The effects of corporate governance and ownership on the innovation performance of Chinese SMEs

We investigate the degree to which corporate governance and ownership affect the innovation performance of firms in China with a particular focus on privately owned small and medium enterprises. Using the appropriate theoretical frameworks, we derive hypotheses regarding the impact of ownership concentration, board size and composition, and the background of the CEO on innovative activity. These hypotheses are tested using a unique sample of 370 mostly private and relatively small Chinese firms in Zhejiang province, for the period 2004–2006. Using two measures of innovation, invention patents and new product sales, and a variety of estimation methods appropriate to each measure, we find limited evidence that corporate governance affects innovation performance, but the results do depend on the measure of innovation. In general, the results suggest that for this sample, corporate governance and ownership affect innovation activity more strongly when innovation is measured by patenting activity, rather than new product sales. We conclude with a discussion about why this might be.     

Mattel,Inc.: Global Manufacturing Principles (GMP) – A Life-Cycle Analysis of a Company-Based Code of Conduct in the Toy Industry

Over the last 20+ years, multinational corporations (MNCs) have been confronted with accusations of abuse of market power and unfair and unethical business conduct especially as it relates to their overseas operations and supply chain management. These accusations include, among others, worker exploitation in terms of unfairly low wages, excessive work hours, and unsafe work environment; pollution and contamination of air, ground water and land resources; and, undermining the ability of natural government to protect the well-being of their citizens. MNCs have responded to these accusations by creating voluntary codes of conduct which commit them to specific standards for addressing these issues. These codes are created at both the industry-wide and the individual company level. Unfortunately, these codes have generated little credibility and public trust because their compliance claims cannot be independently verified, and they lack transparency and full public disclosure. In this article, we present a case study of the voluntary code of conduct by Mattel, Inc., the world’s largest toy company. The code, called the Global Manufacturing Principles (GMP), confronts the general criticism leveled against voluntary codes of conduct by (a) creating detailed standards of compliance, (b) independent external monitoring of the company’s compliance with its code of conduct, and (c) making full, and uncensored public disclosure of the audit findings and company’s response in terms of remedial action. We present a detailed account of how Mattel’s voluntary code of conduct was created, implemented, and ultimately abandoned over 9 years. We provide an evaluative analysis of the company’s GMP compliance throughout its life span, which suggests a bell-shaped curve, where early top management commitments were met with pockets of resistance from operational groups, who were concerned about balancing GMP compliance efforts with traditional performance criteria. The early stage response from Mattel’s top management was quick and supported with the requisite resources. As a result, the compliance process accelerated, becoming increasingly more robust and effective. The success of code compliance and increased transparency in public disclosure energized field managers with a sense of professional satisfaction and publicly recognized accomplishments. The decline in GMP compliance was equally steep. When all the easily attainable targets had been reached at the company-operated plants, addressing vendor plants’ compliance presented a new set of challenges, which taxed corporate resources and management commitment. It would seem that value-based and ethics-oriented considerations, i.e., doing the right thing for the right reason, were no longer the driving force for Mattel’s management. Mattel did not see any economic benefit from its proactive stance, when competitors did not seem to suffer adverse consequences for not following suit. The final contributing factor to the code’s abandonment was a widely publicized series of product recalls which absorbed top management’s attention.     

Corporate governance and Asian companies

While prominent differences in corporate governance exist across the Asia Pacific region, there are common concerns about controlling shareholders expropriating wealth from minority shareholders at the expense of overall wealth creation, as well as about the roles and qualifications of managers in Asian companies. The contributors to this Special Issue of the Asia Pacific Journal of Management address these concerns and provide new evidence on their empirical relevance, as well as the factors conditioning that relevance. They also provide cautionary insight into the merits of specific proposals to reform Asian corporate governance. An important theme emerging from this Special Issue is that one needs to understand the institutional framework in which organizations operate in order to understand the rationale for and consequences of specific corporate governance models, as well as the likelihood that specific governance reforms will be adopted and prove effective. In this context, informal institutions are often more important than formal institutions. In addition to advancing our understanding and appreciation of the linkages between formal and informal institutions, corporate behavior, and performance, as well as the prospects for corporate governance reform, the papers in this Special Issue also suggest challenging and potentially fruitful areas for future research.     

Are OECD-prescribed “good corporate governance practices” really good in an emerging economy?

This paper examines whether adopting OECD-prescribed corporate governance principles can solve the major corporate governance problem in an emerging economy—controlling-shareholder expropriation. We argue that “good governance practices” in OECD countries (e.g., an active board of directors, separation of chairperson and the CEO, significant presence of outside directors, and a two-tier board) cannot mitigate the negative effect of controlling-shareholder expropriation on corporate performance for two main reasons. First, most good governance practices are mainly designed to resolve conflicts between shareholders and the management but not conflicts between controlling and minority shareholders. Second, board directors are typically not independent to controlling shareholders, and supervisory directors often have low status and weak power in a firm. Using a panel of over 1,100 Chinese listed firms between 2001 and 2003, we find supportive evidence for our arguments. We discuss the implication of our study for public policy and strategies of investors.