INTRODUCTION

1
What Is Strategy and
Why Is It Important?
 “Without a
strategy the
organization is
like a ship
without a
rudder.”
 STRATEGY - ORIGIN
 The word strategy has its origin from the Greek
word “strategia” meaning Military Commander. In
the ancient days battles were fought over land. In
contrast, today's battles are fought over markets.
 In the ancient days battles were won not by virtue
of size of the army or armory; but by virtue of their
courage, obsession, and more importantly –
strategies.
 Even in today’s markets, battles fought on the
market front are won by companies by virtue of
their obsession & strategies, whose origin can be
traced to some of the greatest battles fought in the
ancient days.
 The fundamental assumption is – if you have to win,
4
you will have to defeat others.
 SOME PARALLELS
 Japan’s attack on Pearl Harbour
◦ Strategy: Attack where it hurts the most.
◦ Toyota’s entry in the US, challenging GM and
Ford.
 US attack of Morocco to capture Germany
◦ Strategy: Pin-hole strategy
◦ Wal-Mart challenging Sears by entering small
towns.
 Allied Forces Vs Germany (WW-II)
◦ Strategy: Forging alliances.
◦ Yahoo and Microsoft challenging Google.
 Napoleon’s attack on Russia
◦ Strategy: Waiting for the right time.
◦ Reliance’s entry into telecom.
5
 Thinking Strategically:
The Three Big Strategic Questions
1. Where are we now?
2. Where do we want to go?
– Business(es) to be in and market positions to
stake out
– Buyer needs and groups to serve
– Outcomes to achieve
3. How will we get there?
– A company’s answer to “how
will we get there?” is its strategy
 STRATEGY - DEFINITION
 Strategy is all about making trade-offs between
what to do and more importantly what not to do;
consciously choosing to differentiate. It reflects a
congruence between external opportunities and
internal capabilities. Types of strategies –
 Corporate Strategies – It is all about making
choices across various businesses and allocating
resources among them.
 Business Strategies – It is all about developing
leveraging and sustaining competitive advantage.
 Functional Strategies – It is all about finding better
ways to perform existing processes, or adopting
entirely new processes altogether. 7
 MANAGING THE ENVIRONMENT

Economical

Fit Strategic Fit

Technological
Management
Finance
Fit
Operation

Fit
Strategic
Political

PoliticalIntent

HR
Strategic
Fit
Political
Marketing

Fit Managemen Fit

t
Social & Cultural 8
 EVOLUTION OF MANAGEMENT
THINKING
 As Peter Drucker refers to it, a radical change in the
business environment brings about discontinuity.
When the things happening around the firm are
totally disconnected from its past leads to a paradigm
shift.
 A paradigm is a dominant belief about how the
business and its environment operates.
 The first major discontinuity in the history of global
business environment was the - Industrial Revolution.
◦ Mass Production / Machines
◦ Complicated Processes Organization Size
◦ Complex Structures
 Evolving of an emerging paradigm – survival of the
fittest (Fayol & Taylor, 1910).
9
 EVOLUTION OF STRATEGIC THINKING
 The second major discontinuity in the history of global
economic environment – World War II.
◦ Global market place.
◦ Affluence of the new customer (i.e. push to pull).
◦ Changes in the technology fore-front.
◦ Homogeneous to heterogeneous products.
 From uniform performance, performance across firms
became differentiated. The question of outperforming
your competitor became the new buzzword.
 Survival of the most adaptable becomes a new
management paradigm (Ansoff, 1960). Efficiency and
effectiveness are a prerequisite, but no longer
sufficient. 10
IGOR ANSOFF
  
Ansoff’s Planning School - a highly rational &
detailed strategic planning processes. (P-M
Matrix)
Concept of synergy - obtaining greater
advantage from the combination of individual
components of the organization.
Coined the phrase SM (1984)
(Corporate Strategy)
HENRY MINTZBERG
VIEWS OF EMINENT THINKERS - II
 Planning Approach (5Ps) – Henry Mintzberg(1970)
Strategy is a “plan” – an intended course of action, a
guideline (or set of guidelines) to deal with a
situation.
 A strategy can be a “ploy” too, really just a specific
manoeuvre intended to outwit a competitor.
 If strategies can be intended, they must also be
realized. Strategy is a “pattern” – specifically, a
pattern in a stream of actions.
 Strategy is a “position” - specifically a means of
locating an organization in an environment.
 Strategy is a “perspective” – but of an ingrained way
of perceiving the world. 14
MICHAEL PORTER
 VIEWS OF EMINENT THINKERS - IV

 Positioning Approach – Michael E. Porter (1980)

 Choose a consumer segment and position your
product accordingly.
 A firms performance is inversely related with the
bargaining power of environmental forces to which
it is exposed.
 The environmental forces comprises of – supplier,
customer, new entrant, substitutes, competitors.
 The organization will outperform the industry where
environmental forces are weak and vice-versa.
 An organization is seldom in a position to influence
the larger business environment. 16
  
Industry structure determines the strategy of
a firm.

Competitive Positioning

Strategy provides a competitive advantage.

(“What is Strategy?, Harvard Business Review,

1972, Vol 6)
 C K PRAHLAD
 VIEWS OF EMINENT THINKERS - V

 Core Competence (RBV) – C. K. Prahalad (1990)

 The key to superior performance is not doing the same
as other firms, locating in most attractive industries
and pursuing the same strategy; but exploiting the
resource differences among them.
 Core competencies are the collective learning's of a
firm centering around integrating and coordinating
diverse streams of technologies. It undermines a firms
competitive advantage.
 It enables a firm to deliver unimaginable value ahead
of time.
 It believes firms can significantly alter the way an
industry functions. 19
 Examples: Strategies Based
on Distinctive Capabilities
• Sophisticated distribution systems – Wal-Mart
• Product innovation capabilities – 3M Corporation
• Complex technological process – Michelin
• Defect-free manufacturing – Toyota and Honda
• Specialized marketing and merchandising know-how
– Coca-Cola
• Global sales and distribution capability – Black &
Decker
• Superior e-commerce capabilities – Dell Computer
• Personalized customer service – Ritz Carlton
hotels
KENICHI OHMAE
Business strategy is all about
competitive advantage. The sole purpose
of strategic planning is to enable a
company to gain, as efficiently as
possible, a sustainable edge over its
competitors.

(The Mind of the Strategist)

So What Is Strategy?
STRATEGY IS THE OVERALL, INTEGRATED
COMPANY-WIDE PLAN FOR DEPLOYING
RESOURCES :

- TO ATTAIN DESIRED OBJECTIVES

- TO POSITION A COMPANY IN ITS CHOSEN
MARKET

- TO COMPETE SUCCESSFULLY
- TO SATISFY STAKEHOLDERS
 WORKING DEFINITION

STRATEGY IS THE OVERALL

INTEGRATED PLAN FOR DEPLOYING
RESOURCES TO ACHIEVE THE
OBJECTIVES OF AN Organization.
 WHAT ARE THE CHARACTERISTICS OF
STRATEGIC DECISIONS ?
1.   REQUIRE TOP – MANAGEMENT DECISION MAKING
 
2.    FUTURE ORIENTED
 
3.   SIGNIFICANT IMPACT ON LONG-TERM PROSPERITY
OF THE FIRM
   
4.    INVOLVES ALLOCATION OF LARGE AMOUNTS OF
COMPANY RESOURCES

  5. USUALLY HAVE MULTI-FUNCTIONAL OR MULTI-

BUSINESS CONSEQUENCES

6. NECESSITATES CONSIDERING FACTORS IN THE

FIRM’S EXTERNAL ENVIRONMENT
 
 WHAT IS
STRATEGIC
MANAGEMENT ?
STRATEGIC MANAGEMENT
THE DECISIONS AND ACTIONS
RESULTING IN FORMULATION AND
IMPLEMENTATION OF STRATEGIES
DESIGNED TO ACHIEVE THE
OBJECTIVES OF AN Organization.
STRATEGIC MANAGEMENT -
PROCESS

 Strategic Intent
 Strategic Planning
Strategic
◦ Environmental Scanning Gap
◦ Appraisal of the Firm
 Strategy Formulation
◦ Corporate Strategy
◦ Business Strategy Strategic
◦ Functional Strategy Choices
 Strategy Implementation
 Strategy Performance
 Strategy Evaluation & Control 28
Five Tasks of Strategic Management

Developing a Vision and Mission

Setting Objectives
Formulating a Strategy
Implementing the Strategy
Evaluating Performance and Initiating
Corrective Actions
Who Performs the Five
Strategic Management Tasks?

 Senior Corporate Level

Executives
 Business Unit Managers
 Functional Area Managers
 Operating Managers
STRATEGIC
PURPOSE

31
 STRATEGIC INTENT
 If you cannot see the future, you cannot reach there.
 Money never starts an idea; idea starts the money.
 A strategic intent is a statement of purpose of
existence. It involves an obsession to be the best or
outperform the best. It is the cornerstone of an
organizations strategic architecture reflecting its
desired future state or its aspirations.
 It provides a sense of direction and destiny.
 It’s a philosophy that distinguishes it from its
competitors.
 It implies a significant stretch. A substantial gap
between its resources and aspirations. A gap that
consciously manages between stagnation and atrophy.
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 STRATEGIC INTENT - HIERARCHY

Vision
Integrative Single
Mission
Dominant
Objective
Do

s
m

gic
ina

Goals Many
Specific

Lo
nt

Plans
33
 WHAT IS A VISION STATEMENT?

 VISION describes the aspirations for the future without

specifying the means that will be used to achieve those
desired ends.

 Not achieved through calculating or quantitative means

or analytical techniques (Mintzberg) – it is Intuitive and
Imaginative

 Expresses the future aspirations that will lead to be the

best in one’s field of activity.

 Consists of two major components

1. Core Ideology
2. Envisioned Future
 Vision (Cont’d)
 CORE IDEOLOGY : the enduring character of an
organisation that remains unchanged over time

Consists of the:
◦ Core Values (the essential enduring tenets of an
organisation) and

◦ Core Purpose (An organisation’s reason for being, the

raison d’etre)

 ENVISONED FUTURE
◦ Goal as far as one can see into the horizon (10, 20
years).
◦ Description of what it will be like to achieve that goal.
 VISION
 It is a dream (not a forecast) about what the
company wants to become in the foreseeable future.
It provides an unity of purpose amidst diversity of
personal goals. It ensures that the company does not
wander off into unrelated areas or fall into an activity
trap. It enables the top management to remain
focused.
 It is a combination of three basic elements –
◦ An organizations fundamental reason for existence;
beyond just making money.
◦ It stands for the unchanging core values of the
company.
◦ It represents the company’s audacious, but
achievable aspirations. 36
 VISION - CHARACTERISTICS
 Reliance – “Where Growth is a Way of Life”. In
Reliance when a new project becomes operational
top managers hand over charge to the SBU heads
and move on to a new project.
 Clarity – Vividly descriptive image of what the
company wants to be known for in the future.
 Reachable – It should be within a reasonable target
in the known future; not an utopian dream.
 Brevity – It should be short, clear, and
memorizable.
 Empathy – It should reflect the company’s beliefs
to which it is sensitive.
 Sharing – The company across all hierarchies
should have faith in it. 37
 Vision Statement

vision is to dominate the global foodservice

industry. Global dominance means setting the
performance standard for customer
satisfaction while increasing market share
and profitability through our Convenience,
Value, and Execution Strategies.
 Vision Statement
McDonald’s
Corporation
McDonald’s vision is to dominate the global
foodservice industry. Global dominance
means setting the performance standard for
customer satisfaction while increasing market
share and profitability through our
Convenience, Value, and Execution
Strategies.
 Our vision, quite simply, is to be the world’s premier food
company, offering nutritious, superior tasting foods to
people everywhere. Being the premier food company does
not mean being the biggest but it does mean being the best
in terms of consumer value, customer service, employee
talent, and consistent and predictable growth.

We will become number one or number two in every market

Exampleswe serve, and
ofrevolutionize
Strategic this company to have
Visions
the speed and agility of a small enterprise.
 Heinz
Our vision, quite simply, is to be the world’s premier food
company, offering nutritious, superior tasting foods to
people everywhere. Being the premier food company does
not mean being the biggest but it does mean being the best
in terms of consumer value, customer service, employee
talent, and consistent and predictable growth.

General Electric
We will become number one or number two in every market
Examples ofrevolutionize
we serve, and Strategic Visions
this company to have
the speed and agility of a small enterprise.
 Our vision: Getting to a billion connected computers
worldwide, millions of servers, and trillions of
dollars of e-commerce. Our core mission is being the
building block supplier to the Internet economy and
spurring efforts to make the Internet more useful.
Being connected is now at the center of people’s
computing experience. We are helping to expand the
capabilities of the PC platform and the Internet . . .
We have seen only the early stages of deployment of
digital technologies.
Examples of Strategic Visions
 Intel
Our vision: Getting to a billion connected computers
worldwide, millions of servers, and trillions of
dollars of e-commerce. Intel’s core mission is being
the building block supplier to the Internet economy
and spurring efforts to make the Internet more
useful. Being connected is now at the center of
people’s computing experience. We are helping to
expand the capabilities of the PC platform and the
Internet . . . of
Examples We have seen only the early
Strategic stages of
Visions
deployment of digital technologies.
 Wyeth
Our vision is to lead the way to a healthier world. By
carrying out this vision at every level of our organization,
we will be recognized by our employees, customers, and
shareholders as the best pharmaceutical company in the
world, resulting in value for all. We will achieve this by:

 Leading the world in innovation by linking

pharmaceutical, biotech, and vaccines technologies
 Making quality, integrity, and excellence hallmarks
of the way we do business
Examples of Strategic Visions
 Attracting, developing, and motivating the best people
 Continually growing improving our business
 “We will clothe the world by marketing the
most appealing and widely worn casual
clothing in the world.”

“Empower people through great software—any time, any

place, and on any device.”

Examples: Vision Slogans

“The best care to every patient every day.”
 Levi Strauss & Company
“We will clothe the world by marketing the most
appealing and widely worn casual clothing in the
world.”

Microsoft Corporation
“Empower people through great software—any time, any
place, and on any device.”

Mayo Clinic
Examples: Vision Slogans
“The best care to every patient every day.”
 Levi Strauss & Company
“We will clothe the world by marketing the most
appealing and widely worn casual clothing in the
world.”

Microsoft Corporation
“Empower people through great software—any time, any
place, and on any device.”

Mayo Clinic
Examples: Vision Slogans
“The best care to every patient every day.”
 “To make London the safest major city in the
world.”

Greenpeace
“To halt environmental abuse and
promote environmental solutions.”

Charles Schwab
Examples: Vision
“To provide customers Slogans
with the most useful and
ethical financial services in the world.”
 Scotland Yard
“To make London the safest major city in the
world.”

Greenpeace
“To halt environmental abuse and
promote environmental solutions.”

Charles Schwab
Examples: Vision
“To provide customers Slogans
with the most useful and
ethical financial services in the world.”
 VISION & MISSION

VISION
We are a Company of dedicated people making quality products for a
healthier World

MISSION

is a global company committed to building long-term growth in volume and

profit and to enhancing its worldwide leadership position by providing
nutritious food products of superior value.

 
WHAT IS MISSION ?
 It is the fundamental, unique purpose of a business that sets it
apart from other firms of its type.

 States the essential purpose of an organisation, why it is in

existance, the nature of business (es) it is in, and the
customers it seeks to serve and satisfy.

 It identifies the scope of its operations in product or service

areas and the markets it wishes to serve or the customer
needs it wants to satisfy.

 Not too broad nor too narrow in scope.

(Missions may change over time : E.g. NASA Mission of 1960)
MISSION (Cont’D)

Questions asked in formulating a Mission:

1. What Industry or Businesses are

we in?

2. What Customers do we serve?

3. Why does this organisation exist?

(A difficult, time-consuming, envisioning

process)
 MISSION

 Mission defines the space that a business wants to

create for itself in a competitive terrain. It enables
the firm to define its business landscape and identify
its competitive forces.
 It is intuitive for managers to conceive their business
in terms of the customer needs they are serving -
◦ What business are we in?
◦ Which customer needs are we serving?
 The scope should not be defined in terms of products,
but in terms of customers-market segment. It should
be broad based and relevant to all stake-holders.
 It serves as a road map to reach the vision; its
reason for existence.
53
 MISSION – SOME IDEAS

 Reliance – “We are in the business of integration”.

All the businesses of the company are strongly
integrated with their main business, though some
may seem unrelated in nature. Defining mission in
terms of products leads to strategic myopia. Some
examples -
◦ We do not offer shoes,
…………………. We offer comfort.
◦ We do not offer steel,
…………………. We offer strength.
◦ We do not offer software's,
…………………. We offer solutions.
◦ We do not offer insurance,
…………………. We offer security. 54
BUSINESS DEFINITION

The starting point in defining Mission.

Can be done along three dimensions :

1. Customer Functions - What is being satisfied?

(e.g. Finding Time, Recording Time, As Fashion Item, Gift Item)

2. Customer Groups or Segments - Who is being Satisfied?

(e.g. Individual, Industry)

3. Alternate Technologies – How is the need being satisfied?

(e.g. Mechanical, Quartz, Digital, Analog)

(Modi-Xerox: “Providing neat reproduction facilities at a

reasonable cost per copy.”)
 To be one of the top three banking companies in terms of
market share in all significant markets we serve.

 To safely deliver a hot, quality pizza in 30 minutes or less

at a fair price and a reasonable profit.

 To satisfy our customers by providing

◦ Quality cars and trucks,
◦ Developing new products,
◦ Reducing the time it takes to bring new vehicles to
market,
◦ Improving the efficiency of all our plants & processes,
and
◦ Building on our teamwork with employees, unions,
dealers, and suppliers
Setting Objectives
Phase 2 of the Strategy-Making Process
Purpose of setting objectives
◦ Converts vision into specific performance
targets
◦ Creates yardsticks to track performance
◦ Pushes firm to be inventive, intentional, and
focused in its actions
Setting challenging, achievable
objectives guards against
◦ Complacency
◦ Internal confusion
◦ Status quo performance
OBJECTIVES

 Objectives are the ends that specifically states how the

Mission will be achieved.
 What is to be accomplished? By when?
 Quantified to the extent possible?

Characteristics of Objectives:
1. They are concrete and specific
2. Time-frame
3. Measurable and Controllable
4. Challenging (Stretch)
 Types of Objectives Required
Financial Objectives Strategic Objectives
Outcomes focused Outcomes focused on
on improving financial improving long-term
performance competitive
business position

$
Examples: Financial
Objectives
X % increase in annual revenues
 X % increase annually in after-tax profits
 X % increase annually in earnings per share
 Annual dividend increases of X %
 Profit margins of X %
 X % return on capital employed (ROCE)
 Increased shareholder value
 Strong bond and credit ratings
 Sufficient internal cash flows to fund 100%
of new capital investment
 Stable earnings during periods of recession
Examples: Strategic Objectives
 Winning an X % market share
 Achieving lower overall costs than rivals
 Overtaking key competitors on product
performance or quality or customer service
 Deriving X % of revenues from sale of new
products introduced in past 5 years
 Achieving technological leadership
 Having better product selection than rivals
 Strengthening company’s brand name appeal
 Having stronger national or global sales and
distribution capabilities than rivals
 Consistently getting new or improved products to
market ahead of rivals
Heinz’s Financial and
Strategic Objectives
 Achieve earnings per share in the range
of $2.15-$2.25 in 2004
 Increase operating cash flow by 45% to $750
million
 Reduce net debt by $1.3 billion in 2003 and further
strengthen the company balance sheet in 2004
 Continue to introduce new and improved food
products
 Remove the clutter in the company product offerings
by reducing the number of SKUs
 Increase spending on trade promotion and
advertising by $200 million to strengthen the
recognition and market shares of the company’s
core brands
 Divest non-core underperforming product lines
Unilver’s Strategic and
Financial Objectives
 Grow annual revenues by 5-6% annually
 Increase operating profit margins from
11% to 16% within 5 years
 Trim company’s 1200 food, household,
and personal care products down to 400
core brands
 Focus sales and marketing efforts on
those brands with potential to become
respected,
market-leading global brands
 Streamline company’s supply chain
Seagate Technology’s
Strategic Objectives
 Solidify the company’s No. 1 position in
the overall market for hard-disk drives
 Get more Seagate drives into popular
consumer electronics products (i.e. video
recorders)
 Take share away from Western Digital in
providing disk drives for Microsoft’s Xbox
 Capture a 10% share of the market for
2.5-inch hard drives for notebook
computers by 2004
DuPont’s Financial and Strategic
Objectives
 To achieve annual revenue growth of 5 to
6% and annual earnings-per-share growth
averaging 10%
 Grow per-share profits faster than
revenues by
(a)Increasing productivity,
(b)Selling enough new products each year
that average prices and average margins
rise, and
(c)Using surplus cash to buy back shares
 Sell the company’s low-margin textiles and
interiors division (with sales of $6.6 billion
and operating profits of only $114 million)
3M Corporation’s Financial
and Strategic Objectives
 To achieve annual growth in earnings
per share of 10% or better, on
average
 A return on stockholders’ equity
of 20-25%
 A return on capital employed
of 27% or better
 Have at least 30% of sales come from
products introduced in the past four
years
 GOALS & OBJECTIVES
 Reliance – “We want to become a Rs.100K crore
company by the year 2005”. It is an end result
(quantifiable) something a firm aims and tries to
achieve in a given time bound frame (usually 2-5
years). It provides a quantitative feel to an abstract
proposition.
◦ It lends direction and time frame.
◦ It provides a benchmark for evaluation.
◦ It helps identifying key success factors.
◦ It is based on Management by Objectives (MBO).
◦ It adds legitimacy and motivation.
◦ It keeps the mid management pre-occupied.
◦ It prevents deviation. 67
Short-term objectives
◦ Targets to be achieved soon
◦ Milestones or stair steps for reaching long-
range performance
Long-term objectives
◦ Targets to be achieved within
3 to 5 years
Short-Term vs.now that will
◦ Prompt actions
permit reaching
Long-Term targeted
Objectives
long-range performance later
A company exhibits strategic intent when
it relentlessly pursues an ambitious
strategic objective and concentrates its
competitive actions and
energies on achieving that objective!

Concept of Strategic Intent

1. First, establish organization-wide
objectives and performance targets

2. Next, set business and

product line objectives

3. Then, establish functional

and departmental objectives
Objectives Are Needed
at All Levels
4. Individual objectives are established last
 CORE IDEOLOGY & VALUES

 Core ideology and values represents a set of doctrines

or deep beliefs that underlie top management
behaviour regarding what is good or desirable for the
firm and what is not.
 In the words of JRD Tata, “I am content that,
throughout my tenure at the top, we have maintained
a clean reputation and yet managed to succeed in
business. And I am confident that, though things will
change after me, our basic values will remain
unchanged.
 In contrast Dhirubhai Ambanis success is largely
attributed to his political connections and hectic
lobbying which provided him with an unfair
advantage. 71
SOME GLARING EXAMPLES
 In 1982 – Reliance’s yarn plant goes on stream,
using PTA and DMT. GoI raises customs duty on
polyester chips, used by Orkay; puts anti-dumping
duty on PFY. In 1987 – Reliance sponsors World
Cup; Polyester fibre taken off OGL List, GoI reduces
import duty on PTA. In 1988 – when Reliance bid
for L&T, the state owned financial institutions
having a 35% stake abstained from voting. The
financial institutions had also sold around 7% of
their stakes in L&T to a Reliance subsidiary to
facilitate the take-over. In 2001 – Reliance bids for
IPCL; controversy over GoI decision to modify
telecom policy, Reliance unveils Rs. 25K crore-
investment plan in telecom. 72
 CORPORATE GOVERNANCE

 The basic theme of corporate governance is to

ensure that professional managers are identified and
made accountable in terms of clear business
processes or activities and held responsible through
adequate mechanisms & control systems for
channelizing their decisions for the benefit of
stakeholders at large.
 Corporate governance aims to reduce the principal-
agent problem present in most professional
managed organizations through appropriate forms of
accountability and control mechanisms.
 In fact the principles of corporate governance implies
that managers go beyond in satisfying the stated
and unstated needs of the multiple stakeholders. 73 73
 AGENCY THEORY
 The root of Corporate Governance goes back to the
Agency Theory; also known as the principal-agent
problem or agency dilemma.
 According to the agency theory top managers and
shareholders interests are usually conflicting in
nature and tend to pull in opposite directions.
 From the strategic point of view managers tend to
diversify into unrelated businesses as it provides
higher returns hence a more favourable appraisal.
However, shareholders can diversify their portfolio at
a much lesser risk and cost.
 This exposes the shareholders to additional risks and
higher costs, not present in portfolio diversifications.
74
 ORIGIN & CONTEXT
 Since the early 20th century since a large part of
public funds were held by publicly traded firms in
the US, various laws were enacted to ensure
proper usage of these funds.
 After the Enron downfall, the US government
passed the Sarbanes – Oxley Act, 2002 to restore
public confidence in corporate governance.
 SEBI Report – 2005, defines corporate governance
(headed by Kumar Mangalam Birla) as the
acceptance by management of the inalienable
rights of shareholders as the true owners of the
corporation and of their own role as trustees on
behalf of the shareholders.
75
75
 GOVERNANCE PRINCIPLES

 Rights and equitable treatment of shareholders: Help

shareholders exercise their rights by effectively
communicating information in transparent ways that is
understandable and accessible and encouraging
shareholders to participate in general meetings.
 Interests of other stakeholders: Recognize the legal
and other obligations of all legitimate stakeholders,
including the society at large.
 Role and responsibilities of the board: It deals with
issues about an appropriate mix of executive and non-
executive directors. The key roles of chairperson and
CEO should not be held by the same person and their
offices be clearly separated. 76
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 GOVERNANCE PRINCIPLES

 Integrity and ethical behaviour: Organizations should

develop a code of conduct for their top management
that promotes ethical and responsible decision making.
 Disclosure and transparency: Disclosure of information
should be timely and balanced to ensure that investors
have clear access to data and facts. They should also
implement systems to independently verify and
safeguard the integrity of the company's financial
reporting. Disclosure with respect to “risk” be made
mandatory.
 Independence of the entity's auditors: Identification,
assessment and mitigation of risks and retirement by
rotation over a fixed period of time. 77 77
 GOVERNANCE STRATEGIES

 Monitoring by the board of directors: The board of

directors, with its legal authority to hire, fire and
compensate top management, safeguards invested
capital. Regular board meetings allow potential
problems to be identified, discussed and resolved.
 Balance of power: The simplest balance of power is
very common; a person benefitting from a decision
should abstain from it (i.e. conflict of interest).
 Remuneration: Performance-based remuneration is
designed to relate some proportion of salary to
individual performance. However, they should
provide no mechanism or scope for opportunistic
behaviour. 78
78
 GOVERNANCE & PERFORMANCE
 Inits “Global Investor Opinion Survey” of over 200
institutional investors in 2002, McKinsey found that
80% of the respondents would pay a premium for
well-governed companies. They defined a well-
governed company as one that had mostly out-side
directors, who had no management ties, undertook
formal evaluation of its directors, and was
responsive to investors' requests for information on
governance issues. The size of the premium varied
by market, from 10% for companies where the
regulatory backdrop was least certain (those in
Morocco, Egypt and Russia) to around 40% for
Canadian & European companies. Implementing
corporate governance therefore makes sense. 79
79