332 Part 3: Strategic Actions: Strategy Implementation
them by the government.^137 This suggests a potential conflict between the principals, par-
ticularly the state owner and the private equity owners of the state-owned enterprises.^138
Some evidence suggests that corporate governance in China may be tilting toward the
Western model. For example, recent research shows that with increasing frequency, the
compensation of top-level executives in Chinese companies is closely related to prior and
current financial performance of their firm.^139 Research also shows that, due to the weaker
institutions, firms with family CEOs experience more positive financial performance
than others without the family influence.^140
Changing a nation’s governance systems is a complicated task that will encounter
problems as well as successes while seeking progress. Thus, corporate governance in
Chinese companies continues to evolve and likely will continue to evolve for some time
to come as parties (e.g., the Chinese government and those seeking further movement
toward free-market economies) interact to form governance mechanisms that are best
for their nation, business firms, and citizens. However, along with changes in the gover-
nance systems of specific countries, multinational companies’ boards and managers are
also evolving. For example, firms that have entered more international markets are likely
to have more top executives with greater international experience and to have a larger
proportion of foreign owners and foreign directors on their boards.^14110-6 Governance Mechanisms and Ethical Behavior
The three internal and one external governance mechanisms are designed to ensure
that the agents of the firm’s owners—the corporation’s top-level managers—make stra-
tegic decisions that best serve the interests of all stakeholders. In the United States,
shareholders are commonly recognized as the company’s most significant stakeholders.
Increasingly though, top-level managers are expected to lead their firms in ways that will
also serve the needs of product market stakeholders (e.g., customers, suppliers, and host
communities) and organizational stakeholders (e.g., managerial and non-managerial
employees).^142 Therefore, the firm’s actions and the outcomes flowing from them should
result in, at least, minimal satisfaction of the interests of all stakeholders. Without at least
minimal satisfaction of its interests, a dissatisfied stakeholder will withdraw its support
from the firm and provide it to another (e.g., customers will purchase products from a
supplier offering an acceptable substitute).
Some believe that the internal corporate governance mechanisms designed and used
by ethically responsible leaders and companies increase the likelihood the firm will be
able to, at least, minimally satisfy all stakeholders’ interests.^143 Scandals at companies such
as Enron, WorldCom, HealthSouth, and Satyam (a large information technology com-
pany based in India), among others, illustrate the negative effects of poor ethical behavior
on a firm’s efforts to satisfy stakeholders. The issue of ethical behavior by top-level man-
agers as a foundation for best serving stakeholders’ interests is being taken seriously in
countries throughout the world.^144
The decisions and actions of the board of directors can be an effective deterrent to
unethical behaviors by top-level managers. Indeed, evidence suggests that the most effec-
tive boards set boundaries for their firms’ business ethics and values.^145 After the bound-
aries for ethical behavior are determined, and likely formalized in a code of ethics, the
board’s ethics-based expectations must be clearly communicated to the firm’s top-level
managers and to other stakeholders (e.g., customers and suppliers) with whom interac-
tions are necessary for the firm to produce and sell its products. Moreover, as agents of the
firm’s owners, top-level managers must understand that the board, acting as an internal