European Corporate Governance Training Network (ECGTN)

• Firm level ownership and financial data, including direct and ultimate ownership data, covering both cash-flow rights and control rights;
• Comparable data on firms’ financial statements, including balance sheet and profits and loss statement;
• Data on firm stock market performance, including relative equity valuation and rates of return;
• Corporate governance actions by firms, including the composition of boards, the act of appointment of independent directors, the voluntary adoption of certain corporate governance charters and bylaws, the presence of incentive contracts for managers;
• Countries’ institutional frameworks, including detailed information on countries’ legal framework, various corporate governance rules, accounting and auditing rules and arrangements, structure and role of financial markets, setup of stock markets, detail on self-regulatory roles, and trading systems.

Studies to date suffered from some methodological deficiencies. Most empirical studies linking corporate governance quality to firm or economic performance suffered from reverse causality, endogeneity and/or sample selection problems. In some cases, standard results had been reversed when other econometric techniques were applied, for example when linking insider ownership to corporate performance. Methodological advances were needed.

Clearly, institutional differences between countries and over time affect the nature and scope of corporate governance issues. While there had been a tendency to focus on institutional similarities, Europe had quite large institutional differences, many of which had not yet been documented. Surprisingly little attention had also been paid to the many “natural experiments” in the form of corporate governance reforms in many European and other countries over the past decade. Identifying both the underlying factors driving the reform changes as well the effects of the changes on economic growth and well-being would help guide reform.

In order to close the gap and advances in State of the Art methodology, ECGTN aimed to bring advances in several key areas.

Comparing the need of policy makers, industry and society for knowledge and competence on corporate governance with the available scientific evidence shows that there was a clear gap in Europe.There are a number of explanations for this absolute and relative shortfall in Europe:

• Few early stage researchers were trained in the area of corporate governance in Europe as few universities had the scale and skill to offer advanced level courses. The surveys revealed that a good portion of the pertinent research on Europe was conducted by early stage researchers working in the United States, confirming that research and training opportunities in Europe were lacking.
• Data availability in Europe was much more limited than in the US, making empirical research more complicated, suggesting a need for cross-country increased efforts.
• Research on Europe was more complicated because it must take into account a range of governance arrangements that are often rooted in local culture and language.
• Corporate governance research involves elements of economics, finance, management, political economy and law, disciplines that did not traditionally engage in joint training programmes. The ECGTN network features nodes in each of these disciplines.

The training experience was enhanced by inclusion of nodes from Turkey, Switzerland, Canada, and the United States, each contributing special expertise and training opportunities. The training experience was further enhanced by association with the European Corporate Governance Institute (ECGI) an interdisciplinary pan-European research Institute with a wide range of industry contacts, and the Centre for Economic Policy Research (CEPR), the longest standing "think net" in economics and finance in Europe. Together, ECGI and CEPR brought an even wider group of scholars and training opportunities to the network.

In order to close the gap and advances in State of the Art methodology, ECGTN intends to bring advances in each of these areas:

While there are many efforts underway to enhance the theoretical foundations of corporate governance, some of these lack feedback from practice and the interaction between various disciplines. Theory, and especially economic and financial theory, needs to take account of institutions, in terms of their impact and how they are created. While traditionally European legal theory is heavily based on insights from case studies, it is often formulated under the influence of sociology and philosophy and in isolation from finance and economics. By having representatives both from academics from a range of disciplines, and from industry, the network will produce the stylized facts that properly inspire new theories. The interaction between economists and legal scholars is expected to produce new theoretical insights in the financial area. The interaction of legal scholars with scholars from finance and economics will bring new theoretical approaches to legal thinking and introduce more quantitatively oriented methods.

The earlier collective efforts in the area of data on ownership and control have shown the possible gains from a European research network. Today, the need is for more data as well as for more synergy in data collection among researchers. While databases have become more easily available, many are not comparable across countries and are not necessarily available to a larger group of researchers. The network will build the means for greater exchange of data.

New empirical research will have to address important methodological issues, including the simultaneity and endogeneity of many measures impeding simple inferences about causality from correlations. More structural models will be needed, both at the level of the individual firm as well as at the level of the economy. The network will allow for interaction between researchers with a broad spectrum of backgrounds, including more quantitatively oriented economists and econometricians.

Institutional differences and “natural experiments”: Testing corporate governance theories requires differences in institutions or changes in institutions. Europe has both a wide variety of corporate governance systems and over the past few years a broad range of corporate governance reform has been pursued. A network operating on a European scale can document these differences, create new databases to capture these differences with their various subtleties, and become a global focus for the study of the causes and effects of policy changes.

Hence, ECGTN has the potential of closing the gap and advancing the international “state of the art”.

The Co-ordinator of the network is Marco Becht of the Centre for Economic Policy Research (CEPR). He is assisted in his management of the network by a Network Steering Committee. 

Day-to-day project management

CEPR, through its day-to-day management of the network activities, acts as the co-ordinator of the reporting, co-operating fully at all times with other institutions on matters of decision making, and serves as the conduit for the network teams to develop planning by consensus or any shorter-term contingency plans if required. In this way, a certain degree of autonomy will be given to each team with which to use its funds, once they have been disbursed by the co-ordinator, for its training expenses and for other costs related to the research training-related transfer of knowledge activities as envisaged by the network as a whole.

Budget management

CEPR will monitor the costs incurred by each team periodically based on the reporting requirements laid down by the Commission and advance any monies to the teams based on their level of expenditure at regular intervals.

Dissemination of Research

Both CEPR and ECGI will disseminate research, which will be achieved initially via the circulation of research results in the CEPR Discussion Paper Series. This will ensure the work of the network receives the widest possible professional scrutiny, both in the research and the policy communities. On average 500 copies of each Discussion Paper are circulated throughout Europe and the rest of the world. CEPR Discussion Papers are also abstracted widely, and can be downloaded in full from the CEPR web site to which the project web site will be linked. CEPR will also take responsibility for establishing and managing the Network’s own website, which will add to the accessibility of the research produced by the teams. In addition, highlights of the network's research will be featured in its newsletter European Economic Perspectives, which is distributed to over 14,000 members of the policy community and the private sector worldwide.

ECGI publishes Working Papers through its two series on Law and Finance, and these are available free of charge from the Social Science Research Network (SSRN). It also publishes several books. Overall, its research output features prominently on www.ecgi.global, which currently ranks as second most visited web site on www.google.com when searching for "corporate governance”.

Transfer of Knowledge

CEPR and ECGI will organise and administer the network's Transfer of Knowledge events and the final conference, which will involve participants in the project, as well as other members of the European research community and senior policy-makers. CEPR will organise and administer the academic conferences scheduled for months 19 and 43 (the latter being the final conference); the research workshops planned for months 11, 22, 34; and the summer schools for months 14 and 38. The final conference will aim to summarise the key results of the project and to examine the policy implications of the research. It may be that the Centre will publish the papers presented there as a conference volume or policy paper if funds allow for this.

ECGI will be responsible for organising all the other ToK events: the two academic conferences taking place in months 7 and 31, and the two research workshops scheduled for months 22 and 46.

ECGI – Management of the Industry Training Programme

ECGI will use its existing links with the industrial nodes in the network to facilitate their integration into the Transfer of Knowledge activities and to supervise the Industry Training Programme through which they will provide training opportunities for the ESRs hired by the network training nodes. Specifically, ECGI will:

• liaise with and act as the network’s point of contact for the industry nodes throughout the duration of the contract
• arrange meetings of team leaders/ ESRs’ mentors with industry node representatives
• facilitate and supervise placements for ESRs at the industry nodes
• foster collaboration between training and industry nodes and ensure the participation of the latter in network management and Transfer of Knowledge activities.

The project will use the latest lines of research that are being pursued in regard to both theoretical and empirical analysis of corporate governance. It will draw on new areas of research in the field of economics, finance, management, political economy and law. It will exploit the rich endowment that Europe possesses in the field of corporate governance reflecting its diverse institutional, legal and political structures. It will also draw on the varied historical evolution of corporate governance systems. It will therefore utilise these cross-sectional differences across countries and time, as well as between institutions and firms within countries.

The first line of research involves providing training in relevant theoretical tools. There have been considerable advances in the modelling of corporate governance arrangements drawing on principal-agent, imperfect information and incomplete contract models. These have broadened our knowledge of the relevance of corporate governance systems and the different instruments of corporate governance. However, there remains a great deal of theoretical modelling to be done.

As one illustration, the recent corporate governance failures in the U.S. have pointed to the failure of intermediary institutions, such as accountancy firms, credit rating agencies and investment analysts, in providing appropriate monitoring of corporate activities and performance. There are a variety of causes that have been suggested ranging from the inadequate access to information of these agencies to collusion and corruption. It is critically important that we improve our understanding of the way in which different institutional arrangements operate and the factors that promote good corporate governance.

A critical element of the corporate governance network will be to provide students with tools to undertake theoretical analysis at the frontiers of research. They will develop skills in game theory, contracts and incomplete contract models. In addition they will develop an understanding of current research which is being undertaken in, law, finance and political economy modelling.

The second line of research is empirical. There are two aspects to this. The first is to assemble relevant data sets on corporate governance, institutional structures, legal systems and political institutions. Several of the principal academics are leaders in this line of research and have gained considerable experience in undertaking both cross-country and single country data collection. There are some relevant data sets that are available on companies and financial institutions but there is also a pressing need for data on particular aspects of corporate governance.

An example of this is the extent to which institutions are active in Europe in initiating corporate actions against poorly performing management. There has been much study of the role of institutions in corporate governance in the US but little is known about how equivalent institutions in Europe compare. The links to industry and financial institutions will be invaluable in assisting in such data collection.

Linked to this is the empirical analysis of the data sets. As previously indicated, a problem that many existing studies have encountered is one of causality and exogeneity of the data. There are, firstly, econometric techniques that provide methods for testing and correcting for endogeneity. Secondly, there are differences across countries and across time in Europe that can be exploited to great advantage to evaluate the impact of exogenous influences on corporate performance. Examples are the institutional reforms that have recently occurred in transition economies and during the course of the twentieth century in Western Europe. Such approaches have already been used in a study of the impact of institutional change over the twentieth century on the ownership of corporations. It is therefore intended that students in this programme will develop expertise in the design and assembling of large data sets and in the application of the latest econometric techniques.

Integration of Complementary Methods

A distinguishing feature of the network and the research programme is its multidisciplinary approach on the interface of economics, finance, management, political economy and law. This will be reflected in the type of data that will be collected. We intend to combine information on corporate governance, ownership and control of firms with data on the legal and political structure of economies. There are already some international data banks that can be used and we will supplement them with more detailed information on individual countries. The type of data that we have in mind include descriptions of changes in the regulatory rules relating to disclosure of information, anti-director provisions, and rights of shareholders and creditors. Such detailed analysis has already been undertaken for the UK and in the process it has revealed some significant insights on the link between law and corporate governance.

One aspect of this insight comes from the substantial structural break that occurred in the UK in the middle of the twentieth century. There was a marked shift in regulation from a largely unregulated to a heavily regulated capital market in the second half of the twentieth century. This shift has allowed researchers to evaluate the way in which regulation affects patterns of ownership and control of corporations. There is considerable opportunity to apply such techniques to the study of evolution of corporate governance in other countries. This area of the evolution of the corporate governance and control of corporations is one of the most interesting current lines of research and it extends the interdisciplinary approach to business history. It provides students on the network with training in the use of historical sources of information.

There has been much discussion of the policy reforms that are required to overcome the failures of corporate governance observed over the last few years. Many reforms have been proposed and one of the primary objectives of the network will be to evaluate the appropriateness of different proposals. The diverse institutional and regulatory structures in Europe provide a rich basis for evaluating these proposals. In particular, we already have information on such factors as the structure of boards, the representation of independent directors and the separation of chairman and chief executive officers of companies in different countries. We will use this to evaluate the range of policy proposals that are emerging from different countries and the European Commission concerning corporate governance reforms and takeover proposals. The analysis will give students basic insights into how to evaluate policy reforms.

In addition to econometric analyses and large data set studies, the research will involve detailed case studies and clinical papers. For example, in the context of the evolution of ownership and control to which reference was made above, much insight came from looking at specific cases. Students will therefore gain training in case study writing as well as large data set analysis.

Although there are some links with an existing RTN on ‘Understanding Financial Architecture: Legal and Political Frameworks and Economic Efficiency’ (funded under the Fifth Framework Programme), there will not be duplication of research and training activities proposed by this network. This previous network has been highly successful in training and developing researchers in areas of applied finance economics with research produced on various aspects of the analysis of law, institutions, and their impact on economic efficiency. ECGTN will train researchers in areas related specifically to corporate governance.