Evaluation and Control

1
Chapter 10

• Evaluation and Control

2
Evaluation and Control

• Evaluation Control
• Process that ensures that the company is
  achieving what it set out to accomplish.
  Compares performance with desired results.

3
Evaluation and Control

• Types of Control
• Behavior Controls
• Policies, rules, SOPs, directives
• Output Controls
• Objectives, targets, milestones
• Input Controls
• Resources, knowledge, skills, values

4
Evaluation and Control

• Shareholder Value
• Present value of the anticipated future stream of
  cash flows plus the value of the company if
  liquidated.

5
Evaluation and Control

• Economic Value Added (EVA)
• EVA After tax operating income (investment in
  assets x weighted average cost of capital)

6
Evaluation and Control

• Market Value Added (MVA)
• Difference between the market value of a
  corporation and capital contributed by
  shareholders and lenders.

7
Evaluation and Control

• Balanced Scorecard
• Financial (How do we appear to shareholders?)
• Customer (How do customers view us?)
• Internal Business Perspective (What must we excel
  at?)
• Innovation and Learning (Can we continue to
  improve and create value?)

8
Corporate Social Performance (CSP)

• What corporations actually do in ethical, social,
  and environmental areas
• Triple Bottom Line (financial social
  environmental)
• Why do companies disclose their CSP?
• How do companies disclose their CSP?

9
Corporate Social Disclosure

• Manage public image legitimacy management
• Impress shareholders
• Pacify public and government
• (annual reports, websites, newsletters, press
  releases, advertising, brochures)

10
Corporate Governance

• Refers to the relationship among the board of
  directors, top management, and shareholders in
  determining the direction and performance of the
  corporation.

11
Corporate Governance

• Setting corporate strategy, overall direction,
• mission or vision
• Hiring and firing the CEO and top management
• Controlling, monitoring, or supervising
• top management
• Reviewing and approving the use of resources
• Caring for shareholder interests

Board of Directors
12
Board of Directors

• Members
• Inside directors
• Management directors
• Officers or executives employed by corporation
• Outside directors
• Non-management directors
• May be executives of other firms but not employed
  by boards corporation

13
Board of Directors Continuum

• Low?---DEGREE OF INVOLVEMENT---?High
• (passive) IN STRATEGIC MGMT (active)
• Phantom Rubber Minimal Nominal Active
  Catalyst
• Stamp Review Particip. Particip.

14
Board of Directors

• Outsider overly simplistic term --
• Some outsiders are not truly objective and could
  be considered insiders.
• Examples
• Affiliated Directors
• Retired Directors
• Family Directors
• Interlocking Directorates

15

• Too many boards are composed of current and
  former CEOs who have a vested interest in
  maintaining a system that is beneficial to them.
• John Byrne Business Week May 6, 2002

16
Board of Directors

• Trends in Corporate Governance
• Boards more involved in reviewing, evaluating,
  and shaping strategy
• Institutional investors active on boards
  pressure on CEO for firm performance
• Shareholders demand directors own more than token
  amounts of the firms stock
• Non-affiliated outside directors increasing
• The inclusion of a corporations workers on its
  board of directors

17
Board of Directors

• Trends in Corporate Governance
• Boards becoming smaller
• Boards taking more control of board functions
• Corporations becoming more global international
  experience needed
• Societal expectations that boards balance
  profitability and social responsibility
• Diversity of board members

18
Board of Directors

• Membership Trends
• (Survey, 1999)
• 75 of boards have at least 1 female director
• 25 of boards have two female directors
• 60 of boards have at least one minority member

19
Evaluation and Control

• Evaluating Top Management
• Board of Directors
• Strategy Committee
• Audit Committee
• Compensation Committee

20
4 Ideas for Reforming Corporate Governance

• Ensure auditors really audit by making them fully
  independent
• Bar law-breaking companies from government
  contracts
• Create a broad duty of loyalty in law to the
  public good
• Find truly knowledgeable directors employees
• Kelly 2002 Business Ethics

21
Integrity in Governance

• Effective corporate governance rests on the
  virtue (quality and integrity) of organizational
  members
• Integrity in relationships
• - between Board and executives
• - between Board/execs and shareholders
• - between Board/execs and stakeholders

22
Governance in Canada

• Canadian Securities Administrators
• TSX Reforms (code of ethics, audit committees)
• Canadian companies listed on NYSE forced to
  comply
• Other Canadian companies voluntarily benchmarking
  U.S. rules/standards

23
Governance in Canada

• Corporate governance system currently being
  evaluated by Federal government and provincial
  finance ministers
• Development of Canadian Public Accountability
  Board (oversees auditors)
• International systems of governance

24
Evaluation and Control

• Benchmarking
• Identify the area or process to be examined
• Find output measures and obtain measurements
• Select best-in-class to benchmark against
• Calculate differences and determine reasons
• Develop tactical programs for closing gaps
• Implement programs and compare

25
Evaluation and Control

• Problems in Measuring Performance
• Short-term orientation
• Goal displacement
• Behavior substitution
• Suboptimization

26
Evaluation and Control

• Strategic Audit
• Type of management audit that is extremely useful
  as a diagnostic tool to pinpoint corporate-wide
  problem areas and to highlight organizational
  strengths and weaknesses.

27
Evaluation and Control

• Audit Steps
• Evaluate current performance results
• Review corporate governance
• Scan and assess the external environment
• Scan and assess the internal environment
• Analyze strategic factors using SWOT
• Generate and evaluate strategic alternatives
• Implement strategies
• Evaluate and control