1 STRATEGIC CONTROL AND CORPORATE GOVERNANCE STRATEGIC MANAGEMENT BUAD 4980

2 2 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 Control STRATEGIC MANAGEMENT – BUAD 4980

3 3 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 Control STRATEGIC MANAGEMENT – BUAD 4980

4 4 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 STRATEGIC MANAGEMENT – BUAD 4980

5 5 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 MANAGEMENT – BUAD 4980

6 6 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  Four steps of contemporary control systems 1.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 Contemporary Approach to Strategic Control STRATEGIC MANAGEMENT – BUAD 4980

7 7 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 Control STRATEGIC MANAGEMENT – BUAD 4980

8 8 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 Control STRATEGIC MANAGEMENT – BUAD 4980

9 9 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  Organizational Culture  System of shared values and beliefs that shape a company’s people, organizational structures, and control systems to produce behavioral norms Organizational Culture STRATEGIC MANAGEMENT – BUAD 4980

10 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 Organizational Culture STRATEGIC MANAGEMENT – BUAD 4980

11 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 Organizational Culture STRATEGIC MANAGEMENT – BUAD 4980

12 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 Incentives STRATEGIC MANAGEMENT – BUAD 4980

13 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 Rewards and Incentives STRATEGIC MANAGEMENT – BUAD 4980

14 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 Rewards and Incentives STRATEGIC MANAGEMENT – BUAD 4980

15 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  Short-Term Objectives and Action Plans  S pecific  M easurable  A ttainable  R ealistic  T imely Rewards and Incentives STRATEGIC MANAGEMENT – BUAD 4980

16 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 STRATEGIC MANAGEMENT – BUAD 4980

17 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 STRATEGIC MANAGEMENT – BUAD 4980

18 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 Governance STRATEGIC MANAGEMENT – BUAD 4980

19 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 The Role of Corporate Governance STRATEGIC MANAGEMENT – BUAD 4980

20 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 The Role of Corporate Governance STRATEGIC MANAGEMENT – BUAD 4980

21 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 The Role of Corporate Governance STRATEGIC MANAGEMENT – BUAD 4980

22 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 The Role of Corporate Governance STRATEGIC MANAGEMENT – BUAD 4980

23 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 The Role of Corporate Governance STRATEGIC MANAGEMENT – BUAD 4980

24 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 The Role of Corporate Governance STRATEGIC MANAGEMENT – BUAD 4980

25 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 The Role of Corporate Governance STRATEGIC MANAGEMENT – BUAD 4980

26 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 The Role of Corporate Governance STRATEGIC MANAGEMENT – BUAD 4980

27 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  External Governance Control Mechanisms  Market Value  Auditors  Banks and Investment Analysts  Regulatory Agencies (SEC, SOX)  Media and Public Activists The Role of Corporate Governance STRATEGIC MANAGEMENT – BUAD 4980

28 STRATEGIC CONTROL AND CORPORATE GOVERNANCE  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 The Role of Corporate Governance STRATEGIC MANAGEMENT – BUAD 4980