Strategic Management and Business Policy: Globalization, Innovation and Sustainability PDF

Strategic Management and Business Policy: Globalization, Innovation and Sustainability Sixteenth Edition Chapter 2 Corporate Governance Copyright © 2024 Pearson Education, Inc. All Rights Reserved Learning Objectives 2.1 Describe the role and responsibilities of the board of directors in corporate g...

Strategic Management and Business Policy: Globalization, Innovation and Sustainability Sixteenth Edition Chapter 2 Corporate Governance Copyright © 2024 Pearson Education, Inc. All Rights Reserved Learning Objectives 2.1 Describe the role and responsibilities of the board of directors in corporate governance 2.2 Explain how the composition of a board can affect its operation 2.3 Describe the impact of the Sarbanes–Oxley Act on corporate governance in the United States 2.4 Discuss trends in corporate governance 2.5 Explain how executive leadership is an important part of strategic management Copyright © 2024 Pearson Education, Inc. All Rights Reserved Role of the Board of Directors (1 of 2) Corporation – a mechanism established to allow different parties to contribute capital, expertise, and labor for their mutual benefit The corporation is fundamentally governed by the board of directors overseeing top management, with the concurrence of the shareholders. Copyright © 2024 Pearson Education, Inc. All Rights Reserved Role of the Board of Directors (2 of 2) Corporate governance – refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation Copyright © 2024 Pearson Education, Inc. All Rights Reserved Responsibilities of the Board (1 of 2) 1. Effective board leadership including the processes, makeup, and output of the board 2. Strategy of the organization 3. Risk vs. initiative and the overall risk profile of the organization 4. Succession planning for the board and top management team 5. Sustainability Copyright © 2024 Pearson Education, Inc. All Rights Reserved Responsibilities of the Board (2 of 2) Due care – the board is required to direct the affairs of the corporation but not to manage them If a director or the board as a whole fails to act with due care and, as a result, the corporation is in some way harmed, the careless director or directors can be held personally liable for the harm done One survey of outside directors revealed that more than 40% had been named as part of lawsuits against corporations Copyright © 2024 Pearson Education, Inc. All Rights Reserved Role of the Board in Strategic Management Monitor developments inside and outside the corporation Evaluate and Influence management proposals, decisions and actions Initiate and Determine the corporation’s mission and specify strategic options Copyright © 2024 Pearson Education, Inc. All Rights Reserved Figure 2-1 Board of Directors’ Continuum Source: T. L. Wheelen and J. D. Hunger, “Board of Directors’ Continuum,” Copyright © 1994 by Wheelen and Hunger Associates. Reprinted by permission Copyright © 2024 Pearson Education, Inc. All Rights Reserved Board of Directors Composition (1 of 4) Inside directors – typically officers or executives employed by the corporation Outside directors – may be executives of other firms but are not employees of the board’s corporation Copyright © 2024 Pearson Education, Inc. All Rights Reserved Board of Directors Composition (2 of 4) Agency theory – states that problems arise in corporations because the agents (top management) are not willing to bear responsibility for their decisions unless they own a substantial amount of stock in the corporation Copyright © 2024 Pearson Education, Inc. All Rights Reserved Board of Directors Composition (3 of 4) Stewardship theory – proposes that, because of their long tenure with the corporation, insiders (senior executives) tend to identify with the corporation and its success Copyright © 2024 Pearson Education, Inc. All Rights Reserved Board of Directors Composition (4 of 4) Affiliated directors – not employed by the corporation, handle legal or insurance work Retired executive directors – used to work for the corporation, partly responsible for past decisions affecting current strategy Family directors – descendants of the founder and own significant blocks of stock Copyright © 2024 Pearson Education, Inc. All Rights Reserved Codetermination: Should Employees Serve on Boards? (1 of 3) Codetermination – the inclusion of a corporation’s workers on its board – began only recently in the United States Although the movement to place employees on the boards of directors of U.S. companies shows little likelihood of increasing, the European experience reveals an increasing acceptance of worker participation on corporate boards Copyright © 2024 Pearson Education, Inc. All Rights Reserved Codetermination: Should Employees Serve on Boards? (2 of 3) Direct interlocking directorate – when two firms share a director or when an executive of one firm sits on the board of a second Indirect interlocking directorate – when two corporations have directors who serve on the board of a third firm Copyright © 2024 Pearson Education, Inc. All Rights Reserved Codetermination: Should Employees Serve on Boards? (3 of 3) Interlocking directorates – useful for gaining both inside information about an uncertain environment and objective expertise about potential strategies and tactics Copyright © 2024 Pearson Education, Inc. All Rights Reserved Nomination and Election of Board Members (1 of 2) Ninety-seven percent of large U.S. corporations use nominating committees to identify potential board members Staggered boards – only a portion of board members stand for re-election when directors serve more than one-year terms Copyright © 2024 Pearson Education, Inc. All Rights Reserved Nomination and Election of Board Members (2 of 2) Main reasons individuals serve on a board: Interested in the business—79% Make a difference—65% Stay active in business community—50% Recruited by friend on the board—25% Compensation—14% Networking opportunities—11% Notoriety/prestige—9% Recruited by friend not on the board—4% Copyright © 2024 Pearson Education, Inc. All Rights Reserved Organization of the Board (1 of 4) The size of a board in the United States is determined by the corporation’s charter and its bylaws, in compliance with state laws Although some states require a minimum number of board members, most corporations have quite a bit of discretion in determining board size Copyright © 2024 Pearson Education, Inc. All Rights Reserved Organization of the Board (2 of 4) The average large, publicly held U.S. firm has ten directors on its board. The average small, privately held company has four to five members. Copyright © 2024 Pearson Education, Inc. All Rights Reserved Organization of the Board (3 of 4) Lead director – consulted by the Chair/CEO regarding board affairs and coordinates the annual evaluation of the CEO Ninety-four percent of U.S. companies that combine the Chair and CEO positions had a lead director Copyright © 2024 Pearson Education, Inc. All Rights Reserved Organization of the Board (4 of 4) The most effective boards accomplish much of their work through committees Although they do not usually have legal duties, most committees are granted full power to act with the authority of the board between board meetings Typical standing committees in order of prevalence are; – Audit (100%) – Compensation (99%) – Nominating (99%) – Finance (31%) – Executive (30%) – Risk (12%) – Social/corporate responsibility (9%) Copyright © 2024 Pearson Education, Inc. All Rights Reserved Impact of the Sarbanes–Oxley on U.S. Corporate Governance Sarbanes–Oxley Act – designed to protect shareholders from excesses and failed oversight of boards of directors – whistleblower procedures – improved corporate financial statements Copyright © 2024 Pearson Education, Inc. All Rights Reserved Improving Governance In implementing Sarbanes–Oxley Act – Securities and Exchange Commission (SEC) requires a company disclose whether it has adopted a code of ethics that applies to the CEO and CFO – SEC also requires that auditing, nominating, and compensation committees be staffed entirely by independent outside directors – In 2006, 78% of Fortune 1000 U.S. firms require board members to own stock in the company Copyright © 2024 Pearson Education, Inc. All Rights Reserved Evaluating Governance S&P Corporate Governance Scoring System researches four major issues: 1. 2. 3. 4. Ownership structure and influence Financial stakeholder rights and relations Financial transparency and information disclosure Board structure and processes Copyright © 2024 Pearson Education, Inc. All Rights Reserved Avoiding Governance Improvements Multiple classes of stock Public to private ownership Controlled companies Copyright © 2024 Pearson Education, Inc. All Rights Reserved Trends in Corporate Governance (1 of 2) Boards shaping company strategy Institutional investors active on boards Shareholder demands that directors and top management own significant stock More involvement of non-affiliated outside directors Increased representation of women and people of color Establishing mandatory retirement age, typically 72 Boards evaluating individual directors Copyright © 2024 Pearson Education, Inc. All Rights Reserved Trends in Corporate Governance (2 of 2) Smaller boards Splitting the Chair and CEO positions Boards are eliminating 1970s anti-takeover defenses Increasingly looking for members with international experience Shareholders may begin to nominate board members Society expects boards to balance profitability with social needs of society Copyright © 2024 Pearson Education, Inc. All Rights Reserved The Role of Top Management Top management responsibilities – getting things accomplished through and with others in order to meet the corporate objectives – multidimensional and oriented toward the welfare of the total organization Copyright © 2024 Pearson Education, Inc. All Rights Reserved Executive Leadership and Strategic Vision (1 of 3) Executive leadership – directs activities toward the accomplishment of corporate objectives – sets the tone for the entire corporation Strategic vision – description of what the company is capable of becoming Copyright © 2024 Pearson Education, Inc. All Rights Reserved Executive Leadership and Strategic Vision (2 of 3) Transformational leaders – leaders who provide change and movement in an organization by providing a vision for that change Copyright © 2024 Pearson Education, Inc. All Rights Reserved Executive Leadership and Strategic Vision (3 of 3) Three key characteristics of effective CEOs: 1. Articulate a strategic vision for the corporation. 2. Present a role for others to identify with and follow. 3. Communicate high-performance standards and also show confidence in the followers’ abilities to meet these standards. Copyright © 2024 Pearson Education, Inc. All Rights Reserved Managing the Strategic Planning Process (1 of 2) Strategic planning staff – charged with supporting both top management and the business units in the strategic planning process Copyright © 2024 Pearson Education, Inc. All Rights Reserved Managing the Strategic Planning Process (2 of 2) Strategic planning staff responsibilities include: 1. Identify and analyze companywide strategic issues, and suggest corporate strategic alternatives to top management 2. Work as facilitators with business units to guide them through the strategic planning process Copyright © 2024 Pearson Education, Inc. All Rights Reserved Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2024 Pearson Education, Inc. All Rights Reserved