Chapter Nine

1. ChapterNine Strategic Control and Corporate Governance

2. Learning Objectives TRANSPARENCY-76 After studying this chapter, you should have a good understanding of: • The value of effective strategic control systems in strategy implementation • The key difference between “traditional” and “contemporary” control systems • The imperative for “contemporary” control systems in today’s complex and rapidly changing competitive and general environments • The benefits of having the proper balance among the three levers of behavioral control—culture, rewards and incentives/boundaries • How a strong and positive culture and reward system can lessen the need for boundaries • Why there is no “one best way” to design strategic control systems and the important contingent roles of business- and corporate-level strategies

3. Formulate Strategies Implement Strategies Strategic Control TRANSPARENCY-77 Traditional Approach to Strategic Control Exhibit 9.1

4. FormulateStrategies ImplementStrategies BehavioralControl InformationalControl StrategicControl TRANSPARENCY-78 Contemporary Approach to Strategic Control Exhibit 9.2

5. Boundaries Culture Rewards TRANSPARENCY-79 Essential Elements of Strategic Control Exhibit 9.3

6. TRANSPARENCY-80 Action Plan for Objective #3 Exhibit 9.4

7. TRANSPARENCY-81a Developing Meaningful Action Plans: MSA Aircraft Interior Products, Inc. Strategy Spotlight 9.4Continued MSA Aircraft Interior Products, Inc., is a San Antonio, Texas-based manufacturing firm founded in 1983 by Mike Spraggins and Robert Plenge. The firm fulfills a small but highly profitable niche in the aviation industry with two key products. The Accordia line consists of patented, light-weight, self-contained window-shade assemblies. MSA’s interior cabin shells are state-of-the-art assemblies that include window panels, side panels, headliners, and suspension-system structures. MSA’s products have been installed on a variety of aircraft such as the Gulfstream series, Cessna Citation aircraft, and Boeing’s 727, 737, 757, and 707 series aircraft. Much of MSA’s success can be attributed to carefully articulated action plans that are consistent with the firm’s mission and objectives. During the past 5 years the firm has increased its sales and profits at an annual rate of 15 to 18 percent. It has also been successful in adding many prestigious companies to its customer base. Below are excerpts from MSA’s mission statement and objectives as well as the action plans to achieve its objective of a 20 percent annual increase in total sales. Mission Statement (Excerpted) • Be recognized as an innovative and reliable supplier of quality interior products for the high-end, personalized transportation segments of the aviation, marine, and automotive industries. • Design, develop, and manufacture interior fixtures and components that provide exceptional value to the customer through the development of innovative designs in a manner that permits decorative design flexibility while retaining the superior functionality, reliability, and maintainability of well-engineered factory-produced products. • Grow, be profitable, and provide a fair return, commensurate with the degree of risk, for owners and stockholders.

8. TRANSPARENCY-81b Developing Meaningful Action Plans: MSA Aircraft Interior Products, Inc. Strategy Spotlight 9.4 Objectives (Excerpted) 1. Achieve sustained and profitable growth over the next three years: 20 percent annual growth in revenues 12 percent pretax profit margins 18 percent return on shareholders’ equity 2. Expand the company’s revenues through the development and introduction of two or more new products capable of generating revenues in excess of $8,000,000 per year by 2005. 3. Continue to aggressively expand market opportunities and applications for the Accordia line of window-shade assemblies, with the objective of sustaining or exceeding a 20 percent annual growth rate for at least the next 3 years. MSA’s action plans are supported by detailed month-by-month budgets as well as strong financial incentives for their executives. Budgets are prepared by each individual department and include all revenue and cost items. Managers are motivated by their participation in a profit-sharing program and the firm’s two founders each receive a bonus equal to 3 percent of total sales.

9. TRANSPARENCY-82 Summary of Relationships Between Control and Business- and Corporate-Level Strategy Exhibit 9.5

10. TRANSPARENCY-83a Intel Corporation’s Exemplary Governance Practices Exhibit 9.6 One of the best examples of governance guidelines are those of Intel Corp. The company’s practices address some of the most important current issues in governance such as director independence, meetings of outside directors, evaluation, and succession planning. The guidelines are on the Intel website for everyone to see. How many other companies would be that proud of their governance Magna Carta? Below are a few highlights: 1. Mix of inside and outside directors. The Board believes that there should be majority of independent directors on the Board. However, the Board is willing to have members of management, in addition to the chief executive officer, as directors. 2. Board definition of what constitutes independence for directors. The Board has an independent director designated as the Lead Independent Director, who is responsible to coordinate the activities of the other independent directors and to perform various other duties. Service as Lead Independent Director shall not exceed five consecutive years. 3. Selection of new director candidates. The Board should be responsible for selecting its own members. The Board delegates the screening process to the Nominating Committee. Board Composition

11. TRANSPARENCY-83b Intel Corporation’s Exemplary Governance Practices (Continued) Exhibit 9.6 1. Board presentations and access to employees. The Board has complete access to any Intel employee. The Board encourages management to schedule managers to present at meetings who: (a) can provide additional insight into the items being discussed because of personal involvement in these areas, or (b) have future potential that management believes should be given exposure to the Board. 2. Outside director’s discussion. The Board’s policy is to have a separate meeting time for the outside directors regularly scheduled at least twice a year during the regularly scheduled Board meetings. The Lead Independent Director will assume the responsibility of chairing the regularly scheduled meetings of outside directors. Board Meetings

12. TRANSPARENCY-83c Intel Corporation’s Exemplary Governance Practices (Continued) Exhibit 9.6 1. Formal evaluation of officers. The Compensation Committee conducts, and reviews with the outside directors, an evaluation annually in connection with the determination of the salary and executive bonus of all officers (including the chief executive officer). 2. The chief executive officer reviews succession planning and management development with the Board on an annual basis. Management review and responsibility

13. Cincinnati Financial (CINF)Cincinnati, Ohio(717,218; .45 percent) Perform a formal governance review using an external consultant, preferably forming a governance committee Review and revise the current director compensation plan given that some directors have relatively minor holdings. Adopt a resolution requiring the Board to consist of a majority of independent directors, including adoption of written definition of independence. Appoint a lead independent director. TRANSPARENCY-84a The CALPERS 2002 Focus List Exhibit 9.7 CALPERS, the California Public Employees’ Retirement System, is actively engaged in monitoring the stocks in its portfolio. Below are two of the corporations on the CALPERS Focus List for the year 2002, the firm’s location, the extent of CALPER’s holdings, and the governance changes that CALPERS is trying to institute. Corporation(CALPERS holdings in shares; percent of outstanding shares) CALPERS Proposed Governance Changes

14. Gateway (GTW)Poway, California(1,112,190; .35 percent) Conduct a formal governance review using an external consultant. Request that the Board declassify itself into a single class of directors whereby each director stands before the shareholders for reelection each year. Adopt a resolution requiring that exclusively independent directors chair the key committees. Separate the chairman and chief executive officer positions or consider the appointment of a lead independent director. TRANSPARENCY-84b The CALPERS 2002 Focus List (Continued) Exhibit 9.7 Corporation(CALPERS holdings in shares; percent of outstanding shares) CALPERS Proposed Governance Changes

15. TRANSPARENCY-85 TIAA-CREF’s Principles on the Role of Stock in Executive Compensation Exhibit 9.8 • Allow for creation of executive wealth that is reasonable in view of the creation of shareholder wealth. Management should not prosper through stock while shareholders suffer. • Have measurable and predictable outcomes that are directly linked to the company’s performance. • Be market oriented, within levels of comparability for similar positions in companies of similar size and business focus. • Be straightforward and clearly described so that investors and employees can understand them. • Be fully disclosed to the investing public and be approved by shareholders. Stock-based compensation plans are a critical element of most compensation programs and can provide opportunities for managers whose efforts contribute to the creation of shareholder wealth. In evaluating the suitability of these plans, considerations of reasonableness, scale, linkage to performance, and fairness to shareholders and all employees also apply. TIAA-CREF, the largest pension system in the world, has set forth the following guidelines for stock-based compensation. Proper stock-based plans should: