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Chapter-8Chapter-8 Board-Management Relationship

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The board of directors chooses the chief executive officer (CEO) and delegates to him or her the responsibility for running the company.

The board's role in this relationship is first to understand and approve of the CEO's strategies and plans and then to monitor the execution of those plans and to periodically evaluate the results.

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directors are charged with "looking out for the interests of the shareholders," There is a fine line between the responsibilities of the board and those of the CEO.A board that crosses the line by interfering or micromanaging can undermine the effectiveness of the CEO and will find it difficult to hold the CEO accountable for poor results it may have had a part in bringing about.

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On the other hand, a board that is too detached from what is happening or too passive in carrying out its responsibilities may, in fact, be abdicating its role in the governance of the organization.

Board members must strive to find the right balance between these two extremes, staying proactive in car rying out their responsibilities as directors without interfering.

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In finding balance, it is of primary importance to remain independent of the CEO. Independence requires board members to refrain from providing legal or consulting services to the CEO or the company.

Board members should not let personal friendships with the CEO interfere with carrying out their responsibilities.

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Independence of board members from a CEO does not require an adversarial relationship, the parties must establish and develop effective ways of communicating and working together in a collaborative partnership built on mutual respect.

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Governance model Governance model A governance model should include routine approaches to the following:• Choosing or clarifying the business or businesses in which the corporation will operate• Hiring the right people in terms of both their abilities and their values• Aligning the interests of the board and management with those of the shareholders• Developing mutually agreeable goals, policies, and standards of performance for the CEO

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• Evaluating plans to achieve agreed-upon goals• Remaining knowledgeable about the firm's activities and per formance and evaluating the results• Reacting appropriately to the results by holding management accountable and rewarding or intervening as necessary

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A SUCCESSFUL STRATEGIC CORPORATE RESTRUCTURING

----- Reconstruction of PepsiCo

P137-138

CASE 8

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problem? what revolution? result? point?

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PointPointthe board and management of PepsiCo achieved a major restructuring of the company during a period of transition to a new CEO.

The restructuring essentially involved pruning away less effective businesses in terms of growth potential and returns on capital and leaving a smaller but richer mix of businesses for the future.

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HOW THE BOARD SHOULD HOW THE BOARD SHOULD FUNCTIONFUNCTION

Most of Board’s tasks may be grouped into three primary activities:

• Reviewing and influencing decisions in an advise-and-consent role

• Reviewing and understanding the firm's results

• Determining when and how to intervene in management's affairs

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Among the board's most important duties are its responsibility for actively participating with the CEO in the development of the company's strategy

and the formulation of detailed plans for the strategy's success full implementation.

HOW THE BOARD HOW THE BOARD SHOULD FUNCTIONSHOULD FUNCTION

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The board must address its role as both partner with and employer of the CEO.

The members of the board can offer the CEO some guidance and providing a sounding board.

However ,the board should avoid providing too much advice and assistance that the CEO could claim that he or she was simply following the board's lead in making critical decisions.

Balance

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Board’s action to handle a crisis P147-148

CASE 9

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problem? what action? result? point?

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Point : Crises test the independence and the action orientation of board members both individually and collectively. The survival of the company and the best interests of the shareholders are often at stake. Board members must be willing to take action swiftly, when necessary, to uphold their duty to shareholders. Board service, as we are coming to recognize more clearly, requires a principled action orientation on the part of board members.

CASE 9

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STRATEGY STRATEGY FORMULATION VERSUS FORMULATION VERSUS IMPLEMENTATIONIMPLEMENTATION

The directors must ensure that operational plans are in place to carry out the strategic intent effectively.

the board should systematically monitor the progress of execution of the strategy.

financial measures and progress toward goals also need to be monitored.

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THE SEARCH FOR A THE SEARCH FOR A SUSTAINABLE COMPETITIVE SUSTAINABLE COMPETITIVE ADVANTAGEADVANTAGE

This dual theme of strategy formulation and concomitant superior execution is closely related to the execution of a sustainable competitize advantage .success of the entire process of strategic planning and execution depends on the ability of the board and the CEO to lead change and execute decisions swiftly and decisively.

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EVER-CHANGING NATUREEVER-CHANGING NATURE OF STRATEGY OF STRATEGY

the basic strategies of American industry have evolved continually :

1. The decades of the seventies and eighties : Diversification and Decentralization

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This theory was one of risk management, promoting the concept that a diversified company was at less risk from market downturns than a single, focused business because numerous industries were unlikely to experience problems simultaneously.

Large corporations tended to diversify into different businesses.

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2. late 1980s : focused and pure-play

financial analysts feared that the numerous business units provided opportunities for companies to mask their risks or troubles in certain profit centers with the successes of another subset of more prosperous business units.

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3. in the 1990s: The New Economy

centered on high technology, telecommunications, computer, and Internet-related businesses.

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This development changed the strategic perceptions of risk and return for the board and CEO of virtually every major U.S. corporation. they have had to decide whether their businesses were threatened by the new technologies as well as whether their companies should attempt to capitalize on the new developments.

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Current Strategic Current Strategic Issues in the U.S. Issues in the U.S. Businesses Businesses 1.The board and the CEO must ensure a proper strategic interface between a parent corporation and its operating divisions, with a strong emphasis on the analytical and financial relationships.

Corporate strategies primarily determine the appropriateness of including various divisions in the corporate portfolio of businesses. it also encompass the allocation of resources among the businesses of the portfolio.

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Current Strategic Current Strategic Issues in the U.S. Issues in the U.S. Businesses Businesses

2. Divisional strategies, or those of focused businesses, require extensive understanding of competitors and realistic product, marketing, and pricing strategies based on the division's role in its competitive environment and the corporate portfolio.

In this context, the board and CEO must place particular emphasis on operating improvements as a critical, continuing competitive factor.