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Copyright © 2009 Cengage. PowerPoint Presentation by John Bowen, Columbus State Community CollegeAll rights reserved. Copyright © 2009 Cengage. PowerPoint Presentation by John Bowen, Columbus State Community CollegeAll rights reserved.

Governing the Corporation Around

the World

Governing the Corporation Around

the World

Part III: Corporate-Level Strategies

Global StrategyGlobal StrategyMike W. PengMike W. Peng

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Copyright © 2009 Cengage. All rights reserved. 11–2

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


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


Concentrated versus Diffused Ownership

• Concentrated Ownership and ControlFounders start up firms and completely own

and control these firms on an individual or family basis

• Diffused OwnershipPublicly traded corporations owned by

numerous small shareholders but none with a dominant level of control

Separation of ownership and controlThe typical image of large US/UK corporations


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


State Ownership

• Until the late 1980sExtensive 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 1980sState-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


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


Principal-Agent Conflicts

• Principal-Agent RelationshipOne example: The relationship between

shareholders and professional managers

• Agency TheoryBecause 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)


Principal-Agent Conflicts (cont’d)

• Agency ProblemsExcessive on-the-job consumptionLow-risk, short-term investmentsEmpire-building (excessive diversification) In SOEs, agency problems are also extensive

• Reducing Agency ProblemsWhile it is possible to reduce information

asymmetries and minimize agency problems, it probably is not realistic to expect to completely eliminate such problems


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 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


Principal-Agent Conflicts and Principal-Principal Conflicts

Figure 11.2


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


Principal-Agent Conflicts versus Principal-Principal Conflicts

Table 11.1Source: 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 CONFLICTS 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 atthe expense of shareholders (such as shirking,excessive compensation, empire-building).

Strategies that benefit controlling shareholders at the expense of minority shareholders (such asminority shareholder expropriation, cronyism).

Institutional protection ofminority shareholders

Formal constraints (such as courts) are moreprotective of shareholder rights. Informal normsadhere to shareholder wealth maximization.

Formal institutional protection is often lacking.Informal norms typically in favor of controllingshareholders.

Market for corporatecontrol

Active, at least in principle as the “governance mechanism of last resort”.

Inactive even in principle. Concentratedownership thwarts notions of takeover.


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


Directing Strategically

Outside Directors versus Inside Directors

Table 11.2

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


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 MechanismsThe market for corporate control: the takeover

marketThe market for private equity: going private


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”)


External Governance Mechanisms

• Exit-based Mechanisms: The Market for Corporate ControlThe takeover or mergers and acquisitions

(M&A) marketThe 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


Internal and External Governance Mechanisms: A Global Perspective

Figure 11.3

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.


Two Primary Families of Corporate Governance Systems

Table 11.3

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


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


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


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 industriesNo 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


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


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


Selected Corporate Governance (CG) Codes Around the World Since the 1990s

Table 11.4

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)


Debates and Extensions

• Opportunistic agents versus managerial stewards

• Global convergence versus divergenceSome 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


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

global strategy mike w. peng c h a p t e r 1111 copyright © 2009 cengage.powerpoint presentation by...

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enterprises family ownership

principal agent conflicts

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diffused ownership founders

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