Understanding and Managing Strategic Governance
Description
In Understanding and Managing Strategic Governance, strategy and management experts Dr. Wei Shi and Robert E. Hoskisson deliver an insightful exploration of the influence that governance actors, like the board of directors, activist investors, institutional investors, and securities analysts, have on important strategic decisions.
Based on surveying the latest research and analyzing unique datasets compiled by the authors, the book explains the impact that governance actors have on a firm's strategic choices and the quality of such choices as well as the unintended consequences of that impact. The authors also describe how executives can manage the conflicting interests of multiple governance actors and leverage the influence of these actors to make effective strategic decisions.
In this book, you'll discover:
* How to avoid the strategic pitfalls that arise from governance actor influence and harm firms' long-term competitiveness
* The effect that governance actors can have on corporate strategy, competitive strategy, corporate innovation strategy, global strategy, stakeholder strategy, and more
* The latest trends in corporate governance and their implications for managers, regulators, and policy makers in this area
Perfect for C-level executives, board of directors, and institutional investors as well as students of corporate governance and strategy, Understanding and Managing Strategic Governance is a revealing and original examination of the interplay between corporate governance and firm strategy and how to manage that interplay to create sustainable competitive advantages.
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Persons
ROBERT E. HOSKISSON, PhD, is the George R. Brown Emeritus Chair of Strategic Management at Rice University's Jones School of Business. His research focuses on how corporate governance actors shape corporate and international strategies, the strategies of emerging economy firms, corporate innovation and entrepreneurship, and mergers and acquisitions behavior.
Content
About the Authors xiii
CHAPTER 1 Introduction to Strategic Governance and Internal Governance Actors 1
CHAPTER 2 Introduction to External Governance Actors 27
CHAPTER 3 Governance Actors and Corporate Strategy 65
CHAPTER 4 Governance Actors and Innovation Strategy 103
CHAPTER 5 Governance Actors and Competitive Strategy 131
CHAPTER 6 Governance Actors and Global Strategy 159
CHAPTER 7 Governance Actors and Stakeholder Strategy 195
CHAPTER 8 Governance Actors and Corporate Political Strategy 229
CHAPTER 9 Strategic Governance in a New Era 257
Index 285
CHAPTER 1
Introduction to Strategic Governance and Internal Governance Actors
BOX 1.1 Strategic Governance Challenge: Chaos in the Board Room
According to a recent survey of 341 chief marketing officers, chief marketing officers (CMOs) spend 68.5 percent of their time "managing the present" and only 31.5 percent "preparing for the future." The survey took place before the COVID-19 pandemic, making it especially telling since strategic marketing is meant to focus on developing initiatives that help build future competitiveness. This type of short-termism, research suggests, has been a rising trend among top management teams for decades. Executives, after all, must increasingly contend with pressures from performance-oriented governance actors such as activist shareholders when making strategic decisions. Some researchers, however, do not consider this trend problematic, asserting that company executives must manage firms for long-term value creation and short-term performance. Under this view, corporate leaders who avoid these twin imperatives do so at their peril.
While boards of directors are duly bound to act with care and loyalty and without conflicting interests for the benefit of shareholders, activist owners among the shareholders pursue returns without necessarily regarding long-term strategic visions, often playing a powerful role in short-termism.
One recommendation for short-termism includes "reward long-term investors" by creating more tiers for tax breaks for long-term investors because the current taxing system rewards trading securities rather than owning companies for the long term. Board members may also align executive compensation with long-term results to motivate them to carry out visions for the long run. These proposals typically try to address governance challenges due to activist shareholders steadily gaining influence on corporate strategic decisions, often forcing election of their board candidates to provide direct inputs into major strategic decisions.
In March 2020, for example, activist hedge fund Impala Asset Management LLC filed documents nominating two directors to Harley-Davidson's board. Impala investors also called for replacing then-CEO Matthew Levatich, who had shifted the firm's marketing focus to a more diverse customer base with Harley's "More Roads" campaign, away from its traditional base of 35- to 60-year-old Americans who buy expensive motorcycles. While Harley holds approximately 50 percent of the US market share in this segment, in recent years the company had been losing sales to bikes produced by BMW, Ducati, and Triumph. According to Impala, the management change was "needed because the current board wasn't proactive enough to address the poor performance," noting that, in 2019, Harley Davidson underperformed its peers and missed its unit shipping guidance for a fifth year in a row, even while Levatich's pay had been raised to more than $11 million, a figure higher than any he had been paid since taking over in 2015. In February 2020, a new CEO, Jochen Zeitz, was abruptly put in place due in part to the pressure of Impala as Levatich stepped down, and Zeitz is refocusing Harley on its traditional business.
In addition to pressuring for reshuffled management, activist shareholders may also use what are known as "wolf pack" strategies. Hedge fund activists team up to foster a common agenda, often forcing firm leaders to boost short-term performance at the expense of the interests of long-term investors and other stakeholders. Such pressures have a compounding effect. One director notes: "From dealing with multiple crises, to being sued, to orchestrating spinoffs, buyouts, and mergers, to dealing with activists, these all bring their own set of challenges." The director makes the point that tough issues, once outlier events, have become commonplace as company leaders come under an increasingly "hot spotlight" from multiple stakeholders, forcing directors to answer more quickly and proactively.
We have written this book to enable practitioners to navigate the new, ever-more challenging governance environment. Managers and board members urgently need up-to-date, sophisticated comprehension on what we call strategic governance: the tools and orientation to fully understand and then manage the increasingly chaotic world of corporate governance and strategic decision-making.
Sources: Campbell, P. (2020). Managing tough issues in the boardroom. https://boardmember.com/managing-tough-issues-in-the-boardroom/, accessed July 13, 2020; Coppola, G., & Weiss, R. (2020). Harley-Davidson gets an unlikely rider. Bloomberg Businessweek, July 27, 8-10; Sampson, R. C., & Shi, Y. (2020). Are US firms becoming more short-term oriented? Evidence of shifting firm time horizons from implied discount rates, 1980-2013, Strategic Management Journal, forthcoming; Welch, D., Deveau, S., & Coppola, G. (2020). Activist battling Harley's board urges focus on core riders. Bloomberg, www.bloomberg.com, March 20; Christie, A. L. (2019). The new hedge fund activism: Activist directors and the market for corporate quasi-control. Journal of Corporate Law Studies 19 (1): 1-41; Moorman, C., & Kirby, L. (2019). How marketers can overcome short-termism. Harvard Business Review Digital Articles, www.hbs.com, 2-5; Thomas, L. (2019). Stop panicking about corporate short-termism. Harvard Business Review Digital Articles, www.hbs.com, 2-4; Porter, M.E. (1992). Capital disadvantage: America's failing capital investment system. Harvard Business Review 70 (5): 65-82.
How many corporate governance teams are equipped to face the strategic challenges spurred by the cross currents within the contemporary activist environment? Authentic strategic governance must go beyond simply making a set of decisions in response to a specific issue, and move toward a comprehensive approach for dealing with activist governance actors. Although activists are mostly found outside the firm, more are working from the inside upon the election of activist representative board members. As activist governance players proliferate and refine new techniques (as those described in the Strategic Governance Challenge Box 1.1), top executives and boards of directors must make critical strategic decisions, often under conflicting pressures. Top managers face the difficulty of needing to move the company forward while managing the challenges to their leadership from outside stakeholders, many of whom hold leverage over firm ownership voting rights, wield power to marshal governance advocates, and exert influence over the views of journalists and analysts.
The Harley-Davidson case that opens this chapter stands as a powerful example of how activist shareholders, the primary initiators of activist campaigns, often try to gain control of a company or replace management. But the activist may force major corporate change through other ways, such as by demanding divestitures and selloffs.1 Announcements to sway the strategic decision-making of a board and CEO have significant influence on stock prices.2 Activist announcements often impact stock market analysts' views, prompting changes in analysts' buy or sell recommendations, which may influence a firm to change its strategy.3
Generally, hedge funds and activist pension funds originate this kind of activism. But, as we will see in our book, other corporations also engage in external governance campaigns through hostile takeover attempts for corporate control or by buying noncontrolling block ownership. Even shareholder governance watchdogs, such as the Institutional Shareholder Services (ISS) and Glass Lewis, as well as government regulators such as the Securities and Exchange Commission, may take actions that demand a strategic response. To manage these types of external governance actors, a firm's internal governance team needs to understand how to best interact with these actors and how to make strategic decisions that will respond to or counteract their targeting, while at the same time capitalizing on the expertise and experiences that these external influencers provide. Boards and managers must also prepare to handle legal interventions, as activist shareholders increasingly turn to the courts in efforts to maintain shareholder rights and value. Responding to these actions is proving expensive; the price of director and officer (D&O) insurance, for example, rose by 104 percent in the United States in the first quarter of 2020 compared with the same period a year earlier. The price rose by 255 percent for the same timeframe in Australia.4
The board of directors serves as a firm's central internal governance mechanism. Directors monitor management, provide advice on major strategic decisions, and direct employment relationships especially by selecting top executives and establishing executive compensation structures. Meanwhile, owners, especially institutional owners, are the main external governance mechanism for publicly traded firms. Historically, top executives have largely held control over major strategic decisions as boards only symbolically monitor, providing merely a "rubber stamp" on the critical strategic decisions.5 Although this tendency continues, especially in countries with large family-controlled diversified business groups like in India and many Asian (South Korea, Japan, Taiwan) and Latin American countries,6 change...
