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Corporate Governance Challenges in Controlled companies. USA versus EU

March 30, 2017 2 comments

Corporate Governance Challenges in Controlled companies. USA versus EU

María Gutiérrez and Maribel Saéz have recently published an enlightening article on this aspect of Corporate Governance, traditionally much more connected with the European reality than with the US case. (1)

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Their analysis covers the three mechanisms with which shareholders may react to underperforming companies, (exit, voice and loyalty or liability (2)), with an innovative approach; they understand their respective effectiveness depends on the type of controlling insider and on the nature of the outsider.  Controlling shareholders have been more common on Europe and other areas than in the US, although in recent times both the reduction of public firms and certain governance practices (dual-class shares…) have made them also more frequent in the US. Even if reality appears to converge, nevertheless governance practices differ as for the treatment that controlling shareholders receive, so that tunneling, self dealing and other rent-extraction methods by them against the minority shareholders or investors is still much more limited in the US than in Europe, (perhaps one of the reasons for the much more limited role of capital markets there). Read more…

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The US Corporate Governance Framework

Literature on Corporate Governance (Corpgov) often comes from the US; many Corpgov institutions have been born in the US; the big controversies regarding board effectiveness, executive pay, and any other Corpgov matter are often raised in the US…..but what is the Corpgov framework in the US? I have ofter read about the US Corpgov without having a systemic knowledge about the framework that defines it. I will try to learn and offer a view of that in the present post. (1)

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The era after SOX (Sarbanes Oxley Act in 2002) unveils differences between the USA Corpgov system, (regulatory or hard law and “one size fits all” regime) and the UK one, (based on soft law or codes, and the “Comply or Explain” principle). Differences also affect gatekeepers, (subject to regulation by Agencies such as the SEC) and the market for corporate control.

 

  1. Peter V. Letsou describes the shared regulatory responsibility in the USA by the States and the Federal Government.

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Does your start-up need a board?

So you are the founder, you had the idea, you probably are the best to know where your  company needs to go…why should you involve anybody else in managing your company?

Particularly at a time when big and successful companies like Facebook and others have kept voting rights in excess of their economic stake after an IPO, isn`t it justified to avoid granting control to strange people?

Johanne Bouchard recently depicted how boards are at Unicorns, (1) these powerful but still at an early stage in their life companies. According to her, they use to be smaller, usually made of (relevant) investors and founders and other executives, (equity ownership at the board usually high), so that its leadership style adopts the shape below; these boards spend their time in value creation and growth related issues, which is perhaps their most relevant difference with mature or consolidated companies,  where (broadly speaking) compliance topics may reign. So, why should a founder have a board at all, particularly when the company hasn`t received large amounts of VC or early funds yet, when only you, your family and friends have contributed to launch the project? Read more…