Chapter 10: Corporate Governance 333
governance mechanism, will hold them fully accountable for developing and supporting
an organizational culture in which only ethical behaviors are permitted. As explained in
Chapter 12, CEOs can be positive role models for improved ethical behavior.^146
A major issue confronted by multinational companies operating in international mar-
kets is that of bribery.^147 As a whole, countries with weak institutions that have greater
bribery activity tend to have fewer exports as a result. In addition, small- and medium-
sized firms are the most harmed by bribery. Thus, bribery tends to limit entrepreneurial
activity that can help a country’s economy grow. While larger multinational firms tend
to experience fewer negative outcomes, their power to exercise more ethical leadership
allows them greater flexibility in selecting which markets they will enter and how they
will do so.^148
Through effective governance that results from well-designed governance mecha-
nisms and the appropriate country institutions, top-level managers, working with others,
are able to select and use strategies that result in strategic competitiveness and earning
above-average returns. While some firms’ governance mechanisms are ineffective, other
companies are recognized for the quality of their governance activities.
World Finance evaluates the corporate governance practices of companies throughout
the world. For 2015, a sampling of this group’s “Best Corporate Governance Awards” by
country were given to Magna International (Canada), China Communications Services
Corporation (China), BASF (Germany), Prosafe (Norway), British Telecom (United
Kingdom), and Intel (United States). These awards are determined by analyzing a number
of issues concerned with corporate governance, such as board accountability and finan-
cial disclosure, executive compensation, shareholder rights, ownership base, takeover
provisions, corporate behavior, and overall responsibility exhibited by the company.^149
SUMMARY
■ Corporate governance is a relationship among stakeholders that
is used to determine a firm’s direction and control its performance.
How firms monitor and control top-level managers’ decisions and
actions affects the implementation of strategies. Effective gover-
nance that aligns managers’ decisions with shareholders’ interests
can help produce a competitive advantage for the firm.
■ Three internal governance mechanisms are used in the
modern corporation:
■ ownership concentration
■ the board of directors
■ executive compensationThe market for corporate control is an external governance
mechanism influencing managers’ decisions and the outcomes
resulting from them.
■ Ownership is separated from control in the modern corporation.
Owners (principals) hire managers (agents) to make decisions
that maximize the firm’s value. As risk-bearing specialists, own-
ers diversify their risk by investing in multiple corporations with
different risk profiles. Owners expect their agents (the firm’s
top-level managers, who are decision-making specialists) to
make decisions that will help to maximize the value of their
firm. Thus, modern corporations are characterized by an agency
relationship that is created when one party (the firm’s owners)
hires and pays another party (top-level managers) to use its
decision-making skills.
■ Separation of ownership and control creates an agency
problem when an agent pursues goals that conflict with the
principals’ goals. Principals establish and use governance
mechanisms to control this problem.
■ Ownership concentration is based on the number of large-
block shareholders and the percentage of shares they own.
With significant ownership percentages, such as those held by
large mutual funds and pension funds, institutional investors
often are able to influence top-level managers’ strategic deci-
sions and actions. Thus, unlike diffuse ownership which
tends to result in relatively weak monitoring and control of
managerial decisions, concentrated ownership produces more
active and effective monitoring. Institutional investors are a
powerful force in corporate America and actively use their
positions of concentrated ownership to force managers
and boards of directors to make decisions that best serve
shareholders’ interests.