The document discusses corporate governance and strategies for maximizing shareholder wealth. It notes that while managers are tasked with pursuing strategies in the best interest of shareholders, their personal goals may instead prioritize job security, power, and salary. A number of governance mechanisms aim to ensure managers do not pursue self-interest over shareholders, including stockholder meetings, boards of directors, and stock-based compensation linking manager pay to share price. The takeover market also constrains managers from underperforming financially. Strategic decisions have ethical dimensions, and companies should establish ethical climates through leadership, mission statements, and incentive systems. When evaluating strategies, managers should consider stakeholder impacts, moral principles, and long-term profit versus other concerns

1. CORPORATE GOVERNANCE AND
STRATEGY
Stockholders delegate the job of
controlling the company and determining
strategies to corporate managers, who
become the agents of the stockholders.
Accordingly, corporate managers should
pursue strategies that are in the best
interest of the stockholders and
maximize stockholder wealth.

2. Why should managers want to pursue other
strategies than those consistent with maximizing
stockholder wealth?
The answer depends on the personal goals of
professional managers. Many have argued that
managers are motivated by desires for status,
power, job security, income, and the like. By
virtue of their position within the company,
certain managers, such as the CEO, can use their
authority and control over corporate funds to
satisfy these desires.

3. Economists have termed such behavior
“on-the-job consumption.”
However, given that some managers put
their own interests first, the problem facing
stockholders is how to govern the
corporation so that managerial desires for
on-the-job consumption, excessive
salaries, or empire-building diversification
are held in check.

4. A number of governance mechanisms,
which include stockholder meetings, the
board of directors, stock-based
compensation schemes, the takeover
market, and leveraged buyouts, etc
perform this function.

5. Stockholders Meetings
These meetings provide a forum in which
stockholders can voice their approval or
discontent with management. In theory,
at such meetings stockholders can
propose resolutions that, if they receive a
majority of stockholder votes, can shape
management policy, limit the strategies
management can pursue, and remove
and appoint key personnel.

6. The role of the Board
Stockholder interests are looked after within the
company by the board of directors.
Board members are directly elected by
stockholders, and under corporate law the
board represents the stockholders' interests in
the company.
Its position at the apex of decision making
within the company allows the board to monitor
corporate strategy decisions and ensure that
they are consistent with stockholder interests.

7. The typical board comprises a mix of
insiders and outsiders.
Inside directors are required because they
have valuable information about the
company's activities. Without such
information the board cannot adequately
perform its monitoring function.
But since insiders are full-time employees
of the company, their interests tend to be
aligned with those of management.

8. Hence, outside directors are needed to
bring objectivity to the monitoring and
evaluation processes.
Outside directors are not full-time
employees of the company.

9. Stock-Based Compensation Schemes
To get around the problem of captive
boards, stockholders have urged many
companies to introduce stock-based
compensation schemes for their senior
executives.
These schemes are designed to align the
interests of managers with those of
stockholders.

10. In addition to their regular salary, senior
executives are given stock options in the
firm. Stock options give managers the right
to buy the company's shares at a
predetermined price, which may often turn
out to be less than the market price of the
stock.
The idea behind stock options is to motivate
managers to adopt strategies that increase
the share price of the company, for in doing
so they will also increase the value of their
stock options.

11. The Takeover Constraint and Corporate Raiders
If the management pursues strategies and takes
actions inconsistent with maximizing stockholder
wealth. Stockholders, however, still have some
residual power, for they can always sell their
shares.
If they start doing so in large numbers, the price
of the company's shares will decline. If the share
price falls far enough, the company might be
worth less on the stock market than the book
value of its assets, at which point it may become
a takeover target.

12. The risk of being bought out is known as
the takeover constraint. The takeover
constraint effectively limits the extent to
which managers can pursue strategies
and take actions that put their own
interests above those of stockholders.

13. Poison Pills and Golden Parachutes
One response by management to the
threat posed by takeovers has been to
create so-called poison pills. The purpose
of a poison pill is to make it difficult for a
raider to acquire a company.
The poison pill devised by Household
International in 1985 is typical.

14. The management of the Household
International unilaterally add premium to
the existing market price of their stocks
already in the secondary market. This
helped the company nullify any takeover
constraint.

15. Another response to the threat posed by
takeovers has been the increasing use of
golden parachute contracts.
Golden parachutes are severance contracts
that handsomely compensate top-level
managers for the loss of their jobs in the
event of a takeover.

16. Leveraged Buyouts
The LBO is a special kind of takeover. In an LBO a
company's own executives are often (but not
always) among the buyers. The management
group undertaking an LBO typically raises cash
by issuing bonds and then uses that cash to buy
the company's stock.
Thus LBOs involve a substitution of equity for
debt. In effect, the company replaces its
stockholders with creditors (bondholders),
transforming the corporation from a public into
a private entity.

17. The difference is that as stockholders they were
not guaranteed a regular dividend payment
from the company; as bondholders they do
have such a guarantee.

18. STRATEGY AND ETHICS
Strategic decisions have ethical dimensions
Shaping the Ethical Climate of an Organization
To foster awareness that strategic decisions have
an ethical dimension, a company must
establish a climate that emphasizes the
importance of ethics. This requires at least
three steps.
First, top managers have to use their leadership
position to incorporate an ethical dimension
into the values that they stress.

19. Second, ethical values must be
incorporated into the company's mission
statement.
Third, ethical values must be acted on. Top
managers have to implement hiring,
firing, and incentive systems that
explicitly recognize the importance of
adhering to ethical values in strategic
decision-making.

21. Besides establishing the right kind of
ethical climate in an organization,
managers must be able to think through
the ethical implications of strategic
decisions in a systematic way. A number of
different frameworks have been suggested
as aids to the decision-making process.
The four-step model shown in the above
Figure is a compilation of the various
approaches recommended by several
authorities on this subject.

22. In step I evaluating a proposed strategic decision
from an ethical standpoint—managers must
identify which stakeholders the decision would
affect and in what ways.
Most importantly, they need to determine if the
proposed decision would violate the rights of
any stakeholders.
The term right refers to the fundamental
entitlements of a stakeholder.
For example, one might argue that the right to
information about health risks in the workplace
is a fundamental entitlement of employees.

23. Step 2 involves judging the ethics of the
proposed strategic decision, given the
information gained in step 1.
This judgment should be guided by various
moral principles that should not be
violated. The principles might be those
articulated in a corporate mission
statement or other company documents
(such as Hewlett-Packard's The HP Way).

24. In addition, there are certain moral principles
that we have adopted as members of
society—for instance, the prohibition on
stealing—and these should not be violated.
The judgment at this stage will also be
guided by the decision rule that is chosen
to assess the proposed strategic decision.

25. Although long-run profit maximization is
rightly the decision rule that most
companies stress, this decision rule should
be applied subject to the constraint that no
moral principles are violated.

26. Step 3, establishing moral intent, means
that the company must resolve to place
moral concerns ahead of other concerns
in cases where either the rights of
stakeholders or key moral principles have
been violated.
Step 4, requires the company to engage in
ethical behavior.

27. Corporate Social Responsibility
Corporate social responsibility is the sense of
obligation on the part of companies to build
certain social criteria into their strategic
decision-making.
The concept implies that when companies
evaluate decisions from an ethical
perspective, there should be a presumption in
favour of adopting courses of action that
enhance the welfare of society at large.

28. Social Responsibility:
The set of obligations an organization has to
protect and enhance the society in which it
operates.
Continuum of Social Responsibility :
The four stances company can take concerning
their obligations to society fall along a
continuum ranging from lowest to the
highest degree of socially responsible
practices.

29. Social
Obstruction
Social
Obligation
Social
Contribution
Social Response

30. Social Obstruction : An approach to social
responsibility in which firms do as little as
possible to solve social or environmental
problems.
Social Obligation: A social responsibility
approach in which an organization will do
everything that is required of it legally but
nothing more.

31. Social response: A social responsibility
approach in which an organization meets its
basic legal and ethical obligations and also
goes beyond social obligation in selected
areas.
Social contribution: A social responsibility
approach or stance in which an organization
views itself as a citizen of the society and
proactively seeks opportunities to contribute
to that society.