11

Chapter 11
Governing the
chapter

Corporation
Around the
World

Global Strategy
Global Strategy
Mike W. Peng
Mike W. Peng

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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
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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 Principal-Agent Conflicts (contd)

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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 Principal-Principal Conflicts

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), Europes 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-Agent Conflicts and
Principal-Principal Conflicts

Figure 11.2
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 Principal-Principal Conflicts (contd)

Expropriation of Minority Shareholders: family

managers, who represent shareholders, may engage in
activities that enrich the controlling shareholders at the
expense of minority shareholders
Illegal activity: tunneling: divert resources for
personal or family use
Legal activity: related transactions: selling assets
of the firm to another firm they own at prices below
market or merging a profitable part of the firm with
another of their property

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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 chairmana
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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 Directing Strategically
Outside Directors versus Inside Directors

PROS CONS

Outside directors Presumably more independent from Independence may be illusory

management (especially the CEO)

More capable of monitoring and Affiliated outside directors may have family or
controlling managers 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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be scanned, copied or duplicated, or posted to a publicly Table 11.2
accessible website, in whole or in part.
 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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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: 533553. The label of Cell 3 is suggested by the present author. Figure 11.3
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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

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 A Global Perspective

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
Resource-based considerations
Institution-based considerations

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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
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
Globalization has made that companies can compare their ways of
governance
Globalization has increased FPI. Investors demand more protection
Globalization has raised the thirst for global capital, what requires
compliance with listing requirements
The global diffusion of best practices by various organizations including
the OECD
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