The legal approach to Corporate Governance Prime aim: 1) discuss if there are systems that are better than others and 2) introduce the legal approach and compare it with the contractual approach and the insider-outsider model.

National descriptions of governance systems Investor protection characteristics Ownership structure and financial market characteristics Importance of stock exchange and markets for corporate control (takeover markets) The role of banks

Are some systems better than others? Arguments put forward in favour of the “insider” system: Far sighted banks enable firms to focus on long-term investments Banks deliver capital to firms facing liquidity shortfalls, thereby avoiding costly financial distress Banks replace expensive and disruptive takeovers with bank interventions when borrowing firms underperform

Gurgler’s classification of systems OWNERSHIP (CASH-FLOW RIGHTS) OWNERSHIP (CASH-FLOW RIGHTS) VOTING RIGHTS Dispersed Concentrated Dispersed Outsider”keep at Arm’s length” Concentrated A and B sharesInsider

Legal approach: the allocation of power? Problems with the contractual approach to firms Does not grant that managements always return the free cash flow to the investors. Neglects issues on residual rights of control (power): the rights to make any decisions concerning the use of an asset that is not explicitly controlled by law or regulated by contract.

The residual-rights-of-control approach Investors get the free cash flow only if they have power. The possibility to fire and hire directors and members of the board, to force dividend payments or to stop an investment project or a takeover.

Regulatory framework by the EU: Improve shareholders’ rights to information Annual corporate governance statement published on the company’s website Listed companies should be required to publish on their website all information relevant for their shareholders Listed companies should be required to offer all shareholders facilities to vote in absentia Listed companies should be permitted, but not required, to allow absentee shareholders to participate in general meetings via electronic means (such as internet or satellite) Key role to be played by independent, non-executive or supervisory directors.

Objectives of “codes of conduct”: Improving the quality of board governance of companies (United Kingdom, France, Finland, Holland, Belgium, Germany, Ireland) Improving accountability to shareholders and/or maximize shareholder value (United Kingdom, Sweden, France, Holland, Germany,Denmark) Improving companies’ performance, competitiveness and/or access to capital (Finland, Belgium, Germany, Spain, Greece, Italy, Portugal, Denmark) Improving quality of governance-related information available to equity markets (United Kingdom, Belgium, Italy)

Nørby report: a selection of recommendations Use of the one share one-vote principle, eliminating the use of shares with different voting rights Companies have a policy for their relations to various stakeholders Companies develop an information- and communication policy Recommendation on the recruitment and independence of board members as well as procedures to evaluate the work of the board, the management and the cooperation board-management Incentive payment recommended. Even incentive programmes for the board of directors (not in the form of stock options) Disclosure of all significant aspects of incentive programmes The board of directors makes sure that the auditors are independent