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Chapter 10
10
Corporate Governance
Michael
Michael A.
A. Hitt
Hitt
R.
R. Duane
Duane Ireland
Ireland
Robert
Robert E.
E. Hoskisson
Hoskisson
Strategy Formulation
Strategic
Competitiveness
Above Average
Feedback
Returns
Ch10
Corporate Governance
Corporate Governance is a relationship among
stakeholders that is used to determine and control the
strategic direction and performance of organizations
Ch10
Separation of Ownership and Managerial Control
Managers
(Agents)
which creates
Decision
Makers Ch10
Agency Theory
The Agency problem occurs when:
- The desires or goals of the principal and agent conflict
and it is difficult or expensive for the principal to
verify that the agent has behaved appropriately
Example: Overdiversification because increased product
diversification leads to lower employment risk
for managers and greater compensation
Solution: Principals engage in incentive-based performance
contracts, monitoring mechanisms such as the
board of directors and enforcement mechanisms
such as the managerial labor market to mitigate
the agency problem
Ch10
Manager and Shareholder Risk and Diversification
Shareholder
(Business) Managerial
Risk Profile (Employment)
Risk
S Risk Profile
M
A
Dominant Related Related B Unrelated
Business Constrained Linked Businesses
Boards of Directors
Executive Compensation
Insiders
The firm’s CEO and other top-level managers
Related Outsiders
Individuals not involved with day-to-day operations,
but who have a relationship with the company
Outsiders
Individuals who are independent of the firm’s day-
to-day operations and other relationships
Ch10-
Governance Mechanisms
Board of Directors
Ch10-
Governance Mechanisms
Executive Compensation
Salary, Bonuses, Long term incentive compensation
Executive decisions are complex and non-routine
Other characteristics:
Powerful government intervention
Close relationships between firms and government sectors
Passive and stable shareholders who exert little control
Virtual absence of external market for corporate control Ch10-
Corporate Governance and Ethical Behavior
It is important to serve the interests of multiple
stakeholder groups