CHAPTER 9 & 10

STRATEGIC CONTROL AND CORPORATE GOVERNANCE

Strategic Control
This is the process of monitoring and correcting deviations from the firms strategy and performance

According to Schendel and Hofer: "Strategic control focuses on the dual questions of whether: (1) the strategy is being implemented as planned; and (2) the results produced by the strategy are those intended. It involves both the exercise of : Informational Control Behavioural Control

Approaches to Achieving Informational Control Traditional Approach involves a sequential method of organisational control in which: Strategies are formulated and top management sets goals The strategies are implemented, and Performance is measured against predetermined goals at the end of the period (quarterly or annually) It is based on a feedback loop from performance management to strategy

 This method is appropriate when: The environment is stable and relatively simple Goals and objectives can be measured with a high level of certainty But the global business environment is fluid and complex The lengthy time lags makes the organisation less responsive to changes in its environment.

Contemporary Approach
The control process is interactive and dynamic The internal and external environments are continually monitored
Identifying trends and events that signal the need to revise strategies, goals and objectives

The strategy itself may be modified if necessary

 This model ensure both informational and Behavioural controls Informational Controls (doing the right things) It deals with the firms strategic context and seeks to ensure that the organisations goals and strategies fit with the context of its strategic environment. Under the contemporary approach, informational control: a. Is an ongoing process b. Involves a double-loop learning process c. The organisations assumptions, premises, goals , and strategies are continuously monitored, tested and reviewed.

 This is a method of organisational control in which a firm influences the actions of employees through culture, rewards and boundaries. Elements of behavioural control

Behavioural Control doing things right

 This is a system of shared beliefs that shape a companys people, organisational structures, and control systems to produce behavioural norms. The organizational culture sets implicit boundaries (unwritten standards of acceptable behavior)
Dress Ethical matters The way an organization conducts its business It encourages individual identification with corporate goals and objectives, and Acts as a means of reducing monitoring costs

Organisational Culture

Motivating with Rewards and Incentives

Rewards and incentives are a powerful motivator and control mechanism. They must reinforce basic core values and enhance cohesion and commitment to goals and objectives. Features of an Effective Reward System The objectives must be clear, well understood and broadly accepted Rewards must be linked to performance and desired behaviours Performance measures must be clear and visible Feedback must be prompt, clear and unambiguous The compensation system must be perceived to be fair and equitable It must be flexible

Setting Boundaries and Constraints

Boundaries and constraints: Help focus individual efforts on strategic priorities Provide short term objectives and action plans to channel efforts Improve efficiency and effectiveness Minimise improper and unethical conduct

Evolving from Boundaries to Rewards and Culture

Boundaries can become internalised by combining a strong culture with a system of rewards and incentives. This can be achieved by: Hiring the right people Investing in training Providing managerial role models Aligning rewards with organisational goals and objectives

 "Corporate governance involves a set of relationships between a companys management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Monks and Minnow define it as, the relationship among various participants in determining the direction and performance of corporations

Meaning of Corporate Governance

The primary participants are: Shareholders Management The board of directors The purpose of corporate governance is to ensure an alignment between the interests of shareholders and those of managers in order to minimise potential conflicts. Good corporate governance plays an important role in the investment decisions of firms and reflects positively both the firms bottom line and share price on the stock exchange.

 The corporation is a mechanism created to allow different parties to contribute capital, expertise and labour for the maximum benefit of each party. According to the agency theory: 1. the goal of management and shareholders may conflict 2. It is difficult or expensive for the shareholders to verify what management is actually doing 3. shareholders and management may have different attitudes and preferences towards risk

Separation of Ownership from Control

 It seeks to align the interests of shareholders and managers by: 1. Appointing a committed and involved board of directors 2. Shareholder Activism actions by shareholders to protect their interests when they feel that managerial actions of a corporation diverge from shareholder value maximisation 3. Managerial rewards and incentives can be designed such that it aligns the interests of the CEO and top executives with those of the shareholders.

Role of Corporate Governance

 These are measures that are activated and are outside the control of the corporate governance system. They include: The market for corporate control which imposes a takeover constraint Appointment of external auditors Banks and analysts alert the investing community about positive and negative developments Regulatory bodies Media and public activists shape public perceptions about the companys financial prospects and quality of its management. Watchdog groups also act to ensure good corporate governance

External Governance Control Mechanisms

Principal to Principal Conflicts

this is a conflict between two classes of principals (controlling shareholders and minority shareholders) within the context of the corporate governance system This is common in emerging economies with weak legal protection for minority shareholders and concentrated family ownership.

 There is a dominant owner or group of owners who have interests distinct from minority shareholders There is enough motivation for the controlling shareholders to exercise their dominant positions to their advantage There are few formal (legislation or regulatory bodies) or informal constraints In such a situation, controlling shareholders expropriate minority shareholding to the formers advantage.

Conditions for Principal to Principal Conflicts