Strategic Management

Corporate Performance, Governance, and Business Ethics

Content

•Performance, corporate governance, and business

ethics

•Corporate performance and stakeholders

•The agency theory

•Governance mechanisms

Ethics and strategy, unethical behavior

 Specific Outcome
On completion of this session, you will be able to:

Analyze and design control mechanisms.

Learning path

Strategy Current Business

Model
Formulation Mission, Vision, Values &
Goals
Chapter 01
External Analysis, Internal Analysis,
SWOT
Opportunities & Threats Strengths & Weaknesses
Strategic Choice
Chapter 02 Chapter 03

Functional Strategies,
Chapter 04
FEEDBACK Business Strategies,
Chapters 05, 06 & 07
Global Strategies,
Chapters 08
Corporate Strategies,
Chapters 09 & 10

Strategy Governance & Ethics,

Implementation Chapters 11

Designing Organization Designing Organization

Structure Designing Organization Culture Controls
Chapters 12 & 13 Chapters 12 & 13 Chapters 12 &13
Corporate Performance,
Governance & Business Ethics
Stakeholder

A company’s stakeholders are individuals or groups with interests, claims, or

stakes in the company, in what it does, and in how well it performs. They
include stockholders, creditors, employees, customers, the communities in
which the company does business, and the general public. Stakeholders can
be divided into internal stakeholders and external stakeholders.
Stakeholder

Internal stakeholders are stockholders and employees, including executive

officers, other managers, and board members. External stakeholders are all
other individuals and groups that have some claim on the company. Typically,
this group is comprised of customers, suppliers, creditors (including banks
and bondholders), governments, unions, local communities,and the general
public.
Stakeholders and the Enterprise

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Stakeholder impact analysis

1. Identify stakeholders
2. Identify stakeholders’ interests and concerns
3. Identify what claims stakeholders are likely to make on the organization
4. Identify the stakeholders who are most important from the
organization’s perspective
5. Identify the resulting strategic challenges
The unique role of stockholders

A company’s stockholders are usually put in a different class from other

stakeholder groups, and for good reason. Stockholders are legal owners and
the providers of risk capital, a major source of the capital resources that allow
a company to operate its business. The capital that stockholders provide to a
company is seen as risk capital because there is no guarantee that
stockholders will ever recoup their investment and or earn a decent return.
Profitability, Profit Growth, and Stakeholder
Claims
•Stockholders receive a return on investment from dividend payments and
capital appreciation in the market value of a share
•Ways to grow profits
• Participating in a market that is growing
• Taking market share from competitors
• Consolidating the industry through horizontal integration
• Development of new markets through international expansion, vertical
integration, or diversification
Agency Theory
•Business relationship problems when decision-making authority is delegated
from one person to another
•Information asymmetry: Agent has more information about the resources
being managed than the principal
•On-the-job consumption: Describes the behavior of senior management’s
use of company funds to acquire perks
•Empire building: Buying new businesses to increase the size of the company
through diversification

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The Tradeoff Between Profitability and Revenue
Growth Rates

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Challenges for principals

•Shaping the agents’ behavior to act in accordance with the goals set
•Reducing the information asymmetry
•Developing mechanisms for removing agents who do not act in accordance
with the goals
Board of Directors
•The board of directors is the centerpiece of the corporate governance
system
•Inside directors: Senior employees of the company
•Outside directors: Not full-time employees of the company
• Provide objectivity to the monitoring and evaluation of processes
Stock-Based Compensation

Stock options: Right to purchase company stock at a predetermined price at

some point in the future
• Strike price - Stock’s trading price when the option was originally granted
• Motivate managers to adopt strategies that increase the share price of the
company
• Has become increasingly controversial
• Aligns management and stockholder interests
Financial Statements and Auditors

•Quarterly and annual reports of publicly traded companies are filed with the
SEC to give accurate information about the way the agents run the company
•SEC requires that the accounts be audited by an independent and accredited
accounting firm to make sure managers do not misrepresent the financial
information

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Takeover Constraint

•Risk of being acquired by another company

•Corporate raiders - Purchase large blocks of shares in companies that appear
to be pursuing strategies inconsistent with maximizing stockholder wealth
• Greenmail: Pushing companies to either change their strategy to benefit
stockholders, or charging a premium for the stocks when the company
wants to buy them back

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Governance Mechanisms Inside a Company

•Strategic control systems - Formal target-setting, measurement, and

feedback systems
•Employee incentives - Motivate employees to work toward goals central to
maximizing long-term profitability

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Ethics and Strategy

Ethics

• Accepted principles of right or wrong that govern the conduct of a person, the
members of a profession, or the actions of an organization

Business ethics

• Accepted principles of right or wrong governing the conduct of businesspeople

Ethical dilemmas

• Situations where there is no agreement over exactly what the accepted principles
of right and wrong are

Noblesse oblige

• Responsibility of people of high birth to give something back to the society that
made their success possible
Unethical behavior arising from agency problem

Information Anticompetitive
Self-dealing
manipulation behavior

Substandard
Opportunistic Environmental
working
exploitation degradation
conditions

Corruption
Roots of Unethical Behavior

•Personal ethics: Generally accepted principles of right and wrong governing

the conduct of individuals
•Failing to ask oneself if a decision is ethical
•Some organizational cultures de-emphasize business ethics
•Pressure to meet unrealistic performance goals
•Unethical leadership
Behaving Ethically

•Favor hiring and promotion with a well-grounded sense of personal ethics

•Build an organizational culture that places a high value on ethical behavior
• Code of ethics: Formal statement of the ethical priorities to which a
business adheres
•Ensure that leaders practice and preach ethical behavior
Behaving Ethically

•Ensure people consider the ethical dimension of business decisions

•Use ethics officers
•Put strong governance processes in place
•Act with moral courage
Ethical values should include

• Integrity • Fairness
• Honesty • Responsibility
• Openness
• Respect
 CONCLUSIONS
Stakeholders are individuals or groups that have an interest, claim, or stake in the
01 company, in what it does, and in how well it performs.
A company cannot always satisfy the claims of all stakeholders. The goals of different
02 groups may conflict. The company must identify the most important stakeholders to
satisfy their needs.

03 A company’s stockholders are its legal owners and the providers of risk capital, a major
source of the capital resources that allow a company to operate its business. As such, they
have a unique role among stakeholder groups.
04 When pursuing strategies that maximize profitability, a company has an obligation to do so
within the limits set by the law and in a manner consistent with societal expectations.
05 The essence of the agency problem is that the interests of principals and agents are not
always the same, and some agents may take advantage of information asymmetries.
The term ethics refers to accepted principles of right or wrong that govern the conduct of
06 a person, the members of a profession, or the actions of an organization. Business ethics
are the accepted principles of right or wrong governing the conduct of business people,
and an ethical strategy is one that does not violate these accepted principles.
 References

 Hill, C. W., Jones, G. R., & Schilling, M. A. (2014). Strategic

management: Theory: An integrated approach. Cengage Learning.
Chapter 11
.