Sunny Li Sun

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BA 4371-004 International Business Class
13 Governing the Corporation round the World

• Sunny Li Sun
• Nov. 22, 2008

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Singapore Certificate of Entitlement

• Singapore keep a lid on traffic by making
  would-be drivers bid for a so-called COE. The
  prices of COE are set in bimonthly auctions.
• May 10,250 for small runaround peaked
• Nov 1.3, half the price of a Big Mac in Singapore

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Send Big Three Back Home Empty-Handed

• Until they show us the plan, we cannot show them
  the money -- Speaker Nancy Pelosi.
• An Auto Bailout Would Be Terrible for Free Trade
  (Matthew J. Slaughter, Dartmouth)

• GM has 7 corporate jets

• less foreign direct investment (FDI) coming into
  the United States. In 2006 these foreign auto
  makers (multinational auto or auto-parts
  companies that are headquartered outside of the
  U.S.) employed 402,800 Americans. The average
  annual compensation for these employees was
  63,538.
• From 2003-2005 the U.S. received 16 of global
  FDI. That's down from 31.5 it received in
  1988-1990.

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FDI in US Auto IndustrySouth Carolina, Alabama,
Tennessee, Mississippi, and Georgia

• Michigan and Ohio are still dominant centers of
  U.S. vehicle making, producing more than 38 of
  all cars and trucks in 2007, but Southern states
  are making gains as foreign car makers add more
  plants in that part of the country. Four Southern
  states were responsible for 24 of U.S.
  production last year.
• Foreign makers, which currently operate eight
  plants in the South, have the firm support of
  many Southern legislators and governors, who have
  spent much of the past week giving high-profile
  denunciations of a Detroit bailout
• By 2010, the average hourly labor cost, including
  both wages and benefits, should be virtually
  even.
• legacy costs that Detroit plants bear. For each
  active worker the Big Three has on their
  payrolls, they are paying pensions for as many as
  three former workers and dependents -- costs that
  foreign car makers are largely free of in the U.S.

• The foreign auto makers are also able to shift
  output rapidly in response to changes in consumer
  demand. At its factory in East Liberty, Ohio,
  Honda Motor Co. can tweak its assembly lines in a
  matter of minutes to switch to a different model.

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An Auto Bailout Would Be Terrible for Free Trade

• 2/hit U.S.-headquartered companies that run
  multinational businesses. In total, these
  companies employ more than 22 million Americans
  and account for a remarkable 75.8 of all
  private-sector RD in the U.S. Their success
  depends on their ability to access foreign
  customers.
• These foreign affiliates are built by FDI of
  American companies in other countries. In 2006,
  U.S. parent companies exported 495.1 billion to
  foreign markets. That same year their
  majority-owned affiliates earned over 4.1
  trillion in sales -- 8.33 for every 1 in
  exports.
• In 2005 and 2006, the United Nations reported a
  record number of new FDI restrictions around the
  world .
• A bailout will likely entrench and expand
  protectionist practices across the globe
• Rising trade barriers would also hurt the Big
  Three. In 2007, GM produced more motor vehicles
  outside North America than in -- 5.02 million, or
  54 of its world-wide total.
• 3/The bailout's third global cost could fall on
  the U.S. dollar.
• A critical foundation of foreign-investor
  confidence in U.S. assets has been transparent
  competition in our product markets
• Continue earning political-risk premium"

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Who determines the direction and performance of
corporate?
Owners
Board of directors
Managers
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Evolution of OwnershipPower and Control

• concentrated ownership and control - founders
  start up firms and completely own and control
  them on an individual or family basis
• diffused ownership - publicly traded corporations
  owned by numerous small shareholders but none
  with a dominant level of control
• separation of ownership and control - dispersal
  of ownership among many small shareholders, in
  which control is largely concentrated in the
  hands of salaried, professional managers who own
  little (or no) equity

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FAMILY OWNERSHIP

• 2007, News Corp. (controlled by Rupert Murdoch
  family) made an takeover bid for Dow Jones in
  which the Bancroft family controls more than 60
  of the voting power.
• vast majority of large firms throughout
  continental Europe, Asia, Latin America, and
  Africa feature concentrated family ownership and
  control
• Good side
• family ownership and control may provide better
  incentives for the firm to focus on long-run
  performance
• may also minimize the conflicts between owners
  and professional managers
• Bad side
• may lead to the selection of less qualified
  managers (who happen to be the sons, daughters,
  and relatives of founders), the destruction of
  value because of family conflicts, and the
  expropriation of minority shareholders

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ArcelorMittal

• At 32 years of age, Aditya Mittal, son of the
  steel magnate Lakshmi Mittal and CFO of
  ArcelorMittal - the company that his father heads
  and majority owns - is remarkably young for his
  role in a company of 310,000 employees and that
  last year saw sales of 105bn.
• an economics degree at the Wharton School in
  Pennsylvania, joined CSFB as an investment
  banker, after less than a year, join his father
  in early 1997.
• In the early days, being my father's son was a
  double-edged sword. Of course it gave me the
  unique opportunity to join a company with
  fantastic growth prospects that would eventually
  become the biggest in its sector. But (the family
  relationship) also triggered a set of
  expectations different to what others in my
  position would have encountered. I had to
  demonstrate to everyone that I could do the job
  (of being a senior executive in Lakshmi Mittal's
  company) because of who I am, not because of my
  last name

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State-owned Enterprises (SOEs)
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STATE OWNERSHIP

• in theory, all citizens (including employees) are
  owners, in practice, they have neither rights to
  enjoy dividends generated by SOEs (as
  shareholders would) nor rights to transfer or
  sell their property
• SOEs are de facto owned and controlled by
  government agencies far removed from ordinary
  citizens and employees
• Good side
• SOEs get more resources and supports from
  government, keep a monopoly position in some
  market.
• Bad Side
• there is little motivation for SOEs managers and
  employees to improve performance, which they can
  hardly benefit from personally
• SOEs suffer from an incentive problem and often
  perform poorly

• Vietnam draw up a list of inefficient and
  loss-making public firms every year for intensive
  monitoring, warning firms that continue to
  languish will be sold or dissolved.

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Case CNOOCs hunt round the World Sinophobia

• CNOOC, China's third largest oil producer, put a
  USD 2.5 billion bid in for Norwegian offshore oil
  driller Awilco Offshore ASA, Awilco operates oil
  and gas drilling rigs in Australia, Vietnam,
  Saudi Arabia, and the Mediterranean.
• 2005, CNOOC was blocked by the American
  government from acquiring Unocal
• CNOOC fail to bid some Australian Firms.
  Australia regulators worry about CNOOCs the
  underlying business logic (not maximize
  shareholder value) and thus may deprive the
  government of tax revenues

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Classroom Quiz

• The vast majority of large firms throughout
  continental Europe, Asia, Latin America, and
  Africa feature
• a. State ownership
• b. Concentrated family ownership
• c. Diffused ownership
• d. Diffused state ownership

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The Tripod of Corporate Governance
Owners
Board of directors
Managers
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PRINCIPAL - AGENT CONFLICTS

• Top management team (TMT) - group, led by the
  chief executive officer (CEO), that represents
  another crucial leg of the corporate governance
  tripod
• Agency relationship - relationship between
  shareholders (principals) and professional
  managers (agents)
• Principals - persons (such as owners) delegating
  authority
• Agents - persons (such as managers) to whom
  authority is delegated

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PRINCIPAL - AGENT CONFLICTS

• Agency theory - simple yet profound proposition
• to the extent that the interests of principals
  and agents
• do not completely overlap, there will inherently
  be principal agent conflicts
• Agency costs - result of principal-agent
  conflicts
• principals costs of monitoring and controlling
  agents
• agents costs of bonding signaling that they are
  trustworthy
• Information asymmetries - dynamic between
  principals and agents agents such as managers
  almost always know more about the property they
  manage than principals do

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PRINCIPAL-PRINCIPAL CONFLICTS

• principal-principal conflicts - conflicts between
  two classes of principals controlling
  shareholders and minority shareholders
• expropriation - activities that enrich
  controlling shareholders at the expense of
  minority shareholders
• tunneling - form of corporate theft that occurs
  when managers from the controlling family divert
  resources from the firm for personal or family
  use
• related transactions - legal means whereby
  controlling owners sell firm assets to another
  firm they own at below market prices or spin off
  the most profitable part of a public firm and
  merge it with another private firm of theirs

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Parents who indulge errant children are rewarded
only with more bad behavior

• Hong Kong-based Citic Pacific last month revealed
  it faced a near-2 billion loss on
  foreign-currency derivative contracts arranged
  without proper authorization.
• Chairman Mr. Yung, the 66-year-old son of Citic
  founder and former China Vice President Rong
  Yiren. Her daughter charge the hedging
  strategies.
• A six-week delay between discovery of the problem
  and its disclosure to the market.

• Accountant PricewaterhouseCoopers is reviewing
  the company's internal controls.
• Citic Group (China International Trust and
  Investment Company) is bailing out at more than
  1 billion in exchange for a 1.5 billion
  investment and the same amount in credit
  facilities. Its stake grow from 29.4 to 57.6.
• Yung been diluted his 19 stake in Citic Pacific
  to 11.5.

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BOARD OF DIRECTORS

• Inside directors - top executives of a firm
• Outside directors - nonmanagement members of the
  board
• CEO duality when CEO serves as board chair
• e.g. GM CEO Mr. Wagoner became chairman in 2003
• Interlocking directorate - one person affiliated
  with one firm sits on the board of another firm

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ROLE OF BOARD OF DIRECTORS

• Control - effectively control managers
• Service - advising the CEO
• Resource - acquisition functions
• Boards effectiveness in serving the control
  function stems from their independence,
  deterrence, and norms.
• Of GM's 14 board members, nine have been in place
  since Mr. Wagoner became chairman in 2003. Many
  were elected when Mr. Wagoner's mentor and
  predecessor, Jack Smith, was running the auto
  maker. Lead director George Fisher, the retired
  chairman of Eastman Kodak Co., several times in
  recent years voiced support for Mr. Wagoner as
  the company racked up billions in losses. Other
  directors include Phil Laskawy, the retired
  Chairman of Ernst Young, who was recently named
  Chairman of Fannie Mae, and University of North
  Carolina president Erskine Bowles, who was chief
  of staff for President Bill Clinton.

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GOVERNANCE MECHANISMS

• voice-based mechanisms - willingness of
  shareholders to work with managers, usually
  through the board, by voicing their concerns
• pay-for-performance link in executive
  compensation is usually not very strong
• boards may have to dismiss underperforming CEOs
• Why board do not fire Mr. Wagoner?
• Members of General Motors Corp.'s board of
  directors are willing to consider 'all options'
  for the ailing auto maker, including an eventual
  filing for bankruptcy protection, a stance that
  puts them in rare disagreement with Chairman and
  Chief Executive Rick Wagoner.

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GOVERNANCE MECHANISMS

• exit-based mechanisms - means by which corporate
  control is gained from external sources when
  shareholders no longer have patience and are
  willing to exit by selling their shares
• threat of takeovers does limit managers
  divergence from shareholder wealth maximization
• private equity - acquisition of a significant
  portion or a majority control in a more mature
  firm
• leveraged buyouts (LBOs) - means by which private
  investors, often in partnership with incumbent
  managers, issue bonds and use the cash raised to
  buy the firms stock

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GLOBAL CONVERGENCE vs. DIVERGENCE

• Is corporate governance converging or diverging
  globally?
• Convergence advocates argue that globalization
  unleashes a survival-of-the-fittest process by
  which firms will be forced to adopt globally best
  practices.
• Critics contend that governance practices will
  continue to diverge throughout the world.
• Political Root of CG

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INSTITUTIONS AND CORPORATE GOVERNANCE

• given reasonable investor protection, founding
  families may over time feel comfortable becoming
  minority shareholders of the firms they founded
• when formal legal and regulatory institutions are
  dysfunctional, founding families must run their
  firms directly
• absent investor protection, bestowing management
  rights to
• outside professional managers may invite abuse
  and theft
• corporate governance ultimately is a choice about
  political governance

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RESOURCES AND CORPORATE GOVERNANCEVRIO framework

• ability to successfully list on a high profile
  exchange such as the NYSE and LSE is valuable,
  rare, and hard-to-imitate
• managerial human capital - these resources, such
  as the social networks of executives, are unique
  and likely to add value
• top managerial talents are hard to imitate -
  unless they are hired away by competitor firms.
• within an organizational setting (in TMTs and
  boards) that managers and directors at the top of
  an organization can make a world of difference

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OPPORTUNISTIC AGENTS vs.MANAGERIAL STEWARDS

• Agency theory assumes managers are agents who may
  engage in self-serving, opportunistic activities
  if left to their own devices.
• However, critics contend that most managers are
  likely to be honest and trustworthy.
• Stewardship theorists agree that agency theory is
  useful when describing a certain portion of
  managers and under certain circumstances.
• If all principals view all managers as
  selfserving agents with control mechanisms to put
  managers on a tight leash, some managers, who
  initially view themselves as stewards, may become
  so frustrated that they end up engaging in the
  very self-serving behavior agency theory seeks to
  minimize.

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Summary

• Differentiate various ownership patterns around
  the world
• The role of managers in both principal-agent and
  principal-principal conflicts
• The role of the board of directors
• Identify voice- and exit-based governance
  mechanisms and their combination as a package
• Acquire a global perspective on how governance
  mechanisms vary around the world
• Next Week
• Corporate Social Responsibility
• Integrative Cases Presents and Discussion 4