Strategic management Ch 10
-
Upload
rushabh-vora -
Category
Documents
-
view
220 -
download
0
Transcript of Strategic management Ch 10
-
8/3/2019 Strategic management Ch 10
1/28
PowerPoint slides by:
R. Dennis MiddlemistColorado State University
Copyright 2004 South-Western
All rights reserved.
Chapter 10
CorporateGovernance
-
8/3/2019 Strategic management Ch 10
2/28
Copyright 2004 South-Western. All rights reserved. 102
Knowledge Objectives
Studying this chapter should provide you with thestrategic management knowledge needed to:
Define corporate governance and explain why it is used tomonitor and control managers strategic decisions.
Explain why ownership has been largely separated frommanagerial control in the modern corporation.
Define an agency relationship and managerial opportunismand describe their strategic implications.
Explain how three internal governance mechanismsownership concentration, the board of directors, andexecutive compensationare used to monitor and controlmanagerial decisions.
-
8/3/2019 Strategic management Ch 10
3/28
Copyright 2004 South-Western. All rights reserved. 103
Knowledge Objectives (contd)
Studying this chapter should provide you with thestrategic management knowledge needed to:
Discuss the types of compensation executives receive andtheir effects on strategic decisions.
Describe how the external corporate governancemechanismthe market for corporate controlacts as arestraint on top-level managers strategic decisions.
Discuss the use of corporate governance in internationalsettings, in particular in Germany and Japan.
Describe how corporate governance fosters ethicalstrategic decisions and the importance of such behaviorson the part of top-level executives.
-
8/3/2019 Strategic management Ch 10
4/28
Copyright 2004 South-Western. All rights reserved. 104
Figure 1.1
Copyright 2004 South-Western. All rights reserved.
The StrategicManagement
Process
-
8/3/2019 Strategic management Ch 10
5/28
Copyright 2004 South-Western. All rights reserved. 105
Corporate Governance
Corporate governance is:
A relationship among stakeholders used todetermine and control the strategic direction andperformance of organizations
Concerned with making strategic decisions moreeffectively
Used to establish order between a firms owners
and its top-level managers whose interests maybe in conflict
-
8/3/2019 Strategic management Ch 10
6/28
Copyright 2004 South-Western. All rights reserved. 106
Internal Governance Mechanisms
Ownership Concentration
Relative amounts of stock ownedby individual shareholders andinstitutional investors
Board of Directors
Individuals responsiblefor representing the firms
owners by monitoring top-levelmanagers strategic decisions
-
8/3/2019 Strategic management Ch 10
7/28
Copyright 2004 South-Western. All rights reserved. 107
Internal Governance Mechanisms
Executive Compensation
Use of salary, bonuses, andlong-term incentives to alignmanagers interests with
shareholders interests
-
8/3/2019 Strategic management Ch 10
8/28
Copyright 2004 South-Western. All rights reserved. 108
External Governance Mechanisms
Market for Corporate Control
Purchase of a firm that isunderperforming relative toindustry rivals in order to
improve its strategiccompetitiveness
-
8/3/2019 Strategic management Ch 10
9/28
Copyright 2004 South-Western. All rights reserved. 109
Separation of Ownership and ManagerialControl
Basis of the Modern Corporation
Shareholders purchase stock, becoming residualclaimants
Shareholders reduce risk by holding diversifiedportfolios
Professional managers are contracted to provide
decision making
-
8/3/2019 Strategic management Ch 10
10/28
Copyright 2004 South-Western. All rights reserved. 1010
Separating Ownership and ManagerialControl
Modern public corporation form leads toefficient specialization of tasks:
Risk bearing by shareholders
Strategy development and decision making bymanagers
-
8/3/2019 Strategic management Ch 10
11/28
Copyright 2004 South-Western. All rights reserved. 1011
An Agency Relationship
Figure 10.1
Hire
and create
-
8/3/2019 Strategic management Ch 10
12/28
Copyright 2004 South-Western. All rights reserved. 1012
Agency Relationship Problems
Principal and agent have divergent interests andgoals
Shareholders lack direct control of large, publiclytraded corporations
Agent makes decisions that result in the pursuit ofgoals that conflict with those of the principal
It is difficult or expensive for the principal to verify
that the agent has behaved appropriately Agent falls prey to managerial opportunism
-
8/3/2019 Strategic management Ch 10
13/28
Copyright 2004 South-Western. All rights reserved. 1013
Managerial Opportunism
The seeking of self-interest with guile(cunning or deceit)
Managerial opportunism is:
An attitude (inclination)
A set of behaviors (specific acts of self-interest)
Managerial opportunism prevents the
maximization of shareholder wealth (theprimary goal of owner/principals)
-
8/3/2019 Strategic management Ch 10
14/28
Copyright 2004 South-Western. All rights reserved. 1014
Response to Managerial Opportunism
Principals do not know beforehand whichagents will or will not act opportunistically
Thus, principals establish governance and
control mechanisms to prevent managerialopportunism
-
8/3/2019 Strategic management Ch 10
15/28
Copyright 2004 South-Western. All rights reserved. 1015
Examples of the Agency Problem
Possible ProblemsProduct diversification
Increased size, and relationship of size tomanagerial compensation
Reduction of managerial employment risk
Use of Free Cash Flows
Managers prefer to invest these funds inadditional product diversification (see above)
Shareholders prefer the funds as dividends sothey control how the funds are invested
-
8/3/2019 Strategic management Ch 10
16/28
Copyright 2004 South-Western. All rights reserved. 1016
Manager and Shareholder Risk and Diversification
Figure 10.2
-
8/3/2019 Strategic management Ch 10
17/28
Copyright 2004 South-Western. All rights reserved. 1017
Agency Costs and Governance Mechanisms
Principals may engage in monitoringbehavior to assess the activities anddecisions of managers
However, dispersed shareholding makes itdifficult and inefficient to monitor managementsbehavior
Boards of Directors have a fiduciary duty to
shareholders to monitor managementHowever, Boards of Directors are often accused
of being lax in performing this function
-
8/3/2019 Strategic management Ch 10
18/28
Copyright 2004 South-Western. All rights reserved. 1018
Governance Mechanisms
Large block shareholdershave a strong incentive tomonitor management closely:
Their large stakes make it worththeir while to spend time, effortand expense to monitor closely
They may also obtain Boardseats which enhances theirability to monitor effectively
Financial institutions arelegally forbidden fromdirectly holding board seats
OwnershipConcentration (a)
-
8/3/2019 Strategic management Ch 10
19/28
Copyright 2004 South-Western. All rights reserved. 1019
Governance Mechanisms (contd)
The increasing influence ofinstitutional owners (stockmutual funds and pensionfunds)
Have the size (proxy votingpower) and incentive (demandfor returns to funds) todiscipline ineffective top-levelmanagers
Can affect the firms choice of
strategies
OwnershipConcentration (b)
-
8/3/2019 Strategic management Ch 10
20/28
Copyright 2004 South-Western. All rights reserved. 1020
Governance Mechanisms (contd)
Shareholder activism:
Shareholders can convene todiscuss corporations direction
If a consensus exists,
shareholders can vote as ablock to elect their candidates tothe board
Proxy fights
There are limits on shareholderactivism available toinstitutional owners inresponding to activists tactics
OwnershipConcentration (c)
-
8/3/2019 Strategic management Ch 10
21/28
Copyright 2004 South-Western. All rights reserved. 1021
Governance Mechanisms (contd)
Board of directors Group of elected individuals that
acts in the owners interests to
formally monitor and control thefirms top-level executives
Board has the power to:
Direct the affairs of theorganization
Punish and reward managers
Protect owners from managerialopportunism
OwnershipConcentration
Board of Directors(a)
-
8/3/2019 Strategic management Ch 10
22/28
Copyright 2004 South-Western. All rights reserved. 1022
Governance Mechanisms (contd)
Composition of Boards:
Insiders:the firms CEO andother top-level managers
Related Outsiders: individuals
uninvolved with day-to-dayoperations, but who have arelationship with the firm
Outsiders: individuals who areindependent of the firms day-to-
day operations and otherrelationships
OwnershipConcentration
Board of Directors(b)
-
8/3/2019 Strategic management Ch 10
23/28
Copyright 2004 South-Western. All rights reserved. 1023
Governance Mechanisms (contd)
Criticisms of Boards ofDirectors include:
Too readily approve managers
self-serving initiatives
Are exploited by managers withpersonal ties to board members
Are not vigilant enough in hiringand monitoring CEO behavior
Lack of agreement about thenumber of and most appropriaterole of outside directors
OwnershipConcentration
Board of Directors(c)
-
8/3/2019 Strategic management Ch 10
24/28
Copyright 2004 South-Western. All rights reserved. 1024
Governance Mechanisms (contd)
Enhancing the effectivenessof boards and directors:
More diversity in thebackgrounds of board members
Stronger internal managementand accounting control systems
More formal processes toevaluate the boards performance
Adopting a lead director role
Changes in compensation ofdirectors
OwnershipConcentration
Board of Directors(d)
-
8/3/2019 Strategic management Ch 10
25/28
Copyright 2004 South-Western. All rights reserved. 1025
Governance Mechanisms (contd)
Forms of compensation: Salary, bonuses, long-term
performance incentives, stockawards, stock options
Factors complicatingexecutive compensation:
Strategic decisions by top-levelmanagers are complex, non-routine and affect the firm over
an extended period Other variables affecting the
firms performance over time
OwnershipConcentration
Board of Directors
Executive
Compensation (a)
-
8/3/2019 Strategic management Ch 10
26/28
Copyright 2004 South-Western. All rights reserved. 1026
Governance Mechanisms (contd)
Limits on the effectiveness ofexecutive compensation:
Unintended consequences ofstock options
Firm performance not asimportant than firm size
Balance sheet not showingexecutive wealth
Options not expensed at the time
they are awarded
OwnershipConcentration
Board of Directors
Executive
Compensation (b)
-
8/3/2019 Strategic management Ch 10
27/28
Copyright 2004 South-Western. All rights reserved. 1027
Governance Mechanisms (contd)
Individuals and firms buy ortake over undervaluedcorporations
Ineffective managers are usually
replaced in such takeovers
Threat of takeover may leadfirm to operate moreefficiently
Changes in regulations havemade hostile takeoversdifficult
OwnershipConcentration
Board of Directors
Executive
Compensation
Market forCorporate Control (a)
-
8/3/2019 Strategic management Ch 10
28/28
Copyright 2004 South-Western. All rights reserved. 1028
Governance Mechanisms (contd)
Managerial defense tacticsincrease the costs ofmounting a takeover
Defense tactics may require:
Asset restructuring
Changes in the financialstructure of the firm
Shareholder approval
Market for corporate controllacks the precision of internalgovernance mechanisms
OwnershipConcentration
Board of Directors
Executive
Compensation
Market forCorporate Control (b)