Strategic Management: Concepts and Cases - PowerPoint PPT Presentation

Loading...

PPT – Strategic Management: Concepts and Cases PowerPoint presentation | free to download - id: 3ddae4-M2YxZ



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Strategic Management: Concepts and Cases

Description:

Strategic Management: Concepts and Cases Part III: Strategic Actions: Strategy Implementation Chapter 10: Corporate Governance The Strategic Management Process ... – PowerPoint PPT presentation

Number of Views:82
Avg rating:3.0/5.0
Slides: 40
Provided by: personal73
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Strategic Management: Concepts and Cases


1
Strategic Management Concepts and Cases
  • Part III Strategic Actions Strategy
    Implementation
  • Chapter 10 Corporate Governance

2
The Strategic Management Process
3
Chapter 10 Corporate Governance (CG)
  • Overview Eight content areas
  • Define CG and its monitor/control of managers
    decisions
  • Separation between ownership and management
    control
  • Agency relationship and managerial opportunism
  • Three internal governance mechanisms used to
    monitor/control management decisions
  • External corporate governance mechanisms
  • management restraint
  • Executive compensation - types and effects
  • Use of external CG in international settings
  • How CG fosters ethical strategic decisions

4
CG and Its Effect on the Lives of CEOs
  • In 2006 record number of CEOs lost jobs
  • Dismissal
  • Retirement
  • Recruitment to another firm
  • Partly due to increasing scrutiny by
  • Boards
  • Governance activists
  • Increased pressure from the market for corporate
    control
  • Media
  • Trend decrease in average tenure (current
    18-24 mo.)
  • Result CEOs looking at short-term vs. long-term

5
CG and Its Effect on the Lives of CEOs (Contd)
  • CEOs now serving on fewer external boards
  • CG Double-edged sword
  • Can put an end to scandals
  • Might restrictive CEOs (i.e., they wont take
    risks)

6
Chapter 10 Corporate Governance (CG)
  • Overview Eight content areas
  • Define CG and its monitor/control of managers
    decisions
  • Separation between ownership and management
    control
  • Agency relationship and managerial opportunism
  • Three internal governance mechanisms used to
    monitor/control management decisions
  • External corporate governance mechanisms
  • management restraint
  • Executive compensation - types and effects
  • Use of external CG in international settings
  • How CG fosters ethical strategic decisions

7
Introduction
  • Corporate Governance (CG)
  • Set of mechanisms used to manage the
    relationships (and conflicting interests) among
    stakeholders, and to determine and control the
    strategic direction and performance of
    organizations (aligning strategic decisions with
    company values)
  • Effective CG interest to nations as it reflects
    societal standards
  • Firms shareholders are treated as key
    stakeholders as they are the companys legal
    owners

8
Chapter 10 Corporate Governance (CG)
  • Overview Eight content areas
  • Define CG and its monitor/control of managers
    decisions
  • Separation between ownership and management
    control
  • Agency relationship and managerial opportunism
  • Three internal governance mechanisms used to
    monitor/control management decisions
  • External corporate governance mechanisms
  • management restraint
  • Executive compensation - types and effects
  • Use of external CG in international settings
  • How CG fosters ethical strategic decisions

9
Separation of Ownership and Managerial Control
  • Introduction
  • Historically, firms managed by founder-owners
    descendants
  • Separation of ownership and managerial control
    allow shareholders to purchase stock, entitling
    them to income (residual returns) implies
    risk for this group who manage their investment
    risk
  • Shareholder value reflected in price of stock

10
Separation of Ownership and Managerial Control
(Contd)
  • Introduction
  • Small firms managers are high percentage owners,
    which implies less separation between ownership
    and management control
  • Usually implies family-owned businesses
  • This group faces 2 critical issues
  • 1. As they grow, they may not have access to
    all needed skills to manage the growing firm and
    maximize its returns, so may need outsiders to
    improve management
  • 2. May need to seek outside capital (whereby
    they give up some ownership control)

11
Separation of Ownership and Managerial Control
(Contd)
  • Agency relationships
  • Relationships between business owners
    (principals) and decision-making specialists
    (agents) hired to manage principals' operations
    and maximize returns on investment (and focus of
    this chapter)
  • Other agency relationship examples
    Consultants/clients insured/insurer
    manager/employee

12
Separation of Ownership and Managerial Control
(Contd)
  • Agency relationships (Contd)
  • Managerial Opportunism Seeking self-interest
    with guile (i.e., cunning or deceit)
  • Opportunism an attitude and set of behaviors
  • Managers dont know which agents will enact
    managerial opportunism
  • Principals establish governance and control
    mechanisms to prevent agents from acting
    opportunistically

13
An Agency Relationship
14
Separation of Ownership and Managerial Control
(Contd)
  • Agency problems Product diversification
  • Can result in 2 manager benefits shareholders
    dont enjoy
  • 1. Increase in firm size
  • 2. Firm portfolio diversification which can
    reduce top executives employment risk (i.e., job
    loss, loss of compensation and loss of managerial
    reputation)
  • Diversification reduces these risks because a
    firm and its managers are less vulnerable to the
    reduction in demand associated with a single or
    limited number of product lines or businesses

15
Separation of Ownership and Managerial Control
(Contd)
  • Agency problems Firms free cash flow
  • Resources remaining after the firm has invested
    in all projects that have positive net present
    values within its current businesses
  • Available cash flows
  • Managerial inclination to overdiversify can be
    acted upon
  • Shareholders may prefer distribution as
    dividends, so they can control how the cash is
    invested
  • Curve S depicts shareholders optimal level of
    diversification where Point A is preferred by
    shareholders and Point B by top executives

16
Manager and Shareholder Risk and Diversification
17
Separation of Ownership and Managerial Control
(Contd)
  • Agency costs and governance mechanisms
  • Sum of incentive costs, monitoring costs,
    enforcement costs, and individual financial
    losses incurred by principals, because governance
    mechanisms cannot guarantee total compliance by
    the agent
  • Costs associated with agency relationships, and
    effective governance mechanisms should be
    employed to improve managerial decision making
    and strategic effectiveness
  • Sarbanes-Oxley Act

18
Ownership Concentration
  • Introduction Key concepts
  • Ownership Concentration Governance mechanism
    defined by both the number of large-block
    shareholders and the total percentage of shares
    they own
  • Large Block Shareholders Shareholders owning a
    concentration of at least 5 percent of a
    corporations issued shares
  • Institutional Owners Financial institutions such
    as stock mutual funds and pension funds that
    control large-block shareholder positions

19
Ownership Concentration (Contd)
  • Introduction Key concepts
  • Institutional Owners (Contd)
  • The growing influence of institutional owners
  • Provides size to influence strategy and the
    incentive to discipline ineffective managers
  • Increased shareholder activism supported by SEC
    rulings in support of shareholder involvement and
    control of managerial decisions

20
The Board of Directors (BOD)
  • Introduction
  • Group of shareholder-elected individuals (usually
    called directors) whose primary responsibility
    is to act in the owners interests by formally
    monitoring and controlling the corporations
    top-level executives

21
The Board of Directors (BOD) (Contd)
  • As stewards of an organization's resources, an
    effective and well-structured board of directors
    can influence the performance of a firm
  • Oversee managers to ensure the company is
    operated in ways to maximize shareholder wealth
  • Direct the affairs of the organization
  • Punish and reward managers
  • Protect shareholders rights and interests
  • Protect owners from managerial opportunism
  • 3 types Insider, related outsider and outsider

22
The Board of Directors (BOD) (Contd)
  • Historically, BOD dominated by inside managers
  • Managers suspected of using their power to select
    and compensate directors
  • NYSE implemented an audit committee rule
    requiring outside directors to head audit
    committee (a response to SECs proposal requiring
    audit committees be made up of outside directors)
  • Sarbanes-Oxley Act passed leading to BOD changes
  • CG becoming more intense through BOD mechanism
  • BOD scandals led to trend of separating roles of
    CEO and Chairperson

23
The Board of Directors (BOD) (Contd)
  • Outside directors
  • Improve weak managerial monitoring and control
    that corresponds to inside directors
  • Tend to emphasize financial controls, to the
    detriment of risk-related decisions by managers,
    as they do not have access to daily operations
    and a high level of information about managers
    and strategy

24
The Board of Directors (BOD) (Contd)
  • Outside directors (Contd)
  • Large number of outsiders can create problems
  • Limited contact with the firms day-to-day
    operations and incomplete information about
    managers
  • results in ineffective assessments of managerial
    decisions and initiatives.
  • emphasizes financial, as opposed to strategic,
    controls to gather performance information to
    evaluate performance of managers business
    units, which could reduce RD investments,
    increase diversification, and pursue higher
    compensation to offset their employment risk

25
The Board of Directors (BOD) (Contd)
  • Enhancing BOD effectiveness (N5 changes)
  • Increased diversity in board members backgrounds
  • Establishment and consistent use of formal
    processes to evaluate the boards performance
  • Creation of a lead director role that has
    strong agenda-setting and oversight powers
  • Modified compensation of directors
  • Requires that directors own significant stakes in
    the company in order to keep focused on
    shareholder interests

26
Chapter 10 Corporate Governance (CG)
  • Overview Eight content areas
  • Define CG and its monitor/control of managers
    decisions
  • Separation between ownership and management
    control
  • Agency relationship and managerial opportunism
  • Three internal governance mechanisms used to
    monitor/control management decisions
  • External corporate governance mechanisms
  • management restraint
  • Executive compensation - types and effects
  • Use of external CG in international settings
  • How CG fosters ethical strategic decisions

27
Executive Compensation (EC)
  • Executive compensation (EC)
  • Defined Governance mechanism that seeks to align
    the interests of top managers and owners through
    salaries, bonuses, and long-term incentive
    compensation, such as stock awards and stock
    options
  • Thought to be excessive and out of line with
    performance
  • Alignment of pay and performance complicated
    board responsibility
  • The effectiveness of pay plans as a governance
    mechanism is suspect

28
Executive Compensation (EC) (Contd)
  • The effectiveness of executive compensation
  • Complicated, especially long-term incentive comp
  • The quality of complex and nonroutine strategic
    decisions that top-level managers make is
    difficult to evaluate
  • Decisions affect financial outcomes over an
    extended period, making it difficult to assess
    the effect of current decisions on corporation
    performance
  • External factors affect a firms performance in
    addition to top-level management decisions and
    behavior

29
Executive Compensation (EC) (Contd)
  • The effectiveness of executive compensation
    (Contd)
  • Performance-based compensation used to motivate
    decisions that best serve shareholder interest
    are imperfect in their ability to monitor and
    control managers
  • Incentive-based compensation plans intended to
    increase firm value, in line with shareholder
    expectations, subject to managerial manipulation
    to maximize managerial interests
  • Many plans seemingly designed to maximize manager
    wealth rather than guarantee a high stock price
    that aligns the interests of managers and
    shareholders

30
Executive Compensation (EC) (Contd)
  • The effectiveness of executive compensation
    (Contd)
  • Stock options are highly popular
  • Repricing strike price value of options is
    commonly lowered from its original position
  • Backdating options grant is commonly dated
    earlier than actually drawn up to ensure an
    attractive exercise price

31
Market for Corporate Control
  • Market for Corporate Control
  • Definition external governance mechanism
    consisting of a set of potential owners seeking
    to acquire undervalued firms and earn
    above-average returns on their investments
  • Becomes active when a firms internal controls
    fail
  • Need (for external mechanisms) exists to
  • address weak internal corporate governance
  • correct suboptimal performance relative to
    competitors, and
  • discipline ineffective or opportunistic managers.
  • External mechanisms are less precise than
    internal governance mechanisms

32
Market for Corporate Control
  • Managerial defense tactics
  • Hostile takeovers are the major activity
  • Not always due to poor performance
  • Consequent to tactics are the defenses

33
Chapter 10 Corporate Governance (CG)
  • Overview Eight content areas
  • Define CG and its monitor/control of managers
    decisions
  • Separation between ownership and management
    control
  • Agency relationship and managerial opportunism
  • Three internal governance mechanisms used to
    monitor/control management decisions
  • External corporate governance mechanisms
  • management restraint
  • Executive compensation - types and effects
  • Use of external CG in international settings
  • How CG fosters ethical strategic decisions

34
International Corporate Governance
  • Corporate Governance in Germany
  • Concentration of ownership is strong
  • Banks exercise significant power as a source of
    financing for firms
  • Two-tiered board structures, required for larger
    employers, place responsibility for monitoring
    and controlling managerial decisions and actions
    with separate groups
  • Power sharing includes representation from the
    community as well as unions

35
International Corporate Governance (Contd)
  • Corporate Governance in Japan
  • Cultural concepts of obligation, family, and
    consensus affect attitudes toward governance
  • Close relationships between stakeholders and a
    company are manifested in cross-shareholding, and
    can negatively impact efficiencies
  • Banks play an important role in financing and
    monitoring large public firms
  • Despite the counter-cultural nature of corporate
    takeovers, changes in corporate governance have
    introduced this practice

36
International Corporate Governance (Contd)
  • Global Corporate Governance
  • Relatively uniform governance structures are
    evolving
  • These structures are moving closer to the U.S.
    corporate governance model
  • Although implementation is slower, merging with
    U.S. practices is occurring even in transitional
    economies

37
Chapter 10 Corporate Governance (CG)
  • Overview Eight content areas
  • Define CG and its monitor/control of managers
    decisions
  • Separation between ownership and management
    control
  • Agency relationship and managerial opportunism
  • Three internal governance mechanisms used to
    monitor/control management decisions
  • External corporate governance mechanisms
  • management restraint
  • Executive compensation - types and effects
  • Use of external CG in international settings
  • How CG fosters ethical strategic decisions

38
Governance Mechanisms and Ethical Behavior
  • It is important to serve the interest of the
    firms multiple stakeholder groups
  • In the U.S., shareholders (in the capital market
    stakeholder group) are the most important
    stakeholder group served by the board of
    directors
  • Governance mechanisms focus on control of
    managerial decisions to protect shareholders
    interests

39
Governance Mechanisms and Ethical Behavior
(Contd)
  • Product market stakeholders (customers, suppliers
    and host communities) and organizational
    stakeholders (managerial and non-managerial
    employees) are also important stakeholder groups
  • Although the idea is subject to debate, some
    believe that ethically responsible companies
    design and use governance mechanisms that serve
    all stakeholders interests
  • Importance of maintaining ethical behavior
    through governance mechanisms just remember
    Enron and Arthur Andersen!
About PowerShow.com