Strategic Control and Corporate Governance

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  • two central aspects of strategic control: 2 (1) informational control, which is the ability to respond effectively to environmental change, and (2) behavioral control, which is the appropriate balance and alignment among a firm’s culture, rewards, and boundaries.
  • 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 Most appropriate when Environment is stable and relatively simple Goals and objectives can be measured with certainty Little need for complex measures of performance
  • Culture acts as a means of reducing monitoring costs
  • 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
  • Shareholders (investors) Limited liability Participate in the profits of the enterprise Limited involvement in the company’s affairs Management Run the company Does not personally have to provide the funds Board of directors Elected by shareholders Fiduciary obligation to protect shareholder interests
  • The Business Roundtable, representing the largest U.S. corporations, describes the duties of the board as follows: 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 and recommend to shareholders for election an appropriate slate of candidates for the board of directors; evaluate board processes and performance. 5. Review the adequacy of the systems to comply with all applicable laws/regulations.
  • Strategic Control and Corporate Governance

    1. 1. Strategic Control and Corporate Governance Chapter 9 Agudines, Arceily Obregon, Orville Apas, Gretchen Orlanes, Mirafe Bastasa, Janine Salinas, ArvinMcGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. Learning ObjectivesAfter reading this chapter, you should have a good understanding of:LO9.1 The value of effective strategic control systems in strategy implementation.LO9.2 The key difference between “traditional” and “contemporary” control systems.LO9.3 The imperative for “contemporary” control systems in today’s complex and rapidly changing competitive and general environments. 9-2
    3. 3. Learning Objectives (cont.)LO9.4 The benefits of having the proper balance among the three levers of behavioral control: culture, rewards and incentives, and boundaries.LO9.5 The three key participants in corporate governance: shareholders, management (led by the CEO), and the board of directors.LO9.6 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. 9-3
    4. 4. Strategic ControlStrategic control  the process of monitoring and correcting a firm’s strategy and performance  Informational, behavioral 9-4
    5. 5. Ensuring Informational ControlTraditional control system 1. strategies are formulated and top management sets goals 2. strategies are implemented 3. performance is measured against the predetermined goal set 9-5
    6. 6. Traditional Approach to Strategic ControlExhibit 9.1 9-6
    7. 7. 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 9-7
    8. 8. Contemporary Approach to Strategic ControlExhibit 9.2 9-8
    9. 9. Contemporary Approach to Strategic ControlInformational control  a method of organizational control in which a firm gathers and analyzes information from the internal and external environment in order to obtain the best fit between the organization’s goals and strategies and the strategic environment. 9-9
    10. 10. Informational ControlPrimarily concerned with whether or not the organization is “doing the right things” 9-10
    11. 11. Contemporary Approach to Strategic ControlBehavioral control  a method of organizational control in which a firm influences the actions of employees through culture, rewards, and boundaries. 9-11
    12. 12. Effectiveness of Contemporary Control Systems1. Focus on constantly changing information that has potential strategic importance.2. The information is important enough to demand frequent and regular attention from all levels of the organization.3. The data and information generated are best interpreted and discussed in face-to-face meetings.4. The control system is a key catalyst for an ongoing debate about underlying data, assumptions, and action plans. 9-12
    13. 13. Behavioral ControlBehavioral control is focused on implementation—doing things rightThree key control “levers”  Culture  Rewards  Boundaries 9-13
    14. 14. Reasons for an increased emphasis on culture and rewards1. The competitive 2. The implicit long- environment is term contract increasingly between the complex and organization and its unpredictable, key employees has demanding both been eroded. flexibility and quick response to its challenges. 9-14
    15. 15. Building a Strong and Effective CultureOrganizational culture  a system of shared values and beliefs that shape a company’s people, organizational structures, and control systems to produce behavioral norms. 9-15
    16. 16. 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 9-16
    17. 17. Sustaining an Effective CultureEffective culture Maintaining an must be effective culture  Cultivated  Storytelling  Encouraged  Rallies or pep  Fertilized talks by top executives 9-17
    18. 18. Motivating with Rewards and IncentivesRewards and incentive systems  Powerful means of influencing an organization’s culture  Focuses efforts on high-priority tasks  Motivates individual and collective task performance  Can be an effective motivator and control mechanism 9-18
    19. 19. 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 9-19
    20. 20. Characteristics of Effective Reward and Evaluation SystemsExhibit 9.4 9-20
    21. 21. Setting Boundaries and ConstraintsFocus efforts on strategic prioritiesProvide short-term objectives and action plans  Specific and measurable  Specific time horizon for attainment  Achievable, but challenging 9-21
    22. 22. Setting Boundaries and ConstraintsImprove operational efficiency and effectivenessMinimize improper and unethical conduct 9-22
    23. 23. Organizational Control: Alternative ApproachesExhibit 9.6 9-23
    24. 24. Evolving from Boundaries 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 9-24
    25. 25. Role of Corporate Governance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.” 9-25
    26. 26. The Modern CorporationCorporation  A mechanism created to allow different parties to contribute capital, expertise, and labor for the maximum benefit of each party. 9-26
    27. 27. Agency TheoryDeals with the relationship between  Principals – who are owners of the firm (stockholders)  Agents – who are the people paid by principals to perform a job on their behalf (management) 9-27
    28. 28. Agency Theory: Two Problems1. The conflicting 2. The different goals of principals attitudes and and agents, along preferences with the difficulty of towards risk of principals to principals and monitor the agents. agents, and 9-28
    29. 29. 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. 9-29
    30. 30. The New Rules for DirectorsExhibit 9.7 9-30
    31. 31. 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. 9-31
    32. 32. TIAA-CREF’s Principles on the Role of Stock in Executive CompensationExhibit 9.8 9-32
    33. 33. 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. 9-33
    34. 34. External Governance Control MechanismsMarket for corporate controlAuditorsBanks and analystsRegulatory bodiesMedia and public activists 9-34
    35. 35. 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 9-35
    36. 36. 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 9-36

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