1 Globalization of Corporate Governance: A European Perspective TROND RANDØY & JOCHEN JUNGEILGES AGDER UNIVERSITY COLLEGE, NORWAY LARS OXELHEIM LUND UNIVERSITY, SWEDEN Presented at Fudan University May 13, 2006

2 Introduction Research issue:  Does American influence in large public European firms affect their corporate governance?  Does American influence in top European firms affect dismissal risk? Background:  Global increase in CEO pay  Global focus on corporate governance  Globalization and firm performance

3 Motivation Access to global financing essential for growing countries. Globalization of capital affects firms: 30-35% of all shares in Scandinavia  Upgrading (even harmonization) of national corporate governance systems (OECD, 1999)  Investors are willing to pay a premium for well- governed firms (McKinsey, 2000) Do some of the gains of American (institutional ownership) corporate governance come at the cost of other stakeholders – such as higher dismissal risk?

4 CEO succession model Dismissal model;  change of being dismissed non- voluntarily Performance American influence -Corporate control -Corporate monitoring (listing) Controls; -firm size -firm industry -observation year -country -CEO age -CEO tenure)

5 Hypotheses: cross-listing  HYPOTHESIS 1: THERE IS A POSITIVE RELATIONSHIP BETWEEN AMERICAN EXCHANGE LISTING AND PERFORMANCE CONTINGENT DISMISSAL RISK. Agency theory: higher rewards & higher risks  Increased monitoring by auditors/regulators  Might not be necessary with large European owners?  Change of corporate culture – English as corporate language Signaling  Compliance with information needs of US based investors

6 Hypotheses: board membership  HYPOTHESIS 2: THERE IS A POSITIVE RELATIONSHIP BETWEEN AMERICAN BOARD MEMBERSHIP AND PERFORMANCE CONTINGENT DISMISSAL RISK Agency theory: higher rewards & higher risks  Strengthening of incentive-based systems  Change of corporate culture – English as corporate language  Affect the behavior of the board Signaling  Increased trust among US based investors

7 Population: succession events 270 succession events in top 250 European public firms between Data collected by Booz, Allen & Hamilton, and additional variables supplemented by us (15% non-response)

8 Country and industry data from succession events

9 Descriptive statistics: CEO age & tenure, cross-listing and American board membership 67% of succession event from firms with American cross-listing 18% of succession event from firms with American board membership

10 Industry performance and dismissal Forced dismissals Voluntary dismissals

11 Bivariate tests: Spearman’s Rank Corr. & Cramer’s V

12 Methodology: Binary response model: Logit Estimation procedure: Max Likelihood MacFadden’s R 2 or Pseudo R 2

13 CEO dismissal risk: multivariate models

14 Main findings American cross-listing does not increase performance contingent dismissal risk in European firms  Does not alter dismissal behavior – too weak of a mechanism American board membership increase performance contingent dismissal risk in European firms  Corporate governance of boards is affected by nationality of board members – affects behavior Limitations & weaknesses  Confounding effects – are European firms with American influence different than other firms  We still don’t know if there are to few or too many dismissals