cCorporate governance is a crucial set of systems that companies use to manage the business and achieve their goals. Corporate governance includes the following factors: The likelihood that a poorly performing firm can be taken over. Whether the board of directors is dominated by insiders or outsiders. The extent to which most of the stock is held by a few large blockholders versus many small shareholders. The size and form of executive compensation. A recent study compared corporate governance in Germany, Japan, and the United States. First, note from the accompanying table that the threat of a takeover serves as a stick in the United States but not in Japan or Germany. This threat, which reduces management entrenchment, should benefit shareholders in the United States relative to the other two countries. Second, German and Japanese boards are larger than those in the United States, and Japanese boards consist primarily of insiders versus German and American boards, which have similar inside$/$outside mixes. It should be noted, though, that the boards of most large German corporations include representatives of labor, whereas U$.$S$.$ boards represent just shareholders. Thus, it would appear that U$.$S$.$ boards, with a higher percentage of outsiders, would have interests most closely aligned with those of shareholders. German and Japanese firms are also more likely to be controlled by large blocks of stock than those in the United States. Although pension and mutual funds, as well as other institutional investors, are increasingly important in the United States, block ownership is still less prevalent than in Germany and Japan. In both Germany and Japan, banks often own large blocks of stock, something that is not permitted by law in the United States, and corporations also own large blocks of stock in other corporations. In Japan, combinations of companies, called keiretsus, have cross$-$ownership of stock among the member companies, and these interlocking blocks distort the definition of an outside board member. For example, when the performance of a company in a keiretsu deteriorates, new directors are often appointed from the staffs of other members of the keiretsu. Such appointees might be classified officially as insiders, but they represent interests other than those of the troubled company's CEO. In general, large blockholders are better able to monitor management than are small investors, so one might expect the blockholder factor to favor German and Japanese shareholders. However, these blockholders have other relationships with the company that might be detrimental to outside shareholders. For example, if one company buys from another, transfer pricing might be used to shift wealth to a favored company, or a company might be forced to buy from a sister company in spite of the availability of lower$-$cost resources from outside the group. Executive compensation packages differ dramatically across the three countries, with U$.$S$.$ executives receiving by far the highest compensation. However, compensation plans are remarkably similar in terms of how sensitive total compensation is to corporate performance. International Corporate Governance is fairly similar, then you might expect it to be easier to find a qualified replacement from another firm for a poorly performing CEO. This is exactly what the evidence shows: As industry homogeneity increases, so does the likelihood of CEO turnover. The Media and Litigation Corporate governance, especially compensation, is a hot topic in the media. The media can have a positive impact by discovering or reporting corporate problems, such as the Enron scandal. Another example is the extensive recent $(2006)$ coverage being given to option backdating, in which the exercise prices of executive stock options are set after the options officially have been granted. Because th