Edited by PAUL U. ALI and GREG N. GREGORIOU

John Wiley & Sons, Inc.

International CorporateGovernance After

Sarbanes-Oxley

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International CorporateGovernance After

Sarbanes-Oxley

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Founded in 1807, John Wiley & Sons is the oldest independent publishingcompany in the United States. With offices in North America, Europe, Aus-tralia, and Asia, Wiley is globally committed to developing and marketingprint and electronic products and services for our customers professionaland personal knowledge and understanding.

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Edited by PAUL U. ALI and GREG N. GREGORIOU

John Wiley & Sons, Inc.

International CorporateGovernance After

Sarbanes-Oxley

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Copyright 2006 by Paul U. Ali and Greg N. Gregoriou. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

International corporate governance after Sarbanes-Oxley / edited by Paul U.Ali and Greg N. Gregoriou.

p. cm.(Wiley finance series)Published simultaneously in Canada.Includes bibliographical references and index.ISBN-13: 978-0-471-77592-8 (cloth)ISBN-10: 0-471-77592-4 (cloth)1. Corporate governance. 2. United States. Sarbanes-Oxley Act of 2002.

3. Corporate governanceLaw and legislation. I. Ali, Paul U. II.Gregoriou, Greg N., 1956- III. Series.

HD2741.I589 2006658.4dc22

2005026054

Printed in the United States of America.

10 9 8 7 6 5 4 3 2 1

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www.wiley.com

For my parents.PUA

In loving memory of my father, Nicholas, and to my mom, Evangelia.

GNG

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Contents

Preface xi

Acknowledgments xiii

About the Editors xv

About the Authors xvii

PART ONEFramework of Corporate Governance

CHAPTER 1The Ethics of Corporate Governance: What Would the Political Philosophers Say? 3

Colin Read

CHAPTER 2The Politics of Symbolism: Sarbanes-Oxley in Context 9

Justin OBrien

CHAPTER 3Governance and Performance Revisited 27

yvind Bhren and Bernt Arne degaard

CHAPTER 4Corporate Governance as a Process-Oriented Approach to Socially Responsible Organizations 65

Marijan Cingula

CHAPTER 5The Impact of the New Corporate Governance Code on the Belgian Stock Market 95

Albert Corhay, Andree Dighaye, and Pierre-Armand Michel

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PART TWOCorporate Governance and the Global Financial Markets

CHAPTER 6Improving the Corporate Governance of Hedge Funds 129

Greg N. Gregoriou, William R. Kelting, and Robert Christopherson

CHAPTER 7Corporate Governance Reform in Australia: The Intersection of Investment Fiduciaries and Issuers 137

Martin Gold

CHAPTER 8Corporate Social Responsibility and Fiduciary Investment in Australia 161

Paul U. Ali

CHAPTER 9Issuers Liability for Financial Information as an Instrument of Corporate Governance Enforcement 173

Clemens Vlkl

CHAPTER 10Investing in Death/Speculating on Mortality: Some Thoughts on Life Insurance Securitization 185

Paul U. Ali

PART THREEShare Ownership and Shareholder Control Rights

CHAPTER 11Ownership Structure Metrics 197

Stefan Prigge and Sven Kehren

CHAPTER 12The Effectiveness of Shareholders Meetings: An Overview of Recent Developments 223

Gregory F. Maassen and Darrell Brown

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CHAPTER 13The Market for Corporate Control and the Implications of the Takeover Directive (2004/25) 267

Blanaid Clarke

PART FOURAccountability of Directors and Executives

CHAPTER 14Board Power Relations and the Impact of the U.K.s Combined Code on Corporate Governance 299

Timothy J. Nichol

CHAPTER 15CEO Compensation in Australias Largest Companies 319

Geof Stapledon

CHAPTER 16Directors and Officers Liability in France 337

Alain-Xavier Briatte and Michael Julian

CHAPTER 17Independent Directorship Systems in Greater China 359

Margaret Wang

PART FIVEResponsibilities to Stakeholders and Other Emerging Trends inCorporate Governance

CHAPTER 18The Primary Stakeholder Relationships: Corporate Governance and Value Creation 379

Andrea Beretta Zanoni

CHAPTER 19Family Ownership and Corporate Governance 399

Mara Sacristn-Navarro and Silvia Gmez-Ansn

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CHAPTER 20The European Social Model of Corporate Governance: Prospects for Success in an Enlarged Europe 423

Irene Lynch Fannon

CHAPTER 21Contract Negotiation and Internal Regulation Mechanisms in a Firm 445

Hubert de La Bruslerie

CHAPTER 22Prospects and Limits of Corporate Governance Codes 467

Bjrn Fasterling

CHAPTER 23Assessing the Effectiveness of Boards of Directors and Individual Directors 485

Richard Leblanc

References 525

Index 565

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Preface

This reader comprises an edited series of papers on the latest develop-ments in corporate governance worldwide following the introduction ofthe Sarbanes-Oxley Act in the United States. That Act has transformed cor-porate governance practices in the United States and has strongly influ-enced the development of corporate governance in the Asia-Pacific andEuropean markets discussed in the reader. Corporate governance remains atopic of keen interest not only for the accounting, financial, and legal sec-tors but also for the broader business and investor communities due to themeasures taken by regulators around the world in response to the highlypublicized collapses of Enron, Parmalat, and WorldCom and other ac-counting scandals and corporate fraud at Adelphia, Global Crossing,Merck, and Tyco. This is evident in the recent development of corporategovernance standards by professional organizations and societies, thegrowing trend for institutional investors to involve themselves in the gover-nance of the corporations that they invest in, and the increased regulatoryscrutiny of risk management regimes and other internal controls imple-mented by corporations.

This reader brings together experts on corporate governance who haveeach contributed papers on the impact of the Sarbanes-Oxley Act and leg-islation influenced by it on corporate governance worldwide. The reader isdivided into five parts. Part One provides the context for the current de-bate on corporate governance. It discusses the ethical and political under-pinnings of corporate governance and examines the relationship betweencorporate governance and economic performance and stock markets. PartTwo looks at the corporate governance aspects of transactions in theglobal financial markets, including the governance of hedge funds, and therole of institutional and other investors in corporate governance. PartThree deals with shareholder empowerment and the corporate governanceimplications of different ownership structures and the balance of powerbetween shareholders, and the use of the control rights vested in share-holders to influence corporate governance. Part Four investigates issues re-lating to executive power and corporate governance measures directed atthe board level. Finally, in Part Five, the book discusses the future of cor-porate governance, in terms of corporations and their internal/external

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stakeholders, family-dominated corporations, and the seeming ubiquity ofcorporate governance codes, and concludes with a discussion of corporategovernance assessments.

The editors believe that this reader can assist directors and officers, in-stitutional and professional investors, and their respective accounting, au-dit, and legal advisers, in navigating the complex field of internationalcorporate governance.

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Acknowledgments

The editors wish to thank Bill Falloon, senior finance editor, for his enthu-siastic support of this reader, and Laura Walsh, assistant editor, for heroutstanding assistance during the publication process. It has been a plea-sure working with John Wiley & Sons on the production of this reader. Inaddition, the editors would like to express their gratitude to the contribu-tors, without whom it would not have been possible to create this reader.

Paul Ali would like to thank Martin Gold, Sydney Business School, forproviding invaluable information and insights in relation to the Australianequity market and Australian mutual funds. Paul also wishes to thank GeofStapledon, Managing Director of ISS Australia and Professor of Law, Fac-ulty of Law, University of Melbourne, for his ongoing and generous sup-port of corporate governance research initiatives within Australia. Thanksare, in addition, due to the Australian Research Council for their funding ofPauls corporate governance research.

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About the Editors

Paul U. Ali is an Associate Professor in the Faculty of Law, University ofMelbourne, Australia. Paul was previously a lawyer in Sydney, specializingin corporate finance, securitization, and structured finance. He was part ofthe corporate advisory team that advised the Australian Mutual ProvidentSociety, the largest Australian life company, on its demutualization and thereconstruction of its group, and the IPO of a new holding company, AMPLimited, on the Australian and New Zealand Stock Exchanges in 1998 (thethen-largest IPO ever in Australia). Paul has published several books andarticles, including articles on finance law in the Banking and Finance LawReview, Company and Securities Law Journal, Derivatives Use, Tradingand Regulation, Journal of Alternative Investments, Journal of Bankingand Finance Law and Practice, Journal of Banking Regulation, and Journalof International Banking Law and Regulation, and most recently, has co-edited a book on innovative securitizations (Securitisation of Derivativesand Alternative Asset Classes, 2005). He holds an SJD from the Universityof Sydney.

Greg N. Gregoriou is Associate Professor of Finance and coordinatorof faculty research in the School of Business and Economics at State Univer-sity of New York, College at Plattsburgh. He obtained his PhD (Finance)from the University of Quebec at Montreal and is the hedge fund editor forthe peer-reviewed journal Derivatives Use, Trading and Regulation, pub-lished by Henry Stewart Publications, based in the U.K. He has authoredover 40 articles on hedge funds, and managed futures in various U.S. andU.K. peer-reviewed publications, including the Journal of Futures Markets,European Journal of Finance, Journal of Asset Management, EuropeanJournal of Operational Research, and Annals of Operations Research. Thisis his fourth book with John Wiley & Sons.

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About the Authors

Andrea Beretta Zanoni is a Professor of Business Economics and StrategicManagement in the Milan State University, Faculty of Economics. His re-search focuses on Strategic Management behavior, value, and corporategovernance. He earned his Laurea, magna cum laude, in Business Econom-ics from Bocconi University, where he received the Gold Medal for Acade-mic Honor. He is a member of the National University Evaluation Council(NUEC), an institutional body of the Ministry for Universities and Scien-tific and Technological Research and a Fellow of the Italian Academy ofBusiness Economist (AIDEA) and member of Strategic Management Soci-ety. He has published extensively on corporate governance, including thebooks Strategia e politica aziendale negli studi italiani ed internazionali(Business Policy and Strategy in Italian and International Studies) and Pi-anificazione, controllo e bilancio del valore (Planning and Statement ofEconomic Value), and numerous articles in the leading Italian business andfinance journals.

yvind Bhren is a Professor in the Department of Financial Econom-ics at the Norwegian School of Management. His primary interests are cor-porate finance, corporate governance, and the philosophy of science, andhe has published extensively in the Journal of Financial Economics, Euro-pean Finance Review, Journal of Banking and Finance, Scandinavian Jour-nal of Economics, Economics Letters, Decision Sciences, Journal ofBusiness Ethics, Journal of Economic Psychology, and Energy Economics.He has co-authored two recent textbooks in corporate finance. His currentconsulting is on minority freezeouts in listed firms and the redesign of own-ership and organizational structures in large, private family firms. He hasrecently served as an expert witness in a corporate governance case at theNorwegian Supreme Court. He holds a PhD in Management from the Nor-wegian School of Economics and Business Administration.

Alain-Xavier Briatte is avocat au Barreau de Paris with HaarmannHemmelrath. He graduated from the University of Law of Paris II, andParis X. He studied at Reims Management School and teaches corporatelaw there. His practice as an avocat includes corporate law, corporate gov-ernance, corporate litigation, and banking activities in France. He has rep-resented major pension funds in the context of securities offerings in France

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and engaged several corporate governance-related judicial actions whencounseling employee shareholders in the context of the merger of multi-billion-euro pension funds. He also represented the U.S.-based ratingagency, Governance Metrics International, in 2003, covering the CAC 40listed companies governance issues. He served on the OECD CorporateGovernance Task Force, participated in drafting the Directors Charter ofthe French Institute of Directors (Institut Franais des Administrateurs),served on the United Nations Economic Commission for Europes RoundTable on Corporate Governance in 2005, and founded the French Corpo-rate Governance Association.

Darrell Brown is currently senior legal adviser on the USAID-fundedMacedonian Corporate Governance and Company Law Project. He has 16years of experience in financial services, securities and investment, pension,insurance, corporate governance, and commercial law reform as a legal ad-viser and government relations consultant. He has worked in nine coun-tries across North America, Asia, and Europe, including three formerrepublics of the Soviet Union. He was the editor and contributing authorto the multivolume loose-leaf reference Mercer Pension Manual, coveringtax, trust, investment, and securities law as it relates to the provision ofcapital accumulation and retirement plans. He was a contributing authorto the International Foundations Employee Benefits in Canada.

Robert Christopherson is a Professor of Economics and Finance at theState University of New York (Plattsburgh). He holds a BS degree in bothEconomics and Psychology from Central Michigan University, a MA de-gree in Economics from Central Michigan University, and a PhD in Eco-nomics from Wayne State University. He has taught Economics andFinance since 1980, and his research interests include corporate gover-nance of hedge funds, local/regional pricing, and the economics of journalpricing. He has numerous journal publications, edited books, book chap-ters, and articles to his credit.

Marijan Cingula is a Professor at the University of Zagreb, Faculty forOrganization and Informatics in Varazdin and teaches Strategic Manage-ment, Organizational Design, and Capital Markets. He also acquired exten-sive business experience during the transition period in Croatia, includingmanaging the reengineering process of operations at the Varazdin OTCMarket from pink-sheet and fax-based trading to computer-supported on-time order-driven operations. He organized the Market and adjusted theoperations to Croatian laws and international standards, evaluated by theABA. He also managed 38 broker/dealers to establish the first Croatian cap-ital market, now the Varazdin Stock Exchange. He is the author of the firstbook on entrepreneurship for secondary schools in Croatia and the co-author of several books on management and organizational change.

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Blanaid Clarke is a senior lecturer in Law in the Law Faculty, Univer-sity College Dublin, where she teaches at both the undergraduate and post-graduate levels in Corporate Governance, Corporate Finance Law,Contract Law, and Financial Services Law. She is a founding member ofthe Institute of Directors Centre for Corporate Governance at UniversityCollege Dublin. She also works with the Irish Takeover Panel. She holds aPhD in Law from the University of Manchester. She has published severaltexts including Contract Cases and Materials and Takeovers and MergersLaw in Ireland, and numerous articles and papers, including in the Journalof Corporate Studies.

Albert Corhay is Professor of Accounting and Finance at the HECManagement School of the University of Lige, Belgium, and AssociateProfessor of Finance at the University of Maastricht, the Netherlands. Hewas Dean of the Faculty of Economics, Management, and Social Sciencesof the University of Lige and was Chairman of the Management School ofthat University for four years. He holds a BA and an MA degree in Man-agement from the University of Lige and a PhD in Financial Economicsfrom the University of Cambridge. During his doctoral research, he was afellow of the Intercollegiate Centre for Management Sciences, Brussels. Hisresearch centers on portfolio management, asset pricing models, market ef-ficiency, stock price modeling, and estimation of risk. He has written over40 articles published in journals such as the Journal of Finance, Journal ofBanking and Finance, Applied Financial Economics, Journal of BusinessFinance and Accounting, Review of Financial Economics, Quarterly Re-view of Economics and Finance and the International Review of Econom-ics and Finance.

Andree Dighaye is a research and teaching assistant in Accounting andFinance at the HEC Management School of the University of Lige, Bel-gium. She holds a BA and an MA degree in Management from the Univer-sity of Lige, Belgium, and is doing a PhD in Financial Economics at theUniversity of Lige. Her doctoral research deals with the success of stockoption plans.

Irene Lynch Fannon is a Professor in the Faculty and Department ofLaw, University of Cork. She holds a BCL from University College Dublin,a BCL from Oxford University, where she was a Senior Scholar ofSomerville College, and a Doctor of Juridical Science from the Universityof Virginia. She is qualified as a solicitor and has practiced law in London.She was a member of the Audit Review Group established by the IrishGovernment following the Public Accounts Committee Enquiry into DIRTand other irregularities. She was head of the Department of Law at UCCand was also Dean of the Faculty of Law. She is currently on leave of ab-sence at Cleveland Marshall College of Law, where she has been appointed

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to the Baker Hostetler Chair for distinguished visiting academics. She is theauthor of Working within Two Kinds of Capitalism.

Bjrn Fasterling is the head of EDHECs Department of Law. In thisposition he directs academic programs and administers the schools law fac-ulty. He teaches European law, company law and international legal riskmanagement. His research and publications focus on comparative aspectsof company, financial, and liability law. Prior to joining EDHEC, he workedas a German lawyer in the Berlin office of the law firm Wilmer, Cutler &Pickering, and practiced in the fields of corporate law and international ar-bitration. He holds German law degrees (1 state exam, 2 state exam), a PhDin Law from the University of Osnabrck, and an LLM degree from theUniversity of Stockholm. He is a member of various academic associations,including the European Corporate Governance Institute and the MaxPlanck Institute for Foreign Private and Private International Law.

Martin Gold lectures in the postgraduate programs of the Sydney Busi-ness School, Australia. Martin is an experienced funds manager and invest-ment analyst who worked for several institutional investment firms beforebecoming an academic in 2003. He publishes in the areas of innovative fi-nancial products and the fiduciary responsibilities of fund managers.

Silvia Gmez-Ansn is an Associate Professor of Finance in the De-partment of Business Administration and Accountancy, Faculty of Eco-nomics and Business Administration, University of Oviedo, Spain. Sheholds a PhD in Economics from the University of Oviedo. She is currentlyundertaking a major research project on the corporate governance ofSpanish listed companies in conjunction with the Financial Studies Foun-dation and the Spanish Association of Financial Analysts, and has pub-lished extensively on corporate governance, including numerous booksand book chapters. She is a member of the European Corporate Gover-nance Institute, the International Family Enterprise Research Academy,the Centre for Corporate Governance Research at the University of Birm-ingham, and the Working Group on Corporate Social Responsibility ofthe Spanish Civil Sector.

Michael Julian is a member of the New York and Paris Bars and prac-tices with the Paris office of Haarmann Hemmelrath. He advises Europeanand American companies on a variety of corporate governance and M&Aissues. In addition to his extensive work in the field of international merg-ers and acquisitions, he has significant experience in the development andimplementation of corporate governance compliance programs withinlisted and privately held companies. He earned his JD from the West Vir-ginia University College of Law and holds a postgraduate degree (DiplmedEtudes Spcialises) from the Institute for European Studies at the FreeUniversity of Brussels, Belgium. In addition to his legal practice, Michael

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lectures and regularly speaks at conferences on corporate governance andlegal compliance issues.

Sven Kehren holds a diploma in economics from University of Ham-burg. He started his research in corporate governance in 2001. Currently,he is preparing his dissertation on the economic impact of the secondlargest shareholder for publication.

William R. Kelting is Associate Professor of Accounting at the StateUniversity of New York (Plattsburgh). He obtained his PhD from the Uni-versity of Arkansas and his MBA from Rutgers. He is also a CPA. His re-search interests include auditing, governmental and nonprofit accounting,and accounting history. He has published in The Accounting EducatorsJournal, Pensions: An International Journal and in the Journal of FinancialCrime.

Hubert de La Bruslerie is Professor of Finance at the University ofParis I Sorbonne and is currently Dean of the Management and BusinessDepartment of that University. His areas of interest are corporate gover-nance and corporate finance. He has recently published a book on bondmanagement and he is a regular contributor to French finance academic re-views. He is also the official financial expert to the Court of Appeal ofParis.

Richard Leblanc is an Assistant Professor, Corporate Governance, Lawand Ethics, at the Atkinson Faculty of Liberal and Professional Studies,York University, Toronto, Canada. He was recently chosen as one ofCanadas Top 40 Under 40, and is an award-winning teacher, certifiedmanagement consultant, professional speaker, professor, lawyer, and inde-pendent adviser and specialist in boards of directors and effective corpo-rate governance. As an educator, he was the recipient of the first SchulichTeaching Award from York Universitys Schulich School of Business, as se-lected by his students. He also holds a PhD from the Schulich School ofBusiness. His PhD was adjudicated as the winner of the Best DissertationAward by the Administrative Sciences Association of Canada, as assessedby independent peer-review (June 2004). In addition, he provides advisoryassistance to boards of directors and has advised directors and executivesfrom the United States, U.K., Australia, New Zealand, Europe, Russia,China, and Mexico. He is the co-author of Inside the Boardroom: HowBoards Really Work and the Coming Revolution in Corporate Governance(2005), published by John Wiley & Sons.

Gregory F. Maassen (a Fulbright scholar) specializes in the manage-ment and implementation of technical assistance projects (USAID, WorldBank, OECD, EBRD) in the fields of economic law reform, private sectordevelopment, and corporate governance. He is an Assistant Professor at theRotterdam School of Management, Erasmus University in the Netherlands,

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where he regularly publishes articles in international journals and where heteaches MBA courses on corporate governance and strategic management.He is also Chief of Party (Project Manager) and Technical Expert of athree-year USAID Corporate Governance and Company Law Project im-plemented by Emerging Markets Group, previously Deloitte ToucheTohmatsu in Macedonia. He was Head of Office and Project Manager forthe International Finance Corporation (IFC) of the World Bank Group inArmenia and senior specialist in Russia. Other work experience with theIFC included assignments in Georgia, Uzbekistan, Azerbaijan, Mongolia,Kazakhstan, and Ukraine. He holds a PhD from Erasmus University, andhis doctoral dissertation on international corporate governance modelswas published by Spencer Stuart.

Pierre A. Michel is Professor of Investment Analysis at the HEC Man-agement School of the University of Lige, Belgium, and Affiliate Professorof Financial Accounting at the Solvay Business School of the Free Universityof Brussels. He is the Academic Director of the Luxembourg School of Fi-nance (University of Luxembourg). He served as Chairman of the Manage-ment School of the University of Lige for six years. He holds both an MBAand a PhD in Finance from the Stern School of Business of New York Uni-versity. He has published seven books in finance and accounting and haswritten over 40 book chapters and articles, which have appeared mostly ininternational journals, on a variety of topics that include asset valuation,risk estimation, market efficiency, corporate finance, and financial state-ments analysis. He also is President of the Economics and ManagementCommission of the National Fund of Scientific Research (Belgium).

Timothy J. Nichol is Associate Dean of Newcastle Business School,University of Northumbria. He holds a degree in Jurisprudence from Ox-ford University, and is a Qualified Chartered Accountant and Fellow of theChartered Institute of Taxation. In 1997, he was seconded to the KnowHow Fund and worked as a Resident Advisor at the Ukrainian CentralBank as part of a multiagency team advising on the implementation ofbanking reform measures.

Justin OBrien runs the corporate governance program at the School ofLaw, Queens University, Belfast. He is the author of Wall Street on Trial(2003), and the editor of Governing the Corporation: Corporate Gover-nance and Regulation in Global Markets (2005). Dr. OBriens main re-search interests lie in the intersection between Market Regulation andPublic Policy; Corporate Crime; International Comparative CorporateGovernance, and Business Ethics. He has recently received a major grantfrom the Economic and Social Research Council in the United Kingdom toexamine the international implications of the U.S. Sarbanes-Oxley legisla-tion. A former investigative journalist and television editor, he has worked

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for a range of national and international broadcasters, including three divi-sions of the BBC. He holds a doctorate in Political Science and a Mastersof Philosophy in Law from Queens University, Belfast.

Bernt Arne degaard is an Associate Professor in Finance at the Nor-wegian School of Management. He holds a PhD in Finance from CarnegieMellon University. He has published in leading journals, including theJournal of Finance and Nordic Journal of Political Economy, and has re-cently co-authored a book on corporate finance.

Stefan Prigge holds a doctoral degree in Economics from the Universityof Hamburg. He has undertaken research into corporate governance since1995 at the University of Hamburg and Max Planck Institute for ForeignPrivate and Private International Law, Hamburg (19961998). Amongother publications, he edited, in cooperation with Hideki Kanda, Klaus J.Hopt, Mark J. Roe, and Eddy Wymeersch, Comparative Corporate Gover-nance: The State of the Art and Emerging Research (1998). Additional re-search areas include competition in financial markets and regulation of thefinancial sector.

Colin Read is interested in the interplay between public and tax policy,economic efficiency, and ethics. He holds a PhD in Economics, a JD inLaw, and a Master of Accountancy in Taxation. His publications are pri-marily in the areas of the economics of information and in law and eco-nomics. He is currently the Dean of the School of Business and Economicsat Plattsburgh State University.

Mara Sacristn-Navarro is a Professor in the Department of BusinessAdministration, Rey Juan Carlos University, Spain.

Geof Stapledon is Managing Director of ISS Australia and a Professorof Law at Melbourne University. He has published widely in the areas ofcorporate governance, institutional investment, and corporate law. Hisbook, Institutional Shareholders and Corporate Governance, was pub-lished by Oxford University Press in 1996. Geof has degrees in Economicsand Law from the University of Adelaide, and obtained his doctorate fromthe University of Oxford. He has practiced as a solicitor with the Adelaidecommercial law firm, Finlaysons, and with Minter Ellison in Sydney.

Clemens Vlkl studied law at the University of Vienna, StockholmsUniversitet, and the London School of Economics. After working as alawyers associate in Vienna, he became a research assistant at the Uni-versity of Viennas Department of Civil Law, earning a PhD in Corporateand Commercial Law. His dissertation concerned corporate governanceenforcement in Austria. He currently works as a lawyers associate in Vi-enna and is an Assistant Professor at the University of Viennas Depart-ment of Civil Law. His research is focused on tort, corporate and capitalmarkets law, and corporate governance. His publications include a book,

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and various articles on corporate governance enforcement, the SocietasEuropaea, liability for false information under civil law, capital marketslaw, and reporting requirements and alternative dispute resolution.

Margaret Wang is a lecturer in the School of Law, and an Associate ofthe Centre for International Corporate Governance Research, VictoriaUniversity, Melbourne, Australia. Before taking up her position with Victo-ria University, she worked in law firms in Taiwan and Hong Kong whereshe specialized in corporate advisory matters and capital market transac-tions. She is also admitted to practice in Australia. Margaret has publishedextensively on corporate governance in Asia, with a particular focus on theoperation of Chinese businesses within the Greater China region. She iscurrently undertaking research on the challenges confronted by the intro-duction of western standards of corporate governance in Asia. She haspublished a number of articles on corporate governance and independentdirectors, including in the European Business Law Review.

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PART

OneFramework of

Corporate Governance

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CHAPTER 1The Ethics of Corporate

Governance: What Would thePolitical Philosophers Say?

Colin Read

INTRODUCTION

Ethics involves a determination of what is right and what is wrong; or inthe words of the Greek philosopher, Epicurus, ethics deals with things tobe sought and things to be avoided, with ways of life and the (end of life)(Laertius 1925). Ethics extends beyond the individual and invokes a perma-nent rather than a situational perspective. (However, the existential theoryof Jean Paul Sartre would argue otherwise.) Ethics invokes the managementof the environment within which we function from a perspective broaderthan, but obviously inclusive of, the current cohort. Again borrowing fromthe Greek, the terms ecology and economics share a root in the Greek wordoikos, literally meaning house, but interpreted as meaning the environmentwithin which we live. While ecology is the logical study of the environment,economics is the management of the environment within which we operate.Since the corporate environment is in theory an infinitely lived entityowned by finitely lived shareholders, a governance ethic must represent asystem that serves the needs of the current ownership while preserving theability of the corporation to sustain itself and benefit future cohorts.

Before engaging in the techniques one could use to frame governanceproblems within an ethical foundation, let us bound the argument by twoextremes, and from there gain confidence that the ethical solution liessomewhere in between. The first argument states that the corporation ishere only to serve the current cohort. That argument cannot serve as a trulycorporate ethic because the argument could have been made generations

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ago and generations hence with equal conviction but without equal cor-rectness. It would instead create a series of mutually exclusive governanceprescriptions without regard for the costs imposed upon any future cohortwishing to invoke the same situationally convenient argument.

Alternately, we can dispense with the second argument, that the corpo-ration should perpetuate itself in its current form. The market forces thrustupon a corporation are in constant flux, and hence preservation of its cur-rent state is impossible. Instead, this latter argument might be to try tomanage the corporation for maximum preservation. Such a preservationistargument would preserve all corporate capital for future generations. Ofcourse, we should anticipate using capital at some point since, by doing so,one cohort can benefit and no other cohort would suffer. (This notion of anethical decision is also an efficient decision. It is named the Pareto Princi-ple, after the Italian economist who originated the notion.) The ethicalquandary would then be the determination of which generation should bepermitted to benefit from the value of the corporation. Should we delaypaying out dividends indefinitely by constantly retaining earnings, even ifthe capital is depreciated through obsolescence? If such were the case, andhence no single cohort benefits, we would violate the premise that deci-sions are to be made for things sought and to be avoided in life.

The corporate ethic must then lie somewhere between these two ex-tremes. It must necessarily promote efficiency in coexisting with the envi-ronment to generate the quality of life for a current cohort and yet alsoprovide an equity that does not disadvantage a future cohort by the deci-sions of a current cohort. Our test for a corporate ethic must establish abalance between these two competing views.

As an example to further explore this balance, consider corporateperks, bestowed on the current cohort of principals or agents, always atthe expense of future cohorts, or even some current cohorts deluded by ac-counting practices that mask such perks. While such violations by agentsof principals interests impose inefficiencies, we shall next see that they alsoimpose intertemporal inequities. Negotiations over improvements in cur-rent accounting can mitigate the delay in costing such practices. However,the decisions of mortals will always favor benefits that come with delayedcosts. The insights of Robert Solow question this ethic.

THE THEORY OF SOLOW IN A CORPORATE CONTEXT

Let us begin by offering up contributions from some eminent social andeconomic philosophers. I begin with Robert Solow, a contemporary econo-mist who won the Nobel Prize in economics for his study of optimal eco-

4 FRAMEWORK OF CORPORATE GOVERNANCE

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