CHAPTER 9 & 10

STRATEGIC CONTROL AND CORPORATE GOVERNANCE

Strategic Control• This is the process of monitoring and correcting deviations

from the firm’s 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 organisation’s 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 organisation’s assumptions, premises, goals , and strategies are continuously monitored, tested and reviewed.

Behavioural Control – doing things right• 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

Organisational Culture

• This is a system of shared beliefs that shape a company’s 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

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

Meaning of Corporate Governance• "Corporate governance involves a set of

relationships between a company’s 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’

• 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 firm’s bottom line and share price on the stock exchange.

Separation of Ownership from Control• 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

Role of Corporate Governance• It seeks to align the interests of shareholders and

managers by:1. Appointing a committed and involved board of

directors2. 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.

External Governance Control Mechanisms

• 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 company’s financial prospects and quality of its management. Watchdog groups also act to ensure good corporate governance

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.

Conditions for Principal to Principal Conflicts

• 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 former’s advantage.