Transcript Making Companies as Better Citizens: Advancing Corporate

Prof. Dr. Dr. Dr. h.c. Christian Kirchner
Humboldt University Berlin
Corporate Governance, Business Ethics,
and Financial Markets Stability
Paper to be presented at the conference
“Corporate Governance Sound Practices: A Case for
Financial Markets Stability”
Kuwait City, 2 Feb. 2013
1.
Introduction (1)
‘Good’ Corporate Governance: an essential
prerequisite for well-functioning financial
markets (and thus for financial markets
stability)
But how to define ‘good’ Corporate Governance?
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1.
Introduction (2)
 ‘Bad’ Corporate Governance: one of the causes of
the international financial markets crisis in the past
few years
 How to define ‘bad’ Corporate Governance?
 Searching for ‘good’ Corporate Governance:
 Conventional approach: focus on legal rules
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Public ordering / private ordering
Normative criteria
Introduction of business ethics
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1.
Introduction (3)
 Organisation of the paper
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History of the international financial markets crisis
Role of ‘bad’ governance structures
Methodological fundament
Introduction of institutions
- formal institutions
- informal institutions
Formal and informal institutions: necessary, but not
sufficient prerequisites for ‘good’ Corporate
Governance
Role of business ethics
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2.
Short History of the international
financial markets crisis
 Minimum capital requirements for banks
combined with – dysfunctional - financial
reporting standards (‘fair value’- problem)
 Governance problems:
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shareholders’ goals; moral hazard problems
overcoming management’s risk averseness
perverse compensation incentives
 International financial markets crisis as a product
of banking regulation, financial reporting
standards and governance problems
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3.
Methodological Fundament (1)
 Institutional Economics (Coase, Williamson etc.)
 Shifting the focus from the game (markets) to the rules
of the game (framework)
 Rules of the games: formal or informal rules together
with their enforcement mechanism (= institutions)
 Examples for formal institutions: legal rules
 Distinction between public ordering (by the legislator)
and private ordering (by private actors)
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3.
Methodological Fundament (2)
 Assumptions of institutional economics
 Existence of transaction costs
 Incomplete information
 Bounded rationality
 Opportunism (ex ante / ex post)
 Moral hazard as a product of opportunism and
dysfunctional institutions
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4.
Formal institutions (public ordering)
 Better regulation: Basel III plus national
regulation
 corporate governance issues
 Basel II/III: ‘sound corporate governance’
 financial reporting standards: consolidation of special
investment vehicles (SIV): collusion of management
and auditors
 Legal rules on management compensation (e.g.
Germany)
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4.
Formal institutions (private ordering)
 Corporate Governance Codes: not suitable for
financial institutions
 Covenants to protect creditors’ interests: not
applicable for hybrid financial instruments
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5.
Informal institutions
 ‘Sound business practices’
 Eroded by competitive pressure / problem of
business ethics / how to behave morally under
conditions in which actors, who do not act morally,
have a competitive advantage?
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6.
Dilemma of formal and informal
institutions
 Legal interpretation problems (discretion)
 Incentives to extending the rules by means of
interpretation (ex post-opportunism)
 Intervention of regulatory authorities within the
rule of law (judicial review)
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7.
Introduction of reputation mechanism
 Building reputation by
Market places (e.g. Kuwait)
Private market players (financial institutions)
 Asymmetry between building and destroying
reputation
 Open problem 1: finite or infinite game?
 Open problem 2: exploitation of moral behaviour
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8.
Trust building
 Trust building: an investment process
 Methodology
 Starting point: definition of ethical goals
 How to act under given restraints?
 Dilemma structure: losses if defection occurs
 Reciprocal investment into joint welfare gains
 Credible commitments of market participants
 Combination of – private – credible commitments and
market regulation
 Capital market access requirements
 Transparency and compliance
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9.
Example: management compensation
 The Wittenberg Center for Global Ehtics (WCGE)
process
 Starting point: How to cope with loss of trust in
financial institutions in Germany
 Credible commitments: ethical foundations of
management compensation
 The process: Dialogue managed by the WCGE
 Expected outcome: credible commitment of
German financial institutions (in the fields of
management compensation)
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10. Interface between regulation,
corporate governance and business
ethics
Starting point: Regulation (public ordering)
Complemented by private ordering
(corporate governance codes for financial
institutions)
Informal rules: only functioning together
with private credible commitment
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11. Practical consequences
(lessons learnt)
Interplay between
Public ordering
Private ordering
Private credible commitments
Central Issues:
Minimum capital requirements (hybrid capital)
Corporate Governance: management
compensation
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