CHAPTER 3 | STRATEGIC MANAGEMENT

Cards (35)

  • Legitimacy
    • A condition that prevails when there is a congruence between an organization’s activities and society’s expectations.
  • Legitimation
    A dynamic process by which a business seeks to perpetuate its acceptance.
  • Corporate Governance
    • Refers to the method by which a firm is being governed, directed, administered, or controlled, and to the goals for which it is being governed. 
    • Is concerned with the relative roles, rights, and accountability of such stakeholder groups as owners, boards of directors, managers, employees, and other stakeholders.
  • Shareholders
    Own stock in the firm, giving them ultimate control (the shareholder-primacy model).
  • Board of Directors
    • Govern and oversee management of the business.
  • Managers
    The individuals hired by the Board to manage the business on a  daily basis. 
  • Employees
    Hired to perform actual operational work
  • The Corporation’s Hierarchy of Authority
  • Outside directors
    • are independent from the firm
  • Inside directors
    • have some tie to the firm
    •Board independence from management is crucial to good governance.
  • Issues Surrounding Compensation
  • Stock Options
    • Allows the recipient to purchase stock in the future at the price it is today.
  • Backdating
    Allows the recipient to purchase stock at yesterday’s price, resulting in immediate wealth increase.
  • Spring-Loading
    • Granting of a stock option at today’s price, but with the inside knowledge that stock’s value is improving.
  • Bullet Dodging
    • Delaying of a stock option grant until right after bad news.
  • Say on Pay 

    Evolved from concerns over excessive executive compensation.
  • Clawback provisions
    • Compensation recovery mechanisms that enable a company to recoup CEO pay, typically in the event of a financial restatement or executive’s misbehavior.
  • CEO Pay Controversy 
  • Retirement packages
    • have come under scrutiny.
    • $210 million to Robert Nardelli when he was ousted from Home Depot. 
    • $125 million to outgoing Bank of America CEO, Ken Lewis
    • In contrast, many of today’s workers do not have a retirement plan.
    • Those who do generally have a defined contribution plan, rather than a defined benefit plan. 
  • Outside Director Compensation
    • Paying board members is a recent idea.
    • Today, outside board members are paid.
    • From 2003-2010, their median pay rose about a third, from $175,800 to $233,800.
    • Controversy over whether directors should be paid at all, and whether they are paid enough.
  • Transparency
    •Exec compensation packages may include deferred pay, Severance, pension benefits, & other perks over $10,000.
    •SEC Rules require disclosure of executive compensation.
    •Such disclosures may have a moderating impact prior to implementation.
  • Mergers and acquisitions
    • Expectation is that the threat of a possible takeover will motivate top managers to pursue shareholder, rather than self-interest. 
    • But many corporate CEOs and boards go to great lengths to protect themselves from takeovers, using:
    • poison pills  (discourages a hostile takeover by making the firm difficult to take on)
    • golden parachutes (firm agrees to pay key officers in the event of a change in control of the corporation) 
  • Insider Trading
    • The practice of buying or selling a security by someone who has access to material information that is not available to the public.
  • Material Information
    is information that a reasonable investor might want to use, and is likely to affect the price of the firm’s stock.
  • tipper
    provides that information
  • tippee
    • receives the information
  • Sarbanes-Oxley Act of 2002 (SOX)
    • Amends securities laws to protect investors in public companies
    • Enhances public disclosure to require reporting of off-balance sheet transactions, and personal loans to executives
    • Limits the nonauditing services an auditor can provide to a firm it audits
    • Makes it unlawful for accounting firms to provide services where conflicts of interests exist
    • CEOs and CFOs must certify financials, and are held responsible for financial representations
  • Changes in boards of directors
    • More Board diversity
    • A greater ratio of outside board members to inside board members 
  • Red Flags Signaling Board Problems
  • The Board’s Relationship with CEO
    • Boards are responsible for monitoring CEO performance and dismissing poorly performing CEO
    • Formerly, CEOs were protected; no more; firings of CEOs are up significantly
    • If CEO also serves as Chairman of the Board, this duality can offer some protection
    • Activists have moved to separate CEO and Board functions 
  • The Business Judgment Rule
    • protects board members if:
    • they act in good faith,
    • making informed decisions 
    • that reflect the company’s best interests, and not their own interests.
    • Good Faith is central to the defense
    • The argument in favor of the Business Judgment Rule is that Board members need to be free to take risks without fear of liability.
  • The Shareholder Democracy
    Movement rises from the fact that although they are owners, shareholders  may find that their votes are not counted. They seek:
     Majority Vote
    • The requirement that board members be elected by a majority of votes cast, rather than by a plurality.
    Banning Classified or Staggered Boards 
    • Electing members in staggered terms means that it might take 3 or more years to replace a board.
    Proxy Access
    • Would provide shareholders with the opportunity to propose nominees for the board of directors.  
  • The Role of the SEC
    • The SEC Is responsible for protecting investor interests.
    • Critics argue that the SEC is more focused on the needs of businesses than on that of investors.
    • The SEC failed to stop the Bernard Madoff Ponzi scheme before losing investors billions, although they had been warned of the scheme a decade earlier.
  • Investor Relations
    • A majority of corporate boards now communicate with their major investors
    • Public corporations have obligations to current and potential shareholders, including Full disclosure (Transparency), and the duty to provide information that might affect investment decisions.
    • Management is also responsible for communicating with shareholders. 
    • CEO Warren Buffet calls his annual shareholder meeting a “Woodstock weekend for capitalists.” 
  • An Alternative Model of Corporate Governance
    • The Anglo-American model of corporate governance is one of shareholder primacy
    • A emerging perspective is a director-primacy model of corporate governance
    • A director-primacy model is based on the concept of a corporation that is not owned, but is an independent legal entity that owns itself. 
    • Boards are mediating hierarchs, responsible for balancing competing interests of stakeholders
    • Boards have a duty to shareholders, but boards are the ultimate decision-makers, whose duty is to the corporation