Chapter 9 Exam Notes: Strategic Control and

Corporate Governance

1. Strategic Control — Overview

Strategic control: process of monitoring and correcting a firm’s strategy and performance. Two core
components: 1. Informational control — ability to respond effectively to environmental change. 2.
Behavioral control — appropriate balance/alignment among culture, rewards, and boundaries.

2. Informational Control

Definition: gathering/analyzing internal & external information to obtain the best fit between the
organization’s goals/strategies and the environment. Asks: “Are we doing the right things?”

Traditional vs. Contemporary Approach

Traditional Contemporary

Sequential/linear: (1) Formulate strategy → (2) Formulate ⇄ Implement, connected via a continuous loop
Implement → (3) Measure performance of Informational Control & Behavioral Control

Feedback loop: performance → back to formulation Ongoing organizational learning; continuously

updates/challenges assumptions

Examples: sales quotas, budgets, production schedules Faster feedback; part of daily management

Quinn: rigid “grand design” plans rarely work — change is incremental.

Mintzberg: leaders “craft” strategy rather than dictate it.

Benefits of Continuous Monitoring

1. Shortens time lags

2. Detects competitive changes earlier
3. Enhances speed/flexibility of response

4 Characteristics of Effective Contemporary Control Systems

1. Focus on constantly changing, strategically important information

2. Important enough to demand frequent/regular attention at all levels
3. Data best interpreted via face-to-face meetings
4. Acts as a catalyst for ongoing debate about data, assumptions, action plans

Executives using the system interactively signal what matters to the organization.

3. Behavioral Control

Definition: influencing employee actions through culture, rewards, and boundaries. Asks: “Are we
doing things right?” (implementation focus)

Reasons for greater emphasis on culture/rewards (vs. rigid rules): 1. Complex, unpredictable
environment demands flexibility/speed 2. Erosion of long-term implicit employer–employee contract

A. Culture

Organizational culture: shared values/beliefs shaping people, structure, and control systems →
produces behavioral norms. - Sets implicit boundaries (unwritten standards) - Builds identification with
the org; can boost engagement - Downside: strong culture → core rigidities - Cannot be “built”; must be
cultivated/reinforced via storytelling and leader/culture-warrior role modeling

B. Rewards & Incentives

Reward system: policies specifying who gets rewarded and why.

Individual-level problems: - Workers don’t see link between actions & pay → demotivating - Incentives
too narrowly tied to individual work → dysfunctional behavior

Cross-unit problems: - Different business units → different reward systems → subcultures - Can reduce
cohesiveness, cause info hoarding, cross-purposes, loss of overall-goal focus

Characteristics of Effective Reward Systems: - Clear, well-understood, broadly accepted objectives -

Rewards clearly linked to performance/desired behaviors - Clear, visible performance measures -
Prompt, clear, unambiguous feedback - Perceived as fair/equitable - Flexible/adaptable

Agile compensation: reward good performance at the moment it occurs (immediacy = more
effective)
Non-financial motivators > cash for employees already satisfied with base pay
Top 3 non-monetary rewards: (1) managerial praise, (2) attention/involvement from leaders, (3)
opportunities to lead projects/task forces

C. Boundaries & Constraints

Definition: rules specifying acceptable/unacceptable behavior. Causes of counterproductive behavior:

self-interest, unclear goals, malfeasance.

4 Purposes of Boundaries: 1. Focus effort on strategic priorities 2. Provide short-term

objectives/action plans (must be specific, measurable, time-bound, achievable-yet-challenging) 3.
Improve efficiency/effectiveness — rule-based control fits stable environments,
unskilled/interchangeable labor, need for consistency, high malfeasance risk (e.g., banking, casinos) 4.
Minimize improper/unethical conduct (e.g., anti-bribery/kickback rules)

Situational Fit Table

Approach Best Suited When

Culture (unwritten rules) Professional orgs, high autonomy, norm-driven

Rules (written constraints) Standardized output, repetitive/routine tasks, low need

for innovation

Rewards (performance incentives) Output easily measured; unrelated diversification

strategies

Goal: evolve from external boundaries → strong culture + rewards so boundaries become internalized.
4 steps: (1) hire people who fit values, (2) training, (3) managerial role models, (4) align reward systems
with goals.

4. Corporate Governance

Definition (Monks & Minow): relationship among participants determining direction/performance of

corporations — shareholders, management (CEO), board of directors.

Good governance → higher investor confidence, valuation premium, often superior financial
performance
Problem: managers may act in self-interest, harming shareholders

Agency Theory

Principals = owners/stockholders; Agents = managers hired to act on owners’ behalf

Two core problems:
1. Conflicting goals + difficulty monitoring agents
 2. Differing risk preferences between principals and agents

Governance Mechanisms (align owner–manager interests)

1. Board of directors — committed, involved, fiduciary duty to shareholders

2. Shareholder activism
3. Managerial incentives (contract-based rewards/compensation)

Board of Directors — Key Duties (Business Roundtable)

1. Select, compensate, evaluate CEO & senior management

2. Monitor management / exercise oversight:
Succession planning
Review/monitor strategic plans
Review risk assessment & management
Review operating plans/budgets
Ensure integrity of financial statements
Advise on significant issues
Approve major corporate actions
Nominate directors/committees; oversee governance
Oversee legal/ethical compliance
3. Represent interests of all shareholders

Effective boards: allocate time to high-value issues (synergies, strategic alternatives, value drivers,
resource reallocation).

Trends: younger/more diverse boards; push for director independence (outsider dominance).

Outsider-Dominated Boards — Pros/Cons - Pros: independent CEO oversight, broader external

knowledge/network, more outside-committee candidates - Cons: less operational info (filtered via CEO),
weaker ability to evaluate internal execs as future CEOs, non-CEO execs lose strategic decision-making
development - Note: simply having majority outside directors is not sufficient for board effectiveness.

Actions Improving Board Dynamics: 1. Build right expertise 2. Manageable board size 3. Directors
who can fully participate 4. Balance past/present/future focus 5. Consider management talent
development 6. Get a broad view 7. Maintain transparency & trust

Shareholder Rights

1. Sell stock
2. Vote proxy (incl. board elections)
3. Sue for damages if directors/managers fail duties
4. Access certain company information
5. Residual claims upon liquidation/bankruptcy (after creditors paid)

Shareholder activism: actions by large shareholders (institutional/individual) to protect interests when

management diverges from value maximization; institutions shifting from “traders” to “owners.”
Activist investors buy a substantial (not majority) stake, then pressure for leadership change or actions
like stock buybacks.

Managerial Rewards & Incentives (3 policies to align CEO interests)

1. Require CEOs to be substantial company stockholders

2. Structure salary/bonus/stock options to reward superior & penalize poor performance
3. Credible threat of dismissal for poor performance

5. External Governance Control Mechanisms

Ensure managerial actions maximize shareholder value & protect stakeholders — external to the firm’s
own governance system.

Mechanism Key Points

 1. Market for corporate control Dissatisfied shareholders sell shares; takeover
constraint = risk of hostile acquisition. Weakened by
poison pills (reduce firm value to acquirer), greenmail
(buy back acquirer’s stock at premium), golden
parachutes (lucrative severance for ousted execs)

2. Auditors Certify accounting statements; can fail to catch

irregularities because (a) appointed by the audited firm
(relationship bias), (b) auditing firms often have lucrative
consulting contracts with same clients

3. Banks & analysts Banks monitor loan covenants/financial health; analysts

issue buy/hold/sell recs — often more optimistic than
warranted

4. Government regulatory bodies e.g., SEC — require disclosure (quarterly/annual filings,

insider trading, exec comp) to (a) build market/investor
confidence, (b) protect small investors from information
asymmetry

5. Media Shapes public perception of firm/management quality

6. Public activists Consumer/activist groups expose corporate malfeasance

6. Corporate Governance: International Perspective

Principal–Agent vs. Principal–Principal Conflicts

Dimension Principal–Agent Conflicts Principal–Principal Conflicts

Between Shareholders & professional Controlling shareholders & minority

managers (small equity stake) shareholders

Ownership pattern Dispersed (5–20% = “concentrated”) Concentrated (often >50% held by

controlling shareholders)

Manifestation Shirking, pet projects, excessive pay, Minority shareholder expropriation,

empire building nepotism, cronyism

Institutional protection Courts/judicial review limit Often weak/corrupt/unenforced;

expropriation; norms favor informal norms favor controlling
shareholder wealth max shareholders

Principal-Principal conflicts most common in emerging economies & continental Europe

(concentrated/family ownership, business groups, weak minority protection)
Common practice: appointing family members as chairman/CEO/executives

3 Conditions for Principal–Principal Conflicts: 1. Dominant owner(s) with interests distinct from
minority shareholders 2. Motivation to exploit dominant position 3. Weak formal/informal constraints on
controlling shareholders

Key terms: - Expropriation of minority shareholders: enriching controlling shareholders at minority

shareholders’ expense - Business group: legally independent firms bound by formal/informal ties,
acting in coordination — can enable tech transfer/capital allocation, but also favorable intragroup deals
(cross-holdings, board interlocks)

Quick-Hit Definitions (for rapid review)

Strategic control: monitoring/correcting strategy & performance

Informational control: “doing the right things”
Behavioral control: “doing things right”
Organizational culture: shared values/beliefs → behavioral norms
Reward system: policies on who gets rewarded & why
Boundaries/constraints: rules on acceptable/unacceptable behavior
Corporate governance: shareholders–management–board relationship
Agency theory: principal (owner) vs. agent (manager) conflict
Board of directors: fiduciary body overseeing management on shareholders’ behalf
Takeover constraint: risk of hostile acquisition due to poor performance
Poison pill / greenmail / golden parachute: anti-takeover defenses
Expropriation of minority shareholders: controlling shareholders benefiting at minority
expense
Business group: coordinated but legally separate firms