chapter 16 governing the corporation. learning objectives after studying this chapter, you should be...
TRANSCRIPT
Chapter 16
Governing the Corporation
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Differentiate various ownership patterns around the world
2. Articulate the role of managers in both principal-agent and principal-principal conflicts
3. Explain the role of the board of directors
4. Identify voice- and exit-based governance mechanisms and their combination as a package
5. Acquire a global perspective on how governance mechanisms vary around the world
6. Articulate how institutions and resources affect corporate governance
7. Participate in two leading debates on corporate governance
8. Draw implications
OWNERSHIP AND CONTROL
concentrated ownership and control - founders start up firms and completely own and control them on an individual or family basis
diffused ownership - publicly traded corporations owned by numerous small shareholders but none with a dominant level of control
separation of ownership and control - dispersal of ownership among many small shareholders, in which control is largely concentrated in the hands of salaried, professional managers who own little (or no) equity
FAMILY OWNERSHIP
vast majority of large firms throughout continental Europe, Asia, Latin America, and Africa feature concentrated family ownership and controlfamily ownership and control may provide better incentives for the firm to focus on long-run performancemay also minimize the conflicts between owners and professional managersmay lead to the selection of less qualified managers (who happen to be the sons, daughters, and relatives of founders), the destruction of value because of family conflicts, and the expropriation of minority shareholders
STATE OWNERSHIPstate-owned enterprises (SOEs) suffer from an incentive problem and often perform poorlyin theory, all citizens (including employees) are owners, in practice, they have neither rights to enjoy dividends generated by SOEs (as shareholders would) nor rights to transfer or sell “their” propertySOEs are de facto owned and controlled by government agencies far removed from ordinary citizens and employeesthere is little motivation for SOE managers and employees to improve performance, which they can hardlybenefit from personally
PRINCIPAL - AGENT CONFLICTS
top management team (TMT) - group, led by the chief executive officer (CEO), that represents another crucial leg of the corporate governance tripod
agency relationship - relationship between shareholders (principals) and professional managers (agents)
principals - persons (such as owners) delegating authority
agents - persons (such as managers) to whom authority is delegated
PRINCIPAL - AGENT CONFLICTS
agency theory - simple yet profound proposition:to the extent that the interests of principals and agentsdo not completely overlap, there will inherently be principal agent conflictsagency costs - result of principal-agent conflicts:principals’ costs of monitoring and controlling agentsagents’ costs of bonding signaling that they are trustworthyinformation asymmetries - dynamic between principals and agents; agents such as managers almost always know more about the property they manage than principals do
PRINCIPAL-PRINCIPAL CONFLICTS
principal-principal conflicts - conflicts between two classes of principals: controlling shareholders and minority shareholders
expropriation - activities that enrich controllingshareholders at the expense of minority shareholders
tunneling - form of corporate theft that occurs when managers from the controlling family divert resourcesfrom the firm for personal or family use
related transactions - legal means whereby controlling owners sell firm assets to another firm they own at below market prices or spin off the most profitable part of a public firm and merge it with another private firm of theirs
BOARD OF DIRECTORS
inside directors - top executives of a firm
outside directors - nonmanagement members of
the board
CEO duality – when CEO serves as board chair
interlocking directorate - one person affiliated with one firm sits on the board of another firm
ROLE OF BOARD OF DIRECTORS
control - effectively control managers
service - advising the CEO
resource - acquisition functions
Boards’ effectiveness in serving the control function stems from their independence, deterrence, and norms
GOVERNANCE MECHANISMS
voice-based mechanisms - willingness of shareholders’ to work with managers, usually through the board, by “voicing” their concerns pay-for-performance link in executive compensation is usually not very strong
boards may have to dismiss underperforming CEOs
GOVERNANCE MECHANISMS
exit-based mechanisms - means by which corporate control is gained from external sources when shareholders no longer have patience and are willing to “exit” by selling their sharesthreat of takeovers does limit managers’ divergence from shareholder wealth maximizationprivate equity - acquisition of a significant portion or a majority control in a more mature firm leveraged buyouts (LBOs) - means by which private investors, often in partnership with incumbent managers, issue bonds and use the cash raised to buy the firm’s stock
INSTITUTIONS AND CORPORATE GOVERNANCE
given reasonable investor protection, founding families may over time feel comfortable becoming minority shareholders of the firms they founded
when formal legal and regulatory institutions are dysfunctional, founding families must run their firms directly
absent investor protection, bestowing management rights to outside professional managers may invite abuse and theft
corporate governance ultimately is a choice about political governance
RESOURCES AND CORPORATE GOVERNANCEVRIO framework
ability to successfully list on a high profile exchange such as the NYSE and LSE is valuable, rare, and hard-to-imitatemanagerial human capital - these resources, such as the social networks of executives, are unique and likely to add valuetop managerial talents are hard to imitate - unless they are hired away by competitor firms.within an organizational setting (in TMTs and boards) that managers and directors at the top of an organization can make a world of difference
OPPORTUNISTIC AGENTS vs.MANAGERIAL STEWARDS
Agency theory assumes managers are agents who may engage in self-serving, opportunistic activities if left to their own devices. However, critics contend that most managers are likely to be honest and trustworthy.Stewardship theorists agree that agency theory is useful when describing a certain portion of managers and under certain circumstances. If all principals view all managers as selfserving agents with control mechanisms to put managers on a “tight leash,” some managers, who initially view themselves as stewards, may become so frustrated that they end up engaging in the very self-serving behavior agency theory seeks to minimize.
GLOBAL CONVERGENCE vs. DIVERGENCE
Is corporate governance converging or diverging globally?Convergence advocates argue that globalization unleashes a “survival-of-the-fittest” process by which firms will be forced to adopt globally best practices.Critics contend that governance practices will continue to diverge throughout the world.