IBSE: BUSS 5034

Topic 9
Governing the Corporation Globally

Dr Sunil Savur

University of South Australia Australia’s University of Enterprise

University of South Australia
Australia’s University of Enterprise
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classroom

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possible

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• Do not attend classes if you are unwell and contact the lecturer/tutor and
course coordinator
 • Need to expand
Small WH Large firms • Run out of money
firms Y • Runs out of sons, daughters
and other relatives

Small HO Large firms • IPO

• Private equity
firms W • M&A

Inevitable
Large firms Separation of ownership Berle & Means 1932

Failure of Reduced
Separation of competitive Fama & Jensen Is that true?
1983
ownership advantage

Family owned
Other forms
of ownerships
State owned
% of Family Owned of US$ 1 billion + firms

• SE Asia: 85% Samsung: 15% of country GDP

• Latin Am: 75% Tata: 4% of country GDP
• India: 67%
• China: 40%
• Europe: 40%
• USA: 15%

State Owned:

• World: 10% of global GDP Sinopec

• China: 80% of market cap China Mobile
• Russia: 62% Dubai Ports
• Brazil: 38% Gazprom

Also:
• Going public is dropping – less of IPOs
• More of private equity (25% of all M&As)
Learning objectives
• Various Ownership types and role of principal-agent conflicts

• Role of the board of Directors

• Voice-based and exit-based governance mechanisms

• Applying the Strategy Tripod to corporate governance

• Debates and extensions

• The Savvy Strategist

University of South Australia
Australia’s University of Enterprise
 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

Adapted from Peng MW 2022, Global Strategy, Cengage

University of South Australia

Australia’s University of Enterprise
 Conflicts

• 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

Adapted from Peng MW 2022, Global Strategy, Cengage

University of South Australia

Australia’s University of Enterprise
• Principal-Agent Relationship Principal-Agent Conflicts
• 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)

• 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
Adapted from Peng MW 2022, Global Strategy, Cengage

University of South Australia

Australia’s University of Enterprise
• 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 minority strong shareholder
resistance
• The reason? James’ father is Rupert Murdoch who owned 35% of BSkyB and was
chairman of the BSkyB board
• 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” and Legal activity – related transactions
Adapted from Peng MW 2022, Global Strategy, Cengage

University of South Australia

Australia’s University of Enterprise
 Board of Directors
• Key features
• Board Composition: 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 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 3. Resource acquisition
• Directing strategically: Directors must strategicallyAdapted
prioritize
from Peng MW 2022, Global Strategy, Cengage

University of South Australia

Australia’s University of Enterprise
 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
2. Sticks – CEO and top management team turnover
• External (Exit-Based) Governance Mechanisms
1. The market for product competition: Complements market for corporate
control and private equity
2. The market for corporate control: The takeover market
3. The market for private equity: Going private
Adapted from Peng MW 2022, Global Strategy, Cengage

University of South Australia

Australia’s University of Enterprise
 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

• Exit-Based Mechanisms: Market for Private Equity

• Private equity – equity capital invested in private companies

• Leveraged buyouts – private investors issue bonds to raise money to buy the
firm’s stock Adapted from Peng MW 2022, Global Strategy, Cengage

University of South Australia

Australia’s University of Enterprise
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

Adapted from Peng MW 2022, Global Strategy, Cengage

University of South Australia

Australia’s University of Enterprise
 Comprehensive model of Corporate Governance
• Industry-Based Considerations
• Outside directors on the board?
• Insider ownership?
• CEO duality?
• Resource-Based Considerations
• Managerial human capital
• Institution-Based Considerations
• Formal institutional framework
• Informal institutional framework
Adapted from Peng MW 2022, Global Strategy, Cengage
• Foreign portfolio investment (FPI): Foreigners purchasing stocks and bonds

University of South Australia

Australia’s University of Enterprise
 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

Adapted from Peng MW 2022, Global Strategy, Cengage
response to changing events

University of South Australia

Australia’s University of Enterprise
 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)

Adapted from Peng MW 2022, Global Strategy, Cengage

University of South Australia

Australia’s University of Enterprise
 Institution-Based Considerations
• Formal institutional framework
• Formal legal protection encourages founding families/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?
• The rise of capitalism has affected governance
• Aspects of globalization: (1) contact with different governance norms, (2) FPI
investors demand more protection, and (3) thirst for global capital requires
Adapted from Peng MW 2022, Global Strategy, Cengage

adherence to listing requirements

University of South Australia

Australia’s University of Enterprise
Debates and extensions

• Opportunistic Agents versus Managerial Stewards

• Global Convergence versus Divergence

• Value versus Stigma of Multiple Directorships

• State Ownership versus Private Ownership

Adapted from Peng MW 2022, Global Strategy, Cengage

University of South Australia

Australia’s University of Enterprise
 History of State v/s Private ownerships
• 1929-1933 – Great depression – move to SOE
• Till 1980 – half of Europe’s GDP from SOE
• From 1980’s – Thatcherism – privatisations
• After 1990’s Soviet collapse: aggressive privatization reached BRIC,
Vietnam, Africa
• Spearheaded by IMF and WB
• 2008 – GFC – pendulum swung back
• USA calls it Govt Sponsored Enterprises (GSE)
- AIG, GM, RBS – “too big to fail”
• Now:
- 4 of top 10 largest firms by sales are SOE
- 6 of top 10 largest firms by profit are SOE

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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
Adapted from Peng MW 2022, Global Strategy, Cengage

University of South Australia

Australia’s University of Enterprise