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Corporate Governance Failures

The Role of Institutional Investors in the Global Financial Crisis

Edited by James P. Hawley, Shyam J. Kamath, and Andrew T. Williams

Publication Year: 2011

Corporate governance, the internal policies and leadership that guide the actions of corporations, played a major part in the recent global financial crisis. While much blame has been targeted at compensation arrangements that rewarded extreme risk-taking but did not punish failure, the performance of large, supposedly sophisticated institutional investors in this crisis has gone for the most part unexamined. Shareholding organizations, such as pension funds and mutual funds, hold considerable sway over the financial industry from Wall Street to the City of London. Corporate Governance Failures: The Role of Institutional Investors in the Global Financial Crisis exposes the misdeeds and lapses of these institutional investors leading up to the recent economic meltdown.

In this collection of original essays, edited by pioneers in the field of fiduciary capitalism, top legal and financial practitioners and researchers discuss detrimental actions and inaction of institutional investors. Corporate Governance Failures reveals how these organizations exposed themselves and their clientele to extremely complex financial instruments, such as credit default swaps, through investments in hedge and private equity funds as well as more traditional equity investments in large financial institutions. The book's contributors critique fund executives for tolerating the "pursuit of alpha" culture that led managers to pursue risky financial strategies in hopes of outperforming the market. The volume also points out how and why institutional investors failed to effectively monitor such volatile investments, ignoring relatively well-established corporate governance principles and best practices.

Along with detailed investigations of institutional investor missteps, Corporate Governance Failures offers nuanced and realistic proposals to mitigate future financial pitfalls. This volume provides fresh perspectives on ways institutional investors can best act as gatekeepers and promote responsible investment.

Published by: University of Pennsylvania Press

Contents

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1 Introduction

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pp. 1-25

In late 2008 and early 2009, the subject of financial risk was widely debated and discussed among academics and practitioners, in the business press and on blogs, and among the general public, as well as in the U.S. Congress and parliaments abroad. Yet some of us were struck by how little serious attention (indeed, how little attention of any sort) was being paid to the relation...

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2 Beyond Risk: Notes Toward a Responsible Investment Theory

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pp. 26-51

This chapter argues that today’s dominant theory of investment, modern portfolio theory (MPT), is based on a definition of success that fails to acknowledge adequately the extent to which investments at the portfolio level can affect the overall financial markets. In particular, its techniques intended to control risks at the portfolio level while maximizing returns— such as diversification, securitization, hedging, arbitrage, and leverage—can create market-level risks that threaten financial and economic stability...

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3 The Quality of Corporate Governance Within Financial Firms in Stressed Markets

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pp. 52-82

The recent financial crisis has caused internal and external corporate stake-holders to increase their scrutiny of the quality of corporate governance within financial firms in stressed markets. This scrutiny includes examining the impact that financial models, financial products (e.g., credit default swaps), and business operating styles (e.g., the amount of financial leverage)...

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4 Chasing Alpha: An Ideological Explanation of the Catastrophic Failure in the U.K.'s Financial Services Industry

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pp. 83-96

‘‘Alpha’’ is shorthand in the City of London for supercharged profit, and ‘‘chasing alpha’’ is what Britain’s bankers, investors, and corporate chief executives did in the last two decades of the twentieth century and the opening years of this millennium, culminating between 2003 and 2007 in an orgy of leverage and reckless growth plans. But to most participants and observers, the years 1997–2007 seemed to show that chasing alpha worked. By the year 2007, the U.K. had come to play a pivotal role in the global financial services industry. The financial districts...

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5 Corporate Governance, Risk Analysis, and the Financial Crisis: Did Universal Owners Contribute to the Crisis?

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pp. 97-114

My colleague Andrew Williams and I ended our book on fiduciary capitalism (published in 2000) by suggesting that a critical element in corporate governance was ‘‘who will watch the watchers?’’—who will monitor the monitors? In light of the 2007–2010 financial and economic crises we should have added, ‘‘and for what will they monitor?’’ This chapter argues...

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6 Great Expectations: Institutional Investors, Executive Remuneration, and ``Say on Pay''

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pp. 115-143

The year 2009 was a watershed for the regulation of executive remuneration. Around the world, governments considered how best to regulate in light of evidence from the global financial crisis of a link between certain remuneration structures and excessive risk-taking.1 Two clear categories of regulatory response emerge from this latest crisis. First, there is the local...

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7 Against Stupidity, the Gods Themselves Contend in Vain: The Limits of Corporate Governance in Dealing with Asset Bubbles

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pp. 144-164

Existing laws on governance are aimed at preventing managers from abusing the resources that investors have committed to business institutions, by requiring corporate processes intended to detect and prevent misuse of those resources. The law does not require managers to maximize corporate resources. The law does not, and cannot, dictate outcomes of management...

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8 Real Estate, Governance, and the Global Economic Crisis

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pp. 165-187

The real estate market played an important role in the current economic crisis. Investors’ bullish perspectives regarding the residential and commercial property markets not only allowed borrowers access to cheap and a-most unlimited credit but also offered the possibility of raising large amounts of equity on the public capital markets. However, when the...

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9 The Sophisticated Investor and the Global Financial Crisis

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pp. 188-216

The financial instruments and risky practices that caused the global financial crisis of 2008 were enabled by decades of deregulation and anemic government enforcement efforts. The elements that combined to create the crisis were subprime mortgage securities, credit default swaps, highly leveraged hedge funds, and excessive...

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10 The Role of Investment Consultants in Transforming Pension Fund Decision Making: The Integration of Environmental, Social, and Governance Considerations into Corporate Valuation

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pp. 217-241

The global financial crisis of late 2007 and beyond is arguably the most severe financial crisis since the Great Depression. A number of the world’s leading financial institutions have either gone bust or been bailed out by government, global capital markets remain in a climate of unease and limited confidence, and governments around the world had to return to...

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11 Funding Climate Change: How Pension Fund Fiduciary Duty Masks Trustee Inertia and Short-Termism

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pp. 242-278

On January 27, 2010, the U.S. Securities and Exchange Commission (SEC) voted to provide guidance on when public companies should disclose the impact of climate change-related business or legal developments. While the SEC’s guidance does not constitute a legal change, it underlines more powerfully than ever that climate change is a risk that investors cannot ignore....

Notes

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pp. 279-334

List of Contributors

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pp. 335-336

Index

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pp. 337-342

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Acknowledgments

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pp. 343-344

The editors gratefully acknowledge the support of the School of Economics and Business and the Elfenworks Center for the Study of Fiduciary Capitalism at Saint Mary’s College of California for organizing the conference at which the chapters in this volume were originally presented. We also deeply appreciate the cooperation of the co-conveners of the conference: the Prin-...


E-ISBN-13: 9780812204643
Print-ISBN-13: 9780812243147

Page Count: 352
Publication Year: 2011

Research Areas

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Subject Headings

  • Financial risk -- Congresses.
  • Corporate governance -- Congresses.
  • Institutional investments -- Congresses.
  • Global Financial Crisis, 2008-2009 -- Congresses.
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