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

Global StrategyGlobal StrategyMike W. PengMike W. Peng

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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.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 ManagementGlobal Strategic ManagementMike W. PengMike W. Peng

Chapter 11

Corporate Governance

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


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 and Principal-Principal Conflicts

Figure 11.2


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 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.

Table 11.1


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


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


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

Table 11.3


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


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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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