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Strategic management 4
The soft elements of the strategy:
interest-groups, governance,
cultures, and ethics)
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Expectations and Purposes
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
The logic of the analysis
1.
2.
3.
4.
5.
Identification of organisational
stakeholders
Stakeholder mapping
Corporate governance
Ethical issues
Culture
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Role of People


Complex role that people play in
strategy development
Strategy is about
• what people expect an organisation to
achieve
• what influence people can have over
an organisation’s purposes

There are two important groups of
peoples: ownes, and stakeholders
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
The most important interest group:
the owners (stockholders)
Owners
Their main interest
Small investors
Divident, share price
Financial investors
Rise of value the assets in long
term
Professional investors
Specific goals, rise of the assets
State
Employment, tax
Banks
Providing loans, share price
Local governments
Employment, tax, contribution
Other company
Business connection
Management
Long term carreer, divident
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Classical rights of shareholders


the right to sell the
stock
the right to vote
the proxy


the right to bring
suit for damages if
the managers or
directors fail to
meet their
obligations
the right to have
certain information
from the company
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
What is a corporation?






collective ownership of an enterprise
limited liability as essential element
risk taking and profit making organization
flexibility in determining capital and
governance structure (within the corp.
law)
has an independent legal status –
separate - from its owners
directed by its own management teams
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Types of owners


active/ interested in the operation of
corporation too, not only in the profit
(professional investors, majority
owners)
passive / interested in simply the
income (profit)
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Evolution of the Modern Corporation
The business
environment
Strategic
changes
Organizational
consequences
Early
19th
century
Local markets
Transport slow
Limited mechanization
Firms specialized &
focused on local
markets
Small firms.
Simple management structures
Late
19th
century
Introduction of
railroads, telegraph
industrialization
Geographical and
vertical expansion
Functional structures. Line/staff
separation. Accounting systems
Early
20th
century
Excess capacity in
distribution. Growth
of financial institutions & world trade
Product &
multinational
diversification
Development of
multidivisional
corporation
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Evolution of the corporate-governance structure
Beneficiaries
Trustees of funds
Investors
Invetment funds
General assembly
Ownermanager
1800
Investors
General Assembly
Owners’s
representatives
Executive
management
1900
General assembly
Board
Board (Directors)
Executive managers
Executive commity
Managers
1950
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
2000
The Chain of Corporate Governance
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Role of owners in this decade
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




to participate in forming of corporate
strategy
not to interfere to daily operations
assessment of directors
to keep the company in operation
to improve results of company
to use profit for interests of
himself/herself and that of company
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Some common conflicts of expectations
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Definition of the stakeholders
The terms of stakeholder refers to any (non
owner) group or individual who has an
interets in existence of an organizaton and
hwo has legitimate expectation about their
activities.
Stakeholders are those individuals or groups
who
 depend on the organisation to fulfil their
own goals
 and on whom the organisation depends
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
External Stakeholders
Stakeholders
Market
Examples
Influence
Social/
political
Policy makers,
Social legitimacy
regulators, government
agencies
Technological
Key adopters,
standards agencies,
owners of competitive
technologies
Suppliers, competitors, Economic/value
distributors,
creation
shareholders
Diffusion of new
technology/
adoption of
industry standards
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
1. Types of stakeholders
Stakeholders
Their main interest
Suppliers
Long term connections
Buyers
Quality, quick reaction, small price
Other business partners
Long term connection, liquidity
Potencial entrans
Stable and business-like market
Substitute product producers Clear roles, and conditions
Workers, and their unions
Good working conditions, wages
Employer’s association
Rule-following behavior
Government’s regulators
Rule-following behavior
Enterprises in the industry
Acceptance some mutual rules
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
2. Types of stakeholders
Stakeholders
Their main interest
Local authorities
Tax, subsidy
Local communities
Help
Trade unions
Acceptance
Customer groups
Consumer-friendly behavior
Employment association
Acceptance
Government
Pay tax, follow the laws
Press, media
Provide infromation, and advertise
Pressure groups
Specific interest
Foreign countries
Follow the local custom
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Stakeholder Mapping: the Power/Interest Matrix
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Use of Stakeholder Mapping
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
Do actual levels of interest and power
reflect corporate governance
framework?
Who are key blockers and facilitators
of a strategy?
Is repositioning of stakeholders
desirable/feasible?
Which are the key stakeholders whose
interest and power must be
maintained to support the strategy?
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Corporate Governance
The governance framework
• whom the organisation serves
• how the purposes and priorities should be
decided
• how an organisation should function
• how power is distributed among
stakeholders
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Corporate Governance (CG)
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
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CG is the system by which business corporations
are directed and controlled.
The CG structure specifies the distribution of
rights and responsibilities among different
participants in the corporation, such as, the
board, managers ,shareholders and other
stakeholders and spells out the rules and
procedures for making decisions on corporate
affairs.
By doing this, it also provides the structure
through which the company objectives are set,
and the means of attaining those objectives and
monitoring performance.
OECD definition
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Separation of ownership and control
exclusive control of stocks by shareholder
 shareholders’ communities interest limited
to the price of the stock
 control rights of corporation’s properties
delegated to management
 certificate of proportional share of corp.
THE CORP. ITSELF IS THE OWNER OF
ITS OWN PROPERTY!!!

Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Classical rights of shareholders


the right to sell the
stock
the right to vote
the proxy


the right to bring
suit for damages if
the managers or
directors fail to
meet their
obligations
the right to have
certain information
from the company
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Rights of contemporary
shareholders
Control and economic rights no longer
attach to the same individual or
group.
The shareholder surrendered control
over his wealth.
The shareholder is a supplier of capital
and a risk taker.
Ultimate responsibility and authority of
ownership is attached to stock
ownership.
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General Assembly
Independent external auditor
Supervisory Board
Level of governance:
Corporate strategy,
Corporate reponsibility,
Mission of the corporation
Level of the management:
Organizing activities
Implemetation of strategy
Controling day-to day
activities
Board
Chairman
CEO
Executive
committie
Management teams
Employees
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Governance – management by
bodies
The corporate governance is
 Collective
 Democratic
 Responsible
 Legally framed
 Well structured
management
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Key forms of CG : the bodies
What is „a” body?
Body is a team, members created by
delegation, nomination or election
(voting)
Body has a leader (heading), named
chairperson
Bodies have legal background
Body has a bylaw
Bodies have responsibilities by law
or by the status of the body
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Bodies in the international
corporate governance




General Assembly, the body of owners
(shareholders)
Board; members are elected by the
General Assembly. (In Germany board
members are elected by the Supervisory
Board)
Supervisory Board; members are
elected by the General Assembly. (In
US/UK no Supervisory Board)
Management team (not defined by law)
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Key Actors of Bodies
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Chairwoman/chairman of the General
Assembly, elected by the owners
Chairperson of the Board/Supervisory
Board, elected by body members
Board Committee leaders, nominated by
the Board
Top management (executives), nominated
by the Board
Independent external auditor, contracted
by the management or the Board,
accepted by the General Assembly
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Special bodies
Committees of the Board
 Executive C.
 Financial C.
 Audit C.
 Nominations C.
 Remunerations C.
 Strategic C.
 Ad Hoc C. (e.g. for project, M&A)
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Collective Responsibilities of Owners
(General Assembly)
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Creation and change of the Incorporation
Charter, Deed of Foundation (strictly
regulated by Corporate Act)
Voting for Board (Supervisory Board)
members
Creating discussion issues of General
Assembly
Accepting (or not) Board’s reports
Electing the chairperson of the General
Assembly
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Responsibility of the Board of
Directors
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
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

The Board is the strategic (and
operational) management body of the
Corporation (firm)
Election of Board’s Chairperson
Nomination of management (President,
CEO, etc.)
Creation reports to General Assembly,
presenting the Annual Report
Sharing all duties with the management –
bylaw regulation
Representing officially the Corporation
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Board level decisions
The Board –as the highest level decision
making body of the corporation – sets
direction, vision, strategy.
Makes decisions in major investment,
financial, organizational, market
questions and appoints the very leading
persons of management.
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Primary functions of the Board
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SELECT (CEO, board members, management
compensation)
REVIEW AND APPROVE (financial objectives,
strategic plan, adequacy of the system to law)
ADVICE AND COUNCEL (to the top
management)
EVALUATE (board processes, performance)
OTHERS („umbrella definition)
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Responsibility of the Supervisory
Board
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

Control over the Board and
Management team in order to save
and preserve the owner’s interests
Control the legal conformity of the
firm and they activity with laws, rules
and prescriptions
Not a decision making body
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Responsibility of Board’s
Committees
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Committee is not a decision making
body
Consulting, foundation of business
decisions, controlling function
Committee members are Board
members and experts
Analysis for the Board and General
Assembly
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Responsibility of Management
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
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
Shared responsibility with the Board
Management of day-to-day operation
Functional and structural organization of
business
Management of key processes and
functions (e.g. production, marketing,
controlling, logistic, human resources,
sales, finances, organizational
development)
Expertise for the Board and General
Assembly
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Market for Corporate Control

Definition: Shares of public firms
are traded, and in large enough
blocks this means control over
corporations is traded. That puts
some pressure on managers to
perform, otherwise their corporation
can be taken over, and they will be
fired.
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
The Chain of Corporate
Governance

Chain or hierarchy of control
• Separation of ownership and
management control
• Beneficiaries, trustees of funds,
investment managers, board, executive
directors, senior executives, managers

Accountability and responsiveness
• Wider range of stakeholders

Principal-agent relationships
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Governance Chain - Issues




Conflicts of interest
Directors’ responsibilities to
shareholders
Accountability to stakeholders
Structure of targets, budgets and
rewards
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Corporate Governance Reforms

Imperfections in governance chain
• Unequal division of power
• Differing access to information


High profile cases of fraud or poor
governance
Committees established for reform
• Risk management
• EU

Real requirements:
• Changes in board behaviour
• Strategic approach
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Recommendations for the future
Proposals to improve the performance of the
Board:
- improving director compensation (stock
options)
- increasing authority of independent director
- separation CEO and chairman positions
- Sarbanes – Oxley
- more executive session meeting
- more independence and transparency in
decisions
- closer connection with the performance of
company
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Role of Governing Bodies

Different ownership structures
• Anglo-Saxon, Rhine, Latin, Japanese
models

Important for international strategy
• Does governance help or hinder
investment?
• Does governance affect speed of
investment?
• Which relationships are critical?
• How quickly will pay-offs be expected?
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Strengths and Weaknesses of Governance
Systems (1)
st
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Strengths and Weaknesses of Governance
Systems (2)
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Governing Bodies’ Influence on
Strategy (1)

Two choices
• Strategic management delegated to
management
• Board engages with management in
strategic management

High profile company failures focused
attention on role of board
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Governing Bodies’ Influence on
Strategy (2)

Implications of board involvement
• Need to operate independently of
management
• Must be competent to scrutinise
managers’ activities
• Need time to do job properly
• Importance of softer issues, e.g. trust,
respect
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Forms of Ownership (1)

Ownership has fundamental effect on
organisational purpose and strategies
• Private/public ownership of equity

Public equity often required for growth
• Sale of all or part of the company

To a more suitable corporate parent
• Target for acquisitions

Compare offer with expected future returns
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Forms of Ownership (2)

Ownership has fundamental effect on
organisational purpose and strategies
• Mutual ownership

Customers are owners rather than
shareholders
• Privatisation

Market forces, customer needs, access to
capital
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Key Points (1)

Expectations and purposes influenced
by:
• Corporate governance, stakeholder
expectations, business ethics and culture

Corporate governance
• Whom organisation serves, how
purposes/priorities decided

Stakeholders’ power and influence
• Stakeholder mapping
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Key Points (2)

Ethical stance
• Corporate social responsibility

Culture
• Levels of cultural frames of reference
• Layers of values, beliefs, behaviours and
taken-for-granted assumptions
• Cultural web

Communication of organisational
purposes
• Values, mission, objectives
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
The most important interest group:
the owners (stockholders)
Owners
Their main interest
Small investors
Divident, share price
Financial investors
Rise of value the assets in long
term
Professional investors
Specific goals, rise of the assets
State
Employment, tax
Banks
Providing loans, share price
Local governments
Employment, tax, contribution
Other company
Business connection
Management
Long term carreer, divident
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Classical rights of shareholders



the right to sell the
stock
the right to vote
the proxy
the right to get
divident


the right to bring
suit for damages if
the managers or
directors fail to
meet their
obligations
the right to have
certain information
from the company
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Types of owners


active/ interested in the operation of
corporation too, not only in the profit
(professional investors, majority
owners)
passive / interested in simply the
income (profit)
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
1. Types of stakeholders
Stakeholders
Their main interest
Suppliers
Long term connections
Buyers
Quality, quick reaction, small price
Other business partners
Long term connection, liquidity
Potencial entrans
Stable and business-like market
Substitute product producers Clear roles, and conditions
Workers, and their unions
Good working conditions, wages
Employer’s association
Rule-following behavior
Government’s regulators
Rule-following behavior
Enterprises in the industry
Acceptance some mutual rules
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
2. Types of stakeholders
Stakeholders
Their main interest
Local authorities
Tax, subsidy
Local communities
Help
Trade unions
Acceptance
Customer groups
Consumer-friendly behavior
Employment association
Acceptance
Government
Pay tax, follow the laws
Press, media
Provide infromation, and advertise
Pressure groups
Specific interest
Foreign countries
Follow the local custom
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Corporate governance
The relationship between the
shareholders, Board of Directors, and
the management of the company to
ensure that management acts in a
way to protect the interets of the
investors (including creditors) in the
company.
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Evolution of the corporate-governance structure
Beneficiaries
Trustees of funds
Investors
Invetment funds
General assembly
Ownermanager
1800
Investors
General Assembly
Owners’s
representatives
Executive
management
1900
General assembly
Board
Board (Directors)
Executive
managers
Executive commity
Managers
1950
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
2000
The Chain of Corporate Governance
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
General Assembly
Independent external auditor
Supervisory Board
Level of governance:
Corporate strategy,
Corporate reponsibility,
Mission of the corporation
Level of the management:
Organizing activities
Implemetation of strategy
Controling day-to day
activities
Board
Chairman
CEO
Executive
committie
Management teams
Employees
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Governance – management by
bodies
The corporate governance is
 Collective
 Democratic
 Responsible
 Legally framed
 Well structured
management
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Key forms of corporate governance : the
bodies
What is „a” body?
Body is a team, members created by
delegation, nomination or election
(voting)
Body has a leader (heading), named
chairperson
Bodies have legal background
Body has a bylaw
Bodies have responsibilities by law
or by the status of the body
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Bodies in the international
corporate governance




General Assembly, the body of owners
(shareholders)
Board; members are elected by the
General Assembly. (In Germany board
members are elected by the Supervisory
Board)
Supervisory Board; members are
elected by the General Assembly. (In
US/UK no Supervisory Board)
Management team (not defined by law)
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Key Actors of Bodies





Chairwoman/chairman of the General
Assembly, elected by the owners
Chairperson of the Board/Supervisory
Board, elected by body members
Board Committee leaders, nominated by
the Board
Top management (executives), nominated
by the Board
Independent external auditor, contracted
by the management or the Board,
accepted by the General Assembly
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
New corporate governance rules between 1994-2006
The different rules
1994
1998
2002
2006
Renumeration pay by performance
May
May
MUST
MUST
Renumeration disclosure
May
May
May
MUST
Audit committee creation
May
MUST
MUST
MUST
Audit committee independence
May
MUST
MUST
MUST
Board independence
May
MUST
MUST
MUST
Removal of cross-shareholding
May
May
MUST
MUST
Liability of the Board
May
May
May
MUST
Comply or explain
May
May
May
MUST
Separation of Chairman and CEO
May
May
May
May
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Two side of the governance: business
judgement rule and checks/balances



Rule granting directors of publicly listed
companie’s immunity from liability if their actions
were executed in good faith, using sound
business judgement and exercised with resonable
care.
It also refers to the defence of corporate
sovereignty, which means that courts do not
intervene into company’s affaires until the
decisions of the company are in accordance with
good faith and resonable care.
On the other hand there are rules and processes
for governance and control of private sector
companies, which balance the authonomy
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
The balancing institutions


The most important balances are the
corporate governance rules, and
bodies, and structures,
The other types of important
balances are rules determining fair
behavior in business relations:
• The code of ethics, and
• The business culture
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
The stories of corporate disasters
Dominant CEO („one
man” show)
Poor strategy
Conformist culture
Ill-judged acquisitions,
over-expansions
Greed, hubris,
irresponsibility
Accidental external trigger
Disaster
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Inadequate control environment
Inadequate control environment
Ineffective board
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005
Corporate social responsibility
Corporate social responsibility (CSR) is
a company’s obligation to be
accountable to all of its stakeholders
in all its operations and activities with
the aim of achieving sustainable
development not only in the
economical dimensions but also in the
social and environmental dimensions.
Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005