Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Strategic Management: Text and Cases, 4e 9 Strategic Control and Corporate Governance

9 - 2 Ensuring Informational Control Traditional control system Based largely on the feedback approach Traditional approach is sequential Strategies are formulated and top management sets goals

9 - 3 Ensuring Informational Control Contemporary control system Interactive relationships between strategy formulation, implementation and control Two different types of control

9 - 4 Informational control Behavioral control Both types of control are necessary success Contemporary Approach to Strategic Control

9 - 5 Informational Control Key question -“Do the organization’s goals and strategies still ‘fit’ within the context of the current strategic environment?” Deals with internal external environments Two key issues

9 - 6 Behavioral Control Behavioral control is focused on implementation— doing things right Three key control “levers” -Culture -Rewards -Boundaries

9 - 7 Behavioral Control: Balancing Culture, Rewards, and Boundaries Contemporary approach - A balance between Culture Rewards Boundaries Traditional approach -Emphasizes comparing outcomes to predetermined strategies and fixed rules Adapted from Exhibit 9.3 Essential Elements of Strategic Control

9 - 8 Building a Strong and Effective Culture Organizational culture is a system Organizational culture shapes a firm’s Culture sets implicit boundaries (unwritten standards of acceptable behavior)

9 - 9 Motivating with Rewards and Incentives Rewards and incentive systems Potential downside

Setting Boundaries and Constraints How would you set boundaries at Enron? Using organizational culture … Using written rules ….

Some Definitions Culture: a system of unwritten rules that forms an internalized influence over behavior. Rules: Written and explicit guidelines that provide external constraints on behavior. Rewards: The use of performance-based incentive systems to motivate.

Role of Corporate Governance Relationship among t he shareholders, the management and the board of directors Align managerial motives with t he interests of the shareholders and the board of directors

Governance Mechanisms: Aligning the Interests of Owners and Managers Committed and involved board of directors Shareholder activism Managerial incentives External Governance Control Mechanisms

Governance Controls Internal Executives Management Board of directors Shareholders (investors) External Market for corporate control Auditors Banks and analysts Regulatory bodies Media

Agency Theory Deals with the relationship between -Principals -Agents Goals of principals and agents may conflict Principal and agent may have different attitudes and preferences toward risk

Major Provisions of Sarbanes-Oxley Act Auditors CEOs and CFOs Executives