328 Part 3: Strategic Actions: Strategy Implementation
using takeover defenses reduces the amount of pressure managers feel to seek short-
term performance gains, resulting in them concentrating on developing strategies with a
longer time horizon and a high probability of serving stakeholders’ interests. Such firms
are more likely to invest in and develop innovation; when they do so, the firm’s market
value increases, thereby rewarding shareholders.^116
An awareness on the part of top-level managers about the existence of external inves-
tors in the form of individuals (e.g., Carl Icahn) and groups (e.g., hedge funds) often
positively influences them to align their interests with those of the firm’s stakeholders,
especially the shareholders. Moreover, when active as an external governance mechanism,
the market for corporate control has brought about significant changes in many firms’
strategies and, when used appropriately, has served shareholders’ interests. Of course,
the goal is to have the managers develop the psychological ownership of principals.^117
However, such sense of ownership can be taken too far such that narcissistic (i.e., egotis-
tical) top executives can feel that they are personally central to the identity of the firm.^11810-5 International Corporate Governance
Corporate governance is an increasingly important issue in economies around the world,
including emerging economies. Globalization in trade, investments, and equity markets
increases the potential value of firms throughout the world using similar mechanisms to
govern corporate activities. Moreover, because of globalization, major companies want to
attract foreign investment. For this to happen, foreign investors must be confident that
adequate corporate governance mechanisms are in place to protect their investments.
Although globalization is stimulating an increase in the intensity of efforts to improve
corporate governance and potentially to reduce the variation in regions and nations’ gov-
ernance systems,^119 the reality remains that different nations do have different governance
systems in place. Recognizing and understanding differences in various countries’ gover-
nance systems, as well as changes taking place within those systems, improves the likeli-
hood a firm will be able to compete successfully in the international markets it chooses
to enter. Next, to highlight the general issues of differences and changes taking place in
governance systems, we discuss corporate governance practices in two developed econo-
mies (Germany and Japan) and in the emerging economy of China.10-5a Corporate Governance in Germany and Japan
In many private German firms, the owner and manager may be the same individual. In
these instances, agency problems are not present.^120 Even in publicly traded German cor-
porations, a single shareholder is often dominant. Thus, the concentration of ownership
is an important means of corporate governance in Germany, as it is in the United States.^121
Historically, banks occupied the center of the German corporate governance system.
This is the case in other European countries as well, such as Italy and France. As lenders,
banks become major shareholders when companies they financed seek funding on the
stock market or default on loans. Although the stakes are usually less than 10 percent,
banks can hold a single ownership position up to, but not exceeding 15 percent of the
bank’s capital. Although shareholders can tell banks how to vote their ownership position,
they generally do not do so. The banks monitor and control managers, both as lenders
and as shareholders, by electing representatives to supervisory boards.
German firms with more than 2,000 employees are required to have a two-tiered board
structure that places the responsibility for monitoring and controlling managerial (or super-
visory) decisions and actions in the hands of a separate group.^122 All the functions of strategy
and management are the responsibility of the management board (the Vorstand); however,