Governance & the International Firm 325325 UniMelb 1 Governance & International Firm Week 2: A complex International Business Environment Dr Peter Verhezen.

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Presentation transcript:

Governance & the International Firm UniMelb 1 Governance & International Firm Week 2: A complex International Business Environment Dr Peter Verhezen

Governance & the International Firm UniMelb 2 Stakeholder vs Shareholder Model within International Environment n Globalization of international economy n Corporate Scandals n Good Corporate Governance (strict sense): –Compliance oriented –Legislation and Regulatory –Codes of Best Practices n Good Corp Governance (broad sense): –Different participants who can express their trust in the company –Importance of Reputation

Governance & the International Firm UniMelb 3 Shareholder Model or Agency Theory within International Environment n Managers are the agents for the Investors or Principal n Make sure that managers align their objectives with maximizing the shareholders or corporations’ value n Value of a company: Physical or Tangible Assets + Intangible Assets (cf Graphic)

Governance & the International Firm UniMelb 4 Fast changes in the International Business Environment n Globalization of business: more and more countries have entered the global “international business” n Changes in the nature of work as result of ICT innovation. Power shifts. n Changes in capital & financial markets which are really going global n Product-Market globalization: competitive advantages n Changes in Organizational form: global networks & alliances n Changes in Regulatory environment: SOA, IAS, OECD

Governance & the International Firm UniMelb 5 Comparative Analysis on Governance in France - Germany Importance of Stock MarketShareholder Model –Raise cash to finance investments for growth –Acquire other companies (Mergers & Acquisitions) –Stock Options Remuneration of Top Management

Governance & the International Firm UniMelb 6 France’s Historical Governance n The French State and its ownership in shares: concentrated ownership by French State in important industries n Financial system & enterprise financing: heavy state loans and subsidies in the 70s n Strong Hierarchical system in French Corporations From late 70s onwards, due to the ‘new economy’ one sees an increase of German companies using the stockmarket to raise money

Governance & the International Firm UniMelb 7 Germany’s Historical Governance n Inter-company shareholding n Bank-Industry relations n Codetermination From 90s onwards, due to the ‘new economy’ one sees an increase of German companies using the stockmarket to raise money

Governance & the International Firm UniMelb 8 Why Shareholder Model is not optimal n Financial markets do not guarantee the best capital allocation: –Hubris & greed resulting in stock speculation n Example: dot.com crash in 2001 n M&A activities do not prove to provide higher Returns on Equity or Investment n Example: Times Warner acquired by AOL which did not result in the expected synergy translating in high returns n Stock Options Remuneration does not prove to align Top Management with Shareholders objectives n Example: CEO Airbus who is forced to resign after selling stocks in times of crisis (A380 delays)

Governance & the International Firm UniMelb 9 Why Shareholder Model is still popular n International Investment relies on contractual protection of those investment provided by Shareholder Agent Theory n Global competition is ‘survival of the fittest’ with is measured in Return on Equity & Investment n Rapid pace of changes favor Investors’ perspective instead of rigid labor markets (such as in Europe which is more stakeholder oriented than the Anglo-Saxon shareholder model) However, still no international institution which can guarantee enforcement of those international contracts

Governance & the International Firm UniMelb 10 Goodwill and Good Reputation Constituency ActivitiesGenerating Reputation EmployeesGenerate trustTrustworthiness Empower Instill Pride InvestorsShow profitabilityCredibility Maintain Stability Have growth prospects CustomersCultivate product qualityReliability Provide customer service CommunityServe the communityResponsibility Green the environment