Strategic

Control and
Corporate
Governance

Chapter Nine
 Learning Objectives
After reading this chapter, you should have a
good understanding of:
LO9.1 The value of effective strategic control
systems in strategy implementation.
LO9.2 The key difference between traditional and
contemporary control systems.
LO9.3 The imperative for contemporary control
systems in todays complex and rapidly
changing competitive and general
environments.
9-2
 Learning Objectives (cont.)
LO9.4 The benefits of having the proper balance
among the three levers of behavioral control:
culture, rewards and incentives, and boundaries.
LO9.5 The three key participants in corporate
governance: shareholders, management (led by
the CEO), and the board of directors.
LO9.6 The role of corporate governance mechanisms
in ensuring that the interests of managers are
aligned with those of shareholders from both the
United States and international perspectives.

9-3
 Strategic Control
Strategic control
the process of monitoring and correcting a
firms strategy and performance
Informational, behavioral

9-4
 Ensuring Informational Control
Traditional control system
1. strategies are formulated and top
management sets goals
2. strategies are implemented
3. performance is measured against the
predetermined goal set

9-5
 Traditional Approach to
Strategic Control

Exhibit 9.1

9-6
 Traditional Approach
to Strategic Control
Most appropriate when
Environment is stable and relatively simple
Goals and objectives can be measured with
certainty
Little need for complex measures of
performance

9-7
 Contemporary Approach
to Strategic Control

Exhibit 9.2

9-8
 Contemporary Approach to Strategic
Control
Informational control
a method of organizational control in which a
firm gathers and analyzes information from the
internal and external environment in order to
obtain the best fit between the organizations
goals and strategies and the strategic
environment.

9-9
 Question
Top managers at USA Today meet every Friday to
review daily operational reports and year-to-
date data. This is an example of
A.Behavioral control
B.Informational control
C.Strategy formulation
D.Strategy implementation

9-10
 Informational Control
Primarily concerned with whether or not the
organization is doing the right things

Key question
Do the organizations goals and strategies
still fit within the context of the current
strategic environment?

9-11
 Informational Control
Two key issues
Scan and monitor external environment
(general and industry)
Continuously monitor the internal
environment

9-12
 Contemporary Approach
to Strategic Control
Behavioral control
a method of organizational control in which a
firm influences the actions of employees through
culture, rewards, and boundaries.

9-13
Effectiveness of Contemporary Control
Systems
1. Focus on constantly changing information that
has potential strategic importance.
2. The information is important enough to demand
frequent and regular attention from all levels of
the organization.
3. The data and information generated are best
interpreted and discussed in face-to-face
meetings.
4. The control system is a key catalyst for an
ongoing debate about underlying data,
assumptions, and action plans.

9-14
 Behavioral Control
Behavioral control is focused on
implementationdoing things right
Three key control levers
Culture
Rewards
Boundaries

9-15
 Reasons for an increased emphasis on
culture and rewards
1. The competitive 2. The implicit long-
environment is term contract
increasingly between the
complex and organization and its
unpredictable, key employees has
demanding both been eroded.
flexibility and quick
response to its
challenges.

9-16
 Building a Strong and Effective
Culture
Organizational culture
a system of shared values and beliefs that
shape a companys people, organizational
structures, and control systems to produce
behavioral norms.

9-17
 Building a Strong and Effective
Culture
Culture sets implicit boundaries (unwritten
standards of acceptable behavior)
Dress
Ethical matters
The way an organization conducts its
business

9-18
 Example: Wal-Mart
A lot of Wal-Mart's success was attributed to the
strong and pervasive culture at the company,
which was developed and nurtured by founder
Sam Walton.
In over four decades of operation, Wal-Mart
managed to retain most of the elements of
culture it had when it first started out, as well as
the entrepreneurial spirit which often drives
startup companies to success.

9-19
 Sustaining an Effective Culture
Effective culture Maintaining an
must be effective culture
Cultivated Storytelling
Encouraged Rallies or pep
Fertilized talks by top
executives

9-20
 Motivating with Rewards and
Incentives
Rewards and incentive systems
Powerful means of influencing an
organizations culture
Focuses efforts on high-priority tasks
Motivates individual and collective task
performance
Can be an effective motivator and control
mechanism

9-21
 Motivating with Rewards and
Incentives
Potential downside
Subcultures may arise in different business
units with multiple reward systems
May reflect differences among functional
areas, products, services and divisions

9-22
 Characteristics of Effective Reward and
Evaluation Systems
Exhibit 9.4

9-23
Setting Boundaries and Constraints
Focus efforts on strategic priorities
Provide short-term objectives and action
plans
Specific and measurable
Specific time horizon for attainment
Achievable, but challenging

9-24
 Setting Boundaries and Constraints

Improve operational efficiency and

effectiveness
Minimize improper and unethical conduct

9-25
 Question
Effective boundaries and constraints:
A.Tend to inhibit efficiency and effectiveness
B.Distract employees who are trying to focus on
organizational priorities
C.Minimize improper and unethical conduct
D.Tend to limit organizational growth

9-26
 Organizational Control:
Alternative Approaches
Exhibit 9.6

9-27
 Evolving from Boundaries
to Rewards and Culture
System of rewards and incentives
coupled with a strong culture
Hire the right people
Training plays a key role
Managerial role models are vital
Reward systems clearly aligned with
organizational goals and objectives

9-28
 Role of Corporate Governance
Corporate governance
the relationship among various participants
in determining the direction and performance
of corporations.
primary participants are the shareholders,
the management, and the board of
directors.

9-29
 The Modern Corporation
Corporation
A mechanism
created to allow
different parties to
contribute capital,
expertise, and labor
for the maximum
benefit of each
party.

9-30
 Agency Theory
Deals with the relationship between
Principals who are owners of the firm
(stockholders)
Agents who are the people paid by
principals to perform a job on their behalf
(management)

9-31
 Agency Theory: Two Problems
1. The conflicting 2. The different
goals of principals attitudes and
and agents, along preferences
with the difficulty of towards risk of
principals to principals and
monitor the agents.
agents, and

9-32
 Governance Mechanisms
Board of directors
a group that has a fiduciary duty to ensure
that the company is run consistently with the
long-term interests of the owners, or
shareholders, of a corporation and that acts
as an intermediary between the
shareholders and management.

9-33
 The New Rules for Directors
Exhibit 9.7

9-34
 Governance Mechanisms
Shareholder activism
actions by large shareholders, both
institutions and individuals, to protect their
interests when they feel that managerial
actions diverge from shareholder value
maximization.

9-35
 TIAA-CREFs Principles on the Role of Stock
in Executive Compensation
Exhibit
9.8

9-36
 External Governance
Control Mechanisms
External governance control
mechanisms
methods that ensure that managerial actions
lead to shareholder value maximization and
do not harm other stakeholder groups and
that are outside the control of the corporate
governance system.

9-37
 External Governance
Control Mechanisms
Market for corporate control
Auditors
Banks and analysts
Regulatory bodies
Media and public activists

9-38
 Sarbanes-Oxley Act
Auditors
Barred from certain types of non-audit work
Not allowed to destroy records for five years
Lead partners auditing a firm should be
changed at least every five years

9-39
 Sarbanes-Oxley Act
CEOs and CFOs
Must fully reveal off-balance sheet finances
Vouch for the accuracy of information
revealed
Executives
Must promptly reveal the sale of shares in
firms they manage
Are not allowed to sell shares when other
employees cannot
9-40
 Research Work
McDonalds Corporation, the worlds largest fast
food restaurant chain ,with 2008 revenues of
$24 billion, has recently been a roll. Its
shareholder value has more than tripled
between April 2003 and April 2009. Using the
internet or library sources, evaluate the quality
of the corporation in terms of management, the
board of directors, and shareholder activism.
Are the issues you list favorable or unfavorable
for sound corporate governance?

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 Discussion Questions
The problem of many firms may be attributed to
a traditional control system that failed to
continuously monitor the environment and make
necessary changes in their strategy and
objectives. What companies are you familiar
with that responded appropriately (or
inappropriately) to environmental change?

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How can a strong, positive culture enhance a
firms competitive advantage? How can a weak,
negative culture erode competitive advantage?
Explain and provide examples/
Using the net, research a firm that has an
excellent culture and/or reward and incentive
system. What are this firms main financial and
nonfinancial benefits?

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