Using class material, newspapers, academic articles and government/specialized reports, compare the US corporate governance system with the French system of corporate governance and explain the key differences and common points you identify. As we wish to compare the American and French model of Corporate Governance, we will do so by stating common points or differences following the 8 main points of Corporate Governance. They are the following: forms of organizations in the country, shareholders' rights, stakeholders' rights, management structure, the role of directors, employees, the government and finally, the corporate social responsibility. Form of Organizations: In France, there are a great number of private companies; most often owned by families since generations and generations; for example Hermès. These types of corporations (private) generally do not sell their stocks, which stay in the same family. However, shareholders in these companies have the same characteristics as in another type of organization. The most numerous form of business in the United States is the model of sole proprietorship (75%) (and partnership represent 8% of all businesses). They are mainly small enterprises and are the easiest ways to start a business in the United States. The other dominant model is the corporation one (20% of businesse). Although they are fewer in number, they represent an important share of the country's aggregate business receipts (86.5% of business sales). Indeed, many of the largest businesses in the US are public companies; such examples include Microsoft or General Motors Company. These public companies generally have numerous shareholders, who sell and buy shares on the stock market. Shareholders' rights and roles: In France, companies' shareholders have an important role. The Winter report (2002), aimed at modernizing and tightening corporate law as well as corporate governance through 10 priorities including a set of rules about shareholder's rights. The law on new economic regulations of 2001, following existing guidance of "best practice" wanted to increase the rights of minority shareholders. (Charreaux, Wirtz, 2007). Another major point of this law was to ensure a transparency towards shareholders. In France we can state 3 main rights which are; the right to vote at general meetings, the right to dividends and finally, the right of "balance-adjustment" in case the company would go bankrupt. In North America, we can identify 6 shareholders' main rights. They have the voting power on major issues like the election of directors or major changes for a company like a merger or an acquisition. One of their rights is the ownership of a portion of the company; indeed, by buying stock, they own something which has value. They also have the right to transfer ownership by trading their stock on the market. They are entitled to the company's dividends (in the case profits are not reinvested in the firm to increase its value). Being a shareholder also means they are allowed to see books and records of the company. This is not a problem for public companies, which have the obligation to make their financial situation public but it can be more delicate for private ones. Shareholders also have the right to sue the company in case of a wrongful act (an example of this kind a lawsuit was in 2002 with the WorldCom scandal, when the company largely overstated its earnings, thus hiding the reality from shareholders). Stakeholder's rights and roles: Stakeholders are generally investors in a company, whose actions can have an impact on the company's decisions. They generally meet at the board of directors where they have the right and responsibility to agree or not with a decision for the company or introduce a new one. They have the right to appoint anyone to senior management or get someone to leave the company if necessary. Apart from the board of directors, they can also get involved directly with the company by taking over departments and taking decisions "directly". In the United States, their protection is generally ensured thanks to contracts and strict regulations. In France, and since the Winter report followed by new laws, everyone orbiting around the company has increased rights and security. An employee can become a stakeholder and participate in its management better than before. Management structure: France is one in a few countries letting companies have the choice between a one- and two-tier structure. Some companies have a one-tier structure, where the board of directors makes important business decisions concerning the company. Other companies have a two-tier structure. This structure means having two boards of directors, the first one (management board) supervises the company and gives general guidelines while de second one (supervisory board) oversees major decisions for the company. The second board is appointed half by shareholders and half by employees. This second board elects the management board. In the United States however, companies have a unitary board of directors with a combined chief executive officer (CEO) and chairman. The unitary board is usually composed of no less than 3 people and up to 24 people. They elect the single PDG, who will be both CEO and chairperson. Employees: Various corporate governance codes have been drawn up by the employers' associations (MEDEF and AFEP) under the names of the Viénot 1 & 2 reports and the Bouton report (Charreaux, Wirtz, 2007). Employees in France benefit from a good protection thanks to the numerous unions. They put a lot of pressure on companies and the government to improve their situations. They enable employees to have a say and protection even if they are not part of the union. In the United States, the interests of workers are defined through contracts and regulations from the government. Unlike in France, employees do not have any voice in a company's corporate governance (O'Connor, 2000). The only link they have to the company is through pension funds, which are important shareholders of companies in the U.S. Pension funds as investment in a corporation is a voice for employees. Roles of directors: The principal conclusions of Mace (1971) were that "directors serve as a source of advice and counsel, serve as some sort of discipline, and act in crisis situations". They are also accountable for the strategy of the company. In the United States, just like in France, directors have to be loyal and act honestly, in the best interests of their company. Their mission is to maximize shareholder's wealth. France has also developed a complex system of cross-shareholding where the director of a company attends another company's board. Government: In the United States, the government only provides the regulatory framework, leaving the actors on the market "fight it out; the "winner take all" criteria" (Mendez, 2004). They have information control, asking companies to be more transparent to the public. They also have monopoly control with antitrust laws to prevent any excess of power or monopoly. France seems to have more protectionist policies and is also much more involved with national companies with interventionist policies. Corporate social responsibility: Around the world, we have witnessed a growing concern for corporate social responsibility. A study comparing CSR between US and EU (Maignan, Ralston, 2002) showed that one difference was that US businesses mentioned more often their involvement in CSR than French ones. Also, the study showed that US companies did this as an "extension of their core values" while French corporations did this for customers and national regulations. This brings us to an important difference; French public corporations have the obligation to be responsible (socially) and to publish a report annually. This was introduced in 2010 via the Grenelle Law II. The study (Maignan, Ralston, 2002) also showed that US corporations seem to commit to CSR to "look good" and add value, not to "do something good". Conclusion: Overall, we can say that Corporate Governance is quite different in the United States and France. There are similarities in the players' roles however they differ when it comes to employee protection and role with numerous unions in France unlike in America. Both governments have policies to protect all actors and have similarities in the management structure (depending on the French companies' choice). To conclude, it is safe to say that both countries' Corporate Governances have more or less the same values and goals.
Essay 2: Effective corporate governance the chairman and CEO of an organization need to carry out their functions effectively. Please explain (a) what are the respective role and functions of the Chairman and the CEO and (b) what are the advantages and disadvantages of allowing one individual to act as both chairman of the board and chief executive officer of a quoted company. We will now focus on the actual governance of a corporation through two major roles: CEO and Chairman. We will do so and start by explaining the role and functions of both the chairman and the CEO. We can find a lot of literature on the actual role of a CEO. One author (Mintzberg, 1998) decided to run an intensive five weeks of observation in 5 American firms (middle- to large-sized). Unlike previous authors, he did more than just ask top executives to write diaries about their daily activities but spent a lot of time with these 5 CEOs and exchanged mails afterwards to make sure his report was accurate. From this research, Mintzberg developed a framework composed of 10 basic roles of a top executive, which can be subdivided into 3 smaller groups: interpersonal roles, information-process activities and decision-making activities. The first CEO's interpersonal role is the role of Figurehead. Indeed, a CEO is a person put in charge of handling social, legal and ceremonial affairs. Usually, they must attend and lead formal dinners, welcome and take care of important business visitors, agree to and sign various contracts. Then, there is the Leader role as he needs to stay in touch with his subordinates to keep them trained and motivated but most importantly, he must fulfill the needs of the company through the actions of the subordinates. Finally, the Liaison role is more external to the company. Indeed, the chief executive must keep cordial relationships with his network of top executives and other important people. These networks are essential in business and consist of exchanges of information and benefits. When it comes to the CEO's information-process, we can identify 3 main roles performed before processing the information. The first one is the role of Monitor, as the CEO sends and receives a lot of information, coming from various sources. The information he seeks is about the surroundings of the company, to better understand the milieu his company is evolving in. This information generally comes from outside the company thanks to his network (part of his Liaison role). This brings us to the Disseminator role, which is when the CEO shares the right and chosen information with subordinates and the Spokesman role, where the CEO shares the information with outsiders and keep them informed on how the company is doing or what she is doing. The last set of roles concerns decision-making activities. The first role is the one of Entrepreneur as he is the one who takes the responsibility of making changes to the company. The second role is the Disturbance handler where the CEO has to take actions if the company is facing a crisis or disturbance. The resource allocator role explains itself; the CEO is responsible for deciding who has what in the firm and so on. Finally, as a negotiator, the manager is often required during important or critical negotiations. Indeed, he is the one with the power but most importantly, he has all the information. What we can say is that the role and functions of a CEO are very complex and diversified. He must be everywhere at anytime and his actions are critical to a company's situation. We will continue our work by observing the role and functions of a chairman. In a company, the chairman is appointed by the board and his most important role is to make sure of the effectiveness of the board in setting up strategies. The chairman has various tasks; the first one is to lead the board. Moreover, he is responsible for the composition and development of the board. As the board's leader, he must give the right information to the board's members and lead their meetings in an efficient way. He has the responsibility to plan them and involve all members in the work. Finally, he has the role of supporting the CEO. Outside of the board and outside of the company, the chairman also has the function of communicating the company's goals and policies to outsiders. Now that we have defined the role and functions of the CEO and chairman, we will discuss the combined position of CEO and Chairman in a company. Indeed, the role of chairman can be combined with that of a CEO, most often in smaller companies (Institute of Directors, 2010). More importantly, we will focus on the advantages and disadvantages of this concept in a quoted company. Brickley, Coles and Jarrell (1997) recently studied this situation and what it entailed for companies. They came up with several conclusions which will help us determine advantages and disadvantages of combining roles in a company. Even though it seems logical to have two different people doing two different roles, there are a few advantages having the two functions combined. Brickley, Coles and Jarrell (1997) argue that a company can save costs linked to separating the two roles. These are agency costs of making sure the chairman acts in the right way towards the company and board. Moreover, combining the roles can give the CEO a different perspective, maybe better, wider or newer thanks to the multiple roles and functions. Furthermore, When a CEO is also a chairman it permits him to have a global vision of the company strategy. Indeed, in a lot of cases, the chairman aims to have good results in the short term in order to impact directly the price of the stock of the company and its image, and to increase the dividends of the people of the board and of the investors. These results at short term are very important for the company but it is also really important to consider the strategy of the company in long term. Indeed, the strategic choices for the company like buying assets or invest in Merger or acquisition for example are often made in order to optimize the result and benefits in long term and have often a bad influence on the price stock at short term and sometimes on the company's image. However it is crucial for the company to take decisions like that in order to ensure the durability of the company's activity. These decisions are taken by the CEO of the company. This example shows well that it is really important to take decision in favor of the well-being of the company in long term and in short term. That's why having a CEO who is also a Chairman permits to equilibrate the strategic decision in favor of the investors and of the activity of the company. Moreover, it is really good for the company to have a CEO Chairman because he can understand the different axes in the measurability of the performance of the company and try to take good decisions to maximize the global result by trying to satisfy everyone. Also, in case of a meeting of the board the important shareholders will more be able to trust the CEO chairman if he explicates that the objectives of the company are not focused on the stock price but on the revenue of the company in long term, than if he was only the Chairman. Finally, the fact of having a Chairman who is also a CEO permit to keep a strong link between the company and the investors, what can be considered as better for the company. Many authors recommend that these roles should be separated. The Working Group stated that having 2 different people would "increase accountability and ensure that the interests of the shareholders as a whole were given due weight" (Ford, 1997). Moreover, the combination of the two roles could be a source of conflict because of the concentration of power. If we believe some of Corporate Governance's basic principles, there would be conflicts of interests between the CEO position and the chairman position. Indeed, CEOs have specific obligations towards the company and have to protect their own situation while the chairman's position has to participate actively in making a collective decision with the board (keeping the whole company's interest in mind). And the board might have to make the decision by assessing critically the CEO's performance, his choices, etc. The board needs to be able to speak freely in order to be efficient and transparent with one another. This would be difficult if the CEO was sitting at the same table during a meeting. If the chairman is the CEO, then he might not make the objective and right decision, if he wants to protect his own interests as the CEO. Moreover, there is a difference between both position's goals. Indeed, the chairman has quite short-term goals, which are linked to stock prices and shareholders while the CEO has longer-term goals, linked to the company's situation, strategy, future. The problem if both roles where held by only one person would be the difficulty of making decisions with two different interests. Also, because only one person would have the roles of acting, reporting information and taking decisions, this would leave very little transparency towards the board or the company. Indeed, the CEO's actions could be invisible to the board and this could actually lead to bigger problems like corruption or other public scandals. Separating the two roles would enable the chairman to "monitor" the CEO's actions and thus protect stockholders interests. Even though there might be advantages to having only one CEO/chairman, it seems legitimate that the two roles should be separated as the chairman and CEO can both concentrate on different (but equally important) aspects of the company. Also, it seems that the demands from shareholders to split both roles are more and more numerous; big companies like Wells Fargo or News Corp. are faced with shareholders demanding that they appoint an independent director instead of their CEO in the role of chairman (Semadeni & Krause, 2012)
Essay 3: In the 1990's, the stock options plans for top managers were seen by many as a relevant instrument for aligning interests of shareholder and management, thus solving many corporate governance issues. Please explain and justify why we could now consider that this hope has failed. An employee stock plan occurs when a person from a company holds shares from this same corporation. Stock option plans started their exponential growth in the 1990's when new technologies firms launched these plans to attract but also retain potential or current employees. Before, stock options were only granted to CEOs and other directors from outside the company. Today, they have become a good way to compensate employees in various industries. Overall, managers believe that being a shareholder would increase loyalty and better performances however, the subject is now highly controversial and we can say this hope has not lived up to managers' expectations. Let us start by defining these stock option plans (or SOPs). An SOP occurs when a firm releases a certain number of shares to its employees at a fixed price and this for a limited time frame. Usually, this price (or strike price) equals the market value of the given stock at the time. Employees have to wait for the maturity of this option (generally four years) to buy shares. If the stock's market value has increased during the four years, then employees are able to buy shares at an important discount. Once these employees own stocks, they can choose to keep them or sell them on the stock market. This brings us to our controversy on stock option plans, and how they do not live up to firms' expectations as they enable employees to become shareholders. The first criticism one could easily make about stock option plans is about the "loyalty" of the employees. Indeed, it seems that once the new owners of options have waited for the maturity of their options, they tend to cash in their options immediately. There are a few reasons for this; first, employees may wish to diversify the options they hold, which means they will sell their company's options to get shares from another (maybe faster-growing) company. Second, some employees might simply want or need the extra money and just retrieve their new gains. We could thus say that stock option plans do not always increase employee loyalty, or if it does, only until their stock options reach maturity. The second criticism involves the hope of stock option plans to increase employees' performances. We can see why the management would think holding shares would encourage employees to work even better in order to increase the value of the firm on the market. However, experience has shown that these plans increase the risks taken by management. Stock option plans have a specificity that "regular" shareholding does not have. Indeed, stock option owners can decide whether or not to exercise their options to buy. This means that they only share the success part of owning shares, they are not affected if the market price decreases, unlike regular shareholders. Another criticism about stock option plans is that it can put the company at a certain risk. Indeed, it seems that if a large number of employees decided to exercise their options to buy at the same time (if the market price is favorable for example), then the company's structure would be at risk. When employees decide to exercise their options, the firm must, on the other hand, re-issue shares and if the number of new shares is too important, then the value of the remaining stocks is decreased. The most "dangerous" aspect is that once a company offers stock option plans, it cannot control the day when employees will decide to exercise their options, most importantly, it is highly likely to happen in the same period of time if the market is favorable for stock options. Finally, if we look at a concrete example of failures with stock option plans we can see they can lead to many problems. Let us look at the Enron scandal of 2001 for example. Enron was an American energy company based in Texas. Enron's stocks began to increase thanks to diversification of the company with electricity plants, paper plants or water plants, pipelines, and even broadband services around the world. At the same time, new executives used financial loopholes to hide the company's debts (billions of dollars). Employee or executive stock option plans were widely used in Enron (just like in the rest of the country) and they were making a lot of money, not knowing about the real financial crisis of the company. The real problem was that people within the company were obsessively thinking about short-term earnings, which is not a way to run a company. Moreover, there were problems with the management, who had sold hundreds of millions worth of stock just before the crisis. We can say that stock option plans have multiple risks, either linked to management or employees, and that the downfall may be fast and brutal. We have witnessed a number of scandals similar to the Enron case like Tyco or WorldCom among others. Overall, it seems that as far as stock option plans are concerned, disadvantages tend to outweigh the advantages for companies. However, Gilles (1999) suggested various possible alternatives to these problems. Some of which include the use of "premium-price options", which makes an option worth nothing unless the firm improves its performance by setting the exercise price higher than the market price when the option is released by the company. Another given solution is companies giving and setting guidelines to management, requiring them to keep a certain number of stock options to be "eligible for future stock options" Collier-Hillstrom (2012).