Corporate Governance

Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation Concerned with identifying ways to ensure that strategic decisions are made more effectively. Used in corporations to establish order between the firms owners and its top-level managers whose interests may be in conflict.

o Role of Board
Monitor (Monitor developments inside and outside the corporation) Evaluate and influence(Review proposals, advise, provide suggestions and alternatives) Initiate and determine The board of directors has an obligation to approve all decisions that mght affect the long run performance of the corporation.

o Responsibilities of the board

Setting corporate strategy, overall direction, mission or vision Hiring and firing the CEO and top management Controlling, monitoring, or supervising top management Reviewing and approving the use of resources Caring for shareholder interests

Role of BOD in the strategic management process

Monitor: Keep abreast of developments both outside & inside the company Bring to managements attention developments it might have overlooked. Evaluate and influence: Examine mgts proposals, decisions, & actions. Agree or disagree with them; give advice, offer suggestions & outline alternatives (if any). Initiate and determine:

 Delineate a companys mission & vision; and specify strategic options to management

Members of board of directors:

Inside directors are officers or executives employed by the boards corporation Officers or executives employed by corporation About 20%/60% in large/small US firms Management directors the firms CEO and other top-level managers Outside directors are executives of other firms but are not employees of the boards corporation Non-management directors May be executives of other firms but not employed by boards corporation individuals who are independent of the firms day-to-day operations and other relationships About 80%/40% in large/small us firms

Agency Theory
Problems arise in corporations because the agents (top management) are not willing to bear responsibility for their decisions unless they own a substantial amount of stock in the corporation.

Stewardship Theory
Executives tend to be more motivated to act in the best interest of the corporation than their own self-interests. Theory argues that over time, senior executives tend to view the corporation as an extension of themselves.

Codetermination The inclusion of a corporations workers on its board of directors Interlocking Directorates useful for gaining both inside information about an uncertain environment and objective expertise about potential strategies and tactics Direct Interlocking Directorate When two firms share a director or when an executive of one firm sits on the board of a second firm. Indirect Interlocking Directorate When two corporations have directors who also serve on the board of a third firm. Members of a Board of Directors 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

Election :Board of Director Membership

Willing to challenge management (95%) Special expertise (67%) Availability for advice and meetings (57%) Expertise on global issues (41%) Understands key technologies (39%) External contacts valuable to the firm (33%) Detailed knowledge of industry (31%) High visibility in field (31%) Accomplished in representing firm to stakeholders (18%)

Corporate Stakeholders: Stakeholders are individuals, groups or institutions who have a stake in or are significantly influenced by an organizations decisions and actions Shareholders Governments Political & social action groups Employees Customers Communities Suppliers Trade Associations Stakeholder analyss is the identification and evaluation of corporate stakeholders.This can be done in 3 step process. 1. Primary stakeholders have a direct connection with the corporation and have sufficient bargaining power to directly affect corporate activities 2. Secondary stakeholders have an indirect stake in the corporation but are also affected by corporate activities 3. Estimate the effect on each stakeholder from a particular strategic decision

CHAPTER 3:SOCAL RESPONSBLTY AND ETHCS N STRATEGC MANAGEMENT

Social Responsibility: proposes that a private corporation has responsibilities to society that extend beyond making a profit. RESPONSBLTES OF A BUSNESS FRM: There are 2 contrasting views of the responsibilities of business firms to society: 1.Friedmanss traditional view of business responsibility 2.Carrols four responsibilities of business
Milton Friedman's view on business responsibility accentuates the importance of maximising firm's value. Archie Carroll on the other hand, creates a wider window of responsibility by incorporating social responsibility into the formula.

1. Friedmanss traditional view of business responsibility:

Milton Friedman dictates that firms' primary responsibility is to maximise shareholder revenue and should overcome all hindrances in the environment to do so. This would include having employees work long hours, maintaining high prices or even sidelining the importance of environmental safety. Friedman believes that if firms continue to operate this way, bearing in ming legal implications, the long-run success of the economy is justified just by the firms driving the economy through their profits.

Primary goal of business is profit maximization not spending shareholder money for the general social interest 2. Carrols four responsibilities of business:
Archie Carroll on the other hand illustrates a wider scope of responsbility. There are four segments to his model, which comprise of economic, legal, ethical and discretionary responsibilities. Business firms have four responsibilities

(a) Economic (b) Legal (c) Ethical Follow generally held beliefs about how one should act in society Work with employees & community in planning for layoffs, though no laws requiring this Many people expect firms to do these things Purely voluntary obligations a firm assumes Philanthropic contributions, training hard-core unemployed, providing daycare centers, etc. Many people do not expect firms to do these things Defined by governments in laws that management is expected to obey Produce goods & services of value to society so that the firm may repay its creditors and stockholders

(d) Discretionary

Decision making, your ethics are your personal standards of right and wrong. They are your basis
for making ethically sensitive decisions.
Reasons for Unethical Behavior Unaware that behavior is questionable Lack of standards of conduct Different cultural norms and values Behavior-based or relationship-based governance systems Different values between business people and stakeholders

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. Most managers have probably used one of the four types of moral relativism:

1.Naive relativism holds that every person has his or her own standard that enables him or her to make choices. 2.Role Relativism distinguishes between our private selves and our public roles. 3.People refer to social norms to render ethical judgments. 4.Cultural relativism holds that there is no universal moral code by which to judge another society's moral and ethical standards.

Kohlbergs Levels of Moral Development

Preconventional Level Concern for self Conventional Level Consideration of laws and norms Principled Level Adherence to internal moral code

Code of Ethics: Specifies how an organization expects its employees to behave while on the job.
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Ethics- the consensually accepted standards of behavior for an occupation, trade, or profession Morality- the precepts of personal behavior based on religious or philosophical grounds Law is the formal codes that permit or forbid certain behaviors and may or may not enforce ethics or morality

Approaches to Ethical Behavior Utilitarian: Actions and plans judged by consequences Individual Rights: People have fundamental rights to be respected in all decisions Justice : Distribution of costs and benefits to be equitable, fair, and impartial

Cavanaghs questions to solve ethical problems: 1. Utility- does it optimize the satisfactions of the stakeholders? 2. Rights- Does it respect the rights of the individuals involved 3. Justice- Is it consistent with the canons of justice?

CHAPTER 4: ENVRONMENTAL SCANNNG AND INDUSTRY ANALYSIS

Environmental scanning- the monitoring, evaluation and dissemination of information from the external and internal environments to key people within the corporation.

Natural environment 1. Physical resources 2. Wildlife 3. Climate Societal environment: social systems that influence long-term decisions 1. Economic forces 2. Technological forces 3. Political-legal forces 4. Sociocultural forces Task environment: Elements or groups that directly affect a corporation and are affected by it 1. 2. 3. 4. 5. 6. 7. 8. Government Local communities Suppliers Competitors Customers Creditors Unions Special interest groups/trade associations

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Industry analysis- an in-depth examination of key factors within a corporations task

environment. STEEP Analysis- monitoring trends in the societal and natural environments. The purpose of STEEP is to look at five areas that can influence the marketplace or business environment. It provides an understanding of the drivers behind the trends and therefore is a good tool to use when making business decisions. Sociocultural- Data about people Technological- Data about scientific and technological developments Economic- Data about international, national, regional and local economies Ecological- Data related to energy Political-legal forces- Data about government policies, legislation, regulation

Probable impact on corporation

Probability of occurrence

One of the simplest ways to prioritize your companys responses to customer information is a Priority Matrix. This is a chart with one axis measuring how important customers view an issue and the other axis measuring how well you are performing in that area. Areas that rate high in importance and low in performance should be your priority issues.

Used to identify and analyze developments in the external environment

Industry Analysis:Analyzing the task environment Industry A group of firms producing a similar product or service, such as soft drinks or financial services.

Porters 5 forces: Threat of new entrants Rivalry among existing firms Threat of substitute products Bargaining power of buyers Bargaining power of suppliers Relative power of other stakeholders

1.Threats of new competitors entering the market. The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. The possible barriers to entry: economies of scale product differentiation

capital requirements switching costs access to distribution channels cost disadvantages independent of size governmental policy

2. Intensity of rivalry among firms in the industry.Corporations are mutually dependent.Intense rivalry is related to the presence of several factors: number of competitors rate of industry growth product or service characteristics amount of fixed costs capacity height of exit barriers diversity of rivals

3. Substitute products or services are those products/services that appear to be different but can satisfy the same need as another product/service. 4. Bargaining Power of Buyers- ability of buyers to force prices down, bargain for higher quality, play competitors against each other Large purchases Backward integration Alternative suppliers Low cost to change suppliers Product represents a high percentage of buyers cost Buyer earns low profits Product is unimportant to buyer

5. Bargaining Power of Suppliers- ability of suppliers to raise prices or reduce quality Industry is dominated by a few companies Unique product or service Substitutes are not readily available Ability to forward integrate Unimportance of product or service to the industry

Industry Evolution

Fragmented industry- no firm has a large market share and each firm only serves a small piece of the total market in competition with other firms No dominant industry

Consolidated industry- domination by a few large firms, each struggles to differentiate products from its competition Dominated by a few large firms

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Categorizing International Industries Multi-domestic Industries- specific to each country or group of countries Global Industries- operate worldwide with multinational companies making only small adjustments for country-specific circumstances Regional industries- multinational companies primarily coordinate their activities within regions

Continuum of International Industries

Strategic Types
MLES AND SNOW TYPOLOGY: Defender: protect market share hold current position Analyser: seek market opportunities but protect existing areas hold market share but with some innovation Prospector: find new opportunities exploit and take risks Reactor: respond only to others often late and inadequate

Hypercompetition
Creates a condition of disequilibrium and change Competitive advantage comes from: knowledge of environment willingness to take risks Cannibalization of own products

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Industry matrix: (external factor evaluaton!!!) t summarizes the key success factors withn a particular ndustry.matrix gives a weight for each factor based on how important that factor is for success within the industry. The matrix also specifies how well varous compettors in the industry are respondng to each factor. 1. List the 8 to 10 factors that appear to determne success in the industry. 2. Assign weight to each factor,from 1.0 (most mportant)to 0.0(not mportant) based on that factors probable mpact on the overall ndustrys current and future success. 3. Examne a partcular company wthn the ndustry. 4. Multply the weght n column 2 for each factor by ts ratng n column 3 to obtan that factors weighted score for company A. 5. Examne a second company withn the ndustry n ths case , company B. assgn a ratng to each key success factor from 5.0(outstandng ) to 1.0(poor). 6. Multply the weght n column 2 for each factor tmes ts ratng n column 5 to obtan that factors weighted score for company B. 7. Finally,add the weighted scores for all the factor s n column 4 and 6 to determne the totatl weighted scores for companies A and B . the total weighted score indicates how well each company is respondng to current and expected key success factors n the ndustry s envronment.

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EFAS TABLE(External factors analysis summary)

1. List opportunities and threats (510 each) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factors probable impact on the companys strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the companys response to that factor. 4. Multiply each factors weight times its rating to obtain each factors weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment.

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