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Ch11 Discussion Light
- 1. Corporate Governance Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 11
- 2. Chapter 2 Strategic Leadership Chapter 4 The Internal Organization Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 9 International Strategy Chapter 1 Introduction to Strategic Management Chapter 3 The External Environment Chapter 5 Business-Level Strategy Chapter 8 Acquisition and Restructuring Strategies Chapter 11 Corporate Governance Strategic Intent Strategic Mission Chapter 7 Corporate-Level Strategy Chapter 10 Cooperative Strategy Chapter 12 Strategic Entrepreneurship Strategic Analysis Strategic Thinking Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities The Strategic Management Process
- 19. Manager and Shareholder Risk and Diversification Risk Diversification Dominant Business Unrelated Businesses Related Constrained Related Linked Managerial (employment) risk profile Shareholder (business) risk profile B S A M
Hinweis der Redaktion
- Corporate Governance Instructor notes are provided for four topics in this set of slides: â€˘ď€ How to increase product diversification and how to intensify effort to innovate without increased agency problems (see first slide titled “Agency Relationship: Owners and Managers“ â€˘ď€ The growing influence of institutional owners (see first slide titles “Governance Mechanisms“) â€˘ď€ A discussion of the risks associated with boards dominated by outsiders (see third slide titled “Governance Mechanisms“) â€˘ď€ A continued discussion of the role played by outsiders (see first slide titled “Corporate Governance and Ethical Behavior“) Note: See text for citation list.
- Agency Relationships Owners and Managers How to increase product diversification and how to intensify effort to innovate without increased agency problems? Firms undertake a variety of actions to reduce risk through diversification, including entering diverse lines of business, joining alliances, taking on temporary partners, and outsourcing risky projects, including R&D. The challenge, as explained in the book, is that shareholders do not directly benefit from risk-reducing diversification strategies when they can replicate this diversification on their own. Diversification, therefore, is often seen as managers’ opportunistic pursuit of their own self-interests at the expense of the shareholders who can, if they so desire, diversify their individual portfolios simply by buying shares in other companies. While this view reflects the influence of agency theory, recently such views have been challenged by stewardship theory (Donaldson, 1990a; Donaldson & Davis, 1991), a framework presuming that managers are actually seeking to maximize organizational performance. For instance, one reason for diversifying would be to enhance company profit and growth prospects by reducing dependence on static or declining products, markets, and even industries. In the parlance of the I/O model discussed in Chapter 1, such a motive might lead companies to increase diversification into technologies or industries where profit rates are increasing most and to those where the competitive dynamism is relatively more stable. Managers might also opt to diversify for earnings stability and economies of scale. In short, diversification strategies might represent opportunism, but it might also reflect management rational and genuine response to financial adversity and/or the need for improved financial performance for their company.
- Governance Mechanisms The Growing Influence of Institutional Owners (p. 350) The discussion of the relationship between corporate ownership and performance was initiated as far back as the 1930s, but it remains an issue today. Pioneering researchers in corporate governance show that companies with separated ownership and control functions operate with different managerial rules in investment decision-making from those in which ownership and control are combined in a single decision-maker. Different managerial rules are caused by the different basis on which the stakeholders optimize the tradeoff between their profit and utility maximization and the distribution of decision-making and risk-bearing functions. With diffused ownership and a lesser number of shares, an individual shareholder’s control is diluted while a manager’s control increases. This gives rise to conflict of interests resulting in less than optimal value for the shareholders. Erosion of value also comes from agency costs arising from ensuring that management acts in shareholders’ interests. A manager may behave opportunistically by choosing to exchange profits for personal benefits, such as “on-the-job” consumption. Thus consuming away the economic goods today rather than preserving them for the future. It is assumed that large-block investors and institutional ownership have both the size and the incentive to discipline ineffective managers and thus to influence a firm’s strategic choice. The shift in governance whereby ownership of many modern corporations is concentrated in the hands of institutional investors might come with a high price tag vis-à - vis strategic choice and long-term planning. For example, institutional investors are overly focused on current profitability, which might conflict with future period earnings due to investments in risky R&D projects and exploration of new business models. Moreover, as suggested in the book, even very strong institutional investors might not avert financial disaster. For example, CalPERS, which provides retirement and health coverage to over 1.3 million employees and is one of the largest public employee pension funds in the United States, had invested in Enron! (Continued on next slide.)
- Governance Mechanisms (cont.) The Growing Influence of Institutional Owners (p. 350) (cont.) Interestingly, over the past decade the world’s leading private equity firms consistently have delivered internal rates of return twice as large as the S&P 500’s. They’ve achieved this is by adding value to the underlying operations (Rogers, Holland, & Haas, 2002). For example, private equity firms: â€˘ď€ Clearly define their investment thesis and its time frame to fruition â€˘ď€ Hire managers who act like owners â€˘ď€ Focus on a few measures of success that all employees understand â€˘ď€ Make capital work hard or otherwise re-deploy under-performing assets quickly â€˘ď€ Make the center an active shareholder Ask Can institutional owners understand and act like managers of private equity firms? (Continued on next slide.)
- Governance Mechanisms (cont.) The Growing Influence of Institutional Owners (p. 350) (cont.) Board of Directors (p. 353) Much of the governance literature advocates boards dominated by outsiders. What might be some of the risks associated with boards dominated by outsiders? As discussed in the book, a large number of outsiders can create several problems. First, outsiders have limited contact with the firm’s day-to-day operations and incomplete information about managers. This, in turn, leads to ineffective assessments of managerial decisions and initiatives. Second, in the absence of full information, outsider-dominated boards emphasize the use of financial, as opposed to strategic, controls to gather performance information to evaluate managers’ and business units’ performances. Strong reliance on financial evaluations shifts risk to managers, who, in turn, may reduce R&D investments, increase diversification, and pursue higher compensation to offset their employment risk. (Continued on next slide.)
- Governance Mechanisms (cont.) The Growing Influence of Institutional Owners (p. 350) (cont.) Board of Directors (p. 353) (cont.) Recently, Phan and his colleagues (2002) explained the relationships between corporate governance and innovation (R&D expenditures, patents, and new products) in 86 publicly listed pharmaceutical firms. Consistent with agency theory, they found that the presence of large block private and institutional shareholders—controlling for firm size and performance — positively influenced innovation. They demonstrated that CEO duality was positively related to R&D expenditures, and that boards with more insiders were positively associated with the number of new products. In short, in the highly turbulent pharmaceutical industry, where risky decisions have to be made under substantial uncertainty, active ownership, unitary command structures, and strategically involved boards provide superior explanatory power for the governance-innovation link.
- Corporate Governance and Ethical Behavior To improve corporate governance, watchdog groups advocate separating the chairperson and the chief executive positions and creating corporate boards that are dominated by outsiders. Here is where the S&P 500 currently stands in relation to this issue: â€˘ď€ Fifteen instances where Chairperson is not CEO and is an Independent Director, 16 instances where Chairperson is not CEO and is an Outside Related Director, 65 instances where Chairperson is Former CEO, three instances where Chairperson is not CEO and is an Executive, six instances where Chairperson is not CEO and is a Former Executive, 392 instances (78%) where Chairperson is ALSO the CEO (CEO duality). Source : The Corporate Library. 2003. Exclusive special report on CEO/Chairman splits in the S&P 500: How Many and How Independent? (http://www.thecorporatelibrary. com/spotlight/boardsanddirectors/SplitChairs.html)