1. Governing the Corporation Around the World11
Governing the Corporation Around the World
chapter
Part III: Corporate-Level Strategies
Global Strategy Mike W. Peng
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2. Outline Owners Managers Board of directors
Governance mechanisms as a package
A global perspective
A comprehensive model of corporate governance
Debates and extensions
The savvy strategist
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3. Owners
Concentrated versus Diffused ownership - Founders usually start up firms and completely own and control these enterprises
Family ownership - Founding family and descendents maintain controlling interest
State ownership - Means of production owned by the government, central or local. Managers employed by the state; firm governed by the state
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4. Concentrated versus Diffused Ownership
Concentrated Ownership and Control
Founders start up firms and completely own and control these firms on an individual or family basis
Diffused Ownership
Publicly traded corporations owned by numerous small shareholders but none with a dominant level of control
Separation of ownership and control
The typical image of large US/UK corporations
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5. Family Ownership Outside the Anglo-American world
Relatively little separation of ownership and control
Most large firms are typically owned and controlled by families or the state
The majority of large corporations throughout continental Europe, Asia, Latin America, and Africa feature concentrated family ownership and control
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6. State Ownership Until the late 1980s Since the 1980s
Extensive state ownership throughout communist countries in the Soviet Union and in China
In many developed economies, state ownership is also high in France, Italy, and Great Britain
Since the 1980s
State-owned enterprises (SOEs) have failed to deliver satisfactory performance due to an incentive problem
Privatization has reduced the SOE share of the global GDP from over 10% in 1979 to under 5% today
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7. 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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8. Principal-Agent Conflicts
Principal-Agent Relationship
One example: The relationship between shareholders and professional managers
Agency Theory
Because the interests of principals and agents do not completely overlap, there will inherently be principal-agent conflicts, which result in agency costs
Conflicts persist because of information asymmetries between principals and agents (agents always know more about their tasks than principals)
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9. Principal-Agent Conflicts (cont’d)
Agency Problems
Excessive on-the-job consumption
Low-risk, short-term investments
Empire-building (excessive diversification)
In SOEs, agency problems are also extensive
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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10. Principal-Principal Conflicts
Instead of between principals (shareholders) and agents (professional managers), the primary conflicts are between two classes of principals: controlling shareholders and minority shareholders
The 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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11. Principal-Agent Conflicts and Principal-Principal Conflicts
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Figure 11.2

12. 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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13. Principal-Agent Conflicts versus Principal-Principal Conflicts
Ownership pattern
Dispersed—shareholders holding 5 percent of
equity are regarded as “blockholders.”
Dominant—often greater than 50 percent of
equity is controlled by the largest shareholders.
Manifestations
Strategies that benefit entrenched managers at
the expense of shareholders (such as shirking,
excessive compensation, empire-building).
Strategies that benefit controlling shareholders
at the expense of minority shareholders (such as
minority shareholder expropriation, cronyism).
Institutional protection of
minority shareholders
Formal constraints (such as courts) are more
protective of shareholder rights. Informal norms
adhere to shareholder wealth maximization.
Formal institutional protection is often lacking.
Informal norms typically in favor of controlling
shareholders.
Market for corporate
control
Active, at least in principle as the
“governance mechanism of last resort”.
Inactive even in principle. Concentrated
ownership thwarts notions of takeover.
Source: Adapted from M. Young, M. W. Peng, D. Ahlstrom, & G. Bruton, 2008, Corporate governance in emerging economies: A review of principal-principal perspective,(p. 202), Journal of Management Studies,45:
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Table 11.1

14. 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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15. Directing Strategically Outside Directors versus Inside Directors
PROS
CONS
Outside directors
Presumably more independent from
management (especially the CEO)
Independence may be illusory
More capable of monitoring and
controlling managers
“Affiliated” outside directors may have family or
professional relationships with the firm or management
Good at financial control
Not good at strategic control
Inside directors
Firsthand knowledge about the firm
Non-CEO inside directors (executives) may not be able
to control and challenge the CEO
Good at strategic control
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Table 11.2

16. 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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17. Internal Governance Mechanisms
Voice-based mechanisms
Shareholders’ willingness to work with managers, usually through the board, by “voicing” their concerns
“Carrots” and “sticks”
Carrots: Very high pay for performance?
Sticks: Dismissal (boards are now more “trigger happy”)
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18. 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
In the 1980s, nearly half of all major US corporations received a hostile takeover offer
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19. Internal and External Governance Mechanisms: A Global Perspective
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 Management Journal, 19: 533–553. The label of Cell 3 is suggested by the present author.
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Figure 11.3

20. 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
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Table 11.3

21. A Global Perspective
Strengthening governance mechanisms through privatization: Two decades of privatization in CEE (and other parts of the world) suggest three lessons:
Privatization to insiders helps improve the performance of small firms
In large corporations, similar privatization to insiders, without external governance pressures, is hardly conducive for needed restructuring
Outside ownership and control, preferably by blockholders, funds, foreigners, and/or banks, are more likely to facilitate restructuring
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22. A Comprehensive Model of Corporate Governance
Industry-based considerations
Outside directors on the board?
Link between inside management ownership and firm performance?
CEO duality?
Resource-based considerations
Managerial human capital
Institution-based considerations
Formal institutional framework
Informal institutional framework
Foreign portfolio investment (FPI)—foreigners purchasing stocks and bonds
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23. 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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24. 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)
TMT and board diversity: Good or bad?
Boosts firm performance
Longer debates, slower speed, and more conflicts
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25. Institution-Based Considerations
Formal institutional framework
Formal legal protection encourages founding families and their heirs to dilute their equity
Large shareholders in emerging economies usually need to have a higher percentage of shares to ensure control
Informal institutional framework: Why and how have informal norms and values concerning corporate governance changed to such a great extent?
The rise of capitalism has affected governance
Three aspects of globalization: contact with different governance norms, FPI investors demand more protection, and the thirst for global capital requires adherence to listing requirements
The global diffusion of “best practices” by various organizations including the OECD
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26. Selected Corporate Governance (CG) Codes Around the World Since the 1990s
DEVELOPED ECONOMIES
EMERGING ECONOMIES
Cadbury Report (United Kingdom, 1992)
King Report (South Africa, 1994)
Dey Report (Canada, 1994)
Confederation of Indian Industry Code of CG (India, 1998)
Bosch Report (Australia, 1995)
Korean Stock Exchange Code of Best Practice (Korea, 1999)
CG Forum of Japan Code (Japan, 1998)
Mexican Code of CG (Mexico, 1999)
German Panel on CG Code (Germany, 2000)
Code of CG for Listed Companies (China, 2001)
Sarbanes-Oxley Act (United States, 2002)
Code of Corporate Conduct (Russia, 2002)
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Table 11.4

27. 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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28. 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, anticipate changes, and be aware of differences
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