Download - Strategic MAnagment-Corporate Governance
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PowerPoint Presentation by Charlie Cook
The University of West Alabama
Strategic ManagementCompetitiveness and Globalization:
Concepts and CasesMichael A. Hitt R. Duane Ireland Robert E. Hoskisson
Seventh edition
STRATEGIC
ACTIONS:
STRATEGY
IMPLEMENTATION
Student Version
2007 Thomson/South-Western.
All rights reserved.
CHAPTER 10
Corporate Governance
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Corporate Governance
Corporate governance is:A relationship among stakeholders that is used to
determine and control the strategic direction and
performance of organizations.
Concerned with identifying ways to ensure that
strategic decisions are made more effectively.
Used in corporations to establish order between the
firms owners and its top-level managers whose
interests may be in conflict.
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Internal Governance Mechanisms
Ownership ConcentrationRelative amounts of stock owned
by individual shareholders and
institutional investors
Board of Directors Individuals responsible
for representing the firms
owners by monitoring top-level
managers strategic decisions
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Internal Governance Mechanisms (contd)
Executive CompensationThe use of salary, bonuses, and
long-term incentives to align
managers interests with
shareholders interests. Market for Corporate Control
The purchase of a firm that is
underperforming relative to
industry rivals in order to improveits strategic competitiveness.
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Separation of Ownership andManagerial Control
Basis of the modern
corporation
Shareholders purchase
stock, becoming residual
claimants.
Shareholders reduce risk
by holding diversified
portfolios.
Professional managers are
contracted to provide
decision making.
Modern public corporation
form leads to efficient
specialization of tasks:
Risk bearing by
shareholders
Strategy development and
decision making by
managers
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Managerial Opportunism
The seeking of self-interest with guile (cunning ordeceit)
Managerial opportunism is:
An attitude (inclination)A set of behaviors (specific acts of self-interest)
Managerial opportunism prevents the
maximization of shareholder wealth (the primary
goal of owner/principals).
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Governance Mechanisms
Large block shareholders have astrong incentive to monitor
management closely:
Their large stakes make it worth
their while to spend time, effort and
expense to monitor closely.
They may also obtain Board seats
which enhances their ability to
monitor effectively.
Financial institutions are legallyforbidden from directly holding
board seats.
Ownership
Concentration (a)
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Governance Mechanisms (contd)
The increasing influence ofinstitutional owners (stock
mutual funds and pension funds)
Have the size (proxy voting power)
and incentive (demand for returns tofunds) to discipline ineffective top-
level managers.
Can affect the firms choice of
strategies.
Ownership
Concentration (b)
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Governance Mechanisms (contd)
Shareholder activism: Shareholders can convene to
discuss corporations direction.
If a consensus exists, shareholders
can vote as a block to elect their
candidates to the board.
Proxy fights.
There are limits on shareholder
activism available to institutional
owners in responding to activiststactics
Ownership
Concentration (c)
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Governance Mechanisms (contd)
Board of directors
Group of elected individuals that
acts in the owners interests to
formally monitor and control the
firms top-level executives
Board has the power to:
Direct the affairs of the organization
Punish and reward managers
Protect owners from managerialopportunism
Ownership
Concentration
Board of Directors
(a)
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Governance Mechanisms (contd)
Composition of Boards: Insiders:the firms CEO and other
top-level managers
Related Outsiders:individuals
uninvolved with day-to-day
operations, but who have a
relationship with the firm
Outsiders:individuals who are
independent of the firms day-to-day
operations and other relationships
Ownership
Concentration
Board of Directors
(b)
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Governance Mechanisms (contd)
Criticisms of Boards of Directorsinclude:
Too readily approve managers self-
serving initiatives
Are exploited by managers withpersonal ties to board members
Are not vigilant enough in hiring and
monitoring CEO behavior
Lack of agreement about the
number of and most appropriaterole of outside directors.
Ownership
Concentration
Board of Directors
(c)
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Governance Mechanisms (contd)
Enhancing the effectiveness ofboards and directors:
More diversity in the backgrounds
of board members
Stronger internal management andaccounting control systems
More formal processes to evaluate
the boards performance
Adopting a lead director role.
Changes in compensation ofdirectors.
Ownership
Concentration
Board of Directors
(d)
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Governance Mechanisms (contd)
Forms of compensation: Salaries, bonuses, long-term
performance incentives, stock
awards, stock options
Factors complicating executivecompensation:
Strategic decisions by top-level
managers are complex, non-routine
and affect the firm over an extended
period.
Other variables affecting the firms
performance over time.
Ownership
Concentration
Executive
Compensation (a)
Board of Directors
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Governance Mechanisms (contd)
Limits on the effectiveness ofexecutive compensation:
Unintended consequences of stock
options
Firm performance not as importantthan firm size
Balance sheet not showing
executive wealth
Options not expensed at the time
they are awarded
Ownership
Concentration
Board of Directors
Executive
Compensation (b)
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Governance Mechanisms (contd)
Individuals and firms buy or
take over undervalued
corporations.
Ineffective managers are usuallyreplaced in such takeovers.
Threat of takeover may lead
firm to operate more efficiently.
Changes in regulations have
made hostile takeovers difficult.
Ownership
Concentration
Market forCorporate Control (a)
Board of Directors
Executive
Compensation
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Governance Mechanisms (contd)
Managerial defense tacticsincrease the costs of mountinga takeover
Defense tactics may require:
Asset restructuring
Changes in the financial structureof the firm
Shareholder approval
Market for corporate controllacks the precision of internalgovernance mechanisms.
Ownership
Concentration
Executive
Compensation
Market forCorporate Control (b)
Board of Directors
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Organizational
Stakeholders
Product Market
Stakeholders
Governance Mechanisms andEthical Behavior
It is important to serve the interests ofthe firms multiple stakeholder groups!
Shareholders (in the capital marketstakeholder group) are viewed as the
most important stakeholder group.
The focus of governance mechanisms is
on the control of managerial decisions to
assure shareholder interests.
Interests of shareholders is served by the
Board of Directors.
Capital MarketStakeholders
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Organizational
Stakeholders
Product Market
Stakeholders
Capital MarketStakeholders
Governance Mechanisms andEthical Behavior (contd)
Product market stakeholders(customers, suppliers and host
communities) and organizational
stakeholders may withdraw their support
of the firm if their needs are not met, at
least minimally.
It is important to serve the interests ofthe firms multiple stakeholder groups!
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Product Market
Stakeholders
Organizational
Stakeholders
Capital MarketStakeholders
Governance Mechanisms andEthical Behavior (contd)
It is important to serve the interests ofthe firms multiple stakeholder groups!
Some observers believe that ethicallyresponsible companies design and use
governance mechanisms that serve all
stakeholders interests.
Importance of maintaining ethical
behavior is seen in the examples ofEnron, WorldCom, HealthSouth and
Tyco.