The Two-Tier Board Structure: An apt model for New Zealand?

Table of Contents

I. INTRODUCTION

II. BOARD STRUCTURES
A. Introduction
B. US Board Structure
1. Introduction
2. Board of Directors
3. The Problem of Effective Corporate Monitoring
a. Enron Corporation
b. WorldCom
c. Remark
4. Reformations by the Sarbanes-Oxley Act 2002
C. New Zealand Board Structure
1. Introduction
2. Board of Directors
3. Non-Executive Officers and Audit Committees
4. Social Responsibility
D. German Board Structure
1. Management Board vs. Supervisory Board
2. Rigid Separation
3. Size of the Supervisory Board
4. Directors’ Appointment
5. Additional Shareholder Rights
6. Remark

III. EVALUATION OF THE TWO-TIER SYSTEM
A. Introduction
B. Prospects
1. Clear Allocation of Responsibilities
2. Fraud Prevention
3. Equilibrium with Stakeholder Interests
C. Negative Aspects
1. Increase in Bureaucracy
2. Unattractive to Top Managers
3. Threat of Power Imbalance
D. Reality Check
1. Introduction
2. Codetermination
3. Banking Background – the Danger of the Insider System
4. Interlocking Director Problem

IV. TWO-TIER SYSTEM IN NZ?
A. Introduction
B. Average Size of New Zealand Companies
C. Codetermination
D. New Zealand Shareholders
E. Interlocking Relationships
F. Remark

V. SUMMARY AND CONCLUDING REMARKS
APPENDIX A: Shareholder Value of 40 major German Stock Companies in the late Nineties in Order
APPENDIX B: Aggregated Voting Blocks of German Banks (1986)
APPENDIX C: Comparison of Institutional Voting Blocks (1991)
APPENDIX D: Percentage of Stock of Largest German Corporations held by German Banks (1990)
APPENDIX E: Average Period of Time in Office for CEOs of Germany’s 40 largest Stock Companies (1960-1997)
APPENDIX F: List of German Executives who hold Office on more than one Stock Company and Number of different Membership
APPENDIX G: Interrelationship of the Allianz Group and the Deutsche Bank AG

Bibliography

The Two-Tier Board Structure: An apt model for New Zealand?

I. INTRODUCTION

In times of global corporate disasters many turn to corporate board structures in order to find solutions. The board of directors is responsible for monitoring the management and is therefore in the focal point of many legal scholars.^[1] Current US board structures have proved to fail to provide sufficient supervision. Scandals such as Enron and WorldCom have shuttered especially American but also European legislatures. Highest priority, at present, is to re-establish investors’ faith in the securities market.^[2] Corporations are facing reluctant investments or even fearful avoidance of the stock market.^[3] Many US scholars see a solution in the adoption of the German two-tier board system^[4] and the European Union gives the managements of European Corporations, the Societas Europeas, the possibility to opt for the two-tier-system. In the 1997 Report on the Corporate Governance Movement in France, even the Organization for Economic Co-Operation and Development (OECD) praised the two-tier-system to be superior and more effective in monitoring management than the unitary system, which is in place in the majority of countries, including the United States of America (USA) and New Zealand, at the moment.^[5] The two-tier-system is on the rise. France offers an optional adoption for major stock companies^[6] and the Netherlands and the Scandinavian countries demand a two-tier structure once a stock company has reached a certain size.^[7]

New Zealand has not faced similar scandals to Enron. Therefore, some might think that there is no necessity to indulge in a discussion on changing board structures. However, the New Zealand market is highly reliant on international investments^[8] and has lately lost ground in the global competition in this regard.^[9] The USA and Germany are both undoubtedly global players and, as André puts it, “by virtually any standard … the world’s largest and most successful economies”.^[10] Germany has a large influence on the legislation of the European Union,^[11] one of New Zealand’s largest trade partners.^[12] Studies have revealed that large international companies impose the two-tier system on French subsidiaries.^[13] If this is done in order to maintain more formal control over the subsidiary or to give the subsidiary more flexibility, is irrelevant. The American jurist Aste concludes that “the two-tier structure may provide [foreign] investors with an additional incentive to invest” in a market.^[14] That German companies would feel more comfortable with a familiar board structure, is apparent. However, the US-American tycoon IBM has implemented the two-tier system in France as well.^[15] Consequently, even countries which are used to a unitary board structure adopt the two-tier board if possible. The New Zealand stock exchange has stagnated for the last decade^[16] and average companies of its local rival Australia have been two and half times more successful in growth than New Zealand companies.^[17] Since US companies have an impact on the world’s economy and still are the largest investors worldwide, it is important for New Zealand to monitor this development closely and determine if it has similar problems which need to be fixed.

This paper evaluates the two-tier system and determines if it is an apt model for New Zealand considering the weak social relations of listed public companies and the country’s lack of independent internal supervisors. Section II shows the board structure in the USA, New Zealand and Germany. Recent reforms in the USA are presented and its main shortfall in the context of board structures is highlighted. With a lack of truly independent directors, US reforms were in terms of corporate monitoring by the board in vain. Then, the paper turns to New Zealand company law and concludes that, similar to its Common Law sister, it lacks real independent supervision and weak social responsibility. Thereafter, the German two-tier system is introduced. In the German system independence is achieved by a structural separation of the supervisor and the supervisee into two entirely separated boards which work without the interference of the other. In Section III, this system is evaluated concluding that the theory may lead to an improvement in corporate governance but that its implementation in Germany is ineffective. Following this result, Section IV looks at the systems’ value to New Zealand and the issues which need to be considered. Section V concludes that New Zealand should refrain from adopting the two-tier system because its complexity would not provide independent directors necessary for objective supervision.

It is significant to note that this study is not exhaustive. Rather, it was subject to various limitations. Time and word restrictions prevent a comprehensive account of all legal matters involved. The complexity, especially of the German statutes and its underlying system has been abridged in order to achieve more clarity for the New Zealand reader. Details and specific characteristics of the law and minor variations have been omitted for the sake of displaying a more general and more understandable system.

II. BOARD STRUCTURES

A. Introduction

The underlying reason for a lack of effective corporate monitoring is frequently assigned to the respective board structure.^[18] At present, there are only two corporate governance models in existence. Cioffi defines them as “the neo-liberal model embodied by the market-driven American [USA] regime, and the neo-corporatist model represented by the codetermined and bank-centred German regime”.^[19] Those two models, although dealing with the same problematic matters of corporate governance, define duties and rights of the directors differently and structure the board of directors in a different way. These different approaches to corporate governance reflect different perspectives these countries have on the purpose of the board and the problems that need to be mitigated and solved.^[20] Mostly these perspectives stem from different legal and political understandings of capitalism and corporate social responsibilities. Germany, for instance, regards itself as a social market economy and sees the fundament of its economy in social capitalism.^[21] The German government therefore follows a course of consensual, negotiated (neo-corporatist) corporate governance, whereas the US economy is more market-driven (neo-liberal) in a manner laid down by the Chicago School.^[22] New Zealand also follows the neo-liberal approach. This can, for example, be derived from a speech of Prime Minister Helen Clark who explained that the 2002 Securities Market Regulation attempts were “a market led approach to economic development, not one that is centrally planned” motivated by the objective to “unleash the potential of the private sector and not to replace it”.^[23]

As a consequence, the role of directors and of corporations in general is viewed differently in Germany than in the USA or New Zealand. Terminologically, the differentiation is being made between the Anglo-Saxon system and the Rhineland model, which focuses much more on a co-operation of labour and capital.^[24] Basically, there are three dissimilarities which influence the arrangement of corporate governance in the respective countries.

- Civil Law v. Common Law

Firstly, Germany is part of a legal system opposite to the one of the USA and New Zealand. New Zealand and the USA are Common Law countries, whereas Germany belongs to the legal family called Civil Law. The legal systems of Civil Law countries were originally based on Roman Law, the Corpus Juris Civilis.^[25] Therefore Civil Law systems are characterized by comprehensive codification with a primary focal point on the legislature.^[26] The Common Law, on the other hand, has organically grown. It relies rather on case law and precedents which is supplemented by narrow and casuistic statutes.^[27] Although particularly the US legislature has attempted to reach a unified and comprehensive codification in most areas of the law,^[28] its legislative power is much more limited than their Civil Law counterpart’s. Consequently, many areas of law are not regulated and are subject to self-regulation and contractual agreements among the citizens.^[29] In Civil Law countries such as Germany, the rules for corporate management and market strategies are set by the government, diminishing possibilities of bargaining processes and self-regulation. The government is thereby able to impose duties and directives in order to uphold social values on companies more easily than governments of Common Law jurisdictions. The USA applies rather a structure of “principle and exception” determining its fiduciary law.^[30] This is a result of its system of judge made law, which is typical for Common Law countries and also applies to New Zealand.^[31] Relying on judicial decisions leads to a case-by-case reconciliation of opposing principles and interests, avoided by Civil Law pre-codification.^[32]

- Shareholder v. Stakeholder

Secondly, the jurisdictions differentiate in terms of who has a right to determine a company’s future. Corporate actions directly affect two groups of people: shareholders and stakeholders. Shareholders own the company through shares.^[33] In the USA, the Supreme Court of Michigan held in its landmark decision in corporate governance Dodge v. Ford Motor Co. that a “business corporation is organized and carried on primarily for the profit of the stockholders”.^[34] Shareholders are the principal whereas management is the agent.^[35] In order to maximise profits the principal may demand that the agent engages in risky, short-term investments.^[36] In a shareholder-based economy the relationship between the principal and the agent is most significant. This is a very market-driven, purely capitalistic approach disregarding companies’ social responsibilities.

The term “stakeholders”, on the other hand, encompasses employees, sub-contractors and the general public.^[37] In a stakeholder-oriented economy stakeholders participate actively in the company’s management and decision-making. This approach acknowledges the impact companies have on their surroundings and tries to hold them responsible for it. Professor Karmel of the Brooklyn Law School claims that “large public corporations … are social institutions imbued with public interest”.^[38] Consistent with Keynes’ theory of directing the economy through control and incentives, the state tries to counterbalance the current situation of the corporate firm being “the primary engine of economic organization, competitiveness, growth, and innovation [as well as its effect on] the distribution of wealth and resources”.^[39] The advantage of this understanding is that stakeholders have a chance to determine their own (professional) future minimising hold ups in the company’s production line.^[40] The legislature provides the legal framework for equitable negotiations and bargaining between stakeholders and the management about major corporate decisions.^[41] However, it may be disadvantageous that stakeholders focus rather on long-term goals avoiding risky investments which may have led to large profits and larger dividends for the shareholders.^[42]

While US corporate law has adopted a shareholder-approach, Germany follows a stakeholder-regime guaranteeing rights to participate in the governance of the firm to various social groups. In Germany, as a result of its Civil Law statute-driven legal system, companies are “forced [by federal law] to recognize competing interests and normative claims as equally legitimate”.^[43] Therefore, these corporations cannot favour shareholder or managerial interests over stakeholder, primarily labour, interests.^[44]

- Insider System v. Outsider System

Finally, there are differences in terms of the accumulation of stock ownership and the relevance of institutional investors.

The so-called insider system can be characterised by a close tie to employees and institutional investors, such as banks or insurance companies.^[45] The term insider system is used because this form of management control is solely carried out by intermediaries holding stake in the firm.^[46] Larger investors build ‘blocks’ and control managements through their voting power.^[47] The outsider system is reliant on outside control mechanisms, such as market demand and takeover threats.^[48] Employees and directors hold only a short-term relationship with the company,^[49] and the outsider system applies usually where the shareholder ownership is highly dispersed. In the US as well as the New Zealand market the outsider system applies. Capital is achieved through equity and shareholders are spread all over the country.^[50] Although the number is growing, institutional investors still do not play as great a role in the USA as they do in Germany; there are usually no majority shareholders.^[51] The German stock market depends on institutional investors which influence companies internally. It is, therefore, an insider system.^[52]

These fundamental differences in approaching company law need to be kept in mind when looking at the legal structures in the following subsections.

B. US Board Structure

1. Introduction

The USA has incorporated a single-tier corporate system (board of directors), also known as the unitary or the one-tier system.^[53] The main parties to corporate governance in the USA are officers, directors, and shareholders. Company Law is primarily state law, but there are predominant characteristics present in companies of every state.^[54]

2. Board of Directors

The main responsibility of the board of directors of American corporations is to monitor management.^[55] The board of directors is required to select, evaluate, determine remuneration of, and replace the senior executives.^[56] In order to evaluate proper management it also supervises the conduct of the corporation’s business actions.^[57] The day-to-day business, on the other hand, is delegated to one or more officers acting as agents for the company.^[58] The standard model for corporate structuring, applied by the majority of American companies, assigns the authority to bind the company in ordinary transactions to the CEO.^[59] Sometimes courts even assume that the CEO retains such power, even though an official delegation may not have taken place.^[60]

Shareholders hold the power to elect and to remove directors and to vote on fundamental changes of the company.^[61] However, they have neither the power to initiate nor to compel business actions.^[62] Their only influence on management is therefore through the board, whose members they can remove. This separation between ownership and control is the reason for many company law regulations and the underlying concept of shareholder primacy.^[63] The separation of ownership and control made shareholders in the USA relatively powerless.^[64]

3. The Problem of Effective Corporate Monitoring

Corporate collapses caused by executive misconduct and fraud are still mainly a US problem and have not occurred to the same extent in Germany or New Zealand. Many attribute the recent corporate disasters to inefficient corporate monitoring by the board of directors.^[65] Chief executive officers have too much power enabling them to minimise supervision by the board. This problem, although a US one on the first sight, has developed to a phenomenon of global interest. US investors influence worldwide markets and the US government pressures other countries, such as New Zealand, to follow their lead in corporate governance regulation.^[66] Consequently, legal professionals all around the globe have been busy in analysing the scandals that led to US corporate governance reform endeavours. In order to understand what needs to be reformed in one’s own country, it is necessary to examine the major US scandals that reached world fame, namely Enron and WorldCom.

a. Enron Corporation

The Houston based Enron Corporation was an energy company in the field of gas and electricity trade as well as the communication sector.^[67] In 2000, Enron employed 21,000 people and claimed revenues of US $101 billion.^[68] It was perceived to be “America’s Most Innovative Company” for six consecutive years by Fortune Magazine. It was also on Fortune’s “100 Best Companies to Work for in America” list in 2000.^[69] By means of accounting strategies Enron’s management misled the board, the company’s shareholders and the general public concerning its financial status. It created “special purpose entities” (SPE)^[70] in order to shift debts from Enron’s books and to hide Enron’s credit risks.^[71] In order to take unprofitable entities of Enron’s books, management transferred such entities to its SPEs.^[72] Thereby Enron appeared to be financially much better off and more profitable than it really was. The executives and a few insiders, namely ‘trustworthy’ employees engaged in insider trading, knew about this process; investors, on the other hand, did not.^[73] They were encouraged to buy Enron stock at horrendous prices while Enron’s Chief Executive Officer (CEO) Kenneth Lay and other executives sold their shares.^[74]

Eventually, in October 2001, the company had to announce a restatement of earnings amounting to several billion dollars. Enron’s management also had to admit that it had improperly recorded US $1.2 billion in notes receivable transactions.^[75] Enron’s board of directors were oblivious to “the economic rationale, the consequences, and the risks of the transactions” conducted by the management.^[76] The imposture was only revealed because one of the company’s auditors had discovered the fraud while reviewing one of the SPEs.^[77] In the aftermath, Enron executives were charged on 53 counts. The indictment included bank fraud, making false statements to banks and auditors, securities fraud, wire fraud, money laundering, money laundering conspiracy and insider trading.

Thousands of employees and investors lost their life savings, children’s college funds and pensions.^[78] Enron had to file bankruptcy in December 2001.

b. WorldCom

WorldCom was the second largest long distance telecommunication company in the USA.^[79] The company had grown primarily by acquiring other telephone companies.^[80] Management’s strategy was to treat operating costs as capital investments.^[81] They achieved a deceived picture of WorldCom’s declining financial status by means of two fraudulent accounting methods: Firstly, they underreported their “line costs”^[82] by capitalizing them on the balance sheet rather than expensing them properly. Secondly, they inflated revenues with bogus accounting entries, “corporate unallocated revenue accounts”.^[83] Again, the board did not prevent the fraud. It might be assumed that the directors either felt too comfortable with executives, as close bonds were common practice in board rooms, or that they lacked necessary monitoring means.^[84]

In June, 2002, the company had to announce that it had overstated earnings by US $3.8 billion in the previous year and that it had to lay off 25 per cent of its work-force.^[85] The company’s market capitalization slumped from US $115 billion to less than US $1 billion,^[86] until it was forced to file for bankruptcy in 2002, which was considered to be the largest such case in US history.^[87] In the post-bankruptcy era, previous bondholders received merely 35.7 cents in the dollar in bonds and stock in MCI, WorldCom’s successor.^[88]

c. Remark

These scandals do not only show that fraudulent executive actions are common but also that the damage does not only include major investment losses but also large-scale lay offs and the loss of credit debts. Executives easily persuade the board of directors by either manipulating facts or by holding back crucial information. Close personal involvement might arguably be another reason executive managers were able to act uncontrolled. The labour force as well as investors are bound to ‘apathy’ because they hardly have any mentionable influence in the unitary system. Employees not only lose their job but also their pensions if management manoeuvres a company into its decline. Shareholder as well as stakeholder interests were affected similarly and simultaneously. At Enron and WorldCom, the boards of directors have failed their duty of competent supervision and other supervisory institutions were not in place.

It became apparent to the US government that legislative steps were necessary to fight corporate fraud.^[89] The next subsection shows how the US government reacted to the lack of effective supervision and concludes that a more profound restructuring might be necessary.

4. Reformations by the Sarbanes-Oxley Act 2002

As a result of the recent scandals in the US economy, Congress enacted the Sarbanes-Oxley Act 2002 (SOX).^[90] In order to prevent any more corporate governance failure, the federal government attempted to obtain more control over those directors with the duty to monitor management.^[91]

Among other improvements, SOX provisions require that companies have an audit committee consisting solely of independent directors. Every member of the audit committee has to be on the company’s board of directors.^[92] Like a second board, the audit committee has the duty to monitor auditing and thereby the financial management of the firm.^[93] The independence of its members is intended to prevent interference from management.^[94] The audit committee comes, therefore, closest to a separate internal supervising institution and arguably constitutes one of the major vehicles of fighting corporate frauds in the USA.^[95]

Krackhardt points out that the standard answer in recent years has been to focus on independent directors in fighting corporate frauds.^[96] Although it has always been unquestioned that directors of the board are supposed to be independent, there has been a dispute on how to define independence.^[97] Ideally, an independent director is free from any relationship with management and any other business interests in the company that could possibly interfere with the exercise of an independent judgment.^[98] Section 301(3)(B) of SOX defines an independent director as a person who does not accept any consulting, advisory, or compensatory fee from the entity and who is not affiliated to the company or any subsidiary in any way. SOX regulations emphasise the importance of independence because of an improved corporate governance situation which arises when directors do not have any personal interests at stake and can decide objectively. They are determined by the company’s best interest and their conscience only and not their own advantage.^[99] Although this can only work to a certain extent as with time they become more and more involved in the company’s business,^[100] they are regarded as an important counterbalance to management’s disproportionately powerful position.^[101] Risks of implementing primarily independent directors are that they might not devote enough time or lack knowledge of the specific needs of the company. Therefore, they may be reluctant to participate properly which would give even more power to the executive management.^[102] Apparently, these are just speculations and do not necessarily need to be true. Finding appropriate directors is, from the author’s perspective, as vital and yet difficult as finding successful executives.

All in all, it is interesting that in terms of board structure the US legislature relies solely on independent directors. Indeed, these directors have to serve on a special audit committee. Nonetheless, it is not clear if this change enforced by SOX is really the appropriate solution for America’s corporate shortcomings. Krackhardt questions the logic behind separate audit committees and independent directors and suggests that a separate board might have been more adequate.^[103] The members of the audit committee are also members of the board, a fact which again undermines their independence. Without a doubt, they would be more willing to criticise board and management decisions they did not participate in reaching than those they took part in themselves.^[104] Therefore, the reform attempt does not, despite any apparent intention, ensure true independence and thereby autonomous and separate supervision. In theory, the German two-board structure, on the other hand, provides for improved shareholder protection as a group of people without a vested interest in the firm is to approve and control management’s decisions.^[105] As will be shown later, strict separation is a key issue of the Rhineland Model.

In the author’s opinion, the fundamental structure of corporate governance in the US was left untouched by SOX. The regulations do not only fail to establish ‘real’ independence in case of audit committee members but it also lacks any further attempt to install more independence among directors who are, separate from the management, in charge of supervision. Without denying the many control mechanisms SOX provides, it appears inefficient in terms of separate inside monitoring. Owen disregards SOX in the context of board structures as it hardly delivers any contribution to the board structure debate and fails to deal with “inside directors”, meaning dependent supervisors.^[106] It seems like the US legislature did not want to interfere too much with the states’ legislative power over company law. The result seems to be more an effort to mend recent corporate problems than finding an ultimate solution which may involve the reformation of the whole system.

C. New Zealand Board Structure

1. Introduction

New Zealand company law is a mixture of case law, statutory provisions, and self-regulation by the market. It is primarily dominated by the Companies Act 1993 (CA) which defines the creation, operation and termination of New Zealand companies.^[107] New Zealand company law, following its Anglo-Saxon tradition, has adopted the unitary board with its main focus on shareholder interests, i.e. profit maximisation.^[108] Similar to US law, there are currently two types of companies^[109] in place in New Zealand: unlisted companies and listed companies.^[110] The term “listed companies” describes those entities that are listed on the New Zealand Stock Exchange (NZX).^[111] Each form of company needs to have at least one or more shareholders as well as one or more directors, who may unite both positions.^[112] In the year 2001, there were 270,000 registered companies in New Zealand; only 216 of these were listed with the New Zealand Stock exchange and only 139 of these were original New Zealand companies.^[113] Notwithstanding its minor share of the overall number of domestic companies, public listed companies have a significant effect on the New Zealand economy. It has been estimated that “the total market capitalisation of the domestic equities market was approximately NZ $44 billion in 2001”.^[114] Between 1985 and 2001 market capitalisation almost tripled and in June 2000, 44 per cent of New Zealanders owned shares.^[115]

[...]

---

^[1] Krackhardt O, New Rules for Corporate Governance in the United States and Germany – A Model for New Zealand?, 36 VUWLR 319, 335.

^[2] Owen C, Board Games: Germany’s Monopoly on the Two-Tier-System of Corporate Governance and Why the Post-Enron United States Would Benefit From Its Adoption, 22 Penn St. Int’l L . Rev. 167

^[3] Ibid, 168 (referring, however, to the US market); Krackhardt detects also a stagnation of the New Zealand investment market (Krackhardt, above n 1, 329).

^[4] Owen, above n 2, p 167; Macey and Miller state that other commentators find the US system inferior to the German but do not mention who these commentators are (Macey J & Miller G, Corporate Governance and Commercial Banking: A Comparative Examination of Germany, Japan, and the United States, 48 Stan. L. Rev. 73, 74); Hann says that the German system is highly regarded (Hann D, Emerging Issues in US Corporate Governance: Are the Recent Reforms Working?, 68 Def. Couns. J. 191, 199).

^[5] Organization for Economic Co-operation and Development (OECD), Economic Surveys: France 1 (1997) [hereinafter OECD Economic Surveys: France].

^[6] Aste L, Reforming French Corporate Governance: A Return to the Two-Tier Board?, 32 GW J. Int’l L. & Econ. 1, 45.

^[7] Owen, above n 2, 167.

^[8] 30 per cent of New Zealand listed shares in 2001 were owned by overseas investors (Fox M & Walker G, Ownership and Foreign Control of NZSE Companies, 17 Companies and Securities Law Journal 56).

^[9] Krackhardt, above n 1, 329.

^[10] André T, Some Reflections on German Corporate Governance: A Glimpse at German Supervisory Boards, 70 Tul. L. Rev. 1819, 1820.

^[11] Cioffi J, Review Essay: State of the Art: A Review Essay on Comparative Corporate Governance: The State of the Art and Emerging Research, 48 Am. J. Comp. L. 501, 506

^[12] The European Union is New Zealand’s second largest trade partner in exports and imports after Australia (Statistics New Zealand, Australia is New Zealand’s most significant trading partner, retrievable from: <http://www.stats.govt.nz/products-and-services/Articles/Australia-Trade-Nov02.htm>, last access on 06.05.2006).

^[13] Aste, above n 6, 47.

^[14] Ibid.

^[15] Ibid.

^[16] New Zealand Stock Exchange, Annual Report for the Year Ended 31 June 2001, (New Zealand Stock Exchange Wellington 2001).

^[17] Healy J, Corporate Governance and Wealth Creation in New Zealand, (2003), 35.

^[18] Wymeersch E, The Corporate Governance Discussion in some European States, in: Contemporary Issues in Corporate Governance (1993), p 3, 30.

^[19] Cioffi, above n 11, 506.

^[20] Ibid, 507.

^[21] Ibid, 522.

^[22] Ibid, 507; Chicago School is a school of thought in economics which favours free-market policies and business deregulation - antonym: Keynesianism (Chicago School (in economics), Wikipedia, retrievable from: < http://en.wikipedia.org/wiki/Chicago_school_%28economics%29>, last access on 08.05.2006).

^[23] Clark Helen, Growing an Innovative New Zealand (February 2002), retrievable from:

< http://www.executive.govt.nz/minister/clark/innovate/innovative.pdf>, last access on 30 June 2006, p 22.

^[24] Van den Berghe L & De Ridder L, International Standardisation of Good Corporate Governance – Best Pracitices for the Board of Directors, (1999), p 40.

^[25] Glendon M, Comparative Legal Traditions 1 (2d ed. 1994), p 44-52.

^[26] Schadbach K, The Benefits of Comparative Law: A Continental European View, 16 B.U. Int’l L.J. 331, 339.

^[27] Ibid, 396.

^[28] Ibid.

^[29] See Lundmark T, Law in the United States: A General and Comparative View, in: Juristische Technik and Methodik des Common Law (Judicial Techniques and Methodoligy of the Common Law) [1998], p 108.

^[30] Cioffi, aboven 11, 523.

^[31] Lundmark, above n 55, 108.

^[32] Ibid.

^[33] Owen, above n 2, 173.

^[34] Dodge v. Ford Motor Co, 170 N.W. 688 (Mich. 1919) [emphasis added].

^[35] Owen, above n 3, 171; Beck A & Borrowdale A, Guidebook to New Zealand – Companies and Securities Law, (7th ed.), p 90, §407, §408.

^[36] Miller & Macey, above n 4, 80.

^[37] Ibid, 94.

^[38] Karmel R, Is It Time For A Federal Corporation Law, 57 Brook. L. Rev. 55, 55.

^[39] Cioffi, above n 11, 501.

^[40] Mann A, Corporate Governance Systeme (Corporate Governance Systems), (2003), p 75.

^[41] Ibid.

^[42] Macey & Miller, above n 4, 90.

^[43] Cioffi, above n 11, 523.

^[44] Ibid.

^[45] Visentini G, Compatibility and Competition Between European And American Corporate Governance: Which Model of Capitalism?, 23 Brook. J. Int’l L. 833, 836-837.

^[46] Berrar C, Entwicklung der CG in Deutschland im internationalen Vergleich (Development of CG in Germany in a international comparison), (ed. 1, 2001), p 39.

^[47] Majority investors who hold enough equity to influence corporate decisions during general meetings by means of their voting rights are commonly referred to as blockholders.

^[48] Berrar, above n 46, 39.

^[49] Ibid.

^[50] Macey & Miller, above n 4, 74; see Walker G, Reid T, Hanrahan P, Ramsay I & Stapledon G, commercial applications of company law in new zealand, p 8 (§105) (stating that 44 per cent of New Zealand residents own equity).

^[51] Jacoby S, Corporate Governance in Comparative Perspective: Prospects for Convergence, 22 CLLPJ 5, 6.

^[52] Hill J, Regulatory Responses to Global Corporate Scandals, 23 Wis. Int’l L.J. 367; in New Zealand the majority of equity shares are owned by big investment houses but due to a different company law they are not able to exert as much control as their German counterparts – New Zealand, therefore, is more affiliated with the outsider system than the insider system.

^[53] Butler S, Models of Modern Corporations: A Comparative Analysis of German and US Corporate Structures, 17 Ariz J Int’l & Comp L 555, 561.

^[54] Ibid.

^[55] See US Revised Model Bus. Corp. Act 8.01(b) (1984) [hereinafter RMBCA]– “all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its boards of directors …”.

^[56] RMBCA 8.01(b) – “in most corporations … the role of the board of directors consists principally of the formulation of policy, the selection of the chief executive officer and other key officers, and the approval of major actions or transactions”.

^[57] Eisenberg M, Corporate Law and Social Norms, 99 Colum. L. Rev. 1253, 1278.

^[58] RMBCA 8.41 – “each officer has the authority and shall perform duties set forth in the articles of incorporation or …prescribed by the board of directors”.

^[59] Owen, above n 2, 173.

^[60] Lee v. Jenkins Brothers, 268 F.2d 357 (2d Cir. 1959).

^[61] RMBCA 8.08(a), 12.02(a).

^[62] See Auer v. Dressel, 118 N.E.2d 590, 593 (N.Y. 1954).

^[63] Krackhardt, above n 1, 322.

^[64] Karmel, above n 38, 92.

^[65] Owen, above n 2, 183.

^[66] Farrar J, Enforcement: A Trans-Tasman Comparison, Corporate Governance at the Cross Roads (14 February 2005), p 9 & 10.

^[67] Ruder D, Lessons from Enron: Director and Lawyer Monitoring Responsibilities (2002), (retrieved from < http://www.law.northwestern.edu/contexec/documents/Ruder_Lessons_Enron.pdf>, last access on 10.04.2006).

^[68] Enron Corporation, Wikipedia (retrieved from: <http://en.wikipedia.org/wiki/Enron_Corporation>, last access on 07.04.2006).

^[69] Ibid.

^[70] Limited partnerships controlled by the Enron Corporation, particularly by its Chief Financial Officer Andrew Fastow.

^[71] Ruder, above n 67.

^[72] Wikipedia, above n 68.

^[73] Ibid.

^[74] Ibid.

^[75] Owen, above n 2, 169.

^[76] Report of the Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp., February 1, 2002, p 23 (retrievable from: <http://news.findlaw.com/hdocs/docs/enron/sicreport/>, last access on 10.04.2006).

^[77] Ibid.

^[78] Wikipedia, above n 68.

^[79] MCI, Wikipedia, (retrieved from: <http://en.wikipedia.org/wiki/WorldCom>, last access on 07.04.2006).

^[80] Ibid.

^[81] Owen, above n 2, 169.

^[82] Interconnection expenses with other telecommunication companies.

^[83] Wikipedia, above n 79.

^[84] Ribstein describes the economic atmosphere before the discovery of the Enron and WorldCom frauds and demonstrates that euphoric, gullible, and stalwart trust in the market and the firm’s executives led to negligence on all monitoring levels (Ribstein L, Bubble Laws, 40 Hous L. Rev. 77, 83).

^[85] Owen, above n 2, 169 [emphasis added].

^[86] Ibid.

^[87] Wikipedia, above n 79.

^[88] Ibid [emphasis added].

^[89] Wagner S & Dittmar L, The Unexpected Benefits of Sarbanes-Oxley, 84 Harv. Bus. Rev. (April 2006), 133.

^[90] Named after Senator Paul A Sarbanes and Representative Michael Oxley who developed this catalogue of rules concerning proper governance.

^[91] Krackhardt, above n 1, 322.

^[92] SOX s 301(3)(A).

^[93] Hamilton R, The Crisis in Corporate Governance: 2002 Style, 40 Hou. L. Rev. 1, 59.

^[94] Krackhardt, above n 1, 345.

^[95] Regulations concerning the independence of gatekeepers is neglected in this paper as these monitoring institutions are outside and not inside supervisors.

^[96] Krackhardt, above n 1, 337.

^[97] Sheikh S, Non-Executive Directors: Self-Regulation or Codification, 23 Comp Law 296, 296-297.

^[98] Rees W & Sheikh S, Corporate Governance and Corporate Control: Self Regulation or Statutory Codification, 3 ICCLR 370, 373.

^[99] Ibid.

^[100] Krackhardt, above n 1, 336.

^[101] Sheikh, above n 97, 298.

^[102] Krackhardt, above n 1, 338.

^[103] Ibid, 345.

^[104] Ibid.

^[105] Chantayan F, An Examination of American and German Corporate Law Norms, 16 St. John’s J.L. Comm. 431, 439.

^[106] Owen, above n 2, 179.

^[107] Gilberton B & Brown A, Corporate governance in New Zealand, retrievable from: <http://www.iflr.com>, last access on 18 June 2006, p 51; Walker et al, above n 50, p 19 (§114).

^[108] Walker et al, above n 50, p 11 (§108) & 10 (§107).

^[109] Companies being defined as artificial legal entities with separate legal personality (Ibid, p 5 [§103]).

^[110] Ibid, p 18 (§113).

^[111] Ibid.

^[112] Ibid, p 16 (§113).

^[113] Ibid, p 7 (§104).

^[114] Ibid, P 7 (§105).

^[115] Ibid, p 8 (§105); NZSE, Share Ownership Survey 2000, (2000).