1. Governing the Corporation Around the World
Chapter 11
Governing the Corporation Around the World
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. What is Corporate Governance?
The relationship among various participants in determin-ing 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
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4. 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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5. 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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6. 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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7. 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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8. 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 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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9. 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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10. © M. W. Peng (www.mikepeng.com)

11. © M. W. Peng (www.mikepeng.com)

12. 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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13. Directing Strategically Outside Directors versus Inside Directors
© M. W. Peng (
Table 11.2

14. 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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15. 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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16. A Global Perspective on Internal and External Governance Mechanisms
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.
Figure 11.3
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17. 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

18. 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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19. 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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20. 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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21. 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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22. 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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23. 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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24. 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
Moral hazard
Recklessness when people and organizations (including firms and governments) do not have to face the full consequences of their actions

25. 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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