firm, something that required the approval of 10 percent of the shareholders, and of contributing to other hanges in corporate policies. Press reporting on misgovernance can also shame politicians and managers who care about their international reputations to act to improve policies in firms. Interestingly, press attention is viewed as equally important to legal challenges. As William Browder reported to us: The press is one of the reasons why we pursue lawsuits. We have pursued 24 lawsuits so far and lost 23. That is the way it is in Russia. But the advantage is the publicity PRIVATE AND GOVERNMENT REGULATORS. Public opinion pressure generated by an active press is also essential to efforts by private sector organizations to use self-regulation to improve corporate governance Consider the approach in the United Kingdom to the range of financial scandals of the 1980s, including the collapse of the Bank of Credit and Commerce International and the Maxwell Group. Instead of legislation that proscribed certain activities matched by court sanctions and fines, the United Kingdom pursued self-regulation, enforced through disclosure. The Cadbury Commission, dominated by the private sector, defined corporate governance standards and developed mechanisms to compel the disclosure of performance relative to standards, allowing the force of public pressure generated by disclosure and news stories to change practices. This publicity route had the advantage that the self-regulatory organization had the power to impose it and the penalty could be introduced quickly. Alternative sanctions, such as fines and court-enforced penalties, were either unavailable or could be delayed through court proceedings, thereby limiting their effectiveness The Cadbury Commission, which issued its report in December 1992, was the first effort at reform by means of disclosure and public pressure. The key element of the report was a code of best practice with 19 recommendations, including an enhanced role for independent directors, a minimum number of independent directors, and the separation of the roles of the chair and the CeO. Since 1993 the London Stock Exchange has made a requirement of listing that a company include a statement of performance relative to the code and a written explanation for any variation in its annual reports. It has since become common practice for company statements issued to the press and for independent press
firm, something that required the approval of 10 percent of the shareholders, and of contributing to other changes in corporate policies. Press reporting on misgovernance can also shame politicians and managers who care about their international reputations to act to improve policies in firms. Interestingly, press attention is viewed as equally important to legal challenges. As William Browder reported to us: “The press is one of the reasons why we pursue lawsuits. We have pursued 24 lawsuits so far and lost 23. That is the way it is in Russia. But the advantage is the publicity." PRIVATE AND GOVERNMENT REGULATORS. Public opinion pressure generated by an active press is also essential to efforts by private sector organizations to use self-regulation to improve corporate governance. Consider the approach in the United Kingdom to the range of financial scandals of the 1980s, including the collapse of the Bank of Credit and Commerce International and the Maxwell Group. Instead of legislation that proscribed certain activities matched by court sanctions and fines, the United Kingdom pursued self-regulation, enforced through disclosure. The Cadbury Commission, dominated by the private sector, defined corporate governance standards and developed mechanisms to compel the disclosure of performance relative to standards, allowing the force of public pressure generated by disclosure and news stories to change practices. This publicity route had the advantage that the self-regulatory organization had the power to impose it and the penalty could be introduced quickly. Alternative sanctions, such as fines and court-enforced penalties, were either unavailable or could be delayed through court proceedings, thereby limiting their effectiveness. The Cadbury Commission, which issued its report in December 1992, was the first effort at reform by means of disclosure and public pressure. The key element of the report was a code of best practice with 19 recommendations, including an enhanced role for independent directors, a minimum number of independent directors, and the separation of the roles of the chair and the CEO. Since 1993 the London Stock Exchange has made a requirement of listing that a company include a statement of performance relative to the code and a written explanation for any variation in its annual reports. It has since become common practice for company statements issued to the press and for independent press 11
reports to identify performance relative to code standards, with a lack of compliance described largely as a failure of corporate governance by the company and its directors. A similar approach regarding company practices toward executive compensation was adopted in the Greenbury report, issued in July 1995, and in the Hampel report, released in January 1998. All these best practices have been consolidated into a supercode published by the london Stock Exchange in June 1998, again with requirements for disclosure rather than compliance This approach--reliance on disclosure supported by widespread communication by the press of performance relative to standards-has led to remarkable changes in firm practices within a short time. A recent study(Dahya, McConnell, and Travlos 2002)showed that while two-thirds of a sample of London Stock Exchange firms were not in compliance with Cadbury standards when they were enacted in 1992 93 percent had complied by 1996. In addition, firms that adopted the standards have seen increased management accountability, as CEOs' tenure has become more sensitive to their firms'performance. This remarkable response was undoubtedly facilitated by the presss(and the publics) acceptance of the standards, so that reports of noncompliance would lead to widespread condemnation of managers and directors The extent and success of a disclosure and publicity approach is widespread. In Hong Kong (China) the stock exchange has historically not had the legal authority to impose penalties on companies that misbehave. Instead, it uses the media as a sanction, taking out advertising space to notify the public about a firm s security violations. The threat is usually enough. Shaming is both a personal penalty for the executives involved and may introduce a financial penalty if others now update their beliefs about the reliability of the executives and company and increase their terms for financing projects suggested by the executives. The effects of this policy were highlighted by Dyck and Zingales(2001), who reported that the average size of private benefits in Hong Kong( China)is only 0.7 percent, versus an international average of 14 percent The New York Stock Exchange is currently considering a similar approach of publishing reprimand letters to members that fail to implement revised listing guidelines relating to, for example
reports to identify performance relative to code standards, with a lack of compliance described largely as a failure of corporate governance by the company and its directors. A similar approach regarding company practices toward executive compensation was adopted in the Greenbury report, issued in July 1995, and in the Hampel report, released in January 1998. All these best practices have been consolidated into a “supercode” published by the London Stock Exchange in June 1998, again with requirements for disclosure rather than compliance. This approach—reliance on disclosure supported by widespread communication by the press of performance relative to standards—has led to remarkable changes in firm practices within a short time. A recent study (Dahya, McConnell, and Travlos 2002) showed that while two-thirds of a sample of London Stock Exchange firms were not in compliance with Cadbury standards when they were enacted in 1992, 93 percent had complied by 1996. In addition, firms that adopted the standards have seen increased management accountability, as CEOs’ tenure has become more sensitive to their firms’ performance. This remarkable response was undoubtedly facilitated by the press’s (and the public’s) acceptance of the standards, so that reports of noncompliance would lead to widespread condemnation of managers and directors. The extent and success of a disclosure and publicity approach is widespread. In Hong Kong (China) the stock exchange has historically not had the legal authority to impose penalties on companies that misbehave. Instead, it uses the media as a sanction, taking out advertising space to notify the public about a firm’s security violations. The threat is usually enough. Shaming is both a personal penalty for the executives involved and may introduce a financial penalty if others now update their beliefs about the reliability of the executives and company and increase their terms for financing projects suggested by the executives. The effects of this policy were highlighted by Dyck and Zingales (2001), who reported that the average size of private benefits in Hong Kong (China) is only 0.7 percent, versus an international average of 14 percent. The New York Stock Exchange is currently considering a similar approach of publishing reprimand letters to members that fail to implement revised listing guidelines relating to, for example, 12
auditor independence and committee structures: requiring firms to publish these letters in their annual reports: and relying on the press to communicate the content of such letters. In short, relying on what James Landis, architect of the U.S. security laws after the crash of 1929, described as" the penalizing 1984,p.172) THE PRESS VERSUS OTHER MECHANISMS FOR ADDRESSING GOVERNANCE PROBLEMS. In some markets the penalties that can be imposed by the press are at least as important as other mechanisms for fighting misgovernance that the literature more commonly focuses on. Consistent with this contention is a recent survey in Malaysia that asked institutional investors and equity analysts to identify the factors that were most important in assessing corporate governance and deciding to invest in publicly listed corporations (Low, Seetharaman, and Poon 2002). The analysts thought that the frequency and nature of public and press comments about the company were more important than a host of other factors that receive more attention in academic debate, such as the companys relationship with the regulatory authorities, the number of independent nonexecutive directors and their qualifications, the existence of remuneration and audit committees, and the identity of company auditors BUSINESS SCHOOL GOVERNANCE AND BUSINESS WEEK RANKINGS. In 1988 the magazine Business week started to publish a ranking of the top U.S. business schools. Despite its arguable criteria(most students experience no more than one business school, yet their responses are used to rank them), this ranking gained a lot of attention, and soon assumed the role of a standard in the industry While we are not aware of any systematic study of the effect of the introduction of these rankings on the governance of business schools, their impact is undoubtedly huge. Suddenly teaching ratings became important and faculties were held accountable, new programs were introduced to cater to students needs, and some schools were even caught coaching their students how to respond to the business Week questionnaires S In the last year or so new competitors have entered the market: the Financial Times and the Wall Street Journal have elaborated their own rankings. To date, however, the Business Week ranking is by far the most important
auditor independence and committee structures: requiring firms to publish these letters in their annual reports: and relying on the press to communicate the content of such letters. In short, relying on what James Landis, architect of the U.S. security laws after the crash of 1929, described as “the penalizing force of pure publicity” (McCraw 1984, p. 172). THE PRESS VERSUS OTHER MECHANISMS FOR ADDRESSING GOVERNANCE PROBLEMS. In some markets the penalties that can be imposed by the press are at least as important as other mechanisms for fighting misgovernance that the literature more commonly focuses on. Consistent with this contention is a recent survey in Malaysia that asked institutional investors and equity analysts to identify the factors that were most important in assessing corporate governance and deciding to invest in publicly listed corporations (Low, Seetharaman, and Poon 2002). The analysts thought that the frequency and nature of public and press comments about the company were more important than a host of other factors that receive more attention in academic debate, such as the company’s relationship with the regulatory authorities, the number of independent nonexecutive directors and their qualifications, the existence of remuneration and audit committees, and the identity of company auditors. BUSINESS SCHOOL GOVERNANCE AND BUSINESS WEEK RANKINGS. In 1988 the magazine Business Week started to publish a ranking of the top U.S. business schools. Despite its arguable criteria (most students experience no more than one business school, yet their responses are used to rank them), this ranking gained a lot of attention, and soon assumed the role of a standard in the industry. 3 While we are not aware of any systematic study of the effect of the introduction of these rankings on the governance of business schools, their impact is undoubtedly huge. Suddenly teaching ratings became important and faculties were held accountable, new programs were introduced to cater to students’ needs, and some schools were even caught coaching their students how to respond to the Business Week questionnaires. 3 In the last year or so new competitors have entered the market: the Financial Times and the Wall Street Journal have elaborated their own rankings. To date, however, the Business Week ranking is by far the most important. 13