jkjhjkjk

8/12/2019 jkjhjkjk

1/22

11-1 2006 by Nelson, a division of Thomson Canada Limited.

Corporate Governance

Chapter Eleven

8/12/2019 jkjhjkjk

2/22


The Strategic .Management .

Process

The Strategic ManagementProcess

Chapter 5Bus. - Level

Strategy

Chapter 6Competitive

Dynamics

Chapter 9International

Strategy

Chapter 10CooperativeStrategies

Chapt er 8Acquisitions &Restructuring

S t r

a t e

g i c

I n p u

t s

S t r

a t e

g i c A

c t i

o n s

S t r

a t e

g i c

O u

t c o m e

s

Chapt er 4Internal

Environment

Chapter 3External

Environment Strat. Intent

Strat. Mission

Strategy Formulation

StrategicCompetitiveness

Chapter 1

Above AverageReturns

Chapter 2

StrategicCompetitiveness

Chapt er 1

Chapter 7Corp. - Level

Strategy

Chapt er 5Bus. - Level

Strategy

Chap ter 11Corporate

Governance

Chapt er 12Structure& Control

Chapter 13Strategic

Leadership

Chapt er 14Entrepreneurship & Innovation

Strategy Implementation

Feedback

Chap ter 11Corporate

Governance

8/12/2019 jkjhjkjk

3/22



Knowledge objectives:1. Define corporate governance & explain why it is used

to monitor & control managers strategic decisions.

2. Explain how ownership came to be separated frommanagerial control in the modern corporation.

3. Define an agency relationship & managerialopportunism & describe their strategic implications.

4. Explain how three internal governance mechanisms ownership concentration, the board of directors andexecutive compensation are used to monitor &control managerial decisions.

8/12/2019 jkjhjkjk

4/22



Knowledge objectives contd

5. Discuss trends among the three types of compensationexecutives receive and their effects on strategicdecisions.

6. Describe how the external corporate governancemechanism the market for corporate control - acts asa restraint on top level managers strategic decisions.

7. Discuss the use of corporate governance ininternational settings, in particular in Germany &Japan.

8. Describe how corporate governance fosters ethicalstrategic decisions & the importance of suchbehaviours on the part of top-level executives.

8/12/2019 jkjhjkjk

5/22


Corporate Governance is a relationship among stakeholdersthat is used to determine and control the strategic direction &performance of organizations.

Concerned with identifying ways to ensure that strategicdecisions are made effectively.

Used in corporations to establish order between the firms

owners and its top-level managers.


8/12/2019 jkjhjkjk

6/22


Ten most admired & respected corporations in Canada

8/12/2019 jkjhjkjk

7/22


Internal Governance Mechanisms

8/12/2019 jkjhjkjk

8/22


Separation of Ownership & Managerial ControlBasis of the modern corporation

Shareholders purchase stock, becoming Residual Claimants

Professional managers contract to providedecision-making.

Modern public corporation form leads to efficient

specialization of tasks.

Shareholders reduce risk efficientlyby holding diversified portfolios.

Risk bearing by shareholders.Strategy development and decision-makingby managers.

8/12/2019 jkjhjkjk

9/22


AgencyRelationship

Risk Bearing Specialist(Principal)

Managers(Agents)

DecisionMakers

which creates

Managerial Decision-Making Specialist

(Agent)

Hire

An agency relationship exists when:

Shareholder s

(Principals)

Firm Owners

Agency Theory

8/12/2019 jkjhjkjk

10/22


The Agency problem occurs when:

The desires or goals of the principal & agent conflictand it is difficult or expensive for the principal to verifythat the agent has behaved appropriately.

Example: Over - diversification: Greater productdiversification leads to lower managementemployment risk & greater compensation.

Solution: Principals engage in incentive-based

performance contracts, monitoring mechanismslike the board of directors & enforcementmechanisms like managerial labour market tomitigate agency problems.

Agency Theory

8/12/2019 jkjhjkjk

11/22


Product Diversification as an example of an Agency Problem

Diversification usually increases the size of thefirm therefore complexity and an opportunityfor top executives to increase theircompensation.

Diversification usually reduces top executivesemployment risk.

Top executives have control over free cash flowand may invest in in products not associatedwith the firms current lines of business.

8/12/2019 jkjhjkjk

12/22


R i s k

Level of Diversification

DominantBusiness

UnrelatedBusinesses

RelatedConstrained

RelatedLinked

Managerial(Employment)Risk Profile

M

B

S hareholder(Business)Risk Profile

S

A

Manager & Shareholder Risk & Diversification

8/12/2019 jkjhjkjk

13/22


Agency Costs & Governance Mechanisms

Managerial interests may prevail when governancemechanisms are weak.

If the board of directors control managerialautonomy, the firms strategies should better reflectthe interests of the shareholders.

8/12/2019 jkjhjkjk

14/22


Governance Mechanisms

Ownership Concentration

- Large block shareholders have a strong incentive tomonitor management closely.

In Canada such shareholders account for 65% to 70% of

publicly traded stocks (59% in the U.S.)

- Their large stakes make it worth their while to spend time,effort & expense to monitor closely.

- Institutional owners are financial institutions such asstock mutual funds and pension funds that control large-block shareholder positions.

8/12/2019 jkjhjkjk

15/22


Insiders

Outsiders

Boards of Directors

- Set compensation of CEO & decide when toreplace the CEO.

- Formally monitor & control the firms top -level executives.

- May lack contact with day to day operations. A firms CEO & other top -level managers

RelatedOutsiders

Individuals not involved with a firms day -to-

day operations, but who have a relationshipwith the company

Individuals independent of a firms day -to-day operations and other relationships

Governance Mechanisms

8/12/2019 jkjhjkjk

16/22


Accountability of Board Members

Increased diversity amongst board members.

The strengthening of internal management &accounting control systems.

The establishment & consistent use of formalprocesses to evaluate boards performance.

Directors are being required to own significant

equity stakes as a prerequisite to holding aboard seat.

8/12/2019 jkjhjkjk

17/22


Executive Compensation

Executive compensation: A governancemechanism aligning the interests of managers& owners through salaries, bonuses and longterm incentives such as stock options.

Stock options: A mechanism which links theexecutives performance to the performance ofthe company.

8/12/2019 jkjhjkjk

18/22


Table 11.4

8/12/2019 jkjhjkjk

19/22


Table 11.5

8/12/2019 jkjhjkjk

20/22


Market for Corporate Control

An external governance mechanism that becomes

active when a firms internal controls fail which is

triggered by a firms poor performance, relative

to industry competition.

8/12/2019 jkjhjkjk

21/22


A Basic List of Management Defence Tactics Increase the costs of mounting a takeover and can

entrench current management.

GreenmailWhere company money is used to repurchase stock froma corporate raider to avoid takeover.

Golden Parachute Raises the cost of making changes at a take-over target dueto the need to pay fired executives large severance packages.

Poison Pill When the takeover target does something to make itselfunpalatable to the suitor (e.g. assume a large amount ofdebt and then issue dividends with the money).

8/12/2019 jkjhjkjk

22/22


Governance Mechanism & Ethical Behaviour

Shareholders are recognized as a companys mostsignificant stakeholders.

The minimum interests or needs of all stakeholders mustbe recognized through the firms actions.

A firms strategic competitiveness is enhanced when itsgovernance mechanisms take into consideration theinterests of all stakeholders.

Only when the proper corporate governance is exercisedcan strategies be formulated & implemented that willhelp the firm achieve strategic competitiveness & earnabove average returns.

Documents

jkjhjkjk