Strategic Control and Corporate Governance chapter 9 Copyright

Strategic Control and Corporate Governance chapter 9. Copyright © 2014 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education

Strategic Control 9 -2 ¥ Strategic control involves monitoring performance toward strategic goals and taking corrective action when needed via effective systems: © Informational control systems © Behavioral control systems © Corporate governance

Strategic Control: Traditional Approach 9 -3 ¥ The traditional approach to strategic control is sequential © Strategies are formulated, goals are set © Strategies are implemented © Performance is measured against goals Exhibit 9. 1 Traditional Approach to Strategic Control

Strategic Control: 9 -4 Contemporary Approach ¥ Relationships between strategy formulation, implementation, & control are highly interactive, utilizing © Informational control © Behavioral control Exhibit 9. 2 Contemporary Approach to Strategic Control

Informational Control 9 -5 ¥ Informational control deals with both the internal & external environment ¥ Do the organization’s goals and strategies still “fit” within the context of the current strategic environment? ¥ Two key issues: © Scan & monitor the external environment © Continuously monitor the internal environment

Behavioral Control 9 -6 ¥ Behavioral control = focused on implementation – “doing things right” ¥ Influences the actions of employees via: © Culture © Rewards © Boundaries Exhibit 9. 3 Essential Elements of Behavioral Control

Behavioral Control: Culture 9 -7 ¥ Organizational culture is a system of ¥ Organizational culture shapes a firm’s © Shared values (what is important) © Beliefs (how things work) © People © Organizational structures © Control systems ¥ Organizational © Behavioral culture produces norms (the way we do things around here)

Behavioral Control: Rewards 9 -8 ¥ Reward systems & incentive programs: © Powerful means of influencing an organization’s culture © Focus efforts on high-priority tasks © Motivate individual & collective task performance © Can be an effective motivator & control mechanism

Behavioral Control: Boundaries 9 -9 ¥ Boundaries © Focusing and constraints can be useful individual efforts on strategic priorities © Providing short-term objectives and action plans to channel efforts Specific, measurable, including a specific time horizon for attainment Achievable, yet challenging enough to motivate Individual managers held accountable for implementation

Corporate Governance 9 -10 ¥ Corporate governance controls focus on relationships between © The shareholders © The management (led by the Chief Executive Officer - CEO) © The Board of Directors ¥ How can corporations succeed (or fail) in aligning managerial motives with © The interests of the shareholders © The interests of the board of directors

Corporate Governance 9 -11 ¥ The separation of owners (shareholders) & management in a modern corporation © Shareholders (investors) have limited liability & can participate in the profits without taking direct responsibility for operations © Management can run the company without personally providing any funds © The Board of Directors are elected by shareholders & have a fiduciary obligation to protect shareholder interests

9 -12 Corporate Governance: Agency Theory ¥ Agency theory deals with the relationship between principals & agents ¥ What to do when the goals of the principals and agents conflict? ¥ What to do when it is difficult or expensive for the principal to verify what the agent is actually doing? ¥ What happens when the principal and the agent have different attitudes and preferences toward risk?

Corporate Governance Mechanisms 9 -13 ¥ Corporate governance mechanisms: aligning the interests of owners and managers through ©A committed and involved Board of Directors © Shareholder activism © Managerial rewards and incentives Contract-based outcomes CEO duality – should the CEO also be chairman of the board of directors?

Corporate Governance Mechanisms 9 -14 ¥ External © The governance control mechanisms market for corporate control The takeover constraint © Auditors Enron, © Banks World. Com? and analysts Lehman Brothers, Countrywide? © Regulatory Securities bodies and Exchange Commission (SEC) The Sarbanes-Oxley Act © Media and public activists Bloomberg Businessweek, Ralph Nader

9 -15 International Corporate Governance ¥ Principal – principal conflicts (vs principal – agent conflicts) involve © Concentrated Motivation ownership, or family ownership to engage in expropriation of minority shareholders for personal gain © Business action groups who can take coordinated Japanese © Few keiretsus, Korean chaebols external regulatory constraints

9 -16 International Corporate Governance Exhibit 9. 9 Principal-Agent Conflicts and Principal-Principal Conflicts: Diagram Source: Young, M. N. , Peng, M. W. , Ahlstrom, D. , Bruton, G. D. , & Jiang, 2008. Principal-Principal Conflicts in Corporate Governance. Journal of Management Studies 45(1): 196 -220; and Peng, M. V. 2006. Global Strategy. Cincinnati: Thomson South-Western. We are very appreciative of the helpful comments of Mike Young of Hong Kong Baptist University and Mike Peng of the University of Texas at Dallas. A