Chapter 10: Corporate Governance
10–5 INTERNATIONAL CORPORATE GOVERNANCE
Our discussion of internal and external governance mechanisms—and their effectiveness
in controlling managerial behavior—has been centered on the United States and the
10-5a Corporate Governance in Germany and Japan
The owner-manager relationship in Germany differs from that described for the United
States. For example:
• In many private German firms, the owner and manager are the same person.
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.
Chapter 10: Corporate Governance
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
Corporate governance in Japan is affected by the concepts of obligation, family, and
consensus.
In Japan, obligation goes beyond principles but is more a product of specific causes,
events, and relationships. It can mean returning a service for one that has been rendered.
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.
Chapter 10: Corporate Governance
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.
10-5b Corporate Governance in China
Corporate governance in China has undergone major changes over the past decade, along
with the privatization of business and the development and integrity of the equity market.
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
chairman of the board be held by two different individuals. It also recommended
Chapter 10: Corporate Governance
10–6 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
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
2. What is meant by the statement that ownership is separated from managerial
control in the corporation? Why does this separation exist?
Historically, U.S. 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
Chapter 10: Corporate Governance
3. What is an agency relationship? What is managerial opportunism? What
assumptions do owners of corporations make about managers as agents?
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
occurred.
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
Chapter 10: Corporate Governance
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?
In recent times, many stakeholders, including shareholders, have been angered by what
they consider excessive compensation received by some top-level managers, especially
While some stock option-based compensation plans are well designed with option strike
prices substantially higher than current stock prices, too many have been designed simply
to give executives more wealth that will not immediately show up on the balance sheet.
Chapter 10: Corporate Governance
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?
The market for corporate control is an external governance mechanism that becomes
active when a firm’s internal controls fail. The market for corporate control is composed
7. What is the nature of corporate governance in Germany, Japan, and China?
In many private German firms, the owner and manager may be the same individual so no
agency problem will exist. Even in publicly traded corporations, there is often a dominant
Chapter 10: Corporate Governance
In the past, 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 U.S. system.
As in Germany, banks 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. The
main bank provides financial advice to the firm and closely monitors managers. Thus,
Japan has a bank-based financial and corporate governance structure compared to the
U.S. market-based financial and governance structure.
Chapter 10: Corporate Governance
As is the case in Germany, Japan’s corporate governance structure is changing. For
example, because of their continuing development as economic organizations, the role of
banks in the monitoring and control of managerial behavior and firm outcomes is less
significant than it has been. The Asian economic crisis in the later part of the 1990s
substantially harmed Japanese firms, revealing the governance problems in the system.
8. How can corporate governance foster ethical decisions and behaviors on the part of
managers as agents?
In the United States, the focus of governance mechanisms is on the control of managerial
MINI CASE
Governance and Activist Investors Outside of the United States
Note: To prepare students for class discussion and to introduce them to the
fundamentals of the Strategic Management process, each chapter Mini-Case is
Activism is spreading around the globe, including in Japan, Germany, and China. In 2015,
Japan adopted a new governance code, which strongly encourages firms to elect more
outsiders to boards of directors. At the same time, shareholders have become more active,
and some “engagement,” or activist, funds have exerted a stronger influence in the
Chapter 10: Corporate Governance
country’s organizations. Activist firms have also sprung up in Germany and China,
especially Hong Kong, although with differing results. Germany’s governance code
minimizes the effect of activist investors to some degree.
Teaching Note
Ask students which of the activist shareholder trends are going to help the world’s
Answers to Case Discussion Questions
1. Why are many countries adopting “western” governance systems similar to those found
in the United States and the United Kingdom that are more shareholder friendly?
Corporate governance practices in the United States and the United Kingdom have
2. What particular governance devices are helping or hindering good governance in these
countries that are changing their governance systems?
In countries where the boards of directors are becoming more diversified with the
Chapter 10: Corporate Governance
3. How do sovereign wealth funds affect governance of firms in home and foreign
countries?
Like activist investors, sovereign wealth funds demand a voice in the governance of an
4. What would you recommend to improve the governance systems in Japan, Germany, and
China, respectively, given the governance devices described in Chapter 10?
Ownership concentration already appears to be actively working in these countries,
ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
Application Discussion Questions
1. Top executives and members of a corporation’s board of directors have different roles and
responsibilities. Traditionally, executives have been responsible for determining the
2. Ask students if they believe that large U.S. firms have been over governed by some
corporate governance mechanisms and under governed by others. Provide an example of
each.
Chapter 10: Corporate Governance
4. The market for corporate control may not be an effective governance mechanism. What
factors might account for the ineffectiveness of this method of monitoring and controlling
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?
4. What ethical issues surround executive compensation? How can one determine whether
top executives are paid too much?
INSTRUCTOR’S NOTES FOR MINDTAP
Cengage offers additional online activities, assessments and resources inside MindTap,
Course Level Resource: Cornerstone to Capstone Diagnostic- features short quizzes in
the key business areas of: Finance, Marketing, Accounting, Management and Economics.
Averaging between 7-9 questions per topical area, these quizzes are designed to help
Chapter 10: Corporate Governance
34
Chapter Level Resources:
• What Would You Do Video
• MindTap Reader (eBook)
• Assignments:
o Multiple Choice Quiz
o Video Quiz
Course Level Case Resources:
• Text Cases (Readings)
• Group Case Activities (Group Case Assignments)
• Supplemental Cases (Readings)
ADDITIONAL INFORMATION FOR SELECT MINDTAP RESOURCES:
WHAT WOULD YOU DO? ALIBABA
This exercise introduces students to strategic decisions as they are made in the real world.
Students should come to class prepared to discuss this exercise, and why they chose the
answer they did. All answers are graded as correct – the point of the exercise is to engage
your student’s interest.
Chapter 10: Corporate Governance
VIDEO QUIZ: ALIBABA
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
RT: 3:18
Topic Key: International Corporate Governance
Alibaba, the Chinese internet giant, declares that it is going public on the NYSE. Alibaba
Suggested Discussion Questions and Answers
• Why would Alibaba choose to list in the U.S. and not in the Hong Kong Exchange?
One possible explanation is a lack of confidence in Chinese government’s
• 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?
The Chinese do not have the best reputation for corporate governance. To bring
Chapter 10: Corporate Governance
• 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?
Diversification and reinvestments would be the best use of these funds to help the
GUIDED CASE: GOVERNANCE AND ACTIVIST INVESTORS
OUTSIDE OF THE U.S.
This auto-graded activity asks students to read the short end-of-chapter case on
Governance and Activist Investors Outside of the U.S., and answer questions in the areas
of Analysis, Strategy, and Implementation & Performance.
Activism is spreading around the globe, and this case offers specific examples from Japan,
Germany, and China. Japan’s new governance code, implemented in 2015, has opened the
Another type of investment fund is the sovereign wealth fund, and these funds are also
taking a more active role in both developed and emerging economies around the globe.
Chapter 10: Corporate Governance
In answering the Guided Case Questions, students will review these concepts:
• Activist investors
YOU MAKE THE DECISION: AVON
You Make the Decision branching exercises are real-world activities that allow each
student to work through challenges by choosing from different decision-making options.
Avon Products, Inc., the beauty supply company, is at a crossroads. Its customers and
employees are vocally unsatisfied with the way the company has neglected their needs
solely for revenue. Also, profit and market share are down because of a rapid increase in
competitors. The company overall is starting to lose its identity.
Vision:
To be the company that best understands and satisfies the product, service, and self-
fulfillment needs of women—globally.
Mission:
• To be a leader in global beauty
Chapter 10: Corporate Governance
Values:
• Belief
Students will review these concepts:
• Shareholder values
The ideal path that earns a perfect score is the following:
• Choose to satisfy the sales representatives and employees is the correct first step when
trying to rebuild the core values of Avon.
GROUP PROJECT: CHECKS AND BALANCES: PLACING
REGULATIONS ON EXECUTIVE PAY
This chapter refers to the importance of strong corporate governance and the benefits of
the mechanisms that are a result. A major facet of corporate governance is executive
Chapter 10: Corporate Governance
Two resources that may be useful to you in understanding the impacts of the Dodd-Frank
Act are as follows:
Students will be asked to:
• Research trends in executive compensation of 10 publicly trades companies prior to and
since the passing of the Dodd-Frank Act in 2010.
• Prepare to answer the following questions:
• What has happened to executive pay packages since passage of the act?
Chapter 10: Corporate Governance
• Prepare a case study of one of the publicly traded companies you identified and discuss
how the passing of the act affected this company.