Student Learning Notes
MCR008 – Corporate Strategy
Student Learning Notes
Topic 10: Corporate governance
(Chapter 2 – Corporate Governance and Sustainability)
1. What is corporate governance? Why does corporate governance receive so much attention
from various stakeholders, including shareholders, investors, business writers and academic
scholars?
Corporate governance is the process of ensuring how important strategic decisions are made and
controlled in organisations. Corporate governance is more than just protecting the interests of
shareholders. A proper system of corporate governance should go beyond mere profit maximisation
but need to consider the effects of the company’s operations on stakeholder groups such as
customers, employees, suppliers, regulatory authorities and society at large. Effective corporate
governance is needed to enhance disclosure and transparency, facilitate effective functioning of the
board and provide an efficient legal and regulatory enforcement framework.
2. What is an agency relationship? Explain what assumptions shareholders of modern
corporations may make about managers as agents.
Agency theory is concerned with potential conflicts that may arise between shareholders
(principals) and managers (agents) who have effective control over companies. Agency relationship
is about how a principal and an agent will interact with each other, and at times shareholders’ and
managers’ interests are not always aligned Shareholders lack direct control of large, publicly traded
corporations. It is difficult and expensive for shareholders to verify whether managers are behaving
appropriately. As an agent, managers may allow self-interest to influence their decision making.
Under these circumstances, managers may not necessarily take decisions that maximise
shareholders’ wealth. The general assumption is that managers will very likely choose to pursue
their own personal goals, such as avoiding risk, maximising their pay and fringe benefits, and
spending money on prestige projects.
3. Explain how the external and internal governance mechanisms – including ownership
concentration, executive compensation, audit committee, decentralised multidivisional
structure, governing board, corporate market control and institutional control – are used to
control and monitor managerial decisions.
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Corporate governance mechanism is designed to reduce the conflicts of interest between investors
and managers, thereby eliminating barriers that may hinder the growth of the value of the
organisation.
a) External governance mechanisms primarily refer to the control of managerial activities by the
external environment of an organisation. It includes two types of control: institutional control
and corporate market control.
 Institutional control is the control of corporate governance through laws, regulations, social
pressures and political factors.
 Corporate market control is the process by which ownership and control of companies is
transferred from one group of investors and managers to another.
b) Internal governance mechanisms are the devices of the processes within an organisation that
oversee managerial activities and performance. They include ownership concentration,
executive compensation, the audit committee, a decentralised multidivisional structure and
governing boards.
 Ownership concentration refers to the situation in which a relatively large number of shares are
owned by a small number of individual or institutional investors. These owners are called
blockholders.
 Executive compensation is the use of managerial incentives such as salary, performance-based
cash and share bonuses, and share options to reward CEOs and senior managers, in order to
align their interests with those of shareholders.
 An audit committee is an independent body directly answerable to the governing board and is
responsible for verifying that the operations of the company have been conducted
appropriately and its accounting records are kept in a proper manner.
 A multidivisional (M-form) structure is one in which independent business divisions are
established so that the responsibility for day-to-day operations and business-level or businessunit strategy is delegated to division managers.
 A governing board is a group of elected individuals that acts in the owners’ interests to formally
monitor and control the company’s top-level executives.
4. What are the primary roles of a governing board? Why are these roles important?
A governing board is a committee at the highest level of a company charged with making all the
major decisions. The members of the governing board are appointed by shareholders at the general
meetings that are held annually. There are four major types of roles of governing boards:
controlling, strategy making, networking and coordinating:
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 The controlling role of a governing board involves ratifying managerial decisions for monitoring
the implementation and performance of their decisions.
 The strategy making role can ensure that managers will analyse and articulate their plans,
proposals and suggestions in greater depth, and at the same time, allows the board to be
actively involved in the strategy-making process in helping managemers generate and acquire
valuable resources.
 The networking role can be used to control or influence other organisations, competitors,
suppliers, customers and regulatory agencies, and more generally to match their business
activities with other corporations.
 The coordinating role can balance the stakeholder interests within a governing board. This
involves setting an overall direction and requiring corporate directors to play a coordinating
role in relation to the stakeholders of their organisations.
5. Which issues of strategic risk are applicable to all global companies, large or small?
Managers of global companies, large or small, need to identify risks. There are five elements or
factors that can prevent strategic risks and managerial greed, including culture (such as
restructuring incentives), leadership (such as the expectations of ethical behaviour), alignment
(such as to ensure performance objectives being aligned with risk), structure (such as to assess how
structural change influences strategic risk), and systems (such as through establishing framework
for identifying and managing strategic risks).
6. How can corporate governance facilitate ethical strategic decisions for effective management
of stakeholders?
The concern for stakeholders has some important implications for corporate governance.
Corporations can be more responsive to the interests of society as a whole by incorporating the
participation of stakeholders in their governing boards. Organisation leaders, such as corporate
directors and senior managers, are expected to negotiate and compromise with stakeholders in the
interests of the corporation. Corporate directors can help their companies through appropriate
actions, such as disclosure of relevant information, adoption of a code of ethics, respect for
environmental concerns, and corporate social activities, which will have positive effects on
stakeholders.
The concern for stakeholders is also expected to have a significant influence on the formulation and
implementation of a company’s mission and strategies. Such concerns will also have significant
impact on how the strategies adopted by an organisation that deal with multiple stakeholders will
change as the organisation evolves through the stages of formation, growth, maturity, and decline
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or revival. This will provide a relevant framework for assessing the roles, rights, responsibilities and
legitimacies of different actors in the interactions between organisations and their environment.
7. Describe the types of corporate governance practices in Australia, Japan, Malaysia and
Singapore.
The corporate governance practice of each country is shaped by its political, economic and social
environment, as well as by its legal framework. Despite the differences in shareholder philosophies
across countries, good governance mechanisms need to be encouraged among all private and public
organisations.
Among the named four countries, there are common understanding that in order to protect the
interest of shareholders as well as stakeholders, companies will need to consider four generic
corporate governance principles, which includes the responsibility of directors, the accountability of
the board to shareholders, the transparency of clear financial and operational information, and the
fairness that all shareholders are treated the same way.
The major differences among these countries are listed as follows:

8. In circumstances where boards are faced with powerful and influential CEOs, in what ways (if
any) will their strategic priorities change?
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In some companies, the CEO of the company is also the chairperson of the board of directors. Due
to this, the CEO’s decisions can influence the decisions made by the board. There would also be an
instance where the CEO owns a large number of shares of the company. This could once again
influence or change the strategic priorities made by the board of directors. A powerful and
influential CEO can also ‘invite’ potential acrimonious conflict with the group members particularly
when the individuals who are the committee members of the board are all strong-minded
individuals. Conflicts do happen and when there is a resounding agreement from the board, the
CEO may be displaced.
9. Are directors on a governing board merely ‘rubber stamps’? In other words, do they endorse
whatever managers present to the board? Explain.
Directors on a governing board should not merely act as a “rubber stamp’. Proper corporate
governance requires the effective coordinating effort of all corporate leaders in generating support
within the company, motivating active participation of employees, conveying the significance of the
strategy and its goals, and maintaining a high level of company-wide awareness of the importance
of constant improvement and innovation.
A governing board is at the core of the corporate governance of modern organisations. It is the
point of coordination and interaction where members of the board meet regularly to discuss and
ostensibly control the decisions and actions of the organisation. Governing boards are often
described, or portrayed visually, as the top of an organisation, and endowed with the authority to
set objectives and monitor the performance of the management.
10. In both South Asian and Asia-Pacific nations, there is a predominance of family members as
powerful shareholders. What corporate governance strategies can be used to ensure that
ethical governance holds sway over these dominant interests?
In these countries, regulations by government have been tightened to ensure corporate
governance, by revising various policies and governance legislation within Companies Act. Although
family members could be powerful shareholders, in many Asian countries, there is now a regulation
about director’s duties and guidelines to ensure good corporate governance.
11. If the primary objective of a governing board is to control managerial decisions, who controls
the governing board?
In general, the board has the power to direct the affairs of the organisation, punish and reward
managers, and protect shareholders from managerial opportunism. In the absence of legal
definition, the directors can protect whomever they choose, be it the members of the organisation
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or an external constituency, depending on their own needs and the pressures to which they are
subjected. The control of governing boards is primarily institutional which includes regulatory
frameworks, social pressure and political impact.
12. What role can consideration of corporate governance mechanisms play in the selection of
investments in the Asia–Pacific region? Explain and give examples.
Most states in the Asia-Pacific region are developing countries. The trend towards globalisation,
along with improved technology and private sector development, increases capital flows from the
developed countries to developing economies. To attract foreign investment, developing markets in
particular need to demonstrate good corporate governance to instil investor confidence, thereby
encouraging access to the global capital necessary for job creation and economic growth.