17
Not all investors have adopted a strong activist stance. The mutual fund industry, one of the fastest
growing sectors of the financial services industry, is generally far less committed to activism than the
pension fund industry. This partly reflects the fact that the mutual funds must differentiate their products
by applying their skills in assembling portfolios that are different from those of competitors and must
demonstrate their portfolio management skill; they thus do not emulate but try to beat indexes. On balance,
this sector is more likely to continue to pursue “buy and sell strategies”. Nevertheless, while on average the
mutual fund industry is less committed to activism than the pension fund industry, the trend among all
mutual funds is to engage in some forms of activism, particularly by voting their shares.
In summary, banks in the insider systems are increasingly taking on many characteristics of the market-
based outsider system. Meanwhile, the outsider system is evolving considerably, as a significant share of
the investor community has moved away from the traditional “arm's length” relationship towards
“relationship investing” and more active interaction with corporate management.
The state
In the post World War II years, the state assumed an important role in the economy of most OECD
Member states as a regulator and (with the exception of the US) as an important owner of productive assets
in the economy. This role has been radically redefined in recent years through the twin processes of
deregulation and privatisation.
25
The reasons for a big state were multiple: there was a strategic and
political economy dimension in the context of the cold war; there was a need to address income inequality
in earlier forms of unbridled capitalism; there were concerns with consumer welfare, as natural monopolies
were deemed hard to contain within “generic” competition rules; there were also financial considerations
in a world where large capital flows were mostly state-related and the vast sums of capital needed to
finance infrastructure investment could only be supplied with the direct participation of the state.
It is not within the scope of this paper to analyse the enormous changes that occurred in all of the above
areas, generating privatisation, deregulation and commercialisation. We should nevertheless delve briefly
upon certain corporate governance aspects of this equation. Privatisation was largely a response to
enormous flaws in the corporate governance of state-owned enterprises (SOEs).
26
In most OECD
countries, the process of decision-making, of the appointment and firing of the directors and managers, and
the setting of objectives were largely politicised.
27
Economic efficiency receded into the background as the
short-term interests of political agents became the principal motivation behind corporate strategy. Even in
the few OECD countries (like France, for example) where an economically sophisticated bureaucracy and
highly specialised and educated class of SOE managers emerged, the accountability problem did not go
away: SOE corporate governance has been likened to a series of agents without principals.
Widespread state ownership in the economy resulted on the blurring of the lines between a legitimate
public interest in the way certain goods and services (especially infrastructure and utility services) are
supplied to the population and the commercial character of the production of such goods; firms found
themselves following conflicting incentives; neither the public interest nor the commercial objectives were
met.
In answer to the above shortcomings, OECD Member countries undertook an enormous privatisation
effort. While privatisation in these countries as a whole had given proceeds of no more than US$ 20
25
See Nestor and Mahboobi (1999).
26
See Estrin (1998).
27
See Boycko et al (1996).
18
billion in 1990, by 1997, this figure had increased to more than US$ 100 billion. The global figure (i.e.
including non-OECD Members) for privatisation in 1997 was US$ 153 billion.
28
Privatisation has resulted in one of the most swift and dramatic changes of context for utilities and
infrastructure industries. Intense global competition between large multinational companies (both for
markets and capital) with deep roots in the capital markets has replaced a landscape of national, over-
regulated monopolies in fragmented markets, financed primarily through budgetary sources -- mostly,
deficits.
Evidence on privatisation experience to date has consistently shown that change in ownership improved
performance considerably at the firm level, in terms of both productive efficiency and profitability.
29
This
is largely the result of vast improvements in corporate governance. In terms of wider objectives, such as
fostering the development or further expansion of equity markets, privatisation has also been a great
success. Countries like Italy, Spain and Portugal have seen the capitalisation of their stock markets more
than quadruple as a result of privatisation in recent years. Hence, privatisation has created the conditions
for a profound change in the corporate governance context.
Commercialisation of corporate governance of SOEs is a twin development to privatisation in many
countries, including France, New Zealand and most of the Nordic countries. While some firms were kept
in the public sector for a number of different - mostly, political - reasons, important reforms took place in
the way these firms are governed. A clear regulatory and institutional separation between public interest
and commercial objectives took place. The state as owner (through the treasury institutions that were
mandated to pursue these interests) concentrated on maximising shareholder value; this task was facilitated
by the partial floatation of companies, which gave them a market value. Public interest and consumer
welfare objectives (i.e. public policy issues) were assigned to different institutions. This has helped to
clarify objectives and contributed to SOEs coming closer to private commercial firms, in terms of
corporate governance.
30
Employees and other stakeholders
By “stakeholders” the corporate governance literature has come to refer to a host of different interest
groups intimately linked to the development of a corporation other than its management, its board and its
shareholders; we have already discussed the role of the banks. We will now discuss briefly the role of the
employees and also allude to other interests that in some cases have laid a claim as corporate governance
principals, such as main suppliers or communities.
Many countries have long recognised the importance of stakeholders in their corporate governance
systems, in various ways. Germany, Netherlands, Belgium and Austria provide for seats in their
supervisory boards
31
for employee representatives. In Japan, the supply chain is intimately linked through
cross shareholdings, the backbone of the
keiretsu system. In the US, employees are the beneficiaries of
Employee Stock Ownership Plans (ESOPs), which might wield considerable corporate power and in some
cases even control the corporations.
28
See OECD (1999c).
29
See, among others, Megginson et al (1994).
30
See Nestor and Mahboobi (1999).
31
In two-tier board systems, the supervisory board is responsible for hiring and overseeing the management board.
The latter is actually running the day-to-day business of the corporation.