Strategic

Control and
Corporate
Governance

chapter 9

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education .
 Learning Objectives
9-2

After reading this chapter, you should have a

good understanding of:
LO9.1 The value of effective strategic control
systems in strategy implementation.
LO9.2 The key difference between “traditional” and
“contemporary” control systems.
LO9.3 The imperative for “contemporary” control
systems in today’s complex and rapidly changing
competitive and general environments.
 Learning Objectives
9-3

LO9.4 The benefits of having the proper balance

among the three levers of behavioral control: culture,
rewards and incentives, and boundaries.
LO9.5 The three key participants in corporate
governance: shareholders, management (led by the
CEO), and the board of directors.
LO9.6 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.
 Strategic Control
9-4

Consider…
Once strategy is formulated, it must be
implemented, and part of implementation is
establishing a mechanism for monitoring
and correcting organizational performance.
This control mechanism must be consistent
with the strategy the firm is following.
How does a firm make sure all key
stakeholders are moving in the right
direction?
 Strategic Control
9-5

 Strategiccontrol involves monitoring

performance toward strategic goals and
taking corrective action when needed via
effective systems:
 Informational control systems
 Behavioral control systems
 Corporate governance
 Strategic Control:
Traditional Approach
9-6

 Thetraditional approach to strategic

control is sequential
 Strategies are formulated, goals are set
 Strategies are implemented
 Performance is measured against goals

Exhibit 9.1 Traditional Approach to Strategic Control

 Strategic Control:
Traditional Approach
9-7

 Control = feedback loop from

performance measurement to strategy
formulation
 Involves lengthy time lags, “single-loop”
learning
 Most appropriate when
 Environment is stable and relatively simple
 Objectives can be measured with certainty
 Little need for complex measures of
performance
 Strategic Control:
Contemporary Approach
9-8

 Relationships between strategy

formulation, implementation, & control
are highly interactive, utilizing
 Informational control
 Behavioral control

Exhibit 9.2 Contemporary Approach to Strategic Control

 Strategic Control:
Contemporary Approach
9-9

 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
 Both types of control are necessary, but
not sufficient, conditions for success
 Question?
9-10

 Top managers at ABC Company 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.
 Informational Control
9-11

 Informational control deals with both the

internal & external environment
 Do the organization’s goals and
strategies still “fit” within the context of
the current strategic environment?
 Two key issues:
 Scan & monitor the external environment
 Continuously monitor the internal
environment
 Informational Control
9-12

 Informational control = ongoing process

of organizational learning
 Focus on constantly changing
information - continuous monitoring,
testing, review
 Updates & challenges assumptions, so
 Time lags are shortened
 Changes are detected earlier
 Speed & flexibility of response is enhanced
 Question?
9-13

 Which of the following is not one of the

characteristics of a contemporary control
system?
A. It is a key catalyst for an ongoing debate about
underlying data, assumptions, and action plans.
B. It must focus on constantly changing information
that is strategically important.
C. It circumvents the need for face-to-face meetings
among superiors, subordinates, and peers.
D. It generates information that is important enough
to demand regular and frequent attention.
 Behavioral Control
9-14

 Behavioral control = focused on

implementation – “doing things right”
 Influences the actions of employees via:
 Culture
 Rewards
 Boundaries

Exhibit 9.3 Essential Elements of Behavioral Control

 Behavioral Control: Culture
9-15

 Organizational culture is a system of

 Shared values (what is important)
 Beliefs (how things work)

 Organizational culture shapes a firm’s

 People
 Organizationalstructures
 Control systems

 Organizational culture produces

 Behavioralnorms (the way we do things
around here)
 Behavioral Control: Culture
9-16

 Organizational
culture sets implicit
boundaries regarding:
 Dress
 Ethicalmatters
 The way an organization conducts its
business
A strong culture
 Leads to greater employee engagement
 Provides a common purpose and identity
 Reduces monitoring costs
 Behavioral Control: Culture
9-17

 Effective organizational cultures must be

 Cultivated
 Encouraged
 Fertilized

 Organizational cultures can be

maintained by
 Storytelling
 Rallies or pep talks by top executives
 Behavioral Control: Rewards
9-18

 Reward systems & incentive programs:

 Powerful means of influencing an
organization’s culture
 Focus efforts on high-priority tasks
 Motivate individual & collective task
performance
 Can be an effective motivator & control
mechanism
 Behavioral Control: Rewards
9-19

 Potential downside:
 Individual actions are not related to
compensation; employees are rewarded for
the wrong things
 Different business units have differing
rewards systems
 Behavior reinforced within subcultures may
reflect value differences in opposition to
the dominant culture
 Reward systems may lead to information
hoarding, working at cross purposes
 Behavioral Control: Rewards
9-20

Exhibit 9.4 Characteristics of Effective Reward and Evaluation Systems

 Behavioral Control: Boundaries
9-21

 Boundaries and constraints can be useful

 Focusing individual efforts on strategic
priorities
 Providing short-term objectives and action
plans to channel efforts
 Specific,measurable, including a specific time
horizon for attainment
 Achievable, yet challenging enough to motivate
 Individual managers held accountable for
implementation
 Question?
9-22

 Rules and regulations, rather than culture or

rewards, would probably be used for strategic
control at what type of company?
A. Software developer
B. Stock brokerage firm
C. Manufacturer of mass-produced products
D. High-tech research facility
 Behavioral Control: Boundaries
9-23

 Boundaries and constraints can also

 Improve efficiency and effectiveness through
rule-based controls, appropriate when
 Environments are stable and predictable
 Employees are largely unskilled and
interchangeable
 Consistency in product and services is critical
 The risk of malfeasance is extremely high

 Minimize improper and unethical conduct via

 Anti-bribery policies
 Regulations and sanctions – i.e. Sarbanes-Oxley
 Behavioral Control Systems
9-24

Exhibit 9.5 Organizational Control: Alternative Approaches

 Behavioral Control Systems
9-25

 Rewards and incentives, plus a strong

culture, reduce the need for external
controls, IF organizations
 Hire the right people
 Train people in the dominant cultural values
 Have managerial role models
 Have reward systems clearly aligned with
organizational goals and objectives
 Example:
Building a Strong, Rewarding Culture
9-26

 Zappos hires only one out of 100 applicants - a

hiring process that is weighted 50% on job skills &
50% on the potential to mesh with Zappos’ culture.
 Call center reps are measured based on how much
time they spend with customers, not how many calls
they take
 Rewards include Zollars (Zappos dollars) given
by peers to peers for deserving behaviors
 Because Zappos has a strong culture they can…
 Run primarily using recognition with few “incentive”
programs
 Eschew traditional programs – use what works for them
 Corporate Governance
9-27

 Corporate governance controls focus on

relationships between
 The shareholders
 The management (led by the Chief Executive
Officer - CEO)
 The Board of Directors

 How can corporations succeed (or fail) in

aligning managerial motives with
 The interests of the shareholders
 The interests of the board of directors
 Corporate Governance
9-28

 The
separation of owners (shareholders) &
management in a modern corporation
 Shareholders (investors) have limited liability
& can participate in the profits without taking
direct responsibility for operations
 Management can run the company without
personally providing any funds
 The Board of Directors are elected by
shareholders & have a fiduciary obligation to
protect shareholder interests
 Corporate Governance:
9-29
Agency Theory
 Agency theory deals with the relationship
between principals & agents
 What to do when the goals of the
principals and agents conflict?
 What to do when it is difficult or
expensive for the principal to verify what
the agent is actually doing?
 What happens when the principal and the
agent have different attitudes and
preferences toward risk?
 Corporate Governance
9-30
Mechanisms
 Corporate governance mechanisms:
aligning the interests of owners and
managers through
A committed and involved Board of Directors
 Shareholder activism
 Managerial rewards and incentives
 Contract-based outcomes
 CEO duality – should the CEO also be chairman of
the board of directors?
 Corporate Governance
9-31
Mechanisms
 Duties of the Board of Directors
 Regularly evaluate, and, if necessary, replace
the CEO; determine management
compensation; review succession planning.
 Review & approve financial objectives, major
strategies, and plans of the Corporation.
 Provide advice and counsel to top management.
 Select & recommend candidates for the Board
of Directors; evaluate board processes.
 Review the adequacy of all compliance systems.
 Corporate Governance
9-32
Mechanisms
 An effective Board of Directors should
 Become active, critical participants
 Ensure that strategic plans undergo rigorous
scrutiny
 Evaluate managers against high performance
standards
 Take control of the succession process
 Practice director independence
 No interlocking directorships
 Insistthat directors own significant stock in
the company
 Corporate Governance
9-33
Mechanisms
 Individual shareholders have rights:
 Tosell stock, vote the proxy, bring suit for
damages, get information, receive residual
rights following the company’s liquidation
 Collectively, shareholders have power:
 Todirect the course of corporations, file
shareholder action suits, demand key issues
be brought up for proxy votes
 Institutional investors can be aggressive:
 By reviewing performance, requesting changes
in the firm’s governance structure, filing court
action, becoming major shareholders
 Corporate Governance
9-34
Mechanisms
 Boardsare responsible for managerial
rewards and incentives
 Boards can require that CEOs become
substantial owners of company stock
 Salaries, bonuses, and stock options can be
structured so as to provide rewards for
superior performance and penalties for poor
performance
 Dismissal for poor performance should be a
realistic threat
 Corporate Governance
9-35
Mechanisms: CEO Duality?
Unity of Command: Agency Theory:
(in favor of) Duality (in favor of) Separation
 Provides clear focus  Safeguards against
 Eliminates confusion corruption or
and conflict incompetence
 Enhances a firm’s  Removes conflict of
responsiveness interest, especially
regarding CEO
 Enables quick
succession
decisions based on
first-hand knowledge  Improves perceptions
of legitimacy
 Corporate Governance
9-36
Mechanisms
 External governance control mechanisms
 The market for corporate control
 The takeover constraint
 Auditors
 Enron, WorldCom?
 Banks and analysts
 Lehman Brothers, Countrywide?
 Regulatory bodies
 Securities
and Exchange Commission (SEC)
 The Sarbanes-Oxley Act
 Media and public activists
 Bloomberg Businessweek, Ralph Nader
 Example:
Corporate Governance & Stakeholder Groups
9-37

 AIG (American International Group) paid $218

million in bonuses to its financial services division
employees AFTER receiving an $85 billion bailout
from the U.S. government
 The U.S. House of representatives complained
 AIG leadership caved in
 AIG financial services managers were
left without an income
 Many AIG financial services managers were AIG
shareholders
 Was corporate governance effective? Were external
governance control mechanisms inappropriate?
 International Corporate
9-38
Governance
 Principal
– principal conflicts (vs principal –
agent conflicts) involve
 Concentrated ownership, or family ownership
 Motivation
to engage in expropriation of minority
shareholders for personal gain
 Business groups who can take coordinated
action
 Japanese keiretsus, Korean chaebols
 Few external regulatory constraints
 International Corporate
9-39
Governance

Exhibit 9.9 Principal-Agent Conflicts and Principal-Principal Conflicts:

A Diagram
Source: Young, M.N., Peng, M.W., Ahlstrom, D., Bruton, G.D., & Jiang, 2008. Principal-Principal Conflicts in
Corporate Governance. Journal of Management Studies 45(1):196-220; and Peng, M.V. 2006. Global Strategy.
Cincinnati: Thomson South-Western. We are very appreciative of the helpful comments of Mike Young of Hong
Kong Baptist University and Mike Peng of the University of Texas at Dallas.