11
Chapter
11
chapter
Governing the
Corporation
Around the
World
Global Strategy
Strategy
Global
Mike W. Peng
Mike W. Peng
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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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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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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
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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 principalagent 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 (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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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), 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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Principal-Agent Conflicts and
Principal-Principal Conflicts
Figure 11.2
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a publicly accessible website, in whole or in part.
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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Principal-Agent Conflicts versus
Principal-Principal Conflicts
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 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.
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.
Table 11.1
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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 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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Directing Strategically
Outside Directors versus Inside Directors
Outside directors
Inside directors
PROS
CONS
 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
 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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Table 11.2
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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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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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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accessible website, in whole or in part.
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
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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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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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
 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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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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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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