1 STRATEGIC CONTROL AND CORPORATE GOVERNANCE STRATEGIC MANAGEMENT BUAD 4980.

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STRATEGIC CONTROL AND CORPORATE GOVERNANCESTRATEGIC CONTROL AND CORPORATE GOVERNANCE

STRATEGIC MANAGEMENT BUAD 4980

STRATEGIC MANAGEMENT BUAD 4980

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Strategic Control

The process of monitoring and correcting a firm’s strategy and performance

Informational – the ability to respond to environmental change

Behavioral – alignment among a firm’s culture, rewards and boundaries

Strategic ControlStrategic Control

STRATEGIC MANAGEMENT – BUAD 4980STRATEGIC MANAGEMENT – BUAD 4980

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Traditional Approach

Strategies are formulated and top management sets goals

Strategies are implemented

Performance is measured against the predetermined goal set

Usually a top-down focus on goal-setting

Infrequent, periodic formal review process

Informational ControlInformational Control


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Most appropriate when

Environment is stable and relatively simple

Goals and objectives can be measured with certainty

Little need for complex measures of performance

Traditional Approach to Strategic

Control

Traditional Approach to Strategic

Control


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Contemporary Approach

Continually monitor the internal and external environment

Identify trends and events that signal the need to revise strategies, goals and objectives

Assess the appropriateness of organizational goals and strategies within the context of the current strategic environment

Contemporary Approach to

Strategic Control


Strategic Control


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Four steps of contemporary control systems1. Identify constantly changing environmental information

that may have strategic importance

2. Review important information frequently at all levels of the organization

3. Discuss strategic implications of new information in regular face-to-face meetings

4. Engage in debate and discussion to determine which information has significance to the organization and how to adapt strategies accordingly


Strategic Control


Strategic Control


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Behavioral Control is focused on implementation

Three key aspects of behavioral control

Reinforcing the desired organizational Culture

Tying Rewards and incentives to goal achievement

Setting Boundaries within which the organization is allowed to operate to meet goals

Behavioral ControlBehavioral Control


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There is an Increasing need to emphasize culture and rewards

Organizations must be adaptive and flexible to react to rapidly changing competitive pressures

Employees are more likely to switch jobs to advance career paths

Behavioral ControlBehavioral Control


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Organizational Culture

System of shared values and beliefs that shape a company’s people, organizational structures, and control systems to produce behavioral norms

Organizational CultureOrganizational Culture


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Organizational culture defines behavioral boundaries

The way employees relate to one another and demonstrate mutual respect

The ethical framework for work and decision-making

The way an organization conducts business



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Sustaining organizational culture requires

Commitment and demonstrated behavior by leaders and all levels of management

An organizational framework including written policies and reinforcing messages

Team-building efforts and organizational interaction



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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 control mechanism

Rewards and IncentivesRewards and Incentives


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Potential downsides of incentive systems

Varying incentive or reward systems across different business units may create competing sub-cultures

Too much emphasis on rewards may induce unhealthy organizational competition at the individual or functional level



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Characteristics of effective reward and incentive systems: Objectives are clear, well understood and accepted across

the organization

Rewards are clearly linked to performance and desired behaviors

Performance measures are clearly defined and communicated across the organization

Feedback is constructive, clear, prompt and unambiguous

Compensation system is regarded as fair and equitable

Reward and incentive system is adaptable to changing circumstances



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Short-Term Objectives and Action Plans

Specific

Measurable

Attainable

Realistic

Timely



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Set at high level by organizational culture

Rules and conduct policies provide explicit definition of behavioral standards

Reinforced at operating level by performance management systems

Behavioral motivation through properly conceived and implemented compensation, rewards and incentive systems

Organizational Boundaries and Constraints

Organizational Boundaries and Constraints


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Hire according to cultural alignment, proper mix of skills, work ethic and attitude

Train in organizational values, standards, conduct policies and specific work requirements

Managers provide role models, communicate organizational goals and administer performance management systems

Compensation, reward and incentive systems are clearly aligned with organizational goals and objectives – tied to defined outcomes

Achieving Desired Organizational Culture and Performance

Achieving Desired Organizational Culture and Performance


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Corporate Governance

Relationship among various participants in determining the direction and performance of corporations

Primary participants are

Shareholders

Management

Board of Directors

The Role of Corporate GovernanceThe Role of Corporate Governance


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The Modern Corporation

A mechanism created to allow different parties to contribute capital, expertise, and labor for the maximum benefit of each party

Shareholders / Investors participate in the profits of the corporation without being directly responsible for management of operations

Management runs the corporation without the responsibility for providing funds

Shareholders have limited liability and involvement, but elect directors who have fiduciary responsibility to protect shareholders financial interests



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Agency Theory addresses the conflicting interests of corporate owners (principals) and managers (agents)

The goals of the shareholders may be different than those of management

It is often difficult for the shareholders to verify what management is doing

Shareholders and management may have different attitudes or preferences toward risk



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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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Role of the Board of Directors Select, regularly evaluate, and, if necessary, replace the

CEO

Determine and approve appropriate compensation and succession planning for the CEO and top executives

Review and approve financial objectives, major strategies and plans for the corporation

Provide advice and counsel to top management

Select and recommend to shareholders new candidates for the board of directors

Evaluate board processes and performance

Review the adequacy of corporate systems in place to ensure corporate regulatory and legal compliance



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Shareholder Rights

Sell stock

Vote by proxy (approve board of directors and other major corporate ownership changes)

Bring suit for damages if the corporation’s directors or managers fail to perform their obligations

Access to certain corporate information

Residual rights following the corporation’s liquidation or bankruptcy and payment of creditors and settlement of other obligations



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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

Increasingly prevalent action by large institutional investors to force changes in management, board membership and executive compensation



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Board of Director control over CEO performance and compensation

Require CEO’s to hold substantial amounts of company stock

Structure salaries, bonuses and stock options to provide rewards for superior performance and penalties for poor performance

Make dismissal a real potential outcome in the event of major problems or chronic underperformance



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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 Value

Auditors

Banks and Investment Analysts

Regulatory Agencies (SEC, SOX)

Media and Public Activists



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The Sarbanes-Oxley Act

Passed in 2002 following a number of scandals involving improper financial reporting by major corporations and auditing firms

Requires additional internal controls and financial disclosure

Additional controls and requirements on independent auditors

Requires CEO’s and CFO’s to certify audit results

Places controls on conflicts of interest



1 STRATEGIC CONTROL AND CORPORATE GOVERNANCE STRATEGIC MANAGEMENT BUAD 4980.

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