Topic 6:

Chapter 9: Corporate Governance

9.1 Introduction

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community. Corporate governance provides a framework for attaining a company's objectives and encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

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9.2 Definition and Purpose  

Corporate governance is used to monitor and control top-level managers' decisions. It ensures that managers act in the best interests of shareholders and other stakeholders, promotes transparency and accountability, and helps prevent corporate scandals and fraud.

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9.3 Separation of Ownership and Control  

Ownership is often separated from managerial control in organizations, especially in large corporations. Shareholders own the company, but they may not have the expertise or time to manage it. Instead, they delegate this responsibility to professional managers. This separation can lead to conflicts of interest, as managers may prioritize their own interests over those of shareholders.

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9.4 Agency Relationship and Managerial Opportunism  

An agency relationship arises when shareholders (principals) delegate decision-making authority to managers (agents). Managerial opportunism refers to the pursuit of self-interest with guile or deceit. It can occur when managers take actions that benefit themselves at the expense of shareholders. The strategic implications include potential conflicts of interest, reduced trust, and the need for monitoring and control mechanisms.

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9.5 Internal Governance Mechanisms

Three internal governance mechanisms to monitor and control managers' decisions are:

1. Ownership Concentration: Large-block shareholders or institutional owners may have significant influence over managerial decisions.
2. Board of Directors: The board oversees management, approves major decisions, and protects shareholders' interests.
3. Executive Compensation: Compensation packages can be designed to align managers' interests with those of shareholders.

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9.6 Executive Compensation

Top-level managers receive various types of compensation, including salary, bonuses, stock options, and benefits. Compensation can affect managerial decisions by incentivizing performance, aligning interests with shareholders, or, if poorly structured, encouraging short-termism or excessive risk-taking.

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9.7 External Governance Mechanism

The market for corporate control is an external governance mechanism that restrains top-level managers' decisions. It involves the threat of takeover by other companies, which can lead to changes in management or strategy. This threat incentivizes managers to perform well and act in shareholders' best interests.

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9.8 International Corporate Governance

Corporate governance varies across countries due to differences in legal systems, cultures, and economic structures. In Germany, there is a two-tier board system with strong employee representation. In Japan, there are cross-shareholdings among companies. In China, state ownership is prevalent. Understanding these differences is crucial for companies operating internationally.

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9.9 Ethical Decision-Making

Corporate governance fosters ethical decisions by top-level managers by promoting transparency, accountability, and adherence to ethical standards. It helps prevent unethical behavior, corporate scandals, and damage to a company's reputation.

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Conclusion

In this chapter, you have explored the concept of corporate governance and its importance in monitoring and controlling top-level managers' decisions. Corporate governance is a critical aspect of any organization, as it ensures that the interests of shareholders and stakeholders are protected and that the company operates ethically and responsibly.

This chapter also addresses the separation of ownership from managerial control in organizations and the agency relationship that arises from this separation. Managerial opportunism, where managers act in their own interests rather than those of the shareholders, can be a significant concern. Effective corporate governance mechanisms are essential to mitigate this risk.

Three internal governance mechanisms include the board of directors, executive compensation, and ownership concentration. The board of directors plays a crucial role in overseeing management and ensuring that it acts in the best interests of the shareholders. Executive compensation can be structured to align the interests of top-level managers with those of the shareholders. Large-block shareholders and institutional owners can exert significant influence over management decisions.

The external corporate governance mechanism—the market for corporate control—has also been explored. This mechanism acts as a check on managerial performance, with poorly performing managers at risk of being replaced through a takeover.

The nature and use of corporate governance in international settings, particularly in Germany, Japan, and China has been discussed. Different countries have different approaches to corporate governance, reflecting their unique cultural, legal, and economic environments.

Finally, how corporate governance fosters ethical decisions by a firm's top-level managers has been covered.  Ethical behavior is not only morally right but also beneficial for the company's reputation and long-term success.

In conclusion, corporate governance is a complex and multifaceted area that plays a crucial role in the success of any organization. It involves balancing the interests of various stakeholders and ensuring that top-level managers act in the best interests of the company. Effective corporate governance can contribute to a company's long-term success and sustainability.

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Chapter 10: Organizational Structure and Controls

10.1 Introduction

Organizational structure and controls are critical components of strategy implementation. They determine how resources are allocated, tasks are coordinated, and performance is measured. The right structure and controls can enable a company to effectively execute its strategy and achieve its objectives.

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10.2 Organizational Structure and Controls

Organizational structure refers to the way in which a company's activities are divided, organized, and coordinated. Controls are mechanisms used to direct behavior and ensure that employees act in the best interests of the organization. Strategic controls focus on whether the company is moving in the right strategic direction, while financial controls monitor outcomes and financial performance.

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10.3 Strategy and Structure

The relationship between strategy and structure is reciprocal. Strategy influences structure by determining the activities that need to be coordinated and controlled. Conversely, structure can influence strategy by shaping the company's capabilities and limitations. A well-aligned strategy and structure can enhance performance and competitive advantage.

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10.4 Functional Structures

Functional structures are used to implement business-level strategies. They group activities by function, such as marketing, finance, or operations. Functional structures can promote efficiency, specialization, and coordination within functions. However, they may hinder communication and coordination across functions.

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10.5 Multidivisional Structures

Multidivisional (M-form) structures are used to implement diversification strategies. They organize activities by division, with each division responsible for a distinct business or product line. There are three versions of the M-form structure:

1. Cooperative M-form (Cooperative Form): Divisions share resources and collaborate to achieve synergies.
2. Competitive M-form (Competitive Form): Divisions compete for resources and operate independently.
3. Strategic Business Unit (SBU) M-form (SBU Form): Divisions are grouped into SBUs based on market similarities.

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10.6 International Structures

Organizational structures for international strategies include:

1. Worldwide Geographic Area Structure: Activities are organized by geographic region.
2. Worldwide Product Divisional Structure: Activities are organized by product line.
3. Combination Structure: Combines elements of geographic and product divisional structures.

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10.7 Strategic Networks

Strategic networks are groups of companies that collaborate to achieve strategic objectives. The strategic center firm is the leader of the network and coordinates the activities of other firms. Strategic networks can be implemented at the business, corporate, and international levels to leverage resources, share risks, and access new markets.

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Conclusion

This chapter provides an overview of organizational structure and controls, highlighting their importance in strategy implementation. The chapter covers the relationship between strategy and structure, functional structures, multidivisional structures, international structures, and strategic networks. The chapter also defines key terms related to organizational structure and controls.