Chap 2

Strategic Management and
Business Policy 15e, Global Edition
Chapter 2
Corporate
Governance
15e
Copyright © 2018 Pearson Education, Ltd. 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
2-2
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.

2-3
Board of Directors in the US

2-4
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

2-5
Capital Market Authority (CMA) in
Saudi Arabia
• CMA’s functions are to regulate and develop the
Saudi Arabian capital market by issuing the rules
and regulations required to implement the
provisions of the Capital Market Law.
• The basic objectives are to create an appropriate
investment environment, boost investor confidence,
reinforce transparency and disclosure standards
across all the listed companies and protect
investors and dealers from illegal acts in the
market.
2-6
Tadawul
• Raising capital through an IPO allows the company to

tap into a larger investor base, which otherwise would
not be available without the benefit of an organized
market, such as Tadawul, that facilitates and streamlines
access to institutional and individual investors

2-7
Effective Corporate Governance in Saudi
Arabia
• The CMA regulations define corporate
governance as rules to lead and guide
the Company that includes
mechanisms to regulate the various
relationships between the Board,
Executive Directors, Shareholders
and Stakeholders (such as
employees, customers and
suppliers).
2-8
Corporate Governance
Regulations
• Specify the rules and standards governing
the companies’ management listed in the
exchange.
• The regulation constitutes as guiding
principles in applying some of its articles,
but must disclose the provisions that have
been implemented and the provisions that
have not been implemented.

2-9
CMA Corporate Governance
Framework
• Shareholders’ rights
• The board of directors
• Company’s committees
• Internal controls
• The company’s external auditor
• The relationship with the stakeholders
• Professionalism and ethical standards
• Disclosure and transparency

2-10
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

2-11
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.

2-12
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

2-13
Figure 2-1: Board of Directors’ Continuum

2-14
Hewlett and Packard

2-15
Lewis Platt - the fourth CEO in
Hewlett-Packard’s history
A long-time engineering employee

DISARRAY
WITH THE HP
The company prospered as it had
BOARD OF through most of its 50-year history
DIRECTORS (1)
Platt spun off the Medical
Instruments division
Slow to recognize the importance of

the Internet 2-16
Lewis Platt and Carly Fiorina

2-17
In 1999, Platt decided to hire a
passionate leader for the staid
engineering-oriented firm
DISARRAY Carly Fiorina would be the new

WITH THE HP CEO, the first woman to head a
DOW 30 company
BOARD OF
DIRECTORS
Made her name at Lucent
(2) Technologies where she was
President
A remarkable turnaround
2-18
In September 2001, Fiorina announced a US$25 billion
merger with Compaq Computer Company
Walter Hewlett and Lewis Platt opposed the merger with a

low -margin, shrinking PC manufacturing firm
Wall Street hated the idea
HP stock lost 18% of its value on the day the merger was
announced
Many analysts thought this was a bad move
Fiorina forced the merger with the support of the

majority of the board of directors after a proxy battle2-19
DISARRAY WITH THE HP BOARD OF
DIRECTORS (4)
On February 22, 2002, the HP Board sent a
stinging letter of criticism against Walter
Hewlett to shareholders
Hewlett responded by taking out ads in major
newspapers opposing the acquisition
In the end, the merger was approved, but by

only a scant 3% majority
Thus, even an activist or catalyst board can do

more harm than good
© Pearson Education Limited 2015 2-20
• On February 6, 2005, Fiorina was
fired by the Board
• The board wanted to hire someone
good at operations
• They chose Mark Hurd, the 25-year
DISARRAY CEO at NCR Corporation
WITH THE HP • Hurd eliminated 15, 000+ jobs, cut
BOARD OF R&D, attempted to automate
consulting services
DIRECTORS
• In late 2005, Board Chairman
(5) Patricia Dunn and Hurd initiated an
investigation of fellow board
members.
• Using detectives posing as reporters,
they obtained phone records of the
board members
The HP Investigation
• Hurd was successful at turning
the company around - listed as
one of the best CEOs in 2009
• Later accused of sexual
harassment with an HP
DISARRAY marketing consultant
WITH THE HP
• Submitted inaccurate expense
BOARD OF
reports to conceal the
DIRECTORS relationship
(6)
• Forced to resign in August 2010
• Four directors involved in
forcing the resignation resigned
their board seats, five new
board members were named
Carly Fiorina and Mark Hurd
DIRECTORS (7)
• In November, 2010, Leo Apotheker, head of Global
Field Operations at SAP, became CEO – stayed on for
1O months
• Apotheker's move to push forward the HP TouchPad
tablet was a commercial failure
• HP phones were taking a beating
• In September 2011, announced that HP would exit
the PC business.
Sara Alsuhaimi
Chairperson
We have been going
through positive
economic transformation
that is moving the whole
country towards
globalization,
diversification, and growth.
We are aligning the Saudi
Stock Exchange with this
momentum of change
which is visibly reflected in
the position we have
successfully reached
today regionally and
globally”.
DIRECTORS (8)
• HP was the leader in PC

sales within the US and
globally
• The outrage was immediate
and overwhelming
• The company reversed
position two weeks later
• The board was appalled at
his lack of leadership
• The board named one of its
own members, former eBay
CEO Meg Whitman to run
the company
 In 2014, Meg Whitman was named
Chairman of the Board
 From 2011 when Whitman took over as
CEO to 2015, laid off more than 55,000
employees
 Effective November 1, 2015 the
company split into two publicly traded
companies. Why?
 (1) The slow growing PC and printer
business and
 (2) Fast growing cloud technology and
cyber security businesses.

DIRECTORS (9) (8)
• The CEO revolving door at HP
has cost the company more
than US$83 million in severance
pay for CEOs.
DISARRAY • "Before Apotheker ever came
WITH THE HP to HP, the company was known
BOARD OF for its fractious board.
DIRECTORS • Individual directors would cycle
(10) in and out.
• Somehow the group seemed
constantly divided by personal
rivalries, bickering, and leaks to
the press."
DISCUSSION
What was wrong with Carly Fiorina?

What was wrong with Mark Hurd?
What was wrong with Leo Apotheker?
What was wrong with the company?
What should boards of directors do and not
do?

Corporation and Limited Liability
• Mechanism established to allow different parties to

contribute capital, expertise, and labor for their mutual
benefit
• The investor/shareholder participates in the profits (in
the form of dividends and stock price increases)
without taking responsibility for the operations
• Management runs the company without being
responsible for personally providing the funds
• Laws have been passed that give shareholders limited
liability and limited involvement in a corporation's
activities
SHAREHOLDERS
1 2 3
Have the Directors have a The authority and
legal (fiduciary responsibility to
right to elect duty) to represent establish basic
directors the shareholders corporate
and protect their policies, ensure
interests they are followed

Role of the Board in Strategic Management
Monitor Developments inside and outside
Evaluate
Management proposals, decisions and
and
actions
Influence
Initiate and
Mission and strategies
Determine
BOARD OF DIRECTORS' CONTINUUM
A board of directors is involved in strategic

management to the extent that it carries out
monitoring, evaluating and influencing, and
initiating and determining
The board of directors' continuum shows the
possible degree of involvement (from low to high)
in the strategic management process
From phantom boards with no real involvement to
catalyst boards with high involvement
Active involvement is positively related to financial
performance and credit rating 2-34
Discussion
What is
BOD’s
continuum?
2-35
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

2-36
(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

2-37
(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

2-38
DISCUSSION
Contrast agency
theory and
stewardship theory

(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

2-40
SURVEY OF DIRECTORS: MCKINSEY & COMPANY
Directors devote more time to strategy than any other area
High influence, a common plan for creating value
Had healthy debates
Considered global trends, future scenarios, developed

plans
Boards are becoming increasingly active 2-41

FACEBOOK
 Even after the high-profile IPO, Facebook was
still more than 50% controlled by founder Mark
Zuckerberg
 CEO used his position to make significant
strategic decisions without input from the
board of directors
 In 2012, just ahead of the IPO of Facebook, he
bought Instagram for roughly US$1 billion
 Only then informed the board of his move
BOARD OF DIRECTORS: COMPOSITION
 A large U.S. corporation has an average of 10

directors, 2 of whom are insiders
 In 1998 there were no non-executives (outside
directors) that served as Chairman of the Board
for the S&P 500 companies
 By 2012 these outsiders comprised 23% of the
Chair positions
 In 1998 84% of the S&P 500 companies had their
CEO in a dual role as Chairman (CEO duality)
 By 2012 that number had dropped to 56%
2-43
BOARDS AROUND THE WORLD
 Outsiders account for 80% of the board members in

large U.S. corporations, the same as in Canada
 Boards in the UK have 5 inside and 5 outside
directors
 In France boards consist of 3 insiders and 8 outsiders
 Japanese boards contain 2 outsiders and 12 insiders
 The board of directors in a small U.S. corporation has
4 to 5 members, of whom only 1 or 2 are outsiders
 A negative relationship between board size and firm
profitability
2-44
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.

2-45
• 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

2-46
• Interlocking directorates
– useful for gaining both inside information about
an uncertain environment and objective
expertise about potential strategies and tactics

2-47
Nomination and Election of Board
Members (1 of 2)
• 97% 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

2-48
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%

2-49
Mechanism for selecting board
members in Saudi Arabia
• Corporate governance specifies the required
skills to be possessed by members of the
board and the various board committees.
• Finding appropriate board members,
including independent directors, can be a
challenging task.
• The company must have clear policies
and procedures for the membership of the
board of directors.

2-50
Improving process of internal controls
in Saudi Arabia
• The Board shall approve an internal
control system for the Company in order
to assess the policies and procedures
relating to risk management;
implementation of the provisions of the
Company’s governance rules approved
by the Company and compliance with the
relevant laws and regulations.

2-51
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 by-
laws, 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.

2-52
• 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.

2-53
• Lead director
– consulted by the Chair/CEO regarding board
affairs and coordinates the annual evaluation of
the CEO
• 96% of U.S. companies that combine the

Chairman and CEO positions had a lead director.

2-54
• 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.

2-55
In 2003, THE U.S. SECURITIES AND EXCHANGE COMMISSION (SEC)
REQUIRED
A majority of directors on the board

need to be independent outsiders
All listed companies staff their audit, compensation,

and nominating/corporate governance committees
entirely with independent, outside members
CMA: Saudi Arabia
 A public company must strengthen its board of
directors with the appointment of independent
members and also establish an audit,
nomination and remuneration committee as
minimum requirements of local regulations.
 Many public companies elect to setup further
committees depending on the nature and size
of their operations such as an executive
committee and/ or a risk committee.

66% of the outstanding stock in the largest U.S.
and UK corporations owned by institutional
INSTITUTIONAL
investors
INVESTORS IN THE
Mutual funds and pension plans
US AND UK
Taking an increasingly active role
TIAA-CREF's Corporate Governance team monitors

governance practices of the 4000 companies
Invests through its Corporate Assessment Program
2-58
IN CASE OF PROBLEMS, TIAA-CREF
Sends letters stating its concerns
Follows up with visits
Finally sponsors a shareholder resolution

in opposition to management 's actions

INSTITUTIONAL INVESTORS AROUND THE WORLD
In Germany, bankers are represented on almost

every board - own large blocks of stock in
German corporations
In Denmark, Sweden, Belgium, and Italy,

investment companies assume this role
The investment company casts 42.5% of the

Electrolux shareholder votes, thus guaranteeing
itself positions on the Electrolux Board
WOMEN AND MINORITIES
How to increase the number of women

and minorities serving on boards?
Shares of companies with female board members

outperformed comparable businesses with all-male
boards by 26%
Amongst the 100 largest companies listed in 2011

96% of boards of directors had at least one female
director, women made up only 16% of all directors
2-61
Australia - 11.2%
FEMALES
China - 8.1%
on
Boards Hong Kong - 8.6%
ACROSS India - 4.7%
THE Malaysia - 7.8%
WORLD
Singapore - 6.4%
New Zealand - 7.5%
2-62
MINORITIES AND INTERNATIONALS ON THE
BOARD
78% of the U.S. boards - at least one ethnic

minority in 2007
African-American, 47%; Latino, 19%; Asian, 11%
Only 47% in 1995, comprising 14% of total
directors
84% of the top 200 S&P companies in the US had
at least one AfricanAmerican director
33% of U.S. boards had an international director

MINORITIES AND INTERNATIONALS ON THE
BOARD
 In Europe, most had one or more

non-national director
Asian and Latin American boards
are mostly staffed by nationals
Working to add more international
directors
2-64
DIRECTOR PAY
4% of the US companies paid their directors more
than US $150K as a cash retainer
Paid for meeting attendance or other obligations
The median cash retainer was between US $75K and

US $100K (38% )
Small companies paid less (around US$10,000).
Directors held 3% of their firms' outstanding stock

2-65
INSIDE DIRECTORS
The chief executive officer and either the chief

operating officer or the chief financial officer
Residents or vice presidents of key operating divisions

or functional units sometimes serve on the board
Few, if any, inside directors receive any extra

compensation for assuming this extra duty
Very rarely does a U.S. board include any lower-level

operating employees
2-66
CODETERMINATION: SHOULD
EMPLOYEES SERVE ON BOARDS?
 Chrysler, Northwest Airlines, United Airlines (UAL), and

Wheeling-Pittsburgh Steel added representatives from
employee associations to their boards
 Part of union agreements or Employee Stock Ownership
Plans (ESOPs)
 United Airlines workers traded 15% in pay cuts for 55%
of the company (through an ESOP) and 3 of the firm's 12
board seats
 Workers represent themselves on the board not so much
as employees but primarily as owners 2-67
CONFLICT OF INTEREST?
 The United Auto Workers union obtained a temporary seat on

the board as part of a union contract agreement in exchange
for changes in work rules and reductions in benefits
 Chrysler was facing bankruptcy in the late 1970s
 Critics raise the issue of conflict of interest.
 Can a member of the board, who is privy to confidential
managerial information, function, for example, as a union
leader whose primary duty is to fight for the best benefits for
his or her members?
 An increasing acceptance of worker participation (without
ownership) on corporate boards in Europe
2-68
CODETERMINATION IN EUROPE
Germany pioneered codetermination during the

1950s with a two-tiered system:
(1) A supervisory board elected by shareholders

and employees to approve or decide corporate
strategy and policy
(2) A management board (composed primarily of
top management) appointed by the supervisory
board to manage the company's activities
OTHER EUROPEAN COUNTRIES
Passed similar codetermination legislation

(in Sweden, Denmark, Norway, and Austria)
Alternatively, use worker councils to work

closely with management (in Belgium,
Luxembourg, France , Italy , Ireland, and the
Netherlands)
A DIRECT INTERLOCKING DIRECTORATE
Occurs when two firms share a

director or when an executive of
one firm sits on the board of a
second firm
An indirect interlock occurs when

two corporations have directors
who also serve on the board of a
third firm, such as a bank
2-71
THE CLAYTON ACT AND THE BANKING ACT
OF 1933
Prohibit interlocking directorates by U.S. companies
competing in the same industry
But most large corporations in the US, Japan, and

Germany are interlocked either directly or indirectly
with financial institutions
Eleven of the 15 largest U.S. corporations have at least
two board members who sit together on another
board
Twenty percent of the 1000 largest U.S. firms share at
least one board member
2-72
DISCUSSION
What is board of
directors’
composition and why
is it important?
What are director
interlocks? Are they
useful or harmful?

Argue that managers in management-
controlled firms select less risky
strategies with quick payoffs
Manager-controlled firms (with weak

boards) are more likely to go into debt
PROPONENTS to diversify into unrelated markets
OF AGENCY
This quickly boosts sales and assets to
THEORY justify higher salaries but results in
poorer long-term performance
Boards with many outside directors tend

to favor growth through international
expansion and innovative venturing
2-74
CMA: Saudi Arabia: Management Team
 Management Team
 The company’s management team will be required to
have sufficient depth and breadth to prove to
existing and prospective investors their ability to
lead the business and execute on its stated strategy.
 As a company prepares for a listing and offering, the
Board of Directors must assess the capabilities and
experience of their management team so as to
determine whether any strengthening of the
management team are required.
 In addition, succession plans should also be in place
to minimize dependence on individuals and ensure
smooth managerial transition.

Berle and Means: top managers are "hired
hands“
AGENCY Use strategies, such as acquisitions, that

THEORY increase the size of the firm (to become
VERSUS more powerful and to demand increased
STEWARDSHIP pay and benefits)
THEORY IN Diversify the firm into unrelated businesses
CORPORATE (to reduce short-term risk and to allow
GOVERNANCE them to put less effort into a core product
line that may be facing difficulty)
Thus, reduction of dividends and/or stock

price
2-76
 (1) Conflict of
interest when the
PRINCIPALS
(OWNERS/SHAREHOLDERS)
desires or objec
VS. THEIR AGENTS (TOP
tivesMANAGEMENT)
of owners and
agents conflict
2-
77
Attitudes toward
risk may be
different
Agents may shy
away from riskier
strategies to
protect their jobs.
(2) MORAL HAZARD
Refers to the situation

where it is difficult or
expensive for the owners
to verify what the agents
are actually doing…
THE LIKELIHOOD THAT AGENCY
PROBLEMS WILL OCCUR
(1) increases when stock is widely held (no one
shareholder owns more than a small percentage
of the total common stock),
(2) directors know little of the company
(3) directors are personal friends of top

management
(4) a high percentage of board members are

inside directors
© Person Education Limited 2015 2-79
WHAT TO DO?
A positive
The need better relationship
align the interests between corporate
of the agents with performance and
those of the the amount of
owners…How? stock owned by
directors
2-80
Executives are motivated to act in the
best interests of the corporation
Agency theory focuses on extrinsic

rewards that serve lower-level needs,
such as pay and security
STEWARDSHIP Stewardship theory focuses on the
THEORY higher-order needs, such as achievement
and self-actualization
Senior executives over time tend to view
the corporation as an extension of
themselves
Want to ensure the continued life and
success of the company
2-81
SHAREHOLDERS VS. EXECUTIVES
 The shareholder is free to sell stock at any time.

 The average share of stock held less than 1O months.
 A diversified investor or speculator may care little
about risk at the company level
 Prefers management to assume extraordinary risk so
long as the return is adequate.
 Because executives cannot easily leave their jobs, they
are more interested in a merely satisfactory return
 Put heavy emphasis on the firm's continued survival.
2-82
CODETERMINATION: SHOULD
EMPLOYEES SERVE ON BOARDS?
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. 2-83
GLOBAL BUSINESS BOARD ACTIVISM AT
YAHOO
 Board activism now cuts across geographic

boundaries like nothing has in the past.
 Yahoo! was founded in a Stanford University campus
trailer in early 1994,
 it is an acronym for "Yet Another Hierarchical
Officious Oracle“ - a means for people to keep track
of their favorite interests on the Internet.
 Founders Ph.D. candidates David Filo and Jerry Yang
2-84
YAHOO
 The Internet bubble nearly bankrupted it

 Terry Semel, a Hollywood dealmaker who didn't even use e-mail,
was hired to turn it into a media giant
 In 2002, Semel tried to buy Google for roughly US $3 billion (two
years before Google went public).
 Google's revenue stood at a paltry US$240 million, Yahoo!'s was
in excess of US$800 million.
 Despite failures to purchase Google, Facebook, and YouTube,
became an Internet search giant serving more than 345 million
individuals a month
TERRY SEMEL: THE ACQUISITION JUNKIE!
 By 2005, Yahoo! was the number one global Internet brand

 Semel’s compensation as US $230.6 million.
 His reign saw both the rise and fall of the company
 The board grew increasingly dissatisfied
 By 2007, the company was losing market share and
repeated acquisitions had failed to produce any real bump
in the stock price
 In June of 2007, Semel assumed the role of non -executive
chairman, Jerry Yang became the CEO
2-86
JERRY YANG: BAD NEGOTIATOR
Things did not improve

There were regular calls for Yang's resignation
as the company continued to flounder
Frustrated by his inability to strike deals with
rivals Microsoft and Google, the board asked
Yang to resign as CEO
His tenure lasted a scant 18 months
2-87
CAROL BARTZ: FIRED WITH A PHONE CALL
 Hired in January 2009 to turn the company around

 Former CEO of Autodesk, a no -nonsense industry veteran.
 Instituted layoffs, reshuffled management, and turned over
search operations to Microsoft in a deal that brought US
$900 million to Yahoo
 However, shares remained flat, market share continued to
drop
 In September 2011, notified via a phone call from the
Chairman of the Board that she was fired

SCOTT THOMPSON – A RESUME PADDING EXPERT
 Hired as the CEO in January 2012

 As CEO of eBay's PayPal unit - a very good job
 Listed a computer science degree from Stonehill College that he
had not earned – had an accounting degree
 Activist shareholder group Third Point (who has a chair on the
board and owns 5.8% of the company) released details about
his resume padding.
 A proxy fight that led to a board shakeup in 2012.
 Most o f the previous board members removed, new members
approved of by Third Point elected
2-89
ROSS LEVINSOHM AND MARISSA
MAYER
 The former head of global media for the company,

was named the interim CEO
 In July 2012, Marissa Mayer became the new CEO
 A longtime Google executive, ran their search group
 Struggled to turn the fortunes of the company
 There has been some consistency in the leadership.
 In her first two years, Mayer acquired 37 companies
in to build out much needed capacity
2-90
THE CONTINUOUS CHANGES OF
LEADERSHIP AT YAHOO!
 Damaged the company's ability to perform

 It is difficult to gain any momentum in an
industry when the top management changes
so often and with such dramatic flair
 The board of directors has a responsibility to
the shareholders
 The question is: At what point have they failed
to do their job?
2-91
What went
DISCUSSION
wrong at
Yahoo?
2-
92
NOMINATION AND ELECTION OF
BOARD MEMBERS
97% of U.S. boards 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
2-93
Willingness to challenge
management when necessary
Nomination Special expertise that is important

and Election to the company
of
Available for outside meetings to
Board advise management
Members:
GOOD Expertise on global issues
DIRECTOR
Understands the firm’s key
technologies and processes
The size of a board in the
United States is determined by
the corporation’s charter and
its by- laws, in compliance with
state laws
ORGANIZATION Some states require a minimum

OF THE BOARD number of board members
But most corporations have

quite a bit of discretion in
determining board size
The average large,
publicly held U.S. firm
has 10 directors on its
board
ORGANIZATION
OF THE BOARD
The average small,
privately-held company
has four to five
members
Lead director
• consulted by the Chair/CEO regarding
Organization board affairs and coordinates the
of the Board annual evaluation of the CEO
96% of U.S. companies that

combine the Chairman and
CEO positions had a lead
director
The most effective boards
accomplish much of their work
through committees
Organization
of the Board
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 2-98
Impact of the Sarbanes-Oxley Act 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

2-99
IMPLEMENTING THE SARBANES-OXLEY ACT
The SEC required in 2003 that a

company disclose whether it has
adopted a code of ethics that
applies to the CEO and to the
company's principal financial
officer.
Requires that the audit,
nominating, and compensation
committees be staffed entirely
by outside directors
2-100
NYSE
The New York Stock Exchange reinforced the
mandates of Sarbanes-Oxley by requiring that
companies have a nominating/governance
committee composed entirely of independent
outside directors.
Similarly, NASDAQ rules require that
nominations for new directors be made by
either a nominating committee of
independent outsiders or by a majority of
independent outside directors
IN RESPONSE TO SARBANES- OXLEY
60% of directors were spending more time on

board matters than before Sarbanes-Oxley
85% were spending more time on their
company's accounts
83% were more focused more on governance
practices, and
52% - on monitoring financial performance.
2-102
SARBANES-OXLEY
Newly elected outside directors with financial

management experience increased to 10% of
all outside directors in 2003 from only 1% of
outsiders in 1998.
78% of Fortune 1000 U.S. boards in 2006
required that directors own stock in the
corporation, compared to just 36% in Europe,
and 26% in Asia.
2-103
Evaluating Governance
S&P Corporate Governance Scoring System
researches four major issues:
1. Ownership structure and influence
2. Financial stakeholder rights and relations
3. Financial transparency and information
disclosure
4. Board structure and processes

2-104
Avoiding Governance Improvements
• Multiple classes of stock
• Public to private ownership
• Controlled companies

2-105
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 minorities

2-106
Trends in Corporate Governance
(2 of 2)
• Boards evaluating individual directors
• Smaller boards
• Splitting the Chairman and CEO positions
• Shareholders may begin to nominate board
members
• Society expects boards to balance profitability with
social needs of society

2-107
More U.S. public corporations have gone
private
Multiple classes keep outsiders from

having sufficient voting power to change
the company
AVOIDING Insiders, usually the company's founders,

GOVERNANCE get stock with extra votes, while others get
IMPROVEMENTS second -class stock with fewer votes.
In 2012 Mark Zuckerberg owned 28% of

the outstanding shares, but controlled 57%
of voting shares
In 2006, 6% of companies had multiple

classes of stock 2-108
 Used by Google, Infrasource
Services, Orbitz , and W&T Offshore
 If a corporation in which an
individual group or another
company controls more than 50% of
the voting shares decides to
SIDESTEPPING become a "controlled company," it
NEW is then exempt from requirements
GOVERNANCE by the New York Stock Exchange
REQUIREMENTS (NYSE) and NASDAQ that a majority
of the board and all members of key
board committee should be
independent outsiders
 Minority shareholders then have no
power
EVALUATING GOVERNANCE
 Independent rating services have established criteria for
good governance
 Standard & Poor's (S&P), Moody's, Morningstar, The
Corporate Library, Institutional Shareholder Services (ISS),
and Governance Metrics International (GMI)
 Bloomberg BusinessWeek annually publishes a list of the
best and worst boards of U.S. corporations
 S&P, Moody's, and The Corporate Library use a wide mix
of research data and criteria to evaluate companies
 ISS and GMI have been criticized because they primarily
use public records to score firms, using simple checklists
2-110
THE S&P CORPORATE GOVERNANCE
SCORING SYSTEM
Researches four major issues:

• Ownership Structure and Influence
• Financial Stakeholder Rights and Relations
• Financial Transparency and Information Disclosure
• Board Structure and Processes
Moving from the poorest to the best-governed

categories nearly doubled a firm's likelihood of
receiving an investment-grade credit rating. 2-111
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

2-112
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

2-113
• Transformational leaders
– leaders who provide change and movement in
an organization by providing a vision for that
change

2-114
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.

2-115
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

2-116
Managing the Strategic Planning
Process (2 of 2)
Strategic planning staff responsibilities
include:
1. Identify and analyze company-wide 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

2-117
Egregious pay for CEOs who
don't perform.
Leo Apotheker was paid
over US $30 million dollars
during his 11-month tenure
CEO PAY at HP despite making
strategic choices that cost
the company hundreds of
millions in sales and a share
price that dropped almost
in half.
CEO PAY (2)
Researchers calculated a "deserved pay"
based upon earnings growth and shareholder
return
No correlation in the S&P 100 between CEO
pay and company performance
The 2015 median pay for the nation's 200
top-paid CEOs was US $11.5 million and the
CEO pay as multiple of the typical worker pay
was over 295 times

THE DODD-FRANK FINANCIAL REFORM
LAW (2010)
 Requires companies to submit executive compensation
packages for a nonbinding shareholder vote at least once
every three years
 Most public companies now do so annually
 These votes have done little to curb CEO pay
 Since the legislation went into effect, CEO pay has risen
12% annually
 But in 2011, shareholders rejected CEO Vikram Pandit's
(Citi group) US$14 .8 million pay package after the stock
dropped over 40% 2-120
THE CEO ARTICULATES A STRATEGIC VISION
FOR THE CORPORATION
The CEO envisions the company not as it currently is

but as it can become
Gives renewed meaning to everyone's work
Enables employees to see beyond their own jobs to
the functioning of the total corporation
Louis Gerstner proposed that IBM change its
business model from computer hardware to services
 98% of managers believe that the CEO must convey
a strong sense of vision

THE CEO PRESENTS A ROLE FOR OTHERS
TO IDENTIFY WITH AND TO FOLLOW
 Humble Leader empathizes with followers and sets

an example in terms of behavior, dress, and actions
 Attitudes and values are clear-cut and
communicated in words and deeds
 Steve Ballmer, then CEO of Microsoft personally
crawled under conference room tables to plug in PC
monitors and diagnose a problem
 Leads to higher sales and profits with lower turnover
2-122
THE CEO COMMUNICATES HIGH-PERFORMANCE
STANDARDS AND ALSO SHOWS CONFIDENCE IN
THE FOLLOWERS’ ABILITIES TO MEET THESE
STANDARDS
 Empowers followers by raising their beliefs in their

own capabilities
 Sets stretch goals that provide a challenge
 Communicates high expectations
 Must be willing to follow through by coaching people
 Ivan Seidenberg, CEO of Verizon Communications
showed his faith by letting managers handle
important projects and represent him in public forums
 Grateful managers were fiercely loyal
HUBRIS AND NARCISSIM
•Overconfidence and self-admiration
blind them to information contrary to a
decided course of action
•Charge ahead with mergers and
acquisitions (M & As) although most M
& As destroy shareholder value
•Could avoid selling new stock to finance
them
DISCUSSION
What could
undermine
one’s ability to
be a good
leader?
MANAGING
THE Strategic planning
STRATEGIC staff
PLANNING  charged with
PROCESS supporting both
top management
and the business
units in the
strategic planning
process
2-126
MANAGING THE
STRATEGIC PLANNING PROCESS
Strategic planning staff

responsibilities include:
• Identify and analyze company-wide strategic
issues, and suggest corporate strategic
alternatives to top management
• Work as facilitators with business units to
guide them through the strategic planning
process
2-127
TOP-DOWN OR BOTTOM-UP?
 Bottom-up strategic planning is most

appropriate in multidivisional corporations
operating in relatively stable environments
 Top-down strategic planning is most appropriate
for firms operating in turbulent environments
 Others engage in concurrent strategic planning
 All the organization's units draft plans for
themselves after they have been provided with
the organization's overall mission and objectives 2-128
SUCCESSFUL BOARDS
The criteria for candidate selection based on

the strategic needs of the company
Realistic performance expectations rather than
demanding a quick fix
A deep understanding of the business
Strong strategic oversight of top management
Thoughtful annual reviews of CEO performance
Listing Incentives for Companies in Saudi Arabia
• A part of the efforts to “incentivize and encourage

private sector companies to offer and list their shares
on the stock market” initiative
• Under the umbrella of the Financial Sector
Development Program (FSDP), one of the
executive programs launched by the Council of
Economic and Development Affairs (CEDA)
• Seek to achieve the objectives of the Kingdom›s
Vision 2030 to develop the national economy and
diversify income sources through enhancing the
depth of financial sector institutions and developing
the Saudi capital market to be an advanced capital
market.
Rania Nashar, CEO of
Sambia Financial Group
•Deepen the
transparency and
governance
standards!!!

Chap 2

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap 2

Uploaded by

Copyright:

Available Formats

Strategic Management and

Business Policy 15e, Global Edition

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

2-1 Describe the role and responsibilities of the board of

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

• Raising capital through an IPO allows the company to

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

A long-time engineering employee

Slow to recognize the importance of

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

DISARRAY Carly Fiorina would be the new

Walter Hewlett and Lewis Platt opposed the merger with a

Wall Street hated the idea

Many analysts thought this was a bad move

Fiorina forced the merger with the support of the

In the end, the merger was approved, but by

Thus, even an activist or catalyst board can do

• HP was the leader in PC

DISARRAY WITH THE HP BOARD OF

What was wrong with Carly Fiorina?

© Pearson Education Limited 2015 2-30

• Mechanism established to allow different parties to

© Pearson Education Limited 2015 2-32

Monitor Developments inside and outside

A board of directors is involved in strategic

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

© Pearson Education Limited 2015 2-39

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Directors devote more time to strategy than any other area

High influence, a common plan for creating value

Had healthy debates

Considered global trends, future scenarios, developed

Boards are becom­ing increasingly active 2-41

 A large U.S. corporation has an average of 10

 Outsiders account for 80% of the board members in

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

• The size of a board in the United States is

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

• The average large, publicly held U.S. firm has ten

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

• 96% of U.S. companies that combine the

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

• The most effective boards accomplish much of

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.

A majority of directors on the board

All listed companies staff their audit, compensation,

© Pearson Education Limited 2015 2-57

Boards are becoming increasingly active 2-41

TIAA-CREF's Corporate Governance team monitors

 The shareholder is free to sell stock at any time.