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STRATEGIC MANAGEMENT & BUSINESS POLICY10TH EDITION

THOMAS L. WHEELEN J. DAVID HUNGER

CHAPTER 2 Corporate Governance

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Corporate Governance

CorporationA mechanism established to allow different parties to

contribute expertise and labor for their mutual benefit

Corporate GovernanceThe relationship among the board of directors, top

management, and shareholders – determining the direction and performance of the corporation

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Corporate Governance

Tyco International Ltd.– Operates in 100 countries, Revenues of $36 B– Dennis Kozlowski (1975 – 2002)

• CEO 1995 – Credited with rapid worldwide expansion• Compensation

– 1996 $8.8MM

– 1999 $136.1MM

– Company Loans for $$MM

• Treated Company as his own– Wife B-Day Party $2.1 MM

– Shower Curtain $6 K

– Dog Umbrella Stand $15K

– Apartment $16.8MM

– Board of Directors• Members granted large loans

• Many conflicts of interest

• Many former company executives

• Regularly bypassed in the decision processPrentice Hall, Inc. © 2006 2-4

Corporate Governance

BOD Responsibilities (200 Directors from 8 countries)

– Setting strategy and overall direction, mission or vision

– Hiring firing CEO and top management

– Controlling, monitoring or supervising top management

– Reviewing and approving use of resources

– Caring for Shareholder interests

(CEO’s surveyed)– Corporate performance

– CEO Succession

– Strategic planning

– Corporate governance

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Corporate Governance

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Corporate Governance

Role of Board in Strategic Management

–Monitor

–Evaluate and influence

–Initiate and determine

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Board of Directors Continuum

Small Entrepreneur Large Public

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Board of Directors

Members --

–Inside directors•“management directors”•Officers or execs employed by the firm

–Outside directors•“non-management directors”•Execs of other firms not employed by the board’s corporation•80% of members in large publicly held firms•19% in privately held firms

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Agency Theory

Agency Problem ––Objectives of owners & agents in conflict–Difficult for owners to verify agent performance

Risk Sharing Problem ––Owners & agents risk assessment in conflict

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Stewardship Theory

Stewardship TheoryExecutives more motivated to act in best interest of the corporation than their own self-interests. Theory that over time, senior executives tend to view corporation as extension of selves.

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Agency Theory versus Stewardship TheoryA

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Board of Directors

When Outsiders can be considered Insiders

–Affiliated DirectorsConflict of interests

–Retired DirectorsFormer CEO’s- Objectivity?

–Family DirectorsDescendents with significant blocks of stock

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Board of Directors

Codetermination

–The inclusion of a corporation’s employees on its board of directors–More popular in Europe–With or without ownership

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Board of Directors

Interlocking Directorates

–Direct InterlockingShared director or exchanged seats

–Indirect InterlockingTwo corporations have directors that serve on the board of a 3rd firm

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Board of Directors

Nominations & Elections

–Traditional Approach•CEO invitation to membership•Shareholders approval in annual proxy statement•All nominees usually elected

–Staggered Board Approach•Staggered terms of service/election

–Annual Elections•Opportunity for hostile takeover•Increased shareholder control

Criteria for a good Director– Willing to challenge management– Has special expertise– Available outside of meetings– Expertise on global business issues– Understands key firm’s technologies– Brings valuable external contacts– Knowledge of firm’s industry– High visibility in their field– Accomplished in representing the firm to

stakeholders

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Board of Directors

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Board of Directors

Sarbanes-Oxley

–Key elements–All audit committee members must be outside directors and

receive no additional fee–Board no longer grants loans to officers–Formal procedures for “whistle blowers”–CEO and CFO must certify all financial info.–Internal and external auditors may not be from the same firm–Must identify if there is a member of the audit committee with

financial expertise

–Code of Ethics for CEO and CFO must be disclosed

–Members of the Audit, Nominating, and Compensation Committees must all be outside directors

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Board of Directors

Organization of the Board

–Size•Charter & Bylaws Determination•States may set minimums•Large Publicly held – 11•SME Privately held – 7 or 8•Family owned - 4

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Board of Directors

Corporate Governance Trends

–Review & shaping of strategy – active participation–Pressure for corporate performance from shareholders and institutional investors–Demand for executive/director stock ownership with performance based incentives–Outside directors increasing–Impact of Sarbanes-Oxley–Smaller boards–Separate CEO/COB and/or Lead Director–Members with Int’l experience–Shareholder nominations–Social responsibility on the rise

CEO Responsibilities– Provide executive leadership and effective

strategic management– Manage the strategic planning process

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Board of Directors

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Board of Directors

Transformational leaders

–Articulate a strategic vision

–Presents a role for others to identify with and to follow

–Communicates high standards of performance and confidence in followers ability

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Strategic Management Process

Strategic Planning Staff

–Supports top management & business units in the strategic planning process–Identify & analyze company-wide strategic issues–Generate strategic alternatives–Facilitate business units in coordinating activities related to strategic planning process

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Strategic Management Process

Board of Directors Role in Succession Planning

•Set criteria for selection based on strategic needs of the company

•Executive type•Dynamic industry expert - growth•Analytical portfolio manager - diversification•Cautions profit planner - stability•Turnaround specialist – weak company/active market•Professional liquidator – company can’t be saved

•Set realistic performance expectations•Develop a deep understanding of the organization

and conduct thoughtful annual reviews of the CEO

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STRATEGIC MANAGEMENT & BUSINESS POLICY10TH EDITION

THOMAS L. WHEELEN J. DAVID HUNGER

CHAPTER 2 Corporate Governance

Criteria for a good Director– Willing to challenge management– Has special expertise– Available outside of meetings– Expertise on global business issues– Understands key firm’s technologies– Brings valuable external contacts– Knowledge of firm’s industry– High visibility in their field– Accomplished in representing the firm to

stakeholders

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Board of Directors

BOD Responsibilities (200 Directors from 8 countries)

– Setting strategy and overall direction, mission or vision

– Hiring firing CEO and top management

– Controlling, monitoring or supervising top management

– Reviewing and approving use of resources

– Caring for Shareholder interests

(CEO’s surveyed)– Corporate performance

– CEO Succession

– Strategic planning

– Corporate governance

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Corporate Governance