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A Critique of the Anglo-American Model of

Corporate Governance
Thomas Clarke

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CLPE RESEARCH PAPER 15/2009

Thomas Clarke

A Critique of the Anglo-American Model of Corporate

Governance

EDITORS: Peer Zumbansen (Osgoode Hall Law School, Toronto, Director, Comparative Research in
Law and Political Economy, York University), John W. Cioffi (University of California at Riverside),
Nassim Nasser (Osgoode Hall Law School, Toronto, Production Editor)
CLPE RESEARCH PAPER XX/2007 • VOL. XX NO. XX (2007)
 CLPE Research Paper 15/2009
Vol. 05 No. 03 (2009)

Thomas Clarke

A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE

Abstract: There is a developing literature comparing different models of capitalism from

alternative analytical frameworks highlighting the strengths and weaknesses of diverse forms of
capitalism, and the prospects for institutional diversity when confronted with growing pressures
for international economic integration.

This paper examines how different varieties of capitalism produce different levels of inequality.
Specifically how the Anglo-American variant of corporate governance in its US manifestation
afforded CEOs of large corporations inordinate power and wealth, and the consequences of this
for inequality in wider society. Arrogation of an increasing share of the wealth of corporations by
CEOs impacts upon relationships with other stakeholders and displaces CEOs objectives. The
significance is that this is precisely the model of capitalism that is being propagated vigorously
throughout the world.

This dynamic induced the present international financial crisis, in which investment bank
executives were massively incentivised to pursue vast securitization and leverage which hugely
enriched themselves, but caused the collapse of financial institutions worldwide, the violent
instability of financial markets, substantial damage to the real economy, and impacted severely
on the employment security and living standards of working people.

Keywords: Anglo-American Corporate Governance

JEL classification: P16 & P12

Thomas Clarke
Director
Centre for Corporate Governance
UTS Sydney
PO Box 123
Broadway
NSW 2007
Australia
[email protected]

i
ii
A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE
GOVERNANCE
Thomas Clarke*

I. Introduction: Varieties of Capitalism /Varieties of Inequality?

There is a developing literature comparing different models of capitalism from alternative

analytical frameworks highlighting the nature and extent of diverse forms of capitalism, their
relative strengths and weaknesses, and the prospects for institutional diversity when confronted
with growing pressures for international economic integration (Deeg and Jackson 2006). The
varieties of capitalism thesis elaborated by Hall and Soskice (2001) adopts a firm centred
approach focusing on the incentives for coordination; a wider typology of governance
mechanisms in terms of social systems of production is offered by Hollingsworth and Boyer
(1997); and a national business systems approach of Whitley (1999) examines the internal
capacities of business firms.

The varieties of capitalism literature has great resonance in the consideration of comparative
corporate governance. For more than a decade an intense debate has continued concerning the
globalization and convergence of corporate governance (Hansmann and Kraakerman 2001;
Branson 2001; McDonnell 2002; McCahery et al 2002; Hamilton and Quinlan 2005; Clarke
2004; 2007).

The question of whether economies will converge towards a common corporate Anglo-American
governance system, or sustain the present diversity of institutions is one of the key issues facing
countries in Europe, the Asia Pacific and throughout the rest of the world. Lower economic
growth and higher unemployment in Europe compared to the Anglo-American countries since
the mid-1990s, undermined some of the confidence in Europe’s social model (though by 2005
Germany had returned to its former position as the world’s largest exporter). Despite the
pressures towards adopting Anglo-Saxon modes of corporate governance, the divergences in
both the policy and practice of corporate governance in Europe have thus far resisted any move
towards European standards. However with greater market integration and the developing
influence of Anglo-American institutional investors, it is possible the market will play a greater
role. Yet debates on company law harmonisation in the European Union have been held up by
countries not wishing to see elements of their own systems of corporate governance disappear in
the process. One explanation for this impasse is the institutional complementarity thesis which
justifies the continuing diversity of systems, rejecting the ‘one-best-way’ strategy adopted by the
*
Thomas Clarke studied social science (B.Soc.Sc) at Birmingham University; industrial relations (M.A.) at
Warwick University, and completed his Ph.D. at Warwick University in industrial and business studies. He has
taught at the University of St Andrews, Scotland, and at the China Europe International Business School (CEIBS) in
Shanghai. Presently he is Professor of Management, and Director of the Centre for Corporate Governance at UTS
Sydney. He has published recently Theories of Corporate Governance, (2004) London: Routledge and International
Corporate Governance, (2007) London: Routledge.
2 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

‘convergence thesis.’ Instead a plurality of models is assumed, each corresponding to local

circumstances, supported by a cluster of social norms and regulation, enabling balanced
economic development. As Reberioux argues what is often presented as the practical economic
inevitability of convergence, is in essence a profoundly ideological and political argument:

“Two competing theories behind forms of corporate governance can thus be discerned. In the
first case, the US model – the predominance of widely held corporations controlled by their
owners – is presented as optimal. If one adds a general law that institutions are evolving toward
efficiency, then one obtains the convergence thesis: the European system is bound to change in
the direction of the Anglo-Saxon one; it is only a matter of time. From a neo-institutionalist
perspective, this process of convergence is seen as the result of rational micro-behaviour by
individuals when crafting their governance structure (Williamson 1995)…Without delving
further into a complex debate, it is worth noting that the micro-efficiency of shareholder value
has not yet been proved, and probably never will be. The fundamental reason is that shareholder
sovereignty is not an efficient arrangement, but rather a power relationship, that is a particular
(societal) way to design a corporation…The institutional complementarity thesis provides a
contrasting perspective on the continuing diversity of capitalist systems (Amable 2000). The core
of this theoretical approach is a rejection of the ‘one best way’ strategy adopted by the
convergence thesis in analysing institutions. Rather, a plurality of models is assumed, each
corresponding to local circumstances. The focus should not be upon a particular (isolated)
institution, but on the cluster of social norms that underpin national regulation. This societal
approach emphasises the systemic links between institutions that enable balanced economic
development” (2000:117-8).

The diversity of corporate models is valuable and is rooted in societal characteristics that
together shape the competitiveness of the different models. Though shareholder value may be
gaining ground due to the influence of Anglo-Saxon institutional investors, a stakeholder
approach is closer to the reality of European social democracies, and the outcome of the
confrontation between the two competing philosophies is highly uncertain. It is unlikely that
imported Anglo-Saxon capital market related features of corporate governance will work well
with Continental labour-related aspects of corporate governance as represented in supervisory
boards. It is likely any such European compromise would be more unstable than existing systems
(Reberioux 2000; Cernat 2004).

A more pessimistic view is offered by Christel Lane (2003) who reviews the evidence on the
German case and concludes that a new Anglo-American logic of corporate governance is
diffusing beyond the major corporations of the DAX 30, and that this is not simply attributable to
external constraints, but to powerful actors within the German economy including large banks
and insurance companies. This is significant firstly because Germany has been the paradigm for
the model of co-ordinated capitalism as distinct from competitive or liberal market capitalism. If
the cohesive German system is in the process of fundamental change, then other continental
European business systems are likely to be vulnerable. Secondly Lane argues it is wrong to
assume the adoption of the Anglo-American model is simply about changes in capital markets
and corporate financing:
2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 3

“Because forms of corporate governance structure most other relationships within firms and even
in society as a whole, they are inherently connected with a distribution of power and material
welfare. They therefore decisively shape the logic of the whole political economy. Hence there is
strong concern, particularly but not only on the part of labour, with the consequences of change
for the distribution of surplus and control to various stakeholders in the firm, as well as the future
viability of the production paradigm of diversified quality production.”

Pursuing Lane’s perspective this paper focuses on how different varieties of capitalism with
different logics of political economy produce different levels of inequality. Specifically the paper
examines how the Anglo-American variant of corporate governance in its US manifestation has
afforded CEOs of large corporations inordinate power and wealth, and the consequences of this
for inequality in the wider society. Yet this is precisely the model of capitalism that is being
propagated most vigorously in other regions of the world by executives themselves, large
international corporations, institutional investors, and international agencies such as the OECD
and IMF. This dynamic induced the present international financial crisis, in which investment
bank executives were massively incentivised to pursue vast securitization and leverage which
hugely enriched themselves, but caused the collapse of financial institutions worldwide, and the
violent instability of financial markets. The social consequences of this reckless financial
irresponsibility in terms of structural damage to international economies, government
programmes and unemployment remains to be calculated.

II. US CEO POWER AND REWARD

The person increasingly at the centre of defining and projecting the responsibilities and
objectives of the corporation in the Anglo-American mode of corporate governance is the Chief
Executive Officer (CEO). The position of CEO has grown in status and public recognition as
corporations have become larger and more powerful and extended their reach globally. The
leadership qualities of CEOs are celebrated in business bookshops in the way once reserved for
statesmen, generals or explorers. Among the qualities expected of CEOs is the vision to see a
new future for the corporation (a sage CEO once said there is a hair’s breadth difference between
a vision and an hallucination), and as John Harvey-Jones the former CEO of ICI described it the
capacity to make things happen. As CEO of Disney Michael Eisner made things happen when in
1998 he appropriated a total compensation package of $576 million. (This was greater than the
combined compensation of all 100 CEOs of the FTSE 100 companies at the time, and greater
than the combined salaries of similar large groups of CEOs of leading companies in other parts
of the world).

Though the board of directors is invested with the responsibility for the company in law, the
practical reality is often that the CEO is very much in charge. In the United States CEOs
4 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

accumulated power to themselves as their corporations began to dominate world markets in the
middle decades of the 20th century, and the role of the board was marginalised: “Corporate
boards, asserts legal tradition, are the sovereigns of their realm. But until they began to flex their
muscles during the 1990s, boards rarely behaved that way, leaving most decisions in the hands of
management (Lorsch and MacIver 1989; Useem 1996). State corporation laws that assign
ultimate responsibility for company affairs to the governing body permit directors to delegate the
running of the company to management. The problem is that, until recently, management’s
power in large American companies reflected less a deliberate delegation of authority by a
sovereign body than a de facto reality in which management had become dominant, effectively
controlling the agenda of the board to which it was only nominally subordinate.” (Useem and
Zelleke 2006:2)

Chief executives used their control of boards not only to prevent any challenge to their position,
but to aggregate to themselves an increasing share of the wealth generated by the company, both
in terms of rapidly inflating salaries, and massively growing stock options. “A comparative
perspective underscores the immense power, charisma and leadership given in the US corporate
governance system to the chief executive officer (CEO), who usually also exercises the role of
chairman of the board. In fact, in the USA, the split of these two roles is generally perceived as a
transitional arrangement or a sign of weakness, particularly in the case of new outside CEOs.
The over-centralisation of power in the CEO is evident in the gap between the CEO’s salary and
that of other executives” (Aguilera 2005:45; Khurana 2002)

A. ESPRIT DE CORPS

An all-embracing esprit de corp is often encouraged in boards, and may well assist in
maintaining collegiality and commitment among board members, but this can be misused by
over-powerful CEOs who manipulate boards to prevent any challenge to their power or
autonomy: “Among large US corporations there are strong disincentives, rather than incentives,
for non-executive directors to challenge executives or to adopt corporate governance reforms that
will limit managerial autonomy. These disincentives come from the social pressure to maintain
managerial autonomy and authority for the elite of corporate leaders. Qualitative studies suggest
that senior managers and directors of large established corporations have a shared group
consciousness as members of a unified corporate leader elite” (Wei Shen (2005:84; Useem
1984). Westphal and Khanna’s (2003:387) survey of Forbes 500 companies in the US discovered
evidence that non-executive directors experience social sanctions by their peer directors if they
are perceived to threaten the elite position by advocating:
• The separation of CEO and chairman positions
• The creation of independent nominating committees
• The repeal of poison pill protection
• The dismissal of the CEO.
Similarly in the UK the sway of CEOs means that executive directors at least are unlikely to
express policy disagreements with their boss at board meetings, as one non-executive director
2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 5

commented: “The executive directors of boards have very little awareness of their
responsibilities under company law or any other law, and the reason for that is quite
understandable: they owe their jobs, careers and futures to the chief executive. He appoints them.
If they are going to have an argument with the chief executive or differences of opinion on
policy, which occur all the time, that has to be off board” (McNulty, Roberts and Stiles 2003:11).

B. MANAGEMENT AND BOARD DEFENCES

The commitment to a resolute espirit de corps may readily develop into a determined
entrenchment of management and boards in the face of a potential hostile takeover.
Managerialist theory argues that though shareholders should make the ultimate decision
regarding takeovers, in fact control is effectively in the hands of top management who dominate
the board of directors and proxy voting machinery to ensure their continued rule (Herman 1981).
However in the 1980s in the United States a confluence of factors including the availability of
large amounts of loan capital, and new financial instruments such as junk bonds (bonds with low
credit ratings), and relaxed regulation of the anti-trust laws, suddenly large corporations that
previously thought themselves invulnerable became takeover targets. This reinvigorated market
for corporate control, it was thought provided a means to re-establish the link between ownership
and control. Hostile takeovers it was argued, played a role in corporate governance by bringing
purportedly efficient market pressures to bear on poorly performing managers (Goldstein
2000:381). In fact managers themselves had found merger and takeover activity an easier route
to growing their companies, but now this method of acquisition came back to bite them in the
assault of hostile takeovers. “In historical perspective the corporate raiders of the 1980s were
capitalizing on a transformation of the relation between finance and industry in the United States
that had been going on since the 1950s. Paving the way for the financial revolution of the 1980s
was the growing tendency of strategic managers of the US industrial corporations to reap their
own personal rewards through participation in the market for corporate control rather than
through enhancing the value creating capabilities of the companies that they were entrusted to
manage”(Lazonick 1992:473).

But for top managers hostile takeovers presented the stigma of unemployment, and for workers
and surrounding communities the consequences of takeover battles can be devastating as both
sides expend enormous resources on investment bank and advisers fees, and can often only
recover from the debt accumulated in any restructuring activity intended to impress financial
markets by slashing costs including employment. Yet for shareholders such takeovers offer the
prospect of windfall gains. “Thus, the bustling market for corporate control in the 1980s
threatened the autonomy previously enjoyed by top managers of large corporations as well as the
relationships such firms had developed with their employees and communities, and it
exacerbated the potential for conflict between shareholders and managers ..” (Davis 1991:584).
6 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

Responding to this threat top management and boards took protective action to make takeovers
difficult without their consent. An ingenious array of shark repellents was created as barriers to
hostile takeover. Corporate charter amendments to protect against takeover have many forms but
among the most common are the classified board provision; the supermajority provision; and the
fair price provision. The classified board provision introduces staggered board elections, making
it impossible for a new majority shareholder ousting the board and replacing it entirely in a
single election. The supermajority provision raises the minimum number of shareholder votes
necessary for a takeover or merger approval to two thirds or three quarters. The fair price
provision requires board approval of a takeover or the acquirer pays a minimum price for all
remaining shares. The poison pill or shareholder rights plan is a security issued as a dividend to
existing shareholders that entitles the holder to purchase shares in the firm at a deep discount if a
takeover attempt occurs without board approval, dramatically increasing the cost a potential
acquirer would have to pay to get control of the company. When the Delaware Supreme Court in
November 1985 legitimated the adoption of a poison pill by boards, without shareholder
approval, when the firm was not at the time threatened by a takeover attempt, the adoption of
poison pills rocketed (Davis 1991:589).
Restored to their entrenched position, CEOs in the US were well placed to personally capitalize
on the renewed growth of the new economy.

C. CEO PAY IN THE UNITED STATES

During the boom years of the 1990s there was a rapid and sustained escalation in CEO salaries in
the United States, and any expected adjustment downwards in executive reward with the market
crash of 2001, and the halving of the market capitalisation of many large corporations, did not
occur. Though there were more stringent efforts to link CEO compensation to performance, CEO
reward remained at incredibly high levels whether the companies they managed did well or not.
Extremely lucrative share option schemes continued, and if the options packages became more
sophisticated, there were many devices such as backdating widely employed to ensure executives
extracted the best possible reward from their options.

Table 1 US Highest Paid CEOs in 2006

Table 2 European Highest Paid CEOs in 2006

Looking at the extremes of this profligacy, Table 1 indicates the total remuneration of the ten
highest paid CEOs in public corporations in the US in 2006, and in contrast the total
remuneration of the ten highest paid CEOs in European listed public corporations is given in
Table 2. Included in the compensation figures are base salary, bonuses, benefits, long term
incentive plans, and profits from cashing out on stock options where this information was
accessible. The inflation of US CEO salaries relative to their colleague CEOs in Europe, is
demonstrated by the fact that the US average top CEO salary is almost three times greater than
their counterparts in Europe. While these comparisons are inevitably crude since much
compensation of different forms is hidden in the US, and probably more so in other countries,
2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 7

these astonishing disparities are an indication of how out of control US CEOs reward has been
for a long time.

CEO salaries are only a part of wider structures of inequality that have become more extreme in
recent years, and rewards for executives in the finance sector have become even more
astronomically inflated: James Simons the Director of Renaissance Technologies received $1.5
billion in compensation in 2006, Steven Cohen of SAC Capital received $1.2 billion, Kenneth
Griffin of Citadel Investment Group also received $1.2 billion, T.Boone Pickens of BP Capital
picked up $1.1 trillion, and George Soros earned a modest $950 million. While CEOs of
corporations might be criticized for putting their self-interest before that of the companies they
manage, the directors of fringe financial institutions appear to have manipulated and destabilized
world markets to secure even greater personal reward (IPS 2007; Soros 2008). Whatever loss
occurs to shareholder funds due to excessive CEO salaries in U.S. corporations and financial
institutions the wider implications of this extravagance are more serious, in terms of how the
corporations are managed, the objectives they pursue, and the consequences for the wider
economy and community.

D. DISPLACEMENT OF GOALS

An insidious indicator of the extent of management entrenchment in U.S. corporations is the

rapid escalation of CEO and executive remuneration regardless of performance. Though equity
based reward was intended to align executives with shareholders interests, the explosion of
executive share options suggests in this respect management of is out of control of either boards
or shareholders (Figure 1). William McDonough, the then President of the New York Federal
Reserve Board in a speech in 2002 captured the sentiments of many regarding this reckless
inflation of executive reward:

“I believe there is one issue in particular which requires corrective action. A recent study shows
that, 20 years ago, the average Chief Executive Officer of a publicly-traded company made 42
times more than the average production worker. Perhaps, one could justify that by the additional
education required, the greater dedication, perhaps even the harder work. The same study shows
that the average present day CEO makes over 400 times the average employee’s income. It is
hard to find somebody more convinced than I of the superiority of the American economic
system, but I can find nothing in economic theory that justifies this development. I am old
enough to have known both the CEO’s of 20 years ago and those of today. I can assure you that
we CEO’s of today are not 10 times better than those of 20 years ago.”

Figure 1 Median CEO Pay in the US 1980-2001

The job of CEO is a very demanding one and needs to be rewarded to attract talented people and
to offer them material incentives for staying committed to a tough role. However as McDonough
8 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

argues this was always the case, long before the current excessive rewards were offered. The
essential problem is not the absolute growth in CEO reward, it is firstly how the arrogation of an
increasing share of the wealth of the corporations by the CEO impacts upon relationships with
other employees, shareholders, and the wider community. The second concern is how excessive
and unrestrained CEO compensation displaces the CEOs objectives from the development and
success of the company to individual strategies of how to maximise their personal earnings.

This displacement of CEO goals is not a recent problem but occurred in earlier periods in
different forms, for example in earlier periods of merger and takeover activity, often the most
insistent driver was CEOs ambition, since they associated acquisitions with higher rewards for
themselves. Similarly the sustained lack of capital investment in US and UK industry in the
1970s and 1980s was partly due to the self-interest of management: “The problem was not only
the high cost and mobility of capital. The problem was also the willingness of many top
managers of industrial corporations to take advantage of the permissive financial environment to
appropriate huge levels of compensation for themselves while neglecting to build organizational
capabilities in the companies they were supposed to be lead” (Lazonick (1992:476).

There is much evidence to support the view that presently in large corporations in the United
States:
i. Executive compensation has been completely out of control for some time;
ii. The disparity created with the rewards of other company workers is both morally
unconscionable and functionally damaging;
iii. Executives are taking an increasing share of the earnings of corporations, and are
becoming significant shareholders in their own right;
iv. Executive compensation in the past has often not been due to achieving results but
has amounted to rewards for failure;
v. The elaborate structures designed to link executive reward to performance has often
compounded the problems rather than alleviating them;
vi. There is a real danger that the excessive compensation secured by U.S. executives
will become the benchmark for executive reward in other regions of the world where
up till now executive rewards have remained modest in comparison.

Excessive executive compensation in large U.S. corporations is not an isolated problem, it is

endemic, and it has occurred because executives seized control of their own reward structures, as
Bebchuk and Fried argue “Managerial power has played a key role in shaping executive pay. The
pervasive role of managerial power can explain much of the contemporary landscape of
executive compensation, including practices and patterns that have long puzzled financial
economists. ..Managerial influence over the design of pay arrangements has produced
considerable distortions in the arrangements, resulting in costs to investors and the economy. The
influence has led to compensation schemes that weaken managers’ incentives to increase firm
value and even create incentives to take actions that reduce long-term value…Flawed
compensation arrangements have not been limited to a small number of ‘bad apples’; they have
been widespread, persistent and systemic. Furthermore, the problems have not resulted from
temporary mistakes or lapses of judgement that boards can be expected to correct on their own;
2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 9

rather they have stemmed from structural defects in the underlying governance structure that
enables executives to exert considerable influence over their boards. The absence of effective
arm’s-length dealing under today’s system of corporate governance has been the primary source
of problematic compensation arrangements. Finally, while recent reforms that seek to increase
board independence will likely improve matters, they will not be sufficient to make boards
adequately accountable; much more needs to be done” (2005:1-2)

III. COMPOUNDING INEQUALITY

More critical than the detachment of US executives from their shareholders interests that
occurred in the 1990s, was the distance that grew between the rewards and lifestyle of executives
and their employees. In 1980 the ratio of CEO and worker compensation in the US was
approximately 50:1 in the S & P 500 companies, and by 1990 this had risen to a ratio of 107:1.
With the meteoric rise in executive pay in the 1990s the ratio expanded to an unprecedented
525:1 (Institute for a Fair Economy 2006; Ertuk et al 2005). Though there was productivity
growth during this era almost all the benefits went to top management: As Dew-Becker and
Gordon who examined the distribution of the benefits of growth in the U.S. comment “Our
results show the dominant share of real income gains accruing to the top 10 percent and top 1
percent is almost as large for labour income as total income...It is not that all gains went to
capital and none to labour; rather, our finding is that the share of gains that went to labour went
to the very top of the distribution of wage and salary incomes” (2005:77). In two decades US
workers saw no measurable improvement in their wages, while US executives enjoyed the
experience of becoming multi-millionaires en masse. This is hardly a recipe for a well integrated
and orderly economy and society, and it is not surprising that the US now has among the worst
social and health problems of any advanced industrial country (Figure 2).
Figure 2 Comparison of CEO and Worker Pay in the US 1980-2002

Among the arguments used to justify the enormous increases in US CEO reward are the effects
of the bull market and the greater demands made upon executives, when it could be argued
greater demands are actually made upon executives when the market is falling (Bebchuk and
Grinstein 2005:299). A further argument put is that in these competitive times greater rewards
are required as an incentive to executives, when there is little evidence that reward has been
effectively linked to CEOs own performance. It appears that neither boards or shareholders have
been able to prevent an unprecedented inflation in US executive reward which Bebchuck and
Grinstein calculate cost US$250 billion for the top five executives in all US listed corporations
between 1993-2002, and saw the earnings of the top five executives as a proportion of aggregate
firm earnings rise from 5% in 1993 to 12.8% in 2000-2002 (Bebchuk and Grinstein 2005:297).
When shareholder returns collapsed dramatically in 2001/2002, lavish CEO compensation in the
S&P 500 continued regardless; and CEO compensation per dollar of net profit between 1960 and
2000 increased exponentially (Economist 25 October 2003).
10 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

Furthermore given the extensive opportunities for executives to translate earnings into stock they
have become major shareowners in their own companies. Holderness et al (1999) compared a
cross section of 1,500 U.S. public companies in 1935 with a modern benchmark of 4,200 listed
firms in 1995. They discovered that managerial ownership of common stock rose from 13
percent in 1935 to 21 percent in 1995. It seems the separation of ownership and control is now in
reverse, and Core et al (2003:53) estimate the current levels of inside ownership at U.S. public
corporations at 20 percent. A large proportion of these shares are owned by CEOs, and Mehran
(1995) records average ownership by the CEO and his immediate family of 5.9 per cent for 153
randomly selected manufacturing firms, which in many cases would make them one of the
largest shareholders. One of the intellectual inspirations for the new incentive pay structures for
management was a paper by Jensen and Murphy (1990) that insisted executives needed to see
more alignment between their performance and reward. Yet most of the consequent movement to
incentivise management has achieved the opposite of the intended effect. In their research on the
growth in executive pay Bebchuk and Grinstein (2005a) conclude that executive pay during
1993-2003 grew by far more than could be explained by changes in firm size, performance and
industry mix. In a further paper they discover “an asymmetry between increase and decreases in
size: while increases in firm size are followed by higher CEO pay, decreases in firm size are not
followed by reduction in such pay” (Bebchuk and Grinstein 2005b:1).

Essentially the extraordinary elevation in executive reward that occurred in the 1990s in the
United States had little to do with the productive efforts of the executives themselves, and was
fuelled by the longest running bull market in history. The sustained rise in share prices in this
period reflected institutional savings flows and momentum investing, together with falling
interest rates. Stock options became an accelerator mechanism providing risk free bonuses to
senior management. “Corporate governance in the 1990s operated against a background of rising
share prices, the capital market was not an agent of discipline but a facilitator of painless general
enrichment though rising share prices; amidst increasing confusion about what management
could do in a world whose stock market was running on narratives (not discounted cash flows)
and encouraging CEOs to pose as heroes…Many CEOs in the decade of the 1990s profited
personally from using the language of value creation to cover the practice of value skimming.
Right at the end of the 1990s, just before the collapse of the Tyco share price and his personal
disgrace, Denis Kozlowski, the Tyco CEO publicly defended his 1999 pay by claiming ‘while I
gained $139 million (in stock options) I created $37 billion in wealth for our shareholders’ ”
(Erturk 2005:690).

Though the collapsing share market in 2001/2002 exposed acute problems of corporate
governance and strategy, and raised serious questions regarding the performance and reward of
corporate executives, most bloated executive pay packets escaped largely unscathed. Indeed on
the occasions when executives were dismissed for poor performance, it was often discovered that
they had gilt edged pension entitlements that rewarded them massively for their failure, stealth
compensation that may include hidden pension entitlements, deferred compensation
arrangements, and post-retirement consulting. This prompted the UK Department of Trade and
Industry to publish its document on Rewards for Failure (2003) on director’s remuneration,
2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 11

contracts, performance and severance, and alerted institutional investors to start checking the
small print of executive’s contracts more closely.

Among the many reasons why executive compensation packages have not delivered performance
improvement, but often exacerbated the provision of increasing amounts of corporate earnings
regardless of the contribution of the CEO, include the fact that behind the appearance of
independence of compensation committees and the employment of external consultants,
company directors have formed positive beliefs about types of pay arrangements from which
they themselves have benefited during their management career (similarly compensation
consultants enjoyed higher fees to the degree they can justify higher pay for the executives of the
companies they are advising). Executive pay inflation has consistently been driven by boards
seeking to pay their CEO more than the industry average, thus serving to progressively ratchet up
the average. “A review of reports of compensation committees in large companies indicates that
a large majority of them used peer groups to determine pay and set compensation at or above the
50th percentile of the peer group. Such ratcheting is consistent with a picture of boards that do
not seek to get the best deal for their shareholders, but are happy to go along with whatever can
be justified as consistent with prevailing practices” Bebchuk and Fried (2005:13).

When companies do use objective criteria these criteria are not designed to reward managers for
their own contribution to the firm’s performance, as bonuses are typically not based on the firm’s
operating performance or earnings increases relative to its industrial peers, but on metrics that
cannot distinguish the contribution of industry wide or market wide movements. In fact
conventional stock options allowed executives to gain from any increase in stock price above the
grant-date market value, even when their company’s performance might have significantly
lagged that of their peers. Towards the end of the 1990s CEOs became adept at achieving
temporary spikes in the company’s stock price to release the maximum benefit from stock
options, even when their companies long term stock performance was poor (Bebchuk and Fried
2005:23-24). In addition a panoply of ways have been learned to further boost executive
unearned reward through stock options including backdating (the widespread practice of
adjusting stock option grant dates to an earlier time than they were actually granted in order to
provide a windfall to the option holder); spring-loading, the practice of scheduling an option
grant before the release of positive corporate news, anticipating a rise in the stock price and
attempting a maximum boost to the value of the stock option; and bullet-dodging, the practice of
delaying a grant until after negative news is released and a company’s stock price has declined.
The problem with all of these tricks is that they are “bound up with concepts of insider trading”
as Christopher Cox, the chairman of the Securities and Exchange Commission referred to spring-
loading in testimony before a Senate Committee on 6 September 2006.

Table 3 Comparison of CEO Compensation and Ratio of CEO to Worker Pay 1998-2005
12 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

The out of control inflation in executive pay in the United States threatens to impact upon
executive reward internationally. In the past there was some resistance to this, when the first
President Bush took a large party of U.S. executives to Japan to examine the reasons why U.S.
industry had failed to compete in the 1980s, the first suggestion of the Japanese executives to
their American counterparts was, “why don’t you try paying yourselves less money?” (At the
time Japanese executive salaries in manufacturing industries were a small fraction of U.S.
salaries, and have remained modest in comparison). Today many European and Asian executives
look upon swollen U.S. executive salaries more as a benchmark to aspire towards. Already a
higher proportion of executive pay is being offered in equity-based compensation and in
incentive payments in other parts of the world, which were significant stages in the acceleration
of the inflation of U.S. executive pay. As Table 3 reveals, though US CEO compensation across
a sample of 350 large public companies remains more than double the reward of CEOs drawn
from similar samples of public companies in other advanced industrial countries, the rate of
growth of CEO compensation in many other countries in the last decade exceeds that of the
United States.

A. EXECUTIVE REMUNERATION REFORM

In 2006 a survey of 768 directors in the 2,000 largest U.S. corporations by Heidrick and
Struggles and the USC Marshall School of Business, nearly 40 percent of directors said CEO pay
was “too high in most cases,” and yet 64 percent of directors expected to see continued increases
in cash compensation, and 58 percent expected an increase in stock-based compensation
(2006:1). Nevertheless efforts continue to be made to make executive reward systems more
rigorous and to eliminate fundamental problems such as mismatched time horizons and the
gaming that can lead to fraudulent accounting (Hall 2003). Bebchuk and Fried (2005)
recommend a series of measures to increase the transparency of executive pay arrangements
including placing a dollar value on all forms of compensation, and to include these amounts in
compensation reports; expensing options to make the costs more visible to investors; and
reporting how much executive remuneration results from general market and industry
movements. They recommend strengthening the link between pay and performance by reducing
windfalls in equity-based compensation, filtering out gains in stock price due to general market
movements; attaching bonuses to long term performance rather than short term accounting
results, and including ‘clawback’ provisions if accounting numbers are subsequently restated; not
paying for simply expanding the company through acquisition; and avoiding soft landing for
executives where generous exit packages eliminates any gap between the rewards of good and
poor performance.
However executive reward will remain an issue when there are questions regarding boards’
accountability, and CEOs dominating influence over boards. More fundamentally it may be
questioned whether executive performance pay should be in the form of stock options at all,
since these create an incentive for management to manage performance of financial results in
order to maximise share price. Pay for performance might better be linked to the underlying
drivers of performance that impact on the financials, and to non-financial performance indicators
2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 13

in a more balanced scorecard. The focus could then be upon management for sustainability,
rather than short term performance management aimed at the stock price.

Figure 3 Distribution of Stock Market Holdings by Wealth Class

B. ADVANCING INEQUALITY IN THE UNITED STATES

The hundreds of millions of dollars in compensation routinely claimed each year by the leading
U.S. business and financial leaders has to be put into the perspective that although the United
States is the most prosperous country on earth, it is typified by mounting, severe and very visible
inequality. While CEO salaries inflated through the roof, in recent years average earnings in
America actually went down. Looking at the distribution of stock market holdings in the United
States, the richest 1% of the population own 36.9% of these assets, and the richest 10% own
79%, in contrast 80% of the population own only 9.4% of these assets (Figure 3). The campaign
for shareholder value of the last 20 years may be reinterpreted in this light. Looking at the boom
time of the 1990s the advancing prosperity in the US hardly touched most of the population, and
the meagre gains they made have been lost since 2001. Some would defend this extreme level of
inequality as the price of incentives and performance, but given the awful impact on the quality
of most people’s lives, it hardly makes the Anglo-American model as attractive as it is often
portrayed by the rich and famous who have benefited from it (EPI 2008).The groundswell of
opposition to this increasing poverty in the US economy and society led to the emphatic election
of Barak Obama as President of the United States.

Figure 4 World Exchange Market Capitalization (US $trillion)

IV. THE 2008 INTERNATIONAL FINANCIAL CRISIS

“America’s financial institutions have not managed risk;

they have created it” (Joseph Stiglitz 2008a)

The apparent ascendancy of Anglo-American markets and governance institutions was

profoundly questioned by the scale and contagion of the 2008 global financial crisis. The crisis
originated in Wall Street where de-regulation unleashed highly incentivised investment banks to
flood world markets with toxic financial products. As the accumulated cost of the financial crisis
was realised the commitment to establish a new international financial regulatory framework
increased. The market capitalisation of the stock markets of the world had peaked at $62 trillion
at the end of 2007, followed by a calamitous fall to $33 trillion by October 2008 (Figure 4), as
derivatives markets that had reached $500 trillion dollars unwound. The general market
14 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

assistance and specific rescue packages for individual financial institutions amounted to almost
$4 trillion worldwide by October 2008 (Table 4). As the financial crisis impacted upon the real
economy the fears of a prolonged recession grew, with US industrial production falling further
than it had for over 30 years, and for example the US automotive industry becoming increasingly
precarious announcing further major redundancies and looking for support from the federal
government. The International Labour Organisation in Geneva estimated that up to 20 million
people in the world would lose their employment as a consequence of the financial crisis, and
that for the first time in a decade the global total of unemployed would be above 200 million
(Associated Press, 21 October 2008).

Table 4 Government Support for Global Financial Crisis 2008

The explanation of why investment banks and other financial institutions took such spectacular
risks with extremely leveraged positions on many securities and derivatives, and the risk
management, governance and ethical environment that allowed such conduct to take place is
worth further analysis. With the recovery of US financial markets after the Enron debacle, the
explosion of financial innovation gave the world a new breed of Masters of the Universe in the
derivatives dealers and hedge fund managers who manipulated trillions of dollars, while
charging immense fees. This long financial boom of recent years saw the culture of financial
excess permeate through swathes of the rich industrial countries as people were encouraged to
live on debt.

A. INCENTIVISATION

The most critical part of the explanation of why investment banks and other financial institutions
took such extreme risks with highly leveraged positions in complex securities, neglecting risk
management, governance principles and often basic business ethics was that they were
incentivised to do so. Massively incentivised irresponsibility became the operating compensation
norm in the financial community, as banks and fringe financial institutions chased the super
profits available as global financial markets expanded exponentially. “The management teams at
the investment banks did exactly what they were incentivized to do: maximize employee
compensation. Investment banks pay out 50% of revenues as compensation. So, more leverage
means more revenues, which means more compensation. In good times, once they pay out the
compensation, overhead and taxes, only a fraction of the incremental revenues fall to the bottom
line for shareholders. The banks have done a wonderful job at public relations. Everyone knows
about the 20% incentive fees in the hedge fund and private equity industry. Nobody talks about
the investment banks’ 50% compensation structures, which have no high-water mark and
actually are exceeded in difficult times in order to retain talent”(Einhorn 2008:11). The report on
the vast write-downs at UBS examines how the compensation structure directly generated the
behaviour which caused the losses, as staff were motivated to utilise the low cost of funding to
invest in subprime positions. As a result there were insufficient incentives to protect the UBS
franchise for the longer term “it remains the case that bonus payments for successful and senior
2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 15

international business fixed income traders, including those in the businesses holding subprime
positions were significant. Essentially, bonuses were measured against gross revenue after
personnel costs, with no formal account taken of the quality and sustainability of those earnings”
(UBS 2008:42).

V. REGULATION AND GOVERNANCE OF FINANCIAL INSTITUTIONS

There was a widespread sense that this regulatory failure of financial markets could not be
allowed to occur again. Chancellor Angela Merkel of Germany, usually a stalwart ally of
President Bush, derided the lack of regulation that, in her view, allowed the financial crisis to
erupt in the United States and seep toward Europe. She reminded the German public that the
United States and Britain rejected her proposals in 2007 for regulating international hedge funds
and bond rating agencies. "It was said for a long time, 'Let the markets take care of themselves,' "
Merkel commented. Now, she added, "even America and Britain are saying, 'Yes, we need more
transparency, we need better standards.' " Germany's finance minister, Peer Steinbrueck, said that
the "Anglo-Saxon" capitalist system had run its course and that "new rules of the road" are
needed, including greater global regulation of capital markets (Washington Post 28 September
2008). A strong emphasis both in Europe and the United States was upon reforming executive
compensation structures that encouraged excessive risk-taking, and aligning reward with long
term value creation was another imperative.

Yet in the middle of the financial crisis an indication of how entrenched the irresponsibility of
the financial sector had become was the astonishing news that the surviving US financial
institutions were preparing to pay 2008 end of year executive bonuses approximately equivalent
to the billions of dollars of aid they had just received from Congress. While the US economy was
collapsing around them, and the US public were becoming increasingly concerned how they
might survive a severe recession, the executives of major banks seemed focused primarily on
maintaining their bonuses. Horrified by so immediate a betrayal of the public intervention to
assist the banks, Henry Waxman, the Chairman of the US Congress Committee on Oversight &
Government Reform sent a letter to the CEOs of Bank of America, Bank of New York, Citi,
Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, State Street Corp. and Wells
Fargo:

“Earlier this month, the Treasury Department announced plans to invest $125bn of taxpayer
funds in nine major banks, including yours, as an emergency measure to rebuild depleted capital.
According to recent public filings, these nine banks have spent or reserved $108bn for employee
compensation and bonuses in the first nine months of 2008, nearly the same amount as last year.
Some experts have suggested that a significant percentage of this compensation could come in
year-end bonuses and that the size of the bonuses will be significantly enhanced as a result of the
infusion of taxpayer funds.” (Washington Post, 29 October 2008).
16 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

Waxman demanded data from the banks on the total compensation per employee from 2006 to
2008 broken down by salaries, bonuses (cash and equity), and other benefits; the number of
employees who were paid over $500,000 in total compensation and how this was structured; the
total compensation paid to the ten highest paid employees; and all policies on bonus payments.

VI. CONCLUSION

The attractiveness of the Anglo-American finance and governance institutions permeated with
inequality and subject to recurrent severe market cycles and financial crisis is open to question as
a model for universal applicability. Indeed the damaging consequences of the 2008 financial
crisis will impact severely upon the world economy, and could well dislodge the faith that the
market based governance system is the only rational and efficient one for the future. It is more
likely that solutions will be found to pressing problems of equity, sustainability and innovation in
a diversity of finance and governance systems, responsive to deeper and wider concerns than the
self-interest of the executives who control corporations, financial institutions and hedge funds
(Lazonick 2007).
2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 17

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Williamson, O.E. (1995) The Economic Institutions of Capitalism, New York: Free Press
 2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 23

VIII. TABLES AND FIGURES

Table 1 Highest Paid CEOs of US public Companies in 2006

Market
Bonus & Stock & 2006 Total Cap.
Company CEO Salary other options other (US bn)
options

1 Yahoo Terry Semel $250, 001 $ 125 $ 71, 410, 090 $71, 660, 216 $47

2 XTO Energy Bob Simpson $1, 208, 334 $31, 229,525 $27,052, 065 $59, 489, 924 $17.3

3 Occidental Ray Irani $1,300,000 $5,958, 639 $45, 563,945 $52, 822, 584 $45
Petroleum
E. Stanley O’Neal
4 Merrill Lynch $700,000 $18, 875, 298 $26, 800, 049 $46,375,347 $82

5 Danaher H. Lawrence Culp $1, 100, 000 $3, 949,746 $41, 165, 925 $46, 375, 347 $19.6
Country Wide
6 Financial Angelo Mozilo $2, 866,667 $ 21, 115, 639 $19, 012,000 $42, 994, 306 $22

7 Ford Alan Mulally $ 666, 667 $ 18, 834, 433 $ 19, 627, 000 $ 39, 128,100 $14

8 Apollo Group Todd Nelson $ 281, 250 $ 32, 345, 192 $0 $ 32, 626, 442 $11.5

9 AT&T Edward Whitacre $ 2, 100, 000 $ 7, 512, 964 $ 22, 152, 797 $ 31, 765,761 $105

10 Altria Group Louis Camilleri $1, 750, 000 $19, 909, 987 $ 10, 909, 987 $31, 677, 662 $182

Average $ 46, 375, 347

Source: Institute for Policy Studies (2007).

 24 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

Table 2 Highest Paid CEOs of European Public Companies in 2006

Market
2006 Total Cap.
Company Country CEO Euro bn

1 Renault France Carlos Ghosn $45, 500,000 €17.5

2 L’oreal France Jean-Paul Agon $19, 300, 000 € 35

3 Unicredit Group Italy Alessandro Profumo $18, 100, 000 € 69.2

4 Vodaphone Great Britain Arun Sarin $15, 200, 000 € 894

5 Assicurazioni Generali Italy Antoine Bernheim $14, 200, 000 € 27.7

6 Deutsche Bank Germany Josef Ackerman $12, 400, 000 € 53.2

7 AXA France Henri de Castries $ 12, 100, 000 € 41.9

8 Total France Thierry Desmarest $ 10, 800,000 $ 116

9 Societé Generale France Daniel Bouton $ 10, 700, 000 € 64.4

10 Banco Santander Spain Alfredo Saénz $10, 600, 000 € 88.4

Average $ 16, 890, 000

Source: Institute for Policy Studies (2007)

2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 25

Figure 1 Composition of Median CEO Pay in the US 1980-2001

Source: Hall B. J. (2003: 23)

ExecuComp and data derived and spliced together from Hall and Liebman (1998), cited in footnote 1, and Hall and
Murphy (2002), cited in footnote 17. The data from 1992 to 2000 are from S&P500 Industrial companies while the data
from
the earlier years are from a sample of Forbes 500 companies.
26 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

Figure 2 Comparison of CEO and Worker Pay in the US 1990-2005 ( In 2005 dollars)

Source: Institute For a Fair Economy (2006).

 2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 27

Table 3 Comparison of CEO Compensation and Ratio of CEO to Worker Pay 1998-2005

CEO compensation Foreign pay relative to

Percent Ratio of CEO U.S. pay, 2005 U.S. =100
( $ Thousands) change to worker
Country 1988 2003 2005 1988-2005 pay, 2005* CEO Worker

Australia $180, 760 $ 737,162 $ 707,747 292% 15.6 33% 82%

Belgium 383,718 739,700 987,387 157 18 46 99
Canada 423,358 944,375 1,068,964 152 23.1 49 83
France 404,331 780,380 1,202,145 197 22.8 56 95
Germany 412,259 1,013,171 1,181,292 187 20.1 55 106
Italy 342,492 893,035 1,137,326 232 25.9 53 79
Japan 502,639 484,909 543,564 8 10.8 25 91
Netherlands 396,403 716,387 862,711 118 17.8 40 87
New Zealand 476,926 396,456 -- 24.9 18 29
Spain 352,006 658, 039 697,691 98 17.2 32 73
Sweden 234,670 743,160 948,990 304 19.2 44 89
Switzerland 510,567 1,263,450 1,390,899 172 19.3 64 130
United Kingdom 453,485 881,047 1,184,936 161 31.8 55 67
United States 805,490 2,386,762 2,164,952 169 39.0 100 100

Non-U.S. average 383,057 794,749 946,931 173 20.5 44 85

* Ratio of CEO compensation to the compensation of the manufacturing production workers

Source: Table 3.47 from Mishel Lawrence, Jared Bernstein and Sylvia Allegretto, The State of Working America
2006-2007, an EPI Economic Policy institute Book, Ithaca, N.Y. ILR Press, an imprint of Cornell University Press,
2008.
28 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

Figure 3 Distribution of Stock Market Holdings by Wealth Class 2004

Source: Economic Policy Institute: The State of Working America 2006-2007

2009] A CRITIQUE OF THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE 29

Figure 4 World Exchange Market Capitalization (US $trillion)

Source: Blumberg
30 CLPE RESEARCH PAPER SERIES [VOL. 05 NO. 03

Table 4 Government Support for Global Financial Crisis 2008

USD
Europe $ 1.8 trillion
UK $ 856 billion

US $ 840 billion
Sweden $ 205 billion
South Korea $ 130 billion
Australia $ 10.4 billion
Rest of the world $ 105.12 billion
Total 3.95 trillion

Source: Compiled from

BBC Credit Crisis: World in Turmoil http://news.bbc.co.uk/2/hi/business/7654647.stm,
ABC News, Tuesday 21 of October, 2008. http://www.abc.net.au/
Reuters,http://www.reuters.com/article/forexNews/idUSTRE49J2GB20081020
IMF Global Financial Stability Report October 2008
http://www.imf.org/external/pubs/ft/gfsr/2008/02/index.htm