CHAPTER 9

Strategic Control and

Corporate Governance

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 Learning Objectives

After reading this chapter, you should have a good understanding of:
9-1 The value of effective strategic control systems in strategy
implementation.
9-2 The key difference between “traditional” and “contemporary” control
systems.
9-3 The imperative for contemporary control systems in today’s complex
and rapidly changing competitive and general environments.
9-4 The benefits of having the proper balance among the three levers of
behavioral control: culture, rewards and incentives, and boundaries.
9-5 The three key participants in corporate governance: shareholders,
management (led by the CEO), and the board of directors.
9-6 The role of corporate governance mechanisms in ensuring that the
interests of managers are aligned with those of shareholders from
both the United States and international perspectives.

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 Strategic Control

Consider . . .
Once strategy is formulated, it must be
implemented, and part of implementation is
establishing a mechanism for monitoring and
correcting organizational performance.
This control mechanism must be consistent with
the strategy the firm is following.
How does a firm make sure all key stakeholders
are moving in the right direction?

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 Strategic Control Mechanisms

Strategic control involves monitoring

performance toward strategic goals and taking
corrective action when needed via effective
systems.
• Informational-control systems
• Behavioral-control systems
• Corporate governance

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 Strategic Control:
Traditional Approach Model

The traditional approach to strategic control is

sequential.
1. Strategies are formulated, goals are set.
2. Strategies are implemented.
3. Performance is measured against predetermined goals.

Exhibit 9.1 Traditional Approach to

Strategic Control
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 Strategic Control:
Traditional Approach

Traditional approach to strategic control =

feedback loop from performance measurement to
strategy formulation
Involves lengthy time lags, “single-loop” learning
Most appropriate when:
• Environment is stable and relatively simple.
• Objectives can be measured with certainty.
• There is little need for complex measures of
performance.

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 Strategic Control:
Contemporary Approach Model

Relationships between strategy

formulation, implementation, &
control are highly interactive,
utilizing:
• Informational control
• Behavioral control

Exhibit 9.2 Contemporary

Approach to Strategic Control

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 Strategic Control:
Contemporary Approach

Informational control = Is the organization

“doing the right things”?
Behavioral control = Is the organization “doing
things right” in the implementation of its strategy?
Both types of control are necessary, but not
sufficient, conditions for success.

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 Strategic Control:
Contemporary Approach Effectiveness

Contemporary control systems using

informational control are effective when:
• Focus is on constantly changing information that
has potential strategic importance.
• Information is important enough to demand
frequent & regular attention from all levels.
• Data & information are interpreted & discussed in
face-to-face meetings.
• Control system is a catalyst for ongoing debate
about underlying data, assumptions & plans.

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 Question
(1 of 3)

Top managers at ABC Company meet every Friday

to review daily operational reports and year-to-
date data. This is an example of
A. behavioral control.
B. informational control.
C. strategy formulation.
D. strategy implementation.

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 Informational Control: Issues

Informational control deals with both the

internal & external environment.
Do the organization’s goals and strategies still
“fit” within the context of the current strategic
environment?
Two key issues:
• Scan & monitor the external environment
• Continuously monitor the internal environment

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 Informational Control: Characteristics

Informational control = ongoing process of

organizational learning
Focus is on constantly changing information –
continuous monitoring, testing, review.
Data is interpreted and discussed face-to-face.
Ongoing debates challenge assumptions.
• Time lags are shortened.
• Changes are detected earlier.
• Speed & flexibility of response is enhanced.
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 Question
(2 of 3)

Which of the following is not one of the

characteristics of a contemporary control system?
A. It is a key catalyst for an ongoing debate about
underlying data, assumptions, and action plans.
B. It must focus on constantly changing information
that is strategically important.
C. It circumvents the need for face-to-face meetings
among superiors, subordinates, and peers.
D. It generates information that is important enough
to demand regular and frequent attention.

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 Behavioral Control Model

Behavioral control
= focused on
implementation –
“doing things right”
Influences the
actions of employees
via:
• Culture
• Rewards
• Boundaries

Exhibit 9.3 Essential

Elements of
Behavioral Control
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 Behavioral Control: Culture

Organizational culture is a system of:

• Shared values (what is important).
• Beliefs (how things work).

Organizational culture shapes a firm’s people,

organizational structures, and control systems.
Organizational culture produces behavioral norms
(the way we do things around here).

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 Behavioral Control: Role of Culture

Organizational culture sets implicit boundaries

regarding:
• Dress

• Ethical matters

• The way an organization conducts its business

A strong culture
• Leads to greater employee engagement

• Provides a common purpose and identity

• Reduces monitoring costs

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 Behavioral Control: Sustaining an
Effective Culture

Effective organizational cultures must be:

• Cultivated
• Encouraged
• Fertilized

Organizational cultures can be maintained by:

• Storytelling
• Rallies or pep talks by top executives

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 Behavioral Control: Rewards

Reward systems & incentive programs:

• Powerful means of influencing an organization’s
culture
• Focusing efforts on high-priority tasks
• Motivating individual & collective task performance
• Can be an effective motivator & control mechanism

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 Behavioral Control: Downside of
Reward Systems

Potential downsides to reward systems:

• Individual actions are not related to compensation;
employees are rewarded for the wrong things.
• Different business units have differing rewards
systems.
• Behavior reinforced within subcultures may reflect
value differences in opposition to the dominant
culture.
• Reward systems may lead to information hoarding,
working at cross purposes.

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Behavioral Control: Reward Systems Characteristics

Effective reward systems share common

characteristics.
• Objectives are clear, well understood, and broadly
accepted.
• Rewards are clearly linked to performance and desired
behaviors.
• Performance measures are clear and highly visible.
• Feedback is prompt, clear, and unambiguous.
• The compensation “system” is perceived as fair and
equitable.
• The structure is flexible; it can adapt to changing
circumstances.
From Exhibit 9.4 Characteristics of Effective Reward
©McGraw-Hill Education. and Evaluation Systems
 Behavioral Control: Boundaries
(1 of 2)

Boundaries and constraints can be useful in:

• Focusing individual efforts on strategic priorities
• Providing short-term objectives and action plans to
channel employee efforts by:
• Setting specific, measurable objectives, including a
specific time horizon for attainment
• Making them achievable, yet challenging enough to
motivate
• Holding individual managers accountable for
implementation

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 Question
(3 of 3)

Rules and regulations, rather than culture or

rewards, would probably be used for strategic
control at what type of company?
A. software developer
B. stock brokerage firm
C. manufacturer of mass-produced products
D. high-tech research facility

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 Behavioral Control: Boundaries
(2 of 2)

Boundaries and constraints can also:

• Improve efficiency and effectiveness through rule-based
controls, appropriate when:
• Environments stable and predictable.

• Employees are largely unskilled and interchangeable.

• Consistency in product and services is critical.

• The risk of malfeasance is extremely high.

• Minimize improper and unethical conduct via:

• Explicit rules

• Anticorruption and anti-bribery policies

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 Behavioral Control Systems: Situational Factors

Approach Some Situational Factors

Culture: A system of unwritten rules that forms an • Often found in professional organizations.
internalized influence over behavior. • Associated with high autonomy.
• Norms are the basis for behavior.

Rules: Written and explicit guidelines that provide • Associated with standardized output.
external constraints on behavior. • Most appropriate when tasks are generally
repetitive and routine.
• Little need for innovation or creative activity.

Rewards: The use of performance-base incentive • Measurement of output and performance is

systems to motivate. rather straightforward.
• Most appropriate in organizations pursuing
unrelated diversification.
• Rewards may be used to reinforce other means
of control.

Exhibit 9.5 Organizational Control: Alternative Approaches

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 Control System:
Corporate Governance
The strategic control mechanism corporate governance
focuses on relationships among
• Shareholders
• Management (led by the CEO)
• Board of Directors

Assumes the separation of owners (shareholders) &

management in a modern corporation
Asks how corporations can succeed (or fail) in aligning
managerial motives with
• Interests of the shareholders
• Interests of the board of directors

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 Corporate Governance:
Agency Theory

Agency theory deals with the relationship

between principals & agents.
What to do when the goals of the principals and
agents conflict?
What to do when it is difficult or expensive for the
principal to verify what the agent is actually
doing?
What happens when the principal and the agent
have different attitudes and preferences toward
risk?

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 Corporate Governance Mechanisms

Corporate governance mechanisms: aligning the

interests of owners and managers through:
• A committed and involved Board of Directors
• Shareholder activism & active engagement
• Managerial rewards and incentives
• Contract-based outcomes – reward & compensation
agreements that align management & stockholder
interests

• Making a decision about CEO duality – should the

CEO also be chairman of the board of directors?

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 Corporate Governance Mechanisms:
Board of Directors Effectiveness
An effective Board of Directors should
• Become active, critical participants.

• Ensure that strategic plans undergo rigorous scrutiny, focus on

past, present, future.
• Evaluate managers against high performance standards.

• Take control of the succession process for upper management as

well as the CEO.
•Practice director independence.
•No interlocking directorships

• Insist that directors own significant stock in the company.

• Build in the right expertise on the board.

• Maintain norms of transparency and trust.

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 Corporate Governance Mechanisms:
Shareholder Activism

Shareholder activism assumes the following:

Individual shareholders have rights.
• To sell stock, vote the proxy, bring suit for damages, get
information, receive residual rights following the company’s
liquidation

Collectively, shareholders have power.

• To direct the course of corporations, file shareholder action
suits, demand key issues be brought up for proxy votes

Institutional investors can be aggressive.

• By reviewing performance, requesting changes in the firm’s
governance structure, filing court action, pushing social
initiatives
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 Corporate Governance Mechanisms:
Managerial Rewards & Incentives

Boards are responsible for managerial rewards

and incentives.
• Boards can require that CEOs become substantial
owners of company stock.
• Salaries, bonuses, and stock options can be
structured so as to provide rewards for superior
performance and penalties for poor performance.
• Dismissal for poor performance should be a
realistic threat.

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 Corporate Governance Mechanisms:
CEO Duality?

Unity of command: (in favor of) duality

• Provides clear focus
• Eliminates confusion and conflict
• Enhances a firm’s responsiveness
• Enables quick decisions based on first-hand knowledge

Agency theory: (in favor of) separation

• Safeguards against corruption or incompetence

• Removes conflict of interest, especially regarding CEO

succession
• Improves perceptions of legitimacy

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 External Corporate Governance
Mechanisms
EXTERNAL governance control mechanisms:

The market for corporate control – if shareholders sell, stock

value declines, increases possibility of takeover.

• Takeover constraint – fear of acquisition by hostile raider

Auditors who verify the firm’s books

Banks and analysts who conduct in-depth studies of firms

Regulatory bodies that require disclosure of financial information

• Securities and Exchange Commission (SEC)

Media and public activists who influence public perception

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 International Corporate Governance

In countries other than the United States and the

UK, there is another perspective. Principal –
principal conflicts (as opposed to principal –
agent conflicts) involve:
• Concentrated ownership, or family ownership
• Motivation to engage in expropriation of minority
shareholders for personal gain

• Business groups who can take coordinated action

• Japanese keiretsus, Korean chaebols

• Few external regulatory constraints

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