Course : MGMT6464005 - Corporate

Governance
Effective Period: September 2024

Strategy, Performance
Measurement, and Risk
Management
Thank you
 Acknowledgement

These slides have been adapted from:

Larcker, D., & Tayan, B. (2016). Corporate

Governance Matters: A Closer Look at
Organizational Choices and Their Consequences.
2nd Edition. Pearson FT Press.

Chapter 6
Learning Outcome

After studying this chapter, the students should be able to :

• LO 1 : Define Corporate Governance
• LO 2 : Basic Concept Corporate Governance
• LO 3: Review the major Corporate Governance science
disciplines t
 Organizational Strategy
• Lockheed Martin’s Vision: Be the global leader in supporting our
customers to strengthen global security, deliver citizen services and
advance scientific discovery.
• Lockheed Martin’s Value Statements:
– Do What’s Right
– Respect Others
– Perform with Excellence
 Organizational Strategy
• Multiple aspects when developing its corporate strategy:
– Scope
– Markets
– Advantage
– Resources
– Environment
– Stakeholders
 Strategy Implementation Process

• Establish the overarching objective of the firm.

• Determine the outcomes that are necessary to achieve the TSR target.
• Assess the viability of specific strategies to achieve the company’s
economic targets.
• Assign targets (both financial and nonfinancial) that will enable the
company to measure the success of its strategy over time.
Business Model Development and Testing

• The board of directors and the senior management team at a major

fast-food restaurant chain decided that the company was not growing
fast enough. At the request of the board, senior-level executives across
the various functional areas of the company convened to examine how
and why the company was falling short. Executives outlined what they
believed to be a simple causal model of how the company made
money.
Business Model Development and Testing

• A large financial services organization had a goal of being a “world

leader in financial advisory and brokerage services to retail investors.”
From prior statistical analyses, executives and the board knew that
customer retention and assets under management were key success
indicators that directly impacted economic results.
 Key Performance Measures
• KPIs are roughly grouped into two categories:
– Financial KPIs include measures such as total shareholder return;
revenue growth; earnings per share; earnings before interest, taxes,
depreciation, and amortization (EBITDA); return on capital;
economic value added (EVA); and free cash flow.
– Nonfinancial KPIs include measures such as customer
satisfaction, employee satisfaction, defects and rework, on-time
delivery, worker safety, environmental safety, and research and
development (R&D) pipeline productivity.
 How Well are Boards Doing with
Performance Measures

• The only measure that had higher measurement quality than

importance is short-term financial accounting results. By contrast,
metrics about customer satisfaction, product quality, innovation, and
other important drivers were not tracked through reliable metrics.
These measures had higher importance than measurement quality
 Risk and Risk Management

• Risk management is now defined in much broader terms than was

formerly the case, and includes CEO succession planning and the
structure of executive compensation.
 Risk and Risk Tolerance

• The risk facing an organization represents the likelihood and severity

of loss from unexpected or uncontrollable outcomes.
• Each company must determine its own tolerance for risk. This decision
should involve the active participation of the board of directors. If the
board (as representatives of shareholders) is willing to accept greater
uncertainty and variability in future cash flows in exchange for
potentially higher economic returns, then a risky strategy might be
appropriate.
 Risk to the Business Model

• The real risks are extensive and relate to all its activities, including
these:
– Operational Risk
– Financial Risk
– Reputational Risk
– Compliance Risk
 Risk Management

• Risk management is the process by which a company evaluates and

reduces its risk exposure. To accomplish this, the organization must
define and develop a risk culture. A risk culture sets the tone for risk
tolerance in the organization and ensures that risk consideration is a
key part of all decisions.
 Risk Management
• Committee of Sponsoring Organizations (COSO) outlines its
recommendations in an eight-step framework:
– Internal Environment
– Objective Setting
– Event Identification
– Risk Assessment
– Risk Response
– Control Activities
– Information and Communication
– Monitoring
 Oversight of Risk Management

• The risk oversight responsibilities of the board can be roughly divided into
four categories:
– The board is responsible for determining the risk profile of the company.
– The board is responsible for evaluating the company’s strategy and
business model to determine whether they are appropriate, given the firm’s
appetite for risk.
– The board is responsible for ensuring that the company is committed to
operating at an appropriate risk level on an ongoing basis.
 Assessing Board Performance on Risk
Management
• Little rigorous research assesses the general effectiveness of risk-
management programs and the performance consequences of these
programs. However, survey data indicates that companies can stand to
improve in this area. In particular, the evidence suggests that boards
are not effective in understanding
• or monitoring technological risks to the organization.
 References

Larcker, D., & Tayan, B. (2016). Corporate Governance

Matters: A Closer Look at Organizational Choices
and Their Consequences. 2nd Edition. Pearson FT
Press.