Corporate Governance Reforms in Continental Europe

Abstract

The fundamental problem of corporate governance in the United States is to alleviate the conflict of interest between dispersed small shareowners and powerful controlling managers. The fundamental corporate governance in continental Europe and in most of the rest of the world is different. There, few listed companies are widely held. Instead, the typical firm in stock exchanges around the world has a dominant shareholder, usually an individual or a family, who controls the majority of the votes. In this essay, we begin by describing the differences in the ownership structure of companies in the three main economies of continental Europe -- Germany, France, and Italy -- with comparisons to the United States and the United Kingdom. We next summarize the corporate governance issues that arise in firms with a dominant shareholder. We take a look at a major European corporate scandal, Parmalat, as an extreme example of investor expropriation in a family-controlled corporation. We outline the legal tools that can be used to tackle abuses by controlling shareholders. Finally, we describe the corporate governance reforms enacted by France, Germany, and Italy between 1991 and 2005 and assess the way in which investor protection in the three countries has changed.

Corporate crime

“…See Seligman (2003) for a history of US securities laws and Zitzewitz (forthcoming) for a survey of economic analyses of these laws. Enriques and Volpin (2007) survey corporate governance reforms in Europe.…”

Examining the Relationship between Disproportional Ownership Mechanisms and Company Performance: An Empirical Research

“…In line with these conclusions, the research explains the strong presence of these devices in continental Europe and East Asia by looking at the limited investor protection of the national regulations in force, and interprets their improvements as able to hamper the employment of disproportional ownership devices (Almeida & Wolfenzon, 2006a;Zattoni & Cuomo, 2010;Faccio, Lang, & Young, 2010;Cuomo et al, 2012). Indeed, in some settings, the law reforms aiming at increasing the investor protection have reflected in a lower use of DOMs (Enriques & Volpin, 2007) because they have limited the incentives to adopt ownership structures separating voting and cash-flow rights, even when the resources available through company performance were large (Saggese, 2013). Thereby, it remains an empirical issue whether past firm outcomes positively or negatively affect the use of disproportional ownership devices.…”

“…streams of literature have emerged. Some studies have emphasized that controlling owners limit the classic agency risk and the managerial opportunism (Roe, 1994) but foster the expropriation of company wealth at the expenses of minority investors (Bigelli & Megoli, 2004;Enriques & Volpin, 2007). Indeed, literature in this strand has suggested that controlling shareholders raise a principal-principal agency problem and can easily extract private benefits of control as the separation between cash-flow rights and voting rights through disproportional ownership mechanisms is wider (Hu & Kumar, 2002;Kang, Kumar, & Lee, 2006;Kumar & Rabinovitch, 2013).…”

Adoption of Corporate Social Responsibility: Board Competencies and Roles

“…However, there is no such thing as a universal ideal governance structure, because such structures are constrained by various issues including company laws and codes of conduct (Enriques & Volpin, 2007). A particular CG structure that meets the needs of one company's CSR practices might be inappropriate for others.…”