New Delhi: Dean of Saïd Business School at Oxford University, Colin Mayer is considered an authority on corporate governance, finance, regulation and taxation. He has consulted for numerous corporations, governments, regulators and international agencies across the world. Mayer also heads Oxera Holdings Ltd, one of the largest independent economics consultancies in the UK.
Listing failures: Mayer says systemic risks weren’t monitored adequately.
In an interview during a recent visit to India, Mayer spoke about the global corporate governance crisis, its possible solutions and the role an active investor could play in solving governance problems. Edited excepts:
In some of your recent works you have mentioned that countries with different corporate governance standards are all in the midst of a crisis. If you were to identify a common thread running through the crises, what would it be?
There has been a serious failure of information on the part of investors. What investors thought was happening was not happening. There has been a serious disclosure problem.
Is there some way to eliminate the large-scale fraud that afflicts the entire system?
One of the main failures that occurred (in the US) last year has been the failure by regulatory authorities to take into account risks that exist across countries.
There has been inadequate monitoring of those systemic risks—and inappropriate response to them when they emerged.
At the corporate governance level, what do you think would be the most obvious solution today?
A lot of success in addressing corporate governance issues is (achieved) by having more active institutional investors...when a company puts out a new issue prospectus, there is a huge volume of information sent to investors. But no one has got any time or ability to absorb the information...where institutions are encouraged to take an active role in governance, then one does observe significant improvements. It need not necessarily be institutions, it can be large shareholders.
In some countries, it is families who play that role. So, for example, in the case of the Indian economy, families are much more significant as dominant shareholders.
In the US, where professional managements dominate, was there a conflict of interest with shareholders?
Well, there clearly were significant failures on the part of some financial institutions in the US. Were they primarily in groups we normally associate with governance, namely, pension funds and life insurance companies? The answer is no. The failure has been occurring in commercial banks.
At the end of the day, the ultimate owners are in large part the financial institutions. Active governance on their part would actually have done quite a lot to address some of the issues that have arisen. Most people point their finger towards the board of directors. Actually if you look at the board of directors of some of the most prominent failures, they had what looked to be a pretty professional set of board members.
Some of your works give the impression that you don’t think independent directors are a solution.
The evidence is that the relationship between governance and independent directors is unclear. Independent directors are in a board where they are there to advise the chief executive and periodically they are supposed to be performing a sort of monitoring and punishment function.
The notion that independent directors are going to solve governance problems, I think, is misleading.
Let’s take the case of a country such as India where families play a dominant role...
Yeah. And in that respect family ownership has a lot of merits. They want to hand it over to their sons and daughters... There is quite a lot of evidence now that in at least some areas, family firms outperform non-family firms.
On the other hand, families, for the very same reason, may pursue interests that are not necessarily desirable from the point of view of the commercial success of the company. So, there can be advantages, but there can also be problems. What I advocate is diversity.