Chapter 11 Organizational Responsiveness: The Role of Board Governance and Strategic Planning Copyright © 1999 by Harcourt Brace & Company All rights reserved

Chapter 11Chapter 11Organizational Organizational

Responsiveness: The Role of Responsiveness: The Role of Board Governance and Board Governance and

Strategic PlanningStrategic Planning

Chapter 11Chapter 11Organizational Organizational

Responsiveness: The Role of Responsiveness: The Role of Board Governance and Board Governance and

Strategic PlanningStrategic PlanningCopyright © 1999 by Harcourt Brace & Company

All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

Bourgeois, Duhaime,

& Stimpert

Copyright © 1999 by Harcourt Brace & CompanyAll rights reserved

Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter Objectives

Describe the composition, purposes, and limitations of boards of directors.

Analyze and assess the board of directors as a strategic management mechanism.

Describe strategic planning processes. Evaluate the strengths, limitations, and overall

effectiveness of strategic planning mechanisms.


Chapter Objectives Chapter Objectives (cont.)(cont.)Chapter Objectives Chapter Objectives (cont.)(cont.)

Describe some alternatives to traditional strategic planning processes.

Briefly describe the corporate governance and strategic planning practices employed by European and Japanese firms.


IntroductionIntroductionIntroductionIntroduction

Two important strategic management “mechanisms:” Board of directors

• Essential component of all corporations.

• Why are so many companies misaligned with their competitive environments and experience poor performance if their boards consist of experienced executives?

Strategic planning processes• Why are many companies surprised by changes in

their industry environments?


Boards of DirectorsBoards of DirectorsBoards of DirectorsBoards of Directors All public corporations are required to have boards, yet

they tend to meet infrequently. Composition

Executive Committee: works closely with firm’s top management.

Audit Committee: responsible for fiduciary oversight. Compensation Committee: establishes compensation

plans for top managers. Nominating Committee: Selects candidates to serve

on board.


Boards of DirectorsBoards of Directors (cont.)(cont.)Boards of DirectorsBoards of Directors (cont.)(cont.)

Insiders, outsiders, and the current interest in board governance. Outsiders defined as directors who are not current or

former members of firm’s top management, or are not employees of the firms or its subsidiaries.

Firm’s CEO frequently serves as board chairman. Divergent interests of shareholders and managers:

• Shareholders (owners and “principals”) want to maximize their ROI.

• Managers (“agents”) want job security and maximum pay.



• This potential divergence is called the agency problem.– Agency theory suggests that boards controlled by outsiders

protect the shareholder interests better.– Institutional investors -- own half of all equities -- wield

great clout on board composition. They also advocate outsider-controlled boards.

• Research studies do not definitively support agency theory.

– Agency perspective too simplistic to explain complex relationship?

– Do all boards face limitations that hinder effective decision making?



Limitation of agency perspective Agency theory assumes that all managers aim to

advance their interests at expense of shareholders.• However, theory does not consider variations of

managerial self-interest seeking across any sample. Agency theory also fails to consider the possibility

that inside directors might bring important expertise to board deliberations.

• Some empirical research supports this possibility.See

Exhibit 11.2



Limitations of boards of directors Board meetings that do not provide a forum for

effective strategic management.• Meet infrequently (less than 8 times per year).

• Appears that goal of most meetings is to keep directors informed of company activities rather than to engage them in strategy formulation or implementation.

Most board members have too many competing responsibilities to have the time necessary for any meaningful leadership role.



Even if they had time, most outside board members lack expertise about their companies or the industries in which their companies compete.

Research suggests that board members are typically chosen for “who they are” and not for “what they know.”

Most research suggests that boards simply follow the lead of the firms’ CEOs.

• Rarely intervene to manage strategy except in crisis situations.



Role of board of directors in strategy formulation and implementation. Sears in late 1980s and early 1990s

• Strategy of offering financial, insurance, and real estate services at their traditional tools and clothing stores was not working.

• Moody’s decided to review and possibly downgrade its ratings on Sears’ debt.

– Board finally acted and separated Sears’ retail and financial services businesses.



General Motors in 1980s• Their market share declined drastically.

– Board was apparently content to do nothing about this. They finally took action (fired CEO) only when the company was on the verge of financial calamity.

See Exhibit 11.3



Archer-Daniels-Midland• Board was controlled by insiders:

Insiders Dwayne Andreas Ralph Bruce John Daniels Lowell Andreas Martin Andreas Michael Andreas H. D. Hale James Randall Shreve Archer

Outsiders Gaylor Coan John Vanier Brian Mulroney “Happy” Rockefeller Glenn Webb Ross Johnson Ray Goldberg Robert Strauss



Archer-Daniels-Midland (cont.)• Board learned that son of CEO was involved in

price-fixing scheme.– Brought attention to insider domination of board.

• Special committee of outsiders made 4 recommendations:

– Board should be controlled by outsiders.

– Current management should be limited to maximum of 3 board members.

– Size of board should be reduced from 17 to 9-15.

– New directors should be under 70 years of age.



Conclusions Uncertain if board reform will improve company

performance or prevent illegal activities. Wharton study identifies characteristics of boards

associated with lower firm performance:• Board chairman and CEO are same person.

• Board is large.

• CEO appoints or nominates outside directors.

• Outside directors have business dealings with company.

• Outside directors are older than 70.

• Outside directors serve on many other boards.


Strategic Planning Strategic Planning ProcessesProcessesStrategic Planning Strategic Planning ProcessesProcesses

Advantages of strategic planning: Allow firms to determine what needs to be done

now to maximize future performance. Provide opportunities for managers to question

basic assumptions underlying their firms’ strategies.

• Better strategic planning should have allowed Sears to recognize industry changes sooner.


Strategic Planning Strategic Planning Processes Processes (cont.)(cont.)


Problems or limitations associated with strategic planning. Planning often fails to acknowledge the emerging

nature of much strategic activity.• Nearly all traditional planning processes tend to

assume away the possibility of unanticipated events emerging in firms’ external environments.

Too often planning relies on regression-based forecasting procedures which merely extend present trends into the future.




• Plans get “locked-in” and actually reduce flexibility of strategic thinking.

– Instead of questioning basic assumptions, planning actually reinforces current thinking.

See Exhibits11.5




Strategic planning process typically produces “point estimates” rather than a range of possible outcomes. As a result, firms fail to develop reasonable

contingencies for the low or high estimates.• Companies are poorly prepared to adjust

production, marketing, and even financial strategies when demand exceeds or falls short of expectations.




Plans often suffer from a phenomenon that Senge calls “eroding goals.” Companies find it expedient to lower their goals

when they find their plans too ambitious.• Organizational goals can slowly erode over time so

that what was considered unacceptable performance at an earlier point in time can slowly become seen as satisfactory.

See Exhibits

11.6 (A) and (B)

on following slides


Exhibit 11.6 (A):Exhibit 11.6 (A):Goal AttainmentGoal Attainment

Goal

Gap

Pressures toAchieve Goal


Exhibit 11.6 (B):Exhibit 11.6 (B):Eroding GoalsEroding Goals

Goal

Gap

Pressures toLower Goal




Planning data are often used -- incorrectly -- for evaluating the performance of management personnel. Incentives often awarded to executives for

“meeting the plan.”• Causes serious disincentives for incorporating

challenging goals in the planning process.




For all of the time and other resources required by formal planning processes, it is unclear that planning has any consequence or impact on firm performance. Few of executives who participate in annual

strategic planning processes find them a useful or even relevant exercise.

Fortune called traditional strategic planning processes as “overly bureaucratic, absurdly quantitative, and largely irrelevant.”




New approaches to planning Scenario planning

• Objective is for managers to develop several different but plausible scenarios for their companies.

– Each scenario is based on a different set of underlying assumptions about the future. Each scenario suggests a different set of strategies or plans.

• Advantages– Managers forced to acknowledge likelihood of many

possible outcomes.




Vision and strategic intent. Emphasizes importance of commitment to

company vision or set of enduring core values.• Can be very motivational for company employees

who are likely to find traditional strategic plans too abstract or meaningless.

• By focusing company efforts on vision, managers will have better idea of how to deal with emergent issues.


ConclusionsConclusionsConclusionsConclusions

Chapter reviewed two corporate governance mechanisms: boards of directors and strategic planning processes. Boards are often hampered by number of

constraints that can limit their effectiveness.• Boards rarely intervene in strategy formulation and

implementation in a proactive way.– Usually limited to removing CEO.

• Board governance is problematic due to the failures or shortcomings of internal governance.


Conclusions Conclusions (cont.)(cont.)Conclusions Conclusions (cont.)(cont.)

Traditional strategic planning processes rarely live up to expectations.

• Business environments are constantly in state of flux -- few of the emerging developments can be adequately anticipated by traditional planning.

– Recent innovations include scenario planning and the concept of strategic intent and vision.


Key Points Introduced Key Points Introduced in Chapter 11in Chapter 11Key Points Introduced Key Points Introduced in Chapter 11in Chapter 11

Boards of directors and strategic planning processes are two important strategic management mechanisms.

All public companies are required to have boards of directors. Most have executive, audit, compensation, and

nominating committees. Boards composed of outside and inside directors.

• Prevailing wisdom suggests that boards should be controlled by majority of outside directors.


Key Points Introduced Key Points Introduced in Chapter 11 (cont.)in Chapter 11 (cont.)Key Points Introduced Key Points Introduced in Chapter 11 (cont.)in Chapter 11 (cont.)

Research finds no consistent correlation between board compensation and firm performance. May be explained by limitations of boards:

• Outside directors who have little time, many competing responsibilities, and little knowledge about the companies at which they serve as directors.

Boards tend to take decisive action only when their firms are confronted by financial distress.



Board governance is problematic because top managers fail to respond to changes in their firms’ competitive environments.

Strategic planning should allow firms to question basic assumptions and select strategies to maximize future performance. In practice, however, most strategic planning

processes are likely to reinforce existing assumptions and often contribute to eroding goals and expectations.



Dissatisfaction with traditional strategic planning processes has encouraged interest in new approaches to planning: Scenario planning. Concepts of strategic intent and vision.

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Chapter 11 Organizational Responsiveness: The Role of Board Governance and Strategic Planning Copyright © 1999 by Harcourt Brace & Company All rights reserved