Ch10MBA - The Strategic Management Process 1 Chapter 10:...

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1 The Strategic Management Process
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2 Chapter 10: Corporate Governance (CG) Overview: Define CG and describe its purpose Separation between ownership and management control Agency relationship and managerial opportunism Three internal governance mechanisms used to monitor/control management decisions The external market for corporate control Use of external CG in international settings How CG can foster ethical strategic decisions
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3 Introduction Corporate Governance (CG): The set of mechanisms used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of organizations Concerned with identifying ways to ensure that strategic decisions are made effectively and align with company values Primary objective: align the interests of managers and shareholders Recent corporate scandals (Enron, Tyco, Arthur Anderson) largely a result of poor corporate governance Involves oversight in areas where the interests of owners, managers, and members of the board conflict Top-level managers are expected to make decisions that maximize company value and owner wealth
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4 Separation of Ownership and Managerial Control Historically, firms were managed by founder-owners & descendants Ownership and control resided in the same persons Over time these firms faced two critical issues As they grew, they did not have access to all needed skills to manage the growing firm and maximize its returns, so they needed outsiders to improve management They also needed to seek outside capital (whereby they give up some ownership control) Firm growth lead to the separation of ownership and control in most large corporations This resulted in the Modern Public Corporation
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5 Separation of Ownership and Managerial Control The Modern Public Corporation is based on the efficient separation of ownership and managerial control This separation allows shareholders to purchase stock, giving them an ownership stake and entitling them to income (residual returns) after expenses This right implies a ‘risk’ for shareholders that expenses may exceed revenues This risk is managed through a diversified investment portfolio Shareholder value is thus reflected in the price of the firm’s stock Shareholders specialize in risk bearing while managers specialize in decision making The separation and specialization of ownership and managerial control should produce the highest returns for the firm’s owners
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6 Separation of Ownership and Managerial Control The separation between owners and managers also creates an agency relationship Agency Relationship – exists when one or more persons (principals) hire another person or persons (agents) as decision- making specialists to perform a service Decision making responsibility is delegated to a second party for compensation Agents manage principals' operations and maximize their returns
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This note was uploaded on 07/31/2011 for the course MAN 6782 taught by Professor Marlin during the Spring '11 term at University of South Florida.

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Ch10MBA - The Strategic Management Process 1 Chapter 10:...

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