Strategic
Control and
Corporate
Governance
Chapter Nine
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
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.
9-2
Learning Objectives (cont.)
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.
9-3
Strategic Control
Strategic control
 the process of monitoring and correcting a
firm’s strategy and performance
 Informational, behavioral
9-4
Ensuring Informational Control
Traditional control system
1. strategies are formulated and top
management sets goals
2. strategies are implemented
3. performance is measured against the
predetermined goal set
9-5
Traditional Approach to
Strategic Control
Exhibit 9.1
9-6
Traditional Approach
to Strategic Control
Most appropriate when
 Environment is stable and relatively simple
 Goals and objectives can be measured with
certainty
 Little need for complex measures of
performance
9-7
Contemporary Approach
to Strategic Control
Exhibit 9.2
9-8
Contemporary Approach to Strategic
Control
Informational control
 a method of organizational control in which a
firm gathers and analyzes information from the
internal and external environment in order to
obtain the best fit between the organization’s
goals and strategies and the strategic
environment.
9-9
Question
Top managers at USA Today meet every Friday to
review daily operational reports and year-todate data. This is an example of
A. Behavioral control
B. Informational control
C. Strategy formulation
D. Strategy implementation
9-10
Informational Control
Primarily concerned with whether or not the
organization is “doing the right things”
Key question
 “Do the organization’s goals and strategies
still ‘fit’ within the context of the current
strategic environment?”
9-11
Informational Control
Two key issues
 Scan and monitor external environment
(general and industry)
 Continuously monitor the internal
environment
9-12
Contemporary Approach
to Strategic Control
Behavioral control
 a method of organizational control in which a
firm influences the actions of employees through
culture, rewards, and boundaries.
9-13
Effectiveness of Contemporary Control
Systems
1.
2.
3.
4.
Focus on constantly changing information that
has potential strategic importance.
The information is important enough to demand
frequent and regular attention from all levels of
the organization.
The data and information generated are best
interpreted and discussed in face-to-face
meetings.
The control system is a key catalyst for an
ongoing debate about underlying data,
assumptions, and action plans.
9-14
Behavioral Control
Behavioral control is focused on
implementation—doing things right
Three key control “levers”
 Culture
 Rewards
 Boundaries
9-15
Reasons for an increased emphasis on
culture and rewards
1.
The competitive
environment is
increasingly
complex and
unpredictable,
demanding both
flexibility and quick
response to its
challenges.
2. The implicit longterm contract
between the
organization and its
key employees has
been eroded.
9-16
Building a Strong and Effective
Culture
Organizational culture
 a system of shared values and beliefs that
shape a company’s people, organizational
structures, and control systems to produce
behavioral norms.
9-17
Building a Strong and Effective
Culture
Culture sets implicit boundaries (unwritten
standards of acceptable behavior)
 Dress
 Ethical matters
 The way an organization conducts its
business
9-18
Example: Wal-Mart
A lot of Wal-Mart's success was attributed to the
strong and pervasive culture at the company,
which was developed and nurtured by founder
Sam Walton.
In over four decades of operation, Wal-Mart
managed to retain most of the elements of
culture it had when it first started out, as well as
the entrepreneurial spirit which often drives
startup companies to success.
9-19
Sustaining an Effective Culture
Effective culture
must be
 Cultivated
 Encouraged
 Fertilized
Maintaining an
effective culture
 Storytelling
 Rallies or pep
talks by top
executives
9-20
Motivating with Rewards and
Incentives
Rewards and incentive systems
 Powerful means of influencing an
organization’s culture
 Focuses efforts on high-priority tasks
 Motivates individual and collective task
performance
 Can be an effective motivator and control
mechanism
9-21
Motivating with Rewards and
Incentives
Potential downside
 Subcultures may arise in different business
units with multiple reward systems
 May reflect differences among functional
areas, products, services and divisions
9-22
Characteristics of Effective Reward and
Evaluation Systems
Exhibit 9.4
9-23
Setting Boundaries and Constraints
Focus efforts on strategic priorities
Provide short-term objectives and action
plans
 Specific and measurable
 Specific time horizon for attainment
 Achievable, but challenging
9-24
Setting Boundaries and Constraints
Improve operational efficiency and
effectiveness
Minimize improper and unethical conduct
9-25
Question
Effective boundaries and constraints:
A. Tend to inhibit efficiency and effectiveness
B. Distract employees who are trying to focus on
organizational priorities
C. Minimize improper and unethical conduct
D. Tend to limit organizational growth
9-26
Organizational Control:
Alternative Approaches
Exhibit 9.6
9-27
Evolving from Boundaries
to Rewards and Culture
System of rewards and incentives
coupled with a strong culture




Hire the right people
Training plays a key role
Managerial role models are vital
Reward systems clearly aligned with
organizational goals and objectives
9-28
Role of Corporate Governance
Corporate governance
 the relationship among various participants
in determining the direction and performance
of corporations.
 primary participants are the shareholders,
the management, and the board of
directors.”
9-29
The Modern Corporation
Corporation
 A mechanism
created to allow
different parties to
contribute capital,
expertise, and labor
for the maximum
benefit of each
party.
9-30
Agency Theory
Deals with the relationship between
 Principals – who are owners of the firm
(stockholders)
 Agents – who are the people paid by
principals to perform a job on their behalf
(management)
9-31
Agency Theory: Two Problems
1.
The conflicting
goals of principals
and agents, along
with the difficulty of
principals to
monitor the
agents, and
2. The different
attitudes and
preferences
towards risk of
principals and
agents.
9-32
Governance Mechanisms
Board of directors
 a group that has a fiduciary duty to ensure
that the company is run consistently with the
long-term interests of the owners, or
shareholders, of a corporation and that acts
as an intermediary between the
shareholders and management.
9-33
The New Rules for Directors
Exhibit 9.7
9-34
Governance Mechanisms
Shareholder activism
 actions by large shareholders, both
institutions and individuals, to protect their
interests when they feel that managerial
actions diverge from shareholder value
maximization.
9-35
TIAA-CREF’s Principles on the Role of Stock
in Executive Compensation
Exhibit
9.8
9-36
External Governance
Control Mechanisms
External governance control
mechanisms
 methods that ensure that managerial actions
lead to shareholder value maximization and
do not harm other stakeholder groups and
that are outside the control of the corporate
governance system.
9-37
External Governance
Control Mechanisms
Market for corporate control
Auditors
Banks and analysts
Regulatory bodies
Media and public activists
9-38
Sarbanes-Oxley Act
Auditors
 Barred from certain types of non-audit work
 Not allowed to destroy records for five years
 Lead partners auditing a firm should be
changed at least every five years
9-39
Sarbanes-Oxley Act
CEOs and CFOs
 Must fully reveal off-balance sheet finances
 Vouch for the accuracy of information
revealed
Executives
 Must promptly reveal the sale of shares in
firms they manage
 Are not allowed to sell shares when other
employees cannot
9-40