Corporate Governance and Corporate Responsibility: A Comparison of the UK and US

Cynthia Williams Ruth Aguilera John Conley Deborah Rupp

CAPITAL MARKETS

SUPPLIERS

LAW

OWNERS

MANAGERS

FIRM

BOARD OF DIRECTORS CONSUMERS

PRODUCT MARKETS

EMPLOYEES

LABOR MARKETS

Anglo-American system
(in contrast to Continental system):

Dispersed ownership/uncommitted owners Developed financial markets Relatively high financial transparency Active mergers and acquisitions market Flexible labor markets Low employee participation in management Outsider system of accountability v. insider

Refinements to the UK/US Portrait:

Dispersed ownership versus increasing institutional ownership 60% of US market and 80% of UK market held by institutions, domestic and foreign Owners can coordinate action and act collectively in both market

Differences between the UK/US

Inside the firm:

CEO and Chair of Board are split in 90% of UK companies (Higgs) CEO and Chair are split in only 19% of US companies (Higgs) CEO compensation design in US (higher absolute levels and greater incentive proportion) may indicate greater power

Differences between the UK/US

Between the firm and stockholders:

More of institutional ownership in the UK is comprised of pension funds and insurance companies US: higher concentration of mutual funds Do pension funds and insurance companies exhibit a longer time-frame in their investment strategy? Indexed owners should as well: Hawley & Williams Fiduciary Capitalism Turnover is lower for UK institutions v. US institutions

How stockholders act: UK

Engagement: Cadbury and then Myners have encouraged Result: quiet diplomacy on strategy, board effectiveness, succession, executive remuneration: Black & Coffee, 1994; Holland, 1998 Financial institutions avoid one man show style of US CEOs: Holland, 1998 Mallin et al., 2005: Outsiders in the traditional corporate governance framework are starting to act like the insiders of Continental system

How stockholders act: US

Institutions typically have a more distant relationship US securities law may require Reg. FD discourages quiet diplomacy Recent SEC proposal to allow shareholders more power in the relationship (nominations) have been rejected Communications filtered through IR departments, not direct to the top as weve heard in the UK Closer to the outsider model than in the UK

Place of CSR also differs

Use of Key Phrase Concepts in Newspaper Articles - "Corporate Social Responsibility
200

180

160

Number of articles containing topic

140

120 Wall Street Journa (US)l Financial Times (UK)

100

80

60

40

20

19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
24 year period by years

Government emphasis differs

www.csr.gov.uk The UK government gateway to Corporate Social Responsibility: Welcome to the Governments website on CSR. We have an ambitious vision for UK businesses to consider the economic, social and environmental impacts of their activities, wherever they operate in the world. OFR: new requirement for boards to disclose effects of company action on environment and society What will the impact be? How important is it? Weve heard conflicting accounts Explicit emphasis on long-term shareholder value

Government:

Mr. Malcolm Wicks is the new Minister for Corporate Social Responsibility. "I want Britain to be a leading player in this coming green industrial revolution" Rt Hon Tony Blair MP, Prime Minister

Institutional investors actions

SIP requirements to disclose SEE as context Conley & Williams interviews: this made a significant difference in funds behavior ISC principles, 2002: Will intervene for business strategy and if approach to CSR is problematic ABI, Disclosure Guidelines, 2000: Expect disclosure on approach to CSR Coalitions on climate change, HIV/Aids, oil and gas revenue transparency, labor conditions in supply chains Why?

Aguilera, Rupp, Williams & Ganapathi:

Three basic motives based on justice research
(Cropanzano, Byrne, Bobocel & Rupp, 2001; Cropanzano, Rupp, Mohler, & Schminke, 2001)

Instrumental motives- self-interest driven Relational motives- concerned with relationships among group members Moral motives- concerned with ethical standards and moral principles

Theoretical Framework Individual level Organizational

level Need for Control Instrumental motive Need for Belongingness Shareholder interests (short/long term) Stakeholder interests Legitimation (long-term) Stewardship interests Higher order values

National level

Transnational level IGO NGOS Power

Competitiveness

Relational motive

Social Cohesion

Collaboration

Moral Motive

Need for Meaningful Existence

Altruism

Collective Responsibility

Aguilera, Rupp, Williams & Ganapathi (AMR,

The Case of the UK (relative to the US)

Organizational level Shareholder interests (short/long term) National level

Instrumental motive

Competitiveness

Relational motive

Stakeholder interests Legitimation (long-term)

Social Cohesion

Moral Motive

Stewardship interests Higher order values

Collective Responsibility

Application to institutional investors:

Instrumental motives predominate Competitive advantage to firms reputations from attending to environment and social issues Reputation affects stock prices and reduces volatility (Clark & Hebb, 2005) E.g., Extractive Industry Transparency Initiative E.g,, I.I. Group on Climate Change

Other motivations

Relational: Could be a bandwagon effect E.g., 11 of 20 top fund managers in Social Investment Forum, interviews show not all true believers Moral: Individuals within funds may have strong moral or political views about these matters Usually discuss in terms of long-term value of investments, not their own values

Why less interest in the US?

No required disclosure of social and environmental facts, either by companies or pension funds No systematic government encouragement Less consumer interest, so less likely to have a consumer backlash? Demonstrating financial materiality is required in order to interest US mainstream investors Geography and sociology of London allow norms to shift rapidly What else are we missing?

Conclusions

On matters of core corporate governance, important differences UK is becoming more relational/more like an insider system More emphasis on long-term shareholder value, at least by government and some large shareholders CSR is a wedge issue that is further driving differences At some point it becomes inaccurate to speak of Anglo-American corporate governance system