corporategovernance (1)
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Transparency 10-1
Chapter 10
Corporate Governance
Michael A. HittR. Duane Ireland
Robert E. Hoskisson
1999 South-Western College Publishing
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Transparency 10-2
Competitiveness
Chapter 3
Internal
Environment
Chapter 2
External
EnvironmentThe Strategic
Management
Process
Strategic Intent
Strategic Mission
Strategic
Competitiveness
Above Average
Returns
Feedback
Strategy Formulation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive
Dynamics
Chapter 6
Corporate-Level
Strategy
Chapter 8
International
Strategy
Chapter 9
Cooperative
Strategies
Chapter 7
Acquisitions &
Restructuring
Strategic
Inputs
Strategic
Actions
Strategic
Outcomes
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Transparency 10-3
Competitiveness
Chapter 3
Internal
Environment
Chapter 2
External
EnvironmentThe Strategic
Management
Process
Strategic Intent
Strategic Mission
Strategic
Competitiveness
Above Average
Returns
Feedback
Strategy Formulation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive
Dynamics
Chapter 6
Corporate-Level
Strategy
Chapter 8
International
Strategy
Chapter 9
Cooperative
Strategies
Chapter 7
Acquisitions &
Restructuring
Chapter 10
Corporate
Governance
Chapter 11
Structure
& Control
Chapter 12
Strategic
Leadership
Chapter 13
Entrepreneurship
& Innovation
Strategic
Inputs
Strategic
Actions
Strategic
Outcomes
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Corporate Governance is a relationship amongstakeholders that is used to determine and control the
strategic direction and performance of organizations
Corporate Governance
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Transparency 10-5
Corporate Governance is a relationship amongstakeholders that is used to determine and control the
strategic direction and performance of organizations
Concerned with identifying ways to ensure that
strategic decisions are made effectively
Corporate Governance
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Transparency 10-6
Used in corporations to establish order between thefirms owners and its top-level managers
Corporate Governance is a relationship amongstakeholders that is used to determine and control the
strategic direction and performance of organizations
Concerned with identifying ways to ensure that
strategic decisions are made effectively
Corporate Governance
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Separation of Ownership and Managerial Control
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Basis of the modern corporation
Separation of Ownership and Managerial Control
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Basis of the modern corporationShareholders purchase stock, becoming...
Residual Claimants
Separation of Ownership and Managerial Control
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Basis of the modern corporation
- Shareholders reduce risk efficiently by holdingdiversified portfolios
Shareholders purchase stock, becoming...
Residual Claimants
Separation of Ownership and Managerial Control
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Basis of the modern corporation
- Shareholders reduce risk efficiently by holdingdiversified portfolios
Shareholders purchase stock, becoming...
Residual Claimants
Professional managers contract to provide decision-
making
Separation of Ownership and Managerial Control
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Basis of the modern corporation
- Shareholders reduce risk efficiently by holdingdiversified portfolios
Shareholders purchase stock, becoming...
Residual Claimants
Professional managers contract to provide decision-
making
Modern public corporation form leads to efficient
specialization of tasks
Separation of Ownership and Managerial Control
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Basis of the modern corporation
Professional managers contract to provide decision-
making
- Risk bearing by shareholders
- Strategy development and decision-making bymanagers
- Shareholders reduce risk efficiently by holdingdiversified portfolios
Shareholders purchase stock, becoming...
Residual Claimants
Modern public corporation form leads to efficient
specialization of tasks
Separation of Ownership and Managerial Control
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Agency Theory
An agency relationship exists when:
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An agency relationship exists when:
Shareholders
(Principals)
Firm Owners
Agency Theory
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An agency relationship exists when:
Shareholders
(Principals)
Firm Owners
Managers(Agents)
Decision
Makers
Hire
Agency Theory
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An agency relationship exists when:
Shareholders
(Principals)
Firm Owners
Agency Relationship
Risk Bearing Specialist
(Principal)
Managers(Agents)
Decision
Makers
which creates
Managerial Decision-Making Specialist
(Agent)
Hire
Agency Theory
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The Agency problem occurs when:
- The desires or goals of the principal and agent conflict
and it is difficult or expensive for the principal to
verify that the agent has behaved appropriately
Agency Theory
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The Agency problem occurs when:
- The desires or goals of the principal and agent conflict
and it is difficult or expensive for the principal to
verify that the agent has behaved appropriately
Example:Overdiversification because increased product
diversification leads to lower employment risk
for managers and greater compensation
Agency Theory
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Transparency 10-20
The Agency problem occurs when:
- The desires or goals of the principal and agent conflict
and it is difficult or expensive for the principal to
verify that the agent has behaved appropriately
Solution: Principals engage in incentive-based performance
Example:Overdiversification because increased product
diversification leads to lower employment risk
for managers and greater compensation
contracts, monitoring mechanisms such as the
board of directors and enforcement mechanisms
such as the managerial labor market to mitigate
the agency problem
Agency Theory
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Transparency 10-21
Risk
Level of Diversification
Manager and Shareholder Risk and Diversification
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Risk
Level of Diversification
Manager and Shareholder Risk and Diversification
Dominant
Business
Unrelated
Businesses
Related
Constrained
Related
Linked
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Transparency 10-23
Risk
Level of Diversification
Manager and Shareholder Risk and Diversification
Dominant
Business
Unrelated
Businesses
Related
Constrained
Related
Linked
Shareholder
(Business)
Risk ProfileS
A
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Transparency 10-24
Risk
Level of Diversification
Manager and Shareholder Risk and Diversification
Dominant
Business
Unrelated
Businesses
Related
Constrained
Related
Linked
Shareholder
(Business)
Risk Profile
Managerial
(Employment
) Risk ProfileS
M
AB
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Transparency 10-25
Principals may engage in monitoringbehavior to assessthe activities and decisions of managers
- However, dispersed shareholding makes it difficult andand inefficient to monitor managements behavior
Agency Theory
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Transparency 10-26
Principals may engage in monitoringbehavior to assessthe activities and decisions of managers
- However, dispersed shareholding makes it difficult andand inefficient to monitor managements behavior
For example: Boards of Directors have a fiduciary
duty to shareholders to monitor
management
- However, Boards of Directors are often accused ofbeing lax in performing this function
Agency Theory
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Transparency 10-27
Governance Mechanisms
Ownership Concentration
Boards of Directors
Executive Compensation
Market for Corporate Control
Multidivisional Organizational Structure
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Ownership Concentration
Governance Mechanisms
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Transparency 10-29
Ownership Concentration- Large block shareholders have a strong incentive to
monitor management closely
Governance Mechanisms
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Ownership Concentration- Large block shareholders have a strong incentive to
monitor management closely
- Their large stakes make it worth their while to spend
time, effort and expense to monitor closely
Governance Mechanisms
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Transparency 10-31
Ownership Concentration
monitor management closely
time, effort and expense to monitor closely
- Large block shareholders have a strong incentive to
- Their large stakes make it worth their while to spend
- They may also obtain Board seats which enhancestheir ability to monitor effectively (although financial
institutions are legally forbidden from directly holding
board seats)
Governance Mechanisms
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Boards of Directors
Governance Mechanisms
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Boards of Directors- Insiders
- Related Outsiders
- Outsiders
Governance Mechanisms
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Boards of Directors
- Review and ratify important decisions
- Insiders
- Related Outsiders
- Outsiders
Governance Mechanisms
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Boards of Directors
- Review and ratify important decisions
- Set compensation of CEO and decide when to
replace the CEO
- Insiders
- Related Outsiders
- Outsiders
Governance Mechanisms
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Boards of Directors
- Review and ratify important decisions
- Set compensation of CEO and decide when to
replace the CEO
- Lack contact with day to day operations
- Insiders
- Related Outsiders
- Outsiders
Governance Mechanisms
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Recommendations for more effectiveBoard Governance
Governance Mechanisms
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Recommendations for more effective
Board Governance
- Increase diversity of board members backgrounds
- Strengthen internal management and accounting
control systems
- Establish formal processes for evaluation of theboards performance
Governance Mechanisms
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Transparency 10-39
Executive Compensation
Governance Mechanisms
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Transparency 10-40
Salary, Bonuses, Long term incentive compensation
Executive Compensation
Governance Mechanisms
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Salary, Bonuses, Long term incentive compensation
- Executive decisions are complex and non-routine
- Many factors intervene making it difficult to establish
for outcomeshow managerial decisions are directly responsible
Executive Compensation
- In addition, stock ownership (long-term incentive
market changes which are partially beyond their control
compensation) makes managers more susceptible to
Governance Mechanisms
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Transparency 10-42
Salary, Bonuses, Long term incentive compensation
- Executive decisions are complex and non-routine
- Many factors intervene making it difficult to establish
for outcomeshow managerial decisions are directly responsible
Executive Compensation
- In addition, stock ownership (long-term incentive
market changes which are partially beyond their control
compensation) makes managers more susceptible to
Incentive systems do not guarantee that managers
make the right decisions, but they do increase the
likelihood that managers will do the things for which
they are rewarded
Governance Mechanisms
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Multidivisional Organizational Structure
Governance Mechanisms
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Transparency 10-44
Designed to control managerial opportunism
Multidivisional Organizational Structure
Governance Mechanisms
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Designed to control managerial opportunism
- Corporate office and Board monitor business-unit
- Increased managerial interest in wealth maximization
managers strategic decisions
Multidivisional Organizational Structure
Governance Mechanisms
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Transparency 10-46
Designed to control managerial opportunism
- Corporate office and Board monitor managers
- Increased managerial interest in wealth maximization
strategic decisions
Multidivisional Organizational Structure
Governance Mechanisms
M-form structure does not necessarily limit corporate-
level managers self-serving actions
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Transparency 10-47
Designed to control managerial opportunism
- Corporate office and Board monitor managers
- Increased managerial interest in wealth maximization
strategic decisions
Multidivisional Organizational Structure
Governance Mechanisms
M-form structure does not necessarily limit corporate-
- May lead to greater rather than less diversification
level managers self-serving actions
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Transparency 10-48
Designed to control managerial opportunism
- Corporate office and Board monitor managers
- Increased managerial interest in wealth maximization
strategic decisions
Multidivisional Organizational Structure
Governance Mechanisms
M-form structure does not necessarily limit corporate-
- May lead to greater rather than less diversification
Broadly diversified product lines makes it difficult for
top-level managers to evaluate the strategic decisions
of divisional managers
level managers self-serving actions
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Transparency 10-49
Market for Corporate Control
Governance Mechanisms
G M h i
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Market for Corporate Control
Operates when firms face the risk of takeover when
they are operated inefficiently
Governance Mechanisms
G M h i
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Transparency 10-51
Market for Corporate Control
Operates when firms face the risk of takeover when
they are operated inefficiently
- Changes in regulations have made hostile takeovers difficult
- Many firms began to operate more efficiently as a result of
- The 1980s saw active market for corporate control, largely
as a result of available pools of capital (junk bonds)
the threat of takeover, even though the actual incidence of
hostile takeovers was relatively small
Governance Mechanisms
G M h i
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Market for Corporate Control
Operates when firms face the risk of takeover when
they are operated inefficiently
The market for corporate control acts as an important
source of discipline over managerial incompetence and
waste
- Changes in regulations have made hostile takeovers difficult
- Many firms began to operate more efficiently as a result of
- The 1980s saw active market for corporate control, largely
as a result of available pools of capital (junk bonds)
the threat of takeover, even though the actual incidence of
hostile takeovers was relatively small
Governance Mechanisms
I t ti l C t G
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International Corporate Governance
Germany
I t ti l C t G
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Germany
Owner and manager are often the same in private firms
Public firms often have a dominant shareholder too,
frequently a bank
International Corporate Governance
I t ti l C t G
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Transparency 10-55
Germany
Owner and manager are often the same in private firms
Medium to large firms have a two-tiered board
Public firms often have a dominant shareholder too,
frequently a bank
- Vorstand monitors and controls managerial decisions
- Aufsichtsrat selects the Vorstand
- Employees, union members and shareholders appointmembers to the Aufsichtsrat
International Corporate Governance
I t ti l C t G
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Transparency 10-56
Germany
Owner and manager are often the same in private firms
Medium to large firms have a two-tiered board
Public firms often have a dominant shareholder too,
frequently a bank
- Vorstand monitors and controls managerial decisions
- Aufsichtsrat selects the Vorstand
- Employees, union members and shareholders appointmembers to the Aufsichtsrat
Frequently there is less emphasis on shareholder value
than in U.S. firms, although this may be changing
International Corporate Governance
I t ti l C t G
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Transparency 10-57
Japan
International Corporate Governance
International Corporate Go ernance
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Transparency 10-58
Japan
Obligation, family and consensus are important factors
International Corporate Governance
International Corporate Governance
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Transparency 10-59
Japan
Keiretsus are strongly interrelated groups of firms tied
together by cross-shareholdings
Banks (especially main bank) are highly influential
with firms managers
Obligation, family and consensus are important factors
International Corporate Governance
International Corporate Governance
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Transparency 10-60
Japan
Keiretsus are strongly interrelated groups of firms tied
together by cross-shareholdings
Banks (especially main bank) are highly influential
with firms managers
- Powerful government intervention
- Close relationships between firms and government sectors
- Passive and stable shareholders who exert little control
- Virtual absence of external market for corporate control
Other characteristics:
Obligation, family and consensus are important factors
International Corporate Governance
Corporate Governance and Ethical Behavior
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It is important to serve the interests of multiple
stakeholder groups
Corporate Governance and Ethical Behavior
Corporate Governance and Ethical Behavior
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Transparency 10-62
Shareholders are one important stakeholder group,
which are served by the Board of Directors
It is important to serve the interests of multiple
stakeholder groups
Corporate Governance and Ethical Behavior
Corporate Governance and Ethical Behavior
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Transparency 10-63
Product market stakeholders (customers, suppliers and
host communities) and Organizational stakeholders
(managerial and non-managerial employees) are also
important stakeholder groups
Shareholders are one important stakeholder group,
which are served by the Board of Directors
It is important to serve the interests of multiple
stakeholder groups
Corporate Governance and Ethical Behavior
Corporate Governance and Ethical Behavior
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Product market stakeholders (customers, suppliers and
host communities) and Organizational stakeholders
(managerial and non-managerial employees) are also
important stakeholder groups
Shareholders are one important stakeholder group,
which are served by the Board of Directors
Although controversial, some believe that ethically
responsible firms should introduce governance
mechanisms which serve all stakeholders interests
It is important to serve the interests of multiple
stakeholder groups
Corporate Governance and Ethical Behavior
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