Selecting Corporate-Level Strategy Chapter 8
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Transcript Selecting Corporate-Level Strategy Chapter 8
Miles A. Zachary
MGT 4380
Corporate governance involves:
Making meta-managerial decisions
Approving financial objectives
Advising on strategic issues
Making TMT members aware of laws and regulations
Representing stakeholders (namely shareholders)
Corporate governance is the responsibility of the board of
directors—a group of individuals, either elected or
appointed, that oversees the activities of an organization or
corporation
Effective board members bring resources and capabilities
to an organization; sometimes celebrity
Board composition is a critical factor in the dynamics
of board decision-making
Board insiders: members of the board that are employed
in the firm
Board outsiders: members of the board external to the
firm
Institutional investors such as hedge funds, retirement funds,
or banks often request a number of outside board members
CEO duality: when the CEO is also the chairman of the
board of directors
Can be controversial since it gives a large amount of power to
one person; can create divisions and conflict in the board
CEO compensation is a balance between competitive
pressures and the value of the day-to-day functions of
a CEO
“Salary commensurate with experience”—firms must
pay for the limited number of quality talent
Market pressures help to dictate the high price firms pay
for a CEO
However, the salary is balanced by industry norms and
investor pressure
Agency Problems
The interests of firm management (e.g., the CEO) and
the owner(s) (e.g., the board, shareholders) are not
always equal
The solution: better alignment
Often done through high CEO compensation and stock
options/ownership opportunities
What are some other ways firms can achieve better
interest alignment?
CEO compensation often includes:
Guaranteed salary
Cash/option bonuses
Stock options
Perks
Perks are often the “unsung” benefits of being a CEO
When a firm is doing poorly, sometimes they are
poised for a takeover
Leveraged buyout (LBO): a company that is purchased
through significant debt then removed from the stock
market
Reduction in workforce and streamline/cost savings ensue
Hostile takeover: an attempt to buy a company that is
resisted by the target firm
Sometimes the target firm may be saved by a “white knight”; a
firm that is a more favorable buyer
Corporate Raider: an individual or a firm that purchases
stock in another firm with the intentions of eventually
taking it over
E.g., Richard Gere’s character in Pretty Woman is a corporate
raider
Shark Repellant: activities conducted by a board to deter
or defend the firm from a takeover
Greenmail-buy back large blocks of shares at a premium to
retain % ownership
Poison pill-sell considerable amounts of stock to dilute the
number of shares a purchaser needs to own the company
Golden parachute-a cash bonus given to executives who help
a takeover transition
In response to several notable corporate scandals at
Enron, WorldCom, and Tyco, congress legislated the
Sarbanes-Oxley Act of 2002
The law set new or increased standards for the boards
of public US companies and accounting firms
Businesses should be careful to not only follow the
letter of the law, but the spirit of the law
Corporate social performance is the degree to which a
firm’s actions honor ethical values that respect
individuals, communities, and the environment
Can be measured by the impact a firm has on:
The community
Product quality/safety
Diversity
Employee relations
Environmental
Ethical corporate governance
Sometimes businesses are created or create new
aspects of their business in the name of social good
Social entrepreneurship is the entrepreneurial actions
where both economic and social value are created
E.g., Tom’s shoes—buy one, give one
While CSR has emerged as an important priority for
businesses, it has been less than effectively
implemented (Porter & Kramer, 2006)
It has pitted firms against society when they are clearly
interdependent
Has been discussed generally as opposed to specifically
how it can improve a firm’s strategy and performance
How are businesses and societies interdependent?
Firms need societies
Education, health care, and equal opportunity create productive
workforce
Good laws protect firm interests and property
Efficient utilization of land, water, energy, and other resources is
essential
Societies need firms
Creates jobs
Innovation improves the quality of living
Corporate taxes help fund government operations
Important to mind the “principle of shared value” where in
a temporary gain in one will hurt the long-term prosperity
of both
Three (3) categories of social issues
Generic social issues are important to society, but do not
significantly affect the organizations operations or longterm competitiveness
Value chain social impacts are those things that are
significantly affected by a firm’s activities in the course
of ordinary business
Social dimensions of competitive context are factors in
the external environment that affect the underlying
drivers of competitiveness in a companies operations
Each of these affect different companies in different
industries differently
The most important thing a firm can do for society is
contribute to a prosperous economy
When firms are punished unnecessarily for being
productive, it hurts the society it operates in
Firms must, however, avoid seeking short-term profits
through deception
Rather, firms should build long-term success by
focusing on shared value and using CSR strategically to
improve their organization and the world