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Education.
Strategic Control and Corporate
Governance
chapter 9
Learning Objectives9-2
After 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.
Learning Objectives
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.
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Strategic Control
Consider…
Once strategy is formulated, it must be implemented, and part of implementation is establishing a mechanism for monitoring and correcting organizational performance.
This control mechanism must be consistent with the strategy the firm is following.
How does a firm make sure all key stakeholders are moving in the right direction?
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Strategic Control
Strategic control involves monitoring performance toward strategic goals and taking corrective action when needed via effective systems: Informational control systems Behavioral control systems Corporate governance
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Strategic Control: Traditional Approach
The traditional approach to strategic control is sequential Strategies are formulated, goals are set Strategies are implemented Performance is measured against goals
Exhibit 9.1 Traditional Approach to Strategic Control
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Strategic Control: Traditional Approach
Control = feedback loop from performance measurement to strategy formulation
Involves lengthy time lags, “single-loop” learning
Most appropriate when Environment is stable and relatively simple Objectives can be measured with certainty Little need for complex measures of
performance
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Strategic Control: Contemporary Approach
Relationships between strategy formulation, implementation, & control are highly interactive, utilizing Informational control Behavioral control
Exhibit 9.2 Contemporary Approach to Strategic Control
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Strategic Control: Contemporary Approach
Informational control = concerned with whether or not the organization is “doing the right things”
Behavioral control = concerned with whether or not the organization is “doing things right” in the implementation of its strategy
Both types of control are necessary, but not sufficient, conditions for success
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Question?
Top managers at ABC Company meet every Friday to review daily operational reports and year-to-date data. This is an example ofA. behavioral control.B. informational control.C. strategy formulation.D. strategy implementation.
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Informational Control
Informational control deals with both the internal & external environment
Do the organization’s goals and strategies still “fit” within the context of the current strategic environment?
Two key issues: Scan & monitor the external environment Continuously monitor the internal
environment
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Informational Control
Informational control = ongoing process of organizational learning
Focus on constantly changing information - continuous monitoring, testing, review
Updates & challenges assumptions, so Time lags are shortened Changes are detected earlier Speed & flexibility of response is
enhanced
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Question?
Which of the following is not one of the characteristics of a contemporary control system?A. It is a key catalyst for an ongoing debate about
underlying data, assumptions, and action plans.B. It must focus on constantly changing information
that is strategically important.C. It circumvents the need for face-to-face meetings
among superiors, subordinates, and peers.D. It generates information that is important enough
to demand regular and frequent attention.
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Behavioral Control
Behavioral control = focused on implementation – “doing things right”
Influences the actions of employees via: Culture Rewards Boundaries
Exhibit 9.3 Essential Elements of Behavioral Control
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Behavioral Control: Culture
Organizational culture is a system of Shared values (what is important) Beliefs (how things work)
Organizational culture shapes a firm’s People Organizational structures Control systems
Organizational culture produces Behavioral norms (the way we do things
around here)
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Behavioral Control: Culture
Organizational culture sets implicit boundaries regarding: Dress Ethical matters The way an organization conducts its
business A strong culture
Leads to greater employee engagement Provides a common purpose and identity Reduces monitoring costs
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Behavioral Control: Culture
Effective organizational cultures must be Cultivated Encouraged Fertilized
Organizational cultures can be maintained by Storytelling Rallies or pep talks by top executives
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Behavioral Control: Rewards
Reward systems & incentive programs: Powerful means of influencing an
organization’s culture Focus efforts on high-priority tasks Motivate individual & collective task
performance Can be an effective motivator & control
mechanism
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Behavioral Control: Rewards
Potential downside: Individual actions are not related to
compensation; employees are rewarded for the wrong things
Different business units have differing rewards systems
Behavior reinforced within subcultures may reflect value differences in opposition to the dominant culture
Reward systems may lead to information hoarding, working at cross purposes
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Behavioral Control: Rewards
Exhibit 9.4 Characteristics of Effective Reward and Evaluation Systems
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Behavioral Control: Boundaries
Boundaries and constraints can be useful Focusing individual efforts on strategic
priorities Providing short-term objectives and action
plans to channel efforts Specific, measurable, including a specific time
horizon for attainment Achievable, yet challenging enough to motivate Individual managers held accountable for
implementation
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Question?
Rules and regulations, rather than culture or rewards, would probably be used for strategic control at what type of company?A. Software developerB. Stock brokerage firmC. Manufacturer of mass-produced productsD. High-tech research facility
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Behavioral Control: Boundaries
Boundaries and constraints can also Improve efficiency and effectiveness through
rule-based controls, appropriate when Environments are stable and predictable Employees are largely unskilled and
interchangeable Consistency in product and services is critical The risk of malfeasance is extremely high
Minimize improper and unethical conduct via Anti-bribery policies Regulations and sanctions – i.e. Sarbanes-Oxley
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Behavioral Control Systems
Exhibit 9.5 Organizational Control: Alternative Approaches
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Behavioral Control Systems
Rewards and incentives, plus a strong culture, reduce the need for external controls, IF organizations Hire the right people Train people in the dominant cultural
values Have managerial role models Have reward systems clearly aligned with
organizational goals and objectives
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Example: Building a Strong, Rewarding
Culture Zappos hires only one out of 100 applicants - a
hiring process that is weighted 50% on job skills & 50% on the potential to mesh with Zappos’ culture.
Call center reps are measured based on how much time they spend with customers, not how many calls they take
Rewards include Zollars (Zappos dollars) given by peers to peers for deserving behaviors
Because Zappos has a strong culture they can… Run primarily using recognition with few “incentive”
programs Eschew traditional programs – use what works for
them
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Corporate Governance
Corporate governance controls focus on relationships between The shareholders The management (led by the Chief
Executive Officer - CEO) The Board of Directors
How can corporations succeed (or fail) in aligning managerial motives with The interests of the shareholders The interests of the board of directors
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Corporate Governance
The separation of owners (shareholders) & management in a modern corporation Shareholders (investors) have limited liability
& can participate in the profits without taking direct responsibility for operations
Management can run the company without personally providing any funds
The Board of Directors are elected by shareholders & have a fiduciary obligation to protect shareholder interests
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Corporate Governance: Agency Theory
Agency theory deals with the relationship between principals & agents
What to do when the goals of the principals and agents conflict?
What to do when it is difficult or expensive for the principal to verify what the agent is actually doing?
What happens when the principal and the agent have different attitudes and preferences toward risk?
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Corporate Governance Mechanisms
Corporate governance mechanisms: aligning the interests of owners and managers through A committed and involved Board of
Directors Shareholder activism Managerial rewards and incentives
Contract-based outcomes CEO duality – should the CEO also be chairman
of the board of directors?
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Corporate Governance Mechanisms
Duties of the Board of Directors Regularly evaluate, and, if necessary, replace
the CEO; determine management compensation; review succession planning.
Review & approve financial objectives, major strategies, and plans of the Corporation.
Provide advice and counsel to top management. Select & recommend candidates for the Board of
Directors; evaluate board processes. Review the adequacy of all compliance systems.
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Corporate Governance Mechanisms
An effective Board of Directors should Become active, critical participants Ensure that strategic plans undergo rigorous
scrutiny Evaluate managers against high
performance standards Take control of the succession process Practice director independence
No interlocking directorships Insist that directors own significant stock in
the company
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Corporate Governance Mechanisms
Individual shareholders have rights: To sell stock, vote the proxy, bring suit for
damages, get information, receive residual rights following the company’s liquidation
Collectively, shareholders have power: To direct the course of corporations, file
shareholder action suits, demand key issues be brought up for proxy votes
Institutional investors can be aggressive: By reviewing performance, requesting
changes in the firm’s governance structure, filing court action, becoming major shareholders
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Corporate Governance Mechanisms
Boards are responsible for managerial rewards and incentives Boards can require that CEOs become
substantial owners of company stock Salaries, bonuses, and stock options can be
structured so as to provide rewards for superior performance and penalties for poor performance
Dismissal for poor performance should be a realistic threat
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Corporate Governance Mechanisms: CEO Duality?
Provides clear focus Eliminates confusion
and conflict Enhances a firm’s
responsiveness Enables quick
decisions based on first-hand knowledge
Safeguards against corruption or incompetence
Removes conflict of interest, especially regarding CEO succession
Improves perceptions of legitimacy
Unity of Command:
(in favor of) Duality
Agency Theory:
(in favor of) Separation
OR?
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Corporate Governance Mechanisms
External governance control mechanisms The market for corporate control
The takeover constraint Auditors
Enron, WorldCom? Banks and analysts
Lehman Brothers, Countrywide? Regulatory bodies
Securities and Exchange Commission (SEC) The Sarbanes-Oxley Act
Media and public activists Bloomberg Businessweek, Ralph Nader
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Example: Corporate Governance & Stakeholder
Groups AIG (American International Group) paid $218
million in bonuses to its financial services division employees AFTER receiving an $85 billion bailout from the U.S. government
The U.S. House of representatives complained AIG leadership caved in AIG financial services managers were
left without an income Many AIG financial services managers were AIG
shareholders Was corporate governance effective? Were external
governance control mechanisms inappropriate?
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International Corporate Governance
Principal – principal conflicts (vs principal – agent conflicts) involve Concentrated ownership, or family ownership
Motivation to engage in expropriation of minority shareholders for personal gain
Business groups who can take coordinated action Japanese keiretsus, Korean chaebols
Few external regulatory constraints
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International Corporate Governance
Exhibit 9.9 Principal-Agent Conflicts and Principal-Principal Conflicts: A DiagramSource: Young, M.N., Peng, M.W., Ahlstrom, D., Bruton, G.D., & Jiang, 2008. Principal-Principal Conflicts in Corporate Governance. Journal of Management Studies 45(1):196-220; and Peng, M.V. 2006. Global Strategy. Cincinnati: Thomson South-Western. We are very appreciative of the helpful comments of Mike Young of Hong Kong Baptist University and Mike Peng of the University of Texas at Dallas.
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