Session 22 Corporate Governance & Strategic

Control

McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.

Learning Objective

Describe Attributes of “Good” and “Bad” BODs

Describe the requirements for Section 5 for the Implementation Analysis and Report

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Corporate Governance

Issues discussed in the case or discovered in your research? If so, recommend corrective action.

If no, move on to an evaluation of the BOD.

The average board size of Fortune 500 companies is 12, of whom 9 are outside board members

16.9% of board seats in the Fortune 100 are held by women

Current average tenure of a CEO is between three to five years

Board of Director Facts & StatisticsBoard of Director Facts & Statistics

Criteria used in BW’s The Best & Worst Boards

shareholder accountability corporate social responsibility board quality board independence corporate performance independence stock ownership environment director quality board activism

Attributes of a Good Board

INDEPENDENCE

Friends and cronies of the CEO are out. Crucial panels like audit should contain no insiders. Cross-directorships are taboo

Attributes of a Good Board

QUALITY

Board meetings should include real, open debate. Directors need to be familiar with managers and conditions in the field

Attributes of a Good Board

ACCOUNTABILITY

Directors ought to hold serious stakes in the company. They should also be prepared to challenge under-performing CEOs

ENHANCING BOARD EFFECTIVENESS

No More than Two Insiders

No Insiders on Audit, Nominating, and Compensation Committees

No Outsiders Drawing Fees from Company

ENHANCING BOARD EFFECTIVENESS

No Interlocking Directorships

Outsiders Meet Regularly without CEO

All Directors Own Minimum of $100k of Stock

Board Stands for Election Every Year

ENHANCING BOARD EFFECTIVENESS

Board’s Evaluate their own Performance Yearly

Employed Directors sit on No More than 3 Boards

Non-Employed Directors sit on No More than 6 Boards

ENHANCING BOARD EFFECTIVENESS

At Least One Outsider with Experience in Core Business

All Directors Attend at Least 75% of Meetings

Board Size No Larger than 15

Best Boards of Directors

1. 3M - With just one insider on its nine-member board the company gets high marks for independence. Outside directors include the CEOs of Lockheed-Martin, Allstate, and Amgen. Audit-committee chairman is the former CFO at Sears. No directors have business ties to the company.

2. APRIA HEALTHCARE - The board includes three top shareholder activists and features a separate chairman and CEO, a rarity. It moved quickly to accept the resignation of a former CEO when directors discovered that his wife had been hired for a company job.

Best Boards of Directors

3. COLGATE-PALMOLIVE - Directors are well-invested in the company and sit on few additional boards. The compensation committee has awarded premium-priced options to CEO Reuben Mark, which pay off only if stock appreciates by 10% to 70%. A new section on governance has been added to the latest proxy.

4. GENERAL ELECTRIC - This talent-packed board, with an unrivaled record of creating shareholder value, remains a favorite with governance experts. it recently added Ralph Larsen, former CEO of Johnson & Johnson and a longtime champion of good governance.

Best Boards of Directors

5. HOME DEPOT - With the departure of co-founder Bernard Marcus, the 12-member board now has only two insiders. Independent directors meet regularly without management. Directors are required to visit 20 stores a year.

6. INTEL - One of the few boards that have a lead director. No insiders sit on the audit, compensation, or nominating committees. The board conducts an annual self-evaluation. Directors have big stakes in the company.

Best Boards of Directors

7. JOHNSON & JOHNSON - The high-powered board includes Delta Air Lines CEO Leo Mullin, Lucent Technologies Chairman Henry Schacht, and CSX CEO John Snow. The outside board members own plenty of J&J stock. Only one director sits on more than four boards.

8. MEDTRONIC - Governance gurus applaud the board's practice of holding regular meetings without the CEO and its performance evaluations for directors. Members are graded on willingness to "hold management accountable" and "meaningful participation" at meetings.

Best Boards of Directors

9. PFIZER - The board was second only to GE in overall approval by governance experts. Independent directors meet without the CEO. No Pfizer executives sit on the audit, nominating, or compensation committees. Stock transactions for directors and executives are posted on the company Web site.

10.TEXAS INSTRUMENTS - Making its third appearance on Business Week's Best Boards list, this highly independent board boasts a roster of well-invested outside directors, including the chief executives of Norfolk Southern, Kimberly-Clark, and Eastman Kodak.

Worst Boards of Directors

1. APPLE - Founder Steve Jobs owns just two shares in the company. Recently departed director Larry Ellison had none and had missed more than 25% of meetings in the past five years. The CEO of Micro Warehouse, which accounted for nearly 2.9% of Apple's net sales in 2001, sits on the compensation committee. Since 2000, the board has awarded Jobs 27.5 million stock options and a $90 million jet.

2. CONSECO - In 2000, the company spent a hefty $45 million to recruit CEO Gary Wendt from GE Capital. Despite the company's recent slide, in July--with the stock hovering at $1--the board awarded Wendt an $8 million bonus. In August, the shares were delisted from the Big Board and now trade at 7 cents. None is a CEO. The board doesn't meet without the CEO present.

Worst Boards of Directors

3. DILLARDS - Before his death in February, Chairman William Dillard presided over a board that included seven directors with ties to the company, including four of his children. No nominating committee--allowing the CEO to hand-pick directors. With two-thirds of board elected by holders of privately held Class B shares, Dillard's is exempt from NYSE governance rules.

4. GAP - Self-dealing includes contracts with the chairman's brother to build and remodel stores and a consulting deal with the__chairman's wife. Slow to replace outgoing CEO Mickey Drexler as performance declined. Interlocking directorship with Drexler sitting on the Apple board, while Apple's Steve Jobs sits on Gap's.

Worst Boards of Directors

4. KMART - The board's woes include multiple investigations of company accounting, a $501 million profit restatement, and a federal grand jury probe into pay practices. The board was passive as the company's performance deteriorated before a bankruptcy filing in January. Meanwhile, the board approved $28 million in retention loans to 25 top executives.

6. QWEST - Founder Philip Anschutz has extensive dealings with the company and sits on compensation and nominating committees. The SEC is probing whether Qwest used "swap" transactions to boost revenue. The compensation committee--described as "comatose" by one expert--awarded ex-CEO Joseph Nacchio an $88 million pay package in 2001, one of the worst years in the company's history. No outside director has operating experience in company's core business.

Worst Boards of Directors

7. TYSON FOODS - Out of 15 board members, 10 have ties to the company, including seven who have extensive business dealings. CEO John Tyson got a $2.1 million bonus for negotiating the acquisition of meatpacker IBP--which Tyson Foods tried unsuccessfully to back out of--in a year when net income fell 42%. Feds say the company for years conspired to smuggle workers from Mexico for its U.S. poultry-processing plants, a charge Tyson denies.

8. XEROX - The bungled succession of Paul Allaire, accusations of funny

accounting, billions in shareholder wealth up in smoke, and a decades-long failure to keep up with changing technology add up to an ineffectual board. With departures of Allaire and CFO Barry Romeril, the board is far more independent. But too many directors sit on too many boards. Director Vernon Jordan's law firm provides legal services.

Establishing Strategic Controls

Establishing Strategic Controls

Strategic control is concerned with tracking a strategy as it is being implemented, detecting problems or changes in its underlying premises, and making necessary adjustments

Characterized as a form of “steering control”

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Types of Strategic Control

For Section 6 of the Implementation Report be sure to cover each of these

areas

Premise control Strategic surveillance Special alert control Implementation control

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Premise Control

Premise control is designed to check systematically and continuously whether the premises on which the strategy is based are still valid

Environmental factors

Industry factors

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Strategic Surveillance

Strategic surveillance is designed to monitor a broad range of events inside and outside the firm that are likely to affect the course of its strategy

Strategic surveillance must be kept as unfocused as possible

Despite its looseness, strategic surveillance provides an ongoing, broad-based vigilance in all daily operations

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Special Alert Control

A special alert control is the thorough, and often rapid, reconsideration of the firm’s strategy because of a sudden, unexpected event

A drastic event should trigger an immediate and intense reassessment of the firm’s strategy and its current strategic situation

Crisis teams Contingency plans

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Implementation Control

Strategy implementation takes place as series of steps, programs, investments, and moves that occur over an extended time

Implementation control is designed to assess whether the overall strategy should be changed in light of the results associated with the incremental actions that implement the overall strategy

Monitoring strategic thrusts Milestone reviews

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Balanced Scorecard Methodology

An alternative approach linking operational and strategic control, developed by Harvard Business School professors Robert Kaplan and David Norton, is a system they names the balanced scorecard

The balanced scorecard is a management system (not only a measurement system) that enables companies to clarify their strategies, translate them into action, and provide meaningful feedback

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Balanced Scorecard

Four perspectives:

1. The learning and growth perspective: How well are we continuously improving and creating value?

2. The business process perspective: What are our core competencies and areas of operational excellence?

3. The customer perspective: How satisfied are our customers?

4. The financial perspective:

How are we doing for our shareholders?

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