Elements of Strategic Management Summaries

  

you are requested to write one paragraph consisting of a minimum of 150 words for each of the 8 recorded lectures. You should explain the essence of each of the 8 recorded lectures. Do not use bullet points. You should write complete paragraphs and when you are done your exam should consist of an absolute minimum of 1000 words.

Session 1: [essay 1] Corporate Governance (14 min) Explain Corporate Governance as presented in the video recording of Session 2. This part of your essay should contain at least 150 words and no bullet points, please.

Session 2: [essay 2] Business Environments (25 min) Explain Business Environments as presented in the related video recording. This part of your essay should contain at least 150 words and no bullet points, please.

Session 2: [essay 3] Creating Value (24 min) Explain Creating Value as presented in the related video recording. This part of your essay should contain at least 150 words and no bullet points, please.

Session 3: [essay 4] Corporate Directors (30 min) Explain the concepts related to Corporate Directors as presented in the video recording of Corporate Directors. This part of your essay should contain at least 150 words and no bullet points, please.

Session 3: [essay 5] Corporate Research (17 min) Explain the concepts related to Corporate Research as presented in the related video recording. This part of your essay should contain at least 150 words and no bullet points, please.

Session 4:[essay 6]Securities and Exchange Commission (17 min) Explain the access techniques, uses, and values of the Securities and Exchange Commission “EDGAR” site as detailed in the related video recording.

Welcome to Class 2
Overview
&
Corporate Governance
Chapter 1
Overview of Course & Textbook
Course is divided into:
Concepts
and
Activities
Management
Research
Strategy
Evaluation
Performance
Report/Write
The Management book presents
TMT Competencies,
Strategy Concepts, and
Methods for Researching
and Assessing Corporate
Performance
Book available only as an “E” book:
Management
Strategy & Performance
Online: http://www.campus-hq.com/
Research, Analyze, and Report
Raymond K. Van Ness
9th Edition
Each Chapter addresses specific questions
Chapter 1: Who is running the company and what should they know
and do?
Chapter 2: What is the business climate and what must firms do to
compete successfully?
Chapter 3: How do firms add value & whom must they satisfy?
Chapter 4: What are the mechanisms for overseeing TMT behavior and
decision-making?
Chapter 5: What is corporate research?
Chapter 6: How can “we” do corporate research and why is it important?
Chapter 7: How do “we” research the social side of performance &
the impact of TMT strategies?
Chapter 8: What do “we” need to know to investigate financial
performance?
Each Chapter addresses specific questions
Chapter 9: Why do different people assess a firm’s performance
differently?
Chapter 10: Why are financial reports confusing and how can they be
made understandable?
Chapter 11: What is a functional tool for standardizing financial
reports?
Chapter 12: What do all the ratios mean and how can they be used
effectively?
Chapter 13: What is an easy and effective way of quantifying a firm’s
performance?
Chapter 14: What is an easy and effective way for reporting a firm’s
performance?
Each person must purchase their own individual
online text & analysis software.
You MUST have your own copy.
Management
Strategy & Performance
Research, Analyze, and Report
Raymond K. Van Ness
9th Edition
Note: A security code will be provided by the
publisher that MUST be included on your
final semester project.
The PSC software will be provided by the publisher when you
acquire your online textbook package.
A Closer look ….
Corporate
Governance
Corporate Governance
The Corporate Governance of a firm
Consists of the:
(1) GOVERNING BODY (leadership),
(2) PROCESSES,
(3) CUSTOMS,
(4) POLICIES, and
(5) PROCEDURES
The GOVERNING BODY consists of:
1. Stockholders
2. Board of Directors
3. Management
Corporate Governance
Leadership
Processes
Procedures
Corporate
Governance
Policies
Customs
Governing Body is responsible for the firm’s
Vision
These are
Anchor Points
that guide the firm
VMS
Strategy
Mission
Vision
What the Firm wants to be
âž” A Vision Statement should be inspiring and highlight a
firm’s aspirations and values.
âž” It should be uplifting and evoke positive emotions.
Inspiring → Uplifting → What we want to become
Note:
A strategic vision for a company provides a panoramic view of
“where we are going” and a convincing rationale for why this
makes good business sense
Mission
What the Firm Does
âž” The firm’s mission statement clarifies where the firm
will focus its attention and highlights its core values and
beliefs.
âž” It may emphasize why and where the company plans to
compete.
Our Values → Where will function → Defines our business
Vision and Mission are Strategy Anchors
The Vision and Mission statements are anchors that:
Communicate “what a firm wants to be.”
Communicate “what the firm does.”
Provide a stable identity analogous to a nation’s constitution.
Express a firm’s values and beliefs about its responsibility as a
corporate citizen.
5. Clarify the purpose of the organization, help employees bond
with the firm, and set a context for understanding
management decisions and actions.
1.
2.
3.
4.
Strategy
Defines the Firm’s “How to” plan
Strategy
Defines the Firm’s “How to” plan
1. Details with precision, intended courses of action and
exacting timelines for each action.
2. Is a precise map of how the firm intends to compete.
3. It clearly specifies Performance Objectives
Note: Crafting and executing strategy are top-priority managerial tasks
because how well a company performs and the degree of market success it
enjoys are directly attributable to the caliber of its strategy and the
proficiency with which the strategy is executed.
Note: The objective of a well-crafted strategy is not merely temporary
competitive success and profits in the short run, but rather the sort of
lasting success that can support growth and secure the company’s future
over the long.
Strategy
Defines the Firm’s “How to” plan
Note 3: Strategy consists of the competitive moves and business
approaches that TMTs (top management teams) intend to employ to
achieve performance objectives
Performance
Objectives
TMTs guide their firms to the achievement of
Performance Objectives by:
✓ Motivating the firm’s employees
✓ Energizing & leveraging value-producing resources
✓ Developing basic, core, and distinctive competencies
Performance Objective Ladder
1st Strategic Competitiveness (Initial Competitive Advantage)
2nd Sustainable Competitive Advantage
3rd Sustained Competitive Advantage
[Recurrent Above Average Returns]
1. Strategic Competitiveness (1st Rung)
Strategic Competitiveness means:
✓ The firm has developed unique competencies so that it can earn
disproportionally higher profits than competitors (above average returns).
✓ It suggests a firm has a competitive advantage over rival firms.
2. Sustainable Competitive Advantage (2nd Rung)
Sustainable Competitive Advantage means:
✓ Developing the ability to Continuously perform value generating activities
more effectively and efficiently than rivals.
✓ The achievement of “commercial staying power.”
Above Average Returns are desirable to investors since they
indicate the firm is a better than “average” investment.
Above average returns are those that exceed what investors would
normally expect to achieve on similar risk investments.
3. Sustained Competitive Advantage
Recurrent Above Average Returns [RAAR]
(3rd Rung)
Recurrent Above Average Returns is:
✓ The ultimate objective is to implement a strategy that enables
AAR to be Recurrent = RAAR
Remember: Sustainable = Recurrent Potential
Sustained = Recurrent Achievements
Performance:
Theoretical Models
Performance: Theoretical Models
What determines a Firm’s Success or Failure?
Two Conflicting Theories about…
Resource-based theory
vs.
Industry/Organizational theory
The question:
Is Performance primarily dependent upon a firm’s competencies and
leadership (This is the Resource-based View)
Or
Is Performance primarily related to the industry in which a firm
competes (This is the Industry/Organizational View)
Corporate Governance & KSAs
Skills
Knowledge
Ability
Managerial
Competence
Literacy = Knowledge
[Understand Concepts]
✓ TMT literacy = highly refined knowledge for creating effective
teams and for crafting competitive strategies.
✓ TMT literacy = knowledge of contemporary theories and
practices for the effective deployment of intellectual,
physical, and financial resources.
✓ TMT literacy = extensive knowledge of corporate accounting
and corporate finance.
Manage = Skills
[Can Apply Concepts]
Management skills-set includes:
1. Technical know-how
2. Organizational Skills
3. Communication Skills
4. Implementation Skills
5. Interpersonal Skills
6. Persuasion Skills
The TMT must be able to apply what they know.
Skills of Persuasion
Management must have:
The right knowledge
Skills to apply that knowledge
Skill to persuade others to follow their leadership
Aristotle, the Greek philosopher, identified three methods of persuasion
and good managers have mastered each:
• Logos = Persuasion by Reasoning
• Pathos = Persuasion by Emotional Appeal
• Ethos = Persuasion by Character
Ability = Critical Thinking
[Can Apply Concepts with great expertise]
Critical thinking requires:
Intellectual discipline
Elimination of bias
Visualizing situations from a variety of perspectives
Reflecting, reasoning, and communicating conclusions in clear
and logical manner.
TMT Strategic Management Activities
1. (SWOT)
Analyze the (internal & external) environments to assess the firm’s
a)
b)
c)
d)
Strengths
Weaknesses
Opportunities
Threats
âž” 1. Scanning
âž” 2. Monitoring
âž” 3. Gathering Competitive Intelligence
2. (Strategic Intent)
Reaffirm or reestablish short & long-term goals and objectives
3. (Strategy Formulation)
Translate goals and objectives into tactical & strategic action plans
4. (Strategy Implementation)
Communicate and activate the tactical and strategic plans
5. (Strategy Management)
Assess interim successes & failures and adjust course as conditions merit
End Corporate Governance
Homework:
(1) Read Chapter 2 in your online textbook
(2) Study online lecture notes!!!!
Point of emphasis:
1. Core Operating Models are Business-level and Conglomerate-level
2. Competitive Models relate to Business-level companies and include
strategies such as cost leadership, differentiation, and niche marketing
3. Goals are a general description of a performance aim
4. Objectives are the specific target within a goal or set of goals.
Welcome to Class 3
Chapter 2
Understanding the 4 Domains of
Business Environments
(1) General
External
(2) Competitive
Environments
(3) Resources
Internal
(4) Leadership
External Environment: General
External
Environment
(1) General
Competitive
(1) The General Environment
The General Environment is external to the firm and yet it affects corporate strategies.
___________________
→ For example, the Covid-19 issue is an event in the General environment and it forced
corporations to make rapid strategic changes to cope with the event.
(1) General
Environment
Sociocultural
Political/Legal
Demographic
Global
Considerations
Technological
Economic
→ Since international trade means business is global,
→ The General environmental includes global considerations.
COMPETING ACROSS THE WORLD
Globalization
Globalization means nations are becoming more
interdependent.
The global economy is:
→ Characterized by the quick and easy movement of
people, knowledge, and ideas from country to
country.
→ The world-wide economic activity between various
countries that are considered intertwined
→ Capable of having both negative and positive effects
on various countries.
Sociocultural Factors
ï‚— Sociocultural factors relate to a country’s:
1.
2.
3.
4.
5.
Dominant religions
The population’s general desire for leisure-time
Attitudes toward consumerism
Environmentalism
Gender roles in society and business.
ï‚— In general, sociocultural factors are characterized by
ï‚— The lifestyles
ï‚— Values
ï‚— Belief systems of populations
Demographic Factors
ï‚— Demographic factors pertain to changes in the:
1. Population size of a country
2. Geographic distribution of people
3. Ethnic mix
4. Income distribution
5. Average age
6. Number of people in the family, etc.
ï‚— For example, American families are getting smaller, the
population is getting older, individuals are getting heavier, and
the Latino population is the fastest growing group of
Americans.
Economic Factors
ï‚— Economic factors relate to a country’s:
1. Inflation or deflation rates
2. Interest rates
3. Tariffs
4. Balance of trade issues
5. Growth of national economies
6. Exchange rates
7. Unemployment rates
8. Labor availability
9. Gross domestic products
10. Savings rates, etc.
Technological Factors
 Technological factors pertain to a country’s:
1) Acceptance of innovation (Attitudes toward new things)
2) Cultural discouragement or encouragement of
technological progress
3) Rate of innovation, inventions, patents
Some cultures reject technological advances while
others enthusiastically embrace new technology.
Political/Legal Factors
ï‚— Political/Legal Factors center on:
1.
2.
3.
4.
5.
6.
The political stability of a country
Its legal system
Number of Antitrust laws
Success of enforcement
Philosophies of regulations vs deregulation
Its general attitude toward business.
External Environment: Competitive
External
Environment
General
(2)
Competitive
(2) The Competitive Environment
Note: The Competitive Environment is external to the corporation, but the strategic moves of
the competition clearly influences the strategies of direct competitors.
Note: A company achieves sustainable competitive advantage when it provides buyers with
lasting reasons to prefer its products or services over those of competitors.
Note: Competing in the marketplace on the basis of a competitive advantage involves
either giving buyers what they perceive as superior value compared to the offerings of
rival sellers or giving buyers the same value as others at a lower cost to the firm.
Customers
Suppliers
Creditors
Competitors
Competitive
Environment
Substitutes
Unions
Associations
Interest
Groups
New
Entrants
INTENSIFYING COMPETITION
Costs, Lack of Differentiation, & Barriers to Exit
1. High fixed costs
(costs that cannot be eliminated easily as volume decreases such as fixed
contracts, rental agreements, overhead expenses, property taxes, etc.)
2. High storage costs
(high costs of inventories, etc.)
3. Lack of differentiation between products or services
(similar or substitute products easily available)
4. Low customer switching costs
(customer can switch suppliers without significant cost or
inconvenience)
5. High exit barriers for competitors
(difficult for a firm to leave a particular industry because of heavy initial
investments, single purpose manufacturing facilities, specialized workforce, etc.)
Test note: Competitive pressures stemming from substitute products are
weaker when buyers do not believe substitute products have equal or better
features, and buyers’ costs of switching to substitutes are relatively high.
BARRIERS TO ENTRY
There are also Barriers to Entering an Industry
→High capital requirements,
→Difficulties in building a network of
distributors-retailers
→Securing adequate space on retailers’ shelves
Note: Firms are looking to expand their market reach by entering product segments or
geographic areas where they do not have a presence yet.
Strategic Groups & Points of Similarity
Breadth &
Depth of
Pricing
Products
Vertical
Quality
Integration
Distribution
Geographic
Systems
Coverage
Customers
Strategic
Group
Strategies
Competition within strategic groups is generally
more intense than between strategic groups
because of the similarities among competing firms
The Internal Environment
The Internal Environment:
ï‚— Is comprised of an organization’s:
(a) Value-producing resources and
(b) Leadership capabilities
Combined these = the strength of: Strategic Competencies.
Internal
Environment
(3)Resources
(4)Leadership
Internal Environment: Resources
Internal
Environment
(3) Resources
Leadership
(3) Resources (value producing)
What a FIRM HAS
Resources can be Tangible or Intangible resources
Value-Producing Resources =
What a firm has
Resources are both tangible and intangible.
Tangible resources:
Intangible resources:
1. Land
2. Facilities
3. Equipment
4. Financial capital
5. Inventories, etc.
1.
2.
3.
4.
5.
6.
7.
Knowledge capital
Creative and innovative workers
Social relationships
Organizational culture
Beneficial locations
Patents, copyrights, Trademarks
Reputation
Value-Producing Resources
Tangible
Resources
Intangible
Resources
Value
Producing
Resources
Internal Environment: Leadership
Internal
Environment
Resources
(4)
Leadership
(4) Leadership
Is KEY to a firm’s success.
(4) Leadership
Implies the ability to Attract:
(4) Leadership
(Leverages what a firm does with what it has)
ï‚— Competent leadership is crucial to firm success.
Capable Leaders should be:
1. Knowledgeable,
2. Adaptable to changes in the business environment,
3. Ethical,
4. Courageous,
5. Tenacious,
6. Inspiring,
7. Persuasive, and
8. Able to develop strategic competencies
Strategic Competencies
ValueProducing
Resources
Capable
Leadership
Strategic
Competencies
Strategic Competencies
Levels of Strategic Competencies
ï‚—1. Basic competencies are what a firm “can do” profitably.
ï‚—2. Core competencies are what a firm “can do extremely well”
while enhancing its profitability.
ï‚—3. Distinctive competencies represent not only what the firm
can do extremely well but also “what distinguishes” it from
competitors.
Distinctive competencies enable a firm to move closer to a
prime objective of achieving and sustaining –
Above Average Returns.
Value-Producing
Resources
Distinctive
Competencies
Capable
Leadership
(Good
Governance)
Strategic
Competitiveness
Distinctive
Competencies
Above Average
Returns
Strategies are crafted within each of the four
domains of the Business environment:
Business
Environment
Internal
External
(1) General
(2) Competitive
(3) Resources
Strategies based on
(4) Leadership
ï‚— Read Chapter Three: Creating Value
Welcome to Class 4
STRATEGIES FOR CREATING VALUE
(The Development of Strategic Competencies
&
(The Challenge of Industry Life Cycles
Chapter 3
Creating Value &
the Satisfaction Chain
 Value creation is the process of producing or providing
a
product or service that is beneficial (valuable) to
ALL Members of the
Satisfaction Chain.
The Satisfaction chain consists of three primary groups:
(1) Customers
(2) Employees
(3) Investors (Shareholders & Creditors)
Communities are also stakeholders in corporate strategies and
should always be considered in strategic decision-making.
Primary members of the
Satisfaction Chain
Investors
Customers
Employees
1. Creditors
2. Shareholders
“Expectations” of Primary Members
of the Satisfaction Chain
✓ Customers – expect:
Desirable, dependable products & services at fair prices
✓ Employees – expect:
Good working environments, satisfying work, & fair wages
✓ Investors –
1. Shareholders – expect:
Investment risks minimized & investment returns maximized
2. Creditors – expect:
Debt obligations liquidated & loan risks reduced
Value Creation & Core Strategies
Business-Level
Strategies
1st Level
Core Strategies
Conglomerate-Level
Strategies
2nd Level
Each level has a unique range of competitive strategies
for value creating activities.
Strategies for Creating Value …
First-level strategy (business-level)
Create Value by focusing on:
providing products and/or services to customers,
maximizing returns, and minimizing risks.
Second-level strategy (conglomerate-level)
Create Value by focusing on:
leveraging the competencies of multiple subsidiaries,
maximizing returns, and minimizing risks.
Business-Level Strategies
1st Level
Creating value with
Business-level Strategies
Firms must develop a unique set of
competitive competencies
Three commonly utilized strategies are:
1. Low-Cost leadership
(least expensive or best value provider)
2. Differentiation
(unique product or service)
3. Niche Market
(an underserved segment of the market)
1. Low-Cost “value” leadership –
 Low-cost strategies are generally aimed at the mass market.
 Products are standardized rather than customized.
 Standardization enables cost reductions.
 Low-cost strategies mean the management team must
continuously locate and leverage every possibility for cost
advantage.
 NOTE: To ensure being perceived as a low-cost value
provider, the firm must also have a strategic emphasis on
providing MORE THAN ACCEPTABLE quality, service, features,
and performance
2. Differentiation (Uniqueness) –
This strategy is based on providing the customer with
a unique product or service.
The product or service is distinctive in its
characteristics or properties.
Examples include:
✓ High Quality
✓ Technical Superiority
✓ Superb Customer Service/Support
✓ Snob-appeal
✓ Membership Experience
✓ Making the product/service or customer seem special in some
other fashion
3. Niche Market –
(Narrow market catering or focus strategy)
➢ Identify an underserved small niche in the market
and concentrate on serving it completely
➢ Niche could be:
1. A unique group of buyers with specific tastes or
preferences
2. A small piece of a product line
3. An underserved geographical or regional market
NOTE:
In Summary,
Competing in the marketplace on the basis
of a competitive advantage involves:
→ Giving buyers what they perceive as superior value compared to the
offerings of rival sellers
or
→ Giving buyers the same value as others at a lower cost to the firm
and
→ Once has achieved a “sustainable” competitive advantage due to
experience, know-how and specialized capabilities, it is nearly impossible for
competitors to imitate and eliminate this advantage.
Niche
Businesslevel
Strategies
Low-Cost
Differentiation
Unique
Conglomerate-Level Strategies
(2nd Level)
Creating value with
Conglomerate-level strategies
To create value at the Conglomerate-level, TMTs can:
1. Leverage value creation through strategic alliances such as:
licensing agreements, joint ventures, and cross-holdings.
2. Uniqueness:: Acquire firms that offer unique skills, systems, or other
competencies that can leverage and extend synergies.
3. Synergy: Select Subsidiary companies that offer the synergistic
benefits of:
(1) Shared knowledge
(2) Operating systems
(3) Facilities
(4) Contact networks, etc.
Acquisitions can be:
1. Contiguous
(same type of business currently in the portfolio)
Greatest Chance of Success in achieving objectives
2. Related Diversifications
(closely related to firms currently in portfolio)
Good chance of success in achieving objectives
3. Unrelated Diversifications
(significantly different from other subsidiaries)
Greatest probability of failure to achieve objectives
Strategic Choices
Divest
(sell subsidiary)
Other
Acquire
Collaborative
Contiguous
Activities
Conglomeratelevel
Strategies
Strategic
Acquire
Alliances
Related
Acquire
Unrelated
The Challenge of
Industry Life-Cycles
Each Stage Requires a unique
value creation strategy
Creating Value &
Industry Life-Cycles
Products and industries built around those products have life cycle.
Services can also have a life-cycle.
Consider the effect of wash-and-wear clothes on the dry cleaners
Personal care specialists are experiencing diminishing markets as more
home care kits become easier to use and have satisfactory results.
Accounting and bookkeeping services are being replaced by home
computer software.
Legal services such as writing wills or crafting estate planning are being
replaced by inexpensive software packages.
Life-cycles are generally described
in terms of stages such as:
1. Introduction
2. Growth
3. Maturity
4. Declining stage
Each stage influences customer demand and affects
the intensity of competition.
Each stage dictates a different strategy.
Introduction Stage –
The introduction stage is the awkward stage.
Providers of the products or services must
educate the consumer:
→ What will the product or service will do me?
→ How do I utilize the product or service?
→ What do I do now that I have the product of service?
→ How it is beneficial?
Can you think of a new area for potential business?
It can be an existing product with a new use.
Practice Keeping An open Mind
Practice Creative Thinking
A New Business Can be Built Around Established Products or
services but with an entirely new purpose or use
Think CREATIVELY
→ New approach to “online” user reviews (perhaps a targeted chat room for
specific complaints)
→ New system of Employee mobile communication
→ HR Software to sense employee moods
→ HR Software to gauge employee satisfaction
→ Software to identify nonmonetary benefits and perks that make employees
or customers happy
→ New uses for voice recognition
→ News Feeds that only report facts with no commentary
→ Software to add a personal touch to customer service
→ New uses for 5G to help elderly
→ Ad free, non-tracking Social Media
However, you will need to carefully educate
the consumer of the uses and benefits of the
new product or service
Promotion
Products
Aimed at educating
Relatively few
the use and value
and
with some emphasis on
Generally undifferentiated
building brand awareness
Introduction
Stage
Distribution
Price
Selective and scattered
Generally High
Growth Stage
Growth
Can anyone think of a company or
product in the Growth Stage?
Growth Stage –
The growth stage of the life-cycle is the most
exciting and comfortable period for suppliers.
Like the rising tide that lifts all ships, the growth stage
is can benefit multiple competitors.
Customers become increasingly interested in the
product – demand increases rapidly.
Products
Promotion
Begin to develop new features
Increasingly targeted toward
building brand awareness and
preference
Packaging options increase
Quality improves
Growth
Stage
Distribution
Becomes wider
Product more accessible
Price
Generally High
Maturity Stage
Can anyone think of a company or
product in the Maturity Stage?
Maturity Stage –
Demand slows
Multiple competitors but fewer new customers
Competitors are more aggressive
Peak profit point in the life-cycle
Advertising tends to focus on attracting competitor’s
customers (switching campaign)
Promotion
Products
Extreme emphasis on branding
Modifications are often made to
emphasize differentiation
Extensive effort at solidifying brand
loyalty
New features may be added
Incentivizes offered to customers of
competitors
Maturity
Stage
Distribution
Price
Becomes wider
Reduced from those in earlier
stages
Product more accessible
Volume discounts expanded
Decline Stage
Can anyone think of a company or
product in the Decline Stage?
Decline Stage –
= antithesis of growth stage
This is the opposite of the growth stage wherein the rising tide lifts all
ships; in this stage the falling tide lowers all ships.
Industry sales fall, profits are compromised, and strategies become
increasingly reactive rather than proactive.
Promotion
Products
Advertising reduced
Number of competing products
reduced
Branding is primary emphasis
Attempts to stimulate emotional
responses from customers to return
Product lines condensed
Decline
Stage
Distribution
Becomes increasing selective as
former channels become
unprofitable
Price
Significantly lower than in any of
the earlier stages
Rebates and other price incentives
become the norm
In Summary, three important points:
1→ Creating value means satisfying a range of constituents
in the value chain, including customers, employees,
and investors.
2→ Industries have a life cycle tied to their products or
services.
3→ Each stage in the life cycle requires a different
competitive strategy.
Read Chapter Four:
Corporate Boards of Directors
End “Creating Value”
&
“Industry Life Cycles”
Welcome to Class 5
Corporate Boards of Directors
Chapter 4
Early in the last century the majority of large corporations were
owned and controlled by a small number of capitalists.
They included such individuals as:










John D Rockefeller (Standard Oil)
JP Morgan (Banking)
Andrew Carnegie (Steel)
Alexander Graham Bell (Telephone)
Thomas Edison (Electricity)
J. Paul Getty (Getty Oil)
William Randolph Hearst (Newspapers)
Milton S. Hershey (Candy)
Will K. Kellogg (Cereal)
Cornelius Vanderbilt (Steamboats and Railroads)
Over time the stockholdings of these capitalists were dispersed to
many beneficiaries.
Beneficiaries were generally uninvolved in the firms, so they
passed control of operational decision-making to insiders with
specialized expertise (management.)
This meant a separation of management from ownership.
→ In an attempt to protect the owners from misbehaving
management, Corporate Boards were invented.

In brief, Corporate Boards are groups of individuals
who have been elected by shareholders to oversee the
performance and behavior of corporate management.


Many corporate boards do not honor their
fiduciary responsibilities.
They act like there is no one in the boardroom
to make decisions.
Shareholders can get angry with
corporate boards that do not fulfill
their responsibilities.
Stewardship Theory
Shareholders can trust Management
The firm is in good hands with Management
Managers are good Stewards of the firm
Management will protect the firm’s value
Agency Theory
Shareholders beware of Management fat cat tendencies
Management may seek rewards regardless of firm performance
Management will pursue its interest despite the consequence
Management thinks it’s all about ME!
MANAGEMENT

Stewardship Theory suggests:
Management serves the best interest of shareholders
Proactive Boards are unnecessary

Agency Theory suggests:
Management serves their own interests
Proactive Boards are essential
Some shareholders believe the majority of corporate
boards do nothing: They are Passive.
They sit back and enjoy the perks
Passive Board to-do list
Corporate Boards: Quick Facts
They act as fiduciaries for shareholders
They are elected for specific terms, typically for 2 or 3 years
Generally, corporations must have a minimum of 9 directors
Boards have powerful committees, including:
→ Audit Committee: (Selects company auditors & reviews financial performance
with management)
→ Compensation Committee (reviews compensation and benefit levels of TMT)
→ Nominating Committee (Makes recommendations for senior management and
board positions)
Board Power
Boards have the power to make all decisions on
behalf of the corporation,
but
They allow the majority of decisions to be made
by the corporate officers
Board Responsibility
For example, the board is responsible for:
→ Determining corporate policy with respect to products, services, prices,
wages and labor relations
→ Evaluate the merits of M&A Activity
→ Determining executive compensation, pension, retirement, and other plans
→ Deciding if dividends should be declared
→ Deciding if new shares should be issued, or if other financing and capital
changes should be made
→ Appointing corporate officers
→ The board also proposes certain extraordinary corporate matters such as
amendments to the articles of incorporation, mergers, asset sales, and
dissolutions
Is my Corporate Board Passive or Proactive?
What?
Ask the
Canary!
In the coal mine, if the Canary passed on to that great
canary heaven in the sky, it was a warning.
→ Make changes NOW or something bad will happen to you!
Beware!!
There can be a Canary in the Board Room
and it may not be moving.
The warning sign of passive boards:
Excessive CEO compensation = Canary in the Board Room
Make changes NOW or something bad will happen!
Passive Boards =
Bad news for corporate shareholders
Board
Environment
Transformational
Motivators
Board
Reconfiguration
a. Peer Pressure by other board members to conform to
a new norms.
b. Lawsuits by shareholders or creditors are likely to
motivate directors to become more concerned about
TMT decisions and actions.
c. Dismal firm performance is likely to unnerve
directors and encourage boards to get more deeply
involved in decision-making.
d. Government regulations – new laws or more
rigorous enforcement of existing laws is a strong
motivator for changes in board behavior.
e.g. Sarbanes-Oxley Act of 2002 (SOX)
Peer
Pressure
Board
Regulation
Environment
Dismal
Performance
Lawsuits
Research has shown:
a. Women – Women on corporate boards “positively”
influences organizational citizenship.
b. Professional expertise – Configuration of professional
expertise on boards influences performance. Bankers and
others with financial experience on corporate boards have
been associated with stabilizing stock returns.
c. Average age – Younger boards tend to outperform older
boards.
d. Committee membership changes – When powerful
committees such as executive compensation committees
change, board power can shift from insiders to outsiders or
vice versa. This could tame run-away executive
compensation packages.
e. Inside/outside director ratio: Increasing outside board
members intensifies challenges to CEO decisions.
f. Board Size – As boards become larger they tend to display
dysfunctional characteristics.
g. CEO Tenure – As the tenure of the Chief Executive Officer
increases, so does the influence over the boards.
h. Duality – Occurs when the CEO is also (COB).
With duality board independence is diminished.
i. Board interlocks occur when two or more corporate boards
have common members (common control*).
* Common control = two different firms influenced (controlled) by same individuals
Some board interlocks are okay and others are illegal!
Women
Duality
Expertise
CEO
Tenure
Age
Board
Reconfiguration
Committee
Changes
Size
Interlocks
In/out
Ratio
SOX provides teeth for civil and criminal
enforcement over the conduct of corporate
boards.
SOX:
Contains substantial penalties associated with boards that fail to
exercise due diligence.
Makes it easier to prosecute securities fraud, particularly financial
fraud.
Reasserts board independence from corporate management.
Places greater responsibility on senior management and directors,
particularly independent directors.
Demands that Independent directors on the audit committee are
to be more diligent in:
1. Overseeing and monitoring the financial reporting process
2. Establishing internal controls
3. Assuring performance transparency
BRIEF BREAK
Interlocking directorates of competing firms are subject to
prohibition and regulation under the Clayton Antitrust
Act. 15 U.S.C. §19 enacted in 1914.
The antitrust rule against interlocking directorates was
designed to prevent anti-competitive coordination between
organizations.
However, the Federal Trade Commission (FTC) seldom
pursues violations unless a complaint is filed.
Concerns of Interlocking Boards:
1. Potential for unfair, self-serving exchange of nonpublic information.
2. Sitting on too many boards = too little time for
exercising due diligence in protecting the interests
of shareholders.
3. Risk of addiction to the perks of multiple corporate
boards – directors may measure their achievements
by the number of boards they are on rather than by
what they actually contribute.
Interlocks are a common practice in the United States –
a perpetual concern of the federal government.
The U.S. Government has attempted to manage some
of the more troubling aspects with antitrust laws.
For example, as far back as 1890, the U.S. Government
passed the Sherman Antitrust Act.
However, none of these Acts make it illegal to sit on
multiple boards of non-competing companies and
this practice of interlocking boards continues.
Benefits of Interlocking Boards
These Directors may:
1. Offer unique knowledge of a particular commercial market.
2. Be uniquely qualified to interpret the conditions and
environment surrounding diversification targets.
3. Be able to provide objective expertise about potential
strategies and tactics for diversification process.
All corporate boards can be divided into two basic
categories:
(1) those that do something (proactive) and;
(2) those that do nothing (sedate).
Proactive boards
Question the actions and decision of management
and are not afraid to insist that changes be made.
Sedate boards
Are frequently head bobbers, nodding in agreement
with all proposals. They do not want to “rock-theboat.”
Corporate Boards of Directors
Can I trust
the Board?
Please review Lecture Video:

Corporate Research
Chapter 5
Caution:
Be sure your 10-K is current. The year end should be for the most
recently filed data and for the previous year. Example 2022 and
2021.
Is a disciplined system of Inquiry
If you are researching without a
specific question (general curiosity)
Applied Research
Basic Research
If you are researching with a
specific question (determined focus)
Research is divided into two broad categories:
(1) Basic
(2) Applied
Basic Research is the pursuit of NEW
Knowledge for the sake of Knowing
It attempts to improve the “knowledge of humanity.“
(Example: learn more about the formation of the universe)
Applied Research is the pursuit of NEW
Knowledge for a specific Purpose.
It attempts to improve the “condition of humanity.”
(Example: learn how to solve a medical problem)
Research
Our Focus
Applied
Basic
Corporate
Research
Context
Performance
Data
Data
Involves Global Considerations
Involves Financial Performance
Involves Qualitative Performance
Our purpose is to learn to do quality research
and provide an objective assessment
of a company’s achievements and behaviors.
This process involves:
(1) Collecting Context Data & Performance Data
(2) Using Primary & Secondary information sources
(3) Assessing Financial issues & Qualitative issues
(4) Benchmarking, which is a potent tool for improving a
company’s own internal activities that is based on
learning how other companies perform them and
borrowing “best practices”.
NOTE
Corporate
Research
Context
Data
General
Environment
Competitive
Environment
Performance
Data
Benchmark
Company
Target
Company
Qualitative
Qualitative
Financial
Financial
You will use both:
(1) Primary data
&
(2) Secondary data
(1) Primary data= From ORIGINAL source
Creator of data
(2) Secondary data= From a NON-ORIGINAL source
Interpreter of data
Context Data
General
Environment
Competitive
Environment
Demographic
General Environment
Sociocultural
Competitive Environment
Suppliers
Customers
Creditors
Competitors
Internal
Environment
Leadership
Resources
Unions
Associations
Internal Environment is
not CONTEXT
New Entrants
Substitutes
Interest Groups
Political/Legal
Economic
Technological
How well did the company perform within the
general and competitive environments?
Performance
Data
Financial
Qualitative
You will Assess
(1) Financial Performance
Strength of Income Statement
Strength of Balance Sheet
Strength of Liquidity
Strength of other financial considerations
(2) Qualitative Performance
Strength of Corporate Citizenship
Strength of Relationships with:
customers, employees, creditors,
shareholders communities, governmental
agencies, trade associations, communities,
competitors, etc.
Strength of Plans for Firm’s future

Balance Sheets
ï‚¡ Assets
ï‚¡ Liabilities
ï‚¡ Equity

Income Statements
ï‚¡ Revenues
ï‚¡ Expenses

Statement of Cash Flows
ï‚¡ Operating Activities
ï‚¡ Investing Activities
ï‚¡ Financing Activities
Financial
Performance
Profit, Equity, &
Share Value
Debt
Cash
Asset
Employees
Vendors /
Suppliers
Customers
Persona
Competitors
Organizational
Communication
Citizenship
Stockholders
Directors
Government
Community
Environment
Vision
Mission
Plan
&
Competitive
Strategic
Progress
Advantage
Positioning
Innovation
Environment
Adaptability
SUMMARY of:
Data Collection Categories
Profit, Equity, &
Share Value
Debt
Management
Cash
Management
Performance
Scorecard
PSC
Asset
Utilization
Organizational
Citizenship
Strategic
Positioning
Data Mining Methods
PSC
CAT
Data
Mining
Corporate research is a process of mining (extracting)
valuable informational gems from existing databases.
The 10-K (annual report) is “The Mother
Lode” of company performance data.
It includes information about both –
â–º Financial Performance
â–º Qualitative Performance
The letters to the stockholders contain numerous
clues about the internal environment of the
company and how management is coping with
the competitive and general environments.
1) Two types of research: (Basic & Applied)
2) Corporate research is: (Applied Research)
3) Two Data sources for research: (Primary & Secondary)
4) A Firms environments include: (External & Internal)
5) The External Environment includes: (General & Competitive) [The CONTEXT]
6) The Internal Environment includes: (Leadership & Resources)
7) The Leadership & Resources are tools for: [The PERFORMANCE]
8) To better understand performance, you need to understand the context in
which a firm must function.
9) Knowledge of Context + Performance = UNDERSTANDING
Performance
Categories
Research
Financial
Qualitative
Evaluation
Report
Synthesize
Defend
Recommendation
Financial
Recommend
Action
Qualitative
Profit, Equity,
Share Value
Organizational
Citizenship
Strategic
Positioning
Holistic
Judgment
Debt
Employees
Investors
Customers
Vision and Mission
Holistic
Data Review
Cash
Directors
Governments
Competitive Advantage
Asset
Competitors
Environmental
Community
Innovation
Cultural sensitivity
Creditors
Other Stakeholders
Growth Plans
Please Read Chapter 6: Corporate Research METHODOLOGIES
Corporate Research Methodologies
&
Securities and Exchange Commission
(EDGAR)
& Other Data Sources
Lecture 7
Do not be intimidated. Continue until you achieve your objective
→
→
→
→ When You learn to navigate the database of the Securities
Exchange Commission (SEC) – You will find a goldmine of
valuable information.
→ You will be able to identify key performance metrics of any
publicly-traded corporation with speed and accuracy.
→ You do not need to be an accountant of a finance guru. Anyone
can perform an SEC analysis with confidence and precision.
What is the SEC?
The U.S. Securities and Exchange Commission (SEC) is an independent agency of
the United States federal government.
The SEC is responsible for enforcing the federal securities laws, proposing
securities rules, and regulating the securities industry in the United States.
What is EDGAR?
EDGAR is the Electronic Data Gathering, Analysis, and Retrieval system used at the
U.S. Securities and Exchange Commission (SEC).
EDGAR is the primary system for submissions by companies and others who are
required by law to file information with the SEC.
SEC’s EDGAR: A Source of Crucial Information
Audited performance data (both qualitative and financial) available at no cost
For your PSC software and for your PDE Written Report:
Some Financial Statements and related data – retrieve ONLY from the SEC
1. The Balance Sheet
2. The Income Statement
3. The Statement of Cash Flows
4. Dividends per share
5. Number of shareholders
Other quantitative data may be retrieved from YahooFinance or Google/Finance
1. The historical stock price (current year end and preceding year end)
2. The Firm Beta
3. The Number of employees
Classic version
A quick look at IBM
https://www.sec.gov/edgar/browse/?CIK=0000051143
→ What is an INDUSTRY?
→ What are SIC and NAICS codes?
→ What is a Proxy Statement & what does it include?
→ What is a DEF 14A & what does it include?
→ What is a Form 20F?
→ What is Beta & how does it relate to stock price?
→ What are the KEY elements in the Annual Reports?
Today’s Log
An industry is an environment in which a number
of companies are providing services or producing products
that are closely related.
Remember:
The condition of an industry is a window into the
challenges and opportunities that a company is facing.
→ It is an element of CONTEXT data that you need.
These are government codes to identify industries.
They are helpful in identifying and collecting data about the
target’s competitive environment.
SIC = Standard Industrial Classification
NAICS = North American Industrial Classification System
For more information on SIC & NAICS see Chapter Two in your text.
A proxy statement is a document required by the
Securities and Exchange Commission (SEC).
It provides shareholders with important information
needed to make informed decisions about matters that
are to be presented at an annual or special stockholder
meeting.
Issues covered in a proxy statement can include:
Proposals for new additions to the board of directors,
Information on directors’ salaries,
Information on bonus and options plans for directors,
The amount and type of compensation paid to its chief executive
officer, chief financial officer and the three other most highly
compensated executive officers.
A company also must disclose the criteria used in reaching
executive compensation decisions and the relationship between
the company’s executive compensation practices and corporate
performance.
SEC Form DEF 14A is a filing with the Securities and
Exchange Commission (SEC) that must be filed by or on behalf of a
registrant when a shareholder vote is required.
SEC Form DEF 14A is most commonly used in conjunction
with an annual meeting proxy.
The form should provide security holders with sufficient
information to allow them to make an informed vote at an
upcoming security holders’ meeting or to authorize a proxy to vote
on their behalf.
SEC Form DEF 14A includes information about:
→ The date, time, and place of the meeting of security holders,
→ Revocability of proxy,
→ Dissenter’s right of appraisal,
→ Persons making solicitations (e. g. offers to purchase stock),
→ Modification or exchange of securities,
→ Voting procedures,
→ Other perfunctory (cursory / related) details.
SEC Form 20-F is an annual report filing for non-U.S. and nonCanadian companies that have securities trading in the U.S.
The information requirements are not as strict as the requirements
for domestic U.S. companies that make regular filings.
The companies in which less than 50% of voting shares are held by
U.S. investors may be eligible.
Beta is a measure of the volatility—or systematic risk—of a security
or portfolio compared to the market as a whole.
Beta is used in the Capital Asset Pricing Model (CAPM), which
describes the relationship between systematic risk and expected
return for assets (usually stocks).
CAPM is widely used as a method for pricing risky securities and
for generating estimates of the expected returns of assets,
considering both the risk of those assets and the cost of capital.
In brief, for our purposes, Beta will be used to assess the volitivity
of our target company’s stock price as compared to our benchmark
company’s stock price.
A stock’s Beta is a measure of its price volatility.
A stock with a Beta of “1” = a stock that moves with the market.
A stock with a Beta of greater than ”1” = the stock price fluctuates
greater than the market as a whole. It is less stable than the market.
A stock with a Beta of less then “1” = the stock price does not
fluctuate as much as the market. It is more stable.
A stock with a negative Beta = the stock price fluctuates inversely to
the market as a whole.
Key Elements of Financial Statement Reporting
(1) Report of Management
Board Chair accepts responsibility for annual report and asserts
that it complies with SEC requirements. Also indicates control systems and
internal auditing procedures are in place.
(2) Auditor’s Report
Public accounting firm summarizes its independent audit of the
company and indicates whether the company appears to be fairly
representing its financial condition. It also states an opinion about the
adherence to generally accepted accounting principles.
(3) Management Discussion
This is management’s interpretation of its own performance. It
includes a gamut of items both quantitative and qualitative. It will discuss
results of operations and funding items.
(4) Financial Statements
Statement of Earnings (Income Statement),
Statement of Financial Position (Balance Sheet), and
Statement of Cash Flows are basic requirements by the SEC.
Other items can be included.
(5) Selected Financial Data
This provides information helpful for making comparisons over
longer periods of time.
For your semester project,
you will need Historical Stock Prices
The Historical stock prices – You will need data from two different years –
→ one for current year, and
→ one for prior year
In other words, if year ends were 12/31/19 and 12/30/18, you will need to report what the
stock was selling for on those dates or very close to those dates.
(Select the adjusted closing stock prices)
IMPORTANT:
The dates of stock prices you report should coincide with the balance sheet dates
(Every balance sheet will include data for both the current and prior year)
You could go to Yahoo Finance and find Historical Stock Prices.
Optional Video Lecture:

Please read Chapter 10: Your Performance Scorecard

Purchase answer to see full
attachment