareholders response

Konan Anderson SENY KANAssistant Professor

Groupe Sup de Co La Rochelle102 rue de CoureillesLes Minimes

17024 La Rochelle Cedex 1Tel : 0546517700

Email : [email protected]

Sami EL OMARIProfessor

Groupe ESC Toulouse20 Boulevard Lascrosses31067 Toulouse Cedex

Tel : 0561294810Email : [email protected]

Abstract

Beyond the normative approach, the analysis of corporate governance throughout its

conflict is more informative and able to give further comprehensive explanation of its

performance. In the corporate governance research, the separation of the Chairman and

Chief Executive Officer (CEO) roles is one of the major mechanisms examined to ensure a

better alignment of corporate stakeholders interests. However, this device can be also a

source of conflict within the top management. In this paper, we combine qualitative

(content analysis) and quantitative methods (event study) to analyze the way stakeholders

manage and react to a governance conflict which occurred within the Vinci Groups top

management. This paper traces this conflict and puts forward different strategies developed

by stakeholders to deal with it. Conflict management finds its expression in an internal and

external mobilization of stakeholders in order to protect them against expropriation.

Keywords: Corporate governance CEO duality Governance conflict - Content analysis -

Event study.


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INTRODUCTION

The board of directors effectiveness hasbecome a pivotal concern in corporate governance

debates. According to Heracleous (2001, p. 165) this is because Corporate collapses, fraud

cases, shareholder suits or questionable strategic decisions are attracting attention to the top

decision-making body of the corporation; the board of directors. One of the well-documented

monitoring mechanisms to deal with such an issue is discussing CEO duality1 (CEO and

Chairman of the Board roles are assumed by the same person) as opposed to the separation of the

CEO/Chairman roles. The most prevalent argument arises from agency theory which concludes

that an independent board structure improves the boards control over the management. Thus,

under the agency theory assumptions, the Chairmansrole should be dissociated from that of the

CEO. Generally, in most of the governance guidelines and recommendations of many financial

institutions, separation appears to take precedence over duality. In France, this trend is adopted

through the Vinot 1 and 2 (1995, 1999) and Bouton (2002) reports. It is also endorsed by la Loi

Nouvelles Rgulations Economiques2of May 15, 2001. On the other hand, a critical alternative

view based on the stewardship theory supports CEO duality.

This theoretical opposition is relevant in the debate related to the organizational

arrangements that prevent conflictual situations between firm stakeholders. It also leads one to

question which arrangement between the separation of the CEO/Chairman roles and CEO duality

is best able to effectively prevent conflicts in firms. In the field of organizational behavior,

scholars define conflicts as the parties awareness of opposition of goals, values, opinions, or

activities (De Reuver 2006, p. 589). In this perspective, it appears that any organization is

subject to the divergence of interests between its stakeholders. In this sense, corporate

governance mechanisms are implemented to prevent and/or to minimize costs associated with


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these diverging interests. However, a corporate governance mechanism like the separation of the

Chairman and CEO roles may be the cause of conflictual situations. That is, it does not perform

in the way expected. In other words, a conflict may occur while preventive mechanisms exist. We

call this eventuality governance conflict.

Although shareholders and managers interests incongruence leading to conflicts is well -

documented, such conflicts issues involving groups of firm stakeholders are less examined. This

gap is due to a tradition of research in corporate governance based on a narrow vision of the

agency theory. However, the split of the CEO and Chairman roles shifts the conflict matters

(inherent to the objectives incongruence) to another level. Corporate governance debates in

previous research admit that only two groups of individuals - shareholders and managers - are

subjected to conflicts in a firm. While adopting stakeholders approach of corporate governance,

we can reasonably extend conflicts issues to all individuals related to the firm. More precisely,

we contend that conflicts may occur not only among groups composing the stakeholders but also

within these groupsthereafter called in-group conflict. Regarding, the management structure,

Kahn et al. (1964)3 identify two key types of conflicts. One, called person role conflict is

defined as orientations divergence of the CEO from the other members of the board. The other,

called inter-sender role conflict reflects disagreement among board members. But, from the

agency theory perspective a lot of attention has been paid to shareholders-managers conflicts. So

one may ask the following question: is each group composing firm stakeholders exempt from

conflicts? By examining the stylized facts of our case study within Vinci, the response is no.

The case studied here enlarges the narrow perspective of agency theory by analysing an in-

group conflict opposing the Chairman of Vinci and his CEO. Vinci is a relevant case study

in the sense that its former Chairmans resignation on June 1, 2006, ending a public power

struggle with the company's CEO, highlights one of the core corporate governance issues,


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This paper is structured in three parts. The first reviews the literature on the several approaches to

CEO duality. In the second part, we present our theoretical framework. The last one is devoted to

the empirical research results which are discussed in the conclusion.

1. CEO DUALITY: THE PROS AND CONS

Basically three approaches help to understand the need to separate (or not) the chairman and CEO

roles. This following section shows their oppositions.

1.1. Agency theory perspective of CEO duality

Agency theory assumes that the separation of ownership and control (Fama and Jensen 1983) of

managerial firms can lead to conflicts of interest between managers and owners. Because an

agency problem occurs when there is incongruence between an agents and a principalsgoals

(Eisenhardt 1989a). In particular, scholars (Smith 1776; Berle and Means 1932; Jensen and

Meckling 1976) acknowledge that relationships between executives and shareholders may be

sources of conflict, depending upon the separation of decision and risk-bearing functions. Taking

for granted that conflicts are source of inefficiency (due to agency costs), it raises the issue of

their prevention and reduction. In particular, Fama and Jensen (1983), in their analysis of the

organizational decision-making process, conclude that the separation of decision management

(the initiation and implementation of decisions) from decision control (the ratification and

monitoring of decisions) in the organization is the major device that limits the costs due to

separation of ownership and control. Consistent with our research topic, this assumes that the

solution to the potential agency problems may be found by delegating the task of decision


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management to the CEO, and decision control to the board. Thus, the CEO has primary

responsibility for initiation and implementation of strategic decisions, while the board is

responsible for ratifying and monitoring decisions taken by the CEO. So, based upon this theory,

it is suggested that CEO duality reduces the monitoring effectiveness of the board over

management, and supports separation of the CEO/Chairman roles.

In corporate governance literature, some authors (Mizruchi 1983; Walsh and Seward 1990)

assume that the Board remains the primary internal control mechanism for aligning the different

interests of shareholders and top management. In this case, the proponents of this argument

(Hambrick and Finkelstein 1987; Harrison et al.1988) assume that, when an individual serves

simultaneously as Chairman and CEO, he acquires a wider power base and control authority.

According to this idea, Morck et al. (1989) conclude that the boards control over him will be

weakened. This change in the magnitude of theboards control promotes the CEO's pursuit of his

agenda (Boyd 1995), which increases the extent of his discretion at the expense of other

stakeholders. Accordingly, Lorsch (1989)5 argues that dual leadership (Brickley et al. 1997)

separation of the CEO and Chairman roles - allows firms to avoid some crises. In addition,

Weidenbaum (1986) postulates that it also facilitates more objective firm assessment and

managersperformance. Thus, proponents of agency theory propose that the combination of the

CEO and Chairman roles lessens board control, and negatively affects firm performance (Boyd

1995). Hence, the separation of the CEO/Chairman roles is consistent with the agency theory.

A critical review of that approach calls into question the implicit assumption of agency theory

that executives are opportunistic agents who will capitalize on whatever improves their personal

welfare at the expense of shareholders.


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1.2. Stewardship theory perspective of CEO duality

This theory addresses the limitations of the agency theorys perception of CEO duality.

Donaldson (1990) argues that agency theorists fail to integrate related research in organizational

behaviour and organizational theory. So, according to that criticism, stewardship theory sets a

moral tone by viewing managers as inherently trustworthy and unlikely to appropriate

organizational resources for their own ends (Davis et al. 1997). In this rationale, CEO duality is

seen to foster strong and unified leadership, rather than flagging Board independence from

management and its monitoring role (Boyd 1995). It is then considered that the desire to

maximize income, for example, might be counterbalanced by a much larger range of human

motives, including needs for achievement, responsibility, and recognition, as well as altruism,

belief, respect for authority, and the intrinsic motivation of an inherently satisfying task

(Donaldson 1990, p. 372). Thus, Donaldson and Davis (1991) proposes a CEO who, far from

being an opportunistic shirker, essentially wants to do a good job, to be a good steward of the

corporate assets (Donaldson and Davis 1991, p. 51).

So, duality refers to a single leader. It is supposed to speed up the response to external events he

is expected to confront. This fast response is revealed in a greater knowledge of the firm and also

in a greater commitment to the organization. Proponents of duality also characterize the board

chair position as being relatively less powerful and more ceremonial and symbolic than the

CEO position (Harrison et al. 1988, p. 214).

The stewardship theory suggests that CEO duality facilitates effective action by the CEO, and

consequently leads to higher performance. So, the stewardship model is consistent with other

research on corporate governance (Boyd 1995, p. 304). In addition, the stewardship theory pulls

some criteria from resource dependence one.


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Resource dependence theorists (Pfeffer and Salancik 1978) relate the CEO duality issue to

the management of uncertainty (Boyd 1995). In fact, resource dependence theory proposes that

corporate boards are a mechanism to manage external dependencies and reduce environmental

uncertainty. This theory also proposes that characteristics of an effective board will vary as a

function of environmental conditions. This perspective suggests that CEO duality might actually

improve organizational performance in certain contexts. Pfeffer and Salancik (1978) argued that

leaders with greater discretion would be better able to implement their strategic decisions, and

more likely to overcome organizational inertia. Duality would increase CEO discretion by

providing a broader power base and control authority, and by weakening the relative power of

other interest groups (Hambrick and Finkelstein 1987, p. 379). Pfeffer and Salancik (1978) also

argued that a single leader will improve responsiveness to external events, and facilitate

accountability of decision making. Support for this rationale is provided by Harrison et al.

(1988), who found that duality facilitated replacement of the CEO. Unlike agency theory,

resource dependence and stewardship perspectives support CEO duality. Nevertheless, Boyd

(1995) sees these different theoretical perspectives as alternatives that he combines in a single

analysis which highlights the uncertainty.

1.3. Commingling theoretical perspectives of CEO duality

Boyd (1995) notes that the aforementioned rationales are likely to be complementary because

they pertain to a continuum. Therefore, he proposes commingling theoretical perspectives of

CEO duality, the core assumption of which is based upon environmental uncertainty. He draws

his model on the following underlined question: under what circumstances does the

consolidation of power and decision-making afforded by duality outweigh the potential abuses


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described by the agency model? (Boyd 1995, p. 304). This author proposes that the main factor

that links these divergent perspectives of management structure is environmental uncertainty.

Environmental uncertainty is a multidimensional construct composed by munificence (measures

the abundance of resources in the environment), dynamism (measures environmental volatility),

and complexity (measures inequalities among competitors). The effectiveness of CEO duality is

then expected to vary at high and low levels of uncertainty for each environmental dimension.

This analysis contributes to the debate without indicating which of the two forms of

managerial structures the most effective solution is. Thus, Boyd concludes his study by the

following statement:

Case studies of the CEO's relationship with board and TMT [Top Management Team]

members could answer several salient questions. For example, how much discretion does

the CEO acquire when assuming the board chair? Does the CEO evenly gain power

relative to both the board and TMT? Does the elevated status improve a CEO's ability to

acquire scarce resources? Case studies could also be applied to dual and independent

board structures in an industry which experiences a sudden discontinuity or shock. (Boyd

1995, p. 309)

Based on Boyd (1995)sargumentation, we propose a duality framework that takes into account

environmental uncertainty for the purpose of our paper (See Figure 1, p.10). We suggest that in a

higher uncertainty context, CEO duality (supported by stewardship theory) would be more

efficient than Chairman/CEO roles separation (agency theory). Conversely, at the bottom of this

figure, that is in lower uncertainty circumstances, we argue that agency theory recommendation

of separation may contribute to governance efficiency to a greater extent. Finally, in the

assumption of a stable environment no higher or lower uncertainty it becomes difficult to


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anticipate the effectiveness of one or the other of the two rationales. This indecision corresponds

to the central area of the figure that we call ambiguity area.

Figure 1: Duality framework under environmental uncertainty

2. THEORETICAL FRAMEWORK

Following Boyd (1995)s continuum of CEO duality, it is relevant to avoid the systematic

opposition of the normative explanations provided by the agency and stewardship theories. Thus,

an in-depth comprehension of governance conflict requires a focus on the role of each

stakeholder involved. So, we mobilize Aguilera and Jackson (2003)s actor-centered model

which helps one to understand how conflicts may occur among the different groups of

stakeholders.

CEO duality

(Stewardship theory)

High uncertainty

Low uncertainty

Duality: is a good means ofreaction

An inefficient protection ofstakeholders

Separation: gooddistribution of power

Ambiguity area

CEO/Chairman: inefficiencyof separation

Chairman/CEO separation

(Agency theory)


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Table 1: Institutional domains related to the three groups of stakeholders

Groups of

Stakeholders

Capital

Definition: "Capital is thestakeholder group that holdsproperty rights, such asshareholders, or that otherwisemakes financial investments inthe firm, such as creditors.

Labor

Definition: Labor refers toemployees ability toinfluence corporatedecision making and tocontrol firms resources.

Management

Definition : Managementrefers to managers consideredas the stakeholders occupying

positions of strategicleadership in the firm andexercising control overbusiness activities

Institutional

domains

- Property rights- Interfirm network- Financial systems

- Representation rights- Union organization- Skill formation

- Ideology- Career

Source: According to Aguilera & Jackson (2003)

Basically, Aguilera & Jacksons model helps stress the dimensions of corporate governance

which consist of three groups of stakeholders6: capital, management, and labor with their

respective institutions shaping the diversity of the relationship (See Table 1, p.11). Thus, we

admit that the outcome of the firms actions reflects the dynamics of the relationships existing

among the stakeholders comprising institutions. The model examines two dimensions of

managers identities and interests in relationto the firm. Following the first dimension, managers

autonomy toward the firm is opposed to their commitment. Their managerial control conceptions

- financial versus functional - is the second dimension.

For the first dimension, the whole argument of Aguilera and Jackson (2003) is grounded on

stewardship theory. For the advocates of this theory (Davis et al. 1997, p. 24-25) identification is

an abstraction by which managers define themselves regarding their membership in a particular

organization by accepting the organization's mission, vision, and objectives producing a

satisfying relationship. Thus, this identification makes them take credit for organizational

successes. At the same time, they also experience frustration for organizational failures. So

managers who identify with an organization are willing to work toward the organization's goals,

solve its problems, and overcome barriers that are preventing the successful completion of tasks


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and assignments. They are eventually motivated to use their own initiative to promote both their

organization and principals success. This reasoning somehow echoes the cognitive analysis of

conflicts proposed by Wirtz (2002). Indeed, his approach to conflict is based upon mental

patterns which are defined as subjective representations of the reality whose diversity can be a

source of conflict. The author emphasizes this idea by stating: [], two managers, A and B, may

theoretically have different perceptions of their duties as loyal stewards if they do not share the

same mental pattern with respect to the interests to be privileged. But even when they agree on

the dominant stakeholders, there still may be conflict. (Wirtz 2002, p. 13)

On the basis of identification, Aguilera and Jackson (2003) make a distinction between

autonomous managers and committed ones. The former reflect managers independence from

specific relationships within the firm, whereas the latter are distinguished on their dependence

upon firm-specific relationships to pursue their interests. The authors state that by virtue of their

autonomy, managers have increased abilities to enforce hierarchical control in the firm.

In accordance with the second dimension, two conceptions of control are opposed: a

financial one (control by financial mechanisms extensively put forward by agency theory) and a

functional one (control based on functional skills, abilities or personal involvement and

leadership).

These dimensions help understand that neither the management, nor either of the other two

groups of stakeholders, is homogeneous. In other words, managers identities and interests in

relation to the firm may diverge and, in turn, generate objectives incongruence. For example,

Carpenter and Fredrickson (2001) (pointing out top management team7 members diversity in

terms of the breadth of their international experience and the heterogeneity of their educational

backgrounds and firm tenures) argued: [] excessive heterogeneity may lead to interpersonal


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conflict and communication breakdowns [](Carpenter and Fredrickson 2001, p. 535). Given

these arguments we suggest the following proposition:

Proposition 1 - The incongruence of managers identities and interests in relation to the

firm leads to conflicts amongst them.

It is considered that the two dimensions of management in corporate governance are

influenced by two major institutional domains, namely managerial ideology and career. First,

managerial ideology helps to understand how managers legitimate their authority, perceive

organizational problems, and justify their actions. Ideologies impact the autonomy or

commitment of managers by shaping the degree of hierarchy or consensus in routine decision

making.

Second, the managerial career is contrasted in the opposition between closed and open labor

markets. This framework helps to specify how the role of each stakeholder toward the firm is

shaped by different institutional domains and thereby generates different types of conflicts and

coalitions in corporate governance. (Aguilera and Jackson 2003, p. 450). According to our

objective, this implies that the incongruence of the CEO and Chairmans identities and interests

will generate conflicts and coalitions in corporate governance.

The overall model shows that three kinds of conflicts and different coalitions are inherent to

the stakeholders interaction. First, when the interests of capital and management oppose those of

labor, particularly regarding distributional issues (e.g., wages), this conflict is labelled class

conflict. Sources of such conflict are trade-offs between wages and profits, capital reinvestments

and paying out dividends or levels of employment and shareholder returns. Second, when the

conflict involves labor and management (both are called insiders) opposed to capital (called


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outsiders), it is called insider-outsider conflict. In this case, the conflict may occur because the

insiders devote themselves to empire building or to the development of strategies opposing

hostile takeovers. Third, when the capital and labor interests are opposed to those of

management, the conflict that arises is called accountability conflict. In this latter case, the aim

of the coalition formed by capital and labor may be to remove managers or to demand more

transparency.

Considering the dynamics of the model, the three groups of stakeholders may form a variety of

coalitions in order to preserve the collective welfare, regardless of the group to which an

individual pertains. By analyzing the way top managers handle their interpersonal grievances,

conflicts, and disputes in an executive hierarchy, Morrill (1989, p. 396-397) argues that when

executives have grievances against their bosses, they [] may use their secret complaints8

occasionally to mobilize allies [] Thus, we provide a second proposition:

Proposition 2 - Stakeholders conflicts lead to the establishment of new coalitions supporting

the protagonists.

A conflict has a certain influence upon the organization. Pondy (1969) reviewed

organizational conflicts by distinguishing frictional conflicts from strategic ones in accordance

with their respective impact on organizational structure. A frictional conflict is seen to be a minor

conflict that does not alter the organizational structure. More precisely, he specifies that []the

pattern of authority relations and the allocation of resources and of functional responsibilities do

not change as a result of such conflicts Pondy (1969, p. 499). Conversely, a strategic conflict is

a conflict that may occur deliberately [] to force the organization to reallocate authority,

resources, or functional responsibilities. Pondy (1969, p. 501). Thus, the outcome of this kind of

conflict is a change in the organizational structure. This rationale is rooted in Assaels (1969)


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argument for constructive change induced by conflict. In line with this idea, we suggest the

following proposition:

Proposition 3 - Conflicts are instrumental in the reconfiguration of corporate governance

devices.

In turn and according to Pondy (1969), a strategic conflict would push stakeholders to take

sides. But the reaction of stakeholders is dependent on their capacity of mobilization (Rowley and

Moldoveanu 2003). Its level is related to stakeholders expected part of the value created by the

firm. In this context, investors in the stock market are a good example of stakeholders who would

use this arbitrage (mobilization versus expropriation) in their relation to the firm. That leads to

the last proposition:

Proposition 4 - Investors would react to a governance conflict as a mean to protect

themselves against expropriation.

These various proposals are being confronted with a case study which provides an example

of an organizational conflict impacting on organizational arrangements, particularly on corporate

governance devices.

3. VINCIS GOVERNANCE CONFLICT

Vinci is a French company and the worlds leading integrated construction and concession group.

Formerly known as Socit Gnrale des Entreprises (SGE) and founded in 18999, it spun off


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from parent Vivendi (formerly Socit Gnrale des Eaux) in 1999. In 2000, SGE became Vinci.

Also in 2000, Vinci merged with the GTM10 group. With a presence in more than one hundred

countries, Vinci operates as a holding company for its subsidiaries, structured in four primary

business areas with many units. The VINCI Construction unit is one of the world's largest

building, civil engineering, and maintenance contractors. VINCI Energies is a French leader in

electrical engineering and information technology. Eurovia (the major operating unit of the

VINCI Roads division) is a top European roadworks and urban redevelopment company. VINCI

Concessions (includes Cofiroute, and Groupe ASF11 - ASF and Escota - acquired in 2005), one

of the world's largest concessions companies, builds and operates car parks, toll roads, and

airports. VINCI Park manages parking facilities in about a dozen countries.

3.1. Understanding the conflict: internal management

The first three propositions are tested through a qualitative approach (Eisenhardt 1989b) based ona case study (Yin 1981, Miles and Huberman 1981). Several authors have resorted to the case

study in addressing issues of research related to the corporate governance (Wirtz 1999b; Catelin

and Chatelin 2001; Chatelin 2001; Pochet 2001). A survey by Wirtz (1999a) also puts forward

the potential of the use of a case study involving corporate governance as a research object.

Moreover, in Organizational Theory and Methodology, Jensen (1983) highlights the interest of

qualitative methods when organizational issues, in which corporate governance takes a great

place, are addressed. Our case study is based on 125 articles collected from theFactivadatabase,

in six French daily newspapers (Le Figaro, Les Echos, Libration, Le Monde, La Tribune,

LExpansion), from May 31, 2006, to March 26, 2007. We collected this corpus during the

summer of 2007.


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In June 2006 - six months after the separation of the CEO and Chairman roles, a conflict

arose between the CEO and the Chairman. We trace this conflict with an underlined objective

which is to respond to the following questions: (1) how did that conflict occur? (2) how was its

solution found and what was its impact on the corporate governance devices? Each of both

questions is related to a stage of the conflict process.

3.1.1 First act: the power struggles context

Antoine Zacharias resigned as Chairman of Vinci on June 1, 2006. His departure followed a

dispute with CEO Xavier Huillard, who had accused Antoine Zacharias of taking advantage of

his position to make excessive personal financial gains. How did that conflict begin?

The conflict between Antoine Zacharias and Xavier Huillard dates back to January 2006. The

Vinci Groups press release of June 15, 2005 announced that during the Board of Directors

meeting on June 14, Antoine Zacharias announced to the Board his intention to separate his twofunctions as Chairman and CEO of Vinci. The CEO and Chairman roles split would be effective

on January 9, 2006. Antoine Zacharias would retain only the function of Chairman, and he

proposed to the Board the appointment of Xavier Huillard as CEO. He also proposed that the

Board co-opt Xavier Huillard as Director when he was to take up the position of CEO. As

decided, the separation of the Chairman and CEO roles in the management structure of Vinci was

endorsed by its Board meeting held on January 9, 2006.

Xavier Huillard thus became CEO with a director mandate. Henceforth, he was in charge of the

operational responsibility of the group. By making such change, Chairman Antoine Zacharias

ensured the promotion of the one who has been his closest associate for the previous ten years.


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Xavier Huillard graduated from the Ecole Nationale des Ponts et Chausses, one of Frances

prestigious civil engineering schools, and he spent his career in the construction industry. He was

recruited by Antoine Zacharias in 1996 to be Director of International Business. Xavier Huillard

went on to hold the positions of Chairman of Sogea (19972002), Chairman of Vinci

Construction (20002002) and Chairman of Vinci Energies (20022005), contributing to the

acceleration in the European development of the latter. He has been a senior executive vice-

president of Vinci for three years.

Antoine Zacharias had been Vincis Chairman since 1997, when the company was called SGE. In

2000, he oversaw the acquisition of GTM, which established Vinci as the worlds largest

construction group. He is seen as an emblematic Chairman with a strong legitimacy that he draws

from having made Vinci a European leader in the construction industry in just ten years.

Everyone recognizes his undeniable strategist and manager skills, which, from 1966 to 2006,

have hoisted his group to the rank of world number one of concessions and construction

companies, multiplied its turnover by 3 and its capitalization by 2012

(Le Monde, June 3, 2006).

From the split of the CEO and Chairman roles, he retains the former role devoted to the groups

strategic and corporate governance issues.

This separation of the CEO and Chairman roles in Vincis management structure took place in

framework of the NRE Act, designed to promote better corporate governance. Antoine Zacharias

justified the appointment of Xavier Huillard as CEO by stating: The logic of my relationship

with Xavier is to reach a consensus. Therefore, there could not be any conflicting situation

between us. And if, for an investment or an appointment that he would have chosen to do, I have

no particular argument and convincing against it, his decision will prevail(Libration, June 1,

2006)


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Nevertheless, Vinci Groups Board of Directors meeting had been scheduled for June 1, 2006

with a single item on the agenda which was the replacement of the recently-appointed CEO -

Xavier Huillard. Some time before the meeting, Vincis spokesman declared that His [the

CEOs] departure has been noted. Then, the debate would focus more on his departure

premium.Antoine Zacharias attempted to unseat his heir apparent and replace him with Alain

Dinin, the head of the Nexity property company and a Vinci board member for the past 10 years.

Indeed, the newspaperLibration of June 1, 2006 mentioned that Alain Dinin is a close friend of

Antoine Zacharias; in the 1990s, the two men were part of the La Gnrale des Eaux13staff , and

he is already Vincis board member. But Vincis directors would not be convinced of the merits

of this choice. Some of them would even challenge the legitimacy of Alain Dinin as CEO.

On the eve of the Board meeting held on June 1, 2006, for his appointment, Alain Dinin took into

account the reluctance of Vincis directors and declined Antoine Zacharias proposal to become

the companys CEO.

In a statement (Les Echos, June 1, 2006), Alain Dinin said, the conditions have not been met in

order for me to take on the CEO role, adding that, while Xavier Huillards departure is not

completed and the board rests in disagreement, I cannot take the proposed position

The relations between the Chairman and his CEO would suddenly deteriorate after the Board met

on February 28, 2006. The principle of a fair compensation to the chairman to recognize his

crucial role in the ASF acquisitionhad been decided, the amount of which was to be determined

after shareholders general meeting of May 16, 2006. This seems to have resulted in the

disagreement between the Chairman and the CEO, as Xavier Huillard opposed the estimated

bonus. However, some close associates of the Chairman assume that the conflict is due rather to

strategic divergences (Libration, June 1, 2006).


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The CEO hired Jean Pierre Versini-Campinchi, a lawyer specializing in criminal law, sent a letter

to the Board to detail his defense, and activated all his networks within the company. In this

unprecedented letter, Xavier Huillard wrote to board members saying the Chairman was

growing unreasonably rich on Vincis back. He denounced stock options worth 250 million, a

55 million retirement package, etc. The letter was published byLe Parisiennewspaper on June

1, 2006. Laurence Parisot - head of the business lobby group MEDEF (Mouvement des

Entreprises de France) - described as "scandalous" the 13 million severance packages,

supplemented by an estimated 250 million of stock options, earned by Antoine Zacharias.

According to Vincis 2005 annual report, Antoine Zacharias was the companys most highly paid

director in 2004, with gross earnings of 4.29 million. However, in addition to this, Zacharias

owned 2.32 million shares in the company and 3.59 million share purchase options. At that time,

the value of his shares was 167 million, and the options were worth 259 million, based on

Vincis then current share price.

The conflict between the two men was so intense that it impacted and divided the

directors and employees. Denis Vernoux, the director representing employee shareholders, stated:

Vincis employees and managers do not follow the board working hypotheses [ousting Xavier

Huillard] (Libration, June 1, 2006). Le Monde (June 2, 2006) also indicated that Xavier

Huillard was supported by a large part of the staff (employees and managers). Moreover, several

petitions were signed within the company to support him.

Les Echos(June 5, 2006) reported that even Vincis press servicedid not know who to support.

So Antoine Zacharias was forced to use DGM, one of the major Parisian communications firm, to

make statements on his behalf. For its part, the CEO chose a communication man - Mathias

Leridon - the head of Tilder. This shows that the conflict was at its height. The headlines were

accordingly very evocative, speaking of The war of leaders.


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Le Monde (June 3, 2006) stated that, Some directors had played a pivotal role in this power

struggle: Dominique Bazy, CEO/Chairman of UBS Holding France, and Denis Vernoux, the

employee shareholders representative, which holds 8% of the capital. In contrast Antoine

Zacharias was able to rely on Alain Dinin, CEO of Nexity, at one time approached to succeed

Mr. Huillard, Alain Minc, president of AM Council (and Chairman of the supervisory board of

Le Monde) and Henri Saint-Olive, Chairman of the Saint-Olive Bank who, according to

LExpansion (June 2006) is one of the managers of Mr. Zachariass wealth.

3.1.2 Second act: the power strugglesdenouement and its impact oncorporate governance devices

Vincis Board meeting on June 1, 2006 decided to maintain Xavier Huillard as CEO by nine

votes against seven. Antoine Zacharias submitted his resignation from his positions as Chairman

and member of the Vinci Board of Directors in the best interests of the company and to put an

end to the troubles within its management team.

Table 2: The board composition before and after the power struggleThe board composition before the power struggle The board composition after the power struggle

Antoine ZachariasChairmanXavier HuillardCEO Xavier HuillardCEO

Bernard Huvelin Bernard HuvelinDominique Bazy Dominique Bazy

Franois David Franois David

Quentin Davies Quentin DaviesGuy DejouanyAlain DininPatrick Faure Patrick FaureDominique Ferrero Dominique FerrerSerge MichelAlain MincYves-Thibault de Silguy Yves-Thibault de SilguyChairman

Willy StrickerDenis Vernoux Denis Vernoux


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The board composition before the power struggle The board composition after the power struggle

Robert Castaigne

Jean-Bernard Lvy

Henri Saint OlivePascale Sourisse

Total: 15 Total: 13

Source: Vincis 2005 and 2006 annual reports The grey cells in column representing the board composition afterthe power struggle correspond to the resigned directors who seem to be very close to Antoine Zacharias. Independentdirectors are indicated in italics.

Antoine Zacharias resigned from Vinci on June 1, 2006. Then, Alain Dinin and Bernard Val

resigned from the company on, respectively, December 8 and 31, 2006. Also, Willy Stricker and

Alain Minc resigned from Vinci on, respectively, January 29 and 30, 2007. Finally, Serge

Michel was the last one to resign from the company on February 26, 2007.

The Board accepted Antoine Zacharias resignation and paid unanimous tribute to his

achievements which, in less than 10 years, had made Vinci the world leader in concessions and

construction, notably through the successive acquisitions of Sogeparc, GTM and ASF. Since

1997, under the chairmanship of Antoine Zacharias, Vinci's revenue tripled, its net profit

increased 21-fold and its market capitalisation 20-fold. The Board of Directors elected Yves-

Thibault de Silguy Chairman and confirmed Xavier Huillard as CEO and Bernard Huvelin as

Vice-Chairman (see Table 2, p.21).

The comparison of the board of directors before and after the conflict may be discussed

around three points, namely the evolution in the board composition, the directors independence

and the evolution of the board committeescomposition. Concerning the notion of independence,

in the new board the independent directors were clearly identified.

At the end of the conflict the board reconfiguration appears as an evidence. In this logic, we note

that the resigned directors comprised all those who were, in addition to their lack of

independence, very closed to the former Chairman. The other resignations were justified by the


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lack of their independence. The new Board of directors is composed of 13 members, seven of

them can be considered as independent. As the outcome of the conflict, this reflects a reduction

of the total number of directors but an increase in the number of independent directors. Now,

there are more independent directors than non-independent ones on the Board of Directors.

The first meeting of this newly elected board unanimously decided to change its committees

composition (compensation, nomination, strategy-investment, audit) (See Table 3, p. 25). Also,

some contracts which bound Vinci to the companies of two of its directors, Alain Minc and Serge

Michel, had been rescinded. The new Chairman decided to bring the board up to date by deciding

to strengthen its industrial component, feminize, internationalize and strengthen the

independence of directors (Le Figaro, September 7, 2007). He stated that an independent

recruiting service would be hired to this end. Les Echos (February 28, 2007) reported Yves-

Thibault de Silguys statement, explaining: Following the recommendations of a report which

was handed to me, I asked the directors who do not have all the guarantees required by the

Bouton corporate governance guidelines - notably concerning their independence - to leave the

board. Subsequently, four directors resigned from the Board. While Bernard Valsresignation

seemed due to a health problem, those of Alain Dinin and Alain Minc14were closely related to

their lack of independence.

With regard to the board committees, there was an evolution to a lesser extent (See Table

3, p. 25). Indeed, directors who had not resigned from the Board and had had a role in one of the

four board committees have been maintained. Three of them were maintained in a committee

position and also assume another role in a different committee. Concerning the new Chairman -

Yves-Thibault de Silguyhe assumed the same former chairmans duties in committees.

We also analyzed executive compensation before and after the power struggle. We considered

two independent samples of executive compensation for a descriptive purpose. The first one


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corresponded to the executive compensation before the conflict and the second one to the

executive compensation after the conflict. We could have done non parametric tests, but our two

samples were very small. So, we analysed the evolution in the executives compensation by

computing a compensation distance (SeeAppendix 1, p. 38) defined as the square root of the

square differencesbetween two executives amount of compensationfollowing the definition of

Euclidean distance - the ordinary distance between two points.


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25

Table 3: The board committees composition before and after the power struggleThe board committees composition before the

power struggle

The board committees composition after the power

struggle

Board Committees Members Head Board Committees Members Head

Audit Committee

DominiqueBazy*

DominiqueBazy

Audi Committee

DominiqueBazy

DominiqueBazy

FranoisDavid

QuentinDavies

BernardHuvelin**

Henri SaintOlive

Compensation

Committee

QuentinDavies*

QuentinDavies

Compensation

Committee

QuentinDavies

QuentinDavies

Alain Dinin Patrick FaureDominiqueFerrero*

DominiqueFerreroDominique

Bazy

Nominating

Committee

AntoineZacharias

AntoineZacharias

Nominating

Committee

Yves-Thibault deSilguy

Yves-Thibaultde Silguy

BernardHuvelin*

BernardHuvelin

QuentinDavies**

Henri SaintOlive

Alain Minc

Investment and

Strategy Committee

AntoineZacharias

AntoineZacharias

Investment and

Strategy Committee


Yves-Thibaultde Silguy

Alain Dinin Patrick FaurePatrickFaure*

FranoisDavid

BernardHuvelin**

DenisVernoux

DenisVernoux*

Source: Vincis 2005 and 2006 annual reportsLegend: * Director maintained in the same position regarding the same committee

**Director maintained in a committee position but assuming his role in another committeeGrey cellscorrespond to directors who were not maintained in a committee position. All of them are thosewho resigned from the company due to the conflict except Franois David who remained a Vinci director

In the formula below, is the difference between executives i and j compensation,Compensationiis the amount of the executive i compensation and Compensationj is the amount of

the executive j compensation.


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26

We found that before the conflict the compensation distance between the Chairman and the

other executives was greater than after the conflict. This suggests that the compensation of the

new management team was diminished after the conflict, but this difference was not statistically

significant.

3.2. Shareholdersreaction

The first part of the results is about the internal management of the governance conflict. But this

latter also affects some external stakeholders. The shareholders may react to this conflict and to

catch their reaction we mobilize the event study method.

3.2.1. Event studySince Fama et al. (1969), the event study has became the standard methodology used in

accounting and finance to analyze stock market reaction to an event announcement.

Theoretically, its based on Bachelier (1900)s concept of market efficiency. We use this

methodology to examine the French stock marketsreaction to the corporate governance conflict

exposed below in the Vinci case. Before exposing the event study methodology we need to

describe briefly the concept of market efficiency which underlies it. By this concept it is

supposed that in a financial market, stocks prices reflect the relevant information available. That

is what scholars called informational efficiency of financial markets. More precisely, according

to his state of art, Fama (1970) argues that a market can be deemed to be efficient when trading

on the basis of available information cannot provide abnormal profit. Fama (1970) put forward

three hypotheses of market efficiency, namely weak, semi-strong and strong forms of market


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efficiency. First, supporters of the weak form of market efficiency contend that the information is

reflected by past prices. Thus, its impossible to predict the asset price on the basis of historical

information. Second, advocates of the semi-strong form of market efficiency assert that all

relevant information is reflected in prices as soon as it publicly available. Finally, exponents of

the strong form of market efficiency claim that all non public information is reflected in prices.

Nevertheless, the market efficiency rationale may be weighted by certain market anomalies such

as seasonality, weather, size, etc.

Conducting an event study involves several stages. The first stage consists in the definition of the

event of interest and the identification of the time line for the event study (cf., Figure 2). In our

study the event is the power struggle that occurred in the Vinci Group. In turn, we conducted the

study for a single firm (Vinci) based on daily data.

Figure 2: Time line for the event study

The second stage consists in the computation of abnormal returns. In this purpose, we use the

market model (Sharpe 1963) to assess the normal rates of returns. The normal rate of returns is

defined as the rate of returns that one should observe in the absence of an event.

0T2

Estimation window(250 days) Event window

T1 T3 T4

250 da s 20 days before theevent

30 days after theevent


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Where is the rate of return of company i observed on day t, is the market index, and

are the parameters estimated by the least squares method and are the residuals for the model.

We estimated the regression parameters ( and ) over a period of 250 trading days (estimationwindow). This estimation is closed 5 days before the event window. We use the parameters and to compute the normal return.

Then, we obtain the abnormal returns for the event window by computing the difference between

the observed return and the normal return estimated by the market model.

where is the measure of the abnormal rate of return of company i on day t, the observed

rate of return of firm i on day t, and the estimate of the normal rate of return using the marketmodel.

In our event study, we select the CAC 4015as the market index. We analyze the same articles

used for our qualitative study (see above) and we believe that there is no delayed market reaction.

As our study was carried out on a single company (Vinci), we use the cumulative abnormal

returns to provide further comprehensive analysis.

3.2.2. What was the stock market reaction to the Vinci governance conflict?Figure 3 (p. 30) shows how the market reacted to the announcement of the governance conflict.

At the end of phase 1 (May 05, 2006 to June 01, 2006) covering the period before the large

diffusion of the governance conflict through the newspapers, Vincis stock return begins to

decrease and shows that the investors are sensitive to this event. The lower point of the cumulated


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abnormal returns in phase 1 (and the start of phase 2) corresponds of the announcement of the

Board decision to maintain the CEO in his function (June 01, 2006). The Chairman (Antoine

Zakarias) resignation was welcomed by the stock market (See Figure 3, point P1, June 1, 2006).

But the increase due to the Chairmans resignation wasnot sufficient to stop the downward trend

of the stocks value.

The Board of directors elected a new Chairman (Yves-Thibault de Silguy), supported the CEO in

his position, and confirmed by the way the adoption of the separation of Chairman and CEOs

roles. The new Chairman announced that the governance system of Vinci had been re-formed and

it was ready to play its full role in the efficient performance of the company. Investors react

positively to these announcements. This is reflected in the increase of the positive daily abnormal

return between point P2 (June 03, 2006) and point P3 (June 15, 2006).

The first element of explanation to this reaction is the strategic character of the conflict. The

conflict was not only perceived as a private conflict between two members of the management

team, but as we explained through the Pondy (1969) approach, this conflict is a strategic one and

was perceived as such as well.


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Figure 3: Abnormal and Cumulated abnormal returns

One of the reasons for the defeat of the Chairman in his confrontation with the CEO is the

disagreement of a large majority of directors with the replacement of the CEO Xavier Huillard by

Alain Dinin CEO of Nexity. The reason for this refusal is the difference existing between Alain

Dininsprofile and the required expertise for VincisCEO position in terms of good knowledge

of the construction industry. This profile incongruence was largely put forward by newspapers

and considered as unsuitable with Vinci Groups interests. To ensure the directors support, the

CEO criticized the Chairman on his remuneration. He condemned the 8 million bonus the

Chairman asked from the group for the successful operation of the ASF purchase. The CEO

denounced this bonus as exorbitant and he divulged other information about the Chairmans

-0,1

-0,08

-0,06

-0,04

-0,02

0

0,02

0,04

0,06

0,08

0,1

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

Abnormal return

Cumulated Abnormal return

P1

P2

P3

P4

Phase 1 Phase 2 Phase 3


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31

remuneration that was considered as exaggerated by a part of directors, MEDEFspresident and

analysts. This information gives credence to the fear shareholders had of being expropriated. The

shareholders were sensitive to this argument. It is shown clearly in point P4 (June 15, 2006),

when the resigned Chairman declared through his lawyer that his resignation was not valid and he

would bring a law suit to get his position back. The newspapers insisted on the fact that this

reaction was only motivated by the desire to benefit from the 35 million of stock options that

Antoine Zacharias lost because of his resignation. The reaction to this information was immediate

as illustrated by the negative abnormal return of this day (point P4, June 15, 2006, Figure 3). The

increasing tendency of Vincis stock price, after the announcement of the group governance

system reform, was stopped by the investors negative reaction to the information about the

resigned Chairmanspotential comeback. Vincisstock registers a large decrease after the point

P4.

An important point that has to be noted here is the reaction of the financial analysts. Despite the

conflict, the analysts remained attached to the fundamental value of Vincis stock. In turn, the

analysts recommendation was to purchase Vinci because the stock was under-valued by the

market and the companys operationalperformance and forecasted business were higher than the

industry average.

DISCUSSION AND CONCLUSION

The main purpose of this research is to understand how a governance reputed best practice

becomes a source of governance conflict. To do so, we develop four propositions. The first three

ones inform about the internal process of the conflict, and the last one is about the reaction of the

stock market to a governance conflict.


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The first proposition analyzes governance conflict causes. The conflict between the CEO and

Chairman of Vinci Group seems to be the outcome of the incongruence of their identification in

relation to the firm. Newspapers were unanimous about their respective managerial skills and

abilities. So, one could infer that the CEOs identification towards the company became stronger

than that of the Chairman. This latter claimed that he deserved a prime for the company

performance. Contrariwise, the CEO considered that it was a company performance and not a

single individuals one. If their cognitive differences had lead to this conflict, divergence

intensity in the underlying dimensions of their respective identifications in relation to the firm led

the conflict to its highest level (e.g., each of the protagonists engaged his own communication

firm). The CEO shows more commitment to the firm than the Chairman. This incongruence is the

core cause of this governance conflict, which corroborates the proposition 1.

As we described above, it is clearly shown that this conflict spread through the company.

The petitions signed to support the CEO and the disagreements amongst directors are illustrative.

This in-group conflict led to the emergence of new coalitions that supported the protagonists. The

employees supported the CEO through their representative director. The Board of directors was

evidently split into two coalitions. The votes during the critical board meeting of June 1, 2006

reflect such a conclusion. That corroborates the proposition 2.

After the governance conflict, the number of directors decreased. The composition of the

Broad also changed. Henceforth, more independent directors were nominated and became the

majority. The conflict had also an impact on the composition of the Board committees. The new

Chairman of Vinci Group showed a real will to bring more transparency by reforming

governance structures. All these elements corroborate the proposition 3 about the impact of a

governance conflict on the corporate governance devices.


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The last proposition is about the external reaction to governance conflict. The stock market

shows his sensitive to this event. The cumulated abnormal return on the duration of the conflict

makes evidence that investors respond negatively to the occurrence of the governance conflict.

After its resolution, the cumulated abnormal return became positive and moved towards zero at

the end of the study window. This fact and the sensitivity of the daily abnormal return to the

different events of the conflict corroborate the proposition 4.

This study shows that governance conflicts are not only limited to the shareholders

managers relationship. A governance conflict can, and often does involve other groups of

stakeholders. When it occurs in a firm, it may mobilize many groups of stakeholders and

institutional domains for its resolution. The findings suggest first that in the separation of the

Chairman and CEO roles, the supervision prerogative may be mutual. In other words, while the

agency theory assigns the monitoring function to the position of Chairman, this study shows that

the monitoring occurs between the Chairman and his CEO. It may thus be termed mutual, rather

than unilateral supervision. According to our duality framework (See Figure 1, p. 10), the choice

of maintaining the separation of the Chairman and CEO roles may be interpreted as a response to

uncertainty surrounding the Vinci Groups strategy. This uncertainty is well illustrated and

justified by the acquisition of ASF by Vinci Group. This new strategic orientation was largely

commented by newspapers we examined.

Second, we show that stakeholders interdependencies intensify the scope of conflicts in the

firm. We show also that conflicts may be instrumental in the reconfiguration of corporate

governance mechanisms. In other words, this governance conflict may be seen as a strategic one.

Finally, the stock markets reaction to this conflict depicts the relevance of stakeholders

approach of corporate governance. A strategic conflict would mean a potential performance


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decrease that the shareholders anticipated. So, the stakeholders outside of the firm may have

mobilization capacities to some extent.

In this paper we do not focus on the impact of such a conflict on the firms performance.

Our analysis may be supplemented by this perspective; this could be another way to enrich it.

This research, based on a case study, could also be prolonged by analysing other governance

conflicts.


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Appendix 1

Proximity Matrix

Table 4: Difference in compensation amongst executives in 2005

Proximity Matrix

Table 5: Difference in compensation amongst executives in 2006

1CEO duality is the case in which the top managerial officer of the corporation simultaneously serves as Chairmanof the Board and is responsible for monitoring and evaluating top management. In fact, theorists argue that CEOduality has two mains contrasting effects on the effectiveness of corporate governance. While the advocates of

Euclidean DistanceYves-Thibault

de SilguyXavier

HuillardRogerMartin

JacquesTavernier


0

Xavier Huillard 962 500 0

Roger Martin 426 770 535 730 0

Jacques Tavernier 40 655 1 003 155 467 425 0

Euclidean DistanceAntoine

Zacharias

Huvelin

Bernard

Huillard

Xavier

Roger

Martin

AntoineZacharias

0

Huvelin Bernard 2 384 704 0

Huillard Xavier 2 831 532 446 828 0

Roger Martin 2 764 380 379 676 67 152 0


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agency theory argue that avoiding duality limits potential CEO entrenchment, other organizational theorists claimthat duality enhances unity of command.2

La loisur les Nouvelles Rgulations Economiques( The New Economic Regulations Act) has introduced a widerange of provisions to strengthen the legislative framework in the fields of competition, company, banking and,broadly, corporate governance concerns.3Quoted by Dornstein (1977)4Vinci - a French company added to the list of the top 40 French firms comprising the CAC 40 index in March 2002- is the worldsbiggest leading integrated concessions - toll highways - and construction group. Formerly called SGESocit Gnrale dEntreprisesand created in 1899 - it took the name Vinci in 2000.5Quoted by Boyd (1995, p. 302)6cf. also Pochet (2001, p.155) for a typology of groups composing stakeholders. Her typology is based on Freeman(1984)s definition of stakeholders and Charreaux (1997, p. 427)s corporate governance mechanism classes.7The authors top management team definition includes the CEO, chairman, chief operating officer (COO), chieffinancial officer (CFO), and the next-highest management tier of a firm.8 Secret complaints is the term used by the author describing the complaint of executives to their closest staffmembers.9In 1899, French engineers Alexandre Giros and Louis Loucheur formed Giros et Loucheur. They changed thename of their company to SGE in 1908.10Grand Travaux de Marseille11Autoroutes du Sud de la France12Newspapers quotations are in French and translated by the authors.13The French utility company14 Indeed, Alain Minc announced his resignation from the Board of Vinci in La Tribune (January 30, 2007). Bycommenting on his statement, this daily underscored its coincidence with the charge of conflict of interest of whichMr. Minc was the subject. In fact, the conflict of interest was derived from Pinaults Artmis having been granted a5.1% stake in Vinci albeit Minc being Pinaults personal advisor.15The CAC 40 (CAC or Cotation Assiste en Continue means automated quotation) is the most relevant marketindex composed by the 40 most significant French capitalizations quoted on Euronext Paris.

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