Description
Corporate governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation
Corporate Governance
Ch10-1
Strategic Inputs
Chapter 2 External Environment Strategic Intent Chapter 3 Internal Environment Strategic Mission
The Strategic Management Process
Strategy Formulation
Chapter 4 Business-Level Strategy Chapter 5 Competitive Dynamics Chapter 8 International Strategy Chapter 6 Corporate-Level Strategy Chapter 9 Cooperative Strategies
Strategic Actions
Chapter 10 Corporate Governance
Chapter 12 Strategic Leadership
Chapter 11 Structure & Control Chapter 13
Entrepreneurship
Chapter 7 Acquisitions & Restructuring
& Innovation
Outcomes
Strategic
Feedback
Strategic Competitiveness Above Average Returns
Ch10-2
Corporate Governance
Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic direction and 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
Ch10-3
Separation of Ownership and Managerial Control
Basis of the modern corporation Shareholders purchase stock, becoming Residual Claimants
- Shareholders reduce risk efficiently by holding diversified portfolios
Professional managers contract to provide decisionmaking Modern public corporation form leads to efficient specialization of tasks - Risk bearing by shareholders - Strategy development and decision-making by managers
Ch10-4
Agency Theory
An agency relationship exists when: Agency Relationship Shareholders (Principals) Firm Owners
Risk Bearing Specialist (Principal)
Hire
Managerial DecisionMaking Specialist (Agent)
Managers (Agents) Decision Makers
which creates
Ch10-5
Agency Theory
The Agency problem occurs when: - The desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately Example: Overdiversification because increased product diversification leads to lower employment risk for managers and greater compensation Solution: Principals engage in incentive-based performance contracts, monitoring mechanisms such as the board of directors and enforcement mechanisms such as the managerial labor market to mitigate the agency problem
Ch10-6
Manager and Shareholder Risk and Diversification
Risk
S
Shareholder (Business) Risk Profile
Managerial (Employment) Risk Profile
M
Dominant Business
A
Related Constrained
Related Linked
B
Unrelated Businesses
Ch10-7
Level of Diversification
Agency Theory
Principals may engage in monitoring behavior to assess the activities and decisions of managers However, dispersed shareholding makes it difficult and and inefficient to monitor management’s behavior Example: Boards of Directors have a fiduciary duty to shareholders to monitor management However, Boards of Directors are often accused of being lax in performing this function
Ch10-8
Governance Mechanisms
Ownership Concentration Boards of Directors
Executive Compensation
Multidivisional Organizational Structure Market for Corporate Control
Ch10-9
Governance Mechanisms
Ownership Concentration
Large block shareholders have a strong incentive to monitor management closely
Their large stakes make it worth their while to spend time, effort and expense to monitor closely
They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)
Ch10-10
Governance Mechanisms
Board of Directors
Insiders
The firm’s CEO and other top-level managers
Related Outsiders
Individuals not involved with day-to-day operations, but who have a relationship with the company
Outsiders
Individuals who are independent of the firm’s day-today operations and other relationships
Ch10-11
Governance Mechanisms
Board of Directors
Recommendations for more effective Board Governance: Increase diversity of board members backgrounds Strengthen internal management and accounting control systems
Establish formal processes for evaluation of the board’s performance
Ch10-12
Governance Mechanisms
Executive Compensation
Salary, Bonuses, Long term incentive compensation Executive decisions are complex and non-routine Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes In addition, stock ownership (long-term incentive compensation) makes managers more susceptible to market changes which are partially beyond their control Incentive systems do not guarantee that managers make the “right” decisions, but they do increase the likelihood that managers will do the things for which they are rewarded
Ch10-13
Governance Mechanisms
Multidivisional Organizational Structure
Designed to control managerial opportunism Corporate office and Board monitor managers’ strategic decisions Increased managerial interest in wealth maximization
M-form structure does not necessarily limit corporatelevel managers’ self-serving actions May lead to greater rather than less diversification Broadly diversified product lines makes it difficult for top-level managers to evaluate the strategic decisions of divisional managers Ch10-14
Governance Mechanisms
Market for Corporate Control
Operates when firms face the risk of takeover when they are operated inefficiently
The 1980s saw active market for corporate control, largely as a result of available pools of capital (junk bonds)
Many firms began to operate more efficiently as a result of the “threat” of takeover, even though the actual incidence of hostile takeovers was relatively small Changes in regulations have made hostile takeovers difficult
Acts as an important source of discipline over managerial incompetence and waste
Ch10-15
International Corporate Governance
Germany
Owner and manager are often the same in private firms
Public firms often have a dominant shareholder too, frequently a bank
Medium to large firms have a two-tiered board
Vorstand monitors and controls managerial decisions Aufsichtsrat selects the Vorstand Employees, union members and shareholders appoint members to the Aufsichtsrat
Frequently there is less emphasis on shareholder value than in U.S. firms, although this may be changing
Ch10-16
International Corporate Governance
Japan
Obligation, “family” and consensus are important factors Banks (especially “main bank”) are highly influential with firm’s managers Keiretsus are strongly interrelated groups of firms tied together by cross-shareholdings
Other characteristics:
Powerful government intervention Close relationships between firms and government sectors Passive and stable shareholders who exert little control Virtual absence of external market for corporate control Ch10-17
Corporate Governance and Ethical Behavior
It is important to serve the interests of multiple stakeholder groups
Shareholders are one important stakeholder group, which are served by the Board of Directors Product market stakeholders (customers, suppliers and host communities) and organizational stakeholders (managerial and non-managerial employees) are also important stakeholder groups Although controversial, some believe that ethically responsible firms should introduce governance mechanisms which serve all stakeholders’ interests
Ch10-18
doc_385844738.ppt
Corporate governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation
Corporate Governance
Ch10-1
Strategic Inputs
Chapter 2 External Environment Strategic Intent Chapter 3 Internal Environment Strategic Mission
The Strategic Management Process
Strategy Formulation
Chapter 4 Business-Level Strategy Chapter 5 Competitive Dynamics Chapter 8 International Strategy Chapter 6 Corporate-Level Strategy Chapter 9 Cooperative Strategies
Strategic Actions
Chapter 10 Corporate Governance
Chapter 12 Strategic Leadership
Chapter 11 Structure & Control Chapter 13
Entrepreneurship
Chapter 7 Acquisitions & Restructuring
& Innovation
Outcomes
Strategic
Feedback
Strategic Competitiveness Above Average Returns
Ch10-2
Corporate Governance
Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic direction and 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
Ch10-3
Separation of Ownership and Managerial Control
Basis of the modern corporation Shareholders purchase stock, becoming Residual Claimants
- Shareholders reduce risk efficiently by holding diversified portfolios
Professional managers contract to provide decisionmaking Modern public corporation form leads to efficient specialization of tasks - Risk bearing by shareholders - Strategy development and decision-making by managers
Ch10-4
Agency Theory
An agency relationship exists when: Agency Relationship Shareholders (Principals) Firm Owners
Risk Bearing Specialist (Principal)
Hire
Managerial DecisionMaking Specialist (Agent)
Managers (Agents) Decision Makers
which creates
Ch10-5
Agency Theory
The Agency problem occurs when: - The desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately Example: Overdiversification because increased product diversification leads to lower employment risk for managers and greater compensation Solution: Principals engage in incentive-based performance contracts, monitoring mechanisms such as the board of directors and enforcement mechanisms such as the managerial labor market to mitigate the agency problem
Ch10-6
Manager and Shareholder Risk and Diversification
Risk
S
Shareholder (Business) Risk Profile
Managerial (Employment) Risk Profile
M
Dominant Business
A
Related Constrained
Related Linked
B
Unrelated Businesses
Ch10-7
Level of Diversification
Agency Theory
Principals may engage in monitoring behavior to assess the activities and decisions of managers However, dispersed shareholding makes it difficult and and inefficient to monitor management’s behavior Example: Boards of Directors have a fiduciary duty to shareholders to monitor management However, Boards of Directors are often accused of being lax in performing this function
Ch10-8
Governance Mechanisms
Ownership Concentration Boards of Directors
Executive Compensation
Multidivisional Organizational Structure Market for Corporate Control
Ch10-9
Governance Mechanisms
Ownership Concentration
Large block shareholders have a strong incentive to monitor management closely
Their large stakes make it worth their while to spend time, effort and expense to monitor closely
They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)
Ch10-10
Governance Mechanisms
Board of Directors
Insiders
The firm’s CEO and other top-level managers
Related Outsiders
Individuals not involved with day-to-day operations, but who have a relationship with the company
Outsiders
Individuals who are independent of the firm’s day-today operations and other relationships
Ch10-11
Governance Mechanisms
Board of Directors
Recommendations for more effective Board Governance: Increase diversity of board members backgrounds Strengthen internal management and accounting control systems
Establish formal processes for evaluation of the board’s performance
Ch10-12
Governance Mechanisms
Executive Compensation
Salary, Bonuses, Long term incentive compensation Executive decisions are complex and non-routine Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes In addition, stock ownership (long-term incentive compensation) makes managers more susceptible to market changes which are partially beyond their control Incentive systems do not guarantee that managers make the “right” decisions, but they do increase the likelihood that managers will do the things for which they are rewarded
Ch10-13
Governance Mechanisms
Multidivisional Organizational Structure
Designed to control managerial opportunism Corporate office and Board monitor managers’ strategic decisions Increased managerial interest in wealth maximization
M-form structure does not necessarily limit corporatelevel managers’ self-serving actions May lead to greater rather than less diversification Broadly diversified product lines makes it difficult for top-level managers to evaluate the strategic decisions of divisional managers Ch10-14
Governance Mechanisms
Market for Corporate Control
Operates when firms face the risk of takeover when they are operated inefficiently
The 1980s saw active market for corporate control, largely as a result of available pools of capital (junk bonds)
Many firms began to operate more efficiently as a result of the “threat” of takeover, even though the actual incidence of hostile takeovers was relatively small Changes in regulations have made hostile takeovers difficult
Acts as an important source of discipline over managerial incompetence and waste
Ch10-15
International Corporate Governance
Germany
Owner and manager are often the same in private firms
Public firms often have a dominant shareholder too, frequently a bank
Medium to large firms have a two-tiered board
Vorstand monitors and controls managerial decisions Aufsichtsrat selects the Vorstand Employees, union members and shareholders appoint members to the Aufsichtsrat
Frequently there is less emphasis on shareholder value than in U.S. firms, although this may be changing
Ch10-16
International Corporate Governance
Japan
Obligation, “family” and consensus are important factors Banks (especially “main bank”) are highly influential with firm’s managers Keiretsus are strongly interrelated groups of firms tied together by cross-shareholdings
Other characteristics:
Powerful government intervention Close relationships between firms and government sectors Passive and stable shareholders who exert little control Virtual absence of external market for corporate control Ch10-17
Corporate Governance and Ethical Behavior
It is important to serve the interests of multiple stakeholder groups
Shareholders are one important stakeholder group, which are served by the Board of Directors Product market stakeholders (customers, suppliers and host communities) and organizational stakeholders (managerial and non-managerial employees) are also important stakeholder groups Although controversial, some believe that ethically responsible firms should introduce governance mechanisms which serve all stakeholders’ interests
Ch10-18
doc_385844738.ppt