Corporate Governance

1
Corporate Governance Organizational Structure

• The Structural Foundation of the Modern
  Corporation

2
What led to the collapse of these once
outstanding companies?

• Enron
• Boosted profits and hid debts totaling over 1
  billion by improperly using off-the-books
  partnerships manipulated the Texas power market
  bribed foreign governments to win contracts
  abroad manipulated California energy market.

3
What led to the collapse of these once
outstanding companies? (contd)

• WorldCom
• Overstated cash flow by booking 3.8 billion in
  operating expenses as capital expenses gave
  founder Bernard Ebbers 400 million in
  off-the-books loans.

4
What led to the collapse of these once
outstanding companies? (contd)

• Global Crossing
• Engaged in network capacity "swaps" with other
  carriers to inflate revenue shredded documents
  related to accounting practices.

5
The scandal sheet goes on and onSo what went
wrong?

• Adelphia
• Arthur Andersen
• Duke Energy
• Dynergy
• K-Mart
• Qwest
• Xerox

6
Who are the major stakeholders in a modern
corporation?

• Investors
• Corporate executives
• Employees
• Suppliers
• Customers
• etc

7
What relationship does corporate governance deal
with?

• Investors (via Board of Directors) vs. corporate
  executives
• Definition of corporate governance
• A relationship among stakeholders that is used
  to determine and control the strategic direction
  and performance of organizations.

8
Why is corporate governance needed?

• Separation of Ownership and Managerial Control
• Agency Relationship
• Agency Costs (incentive, monitoring, enforcement
  costs, and financial losses due to insufficient
  governance)
• Product diversification as an example

9
How does corporate governance work?

• Internal Governance Mechanisms
• External Governance Mechanisms

10
What are the internal governance mechanisms?

• Ownership Concentration (blockholders,
  institutional investors)
• Board of Directors (insiders vs. outsiders,
  diversity strategic control vs. financial
  control)
• Executive Compensation (salary, bonuses,
  long-term incentive compensation)

11
What are the external governance mechanisms?

• Market for corporate control
• Executive labor market

12
What relationship does organizational structure
deal with?

• Corporate executives vs. employees
• Why is organizational structure important?
• Strategy implementation depends on
  organizational structure.

13
What is the relationship between strategy and
structure?

• Structure for a mom-and-pop store
• Structure for GE
• The relationship
• Strategy determines structure
• structure affects strategy. (Chandler, 1962)

14
What are the three generic organizational
structures?

• U-Forms (Unitary/Functional Structures)
• M-Forms (Multidivisional Structures)
• H-Forms (Holding/Conglomerate Structures)

15
What are the advantages of the U-Form structure?

• Specialization
• Centralization
• Economies of scale in monitoring

16
As a firm grows and diversifies, what are the
problems of using the U-Form structure?

• Strategic complexity/loss of strategic control
• Loss of accountability

17
What are the features of the M-Form structure?

• A Multi-divisional structure is designed to
  manage diversification while controlling
  bureaucratic costs and control-loss problems.
• M-Forms decentralizes operating decision-making
  to the business unit/division level where all
  necessary competitive and operational decisions
  are made.
• Strategic decision-making responsibility is
  retained at the headquarters level. The HQ also
  monitors divisions performance by using both
  objective market/output measures and subjective
  performance measures .

18
What is the H-Form structure?

• Holding or Conglomerate structures seek to
  exploit the advantages of internal capital
  markets
• Examples
• Mitsubishi
• Samsung
• Tyco

19
Iridium Case Group Discussion Questions

• 1. Did Iridium have a sound strategy in the
  beginning?
• 2. Was Iridiums strategy well implemented as a
  whole and in individual functional areas?
• 3. What were the primary factors that led to
  Iridiums failure?
• 4. What could have been done to prevent Iridiums
  failure in terms of both strategic planning and
  implementation?