Chapter 9- Strategic Control and Corporate Governance

information control

Ability to respond effectively to environmental change - "doing the right things"

Reward System

policies that specify who gets rewarded and why

boundaries and constraints

rules that specify behaviors that are acceptable and unacceptable

board of directors

a group that has a fiduciary duty to ensure that the company is run consistently with the long-term interests of the owners, or shareholders, of a corporation and that acts as an intermediary between the shareholders and management

Business Group

a set of firms that, though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action

organizational culture

a system of shared values that shape a companies people, organizational structure, and control systems

Agency Theory

a theory of the relationship between principals and their agents, with emphasis on two problems: (1) the conflicting goals of principals and agents, along with the difficulty of principals to monitor the agents, and (2) the different attitudes and preferences toward risk of principals and agents

shareholder activism

actions by large shareholders to protect their interests when they feel that managerial actions of a corporation diverge from shareholder value maximization

market for corporate control

an external control mechanism in which shareholders dissatisfied with a firm's management sell their shares

Behavioral Control

the appropriate balance and alignment among a firm's culture, rewards, and boundaries - "doing things right"

strategic control

the process of monitoring and correcting a firm's strategy and performance

Corporate Governance

the relationship among various participants in determining the direction and performance of corporations Primary Participants are: -Shareholders -The management -BOD

takeover constraint

the risk to management of the firm being acquired by a hostile raider

Corporation

is a mechanism created to allow different parties to contribute capital, expertise, and labor for the maximum benefit of each party.

Purposes Boundaries and Constraints

-Focusing individual efforts on strategic priorities. -Providing short-term objectives and action plans to channel efforts. -Improving efficiency and effectiveness. -Minimizing improper and unethical conduct.

Traditional Approach to Strategic Control

-Strategies are formulated -Strategies are implemented -Performance is measured

Three levers of behavioral control

-culture -rewards -boundaries

Two primary means of monitoring the behavior of managers.

(1) a committed and involved board of directors that acts in the best interests of the shareholders to create long-term value and (2) shareholder activism, wherein the owners view themselves as shareowners instead of shareholders and become actively engaged in the governance of the corporation

Downsides to reward systems

- Incentives can be demotivating (stock price)

To be effective, short term objectives must:

-Be specific and measurable. -Include a specific time horizon for their attainment. -Be achievable, yet challenging enough to motivate managers who must strive to accomplish them.

Several actions that can have a positive influence on board dynamics as the board works to both oversee and advise management

-Build in the right expertise on the board -Keep your board size manageable -Choose directors who can participate fully

The Business Roundtable, representing the largest U.S. corporations, describes the duties of the board as follows:

1. Making decisions regarding the selection, compensation and evaluation of a well-qualified and ethical CEO. The board also appoints or approves other members of the senior management team. 2. Directors monitor management on behalf of the corporation's shareholders. Exercise vigorous and diligent oversight of the corporation's affairs. This includes the following activities. -Plan for senior management development and succession. -Review, understand and monitor the implementation of the corporation's strategic plans. -Review and understand the corporation's risk assessment and oversee the corporation's risk management processes. -Review, understand and oversee annual operating plans and budgets. -Ensure the integrity and clarity of the corporation's financial statements and financial reporting. -Advise management on significant issues facing the corporation. -Review and approve significant corporate actions. -Nominate directors and committee members and oversee effective corporate governance. -Oversee legal and ethical compliance. 3. Represent the interests of all shareholders

4 Characteristics for Contemporary Control Systems to be Effective

1. The focus is on constantly changing information that has potential strategic importance. 2. The information is important enough to demand frequent and regular attention from all levels of the organization. 3. The data and information generated are best interpreted and discussed in face-to-face meetings. 4. The control system is a key catalyst for an ongoing debate about underlying data, assumptions, and action plans.

external governance control mechanisms

methods that ensure that managerial actions lead to shareholder value maximization and do not harm other stakeholder groups that are outside the control of the corporate governance system

To be effective reward systems they must:

to reinforce basic core values, enhance cohesion and commitment to goals and objectives, and meet with the organization's overall mission and purpose