STRATEGIC MANAGEMENT & BUSINESS POLICY

STRATEGIC MANAGEMENT & BUSINESS POLICY15e EDITION

Learning Objectives

2-1 Describe the role and responsibilities of the board

of directors in corporate governance

2-2 Explain how the composition of a board can affect

its operation

2-3 Describe the impact of the Sarbanes–Oxley Act on

corporate governance in the United States

2-4 Discuss trends in corporate governance

2-5 Explain how executive leadership is an important

part of strategic management

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Case study

• CASE 3: EVERYONE

DOES IT

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Corporation: a mechanism established to allow different parties to contribute capital, expertise and labor for their mutual benefit

Corporation is governed by the board of directors that oversees top management with the concurrence/agreement of the shareholders.


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Corporate governance: the

relationship among the board of directors, top management and shareholders in determining the direction and performance of the corporation


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Responsibilities of the Board

Effective Board Leadership

Strategy of the Organization

Risk vs. Initiative

Succession Planning

Sustainabilitycorportare governance & social

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Responsibilities of the Board of Directors

1. Sets corporate strategy, overall direction, mission, or vision

2. Hires and fires the CEO and top management

3. Controls, monitors, or supervises top management

4. Reviews and approves the use of resources

5. Cares for shareholders’ interests

6. Assures that the corporation is managed in accordance with state laws, security regulations and conflict of interest situations


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Responsibilities of the Board (2 of 2)

• Due care

– the board is required to direct the affairs of the

corporation but not to manage them

• If a director or the board as a whole fails to act

with due care and, as a result, the corporation is

in some way harmed, the careless director or

directors can be held personally liable for the

harm done.


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Average time spent by boards• A 2008 global survey of directors by McKinsey &

Company revealed the average amount of time

boards spend on a given issue during their

meetings

• Strategy—24%

• Execution (prioritizing programs and approving

mergers and acquisitions)—24%

• Development of incentives and measuring

performance)—20%

• Governance and compliance -17%

• Talent management—11%

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Role of the Board in Strategic Management

• Monitor developments inside and outside

the corporation

• Evaluate and Influence management

proposals, decisions and actions

• Initiate and Determine the

corporation’s mission and strategies


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Board of Directors Continuum

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Members of a Board of Directors

Inside Directors are officers or executives

employed by the board’s corporation, working in the corporation.

Outside Directors are executives of other firms

but are not employees of the board’s corporation.

In USA, Canada the majority of board members outsiders. In Japan insiders the majority.


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Affiliated directors- not employed by the corporation,

handle legal or insurance work

Retired executive directors- used to work for the

corporation, partly responsible for past decisions affecting current strategy

Family directors- descendents of the founder and own

significant blocks of stock


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Agency theory problems arise in corporations because

top management is not willing to accept responsibility for their decisions unless they own a substantial amount of stock in the corporation. (Agent=manager)

• Stewardship/caring theory it suggests that

executives tend to be more motivated to act in the best

interests of the corporation than in their own self-

interests. Stewardship theory focuses on the higher-

order needs, such as achievement and self-

actualization.

• The theory argues that senior executives over time tend

to view the corporation as an extension of themselves.corportare governance & social

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Codetermination: Should Employees

Serve on Boards? (1 of 3)

• Codetermination

– the inclusion of a corporation’s workers on its

board

– began only recently in the United States

• Although the movement to place employees on

the boards of directors of U.S. companies shows

little likelihood of increasing, the European

experience reveals an increasing acceptance of

worker participation on corporate boards.


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• Co-determination: Should Employees

Serve on Boards?

• Corporations such as Chrysler, Northwest

Airlines, United Airlines (UAL), and

Wheeling-Pittsburgh Steel added

representatives from employee

associations to their boards as part of

union agreements or Employee Stock

Ownership Plans (ESOPs).

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Interlocking/sharing directorate

• Occurs when two firms share a director

or when an executive of one firm sits

on the board of a second firm.

• An indirect interlock occurs when two corporations have directors who also

serve on the board of a third firm, such as

a bank.

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Interlocking Directorates- useful for gaining both inside information about an uncertain environment and objective expertise about potential strategies and tactics

• Interlocking could be direct or indirect:Direct interlocking directorate- when two firms share

a director or when an executive of one firm sits on the board of a second

Indirect interlocking directorate- when two corporations have directors who serve on the board of a third firm


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Board of Directors

Organization of the Board

• Size

– Determined by charter and bylaws

• The average large, publicly held U.S. firm has 10

directors on its board. The average small,

privately held company has 4-5 members. In

Japan, 14; Non-Japan Asia, 9; Germany, 16;

UK, 10; and France, 11.

Organization of the Board (3 of 4)

• Lead director

– consulted by the Chair/CEO regarding board

affairs and coordinates the annual evaluation

of the CEO

• 96% of U.S. companies that combine the

Chairman and CEO positions had a lead

director.


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Organization of the Board (4 of 4)

• The most effective boards accomplish

much of their work through

committees.

• Although they do not usually have legal

duties, most committees are granted

full power to act with the authority of

the board between board meetings.


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Nomination and Election of Board

Members (1 of 2)

• 97% of large U.S. corporations use nominating

committees to identify potential board members

• Staggered boards

– only a portion of board members stand for re-

election when directors serve more than one-

year terms

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Nomination and Election of Board

Members (2 of 2)

Main reasons individuals serve on a board:

• Interested in the business—79%

• Make a difference—65%

• Stay active in business community—50%

• Recruited by friend on the board—25%

• Compensation—14%

• Networking opportunities—11%

• Notoriety/prestige—9%

• Recruited by friend, not on the board—4%

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Nomination and Election of Board Members

Criteria for a good director include:

1. Willingness to challenge management when necessary

2. Special expertise that is important to the company

3. Available for outside meetings to advise management

4. Expertise on global issues

5. Understands the firm’s key technologies and processes

6. Brings external contacts that are potentially valuable to the firm

7. Has detailed knowledge of the firm’s industry

8. Has high visibility in their field

9. Is accomplished at representing the firm to stakeholders


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Approximately 70% of the top executives of U.S. publicly held companies hold the dual/double designation of Chairman and CEO


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Impact of the Sarbanes-Oxley Act on

U.S. Corporate Governance

• Sarbanes Oxley Act 2002-

designed to protect shareholders from excesses

and failed oversight of boards of directors. It

includes:

– whistleblower procedures: include, bans

auditors from providing both external and

internal audit services to the same company. It

also requires that a firm internal auditor

independent from management.

– improved corporate financial statements


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• Help investors Evaluating Governance through:– Rating agencies

– S&P Corporate Governance Scoring System

• They developed rating tools and criteria.

• Avoiding Governance Improvements, through adopting: – Multiple classes of stock: insider investors have extra

votes to avoid outside domination.

– Transform Public firms to private ownership

– Controlled companies: owner controls 50%+ of stock.


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Evaluating GovernanceS&P Corporate Governance Scoring System

researches four major issues:

1.Ownership structure and influence

2.Financial stakeholder rights and relations

3.Financial transparency and information

disclosure

4.Board structure and processes


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Trends in Corporate Governance1. Boards shaping company strategy2. Institutional investors active on boards3. Shareholder demands that directors and top

management own significant stock4. More involvement of non-affiliated outside directors5. Increased representation of women and minorities6. Boards evaluating individual directors7. Smaller boards8. Splitting the Chairman and CEO positions9. Shareholders may begin to nominate board members10.Society expects boards to balance profitability with

social needs of society


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Responsibilities of Top Management

Executive leadership is the directing of activities toward

the accomplishment of corporate objectives. Sets the tone for the entire corporation

Strategic vision- description of what the company is

capable of becoming


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Responsibilities of Top Management

Transformational Leaders provide change and movement in an organization by providing a vision for that change.

Characteristics include:

• CEO articulates a strategic vision for the corporation• CEO presents a role for others to identify with and to

follow• CEO communicates high performance standards and also

show confidence in the followers’ abilities to meet these standards


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Cutting-Edge Approaches To

Leadership• Three contemporary

approaches to leadership:

• First: Transformational-Transactional Leadership

• Transactional - leaders who guide or motivate their followers in the direction of established goals by clarifying role and task requirements.

© Prentice Hall, 2002 17-3217-32 corportare governance & social

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Cutting-Edge Approaches To

Leadership• Transformational - inspire followers to

transcend\increase their own self-interests for the good of the organization.

• Capable of having profound effect on followers.

• Pay attention to concerns of followers.

• change followers’ awareness of issues.

• Excite and inspire followers to put forth extra effort.

• Built on top of transactional leadership.

• Good evidence of superiority of this type of leadership.

© Prentice Hall, 2002 17-3317-33 corportare governance & social

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Managing the Strategic Planning Process

Strategic planning staff- supports both top

management and the business units in the strategic planning process

Major responsibilities include:

• Identifying and analyzing company-wide strategic issues, and suggesting corporate strategic alternatives to top management

• Work as facilitators with business units to guide them through the strategic planning process


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Styles of Corporate Governance

High Entrepreneurship

Management

Partnership

Management

low Chaos

Management

Marionette

Management

Low High

Degree of Involvement

By top management

Degree of involvement by board of directors


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• Chaos Management

• When both the board of directors and top management have little involvement in the strategic management process.

• The board waits for top management to bring it proposals.

• Top management is operationally oriented and continues to carry out strategies, policies, and programs specified by the founding entrepreneur who died years ago.

• There is no strategic management being done here.


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• Entrepreneurship Management

• A corporation with an uninvolved board of directors but a highly involved top management has entrepreneurship management.

• The board is willing to be used as a rubber stamp for top management's decisions.

• The CEO, operating alone or with a team, dominates the corporation and its strategic decisions.


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Styles of Corporate Governance• Marionette\dummy Management

• Probably the rarest form of strategic management style,

• Marionette management occurs when the board of directors is deeply involved in strategic decision making, but top management is primarily concerned with operations.

• Such a style evolves when a board is composed of key stockholders who refuse to delegate strategic decision making to the president.

• This style also occurs when a board fires a CEO but is slow to find a replacement.

• Marionette Management occurred at Winnebago Industries when the company's Board of Directors, chaired by its founder, 72-year-old John K. Hanson, took away Ronald Haugen's title as chief executive officer, but left him as company president.

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1. When does a corporation need a board of directors?2. Who should and should not serve on a board of directors?3. Should a CEO be allowed to serve on another company’s

board of directors?4. What would be the result if the only insider on a corporation’s

board were the CEO?5. Should all CEOs be transformational leaders? Would you like

to work for a transformational leader?


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Social Responsibility

Broader responsibility:

• Private corporation has responsibilities to society that extend beyond making a profit.


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Friedman’s Traditional View

“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits…”


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Carroll’s Four Responsibilities

• Economic: produce goods and services of value to society.

• Legal: abide by law, avoid discrimination.

• Ethical: respect beliefs in society.

• Discretionary/ voluntery :pure voluntary obligations.


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Responsibilities of Business


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Benefits

Ben & Jerry’s

Maytag

Procter &

Gamble

Rubbermaid

•Environmental concerns may enablethe firm to charge premium prices andgain brand loyalty

•Trustworthiness may help generateenduring relationships with suppliersand distributors without spending timeand money policing contracts

•Can attract outstanding employeeswho prefer working for a responsiblefirm

•More likely to attract capital frominvestors who view reputablecompanies as desirable

Discussion

• What is the relationship between

corporate governance and social

responsibility?

The board of directors is in a unique

position to view the corporation as a

whole and to evaluate management's

performance in terms of stakeholder

criteria.corportare governance & social



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Social Responsibility: Balancing

Commitments to Stakeholders

Stakeholders: Groups, individuals, and organizations that are directly affected by the practices of an organization

Employees Investors

Local

Communities

Customers SuppliersCORPORATION


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• It refers to the way in which a business tries to balance its commitments to certain groups and individuals in its social environment.

• Customers: Treat customers fairly and honestly (Examples of companies with excellent reputations in this area: L.L. Bean, Nordstrom, Dell Computer Corporation)

• Employees: Treat employees fairly, with respect for their dignity and basic human needs (Examples of companies with excellent reputations in this area: 3M, Southwest Airlines)

• Investors: Manage financial resources honestly and openly

• Suppliers: Seek mutually beneficial partnerships

• Local Communities: Minimize damage and maximize contributions to local communities


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Reasons for Unethical

Behavior

Moral Relativism

– Morality is relative to some

personal, social or cultural

standard and that there is no

method for deciding whether one

decision is better than another.


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Kohlberg’s Levels of

Moral Development

– Preconventional Level– Concern for self

– Conventional\conservative Level– Consideration of laws and norms

– Principled Level– Adherence to internal moral code


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Code of Ethics:

– Specifies how an organization

expects its employees to behave

while on the job.

The Evolution of Social Responsibility1.Entrepreneurial Era: In the late 1800s, big

business began to flourish, but labor strife, predatory\greedy business practices, and environmental degradation were rampant\out of control. Issued nation’s first law regulating basic business practices.

2.The Great Depression: The collapse of business and banking institutions in the 1930s, combined with widespread job loss, led to a redefinition of the role of business to include protecting and enhancing the general welfare of society.



The Evolution of Social Responsibility3- The Era of Social Activism: Social unrest in the

1960s and 1970s led to laws that further expanded the role of business in promoting general welfare. When at that time characterized business as a negative social force. Many companies were blamed to promote Vietnam war to sell weapons.

4- Contemporary Social Consciousness: Through the economic expansion of the 1990s, many firms have begun to integrate socially conscious thinking into their production and marketing plans. In many industries, this approach has manifested itself in environmentally friendly products. Another emerging example is the extension of employment benefits to domestic partners, use recycling materials..




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What Is Ethical Behavior?

Ethics: Right and wrong, good and bad, in actions that affect others. shaped by personal values and morals

Ethical Behavior: Conforming to generally accepted ethical norms.

Business ethics: Ethical or unethical behaviors of managers and employers of an organization.


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Discussion

• Identify examples of ethical and unethical business practices.– Ethical Business Practices: Examples: Donating a

percentage of profits to charity and community causes (Ben & Jerry’s donates 7-1/2% of pre-tax profits, and Levi Strauss donates 2.4% of pre-tax profits to a variety of causes), encouraging employees to engage in volunteer work using paid work-release time (Walt Disney’s VoluntEARS program), recycling (McDonald’s has a far-reaching environmental protection program).

– Unethical Business Practices: Examples: Forwarding “marketing research” results to sales people, excessive violence in video games, and of course all forms of illegal behavior (e.g. deliberately selling cigarettes to minors).

Assessing Ethical BehaviorApproaches to Ethical Behavior

– Utility: Does a particular act optimize the

benefits to those who are affected by it? Do all

relevant parties receive “fair” benefits?

– Individual Rights: Does the act respect the

rights of all individuals involved?

– Justice: Is the act consistent with what’s fair?

E.g., level of salary, working hours.

– Caring: Is the act consistent with people’s

responsibilities to each other? Every party will

be committed toward each other, the

consultant will finish his duty and the company

will pay.© 2009 Pearson Education, Inc. 55corportare governance & social

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Approaches to Ethical Behavior

• Categorical imperatives\crucial

“golden rules”

Not restrict others behavior


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• Encompasses

three main areas:

1. Air pollution

2. Water pollution

3. Land pollution

– Toxic\deadly

waste

– Recycling

Responsibility Toward the

Environment

Areas of Social Responsibility– Green Marketing: The marketing of

environmentally friendly goods: e.g., power saving computers and monitors

• Includes a number of strategies and practices:

–Production processes

–Product modifications

–Carbon offsets/balance

–Packaging reduction

–Sustainability© 2009 Pearson Education, Inc. 58corportare governance & social

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Areas of Social Responsibility

• Green washing: Using advertising to project a green image without adopting substantive environmentally friendly change.

• Federal Trade Commission (FTC) started hearings in January 2008 regarding green marketing claims.

© 2009 Pearson Education, Inc. 59corportare governance & social

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Responsibility Toward

Customers

Consumer Rights

Unfair Pricing

Ethics in Advertising

Responsibility Toward Customers– Involves providing quality products and pricing

products fairly

• Consumerism

– Social activism dedicated to protecting the rights of consumers in their dealings with businesses

• Basic Consumer Bill of Rights

1. To possess safe products

2. To be informed about all relevant aspects of a product

3. To be heard

4. To choose what to buy

5. To be educated about purchases

6. To receive courteous/considerable service© 2009 Pearson Education, Inc. 61corportare governance & social

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Areas of Social Responsibility

(cont’d)• Unfair Pricing

– Collusion/agreement: When two or more firms agree to collaborate on such wrongful acts as price fixing.

– Price gouging/scoring: Responding to increased demand with overly steep (and often unwarranted) price increases

• Ethics in Advertising

– Truth in advertising

– Morally objectionable/offensive advertising, e.g., using naked woman picture in ads.© 2009 Pearson Education, Inc. 62corportare governance & social

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Responsibility Toward

Employees• Legal and social commitments: Legally,

companies are required to refrain from discrimination against any worker based on race, gender, religion, nationality or other irrelevant factors. Ethically, many people feel that companies should ensure that the workplace is physically and socially safe.

• How far should companies extend themselves to help employees who are laid off?


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Responsibility Toward Investors• Responsibility towards investors has several components:

• Improper financial management:

• Offenses are typically unethical, rather than illegal. Examples

include excessive salaries, and lavish\plentiful or frivolous

perks\bonus (e.g. regular corporate “retreats” to

exotic\interesting island resorts).

• Check kiting:

• Illegal practice of writing checks against money that has not yet

arrived at the bank on which it is drawn.

• Insider trading:

• Illegal practice of using confidential information to gain from the

purchase or sale of stocks.

• Misrepresentation of finances:

• Typically, this takes the form of overly optimistic projections of

earnings.

Review

• What are the Carroll’s four social

Responsibilities of companies? Is there a

consensus on the concept of social

responsibilities? What is the relationship

between social responsibility and ethics?

Try to be practical in your answer.


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Discussion • Should all CEOs be transformation leaders? Would you

like to work for a transformational leader?

• According to the text, top management must successfully

handle two responsibilities that are crucial to the effective

strategic management of the corporation: (1) provide

executive leadership and a strategic vision and (2) manage

the strategic planning process. The successful CEOs often

provide this executive leadership by taking on many of the

characteristics of the transformation leader by

communicating a clear strategic vision, demonstrating a

strong passion for the company, and communicating clear

directions to others. Such transformational leaders, like Bill

Gates at Microsoft, Steve Jobs at Apple, and Anita Roddick

at The Body Shop, are able to command respect and

energize their employees.

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