22
11-1 © 2006 by Nelson, a division of Thomson Canada Limited. Corporate Governance Chapter Eleven
| Date post: | 20-Jan-2015 |
| Category: |
Business |
| Upload: | laiqa-ahmed |
| View: | 754 times |
| Download: | 4 times |
11-1 © 2006 by Nelson, a division of Thomson Canada Limited.
Corporate Governance
Chapter Eleven
11-2 © 2006 by Nelson, a division of Thomson Canada Limited.
The Strategic .
Management .
Process
The Strategic Management Process
Chapter 5Bus. - Level
Strategy
Chapter 6Competitive
Dynamics
Chapter 9International
Strategy
Chapter 10CooperativeStrategies
Chapter 8Acquisitions &Restructuring
Str
ateg
icIn
pu
ts
Str
ateg
icA
ctio
ns
Str
ateg
ic O
utc
om
esChapter 4Internal
Environment
Chapter 3External
Environment Strat. Intent
Strat. Mission
Strategy Formulation
Strategic Competitiveness
Chapter 1
Above Average Returns
Chapter 2Strategic
Competitiveness
Chapter 1
Chapter 7Corp. - Level
Strategy
Chapter 5Bus. - Level
Strategy
Chapter 11Corporate
Governance
Chapter 12Structure& Control
Chapter 13Strategic
Leadership
Chapter 14Entrepreneurship & Innovation
Strategy Implementation
Feedback
Chapter 11Corporate
Governance
11-3 © 2006 by Nelson, a division of Thomson Canada Limited.
Corporate Governance
Knowledge objectives:
1. Define corporate governance & explain why it is used to monitor & control managers’ strategic decisions.
2. Explain how ownership came to be separated from managerial control in the modern corporation.
3. Define an agency relationship & managerial opportunism & describe their strategic implications.
4. Explain how three internal governance mechanisms – ownership concentration, the board of directors and executive compensation – are used to monitor & control managerial decisions.
11-4 © 2006 by Nelson, a division of Thomson Canada Limited.
Corporate Governance
Knowledge objectives cont’d…
5. Discuss trends among the three types of compensation executives receive and their effects on strategic decisions.
6. Describe how the external corporate governance mechanism – the market for corporate control - acts as a restraint on top level managers strategic decisions.
7. Discuss the use of corporate governance in international settings, in particular in Germany & Japan.
8. Describe how corporate governance fosters ethical strategic decisions & the importance of such behaviours on the part of top-level executives.
11-5 © 2006 by Nelson, a division of Thomson Canada Limited.
Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic direction & performance of organizations.
Concerned with identifying ways to ensure that strategic decisions are made effectively.
Used in corporations to establish order between the firm’s owners and its top-level managers.
Corporate Governance
11-6 © 2006 by Nelson, a division of Thomson Canada Limited.
Ten most admired & respected corporations in Canada
11-7 © 2006 by Nelson, a division of Thomson Canada Limited.
Internal Governance Mechanisms
11-8 © 2006 by Nelson, a division of Thomson Canada Limited.
Separation of Ownership & Managerial Control
Basis of the modern corporation
Shareholders purchase stock, becoming Residual Claimants
Professional managers contract to provide decision-making.
Modern public corporation form leads to efficient specialization of tasks.
Shareholders reduce risk efficiently by holding diversified portfolios.
Risk bearing by shareholders.Strategy development and decision-makingby managers.
11-9 © 2006 by Nelson, a division of Thomson Canada Limited.
Agency Relationship
Risk Bearing Specialist(Principal)
Managers (Agents)
DecisionMakers
which createswhich creates
Managerial Decision-Making Specialist
(Agent)
Hire
An agency relationship exists when:
Shareholders (Principals)
Firm Owners
Agency Theory
11-10 © 2006 by Nelson, a division of Thomson Canada Limited.
The Agency problem occurs when:
The desires or goals of the principal & agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately.
Example: Over - diversification: Greater product diversification leads to lower management employment risk & greater compensation.
Solution: Principals engage in incentive-based performance contracts, monitoring mechanisms like the board of directors & enforcement mechanisms like managerial labour market to mitigate agency problems.
Agency Theory
11-11 © 2006 by Nelson, a division of Thomson Canada Limited.
Product Diversification as an example of an Agency Problem
• Diversification usually increases the size of the firm – therefore complexity and an opportunity for top executives to increase their compensation.
• Diversification usually reduces top executives’ employment risk.
• Top executives have control over free cash flow and may invest in in products not associated with the firm’s current lines of business.
11-12 © 2006 by Nelson, a division of Thomson Canada Limited.
Ris
k
Level of Diversification
DominantBusiness
UnrelatedBusinesses
RelatedConstrained
RelatedLinked
Managerial(Employment)
Risk ProfileM
B
Shareholder (Business) Risk ProfileS
A
Manager & Shareholder Risk & Diversification
11-13 © 2006 by Nelson, a division of Thomson Canada Limited.
Agency Costs & Governance Mechanisms
• Managerial interests may prevail when governance mechanisms are weak.
• If the board of directors control managerial autonomy, the firm’s strategies should better reflect the interests of the shareholders.
11-14 © 2006 by Nelson, a division of Thomson Canada Limited.
Governance Mechanisms
Ownership Concentration
- Large block shareholders have a strong incentive to monitor management closely.
In Canada such shareholders account for 65% to 70% of publicly traded stocks (59% in the U.S.)
- Their large stakes make it worth their while to spend time, effort & expense to monitor closely.
- Institutional owners are financial institutions such as stock mutual funds and pension funds that control large-block shareholder positions.
11-15 © 2006 by Nelson, a division of Thomson Canada Limited.
Insiders
Outsiders
Boards of Directors
- Set compensation of CEO & decide when to replace the CEO.
- Formally monitor & control the firm’s top- level executives.
- May lack contact with day to day operations.
A firm’s CEO & other top-level managers
RelatedOutsiders
Individuals not involved with a firm’s day-to-day operations, but who have a relationship with the company
Individuals independent of a firm’s day-to-day operations and other relationships
Governance Mechanisms
11-16 © 2006 by Nelson, a division of Thomson Canada Limited.
Accountability of Board Members
• Increased diversity amongst board members.
• The strengthening of internal management & accounting control systems.
• The establishment & consistent use of formal processes to evaluate board’s performance.
• Directors are being required to own significant equity stakes as a prerequisite to holding a board seat.
11-17 © 2006 by Nelson, a division of Thomson Canada Limited.
Executive Compensation
Executive compensation: A governance
mechanism aligning the interests of managers
& owners through salaries, bonuses and long
term incentives such as stock options.
Stock options: A mechanism which links the
executive’s performance to the performance of
the company.
11-18 © 2006 by Nelson, a division of Thomson Canada Limited.
Table 11.4
11-19 © 2006 by Nelson, a division of Thomson Canada Limited.
Table 11.5
11-20 © 2006 by Nelson, a division of Thomson Canada Limited.
Market for Corporate Control
An external governance mechanism that becomes
active when a firms internal controls fail which is
triggered by a firm’s poor performance, relative
to industry competition.
11-21 © 2006 by Nelson, a division of Thomson Canada Limited.
A Basic List of Management Defence Tactics
Increase the costs of mounting a takeover and can entrench current management.
Greenmail Where company money is used to repurchase stock from a corporate raider to avoid takeover.
Golden Parachute Raises the cost of making changes at a take-over target due to the need to pay fired executives large severance packages.
Poison Pill When the takeover target does something to make itself unpalatable to the suitor (e.g. assume a large amount of debt and then issue dividends with the money).
11-22 © 2006 by Nelson, a division of Thomson Canada Limited.
Governance Mechanism & Ethical Behaviour
• Shareholders are recognized as a company’s most significant stakeholders.
• The minimum interests or needs of all stakeholders must be recognized through the firms actions.
• A firm’s strategic competitiveness is enhanced when its governance mechanisms take into consideration the interests of all stakeholders.
• Only when the proper corporate governance is exercised can strategies be formulated & implemented that will help the firm achieve strategic competitiveness & earn above average returns.
