Strategies&Policies-Chapter 11 Presentation

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Stakeholder’s and Corporate Performance:

Stakeholder’s and Corporate Performance (Isaac Hollihan) Chapter 11 Presentation

Figure 11.1 (p.351) Stakeholders and the Enterprise:

Figure 11.1 (p.351) Stakeholders and the Enterprise

Stakeholders and Corporate Performance:

Stakeholders and Corporate Performance A company’s stakeholders are individuals or groups with an interest, claim, or stake in the company, in what it does, and how it performs. Internal Stockholders are stockholders and employees, including executive officers, other managers, and board members. External Stockholders are all other individuals and groups that have some claim on the company. (p. 350-351)

Stakeholder Impact Analysis:

Stakeholder Impact Analysis Steps in the Stakeholder Impact Analysis are as follows: Identify stakeholders Identify stakeholders’ interests and concerns As a result, identify the claims and stockholders are likely to make on the organization. Identify the stakeholders who are most important from the organization’s perspective. Identify the resulting strategic challenges. (p. 352)

Profitability, Profit Growth, and Stakeholder Claims:

Profitability, Profit Growth, and Stakeholder Claims Stockholders receive a return on investment from dividend payments and capital appreciation in the market value of a share. Here are some ways to grow profits: Taking market share from competitors Consolidating the industry through horizontal integration Development of new markets through international expansion, vertical integration, or diversification Participating in a market that is continuing to grow (p. 353-354)

Agency Theory (Michelle Lowmaster):

Agency Theory (Michelle Lowmaster ) Deals with business relationship problems when decision-making authority is delegated from one person to another Relationship between stockholders and senior managers Stockholder - Principal Senior managers – Agent (p.357) 6

Principal-Agent Relationships:

Principal-Agent Relationships An agency relationship is held to arise whenever one party delegates decision-making authority or control over resources to another. The principal is the person delegating authority. The agent is the person to whom authority is delegated. Ex: Stockholders are the principal, who provide the company with risk capital but delegate control over that capital to senior managers. The CEO is then the agent and is expected to use that capital in a manner consistent with the best interests of stockholders. (p. 357)

The Agency Problem:

The Agency P roblem Information asymmetry is an agent that has more information about the resources being managed than the principal Laws for monitoring agents Codetermination law Securities and Exchange Commission (SEC) Generally agreed-upon accounting principles (GAAP ) On-the-job consumption : Describes the behavior of senior management’s use of company funds to acquire perks Empire building - Buying new businesses to increase the size of the company through diversification (p. 358-359) 8

Figure 11.3 - The Tradeoff Between Profitability and Revenue Growth Rates (p.360):

Figure 11.3 - The Tradeoff Between Profitability and Revenue Growth Rates (p.360) 9

Governance Mechanism Types :

Governance Mechanism Types External Governance Mechanisms Internal Governance Mechanisms

External Governance Mechanisms:

External Governance Mechanisms Primary External Governance Mechanisms Board of Directors Stock-based Compensation Financial Statements & Auditors Takeover Constraint

Board of Directors:

Board of Directors Group of Business leaders (internal and external) who monitor strategic decisions and make sure they’re in alignment with Stockholder interests. Pros : Provides objectivity to strategic decisions, and accountability for high level employees. Cons: Inside directors can potentially dominate and/or manipulate the board. “Rubber Stamp” boards were common in the 1990s.

Stock-based Compensation:

Stock-based Compensation A form of compensation designed to directly link an employee’s compensation with the performance of the company. Pros : Reduces the agency problem by connecting compensation to stock price. Cons: Dilutes the equity of shareholders. Lack of diversification can lead to risk-averse behavior.

Financial Statements & Auditors:

Financial Statements & Auditors Publically traded companies are required to file quarterly and annual financial reports with the SEC. These reports must be audited by an independent audit firm. Pros : Provides verification and accountability from an external source that financial statements are properly reported. Cons: Fraud still occurs, in part due to complicit auditors.

Takeover Constraint:

Takeover Constraint The threat of Stockholder action that results in a decrease in the CEO’s power. Pros : If taken, this action can reduce the influence of a manager. Cons: Whoever initiates a takeover may not be leadership the stockholders want either.

Internal Governance Mechanisms:

Internal Governance Mechanisms Purpose To align the actions of lower level managers and employees with the strategic goals of top managers. Strategic Control Systems Establish standards & targets to measure performance Create systems for measuring and monitoring that performance on a regular basis. Compare actual performance with the established targets Evaluate results and take action (if needed). (Balance Scorecard method) Incentive Systems Positive incentive systems designed to encourage and motivate employees towards goals that advance the long term strategic goals of the company.

Key Terms :

Key Terms Inside Director – Senior Directors of the company, such as the CEO. They provide detailed knowledge about the company. Outside Director – Directors who are not full-time employees of the company. They provide objectivity to the Board of Directors. Stock Options – The right to purchase company stock at a predetermined price at some point in the future. Usually within 10 years of the grant date. Takeover Constraint – The risk of being acquired by another company. Greenmail – A source of gaining wealth where Corporate Raiders push companies to change their corporate strategy to one that will benefit stockholders, or charge a premium for stock when the company wants to buy it back.

Ethics and strategy :

Ethics and strategy Ethics Accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization. Business Ethics Accepted principles of right or wrong governing the conduct of businesspeople. Ethical Dilemmas Situations where there is no agreement over exactly what the accepted principles of right and wrong are, or where none of the available alternatives seems ethically acceptable.

Unethical behavior arises when managers become self-seeking :

Unethical behavior arises when managers become self-seeking Self-dealing: Managers using company funds for own personal consumption Information manipulation: Managers deliberately manipulate company financial information to enhance personal financial situation or competitive position of the firm Anticompetitive behavior: A range of actions aimed at harming competitors Opportunistic exploitation: Unethical behaviors used by managers to rewrite the terms of a contract with suppliers, buyers, or complement providers.

Unethical behavior arises when managers become self-seeking :

Unethical behavior arises when managers become self-seeking Substandard working conditions: Managers underinvest in working conditions or pay employees less than market rates, in order to lower cost Environmental degradation: Occurs when a company’s actions results in pollution or environmental harm, either directly or indirectly Corruption: Managers pay bribes to gain access to profitable business contracts

Roots of unethical behavior:

Roots of unethical behavior First: Personal ethics, which is generally accepted principles of right and wrong governing the conduct of individuals Second: Businesspeople sometimes do not realize they are behaving unethical Third: An organization that de-emphasizes business ethics Fourth: Pressure from top-management to meet unrealistic performance goals Fifth: Unethical leadership, which is employees making unethical decision because their business leaders make unethical decisions.

Behaving ethically:

Behaving ethically Favor hiring and promoting people with well-grounded sense of personal ethics Build an organizational culture that places a high value on ethical behavior Leaders need to articulate the rhetoric of ethical behavior and act in a manner that is consistent with that rhetoric Put decision-making processes in place that require people to consider the ethical dimension of business decisions Use ethics officers Put strong governance processes in place Act with moral courage

Behaving ethically:

Behaving ethically The steps discussed in the previous slide can help ensure that when managers make business decisions, they are fully aware of the ethical implications and do not violate basic ethical rules.

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