answered:   Week 8 Assignment – Business-Level and Corporate-Level Strategies Overview In this assignment, you

 

Week 8 Assignment – Business-Level and Corporate-Level Strategies

Overview

In this assignment, you are to use the same corporation you selected and focused on for the assignments, Strategic Management and Strategic Competitiveness and External and Internal Environments.Research the company on its own website, public filings on the Securities and Exchange Commission’s Filing & Forms page, Strayer University’s online databases, the Lexis Advance database, and any other sources you can find. The annual report will often provide insights that can help address some of these questions.Use the Business-Level and Corporate-Level Strategies Template [DOCX] to ensure that your assignment meets the requirements.

Requirements

Write a 6-8 page paper in which you do the following:

  • Analyze the business-level strategies for the corporation you chose to determine the business-level strategy you think is most important to the long-term success of the firm and whether you judge this to be a good choice. Justify your opinion.
  • Analyze the corporate-level strategies for the corporation you chose to determine the corporate-level strategy you think is most important to the long-term success of the firm and whether you judge this to be a good choice. Justify your opinion.
  • Analyze the competitive environment to determine the corporation’s most significant competitor. Compare their strategies at each level and evaluate which company you think is most likely to be successful in the long term. Justify your choice.
  • Determine whether your choice from Question 3 would differ in slow-cycle and fast-cycle markets.
  • Use at least three quality references. Note: Wikipedia and other websites do not qualify as academic resources.

This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.The specific course learning outcome associated with this assignment is as follows:

  • Determine business-level and corporate-level strategies for a corporation’s long-term success comparable to the competitive environment.

1

Figures title: 7

Week 8 Business-Level and Corporate-Level Strategies Assignment

Student’s Full Name

BUS499 Business Administration Capstone

Professor’s Name

Date

Template Instructions (delete this page before submitting)

This template is provided to help you meet the assignment requirements.

This page should NOT be submitted with your assignment, as it is not part of an academically written paper. Note the “Clarity, writing mechanics, and formatting requirements” section of the grading rubric.


HOW TO USE THIS TEMPLATE

· Read the explanations provided in the template for each section of your paper.

· The explanations are in blue font below.

· You should have already read the assignment instructions in Blackboard.

· Type your response to each of the assignment requirements within the designated sections.

· Each assignment requirement is identified using a section Heading that is in black font

· DO NOT add extra spaces between sections.

· DO NOT change the margins.

· You are required to have a heading for each of the sections in your paper.

· The required headings have been provided for you.

· DO NOT delete, alter, or add anything to the section Headings.

· DO NOT type the assignment instructions into the sections.

· After typing your responses, change the font color to black and make sure it is not in bold.

· Be sure to change the font color on the title page to black after typing your name, professor’s name, and date.

· Everything in blue font below should be deleted and replaced with your responses.

· DELETE this entire page before you submit your assignment to avoid losing points. Do not leave a blank page here.


REMINDERS

· The assignment is due in week 8. Late submissions negatively impact your grade.

· Use the same public corporation you used for assignments in Week 3 and 6.

· Do not copy content from previous assignments in this class or others.

· Include at least 6 full and complete academically written pages that address the requirements. The title page, this instruction page, and the source page do not count.

· Use at least 3 quality sources, one of which MUST be the course textbook.

· Strayer uses SafeAssign – an automated plagiarism checker. It is advised that you do your own writing and use external resources to support what you have written in your own words.

Week 8 Business-Level and Corporate-Level Strategies Assignment

Write your introduction to this 6 page paper here. Include one paragraph (not more than 6 lines of text) that explains what your paper will discuss. Much of your introduction may be taken from the assignment instructions (in your own words). Read all assignment resources to understand what should be included in your paper. Be sure to review the assignment instructions in Blackboard, the grading rubric, and relevant course announcements to understand the requirements. Do not exceed 6 lines of text in this introduction. There should be no direct quotes in this section. After reading these instructions, replace this blue text with your introduction and change the font color to black.

Business-Level Strategies

Analyze the business-level strategies for the corporation you chose to determine the business-level strategy you think is most important to the long-term success of the firm. You will also need to determine whether or not you judge this to be a good choice (Note: in this step you need to choose and write about only one business-level strategy from the text book (not Google). Hint: See Figure 4.1 in the textbook. Include a thorough justification for your choice that is backed by facts and sound judgement. For background, be sure to research and explain the industry in which your selected corporation operates. You could also briefly (1 – 2 sentences) define the business-level strategy (cite your sources) you are writing about using the textbook/Learn, as an introduction to your analysis. Read Chapter 4 in the course textbook. Review the Week 4 Learn Reading for supporting content. Your response here should demonstrate that you understand the key concepts regarding the selected business-level strategy and can apply them to a real-world corporation. Keep in mind that this is a 6 page paper and as such your analysis should thoroughly address the concepts discussed in the course. Avoid unsubstantiated statements, extended introductory commentary, direct quotes, and unrelated content. Strive for about 1 ½ to 2 pages of well-constructed, in-depth analysis in this section.

In this section, you could research and identify the core competencies your chosen firm uses to implement its business-level strategies and discuss their effectiveness. You could also demonstrate from your research how the firm uses its core competencies to create and sell its products in the marketplace. Consider the actions & choices your firm has made to compete in individual product markets. Review Chapters 4-9 for specifics on the business-level strategies. Your response should clearly identify the one business-level strategy from the textbook that you think is most important to the long-term success of the corporation. Your response must also include a clearly stated and justified judgement on whether that strategy is a good choice. Include enough content and depth to demonstrate a thorough analysis of your selected corporation’s business-level strategy. Remember that this is a 6 page paper and as such, you will need to dig deep. After reading these instructions, replace this blue text with your analysis and change the font color to black.

Corporate-Level Strategies

Analyze the corporate-level strategies for the corporation you chose to determine the corporate-level strategy you think is most important to the long-term success of the firm. You will also need to determine whether or not you judge this to be a good choice. (Note: in this step you need to choose and write about only one corporate-level strategy from the text book (not Google). Hint: See chapter 6 in the textbook. Include a thorough justification for your choice that is backed by facts and sound judgement. You could also briefly (1 – 2 sentences) define the corporate-level strategy (cite your sources) you are writing about using the textbook/Learn, as an introduction to your analysis. Read Chapter 6 in the course textbook. Review the Week 6 Learn Reading for supporting content. Your response here should demonstrate that you understand the key concepts regarding the selected corporate-level strategy and can apply them to a real-world corporation. Keep in mind that this is a 6-page paper and as such your analysis should thoroughly address the concepts discussed in the course. Avoid unsubstantiated statements, extended introductory commentary, direct quotes, and unrelated content. Strive for about 1 ½ to 2 pages of well-constructed, in-depth analysis in this section.

Your response should clearly identify the one corporate-level strategy from the textbook that you think is most important to the long-term success of the corporation. Your response must also include a clearly stated and justified judgement on whether that strategy is a good choice. Include enough content and depth to demonstrate a thorough analysis of your selected corporation’s corporate-level strategy. Remember that this is a 6 page paper and as such, you will need to dig deep. After reading these instructions, replace this blue text with your analysis and change the font color to black.

Competitive Environment

Analyze the competitive environment to determine the corporation’s most significant competitor (this will require research outside of the course material). Compare their strategies at each level and evaluate which company you think is most likely to be successful in the long term. Justify your choice. Hint: read chapters 1 through 10 in the course textbook as they provide a solid background for this section. Review the Week 1 through 8 Learn readings for supporting content. Remember that this is a 6 page paper and requires a thorough competitive analysis. Strive for about a 1 ½ to 2 pages of well-constructed, in-depth analysis in this section. Cite your sources and avoid the use of direct quotes. After reading these instructions, replace this blue text with your analysis and change the font color to black.

Market Cycles

Determine whether your choice from Question 3 (Competitive Environment section above) would differ in slow-cycle and fast-cycle markets. It would be a good idea to briefly explain what the slow-cycle and fast-cycle markets are from the textbook (cite your sources) as a short introduction to your determination. Hint: read Chapter 5 in the course textbook. Remember that this is a 6-page paper and therefore each section requires a thorough response that demonstrates your understanding of key concepts covered in the course and your ability to apply them to a real-world corporation. Cite your sources and avoid the use of direct quotes. After reading these instructions, replace this blue text with your response and change the font color to black.

Sources

1. Michael A. Hitt. 2020. Strategic Management: Concepts and Cases: Competitiveness and Globalization 13th ed. Cengage Learning.

2. Author. Publication Date. Title. Page # (written as p. #). How to Find (e.g. web address)

3. Author. Publication Date. Title. Page # (written as p. #). How to Find (e.g. web address)

Senior Seminar in Business Administration
BUS 499

Corporate Governance

Welcome to Senior Seminar in Business Administration.

 

In this lesson we will discuss Corporate Governance.

 

Please go to the next slide.

Objectives

Upon completion of this lesson, you will be able to:

Describe how corporate governance affects strategic decisions

Upon completion of this lesson, you will be able to:

 

Describe how corporate governance affects strategic decisions.

 

Please go to the next slide.

Supporting Topics

Separation of Ownership and Managerial Control

Ownership Concentration

Board of Directors

Market for Corporate Control

International Corporate Governance

Governance Mechanisms and Ethical Behavior

In order to achieve these objectives, the following supporting topics will be covered:

 

Separation of ownership and managerial control;

 

Ownership concentration;

 

Board of directors;

 

Market for corporate control;

 

International corporate governance; and

 

Governance mechanisms and ethical behavior.

 

Please go to the next slide.

Separation of Ownership and Managerial Control

What is Corporate Governance

Shareholders

Purchase stock

Managing of their investment risk

Agency Relationships

Problems

Different interests and goals

Managerial Opportunism

Agency Costs

To start off the lesson, corporate governance is defined as a set of mechanisms used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of organizations. Corporate governance is concerned with identifying ways to ensure that decisions are made effectively and that they facilitate strategic competitiveness. Another way to think of governance is to establish and maintain harmony between parties.

 

Traditionally, U. S. firms were managed by founder- owners and their descendants. As firms became larger the managerial revolution led to a separation of ownership and control in most large corporations. This control of the firm shifted from entrepreneurs to professional managers while ownership became dispersed among unorganized stockholders. Due to these changes modern public corporation was created and was based on the efficient separation of ownership and managerial control.

 

The separation of ownership and managerial control allows shareholders to purchase stock. This in turn entitles them to income from the firm’s operations after paying expenses. This requires that shareholders take a risk that the firm’s expenses may exceed its revenues.

 

Shareholders specialize in managing their investment risk. Those managing small firms also own a significant percentage of the firm and there is often less separation between ownership and managerial control. Meanwhile, in a large number of family owned firms, ownership and managerial control are not separated at all. The primary purpose of most large family firms is to increase the family’s wealth.

 

The separation between owners and managers creates an agency relationship. An agency relationship exists when one or more persons hire another person or persons as decision- making specialists to perform a service. As a result an agency relationship exists when one party delegates decision- making responsibility to a second party for compensation. Other examples of agency relationships are consultants and clients and insured and insurer. An agency relationship can also exist between managers and their employees, as well as between top- level managers and the firm’s owners.

 

The separation between ownership and managerial control can be problematic. Research has shown a variety of agency problems in the modern corporation. Problems can surface because the principal and the agent have different interests and goals. Problems also surface when an agent makes decisions that result in pursuing goals that conflict with those of the principals.

 

Managerial opportunism is the seeking of self- interest with guile. Opportunism is both an attitude and a set of behaviors. Principals do not know beforehand which agents will or will not act opportunistically. As a result, principals establish governance and control mechanisms to prevent agents from acting opportunistically. The agency relationship suggests that any time principals delegate decision- making responsibilities to agents; the opportunity for conflicts of interest exists.

 

The potential conflict between shareholders and top- level managers shown along with the fact that principals cannot easily predict which managers might act opportunistically, demonstrates why principals establish governance mechanisms. However, the firm incurs costs when it uses one or more governance mechanisms. Agency costs are the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals.

 

Please go to the next slide.

4

Ownership Concentration

What is Ownership Concentration

Large block shareholders

The total percentage of the firm’s shares they own

Replaced by institutional owners

Institutional Owners

Mutual funds

Pension funds

Ownership concentration is defined by the number of large- block shareholders and the total percentage of the firm’s shares they own. Large- block shareholders typically own at least five percent of a company’s issued shares. However, in recent years, the number of individuals who are large- block shareholders has declined. Institutional owners have replaced individuals as large- block shareholders.

 

Ownership of many modern corporations is now concentrated in the hands of institutional investors rather than individual shareholders. Institutional owners are financial institutions such as mutual funds and pension funds that control large- block shareholder positions. Due to these prominent owner-ship positions, institutional owners, as large- block shareholders, have the potential to be a powerful governance mechanism. Research has shown that institutional and other large- block shareholders are becoming more active in their efforts to influence a corporation’s strategic decisions. This is unless they have a business relationship with the firm.

 

Please go to the next slide.

5

Board of Directors

Elected by shareholders

Responsibilities

Monitoring and controlling top level managers

Provide resources to firms served

How They Are Grouped

Insiders

Related outsiders

Outsiders

Making Changes for Greater Accountability and Performance

Shareholders elect the members of a firm’s board of directors. The board of directors is a group of elected individuals whose primary responsibility is to act in the owners’ best interests by formally monitoring and controlling the firm’s top- level managers. Those elected to a firm’s board of directors are expected to oversee managers and ensure that the corporation operates in ways that will best serve the stakeholders’ and owners’ interests. Evidence has shown however that boards have not been highly effective in monitoring and controlling top- level managers’ decisions and subsequent actions.

 

In addition to their monitoring role, board members increasingly are expected to provide resources to the firms they serve. These resources might include personal knowledge, expertise or relationships with a wide variety of organizations. Generally, board members are classified into one of three groups. Insiders are active top- level managers in the company who are elected to the board because they are a source of information about the firm’s day- to-day operations. Related outsiders have some relationship with the firm that may create questions about their independence. However, these individuals are not involved with the corporation’s day- to- day activities. Outsiders provide independent counsel to the firm and may hold top- level managerial positions in other companies or may have been elected to the board prior to the beginning of the current CEO’s tenure.

 

A situation in which an individual holds both the CEO and chair of the board title is called CEO duality. Yet, having a board that actively monitors top- level managers’ decisions and actions does not ensure high performance. The value that the directors bring to the company also influences the outcomes. Having a large number of outside board members can also create some problems. Outsiders can, however, obtain valuable information through frequent interactions with inside board members and during board meetings to enhance their understanding of managers and their decisions. Because they work with and lead the firm daily, insiders have access to information that facilitates forming and implementing appropriate strategies. Evidence shows that boards with a critical mass of insiders typically are better informed about intended strategic initiatives, the reasons for the initiatives, and the outcomes expected from pursuing them.

 

Because of the importance of boards of directors in corporate governance and as a result of increased scrutiny from shareholders, the performances of individual board members and of entire boards are being evaluated more formally and with greater intensity. The demand for greater accountability and improved performance is stimulating many boards to voluntarily make changes. Some of these changes in clued the following:

 

Increase in the diversity of the backgrounds of board members;

 

Strengthening of internal management and accounting control systems;

 

Establishing and consistently using formal processes to evaluate the board’s performance;

 

Modifying the compensation of directors; and

 

Creating the lead director role.

 

Please go to the next slide.

 

6

Board of Directors, continued

Executive Compensation

Seeks to align interests of managers and owners

Salaries, bonuses, and long term incentives

Complicated

Long-Term Incentive Plans

Links managerial compensation to wealth of common shareholders

Potential Issues

The compensation of top- level managers, and especially of CEOs, generates a great deal of interest and strongly held opinions. Some believe that top- management team members and certainly CEOs have a great deal of responsibility for a firm’s performance and that they should be rewarded accordingly. On the other hand some think that these individuals are greatly overpaid and that their compensation is not as strongly related to firm performance. There are three internal governance mechanisms that seek to deal with these issues. Executive ­compensation is a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long- term incentives. Long- term incentive plans are an increasingly important part of compensation packages for top- level managers, especially those leading U. S. firms. Using long- term incentives facilitates the firm’s efforts to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders. Effectively designed long- term incentive plans have the potential to prevent large- block stockholders from pressing for changes in the composition of the board of directors and the top- management team. Effectively using executive compensation as a governance mechanism is particularly challenging for firms implementing international strategies.

 

As an internal governance mechanism, executive compensation is complicated. The strategic decisions top- level managers make are complex and nonroutine, meaning that direct supervision is likely to be ineffective as a means of judging the quality of their decisions. The result is a tendency to link top- level managers’ compensation to outcomes the board can easily evaluate. Another issue is that the effects of top- level man-agers’ decisions are stronger on the firm’s long- term than its short- term performance. This makes it hard to assess the effects of their decisions on a regular basis. Lastly, a number of other factors affect a firm’s performance besides top- level managerial decisions and behavior. Unpredictable changes in segments in the firm’s general environment can make it difficult to separate out the effects of top- level managers’ decisions and the effects of changes in the firm’s performance. Properly designed and used incentive compensation plans for top- level managers may increase the value of a firm in line with shareholder expectations, but such plans are subject to managerial manipulation.

 

Please go to the next slide.

 

7

Market for Corporate Control

External Governance Mechanism

Active when internal governance mechanisms fail

Hedge Fund

Activist Pension Funds

Activist Hedge Funds

Which One is Better

The market for corporate control is an external governance mechanism that is active when a firm’s internal governance mechanisms fail. The market for corporate control is composed of individuals and firms that buy ownership positions. They may also purchase potentially undervalued corporations for the purpose of forming new divisions in established companies or merging two separate firms. An effective market for corporate control ensures that ineffective or opportunistic top- level managers are disciplined.

 

A hedge fund is a fund that can pursue many different investment strategies such as the following:

 

Taking long and short positions;

Using arbitrage; and

Buying and selling undervalued securities for the purpose of maximizing investors’ returns.

 

Activist pension funds, on the other hand, are reactive in nature, taking actions when they conclude that a firm is underperforming. In contrast, activist hedge funds are proactive, identifying a firm whose performance could be improved and then investing in it. You could say that hedge funds are better at identifying undervalued companies, locating potential acquirers for them, and removing opposition to a takeover.

 

Please go to the next slide.

 

8

Market for Corporate Control, continued

Defense Strategy Category Popularity among firms Effectiveness as a defense Stockholder wealth effects
Poison pill Preventive High High Positive
Corporate charter amendment Preventive Medium Very low Negative
Golden parachute Preventive Medium Low Negligible
Litigation Reactive Medium Low Positive
Greenmail Reactive Very low Medium Negative
Standstill agreement Reactive Low Low Negative
Capital structure change Reactive Medium Medium Inconclusive

Hostile takeovers are the major activity in the market for corporate governance mechanism. Not all hostile takeovers are prompted by poorly performing targets, and firms targeted for hostile takeovers may use multiple defense tactics to fend off the takeover attempt. Historically, the increased use of the market for corporate control has enhanced the sophistication and variety of managerial defense tactics that are used to reduce the influence of this governance mechanism.

The table on the slide lists a number of defense strategies.

Please go to the next slide.

International Corporate Governance

How Globalization Factors In

Germany

Single shareholder dominate

Two tiered board structure

Japan

Obligation, family, and consensus

Main bank has closest relationship

Bank-based financial and corporate structure

China

Large, socialist, and marketed economy

Moving toward Western model

Stock market is still young

Corporate governance is an increasingly important issue in economies around the world, including emerging economies. The globalization of trade, investments, and equity markets increases the potential value of firms using similar mechanisms to govern corporate activities. Because of globalization, major companies want to attract foreign investment. This occurs when foreign investors are confident that adequate corporate governance mechanisms are in place to protect their investments. Recognizing and understanding differences in various countries’ governance systems along with noting changes taking place within those systems improves the chances that a firm will be able to compete successfully in the international markets.

 

In many private German firms, the owner and manager may be the same individual. In these instances, agency problems are not present. Even in publicly traded German corporations, a single shareholder is often dominant. Traditionally banks occupied the center of the German corporate governance system. This is the case in other European countries as well. German firms with more than two thousand employees are required to have a two- tiered board structure that places the responsibility for monitoring and controlling managerial decisions and actions in the hands of a separate group. All the functions of strategy and management are the responsibility of the management board; however, appointment to the board is the responsibility of the supervisory tier. Corporate governance practices used in Germany are changing. A manifestation of these changes is that a number of German firms are beginning to gravitate toward U. S. governance mechanisms. German firms with listings on U. S. stock exchanges have increasingly adopted executive stock option compensation as a long- term incentive pay policy.

 

The concepts of obligation, family, and consensus affect attitudes toward corporate governance in Japan. In Japan, an obligation may be to return a service for one rendered or it may derive from a more general relationship. As part of a company family, individuals are members of a unit that envelops their lives. Many critics however believe that relationships like this slow decision making. Consensus, another important influence in Japanese corporate governance, calls for the expenditure of significant amounts of energy to win the hearts and minds of people whenever possible. Consensus is highly valued, even when it results in a slow and cumbersome decision- making process. Like in Germany, banks in Japan have an important role in financing and monitoring large public firms. The main bank has the closest relationship with a firm’s top-level managers because it owns the largest share of stocks and holds the largest amount of debt. The main bank provides financial advice to the firm and also closely monitors managers. Due to this, Japan has a bank- based financial and corporate governance structure whereas the United States has a market- based financial and governance structure.

 

China has a unique and large, socialist, market- oriented economy. The government has done much to improve the corporate governance of listed companies. The corporate governance practices in China are changing and the country is experiencing increasing privatization of businesses and the development of equity markets. However, the stock markets in China remain young and underdeveloped. There has been a gradual decline in China in the equity held in state owned enterprises. However the number and percentage of private firms has grown, but the state still relies on direct and/ or indirect controls to influence firms. Some research has suggested that corporate governance in China may be moving toward the Western model. Corporate governance in Chinese companies will continue to evolve and interact to form governance mechanisms that are best for their nation, business firms, and citizens.

 

Please go to the next slide.

 

10

Governance Mechanisms and Ethical Behavior

Agents of Firm

Want to serve best interest of all stakeholders

Shareholders most significant stakeholders

Board of Directors Influence

Decisions and actions

Effective deterrent to unethical behaviors

Act as an internal governance mechanism

The three internal and single external governance mechanisms are designed to ensure that the agents of the firm’s owners make strategic decisions that best serve the interests of all stakeholders. In the United States, shareholders are commonly recognized as the company’s most significant stakeholders. Top- level managers however are expected to lead their firms in ways that will also serve the needs of product market stakeholders and organizational stakeholders. As a result, the firm’s actions and the outcomes should result in at least minimal satisfaction of the interests of all stakeholders. Without achieving a minimal satisfaction of its interests, an unsatisfied stakeholder will withdraw their support from the firm and provide it to another.

 

The decisions and actions of the board of directors can be an effective deterrent to unethical behaviors by top- level managers. Research suggests that the most effective boards set boundaries for their firms’ business ethics and values. Once the boundaries for ethical behavior are determined the board’s ethics- based expectations must be clearly communicated to the firm’s top- level managers and to other stakeholders. As agents of the firm’s owners, top- level managers must understand that the board, acting as an internal governance mechanism, will hold them fully accountable for developing and supporting an organizational culture in which ethical behaviors are permitted. Through effective governance, top- level managers are able to help their firm select and use strategies with a high probability of resulting in strategic competitiveness and earning above- average returns.

 

Please go to the next slide

11

Check Your Understanding

12

Summary

Separation of Ownership and Managerial Control

Ownership Concentration

Board of Directors

Market for Corporate Control

International Corporate Governance

Governance Mechanisms and Ethical Behavior

We have reached the end of this lesson. Let’s take a look at what we have covered.

 

First, we discussed separation of ownership and managerial control. We defined corporate governance as a set of mechanisms used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of organizations. We learned that originally U. S. firms were managed by founder- owners and their descendants. It wasn’t until firms became larger that the managerial revolution led to a separation of ownership and control in most large corporations. We saw that the separation of ownership and managerial control allows shareholders to purchase stock. We later discussed the importance of managing investment risk and agency relationships. We also took a closer look at some issues that may arise from the separation between ownership and managerial control.

 

Next, we went over ownership concentration. We saw that ownership concentration is defined by the number of large- block shareholders and the total percentage of the firm’s shares they own. We noted that large- block shareholders typically own at least five percent of a company’s issued shares. We also learned that the ownership of many modern corporations are now concentrated in the hands of institutional investors rather than individual shareholders.

 

Then we looked at the board of directors. We saw that shareholders elect the members of a firm’s board of directors. The board of directors has the responsibility to act in the owners’ best interests by formally monitoring and controlling the firm’s top- level managers. In addition to their monitoring role, board members increasingly are expected to provide resources to the firms they serve. We went over some various types of resources and three group classifications of board members. We then talked about changes that are trying to be implemented to enhance board member accountability as well as compensation of top-level managers and CEOs.

 

Later we focused our attention on the market for corporate control. We saw that the market for corporate control is an external governance mechanism that is active when a firm’s internal governance mechanisms fail. We noted that the market for corporate control is composed of individuals and firms that buy ownership positions. We later talked about different types of funds such as a hedge fund. We also discussed the occurrence of hostile takeovers and defense strategies.

 

We then discussed international corporate governance. We looked at German, Japanese, and Chinese corporation structure along with how they function. We noted different characteristics of each and gained a better understanding of how each country completes its business.

 

Finally to conclude the lesson we looked at governance mechanisms and ethical behavior. We learned about three internal and one external governance mechanisms that are designed to ensure that the agents of the firm’s owners make strategic decisions that best serve the interests of all stakeholders.

 

This completes this lesson.

PROPERTIES

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BUS 499, Week 8: Corporate Governance

Slide #

Topic

Narration

1

Introduction

Welcome to Senior Seminar in Business Administration.

In this lesson we will discuss Corporate Governance.

Please go to the next slide.

2

Objectives

Upon completion of this lesson, you will be able to:

Describe how corporate governance affects strategic decisions.

Please go to the next slide.

3

Supporting Topics

In order to achieve these objectives, the following supporting topics will be covered:

Separation of ownership and managerial control;

Ownership concentration;

Board of directors;

Market for corporate control;

International corporate governance; and

Governance mechanisms and ethical behavior.

Please go to the next slide.

4

Separation of Ownership and Managerial Control

To start off the lesson, corporate governance is defined as a set of mechanisms used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of organizations. Corporate governance is concerned with identifying ways to ensure that decisions are made effectively and that they facilitate strategic competitiveness. Another way to think of governance is to establish and maintain harmony between parties.

Traditionally, U. S. firms were managed by founder- owners and their descendants. As firms became larger the managerial revolution led to a separation of ownership and control in most large corporations. This control of the firm shifted from entrepreneurs to professional managers while ownership became dispersed among unorganized stockholders. Due to these changes modern public corporation was created and was based on the efficient separation of ownership and managerial control.

The separation of ownership and managerial control allows shareholders to purchase stock. This in turn entitles them to income from the firm’s operations after paying expenses. This requires that shareholders take a risk that the firm’s expenses may exceed its revenues.

Shareholders specialize in managing their investment risk. Those managing small firms also own a significant percentage of the firm and there is often less separation between ownership and managerial control. Meanwhile, in a large number of family owned firms, ownership and managerial control are not separated at all. The primary purpose of most large family firms is to increase the family’s wealth.

The separation between owners and managers creates an agency relationship
. An agency relationship exists when one or more persons hire another person or persons as decision- making specialists to perform a service. As a result an agency relationship exists when one party delegates decision- making responsibility to a second party for compensation. Other examples of agency relationships are consultants and clients and insured and insurer. An agency relationship can also exist between managers and their employees, as well as between top- level managers and the firm’s owners.

The separation between ownership and managerial control can be problematic. Research has shown a variety of agency problems in the modern corporation. Problems can surface because the principal and the agent have different interests and goals. Problems also surface when an agent makes decisions that result in pursuing goals that conflict with those of the principals.

Managerial opportunism is the seeking of self- interest with guile. Opportunism is both an attitude and a set of behaviors. Principals do not know beforehand which agents will or will not act opportunistically. As a result, principals establish governance and control mechanisms to prevent agents from acting opportunistically. The agency relationship suggests that any time principals delegate decision- making responsibilities to agents; the opportunity for conflicts of interest exists.

The potential conflict between shareholders and top- level managers shown along with the fact that principals cannot easily predict which managers might act opportunistically, demonstrates why principals establish governance mechanisms. However, the firm incurs costs when it uses one or more governance mechanisms. Agency costs are the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals.

Please go to the next slide.

5

Ownership Concentration

Ownership concentration is defined by the number of large- block shareholders and the total percentage of the firm’s shares they own. Large- block shareholders typically own at least five percent of a company’s issued shares. However, in recent years, the number of individuals who are large- block shareholders has declined. Institutional owners have replaced individuals as large- block shareholders.

Ownership of many modern corporations is now concentrated in the hands of institutional investors rather than individual shareholders. Institutional owners are financial institutions such as mutual funds and pension funds that control large- block shareholder positions. Due to these prominent owner-ship positions, institutional owners, as large- block shareholders, have the potential to be a powerful governance mechanism. Research has shown that institutional and other large- block shareholders are becoming more active in their efforts to influence a corporation’s strategic decisions. This is unless they have a business relationship with the firm.

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6

Board of Directors

Shareholders elect the members of a firm’s board of directors. The board of directors is a group of elected individuals whose primary responsibility is to act in the owners’ best interests by formally monitoring and controlling the firm’s top- level managers. Those elected to a firm’s board of directors are expected to oversee managers and ensure that the corporation operates in ways that will best serve the stakeholders’ and owners’ interests. Evidence has shown however that boards have not been highly effective in monitoring and controlling top- level managers’ decisions and subsequent actions.

In addition to their monitoring role, board members increasingly are expected to provide resources to the firms they serve. These resources might include personal knowledge, expertise or relationships with a wide variety of organizations. Generally, board members are classified into one of three groups. Insiders are active top- level managers in the company who are elected to the board because they are a source of information about the firm’s day- to-day operations. Related outsiders have some relationship with the firm that may create questions about their independence. However, these individuals are not involved with the corporation’s day- to- day activities. Outsiders provide independent counsel to the firm and may hold top- level managerial positions in other companies or may have been elected to the board prior to the beginning of the current CEO’s tenure.

A situation in which an individual holds both the CEO and chair of the board title is called CEO duality. Yet, having a board that actively monitors top- level managers’ decisions and actions does not ensure high performance. The value that the directors bring to the company also influences the outcomes. Having a large number of outside board members can also create some problems. Outsiders can, however, obtain valuable information through frequent interactions with inside board members and during board meetings to enhance their understanding of managers and their decisions. Because they work with and lead the firm daily, insiders have access to information that facilitates forming and implementing appropriate strategies. Evidence shows that boards with a critical mass of insiders typically are better informed about intended strategic initiatives, the reasons for the initiatives, and the outcomes expected from pursuing them.

Because of the importance of boards of directors in corporate governance and as a result of increased scrutiny from shareholders, the performances of individual board members and of entire boards are being evaluated more formally and with greater intensity. The demand for greater accountability and improved performance is stimulating many boards to voluntarily make changes. Some of these changes in clued the following:

Increase in the diversity of the backgrounds of board members;

Strengthening of internal management and accounting control systems;

Establishing and consistently using formal processes to evaluate the board’s performance;

Modifying the compensation of directors; and

Creating the lead director role.

Please go to the next slide.

7

Board of Directors, continued

The compensation of top- level managers, and especially of CEOs, generates a great deal of interest and strongly held opinions. Some believe that top- management team members and certainly CEOs have a great deal of responsibility for a firm’s performance and that they should be rewarded accordingly. On the other hand some think that these individuals are greatly overpaid and that their compensation is not as strongly related to firm performance. There are three internal governance mechanisms that seek to deal with these issues. Executive compensation is a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long- term incentives. Long- term incentive plans are an increasingly important part of compensation packages for top- level managers, especially those leading U. S. firms. Using long- term incentives facilitates the firm’s efforts to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders. Effectively designed long- term incentive plans have the potential to prevent large- block stockholders from pressing for changes in the composition of the board of directors and the top- management team. Effectively using executive compensation as a governance mechanism is particularly challenging for firms implementing international strategies.

As an internal governance mechanism, executive compensation is complicated. The strategic decisions top- level managers make are complex and nonroutine, meaning that direct supervision is likely to be ineffective as a means of judging the quality of their decisions. The result is a tendency to link top- level managers’ compensation to outcomes the board can easily evaluate. Another issue is that the effects of top- level man-agers’ decisions are stronger on the firm’s long- term than its short- term performance. This makes it hard to assess the effects of their decisions on a regular basis. Lastly, a number of other factors affect a firm’s performance besides top- level managerial decisions and behavior. Unpredictable changes in segments in the firm’s general environment can make it difficult to separate out the effects of top- level managers’ decisions and the effects of changes in the firm’s performance. Properly designed and used incentive compensation plans for top- level managers may increase the value of a firm in line with shareholder expectations, but such plans are subject to managerial manipulation.

Please go to the next slide.

8

Market for Corporate Control

The market for corporate control is an external governance mechanism that is active when a firm’s internal governance mechanisms fail. The market for corporate control is composed of individuals and firms that buy ownership positions. They may also purchase potentially undervalued corporations for the purpose of forming new divisions in established companies or merging two separate firms. An effective market for corporate control ensures that ineffective or opportunistic top- level managers are disciplined.

A hedge fund is a fund that can pursue many different investment strategies such as the following:

Taking long and short positions;

Using arbitrage; and

Buying and selling undervalued securities for the purpose of maximizing investors’ returns.

Activist pension funds, on the other hand, are reactive in nature, taking actions when they conclude that a firm is underperforming. In contrast, activist hedge funds are proactive, identifying a firm whose performance could be improved and then investing in it. You could say that hedge funds are better at identifying undervalued companies, locating potential acquirers for them, and removing opposition to a takeover.

Please go to the next slide.

9

Market for Corporate Control, continued

Hostile takeovers are the major activity in the market for corporate governance mechanism. Not all hostile takeovers are prompted by poorly performing targets, and firms targeted for hostile takeovers may use multiple defense tactics to fend off the takeover attempt. Historically, the increased use of the market for corporate control has enhanced the sophistication and variety of managerial defense tactics that are used to reduce the influence of this governance mechanism.

The table on the slide lists a number of defense strategies.

Please go to the next slide.

10

International Corporate Governance

Corporate governance is an increasingly important issue in economies around the world, including emerging economies. The globalization of trade, investments, and equity markets increases the potential value of firms using similar mechanisms to govern corporate activities. Because of globalization, major companies want to attract foreign investment. This occurs when foreign investors are confident that adequate corporate governance mechanisms are in place to protect their investments. Recognizing and understanding differences in various countries’ governance systems along with noting changes taking place within those systems improves the chances that a firm will be able to compete successfully in the international markets.

In many private German firms, the owner and manager may be the same individual. In these instances, agency problems are not present. Even in publicly traded German corporations, a single shareholder is often dominant. Traditionally banks occupied the center of the German corporate governance system. This is the case in other European countries as well. German firms with more than two thousand employees are required to have a two- tiered board structure that places the responsibility for monitoring and controlling managerial decisions and actions in the hands of a separate group. All the functions of strategy and management are the responsibility of the management board; however, appointment to the board is the responsibility of the supervisory tier. Corporate governance practices used in Germany are changing. A manifestation of these changes is that a number of German firms are beginning to gravitate toward U. S. governance mechanisms. German firms with listings on U. S. stock exchanges have increasingly adopted executive stock option compensation as a long- term incentive pay policy.

The concepts of obligation, family, and consensus affect attitudes toward corporate governance in Japan. In Japan, an obligation may be to return a service for one rendered or it may derive from a more general relationship. As part of a company family, individuals are members of a unit that envelops their lives. Many critics however believe that relationships like this slow decision making. Consensus, another important influence in Japanese corporate governance, calls for the expenditure of significant amounts of energy to win the hearts and minds of people whenever possible. Consensus is highly valued, even when it results in a slow and cumbersome decision- making process. Like in Germany, banks in Japan have an important role in financing and monitoring large public firms. The main bank has the closest relationship with a firm’s top-level managers because it owns the largest share of stocks and holds the largest amount of debt. The main bank provides financial advice to the firm and also closely monitors managers. Due to this, Japan has a bank- based financial and corporate governance structure whereas the United States has a market- based financial and governance structure.

China has a unique and large, socialist, market- oriented economy. The government has done much to improve the corporate governance of listed companies. The corporate governance practices in China are changing and the country is experiencing increasing privatization of businesses and the development of equity markets. However, the stock markets in China remain young and underdeveloped. There has been a gradual decline in China in the equity held in state owned enterprises. However the number and percentage of private firms has grown, but the state still relies on direct and/ or indirect controls to influence firms. Some research has suggested that corporate governance in China may be moving toward the Western model. Corporate governance in Chinese companies will continue to evolve and interact to form governance mechanisms that are best for their nation, business firms, and citizens.

Please go to the next slide.

11

Governance Mechanisms and Ethical Behavior

The three internal and single external governance mechanisms are designed to ensure that the agents of the firm’s owners make strategic decisions that best serve the interests of all stakeholders. In the United States, shareholders are commonly recognized as the company’s most significant stakeholders. Top- level managers however are expected to lead their firms in ways that will also serve the needs of product market stakeholders and organizational stakeholders. As a result, the firm’s actions and the outcomes should result in at least minimal satisfaction of the interests of all stakeholders. Without achieving a minimal satisfaction of its interests, an unsatisfied stakeholder will withdraw their support from the firm and provide it to another.

The decisions and actions of the board of directors can be an effective deterrent to unethical behaviors by top- level managers. Research suggests that the most effective boards set boundaries for their firms’ business ethics and values. Once the boundaries for ethical behavior are determined the board’s ethics- based expectations must be clearly communicated to the firm’s top- level managers and to other stakeholders. As agents of the firm’s owners, top- level managers must understand that the board, acting as an internal governance mechanism, will hold them fully accountable for developing and supporting an organizational culture in which ethical behaviors are permitted. Through effective governance, top- level managers are able to help their firm select and use strategies with a high probability of resulting in strategic competitiveness and earning above- average returns.

Please go to the next slide

12

Check Your Understanding

13

Summary

We have reached the end of this lesson. Let’s take a look at what we have covered.

First, we discussed separation of ownership and managerial control. We defined corporate governance as a set of mechanisms used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of organizations. We learned that originally U. S. firms were managed by founder- owners and their descendants. It wasn’t until firms became larger that the managerial revolution led to a separation of ownership and control in most large corporations. We saw that the separation of ownership and managerial control allows shareholders to purchase stock. We later discussed the importance of managing investment risk and agency relationships. We also took a closer look at some issues that may arise from the separation between ownership and managerial control.

Next, we went over ownership concentration. We saw that ownership concentration is defined by the number of large- block shareholders and the total percentage of the firm’s shares they own. We noted that large- block shareholders typically own at least five percent of a company’s issued shares. We also learned that the ownership of many modern corporations are now concentrated in the hands of institutional investors rather than individual shareholders.

Then we looked at the board of directors. We saw that shareholders elect the members of a firm’s board of directors. The board of directors has the responsibility to act in the owners’ best interests by formally monitoring and controlling the firm’s top- level managers. In addition to their monitoring role, board members increasingly are expected to provide resources to the firms they serve. We went over some various types of resources and three group classifications of board members. We then talked about changes that are trying to be implemented to enhance board member accountability as well as compensation of top-level managers and CEOs.

Later we focused our attention on the market for corporate control. We saw that the market for corporate control is an external governance mechanism that is active when a firm’s internal governance mechanisms fail. We noted that the market for corporate control is composed of individuals and firms that buy ownership positions. We later talked about different types of funds such as a hedge fund. We also discussed the occurrence of hostile takeovers and defense strategies.

We then discussed international corporate governance. We looked at German, Japanese, and Chinese corporation structure along with how they function. We noted different characteristics of each and gained a better understanding of how each country completes its business.

Finally to conclude the lesson we looked at governance mechanisms and ethical behavior. We learned about three internal and one external governance mechanisms that are designed to ensure that the agents of the firm’s owners make strategic decisions that best serve the interests of all stakeholders.

This completes this lesson.

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