Ch 9: Strategic Control and Corporate Governance

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Ch 9 Strategic Control and Corporate Governance

• Analysis Formation Implementation
• Informational Control
• Traditional / Contemporary
• Behavioral Control
• Culture / Rewards / Boundaries
• Role of Corporate Governance
• Aligning managerial shareholder interests
• External Control Mechanisms

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Strategic Control

• Strategic control -- the process of monitoring
  and correcting a firms strategy and performance
• Informational control
• Behavioral control

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Informational Control

• Traditional control system
• strategies are formulated and top management sets
  goals
• strategies are implemented
• performance is measured against the predetermined
  goal set

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Traditional Approach to Strategic Control

• Process typically involves lengthy time lags,
  often tied to the annual planning cycle
• This single-loop learning control system simply
  compares actual performance to a predetermined
  goal

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Traditional Approach to Strategic Control

• Most appropriate when
• Environment is stable and relatively simple
• Goals and objectives can be measured with
  certainty
• Little need for complex measures of performance

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Contemporary Approach to Strategic Control

• Contemporary control system
• Continually monitoring the environments (internal
  and external)
• Identifying trends and events that signal the
  need to revise strategies, goals and objectives
• Double-loop learning

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Contemporary Approach to Strategic Control
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Contemporary Approach to Strategic Control

• Informational control
• the ability to respond effectively to
  environmental change
• Are we doing the right things?
• Outcomes

• Behavioral control
• the appropriate balance and alignment among a
  firms culture, rewards, and boundaries
• Are we doing things right in the implementation
  of our strategy/ strategies?
• Process

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I. Informational Control

• Deals with internal environment and external
  strategic context
• Key question
• Do the organizations goals and strategies still
  fit within the context of the current strategic
  environment?

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Informational Control

• Two key issues
• Scan and monitor external environment (general
  and industry)
• Continuously monitor the internal environment

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Informational Control - Outcomes

• Common measures and controls
• Sales
• Revenue, Increased revenue
• Profit
• Customer service
• Low Cost / Differentiation / Focus
• Cost
• Quality
• Uniqueness

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Evaluating Firm Performance (Ch 3)

• Financial ratio analysis
• Balance sheet
• Income statement
• Historical comparison
• Comparison with industry norms
• Comparison with key competitors

• Stakeholder perspective
• Employees
• Customers
• Owners

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Financial Ratio Analysis (Ch 3)

• Five types of financial ratios
• Short-term solvency or liquidity
• Long-term solvency measures
• Asset management (or turnover)
• Profitability
• Market value
• Balanced Scorecard, Triple bottom line

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II. Behavioral Control

• Behavioral control is focused on
  implementationdoing things right
• Three key control levers
• Culture
• Rewards
• Boundaries

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Reasons for an increased emphasis on culture and
rewards

1. The competitive environment is increasingly
   complex and unpredictable, demanding both
   flexibility and quick response to its challenges.
2. The implicit long-term contract between the
   organization and its key employees has been
   eroded.

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Building a Strong and Effective Culture

• Organizational culture
• a system of shared values and beliefs that shape
  a companys people, organizational structures,
  and control systems to produce behavioral norms.
• Culture acts as a means of reducing monitoring
  costs

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Building a Strong and Effective Culture

• Culture sets implicit boundaries (unwritten
  standards of acceptable behavior)
• Dress
• Ethical matters
• The way an organization conducts its business
• How you interact with customers, suppliers

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Sustaining an Effective Culture

• Effective culture must be
• Cultivated
• Encouraged
• Fertilized

• Maintaining an effective culture
• Storytelling
• Rallies or pep talks by top executives
• Layout / location

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Motivating with Rewards and Incentives

• Rewards and incentive systems
• Powerful means of influencing an organizations
  culture
• Focuses efforts on high-priority tasks
• Motivates individual and collective task
  performance
• Can be an effective motivator and control
  mechanism

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Motivating with Rewards and Incentives

• Potential downside
• Subcultures may arise in different business units
  with multiple reward systems
• May reflect differences among functional areas,
  products, services and divisions
• Individual rationality does not guarantee
  organizational rationality

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Characteristics of Effective Reward
andEvaluation Systems
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Setting Boundaries and Constraints

• Focus efforts on strategic priorities
• Providing short-term objectives and action plans
• Specific and measurable
• Specific time horizon for attainment
• Achievable, but challenging
• Improve operational efficiency and effectiveness
• Minimizing improper and unethical conduct

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Question

• Effective boundaries and constraints
• Tend to inhibit efficiency and effectiveness
• Distract employees who are trying to focus on
  organizational priorities
• Minimize improper and unethical conduct
• Tend to limit organizational growth

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Setting Boundaries and Constraints

• Rule-based controls are most appropriate in
  organizations with the following characteristics
• Environments are stable and predictable.
• Employees are largely unskilled and
  interchangeable.
• Consistency in product and service is critical.
• The risk of malfeasance is extremely high

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Organizational Control Alternative Approaches
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Organizational Control Alternative Approaches
Culture
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Organizational Control Alternative Approaches
Rules
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Organizational Control Alternative Approaches
Rewards
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Evolving from Boundaries (Rules)to Rewards and
Culture

• System of rewards and incentives coupled with a
  strong culture
• Hire the right people
• Training plays a key role
• Managerial role models are vital
• Reward systems clearly aligned with
  organizational goals and objectives

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A Note on Efficiency

• Think whole System Efficiency
• Not just piece/part efficiency

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III. Role of Corporate Governance

• Corporation
• A mechanism created to allow different parties to
  contribute capital, expertise, and labor for the
  maximum benefit of each party.
• Corporate governance
• the relationship among various participants in
  determining the direction and performance of
  corporations.
• primary participants are the shareholders, the
  management, and the board of directors.

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Agency Theory

• Deals with the relationship between
• Principals who are owners of the firm
  (stockholders), and the
• Agents who are the people paid by principals to
  perform a job on their behalf (management)

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Agency Theory Two Problems

1. The conflicting goals of principals and agents,
   along with the difficulty of principals to
   monitor the agents, and

• The different attitudes and preferences towards
  risk of principals and agents.

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Governance Mechanisms

• Board of directors
• a group that has a fiduciary duty to ensure that
  the company is run consistently with the
  long-term interests of the owners, or
  shareholders, of a corporation and that acts as
  an intermediary between the shareholders and
  management.

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Duties of the Board

• 1. Select, regularly evaluate, and, if necessary,
  replace the CEO. Determine management
  compensation. Review succession planning.
• 2. Review and, where appropriate, approve the
  financial objectives, major strategies, and plans
  of the corporation.
• 3. Provide advice and counsel to top management.
• 4. Select / recommend (to shareholders for
  election) an appropriate slate of candidates for
  the BOD evaluate board processes / performance.
• 5. Review the adequacy of the systems to comply
  with all applicable laws/regulations.

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The New Rules for Directors
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Governance Mechanisms

• Shareholder activism
• actions by large shareholders, both institutions
  and individuals, to protect their interests when
  they feel that managerial actions diverge from
  shareholder value maximization.

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TIAA-CREFs Principles on the Role of Stock in
Executive Compensation
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External Governance Control Mechanisms

• External governance control mechanisms
• methods that ensure that managerial actions lead
  to shareholder value maximization and do not harm
  other stakeholder groups and that are outside the
  control of the corporate governance system.

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External Governance Control Mechanisms

• Market for corporate control
• Stock value
• Auditors
• Banks and analysts
• Regulatory bodies
• governments
• Media and public activists

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Sarbanes-Oxley Act

• Auditors
• Barred from certain types of non-audit work
• Not allowed to destroy records for five years
• Lead partners auditing a firm should be changed
  at least every five years

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Sarbanes-Oxley Act

• CEOs and CFOs
• Must fully reveal off-balance sheet finances
• Vouch for the accuracy of information revealed
• Executives
• Must promptly reveal the sale of shares in firms
  they manage
• Are not allowed to sell shares when other
  employees cannot

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International

• Different rules
• Legal issues
• Different governance structures
• Ownership structures/rules