Posts filed under ‘Corporate Governance’
Pay For Performance, Robert Rubin Edition
| Peter Klein |
Remember, it’s not how much you pay, but how. Today’s WSJ profile of Robert Rubin provides some interesting numbers. Citigroup losses over the last year: $20 billion. US government bailout money going to Citigroup in the last month: $45 billion. Rubin’s compensation since becoming senior counselor and a director at Citigroup in 1999: $115 million. Naturally, Rubin says Citi’s near bankruptcy has nothing to do with his leadership. Critics say he encouraged the firm to increase its risk taking in 2004 and 2005. Ah well, another former Golden Boy brought down to earth. Thank goodness something positive is coming out of this mess.
Consider this today’s friendly reminder that corporate welfare is a bipartisan scam.
Update: See also Larry Ribstein.
What Do Boards Do and How Do They Do It?
| Peter Klein |
A new survey paper on Boards of Directors by Ben Hermalin and Mike Weisbach, updating their 2003 paper.
This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Hermalin and Weisbach (2003) survey. The two questions most asked about boards are what determines their makeup and what determines their actions? These questions are fundamentally intertwined, which complicates the study of boards due to the joint endogeneity of makeup and actions. A focus of this survey is on how the literature, theoretical as well as empirically, deals – or on occasions fails to deal – with this complication. We suggest that many studies of boards can best be interpreted as joint statements about both the director-selection process and the effect of board composition on board actions and firm performance.
Don’t let James Walsh see this!
Utrecht Conference on Firm Governance
| Peter Klein |
Utrecht University is sponsoring a conference on “The Governance of the Modern Firm,” 11-13 December 2008, featuring contributions from Paul Davies, Roberta Romano, Bill Lazonick, and many others. (Via Geoff Hodgson.)
Creative Capitalism
| Peter Klein |
The book is coming out in a few weeks, and the blog is back in business. I didn’t follow all the previous discussion but what I read was of high quality and reflected diverse, and interesting, perspectives.
Interviews with Alchian, Coase, Kirzner, Manne
| Peter Klein |
The Liberty Fund has put online several interviews from its Intellectual Portrait Series. Of particular interest to O&M readers:
- Armen Alchian, interviewed by Dan Benjamin
- Ronald Coase, interviewed by Richard Epstein
- Israel Kirzner, interviewed by Tibor Machan
- Henry Manne, interviewed by Fred McChesney
Update (Nov. 2): Manne link fixed.
New NBER Working Papers
| Peter Klein |
Three new NBER papers likely to interest the O&M crowd. (Aggressive Googlers can probably find ungated versions.)
Railroads and the Rise of the Factory: Evidence for the United States, 1850-70 by Jeremy Atack, Michael R. Haines, and Robert A. Margo
Over the course of the nineteenth century manufacturing in the United States shifted from artisan shop to factory production. At the same time United States experienced a transportation revolution, a key component of which was the building of extensive railroad network. Using a newly created data set of manufacturing establishments linked to county level data on rail access from 1850-70, we ask whether the coming of the railroad increased establishment size in manufacturing. Difference-in-difference and instrument variable estimates suggest that the railroad had a positive effect on factory status. In other words, Adam Smith was right – the division of labor in nineteenth century American manufacturing was limited by the extent of the market.
The Limited Partnership in New York, 1822-1853: Partnerships Without Kinship by Eric Hilt and Katharine O’Banion
In 1822, New York became the first common-law state to authorize the formation of limited partnerships, and over the ensuing decades, many other states followed. Most prior research has suggested that these statutes were utilized only rarely, but little is known about their effects. Using newly collected data, this paper analyzes the use of the limited partnership in nineteenth-century New York City. We find that the limited partnership form was adopted by a surprising number of firms, and that limited partnerships had more capital, failed at lower rates, and were less likely to be formed on the basis of kinship ties, compared to ordinary partnerships. The latter differences were not simply due to selection: even though the merchants who invested in limited partnerships were a wealthy and successful elite, their own ordinary partnerships were quite different from their limited partnerships. The results suggest that the limited partnership facilitated investments outside kinship networks, and into the hands of talented young merchants.
Inside the Black of Box of Ability Peer Effects: Evidence from Variation in Low Achievers in the Classroom by Victor Lavy, Daniele Paserman, and Analia Schlosser
In this paper, we estimate the extent of ability peer effects in the classroom and explore the underlying mechanisms through which these peer effects operate. We identify as low ability students those who are enrolled at least one year behind their birth cohort (repeaters). We show that there are marked differences between the academic performance and behavior of repeaters and regular students. The status of repeaters is mostly determined by first grade; therefore, it is unlikely to have been affected by their classroom peers, and our estimates will not suffer from the reflection problem. Using within school variation in the proportion of these low ability students across cohorts of middle and high school students in Israel, we find that the proportion of low achieving peers has a negative effect on the performance of regular students, especially those located at the lower end of the ability distribution. An exploration of the underlying mechanisms of these peer effects shows that, relative to regular students, repeaters report that teachers are better in the individual treatment of students and in the instilment of capacity for individual study. However, a higher proportion of these low achieving students results in a deterioration of teachers’ pedagogical practices, has detrimental effects on the quality of inter-student relationships and the relationships between teachers and students, and increases the level of violence and classroom disruptions.
The Case Against Corporate Social Responsibility
| Dick Langlois |
Another sign of the Apocalypse: Robert Reich channels Milton Friedman.
The Financial Crisis
| Peter Klein |
A regular reader asks why we haven’t written much on the US financial crisis. What, he asks, do organizational economics, strategic management, Austrian economics, entrepreneurship theory, and the new institutional economics say about the events of recent weeks?
I can’t speak for Nicolai, Dick, and Lasse, but I personally have avoided talking about it because, well, I’m too depressed — not so much about the crisis itself, which I view as a necessary corrective to two decades of potentially ruinous malinvestment, but about the political reaction to it. I agree with Larry White that the general level of discourse not just among laypeople but also among the political and financial elites, top journalists, and academics, has been shockingly vapid and vacuous, even by the usual standards. Listening to government officials, pundits, and analysts analyzing the crisis is like listening to my son’s first-grade class discussing the finer points of postmodern French literature. It was too much deregulation! (Huh?) The free market broke down yet again, just like in the 1930s! Market failure! Thank goodness the government is “stepping in”! Excuse me while I blow my groceries.
My view, in brief, is that the current crisis is the predictable result of a massive credit bubble that began under Greenspan in the 1990s and spilled over into the housing market, following the general outlines of the boom-bust cycle described by the Austrians, along with moral hazard encouraged by the financial “safety net” and the implicit (and, increasingly explicit) guarantees of the “too-big-to-fail” mentality. Of course, the US government’s reaction — spending taxpayer money like candy to bail out favored groups and institutions — can only exacerbate the problem. You can do your own Googling like this or this to find informed commentary. I have little to add but will highlight a few favorite comments: (more…)
Call for Papers: International Entrepreneurship
| Peter Klein |
The new Strategic Entrepreneurship Journal is rapidly becoming one of my favorite reads. (And not just because I’m the SEJ’s #1 author — it’s true, when my colleagues and I submitted this paper, we were assigned manuscript number SEJ-0001.) Here’s a call for papers for a special issue on international entrepreneurship edited by Douglas Cumming, Don Siegel, and Mike Wright. The call lists several potential research questions::
- How do government policies impact incentives to form strategic alliances among entrepreneurial firms in domestic versus foreign settings?
- What is the role of laws and public policy in stimulating transnational and returning entrepreneurs?
- What is the role of social networks in international entrepreneurship?
- What factors lead to the success of immigrant entrepreneurs in different countries?
- What is the interaction between public policy and foreign investment in entrepreneurial ventures?
- What explains international differences in governmental policies regarding intellectual property, entrepreneurship, and entrepreneurial finance?
- How does international entrepreneurship affect firm performance?
- How important is product and geographic focus for entrepreneurial success within different public policy settings?
- What are the implications of corporate entrepreneurship for multinational companies?
- How do corporate governance regulations impact international entrepreneurship?
- How do venture capitalists and private equity firms make decisions in an international context, including the decision to make cross-border investments and how to enter international markets?
- What is the role of academic entrepreneurship in various nations? Is their convergence or divergence in policies to stimulate academic entrepreneurship?
- How do universities stimulate international technology transfer and commercialization?
- What is the relative importance of patenting, licensing, and property-based institutions, such as science parks and incubators in stimulating entrepreneurship in various nations?
Submissions are due 31 December. Accepted papers will be presented at a conference at York University in April.
Tullock on the Corporation
| Peter Klein |
Gordon Tullock is retiring this year from George Mason Law School. In the coming weeks you’ll probably be reading a lot of Tullock tributes and Tullock anecdotes (for example, about his famous put-downs). I don’t have much to add on the personal side, but I thought I’d share a remark or two about one of my favorite, and little-known, Tullock articles, “The New Theory of Corporations,” in Erich Streissler, ed., Roads to Freedom: Essays in Honor of Friedrich A. von Hayek (Routledge and Kegan Paul, 1969).
Tullock offers a number of insights into the corporate form and, in particular, the Berle-Means problem, that are well ahead of their time. As Tullock notes in the essay, he draws heavily here on Henry Manne’s work (and, he tells us, many conversations with Manne about these issues). In 1969 the consensus view was that corporations were almost exclusively controlled by salaried managers, running firms in their own interests and largely ignoring the wishes of shareholders. However, Tullock notes:
The theory of management control of corporations, of course, is subject to one very obvious difficulty. It offers no explanation of how managements are changed, and changes of management are an everyday occurrence as any reader of the Wall Street Journal can appreciate. It is true that presidents of large corporations frequently stay in office rather longer than the president of the United States, but they don’t stay in office as long as congressmen and senators, and we would hardly argue that the long tenure of congressmen and senators indicates that we do not have democracy in the United States. Thus, the current orthodoxy that the management actually runs the corporation cannot explain how the management got there or how the everyday occurrence of a change in management occurs. For some reason, this does not seem to disturb the partisans of the . . . Berle and Means theory. (more…)
São Paulo Workshop on Institutions and Organizations
| Peter Klein |
See below for information on the Third Research Workshop on Institutions and Organizations, 13-14 October 2008 at Fundação Getúlio Vargas in Brazil. Session topics include “Organizations, law and corruption,” “Institutions and development,” “Institutions and environment,” “Psychological issues and organization strategies,” and “Industrial and competition policy.”
I participated in last year’s conference and enjoyed it tremendously. There is a growing network of Brazilian researchers working on various topics in the New Institutional Economics. It is a good group to be involved with. (more…)
Technology and Firm Size and Organization (Redux)
| Dick Langlois |
Peter blogged a while ago about an article by Giovanni Dosi, Alfonso Gambardella, Marco Grazzi, and Luigi Orsenigo in the bepress online journal Capitalism and Society. Both this article and the accompanying discussion by Bill Lazonick take aim at my 2003 article “The Vanishing Hand.” I have now crafted a response, which I propose to submit to the journal as a letter. But readers of O&M can read it right away here.
I should also mention that the same issue of Capitalism and Society has an interesting article on the family firm by Princeton historian Harold James, with a wonderful comment by Randall Morck. I met Morck this past November at a conference in Kyoto, and was extremely impressed.
The Puzzle of the Publicly Held Private-Equity Firm
| Peter Klein |
Like many observers, I was puzzled by last year’s IPO of the Blackstone Group, one of the nation’s largest private-equity firms. After all, the ability of PE firms to restructure and improve poorly performing companies owes a lot to their isolation from the day-to-day pressures of satisfying public investors. PE firms already face potential agency conflicts between their general partners and the managers of their portfolio companies, and between their general and limited partners; why add agency problems between the partners and public shareholders? Has the credit squeeze raised the cost of debt finance that much?
Today’s WSJ reports that KKR, which considered going public last year but pulled out, is again pondering an IPO:
The storied corporate-buyout firm has quietly and aggressively hired a battery of executives in recent months, creating an organization chart that looks remarkably similar to that of a public company. It has brought on a general counsel, a public-affairs chief, a chief compliance officer, a chief technology officer, a chief talent officer and a chief human-resources officer. . . .
[P]eople close to KKR acknowledge that it is still keen on becoming a public company and a raft of recent shifts, including the hiring spree, speak to a broader change at the firm and how it views its business.
Perhaps the publicly held PE firm is best described as a new hybrid form, an organization that combines the governance advantages of private equity with the lower capital costs of the publicly traded corporation. Or does it combine the worst features of both?
Award-Winning CEOs
| Peter Klein |
They make more money, sit on more boards, write more books, and have lower golf handicaps than CEOs of similarly performing firms who haven’t won awards (e.g. from Business Week). However, according to a new paper by Ulrike Malmendier Geoffrey Tate, their firms perform poorly after they win awards, compared to a matched set of firms headed by rank-and-file CEOs.
Compensation, status, and press coverage of managers in the U.S. follow a highly skewed distribution: a small number of “superstars” enjoy the bulk of the rewards. We evaluate the impact of CEOs achieving superstar status on the performance of their firms, using prestigious business awards to measure shocks to CEO status. We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the award, both in absolute amounts and relative to other top executives in their firms. They also spend more time on public and private activities outside their companies, such as assuming board seats or writing books. The incidence of earnings management increases after winning awards. The effects are strongest in firms with weak governance, even though the frequency of obtaining superstar status is independent of corporate governance. Our results suggest that the ex-post consequences of media-induced superstar status for shareholders are negative.
The pointer is from Justin Lahart, who blogs for the WSJ.
Against Government-Subsidized VC
| Peter Klein |
Government-subsidized venture capital underperforms private venture capital, according to a new analysis of Canadian data. Firms backed by subsidized VC are less profitable, less innovative, and less attractive to later-stage investors than firms backed by private VC. Poor governance and a negative signalling effect, and not adverse selection, appear to be the drivers. This is from a new NBER paper by James Brander, Edward Egan, and Thomas Hellman, “Government Sponsored Versus Private Venture Capital: Canadian Evidence.” Abstract:
This paper investigates the relative performance of enterprises backed by government-sponsored venture capitalists and private venture capitalists. While previous studies focus mainly on investor returns, this paper focuses on a broader set of public policy objectives, including value-creation, innovation, and competition. A number of novel data-collection methods, including web-crawlers, are used to assemble a near-comprehensive data set of Canadian venture-capital backed enterprises. The results indicate that enterprises financed by government-sponsored venture capitalists underperform on a variety of criteria, including value-creation, as measured by the likelihood and size of IPOs and M&As, and innovation, as measured by patents. It is important to understand whether such underperformance arises from a selection effect in which private venture capitalists have a higher quality threshold for investment than subsidized venture capitalists, or whether it arises from a treatment effect in which subsidized venture capitalists crowd out private investment and, in addition, provide less effective mentoring and other value-added skills. We find suggestive evidence that crowding out and less effective treatment are problems associated with government-backed venture capital. While the data does not allow for a definitive welfare analysis, the results cast some doubt on the desirability of certain government interventions in the venture capital market.
InBev and Bud . . . In Bed?
| Randy Westgren |
Recent news about the impending bid by InBev for Anheuser-Busch was interesting subtext for my current study tour on EU agri-food supply chains. We normally schedule a stop at InBev when we spend our first week based in Leuven, Belgium, which is InBev’s HQ. This year, they told us a visit was impossible. I had assumed that it was due to shake-ups in the management following a weak first quarter, but I guess there was more in the air!
You will note that A-B shares rose on the news. The strategic fit is stunning. InBev is strong in its traditional markets (Belgium and Germany from the Interbrew parent; Brazil from the Ambev parent) as is A-B, who also has an equity strategic alliance with Tsingtao in China. Not much overlap geographically and lots of opportunities for building on existing distribution alliances. A merged firm gets serious presence in mature markets as well as the growing ones.
The other thing that the market will react to is the InBev style. They drive growth with a limited number of global brands; they pare local brands over time. And they are relentless cost-cutters. Look at the top management team for a “Belgian” brewer. It has only taken a few years for the “tradition-oriented” Belgians to be succeeded by aggressive Brazilians. (I know this smacks of ethnic profiling, but ask around. . . .) The corporate culture of InBev is palpable.
Take (Over) My Firm, Please!
| Peter Klein |
To paraphrase Groucho Marx, would you want to take over a firm that wants you to take it over? Most corporate bidders don’t. From Derek Oler and Kevin Smith:
We investigate 401 firms that publicly advertise a desire to be acquired (“take-me-over” or TMO firms) from 1990 to 2006. Over this period the TMO “wave” lags about one year behind the acquisition wave. Most TMO firms show evidence of high debt levels as well as fundamental underperformance relative to industry peers. Although most TMO firms enjoy positive announcement period returns, they significantly underperform in the year following their TMO announcement, and most do not receive a takeover offer. Greater proportionate ownership of the firm by dedicated institutional investors is associated with greater likelihood of the firm avoiding bankruptcy, but not with greater likelihood of the firm being acquired. These results suggest that the TMO announcement is a significant signal of bad news that is not fully anticipated by the market. However, the TMO announcement does increase the odds of the firm actually receiving a takeover offer.
The paper is titled “The Characteristics and Fate of ‘Take Me Over’ Firms.”
I tell you, I’ve been looking for an opportunity to reference Henny Youngman and Groucho Marx in the same post for years!
Wharton Private Equity Review
| Peter Klein |
A special report from Knowledge@Wharton:
While the credit crunch has put a damper on headline-grabbing large buyouts, private equity firms have found other ways to discover value in the current market. In this special report, produced in cooperation with the Wharton Private Equity Club, Knowledge@Wharton looks at how funds are adapting to changes in the credit environment, what opportunities exist in the developed markets of Europe and Japan, and the ways that proposed changes in taxation may affect the industry. Also included is a roundtable discussion on setting up a first-time fund in the current market, as well as an interview with David Rubenstein, co-founder and managing director of The Carlyle Group.
Get the report here. For more on private equity see the proceedings from last fall’s AEI conference.
Incidentally, I used Jensen’s “Eclipse of the Public Corporation” in my strategy class this semester amd continue to be impressed with Jensen’s insight and prescience in that piece, now nearly twenty years old. Still an excellent introduction to the organizational economics of private equity.
The Nature of the (Law) Firm
| Peter Klein |
Gordon Smith shared an interesting report on a recent Georgetown conference, “The Future of the Global Law Firm.” Apparently there is a healthy literature in legal scholarship examining the boundaries and internal organization of law firms. Writes Gordon:
The participants seem to have reached a few points of consensus. First, the legal profession has changed dramatically in the past two decades and it remains under significant stress, meaning that more change is on the way. Second, the rules that constrain change (e.g., prohibition of non-lawyer ownership, rules relating to conflicts, non-competition rules) should be changed sooner rather than later. Third, the traditional legal form (partnership) is largely irrelevant to the current practice of law, even if law firms want to create an organizational structure that encourages the collegiality of a traditional partnership. Fourth, the law firms that will succeed in the future are those that get the organizational structure right.
In a follow-up email, Gordon explains that the organizational features being challenged include the partnership model, the up-or-out “Cravath system,” and the outsourcing of routine services (e.g., electronic discovery) to places like India. Gordon recommends Laura Empson’s Managing the Modern Law Firm for an overview of the issues. I said I thought there was some work by economists and management scholars on the economic organization of the law firm (and professional services firms more generally), but couldn’t come up with much, aside from a series of interesting papers by Luis Garicano and Thomas Hubbard (here, here, and here). Any suggestions from our readers? Is the persistence of the partnership form, for example, mainly the result of arcane professional-ethics rules or is there an underlying efficiency rationale? If consulting firms can have IPOs, why not law firms?
A Really Old Family Firm
| Peter Klein |
One advantage of the public corporation over the family-owned firm is longevity: few family firms last beyond two or three generations. Saturday’s WSJ profiled an interesting exception: Marchesi Antinori Srl, a wine business founded by Giovanni di Pietro Antinori in 1385 and run today by Piero Antinori, 26 generations later. Some of the Antinoris’ unusual business practices:
The Antinoris have flourished in part because of their willingness to flout conventional wisdom over how a family company should be run. Instead of creating clear lines that separate the family’s interests from the company’s, the Antinoris blur the two beyond recognition. The Marquis, his wife and their youngest daughter still live on the top two floors of the 15th-century Palazzo Antinori, a few steps from the Florence cathedral, where the family has resided for the past five centuries.
The business is still run on the palazzo’s bottom two floors, and the three daughters are top executives. . . .
Though the company has a six-person board of directors — including two non-family members — the Marquis says it only meets “for formalities.” The real board meeting, he says, “happens every Sunday, when we sit down to lunch.” That often takes place in one of the family’s nearby vineyards, either in the hills of Chianti, or along the Tuscan coast.
Instead of focusing on quarterly results, the Antinoris plan far into the future, laying the foundations for a company their grandchildren can run. They have been wary of following popular business trends. The family is suspicious of growing too much, which they say can compromise quality and run a company into debt.
One should be wary of drawing strong inferences from a sample of one. Of course, as Herbert Simon once noted, a sample of one is infinitely more informative than a sample of none.
Here is the Antinori wikipedia page. are some older posts on family firms.
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