1. Strategic Control and Corporate Governance
Chapter Nine
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
After reading this chapter, you should have a good understanding of:
LO1 The value of effective strategic control systems in strategy implementation.
LO2 The key difference between “traditional” and “contemporary” control systems.
LO3 The imperative for “contemporary” control systems in today’s complex and rapidly changing competitive and general environments.
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3. Learning Objectives (cont.)
LO4 The benefits of having the proper balance among the three levers of behavioral control: culture, rewards and incentives, and boundaries.
LO5 The three key participants in corporate governance: shareholders, management (led by the CEO), and the board of directors.
LO6 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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4. Strategic Control Strategic control
the process of monitoring and correcting a firm’s strategy and performance
Informational, behavioral
two central aspects of strategic control: 2 (1) informational control,
which is the ability to respond effectively to environmental change, and (2) behavioral
control, which is the appropriate balance and alignment among a firm’s culture,
rewards, and boundaries.
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5. Ensuring Informational Control
Traditional control system
strategies are formulated and top management sets goals
strategies are implemented
performance is measured against the predetermined goal set
Process typically involves lengthy time lags, often tied to the annual planning cycle
This “single-loop” learning control system simply compares actual performance to a predetermined goal
Most appropriate when
Environment is stable and relatively simple
Goals and objectives can be measured with certainty
Little need for complex measures of performance
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6. Traditional Approach to Strategic Control
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7. Traditional Approach to Strategic Control
Most appropriate when
Environment is stable and relatively simple
Goals and objectives can be measured with certainty
Little need for complex measures of performance
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8. Contemporary Approach to Strategic Control
Contemporary control system
Continually monitoring the environments (internal and external)
Identifying trends and events that signal the need to revise strategies, goals and objectives
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9. Contemporary Approach to Strategic Control
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10. Contemporary Approach to Strategic Control
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
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11. Question
Top managers at USA Today meet every Friday to review daily operational reports and year-to-date data. This is an example of  A. Behavioral control B. Informational control C. Strategy formulation D. Strategy implementation
Answer: B. Informational control
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12. Informational Control
Deals with internal environment and external strategic context
Key question
“Do the organization’s goals and strategies still ‘fit’ within the context of the current strategic environment?”
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13. Informational Control
Two key issues
Scan and monitor external environment (general and industry)
Continuously monitor the internal environment
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14. Effectiveness of Contemporary Control Systems
Focus on constantly changing information that has potential strategic importance.
The information is important enough to demand frequent and regular attention from all levels of the organization.
The data and information generated are best interpreted and discussed in face-to-face meetings.
The control system is a key catalyst for an ongoing debate about underlying data, assumptions, and action plans.
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15. Behavioral Control
Behavioral control is focused on implementation—doing things right
Three key control “levers”
Culture
Rewards
Boundaries
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16. Reasons for an increased emphasis on culture and rewards
The competitive environment is increasingly complex and unpredictable, demanding both flexibility and quick response to its challenges.
The implicit long-term contract between the organization and its key employees has been eroded.
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17. Building a Strong and Effective Culture
Organizational culture
a system of shared values and beliefs that shape a company’s people, organizational structures, and control systems to produce behavioral norms.
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18. Building a Strong and Effective Culture
Culture sets implicit boundaries (unwritten standards of acceptable behavior)
Dress
Ethical matters
The way an organization conducts its business
Culture acts as a means of reducing monitoring costs
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19. Example: Wal-Mart
A lot of Wal-Mart's success was attributed to the strong and pervasive culture at the company, which was developed and nurtured by founder Sam Walton.
In over four decades of operation, Wal-Mart managed to retain most of the elements of culture it had when it first started out, as well as the entrepreneurial spirit which often drives startup companies to success.
A lot of Wal-Mart's success was attributed to the strong and pervasive culture at the company, which was developed and nurtured by founder Sam Walton. In over four decades of operation, Wal-Mart managed to retain most of the elements of culture it had when it first started out, as well as the entrepreneurial spirit which often drives startup companies to success. The fact that the company's growth rate was often in double digits bears this out. Wal-Mart's culture was characterized by an orientation towards customer service and providing the best value at the lowest prices.
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20. Sustaining an Effective Culture
Effective culture must be
Cultivated
Encouraged
Fertilized
Maintaining an effective culture
Storytelling
Rallies or pep talks by top executives
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21. Motivating with Rewards and Incentives
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 motivator and control mechanism
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22. Motivating with Rewards and Incentives
Potential downside
Subcultures may arise in different business units with multiple reward systems
May reflect differences among functional areas, products, services and divisions
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23. Characteristics of Effective Reward and Evaluation Systems
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24. Setting Boundaries and Constraints
Focus efforts on strategic priorities
Providing short-term objectives and action plans
Specific and measurable
Specific time horizon for attainment
Achievable, but challenging
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25. Setting Boundaries and Constraints
Improve operational efficiency and effectiveness
Minimizing improper and unethical conduct
Rule-based controls are
most appropriate in organizations with the following characteristics:
• Environments are stable and predictable.
• Employees are largely unskilled and interchangeable.
• Consistency in product and service is critical.
• The risk of malfeasance is extremely high
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26. Question
Effective boundaries and constraints:   A. Tend to inhibit efficiency and effectiveness B. Distract employees who are trying to focus on organizational priorities C. Minimize improper and unethical conduct D. Tend to limit organizational growth
Answer: C. Minimize improper and unethical conduct
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27. Organizational Control: Alternative Approaches
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28. Evolving from Boundaries to Rewards and Culture
System of rewards and incentives coupled with a strong culture
Hire the right people
Training plays a key role
Managerial role models are vital
Reward systems clearly aligned with organizational goals and objectives
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29. Role of Corporate Governance
the relationship among various participants in determining the direction and performance of corporations.
primary participants are the shareholders, the management, and the board of directors.”
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30. 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)
Limited liability
Participate in the profits of the enterprise
Limited involvement in the company’s affairs
Management
Run the company
Does not personally have to provide the funds
Board of directors
Elected by shareholders
Fiduciary obligation to protect shareholder interests
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31. Agency Theory Deals with the relationship between
Principals – who are owners of the firm (stockholders), and the
Agents – who are the people paid by principals to perform a job on their behalf (management)
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32. Agency Theory: Two Problems
The conflicting goals of principals and agents, along with the difficulty of principals to monitor the agents, and
The different attitudes and preferences towards risk of principals and agents.
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33. Governance Mechanisms
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 Business Roundtable, representing the largest U.S. corporations, describes the
duties of the board as follows:
1. Select, regularly evaluate, and, if necessary, replace the CEO. Determine management
compensation. Review succession planning.
2. Review and, where appropriate, approve the financial objectives, major strategies,
and plans of the corporation.
3. Provide advice and counsel to top management.
4. Select and recommend to shareholders for election an appropriate slate of candidates
for the board of directors; evaluate board processes and performance.
5. Review the adequacy of the systems to comply with all applicable laws/regulations.
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34. The New Rules for Directors
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35. Governance Mechanisms
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.
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36. TIAA-CREF’s Principles on the Role of Stock in Executive Compensation
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37. 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.
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38. External Governance Control Mechanisms
Market for corporate control
Auditors
Banks and analysts
Regulatory bodies
Media and public activists
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39. Sarbanes-Oxley Act Auditors
Barred from certain types of non-audit work
Not allowed to destroy records for five years
Lead partners auditing a firm should be changed at least every five years
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40. Sarbanes-Oxley Act CEOs and CFOs Executives
Must fully reveal off-balance sheet finances
Vouch for the accuracy of information revealed
Executives
Must promptly reveal the sale of shares in firms they manage
Are not allowed to sell shares when other employees cannot
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