Understanding and Managing Strategic Governance. Wei Shi

into emerging markets, national governments pay attention to corporate governance.

      German firms with more than 2,000 employees are required to have a two-tiered board structure that places the responsibility of monitoring and controlling managerial (or supervisory) decisions and actions in the hands of a separate group. All the functions of strategy and management are the responsibility of the management board. However, appointment to management falls under the responsibility of the supervisory tier, while employees, union members, and shareholders appoint members to this supervisory tier. Proponents of the German structure suggest that it helps prevent corporate wrongdoing and rash decisions by “dictatorial CEOs,” making the board more stakeholder- versus shareholder-dominant. However, critics maintain that the structure slows decision-making and often ties a CEO's hands during strategy development and implementation. The corporate governance practices in Germany makes it difficult to restructure companies as quickly as in the US. Also, because of the role of local government (through the board structure) and the power of banks in Germany's corporate governance structure, private shareholders rarely have major ownership positions in German firms.

      As in Germany, banks in Japan have an important role in financing and monitoring large public firms. Because the main bank in a keiretsu (a group of firms tied together by cross-shareholdings) owns a large share position and holds a large amount of corporate debt, it has the closest relationship with a firm's top-level managers. The main bank managers provide financial advice to firm leaders and also closely monitor managers, although they have become less significant in fostering corporate restructuring. Japanese firms are also concerned with a broader set of stakeholders than are firms in the US, including employees, suppliers, and customers, because of their group ties. Moreover, a keiretsu is more than an economic concept—it, too, is a family-like network. Some believe, though, that extensive cross-shareholdings impede the type of structural change that is needed to improve the nation's corporate governance practices. However, recent changes in the governance code in Japan have been fostering better opportunities for improved shareholder monitoring.

      China has a unique and large economy, mixed with both socialist and market-oriented traits. Over time, the government has done much to improve the corporate governance of listed companies, particularly in light of increasing privatization of businesses and the development of equity markets. However, the stock markets in China remain young and in development. In their early years, these markets were weak because of significant insider trading, but with stronger governance, they have improved. There has been a gradual decline in the equity held in state-owned enterprises while the number and percentage of private firms have grown, but the state still relies on direct and/or indirect controls to influence the strategies that firms employ. Even private firms try to develop political ties with government officials because of their role in providing access to resources and to the economy. Political governance—control mechanisms used by political actors to achieve their political objectives—permeates listed firms in China. In fact, oftentimes political governance supersedes corporate governance. At times, executives and boards must satisfy government-mandated social goals above maximizing shareholder returns. Such a model sets up potential conflicts between the owners, particularly between the state owner and the private equity owners of such enterprises.

      Along with changes in the governance systems of specific countries, multinational companies' boards and managers also evolve (see Chapter 6). 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. These encounters tend to shift governance systems toward more stakeholder-oriented systems in the United States and more shareholder-oriented systems in Europe and China and other emerging market countries.

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BOARD STRUCTURE AND PROCESS: EFFECTIVE BOARD STRATEGIC CONTROL AND MONITORING

Mainly driven by the argument under agency theory that top managers have too much power and thereby use the firm for better perquisites (such as compensation), board members abide by an institutional norm holding that governance should be focused on control and overcoming potential managerial malfeasance, which is often labeled as the audit culture.²¹ Too focused on auditing, board members may not sufficiently emphasize the need for stewardship and providing strategic advice. As boards are primarily formed to oversee the decision-making processes of corporations, while CEOs and the top management teams are in charge of decision management,²² strategic governance should center on better use of the human and social capital of board members to improve, and not just watch over, strategic decision-making.²³

Because of the audit culture found on many boards, outside directors have not been used fully to contribute to strategic decision-making. However, outside board members can help shape the content, context, and conduct of strategy formulation.²⁴ According to a survey by Russell Reynolds Associates,²⁵ boards of companies that exceeded total shareholder return (TSR) compared to relevant benchmarks for two or more years in a row spend more time on forward-looking, value-creating activities such as strategic planning and review and oversight on major strategic transactions, and less time on audit or compliance activities than their fellow directors on other boards. As a result, “the emphasis on board independence and control may hinder