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Solved by verified expert:1. summarize the news first and then write several knowledge points that related to the PPT.https://www.ft.com/content/21f6befe-3781-11e8-8eee…2. Read the mini-case “The Imperial CEO, JP Morgan Chase’s Jamie Dimon” on P.335 in the text. Answer the following questions in a single Word document.a. What is CEO duality? What potential problems does it have on a firm’s corporate governance?b. Evaluate the governance systems of JP Morgan Chase. How well does it protect shareholders’ interests?c. Should the board get rid of CEO duality? Why or why not? What hindered the shareholder activists’ efforts to separate the two positions? 3. Read the attached case and watch this YouTube video (Links to an external site.)Links to an external site., then answer the following questions.a. What did Dennis Kozlowski do to his former company Tyco that can be characterized as agency problems or managerial opportunism? b. Why do you think he engaged in such behavior? What motivated him to take such risks? video link:
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Chapter 10
Corporate Governance
Corporate Governance
• Corporate governance is:
– the set of mechanisms used to manage relationships
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 more effectively.
– used in corporations to establish harmony between
the firm’s owners and its top-level managers whose
interests may be in conflict.
The Tyco Tale





Who is Dennis Kozlowski?
What did he do at Tyco?
Why would he do that to Tyco?
Who were the losers?
Are there any other companies known for
accounting fraud?
Stakeholders and Corporate Performance
• Stakeholders: Individuals or groups with an
interest, claim, or stake in the company, in what
it does, and in how well it performs.
– Internal Stakeholders (e.g. employees, shareholders,
etc.)
– External Stakeholders (e.g. customers, creditors,
governments, etc.)
• A company must consider stakeholder claims in
developing and implementing strategy
Stakeholders and the Enterprise
Stakeholders at Ford
◼ Employees
◼ Customers
◼ Dealers
◼ Suppliers
◼ Investors
◼ Communities
◼ Society
◼ Government agencies
◼ Nongovernmental organizations (NGOs)
◼ Academia
Stakeholder Impact Analysis

Identify stakeholders

Identify stakeholders’ interests and concerns

Identify what claims stakeholders are likely to
make on the organization

Identify stakeholders who are most important,
from the organization’s perspective

Identify resulting strategic challenges
Separation of Ownership and
Managerial Control
• Introduction
– Historically, firms managed by founder-owners &
descendants
– Separation of ownership and managerial control allow
shareholders to purchase stock, entitling them to
income (residual returns) – implies ‘risk’ for this group
who manage their investment risk
– Shareholder value reflected in price of stock
Separation of Ownership and
Managerial Control
(Cont’d)
• Agency relationships
– Relationships between business owners (principals)
and decision-making specialists (agents) hired to
manage principals’ operations and maximize returns on
investment (and focus of this chapter)
• Principal: person delegating authority
• Agent: person to whom authority is delegated
– Other agency relationship examples:
Consultants/clients; insured/insurer; manager/employee
Separation of Ownership and
Managerial Control (Cont’d)
• Agency problems
– Agents and principals may have different goals
– Agents may pursue goals that are not in the best
interests of their principals
– Agents may take advantage of information
asymmetries to maximize their interests at the
expense of principals
• Managerial Opportunism: Seeking self-interest with
guile (i.e., cunning or deceit)
– Principals establish governance and control
mechanisms to prevent agents from acting
opportunistically
Agency Problem: Product Diversification
• Agency problems: Product diversification
– Can result in 2 manager benefits shareholders “don’t
enjoy”
• 1. Increase in firm size
• 2. Firm portfolio diversification which can reduce top
executives’ employment risk (i.e., job loss, loss of
compensation and loss of managerial reputation)
– Diversification reduces these risks because a firm and
its managers are less vulnerable to the reduction in
demand associated with a single or limited number of
product lines or businesses
Manager and Shareholder Risk and
Diversification
Ownership Concentration
Ownership
Concentration (a)
• Large block shareholders have
a strong incentive to monitor
management closely
– Their large stakes make it worth
their while to spend time, effort and
expense to monitor closely
– They may also obtain board seats
which enhances their ability to
monitor effectively
• Financial institutions are legally
forbidden from directly holding
board seats.
Ownership Concentration (cont’d)
Ownership
Concentration (b)
• The increasing influence of
institutional owners (stock
mutual funds and pension
funds):
– have the size (proxy voting power)
and incentive (demand for returns to
funds) to discipline ineffective toplevel managers.
– can affect the firm’s choice of
strategies.
Board of Directors
Ownership
Concentration
Board of Directors (a)
• Board of directors
– Group of elected individuals that
acts in the owners’ interests to
formally monitor and control the
firm’s top-level executives
• Board has the power to:
– direct the affairs of the organization
– punish and reward managers
– protect owners from managerial
opportunism
Board of Directors (cont’d)
Ownership
Concentration
Board of Directors (b)
• Composition of Boards
– Insiders: the firm’s CEO and other
top-level managers.
– Related Outsiders: individuals
uninvolved with day-to-day
operations, but who have a
relationship with the firm.
– Outsiders: individuals who are
independent of the firm’s day-to-day
operations and other relationships.
Board of Directors (cont’d)
Ownership
Concentration
Board of Directors (c)
• Criticisms of Boards of Directors
– Too readily approve managers’
self-serving initiatives
– Exploited by managers with
personal ties to board members
– Not vigilant enough in hiring and
monitoring CEO behavior
– Lack of agreement about the
number of and most appropriate
role of outside directors
CEO Duality
Executive Compensation
Ownership
Concentration
Board of Directors
• Forms of compensation
– Salaries, bonuses, long-term
performance incentives, stock
awards, stock options
• Factors complicating executive
compensation
Executive
Compensation(a)
– Strategic decisions by top-level
managers are complex, non-routine
and affect the firm over an extended
period
– Other variables affecting the firm’s
performance over time
Executive Compensation (cont’d)
Ownership
Concentration
Board of Directors
Executive
Compensation(b)
• Limits on the effectiveness of
executive compensation
– Unintended consequences of stock
options
– Firm performance not as important
as firm size
– Balance sheet not showing
executive wealth
– Options not expensed at the time
they are awarded
Market for Corporate Control
Ownership
Concentration
Board of Directors
Executive
Compensation
Market for Corporate
Control (a)
• Individuals and firms buy or
take over undervalued firms
– Ineffective managers are usually
replaced in such takeovers.
• Threat of takeover may lead
firm to operate more efficiently
• Changes in regulations have
made hostile takeovers difficult
Market for Corporate Control (cont’d)
Ownership
Concentration
Board of Directors
• Managerial defense tactics increase
the costs of mounting a takeover
• Defense tactics
Executive
Compensation
– Asset restructuring
– Changes in the financial structure of
the firm
– Shareholder approval
Market for Corporate
Control (b)
• Market for corporate control lacks
the precision of internal governance
mechanisms
International Corporate Governance
• Corporate Governance in Germany
– Concentration of ownership is strong
– Banks exercise significant power as a source of
financing for firms
– Two-tiered board structures, required for larger
employers, place responsibility for monitoring and
controlling managerial decisions and actions with
separate groups
– Power sharing includes representation from the
community as well as unions
International Corporate Governance
(Cont’d)
• Corporate Governance in Japan
– Cultural concepts of obligation, family, and consensus
affect attitudes toward governance
– Close relationships between stakeholders and a
company are manifested in cross-shareholding, and
can negatively impact efficiencies
– Banks play an important role in financing and
monitoring large public firms
– Despite the counter-cultural nature of corporate
takeovers, changes in corporate governance have
introduced this practice
Strategy and Ethical Behavior
◼ Business ethics
Accepted principles of right or wrong governing the conduct
of businesspeople
◼ Discussion Question:
◼ During the late 1990s, there was a boom in initial public
offerings of Internet companies (dot.com companies). The
boom was supported by sky-high valuations often
assigned to Internet start-ups that had no revenues or
earnings. The boom came to an abrupt end in 2001 when
the NASDAQ stock market collapsed, losing almost 80% of
its value. Who do you think benefited most from this boom:
investors (stockholders) in those companies, managers, or
investment bankers?
376
Part 4 Implementing Strategy
PRACTICING STRATEGIC MANAGEMENT
Small-Group Exercise:
Evaluating Stakeholder Claims
Break up into groups of three to five people and
appoint one group member as a spokesperson
who will communicate your findings to the class.
Discuss the following:
1. Identify the key stakeholders of your educational institution. What claims do they place
on the institution?
2. Strategically, how is the institution responding to those claims? Do you think the institution is pursuing the correct strategies in view
of those claims? What might it do differently,
if anything?
3. Prioritize the stakeholders in order of their
importance for the survival and health of
the institution. Do the claims of different
stakeholder groups conflict with each other?
If claims conflict, whose should be tackled
first?
Article File 11
Find an example of a company that ran into trouble because it failed to take into account the rights
of one of its stakeholder groups when making an
important strategic decision.
Strategic Management Project: Module 11
This module deals with the relationships your
company has with its major stakeholder groups.
With the information you have at your disposal,
perform the tasks and answer the questions that
follow:
1. Identify the main stakeholder groups in your
company. What claims do they place on the
company? How is the company trying to satisfy those claims?
2. Evaluate the performance of the CEO of your
company from the perspective of (a) stockholders, (b) employees, (c) customers, and
(d) suppliers. What does this evaluation tell
you about the ability of the CEO and the priorities that he or she is committed to?
3. Try to establish whether the governance
mechanisms that operate in your company
do a good job of aligning the interests of top
managers with those of stockholders.
4. Pick a major strategic decision made by your
company in recent years and try to think
through the ethical implications of that decision. In the light of your review, do you think
that the company acted correctly?
The Rise and Fall of Dennis Kozlowski
Under the leadership of Dennis Kozlowski, who
became CEO of Tyco in 1990, the company’s
revenues expanded from $3.1 billion to almost
$40 billion. Most of this growth was due to a series
of acquisitions that took Tyco into a diverse range of
unrelated businesses. Kozlowski was initially lauded
in the business press as a great manager who bought
undervalued assets and then enhanced their value
by imposing tight financial controls at the acquired
companies. Certainly both profits and the stock
price advanced at a healthy clip during much of the
1990s.
Tyco financed the acquisitions by taking on significant debt commitments, which by 2002 exceeded
$23 billion. As Tyco expanded, some questioned the
company’s ability to service its debt commitments.
Chapter 11 Corporate Performance, Governance, and Business Ethics
Others claimed that management was engaging in
“accounting tricks” to pad its books and make the
company appear significantly more profitable than
it actually was. Tyco’s defenders pointed out that its
accounts were independently audited every year, and
the outside accountants had detected no problems.
These criticisms, which were ignored for some time,
were finally shown to have some validity in 2002
when Kozlowski was forced out by the board and
subsequently charged with tax evasion by federal
authorities.
Among other charges, authorities claimed that
Kozlowski treated Tyco as his personal treasury,
drawing on company funds to purchase an expensive Manhattan apartment and a world-class art collection that he obviously thought were befitting of
the CEO of a major corporation. Kozlowski even
used company funds to help pay for an expensive
birthday party for his wife–which included toga-clad
ladies, gladiators, a naked-woman-with-explodingbreasts birthday cake and a version of Michelangelo’s
David that peed vodka! Kozlowski was replaced by
a company outsider, Edward Breen. In 2003, after
a special audit requested by Breen, Tyco took a
$1.5 billion charge against earnings for accounting
errors made during the Kozlowski era (i.e., Tyco’s
profits had been overstated by $1.5 billion during
Kozlowski’s tenure). Breen also set about dismantling parts of the empire that Kozlowski had built,
divesting several businesses.
After a lengthy criminal trial in June 2005,
Dennis Kozlowski and Mark Swartz, the former
377
chief financial officer of Tyco, were convicted of
23 counts of grand larceny, conspiracy, securities
fraud, and falsifying business records in connection
with what prosecutors described as the systematic
looting of millions of dollars from the conglomerate
(Kozlowski was found guilty of looting $90 million
from Tyco). Both were sentenced to jail for a minimum of eight years. As for Tyco, in 2006, CEO Ed
Breen announced that the company would be broken
up into three parts, a testament to the strategic incoherence of the conglomerate that Kozlowski built.40
Case Discussion Questions
1. Under the leadership of Dennis Kozlowski, Tyco
grew rapidly for a decade. Why do you think
Kozlowski pursued his growth through acquisition strategy? How did it benefit Tyco? How did
it benefit Kozlowski?
2. What do you think leads top managers to engage
in accounting manipulations to pad earnings, as
apparently happened at Tyco?
3. During the period when Tyco’s profits were
apparently overstated to the tune of $1.5 billion,
its accounts were audited every year by a major
independent accounting firm that signed off on
them. Why do you think that the accounting firm
did not catch the manipulations at Tyco?
4. Why do you think Kozlowski and Swartz, both
bright successful businessmen, engaged in the
behavior that they did? What motivated them
to take such risks? How risky do you think they
thought their behavior was?

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