Strategic Control and Corporate Governance

1. Strategic Control and Corporate Governance chapter 9

2. Strategic Control • Strategic controlinvolves monitoring performance toward strategic goals and taking corrective action when needed via effective systems: • Informational control systems • Behavioral control systems • Corporate governance

3. Strategic Control: Traditional Approach • The traditional approach to strategic controlis sequential • Strategies are formulated, goals are set • Strategies are implemented • Performance is measured against goals Exhibit 9.1 Traditional Approach to Strategic Control

4. Strategic Control: Contemporary Approach • Relationships between strategy formulation, implementation, & control are highly interactive, utilizing • Informational control • Behavioral control Exhibit 9.2 Contemporary Approach to Strategic Control

5. Informational Control • 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 9-5

6. Behavioral Control • 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

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

8. Behavioral Control: Rewards • 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

9. Behavioral Control: Boundaries • Boundaries and constraints can be useful • Focusing 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

10. Corporate Governance • 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

11. Corporate Governance • 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

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?

13. Corporate Governance Mechanisms • 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?

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

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

16. International Corporate Governance Exhibit 9.9 Principal-Agent Conflicts and Principal-Principal Conflicts: A 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.