Corporations: Complicated vs. Complex

• Corporations..
  • Complex, dynamic organisms
  • Present themselves as complicated, mysterious, and impenetrable mazes of activity
• To Understand How..
  • Corporations act, you must understand how Corporations think
  • Corporations think, you must understand what they say
• What Corporations..
  • Say is not always what they mean
  • Mean is not always what you hear

Evolution of Successful Corporations

• Function much like living organisms 
• Survival depends much more on adaptability than size
• Growth tends to slow decisions
• Predators need a steady supply of prey
• Don't hunt for opportunity, use their own resources to grow their own

Public vs. Private Corporations

• Public: have to disclose information about themselves
• Private: do not have to disclose information

Corporate Style: Economic vs. Political

• Corporation is two separate organisms who are rarely in sync with each other
  • Economic: thrives on logic and process
  • Political: thrives on power and personality

• Stakeholders are often caught in the cross-fire
  • Boards are the official "arrow catchers"
  • Independent directors better at blocking
  • Inside directors better at ducking

Corporate Politics: Warning signs you're in the wrong group

• Self-promoters
• Insinuators
• Magicians
• Strategists
• Bullies

Corporate Politics: Warning signs you're in line to "lose"

• Risky assignments
• Responsibilities reduced
• Responsibilities raised
• Sudden upward move in your position
• Paid extremely well
• Asked to relocate
• Advancement has stalled
• Get a new manager

Corporate Politics: Top 10 ways to improve odds of winning

1. Establish a strong personal profile
2. Use communications consistently and effectively 
3. Support your colleagues
4. Be a problem solver, not a problem finder
5. Practice "dancing on the edge of the knife"
6. Your management's priority IS your priority
7. Demonstrate your skill and ability
8. Think long term
9. Support your boss
10. Build your own political "clout" base

Questions Related to Corporate Strategy

1. In which business arenas should a company compete?
2. Which vehicles should it use to enter/exit a business?
3. What underlying economic logic makes it sensible to compete in multiple businesses?
4. How do we create synergies between our businesses?

Evolution of Diversification in the U.S.

• 1st form probably vertical integration
  • Ex: GM operated steel plants
• 1960s: firms entered industries unrelated to core business because of anti-trust restrictions
• Large number of firms became conglomerates 
  • i.e. corporation involved in many unrelated businesses
• Conglomerates less common over time, increase in collections of related businesses

Portfolio Planning with Diversification

• Practice of diversified businesses or products based on their relative strengths and market attractiveness
• Developed as a tool for addressing the challenges of managing multi-business firms

Categories of Business Units in Portfolio

• Stars: High competitive position/market share, High industry attractiveness or growth rate

• Cash Cows: High competitive position/market share, Low industry attractiveness or growth rate
  • Revenue should be used to develop stars or problem children

• Problem Children: Low competitive position/market share, High industry attractiveness or growth rate

• Dogs: Low competitive position/market share, Low industry attractiveness or growth rate
  • Should be sold

Limitations and Benefits of Portfolio Planning

Limitations

• No economic logic to help in deciding what businesses to enter in the first place
• No help in identifying synergies across businesses
• No help in evaluating resources/capabilities as sources of success in business

Valuable Diversification

• Does not create shareholder value in and of itself, could dissipate value 
• Potential Value Creators
  • Geographic Diversification
  • Horizontal Diversification
  • Vertical Diversification/Integration

Geographic diversification

• "Internationalization": entering new markets in other parts of the world
• Expand into new geographic arenas without altering its business model
• Benefits firms with high R&D costs (pharmaceuticals)
• Ex: Wal-Mart expanded into Europe

Horizontal Diversification

• Extend to which firm participates in related market segments or industries outside its existing value-chain activities
• Key is relatedness of different businesses in corporate portfolio
• Ex: Coke and Pepsi expanded into water, Brinker International expanded with Maggianos, Mac Grill and Chili's

Vertical Diversification

• When a firm vertically integrates
• Ex: Pulte Homes Inc. created Pulte Mortgage LLC

Sources of Benefits from Diversification

• Economies of Scope Synergies
• Revenue-Enhancement Synergies

Economies of Scope Synergies

• HELP THROUGH LOWER COSTS
• Lower price of a common resource by combining purchases
• Share manufacturing capacity to reduce average costs
• Share marketing resources to reduce average marketing costs
• Share distribution to reduce average distribution costs
• Can be achieved across all value chain activities

Revenue Enhancement Synergies

• Bundle products to appeal to new customers
• Cross sell to existing customers

Related vs. Unrelated Diversification

• Unrelated: when company owns many businesses in very disparate industries
  • Nimbleness, Response time
  • In dynamic markets, diversification can hinder competitiveness
• Related: when company owns fewer businesses in similar/related industries
  • Economies of Scope, Revenue Enhancement

Executives Ulterior Motives for Diversification

• Risk reduction-earnings fluctuations
  • More efficient for investors to diversify themselves
• Empire building
  • Rarely results in higher shareholder value or margins
• Compensation
  • Acquisition motivated by executive pay

Strategies for entering attractive new businesses

• Focus on a niche
  • Ex: Red Bull vs. Coke and Pepsi, Under Armour
• Leverage existing resources and capabilities
  • Ex: Wal-Mart leveraged distribution capabilities to enter soft drink industry (Sam's Choice cola)
• Use a revolutionary strategy

Diversification is more likely to contribute to competitive advantage when..

• Firm has VRINE resources that are also general
• Firm has the right structures, systems and processes given its level of diversification

Corporate Strategy Implementation Issues

• Coordination Systems
  • More relatedness means greater need for mechanisms for coordinating across business units
  • More resource sharing across business units
• Compensation Systems
  • Low relatedness: managers based on performance of their business unit
  • High relatedness: managers based on performance of whole corporation
• Corporate-Level Oversight
  • Low relatedness: Corporate oversight resources are less needed
  • High relatedness: needed to facilitate resource sharing and cooperate

Strategic Alliance

• Relationship in which two or more firms combine resources and capabilities in order to enhance the competitive advantage of all parties
• One vehicle for realizing a strategy

Benefits of Strategic Alliances

• Companies which participate most actively in alliances outperform the least active firms by 5-7%
• Share investments and rewards
• Reduce risk
• Reduce uncertainty
• Focus resources on what each partner does best
• Foster economics of scale and scope

Benefits of Strategic Alliances: Joint Investment

• Increase returns by encouraging firms to make investments they'd be otherwise unwilling to make
• Ex: Wal-Mart supplier becomes willing to invest in new equipment

Benefits of Strategic Alliances: Complementary Resources

• Opportunity to create a stock of resources that is unavailable to competitors, can create shared advantage
• Ex: Nestle and Coke combined resources to officer canned tea and coffee products

Benefits of Strategic Alliances: Knowledge Sharing

• Consistent information-sharing routines enhances learning
• Ex: John Deere exchanges key employees with alliance partner Hitachi

Benefits of Strategic Alliances: Informal Management

• Alliances may make it more cost effective to manage an activity than arm's-length transactions or acquisitions

Alliances may serve to build a competitive advantage if..

1. Rivals cannot ascertain what generates the returns because of casual ambiguity surrounding the alliance
2. Rivals can figure out what generates the returns but cannot quickly replicate the resources owing to time decompression diseconomies
3. Rivals cannot imitate practices or investments because they are missing complementary resources and current costs associated with prior investments are now prohibitive
4. Rivals cannot find a partner with the necessary complementary strategic resources
5. Rivals cannot access potential partners' resources because they are indivisible 
6. Rivals cannot replicate a distinctive and socially complex institutional environment that has the necessary formal and informal controls that make managing alliances possible

Motivation for Alliances: 1970s

• Product performance focus
  • Produce with latest technology
  • Market beyond national borders
  • Sell product stressing performance

Motivation for Alliances: 1980s

• Position Focus 
  • Build industry stature
  • Consolidate position
  • Gain economies of scale and scope

Motivation for Alliances: Post 2000

• Learning and Capabilities Focus
  • Ensure constant stream of new prospects with advancing technology
  • Proactively maximize delivered value
  • Optimize total cost by product/customer segment
  • Gain advantage in response to changing conditions and responsibilties

General Types of Alliances

• Joint Venture
  • two firms make equity investments in a theird legal entity
• Equity Alliance
  • one or more partners assumes a greater ownership interest in either the alliance or other partner
• Non-Equity Alliance
  • Involves neither the assumption of equity interest nor the creation of separate organizations
• Consortia (Multi-Party Alliance)
  • Association of several companies and/or government for some definite strategic purpose

Type of Alliance: Transactional, Non-equity

• No Linkages beyond Transaction
  • Simple purchase order for commodities, spot transaction
  • Purchase agreements that are renewable annually or every several years
• Information Sharing
  • Short-term agreements on functions like advertising or manufacturing to achieve efficiencies
    • Ex: Anheuser Busch contract Miller
  • Agreements to distribute products or services 
• Asset, Resource, and Capability Sharing
  • Short-term agreements on functions like advertising or manufacturing 
  • Cross-licensing like that between Disney and Pixar or R&D partnerships like Millennium Pharmaceuticals and its smaller partners

Type of Alliance: Non-equity, long-term

• No Linkages Beyond Transaction
  • Outsourcing
• Information Sharing
  • Many technology standards consortia
• Asset, Resource, and Capability Sharing
  • Ex: technology collaborations like the PowerPC chip between Motorola, IBM and Apple

Type of Alliance: Equity, Long-Term

• Cross-Equity: Partners take ownership in one party or each other
  • Anheuser-Busch's cross ownership with Kirin in Japan and Modelo in Mexico
• Shared Equity
  • Stand-alone joint ventures like Dow-Corning

Type of Alliance: Equity, Permanent

• Cross Equity
  • Keiretsu in Japan or Chaebols in South Korea
• Shared Equity
  • Caltrex, which was jointly owned by Chevron and Texaco prior to their merger

Types of Alliance Partners

• Rivals
• New Entrants
• Suppliers 
• Customers
• Substitutes
• Complementors

Vertical Alliance

• Partner with one or more suppliers or customers
• Typically done to create more value for the end customer and to lower total production costs along the value chain
• Ex: Timkin and suppliers

Horizontal Alliance

• Partner with a rival or potential competitor to gain access to multiple segments of the industry and reduce risk, improve efficiency, or foster learning
• Ex: Mondavi and top foreign wine producers

Co-opetition

• The notion that companies are complementers when they make markets and competitors when they divide markets
  • Relationship called a value net
• Situation in which firms are simultaneously competitors in one market and collaborators in another
• Purpose: find ways of increasing the total value created by parties in the value net (competitors, customers, complementers, suppliers), not just determining how to compete for industry profits

Risks from Alliances

• Poor contract management
• Misrepresentation of resources and capabilities
• Misappropriation of resources and capabilities
• Failure to make complementary resources available
• Being held hostage through specific investments
• Misunderstanding a partner's strategic intent

Levers for Increasing the Probability of Alliance Success

1. Understand the determinants of trust
2. Be able to manage knowledge and learning
3. Understand alliance evolution
4. Know how to measure alliance performance
5. Create a dedicated alliance function

Benefits of Trust

• Cycle: Dedicated Asset Investments, Knowledge Sharing Routines, Inter-Firm Trust
• Trust is one party's confidence that the other party in the exchange relationship will fulfill its promises and commitments and will not exploit its vulnerabilities
• Doesn't adhere to alliances and classical economic perspective but..
  • Trust lowers transaction costs, search costs, contracting costs, monitoring costs, enforcement costs
  • Trust increases knowledge sharing and increases investments in dedicated assets

Relational Quality of Trust

• Initial Conditions 
• Negotiation Process
• Reciprocal Experiences
• Outside Behavior

Components of a Dedicated Alliance Function

• Alliance Business Case
• Partner Assessment and Selection
• Alliance Negotiation and Governance
• Alliance Management
• Assessment and Termination 

Questions to ask when determining when partners fit

• Strategic fit?
• Resource fit?
• Cultural fit?
• Structural fit?

Merger vs. Acquisition

• Merger
  • Consolidation or combination of one firm with another
• Acquisition
  • The purchase of one firm by another so that ownership transfers

Motivations for Mergers and Acquisitions

1. Managerial Self-Interest (Managerialism): Manager can conceivably make acquisitions and even willingly overpay them to maximize their own interests at the expense of shareholder wealth
2. Hubris: Managers may make mistaken valuation and have unwarranted confidence in their valuation and in their ability to create value because of pride, over-confidence and arrogance
3. Synergy: Managers may believe that the value of the firms combined can be greater than the sum of the two independently
   1. Reduced threats, Increased market power and access, Realized cost savings, Increased financial strength, Sharing and leveraging capabilities

Why Mergers and Acquisitions enhance shareholder value..

1. Reducing specific threats
   1. Backward integration to reduce threats from powerful suppliers
2. Increasing market power and access to markets
3. Cost savings
   1. Economies of scope (or scale economies)
4. Enhancing financial strength
5. Sharing and leveraging capabilities
   1. Absorbing/assimilating target firm's resources and capabilities, especially target firm's knowledge
   2. Combining firm resources/capabilities to create valuable and rare bundle of resources

Criticism of Acquisitions as a Vehicle

• Partly by-product of highly visible examples of acquisitions that turned out badly  
• Examples
  • Quaker's acquisition of Snapple
  • AT&T's acquisition of NCR
  • AOL's acquisition of Chrysler

Benefits and Drawbacks of Acquisitions over Internal Development

Benefits

• Speed
• Critical Mass
• Access to complementary assets
• Reduced competition

Types of Acquisitions: Vertical 

• To secure reliable supply of important input
• Create more value for end customers by improving upstream or downstream activities
• Reduce total production costs across the value chain

Types of Acquisitions: Horizontal

• Goal is typically to expand acquirer's product offerings

Type of Acquisitions: Complementary

• Goal is to acquire complementary resources/capabilities that can benefit acquiring firm or both firms
  • Ex: Best Buy's acquisition of Geek Squad

Classification of Acquisitions: Overcapacity

• Example
  • DaimlerChrysler merger
• Objectives
  • Eliminating capacity, gaining market share and increasing efficiency

Classification of Acquisition: Roll-up

• Example
  • Service Corporation International more than 100 acquisitions of funeral homes
• Objectives
  • Efficiency of larger operations 
    • Economies of scale, superior management

Classification of Acquisitions: Product/Market Extension

• Example
  • Pepsi's acquisition of Gatorade
• Objectives
  • Synergy of similar but expanded product lines or geographic markets

Classification of Acquisitions: R&D

• Example
  • Intel's dozens of acquisitions of small high tech companies
• Objectives
  • Short cut to innovation by buying it from small companies

Classification of Acquisitions: Industry Convergence

• Example
  • AOL's acquisition of Time-Warner
• Objectives
  • Anticipation of new industry emerging; culling resources from firms in multiple industries whose boundaries are eroding

Acquisitions: Pricing and Premiums

• Factors in determining offer price
  • Current market value
    • Stock price, number of outstanding shares
  • Intrinsic value
    • Value of target for a particular buyer/owner
  • Purchase price = price actually paid
    • Almost invariably exceeds market price prior to news of potential acquisition
• Premium
  •  
    • Difference between market value before news of acquisition and purchase price
    • Recent Avg: 30-45%
• Walk-away price
  • Price at which acquirer would nix a prospective deal 
  • Acquirers should set a walk-away price early in the process

Problems of Acquisition Premiums: The Synergy Trap

1. Premiums increase the level of returns the combined businesses must extract
2. The longer it takes to implement performance improvements, the more likely the acquisition will fail

The Acquisition Process

• Decision-Making Process Problems
  • 1. Idea
  • 2. Justification due diligence, negotiation
    • Strategic Assessment: process of determining how an acquisition will contribute to overall strategy and competitive position.
• Integration Process Problems
  • 3. Acquisition integration
  • 4. Results

Two Issues of Integrating and Implementing an Acquisition

• Extent to which strategic interdependence is rationale for acquisition 
  • Greater strategic interdependence argues for greater integration
• Extent to which acquired firm needs autonomy to continue to be valuable
  • Valuable employees of acquired firm may leave if too much autonomy is lost

Lessons from Successful Serial Acquirers

• Implementation is a process not an event so start early
• Integration is a full-time job
• Make key decisions quickly
  • Greater "efficiencies" is an explicit goal of many acquisitions
• Integration should address cultural as well as technical issues

M&A and Industry Life Cycle

• Introduction
  • Tends to be R&D and product-related
• Growth
  • Tends to be for acquiring products that are proven and gaining acceptance
• Maturity and Decline
  • Primarily for dealing with over capacity in the industry

Hui: Model Company for Strategic Implementation 

1. Structure: A flat structure facilitates the flowing of information and fast decision-making 
2. Systems: Systems are in place to support the firm's growth strategy through innovation
3. People: Selection and retention of people are rigorously managed
4. People (Culture): Selection and retention reinforces a culture that values innovation

Strategic Formulation and Implementation

• Formulation: The central, integrated, externally oriented concept of how we will achieve our objectives
• Cycle between Formulation and Implementation 
  • Decision-Making: Arenas, Staging, Vehicles, Differentiators, Economic Log
  • Implementation Levers and Strategic Leadership

When a firm is experiencing difficulties or success

3 questions

1. Is its strategy flawed?
2. Is the implementation of its strategy flawed?
3. Are both strategy and implementation flawed?

Examples of the "Knowing-Doing" Gap

Internal and External Resistance

Key Facets of Strategic Implementation 

• Intended Strategy becomes Realized and Emergent Strategies through Implementation Levers and Strategic Leadership
• Implementation Levers
  1. Organization Structure
  2. Systems and Processes
  3. Peoples and Rewards
• Strategic Leadership
  1. Lever and resource allocation decisions
  2. Communicating the strategy to stakeholders

Implementation Levers: Organizational Structure

• Gets most attention, most visible 
• Relatively stable arrangement and division of responsibilities, tasks, and people within an organization 
• Framework that management has devised to divide tasks, deploy resources, and coordinate departments
• Two Essential Functions
  1. Ensures control of resource allocation
  2. Coordinates information, decisions, activities of employees

Influence between Structure and Strategy

• Traditional view is that strategy determines structure
  • Structure should be aligned with strategy
• BUT structure can also shape strategy
  • Ex: Air Liquide, locate personnel at client sites

Forms of Organizational Structure

1. Functional
2. Multi-divisional

3. Matrix

4. Network

5. Partnerships

6. Franchises

Organizational Structure: Functional

• Corporate Office
  • Finance
  • Marking/Sales
  • Operations
  • R&D
• Organizing activities according to the specific functions that a company performs
• Ex: Platypus Technologies has 30 employees organized into small departments: Finance, Marking, HR and R&D

Organizational Structure: Multidivisional

• Headquarters
  • Business Group: product or geographic region
  • Business Group A: Finance, Marketing, Operations
  • Business Group B: Finance, Marketing, Operations
• One solution to problems of managing activities in multiple geographic markets or managing multiple products
• Ex: GM is organized according to product division (GM Trucks, Chevrolet, Buick, Cadillac) 

Organizational Structure: Matrix

• Hybrid between functional and multi-divisional structure
• Form of organization in which specialists from functional departments are assigned to work for one or more products or geographic units
• Goal of matrix approach is to get benefits of both functional and divisional ways of organizing

Organizational Structure: Network

• Small, semi-autonomous and potentially temporary groups brought together for a specific purpose
• Ex: Gore Industries' 6,000 employees spread across the world, work in small teams and are encouraged to seek out colleagues on their own

Partnership vs. Franchises

• Partnerships
  • The company is organized as a group of partners who own shares or units in the corporation
  • Ex: Most law firms
• Franchises
  • Company not only transfers ownership of local facilities to franchisees but franchisees take on all local management responsibility
  • Ex: Burger King

Too much focus on financial accounting performance measures can..

• Cause managers to lose sight of long-term strategic initiatives
• Divert attention from other key stakeholders
• Potential solution: Balanced Scorecard System

Implementation Levers: Systems and Processes

Balanced Scorecard (BSC) System 

• Balanced Scorecard: Generic term for performance measurement and management systems
• Seek to balance concerns with short-term financial performance and need to pursue longer-term (often intangible) objectives

Balanced Scorecard System supports..

• Translating strategy into tangible and intangible performance metrics
• Using a strategy map to ensure that metrics are aligned with strategy
• Making Strategy a continuous and dynamic process

BSC Systems: Four Perspectives on Performance

• Financial
  • Growth
  • Profitability
• External Relations
  • Customers/customer satisfaction
  • Other external stakeholders
• Internal Business Processes
  • Internal processes with implications for shareholders and customers
• Learning and Growth Perspective
  • Change, innovation, and growth
• For each perspective you need to develop objectives, measures, targets and initiatives (activities)

BSC System Strategy Map: Learning and Growth Perspective

• Organizational Capital
  • Culture
  • Leadership
  • Alignment
  • Teamwork
• Information Capital
• Human Capital
• Managers should indicate what needs to be done in terms of people, product and process development
• Leads to Internal Perspective

BSC System Strategy Map: Internal Perspective

• Operations Management Processes
  • Supply, Production, Distribution, Risk Management
• Customer Management Processes
  • Selection, Acquisition, Retention, Growth
• Innovation Processes
  • Opportunity ID, R&D Portfolio, Design/Develop, Launch
• Regulatory and Social Processes
  • Environment, Safety and Health, Employment, community
• Leads to Customer Perspective

BSC System Strategy Map: Customer Perspective

• Customer Value Proposition
  • Product/Service Attributes
    • Price, Quantity, Availability, Selection, Functionality
  • Relationship
    • Service, Partnership
  • Image
    • Brand
• Leads to Financial Perspective

BSC System Strategy Map: Financial Perspective

• Long-Term Shareholder Value
  • Productivity Strategy
    • Improve Cost Structure
    • Increase Asset Utilization
  • Growth Strategy
    • Expand Revenue Opportunities
    • Enhance Customer Value

Implementation Levers: People and Rewards

• People: focus on people first, strategy second
  • Ex: JetBlue and Southwest Airlines both expend considerable effort making sure new hires will fit the firm
• Rewards: Serve as a force of control over outcomes or behaviors. Consists of..
  1. Performance evaluation and feedback
  2. Compensation 
     1. Salary, bonuses, stock, promotions, coveted office space
  • Ex: GE which owns several unrelated companies, links division manager pay to the performance of the unit they manage

People and Rewards: Positive and Negatives

Positives

• Many managers focus on minimizing costs of human resources (typically largest part of operating costs)
• Stock market tend to respond positively to downsizing
• Focusing on human capital has positive effects on several dimensions of operational performance
• Human Capital is key to competitive advantage
  • Retention is key!

Common Management Follies in Reward Systems

• We Hope For..
  • Long term growth
  • Teamwork
  • Setting stretch goals
  • Downsizing
  • Candor
• But we often reward for..
  • Quarterly earnings
  • Individual effort
  • Achieving basic goals
  • Adding key staff
  • Reporting good news (even if not true)

Two Main Responsibilities of Strategic Leadership

1. Making substantive implementation lever and resource allocation decisions
2. Communicating the strategy to key stakeholders

Strategic Leadership: Communicating with Key Stakeholders

• Internal
  • Upward
    • Convince top management of a new strategy
  • Downward
    • Enlist support of those who implement 
  • Across
    • Win support of other units within the firm
• External
  • Outward
    • Win cooperation of external stakeholders including customers and distributors

Three C's of Strategy Communication

• Contacts: Need connections with "influential others"
• Cultural Understanding: Need rich familiarity with organization's culture
• Credibility: Trustworthiness, reliability and integrity of leadership (of the communicators)
• When communicating with Key Stakeholders use the three C's in all directions

Corporate Governance

• The system by which organizations, particularly business corporations, are direct and controlled by their owners
• Broadly, determines how all stakeholders influence the corporation
  • i.e. Shareholders, Management, Board, Employees, Society, Environment 

Principals and Agents

• Principals: Shareholders of a firm
• Agents: Act on behalf of principals in managing the firm
• When interests are virtually identical, the agency problem is small and executives do what is in principals' best interests
  • However, interests often do not overlap. Then agents may act to detriment of principals and visa-versa)
    • Ex: Raise salaries and reduce returns

Roles and Actions of Board of Directors

• Monitoring
  • Executive compensation
  • Executive succession
  • Audit review
• Advice
  • Counseling CEO
• Advocacy
  • Relationships with lenders, suppliers and customers
• These roles and actions are intertwined within the cycle of strategy formulation/implementation and firm performance

Staggered Boards and Board Involvement

• Board elections are staggered so the entire Board does not turn over at once
• Nearly 2/3 of boards today are considered staggered
• Phantom Board: no involvement in the strategic management process of the firm
• Active Board: the public (and major stakeholders) have higher expectations for board involvement today

Incentive Alignment: Principals vs. Agents

• When conflicts of interest arise between principals and agents incentive alignment can solve such problems
• Example: Company receives a buy-out offer
  • Shareholders (principals) would benefit because price assures a good return on investment
  • Management (agents) resists because they may lose their jobs
  • Incentive Alignment: Boards can include "golden parachute" provisions in manager's compensation packages

Incentive Compensation

• Annual Bonus Plans: Oldest form of incentive pay. Board can evaluate executives' performance along multiple dimensions and allocate a year-end cash aware
• Stock Options: An employee receives the right to buy a set number of shares of company stock at a later date for a predetermined price
• Other Long-Term Incentives: Long-term bonuses linked to performance over several years. May help executives avoid short-term myopia and focus on long-term

Corporate Control

• Corporate Control: The right to choose members of the board of directors of a company and to control all major decisions made by a company
• Market for Corporate Control: Control over public corporations is traded and this theoretically puts some pressure on managers to perform, otherwise their corporation can be taken over
• Process: Shareholders elect Board who hire/fires Top Management who directs Corporation

Poor Corporate Governance

Recent Examples of Scandal-Ridden non-U.S. multinationals

• Netherlands Ahold Group (grocery stores)
• Italy's Parmalat (dairy and food products)
• France Vivendi (entertainment)
• French-Belgian Firm ELF (petroleum)

Corporate Governance: US vs Japan

• Owner-manager relationship
  • US: Adversarial
  • Japan:Co-operative
• Manager and shareholder relationship
  • US: Through one company
  • Japan: Through a Keiretsu (group of interlocking companies)
• Ownership concentration
  • US: Control Function
  • Japan: Monitoring Function

Codes of Governance

• Ideals governance standards formulated by regulatory, market and government institutions
• UK: The Cadbury Code
• US: Sarbanes-Oxley Act
  • Public Company Accounting Oversight Board