Chapter 11 Governing the Corporation Around the World

Global Strategy 1e Michael Peng Global Strategy Mike W Peng c h a p t e r 11 Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly acc.

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Corporation

Around the

World

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be scanned, copied or duplicated, or posted to a publicly

accessible website, in whole or in part.

• Debates and extensions

• The savvy strategist

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© M W Peng (www.mikepeng.com)

What is Corporate Governance?

the direction and performance of corporations

The Tripod of Corporate Governance

Source: Adapted from R A G Monks & N Minow, 2001, Corporate Governance (cover), Oxford, UK: Blackwell Figure 11.1

11–3

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Owners

• Concentrated versus Diffused ownership

 Concentrated: Founders start up and control

firms

 Diffused: Numerous small shareholders, none with complete control

• Family ownership - Founding family and

descendants maintain controlling interest

• State ownership - Means of production owned by the government Managers employed by the

state; firm governed by the state

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Managers

• Principal-Agent conflicts: The relationship

between shareholders and professional

managers is a relationship between principals and agents

• Principal-Principal conflicts: Such conflicts are between two classes of principals: controlling shareholders and minority shareholders

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Principal-Agent Conflicts

• Principal-Agent Relationship

shareholders and professional managers

• Agency Theory

do not completely overlap, there will inherently

be principal-agent conflicts, which result in

agency costs

asymmetries between principals and agents

(agents always know more about their tasks

than principals)

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Principal-Agent Conflicts (cont’d)

• Reducing Agency Problems

 While it is possible to reduce information

asymmetries and minimize agency problems, it probably is not realistic to expect to completely eliminate such problems

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 The Murdoch/BSkyB case: A classic example

 In 2003, the 30-year old James Murdoch became CEO of British Sky Broadcasting (BSkyB), Europe’s biggest satellite broadcaster, despite strong minority shareholder resistance

 The reason? James’ father is Rupert Murdoch who owned 35% of BSkyB and was chairman of the BskyB board

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Principal-Principal Conflicts

(cont’d)

• Expropriation of Minority Shareholders

 Family managers, who represent (or are) controlling shareholders, may engage in activities that enrich the controlling

shareholders at the expense of minority shareholders

 Illegal activity: “tunneling”

 Legal activity: related transactions

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© M W Peng (www.mikepeng.com) 11–10

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© M W Peng (www.mikepeng.com) 11–11

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Board of Directors

• Key features of the board

 Board Composition: Otherwise known as the

insider/outsider mix

 Leadership Structure: Involves whether the board is led

by a separate chairman or by the CEO who doubles as a chairman—a situation known as CEO duality

 Board Interlocks: When one person affiliated with one firm sits on the board of another firm

• The role of Boards of Directors: (1) control, (2) service, and (3) resource acquisition functions

• Directing strategically: Directors must strategically

prioritize

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Governance Mechanisms as a

Package

• Internal (Voice-based) Governance Mechanisms

- motivate managers; stock options used as (1) carrots that transform managers from agents to principals, or (2) sticks - CEO and top

management team turnover

• External (Exit-based) Governance Mechanisms

 The market for corporate control: the takeover market

 The market for private equity: going private

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External Governance Mechanisms

• Exit-based Mechanisms: The Market for

Corporate Control

 The takeover or mergers and acquisitions

(M&A) market

 The stock of a firm will be undervalued by

investors when managers engage in

self-interested actions and internal governance

mechanisms fail

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Source: Cells 1, 2, and 4 adapted from E R Gedajlovic & D M Shapiro, 1998,

Management and ownership effects: Evidence from five countries (p 539), Strategic

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Two Primary Families of Corporate Governance Systems

CORPORATIONS IN THE UNITED STATES AND UNITED KINGDOM CORPORATIONS IN CONTINENTAL EUROPE AND JAPAN Anglo-American corporate governance models German-Japanese corporate governance models

Market-oriented high-tension systems Bank-oriented, network-based systems

Rely mostly on exit-based, external mechanisms Rely mostly on voice-based, internal mechanisms

Shareholder capitalism Stakeholder capitalism

Table 11.3

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A Global Perspective

• Different corporate ownership and control

patterns around the world lead to a different mix

of internal and external mechanisms

• Overall, firms around the world are governed by

a combination of internal and external

mechanisms

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A Comprehensive Model of

Corporate Governance

• Industry-based considerations

 Outside directors on the board?

 Link between inside management ownership and firm

 Formal institutional framework

 Informal institutional framework

 Foreign portfolio investment (FPI)—foreigners purchasing stocks and bonds

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Industry-Based Considerations

• More outside directors: Boosting performance?

 In fast-moving industries requiring significant R&D (e.g., IT), outside directors are found to

have a negative impact on firm performance

• Inside management ownership: Better

performance?

 Only good in high-growth, turbulent industries

 No such link in low-growth, stable industries

• CEO duality: Always bad?

 In turbulent industries, CEO duality is good! 

a faster and more unified response to changing events

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Resource-Based Considerations

• Managerial human capital: V, R, and I?

• Top management team (TMT) and board

function within an organizational setting (the O in VRIO)

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Institution-Based Considerations

their heirs to dilute their equity

have a higher percentage of shares to ensure control

informal norms and values concerning corporate

governance changed to such a great extent?

governance norms, FPI investors demand more protection, and the thirst for global capital requires adherence to

listing requirements

organizations including the OECD

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Debates and Extensions

• Opportunistic agents versus managerial

stewards

• Global convergence versus divergence

 Some argue that globalization will unleash a

“survival-of-the-fittest” process by which firms will be forced to adopt globally the best

practices

 Others argue that governance practices will continue to diverge throughout the world

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DEBATE: PRIVATE OWNERSHIP VS

STATE OWNERSHIP

Washington Consensus

View centered on unquestioned belief in the superiority of private ownership over state ownership in economic policy making

spearheaded by the International Monetary Fund and the World Bank

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The Savvy Strategist

• Understand the nature of principal–agent and

principal–principal conflicts to create better

governance mechanisms

• Develop firm-specific capabilities to differentiate

a firm on corporate governance dimensions

• Master the rules affecting corporate governance, and anticipate changes

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