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Global changes pose new questions

Economic realities demand retooling of corporate management approach, governance

by Takashi Kitazume

The global repercussions from the subprime mortgage crisis in the United States are clear evidence of the growing interconnectedness of the world’s economies, which requires a broader scope and purview on the part of corporate managers, a U.S. expert told a recent business symposium in Tokyo.

Corporate managers also need to pay more attention to the increasing capital flow from developing countries — particularly oil-producing economies — into developing nations, said Charles Wolf, a senior economic adviser at RAND Corp.

Wolf was one of the speakers at the June 6 symposium organized by Keizai Koho Center, at which U.S. business school teachers held discussions under the theme, “Changes in the global economic environment and for corporate management.” The event was moderated by Atsushi Sunami, an associate professor of the National Graduate Institute for Policy Studies.

“Interconnectedness is a key aspect of globalization,” Wolf said as he explained how the subprime mortgage schemes — which started in the United States initially as a bipartisan effort to increase home ownership in the country — ended up triggering financial turmoil that involved banks and brokerages around the world.

Subprime loans to credit-risk American borrowers were repackaged as securitized financial instruments and sold not only to U.S. investors but in considerable quantities to foreign banks — Europeans and to a lesser extent those in Asia, Wolf said.

It is generally said that Japanese banks’ exposure to the subprime loans was much smaller than their American and European counterparts. Wolf said he does not have a good answer as to why — were the Japanese banks smarter or just less connected in the growing pattern of interconnectedness?

Another major change in the global economic environment, Wolf noted, is the growing two-way flow of capital between developed and advanced economies, particularly the rising investments in industrialized economies by the so-called sovereign wealth funds in developing countries that have accumulated huge amounts of currency reserves through oil and gas revenues as well as other exports.

These and other changes in the global economic environment imply that corporate managers will have to expand its scope and purview, Wolf said. And that implies the need for broader training and experience on the part of company managers, which will require business schools to also reflect these changes in their curriculum, he said.

Tim Baldenius, a professor of accounting at Columbia Business School, discussed corporate governance from a global perspective and said the long-running coexistence of the so-called U.S. model, which tends to focus on maximizing shareholder value, and a Japanese and European model that places emphasis on a more broadly defined stakeholder value, is proof that both models have strength and weaknesses.

The contrast between the two models, he said, was again highlighted by the recent move by the U.S. fund Steel Partners to oust the top management of Japanese wigmaker Aderans. The episode may have raised questions here on whether such a thing is going to be the future of Japan’s corporate governance, but “in the U.S. and other countries this has been standard practice for many years,” Baldenius told the audience.

The U.S. model of corporate governance is characterized by diffused stock ownership, a low level of ownership concentration and a general understanding that managers are supposed to maximize shareholder value, he said.

The instruments that U.S. companies often use to align managers’ interests with those of shareholders are high-powered incentives such as stock-based compensation plans, which came under scrutiny during the past decade after problems at Enron and WorldCom showed that these could also provide incentives for the managers to “manage” the companies’ earnings by manipulating accounting numbers and stock prices, Baldenius said.

On the other hand, the Japanese or European model typically features block shareholding and an understanding that managers are not just supposed to maximize shareholder value but broaden stakeholder value, with particular emphasis on the well-being of employees, he pointed out.

In this model, the incentives of managers are supposed to be more closely aligned with the interests of employees, which sometimes raises concern that managers with low-powered incentives tend to become risk-averse and may not pursue the most profitable projects, he said.

Because of such differences, a set of rules created to deal with problems arising in one country may not be appropriate for companies from others, Baldenius said.

For example, the Sarbanes-Oxley Act of the United States, launched in response to U.S. accounting scandals, may not make much sense when applied to European or Japanese firms because the SOX was designed to mitigate the incentive problems at American firms that are not the key incentive problems in Japan, he said.

At the same time, Baldenius pointed to an ongoing international diffusion of corporate governance laws, as shown by the introduction of a Japanese version of the SOX law. “So even if you are a purely domestically operating company, you are still not insulated from corporate governance changes that happen elsewhere,” he said.