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The owner-manager relationship in Germany differs from that described for the US. For
example:
Banks historically have occupied a central position in German governance structure.
• Banks became major shareholders when companies they financed either sought new
capital in the stock market or defaulted on loans.
Despite the ability of major owners and banks to monitor and control the managers of large
German firms, maximizing shareholder value has not been a historical focus. However, this
is changing.
Teaching Note
A shift is taking place in German firms’ historic lack of focus on maximizing
shareholder value. For example, SGL Carbon AG lost more than $71 million in the
early 1990s and was later restructured to turn the corporation around. In particular,
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The concept of family goes beyond the American concept to include the firm—individuals
see themselves as members of a company family. And the family concept is extended to
As in Germany, banks also play an important role in financing and monitoring large public
firms in Japan.
• The bank owning the largest share of stocks and the largest amount of debt—the main
bank—has the closest relationship with the company’s top executives.
Teaching Note
Keiretsus are both diversified and vertically integrated to the extent that they
generally include one or more firms in almost all-important industrial sectors.
As in Germany, Japan’s corporate governance structure is changing. For example, the role of
banks in the monitoring and control of managerial behavior and firm outcomes has become
less significant.
STRATEGIC FOCUS
“Engagement” vs. “Activist” Shareholders in Japan, Germany and China
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Teaching Note
Ask the students which of the activist shareholder trends are going to help the world’s
economy. What effect will these activists have on the scope of globalization throughout the
world? What would happen if these activists never targeted the emerging and already
prosperous economies?
Corporate Governance in China
Teaching Note
Examples of differences and changes in international governance follow:
• In France, anger has been growing over the lack of information on top executive
compensation. A recent report recommended that the positions of CEO and
8
Describe how corporate governance fosters ethical decisions
by a firm’s top-level managers.
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GOVERNANCE MECHANISMS AND ETHICAL BEHAVIOR
Governance mechanisms discussed in this chapter focus on ensuring that managers work
effectively toward meeting their obligation to maximize shareholder wealth. However,
shareholders are only one group of the firm’s stakeholders (as discussed in Chapter 1).
Teaching Note
John Smales (outside director of the board at GM) has commented that the most
fundamental obligation of management is to perpetuate the organization, taking
priority even over stockholder interests. His comments may provide a good
opportunity to engage students in a discussion about the purpose of the firm and its
obligations to all stakeholders.
ANSWERS TO REVIEW QUESTIONS
1. What is corporate governance? What factors account for the considerable
amount of attention corporate governance receives from several parties,
including shareholder activists, business press writers, and academic scholars?
Why is governance necessary to control managers’ decisions?
Corporate governance is a relationship among stakeholders that is used to determine and
control the direction and performance of organizations.
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2. What is meant by the statement that ownership is separated from managerial
control in the corporation? Why does this separation exist?
Historically, US firms were managed by the founders/owners and their descendants.
In these cases, corporate ownership and control resided in the same person(s). As
firms grew larger, ownership and control were separated in most large corporations so
3. What is an agency relationship? What is managerial opportunism? What
assumptions do owners of corporations make about managers as agents?
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Despite its advantages, the separation of ownership and control may result in some
potential costs (and risks) for owners by creating an agency relationship. An agency
4. How is each of the three internal governance mechanisms—ownership
concentration, boards of directors, and executive compensation—used to align
the interests of managerial agents with those of the firm’s owners?
Ownership concentration is an effective governance mechanism because owners of
large blocks of stock (representing a higher percentage of ownership) have a greater
financial interest in monitoring managerial decisions than do small shareholders
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5. What trends exist regarding executive compensation? What is the effect of the
increased use of long-term incentives on top-level managers’ strategic decisions?
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6. What is the market for corporate control? What conditions generally cause this
external governance mechanism to become active? How does this mechanism
constrain top-level managers’ decisions and actions?
7. What is the nature of corporate governance in Germany, Japan, and China?
In many private German firms, owner and manager may be the same individual and
thus no agency problem will exist. Even in publicly traded corporations, there is often
a dominant shareholder, so the problem is minimized. Thus, ownership concentration
is an important means of corporate governance in Germany, just as it is in the US.
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Historically, banks have been at the center of the German corporate governance
structure, which is the case in many continental European countries such as Italy and
France. As lenders, banks become major shareholders when companies they had
financed earlier seek funding on the stock market or default on loans. Although stakes
Historically, German executives have not been dedicated to the maximization of
shareholder value. However, corporate governance in Germany is changing. Due at
least partially to the increasing globalization of business, many governance systems
are beginning to gravitate toward the US system.
Attitudes toward corporate governance in Japan are affected by the concepts of
obligation, family, and consensus. As part of a corporate family, individuals are
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Aside from lending money (debt), a Japanese bank can hold up to five percent of a
firm’s total stock; a group of related financial institutions can hold up to 40 percent.
In many cases, main-bank relationships are part of a horizontal keiretsu (a group of
firms tied together by cross-shareholdings). A keiretsu firm usually owns less than 2
percent of any other member firm; however, each company typically has a stake of
that size in every firm in the keiretsu. As a result, somewhere between 30 percent and
90 percent of a typical firm is owned by other members of the keiretsu. Thus, a
keiretsu is a system of relationship investments.
8. How can corporate governance foster ethical decisions and behaviors on the part
of managers as agents?
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it to another (e.g., customers will purchase products from a supplier offering an
acceptable substitute).
MINI-CASE
The Imperial CEO, JPMorgan Chase’s Jamie Dimon
Jamie Dimon, CEO of J.P. Morgan Chase survived the Great Recession quite well.
However, in 2012, the company suffered losses of more than $6 billion due to excessive risk
taking by traders in its London operations. Some of the loss was attributed to poor oversight
at the top. Shareholder activists sought, unsuccessfully, to split the positions of CEO and
Teaching Note
Effective corporate governance has been a critical issue for the past several decades.
Unfortunately, minimal real progress has been made in this area. For all of the grand
gestures and corporate/governmental assurances, effectiveness, transparency,
accountability, the use of incentives, and value creation all have a lot of room for
improvement. Ask students to identify contemporary governance issues/governance
breakdowns and to speculate about why the issue/breakdown exists. Ask them to identify
the weak points in the system. Though students are probably unfamiliar with governance
Chapter 10: Corporate Governance
ANSWERS TO MINI CASE DISCUSSION QUESTIONS
1. How well do you think the governance system of JP Morgan Chase is working to
protect shareholder interests?
2. What particular governance devices are helping or hindering good governance in
the JP Morgan Chase situation?
3. What do you recommend to improve the governance system specifically for JP
Morgan Chase, but also the overall system of governance devices described in
Chapter 10?
ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
Application Discussion Questions
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1. The roles and responsibilities of top executives and members of a corporation’s board of
directors are different. Traditionally, executives have been responsible for determining
the firm’s strategic direction and implementing strategies to achieve it, whereas the board
of directors has been responsible for monitoring and controlling managerial decisions and
actions. Some argue that boards should become more involved with the formulation of a
firm’s strategies. How would the board’s increased involvement in the selection of
strategies affect a firm’s strategic competitiveness? What evidence can the students offer
to support their position?
2. Ask students if they believe that large US firms have been over governed by some
corporate governance mechanisms and under governed by others. Provide an example of
each.
3. How can corporate governance mechanisms create conditions that allow top executives to
develop a competitive advantage and focus on long-term performance? Have students use
the Internet to search the business press and give an example of a firm in which this
occurred.
4. Some believe that the market for corporate control is not an effective governance
mechanism. What factors might account for the ineffectiveness of this method of
monitoring and controlling managerial decisions?
5. Present the following comment to the class: “As a top executive, the only agency
relationship I am concerned about is the one between me and the firm’s owners. I think
that it would be a waste of my time and energy to worry about any other agency
relationships.” What are these other agency relationships? How would students respond
to this person? Do they accept or reject this view? Have them support their position.
Ethics Questions
1. As explained in this chapter, using corporate governance mechanisms should establish
order between parties whose interests may be in conflict. Do owners of a firm have any
ethical responsibilities to managers in a firm that uses governance mechanisms to
establish order? If so, what are those responsibilities?
2. Is it ethical for a firm’s owner to assume that agents (managers hired to make decisions in
the owner’s best interests) are averse to risk? Why or why not?
3. What are the responsibilities of the board of directors to stakeholders other than
shareholders?
4. What ethical issues surround executive compensation? How can we determine whether
top executives are paid too much?
5. Is it ethical for firms involved in the market for corporate control to target companies
performing at levels exceeding the industry average? Why or why not?
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6. What ethical issues, if any, do top executives face when asking their firm to provide them
with a golden parachute?
7. How can governance mechanisms be designed to ensure against managerial opportunism,
ineffectiveness, and unethical behaviors?
INSTRUCTOR’S NOTES FOR MINDTAP
INSTRUCTOR’S NOTES FOR BRANCHING
EXERCISE
Corporate Governance at a Crossroads: Avon
Avon Products, Inc., the beauty supply company is at a crossroads. The customers and
Mission:
– To be a leader in global beauty
– To be women’s choice for buying
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Values
– Belief
– Integrity
– Respect
– Trust
– Humility
The students will review these concepts:
INSTRUCTOR’S NOTES FOR EXPERIENTIAL
EXERCISES
Checks and Balances: Placing Regulations on Executive Pay
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Two resources that may be useful to you in understanding the impacts of the Act:
Students will be asked to:
1. Research trends in executive compensation of 10 publically trades companies.
prior to and since the passing of Dodd-Frank in 2010
2. Prepare to answer the following questions:
a. What has happened to executive pay packages since passage of the act?
b. What is the total shareholder return and how is it calculated? Provide an
example.
c. Has there been any impact on long-term incentive pay for executives?
d. Do you feel that passage of Dodd-Frank has been effective in connecting
executive compensation to company performance?
3. Prepare a case study of one of the publically traded companies you identified and
discuss how the passing of the act affected their company.
4. Present a 15-20 slide deck on their findings and how the passage of Dodd Frank
has directly affected their business.
INSTRUCTOR’S NOTES FOR MEDIA QUIZ
The media quiz offers additional opportunities for students to apply the concepts in the
chapter to a real-world scenario as it is described in news reports.
Title: Alibaba Goes Public
RT: 3:18
Topic Key: International Corporate Governance
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1. Why would Alibaba choose to list in the U.S. and not in the Hong Kong
Exchange?
2. The Hong Kong Exchange rejected Alibaba’s application to list on it because
of its corporate governance structure. Why would a home country restrict
their largest company from going public?
3. Alibaba is a company that is very profitable and has a large market value.
What would be a beneficial use of the funds generated by the IPO?