1. Global Strategy Mike W. Peng c h a p t e r 1111 Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Global Strategic Management Mike W. Peng Chapter 11 Corporate Governance

2. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

3. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

4. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Principal-Agent Conflicts and Principal-Principal Conflicts Figure 11.2

5. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Principal-Agent Conflicts versus Principal-Principal Conflicts 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,45:196-220. PRINCIPAL—AGENT CONFLICTSPRINCIPAL—PRINCIPAL CONFLICTS Ownership patternDispersed—shareholders holding 5 percent of equity are regarded as “blockholders.” Dominant—often greater than 50 percent of equity is controlled by the largest shareholders. ManifestationsStrategies 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. Table 11.1

6. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

7. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Directing Strategically Outside Directors versus Inside Directors Table 11.2 PROSCONS 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

8. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

9. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Two Primary Families of Corporate Governance Systems CORPORATIONS IN THE UNITED STATES AND UNITED KINGDOMCORPORATIONS IN CONTINENTAL EUROPE AND JAPAN Anglo-American corporate governance modelsGerman-Japanese corporate governance models Market-oriented high-tension systemsBank-oriented, network-based systems Rely mostly on exit-based, external mechanismsRely mostly on voice-based, internal mechanisms Shareholder capitalismStakeholder capitalism Table 11.3

10. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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

11. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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