Griseri & Seppala CHAPTER 09

GOVERNING
ORGANIZATIONS
CHAPTER 9
For use with Business Ethics and Corporate Social Responsibility

by Paul Griseri and Nina Seppala
1408007436 © 2010 Cengage Learning
Governing organizations
Learning objectives
• Identify key models of corporate governance.
• Evaluate the impact of underlying mechanism on

governance such as government legislation and
national political cultures.
• Identify variances between different national

approaches to corporate governance.

TOPICS
• Defining corporate governance

• The key features of governance
• The national and international dimensions of governance
• Shareholders and agents
• Shareholding, ownership and control
• Ownership, equity and loan financing
• Are shareholders owners at all?
• Cross-organizational ownerships
• Employee representation
• The roles of government
• Boards of directors
• The future of governance

DEFINING CORPOATE GOVERNANCE
… the whole set of legal, cultural, and institutional arrangements

that determine what publicly traded corporations can do, who
controls them, how that control is exercised, and how the risks
and returns from the activities they undertake are allocated.

THE KEY FEATURES OF GOVERNANCE
Key problems in the governance debate:
 How to ensure that the governing body of an organization acts

with integrity and operates for the good of the business.
 How to balance the influence upon decision making of

shareholders and others with an interest in a business.
 How the governing body of an organization should protect each

key stakeholder group.

THE KEY FEATURES OF GOVERNANCE
Corporate governacne include:

 The structure of top level management, its composition and
membership, and the manner in which it organizes itself and reaches
decisions.
 The national and (potentially) supranational legislation regulating

and defining corporate governance.
 The political and historical traditions surrounding national cultural

attitudes toward specific governance structures.
 The nature of the economies in which an organization operates,

and the pressures they place on governance, and in particular the
engagement of an organization with financial markets and other
sources of funds.
THE NATIONAL AND INTERNATIOANL

DIMENSIONS OF GOVERNANCE
• ‘Anglo-Saxon’ model focus on the relationship between owners

and primary stakeholders.
• The Japanese model focus on consensus and building network.
• In India, the emphasis in on owner and family management.
• Chinese governance is dominated by the role of the state as an

owner and economic partner.

SHAREHOLDERS AND AGENTS
What role should shareholders play in a limited

company?
‘Ownership’
As the business
becomes more
grow more shares Agency problem
fragmented and
are issues
diffused

SHAREHOLDING, OWNERSHIP AND COTNROL
• Owner-management – one individual or family has full

control and near-complete ownership of a firm.
• Majority control – an individual shareholder or a group

control more than 51 of the voting shares.
• Control through legal devices – an individual or group

make lack majority control but through legal mechanism they
can still out-vote other shareholders.
• Minority control – shareholders assign the right to vote on

their behalf to anther.
• Management control – shareholding is too diffuse and

uncoordinated to directly control the affairs of the company.

SHAREHOLDING, OWNERSHIP AND COTNROL

OWNERSHIP< EQUITY AND LOAN FINANCING
Anglo-Saxon Japanese Mainland European

Countries companies countries
Low debt to High debt to

equity ratio equity ratio
High direct equity
holdings of banks

ARE SHAREHOLDERS OWNERS AT ALL?
Many shareholders do not have a real influence on the firms

decisions.
E.g.
• Those who hold a share via a fund stand at arm’s length from corporate
decision making, and only indirectly owns are share in the company, but has
no direct influence on its activities.
• Participation in decision making is also difficult for small shareholders. At

AGM it is generally the larger shareholders that have the greatest say.

CROSS-ORGANIZATIONAL OWNERSHIP
The governance task is often complicated by the matter of

cross-ownership.
 German business own an average of over 20% equity in other

firms.
 Austrian and French business own an average of 33% equity in

other firms.
 Cross-ownerships in Belgium account for over 35%.

EMPLOYEE REPRESENTATION
Employees are often the second most widely considered

stakeholder group.
• Anglo-Saxon countries focus on shareholders interests (Capital)
• In European countries the focus is on both labour and capital

• This has lead to dual board arrangements, with a employee representative.
• In Japan employees are considered the centrepiece of the business.
• In China the main organ of economic life is still the state. Many Chinese
companies have dual board arrangements, but they have little influence.

BOARD OF DIRECTORS
Board of directors consist of:
• A chair
• CEO, or Managing Director
• Other significant shareholders (bank appointee, employee representation)
• Audit committee
• Independent director – ‘non-executive’ director.

BOARD OF DIRECTORS
Ethical issues and the Board of Directors:
 Joint CEO and Chair
 Independent directors often appointed via social networks.
 Performance and remuneration.
 Misconduct and corruption

SUMMARY
 There are contrasting approaches to governance emanating from

Anglo-Saxon, continental European and Asian cultures.
 The three key groups influencing the effectiveness of governance

processes are shareholders, employees and government.
 International operating firms face the need to manage within

different governance frameworks.
 Legislation such as the Sarbanes-Oxley Act in the US has been

criticised as not attacking the root problems of governance.
 The operations of boards of directors are a key element of

governance – issues that undermine their ethical soundness include
conflict of interest and recruitment of too like-minded individuals.


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GOVERNING

For use with Business Ethics and Corporate Social Responsibility

• Evaluate the impact of underlying mechanism on

• Identify variances between different national

For use with Business Ethics and Corporate Social Responsibility

• Defining corporate governance

For use with Business Ethics and Corporate Social Responsibility

DEFINING CORPOATE GOVERNANCE

… the whole set of legal, cultural, and institutional arrangements

For use with Business Ethics and Corporate Social Responsibility

THE KEY FEATURES OF GOVERNANCE

Key problems in the governance debate:

 How to ensure that the governing body of an organization acts

 How to balance the influence upon decision making of

 How the governing body of an organization should protect each

For use with Business Ethics and Corporate Social Responsibility

THE KEY FEATURES OF GOVERNANCE

Corporate governacne include:

 The national and (potentially) supranational legislation regulating

 The political and historical traditions surrounding national cultural

 The nature of the economies in which an organization operates,

THE NATIONAL AND INTERNATIOANL

• ‘Anglo-Saxon’ model focus on the relationship between owners

• The Japanese model focus on consensus and building network.

• In India, the emphasis in on owner and family management.

• Chinese governance is dominated by the role of the state as an

For use with Business Ethics and Corporate Social Responsibility

SHAREHOLDERS AND AGENTS

What role should shareholders play in a limited

For use with Business Ethics and Corporate Social Responsibility

SHAREHOLDING, OWNERSHIP AND COTNROL

• Owner-management – one individual or family has full

• Majority control – an individual shareholder or a group

• Control through legal devices – an individual or group

• Minority control – shareholders assign the right to vote on

• Management control – shareholding is too diffuse and

For use with Business Ethics and Corporate Social Responsibility

SHAREHOLDING, OWNERSHIP AND COTNROL

For use with Business Ethics and Corporate Social Responsibility

OWNERSHIP< EQUITY AND LOAN FINANCING

Anglo-Saxon Japanese Mainland European

Low debt to High debt to

For use with Business Ethics and Corporate Social Responsibility

ARE SHAREHOLDERS OWNERS AT ALL?

Many shareholders do not have a real influence on the firms

• Participation in decision making is also difficult for small shareholders. At

For use with Business Ethics and Corporate Social Responsibility

The governance task is often complicated by the matter of

 German business own an average of over 20% equity in other

 Austrian and French business own an average of 33% equity in

 Cross-ownerships in Belgium account for over 35%.

For use with Business Ethics and Corporate Social Responsibility

Employees are often the second most widely considered

• Anglo-Saxon countries focus on shareholders interests (Capital)

• In European countries the focus is on both labour and capital

• In Japan employees are considered the centrepiece of the business.

For use with Business Ethics and Corporate Social Responsibility

Board of directors consist of:

For use with Business Ethics and Corporate Social Responsibility

Ethical issues and the Board of Directors:

 Joint CEO and Chair

 Independent directors often appointed via social networks.

 Performance and remuneration.

 Misconduct and corruption

Griseri & Seppala CHAPTER 09

Griseri & Seppala CHAPTER 09