RESPONSIBILITIES OF TOP MANAGEMENT
3. The CEO communicates high-performance standards and also shows confidence in the followers’ abilities to meet these standards: The leader empowers followers by
raising their beliefs in their own capabilities. No leader ever improved performance by setting easily attainable goals that provided no challenge. Communicating high expectations to others can often lead to high performance.99 The CEO must be will- ing to follow through by coaching people. As a result, employees view their work as very important and thus motivating.100 Ivan Seidenberg, chief executive of Verizon Communications, was closely involved in deciding Verizon’s strategic direction, and he showed his faith in his people by letting his key managers handle important projects and represent the company in public forums. Grateful for his faith in them, his managers were fiercely loyal both to him and the company.101
The negative side of confident executive leaders is that their very confidence may lead to hubris, in which their confidence blinds them to information that is contrary to a decided course of action. For example, overconfident CEOs tend to charge ahead with mergers and acquisitions even though they are aware that most acquisitions destroy shareholder value. Research by Tate and Malmendier found that overconfident CEOs were most likely to make acquisitions when they could avoid selling new stock to finance them, and they were more likely to do deals that diversified their firm’s lines of busi- nesses.102 Carly Fiorina used the power of her office and her considerable influence with a relatively weak board of directors to push through the Compaq Computer acquisition over the objections of the founders family and many significant shareholders.
Managing the Strategic Planning Process
As business corporations adopt more of the characteristics of a learning organization, strategic planning initiatives can come from any part of an organization. A survey of 156 large corporations throughout the world revealed that, in two-thirds of the firms, strate- gies were first proposed in the business units and sent to headquarters for approval.103 However, unless top management encourages and supports the planning process, it is unlikely to result in a strategy. In most corporations, top management must initiate and manage the strategic planning process. It may do so by first asking business units and functional areas to propose strategic plans for themselves, or it may begin by drafting an overall corporate plan within which the units can then build their own plans. Research suggests that bottom-up strategic planning may be most appropriate in multidivisional corporations operating in relatively stable environments but that top-down strategic planning may be most appropriate for firms operating in turbulent environments.104 Other organizations engage in concurrent strategic planning in which all the organiza- tion’s units draft plans for themselves after they have been provided with the organiza- tion’s overall mission and objectives.
Regardless of the approach taken, the typical board of directors expects top man- agement to manage the overall strategic planning process so that the plans of all the units and functional areas fit together into an overall corporate plan. Top management’s job, therefore, includes the tasks of evaluating unit plans and providing feedback. To do this, it may require each unit to justify its proposed objectives, strategies, and pro- grams in terms of how well they satisfy the organization’s overall objectives in light of
available resources. If a company is not organized into business units, top managers may work together as a team to do strategic planning. CEO Jeff Bezos tells how this is done at Amazon.com:
We have a group called the S Team—S meaning “senior” [management]—that stays abreast of what the company is working on and delves into strategy issues. It meets for about four hours every Tuesday. Once or twice a year the S Team also gets together in a two-day meet- ing where different ideas are explored. Homework is assigned ahead of time. . . . Eventually we have to choose just a couple of things, if they’re big, and make bets.105
In contrast to the seemingly continuous strategic planning being done at Amazon.com, most large corporations conduct the strategic planning process just once a year—often at offsite strategy workshops attended by senior executives.106
Many large organizations have a strategic planning staff charged with supporting both top management and the business units in the strategic planning process. This staff may prepare the background materials used in senior management’s offsite strategy workshop. This planning staff typically consists of fewer than 10 people, headed by a senior executive with the title of Director of Corporate Development or Chief Strategy Officer. The staff’s major responsibilities are to:
1. Identify and analyze companywide strategic issues, and suggest corporate strategic alternatives to top management.
2. Work as facilitators with business units to guide them through the strategic plan- ning process.107
End of Chapter SUMMarY
Who determines a corporation’s performance? According to the popular press, it is the Chief Executive Officer who seems to be personally responsible for a company’s success or failure. When a company is in trouble, one of the first alternatives usually presented is to fire the CEO. That was certainly the case at the Walt Disney Company under Michael Eisner, as well as Hewlett-Packard under Carly Fiorina. Both CEOs were first viewed as transformational leaders who made needed strategic changes to their companies. Later both were perceived to be the primary reason for their company’s poor performance and were fired by their boards. The truth is rarely this simple.
According to research by Margarethe Wiersema, firing the CEO rarely solves a corporation’s problems. In a study of CEO turnover caused by dismissals and retire- ments in the 500 largest public U.S. companies, 71% of the departures were involuntary.
In those firms in which the CEO was fired or asked to resign and replaced by another, Wiersema found no significant improvement in the company’s operating earnings or stock price. She couldn’t find a single measure suggesting that CEO dismissal had a positive effect on corporate performance! Wiersema placed the blame for the poor results squarely on the shoulders of the boards of directors. Boards typically lack an in-depth understanding of the business and consequently rely too heavily on executive search firms that know even less about the business. According to Wiersema, boards that successfully managed the executive succession process had three things in common:
■
■ The board set the criteria for candidate selection based on the strategic needs of the company.
■
■ The board set realistic performance expectations rather than demanding a quick fix to please the investment community.
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■
■ The board developed a deep understanding of the business and provided strong strategic oversight of top management, including thoughtful annual reviews of CEO performance.108
As noted at the beginning of this chapter, corporate governance involves not just the CEO or the board of directors. It involves the combined active participation of the board, top management, and shareholders. One positive result of the many corporate scandals occurring over the past decade is the increased interest in governance. Institu- tional investors are no longer content to be passive shareholders. Thanks to new regula- tions, boards of directors are taking their responsibilities more seriously and including more independent outsiders on key oversight committees. Top managers are beginning to understand the value of working with boards as partners, not just as adversaries or as people to be manipulated. Although there will always be passive shareholders, rubber-stamp boards, and dominating CEOs, the simple truth is that good corporate governance means better strategic management.
Pearson MyLab Management
®Go to mymanagementlab.com for the following assisted-graded writing questions:
2-1. What are the roles and responsibilities of an effective and active Board of Directors?
2-2. What are the issues that suggest the need for oversight of a particular company’s management team?
affiliated directors (p. 82) agency theory (p. 79)
board of directors’ continuum (p. 77) board of director responsibilities
(p. 76)
codetermination (p. 84) corporate governance (p. 75)
due care (p. 76)
executive leadership (p. 93) inside directors (p. 79) interlocking directorate (p. 84) lead director (p. 86)
outside directors (p. 79) poison pills (p. 91)
retired executive directors (p. 82) Sarbanes–Oxley Act (p. 87) stewardship theory (p. 81) strategic vision (p. 93)
top management responsibilities (p. 92)
transformational leaders (p. 93)
K E Y T E R M S
D I S C U S S I O N Q U e S t I O N S
2-3. Explain the role of executive leadership in building the strategic vision in corporations.
2-4. Is there a close relationship between the composi- tion of a board of directors and the organizational performance?
2-5. Why is the combined Chair/CEO (or Managing Director) positions being increasingly criticized by most management scholars?
2-6. What is the role of codetermination? In your opin- ion, is the incorporation of lower-level employees on the board appropriate?
2-7. How should a board of directors be involved in the executive leadership of an organization?
S T R A T E G I C P R A C T I C E E X E R C I S E
A. Think of the best manager for whom you have ever worked. What was it about this person that made him or her such a good manager in your eyes? Consider
the following statements as they pertain to that per- son. Fill in the blank in front of each statement with one of the following values:
STRONGLY AGREE = 5; AGREE = 4; NEUTRAL = 3;
DISAGREE = 2; STRONGLY DISAGREE = 1 1. I respect him/her personally, and want to
act in a way that merits his/her respect and admiration.
2. I respect her/his competence about things she/he is more experienced about than I.
3. He/she can give special help to those who co- operate with him/her.
4. He/she can apply pressure on those who don’t cooperate with him/her.
5. He/she has a legitimate right, considering his/her position, to expect that his/her sug- gestions will be carried out.
6. I defer to his/her judgment in areas with which he/she is more familiar than I.
7. He/she can make things difficult for me if I fail to follow his/her advice.
8. Because of his/her job title and rank, I am obligated to follow his/her suggestions.
9. I can personally benefit by cooperating with him/her.
10. Following his/her advice results in better decisions.
11. I cooperate with him/her because I have a high regard for him/her as an individual.
12. He/she can penalize those who do not follow his/her suggestions.
13. I feel I have to cooperate with him/her.
14. I cooperate with him/her because I wish to be identified with him/her.
15. Cooperating with him/her can positively af- fect my performance.
SOURCE: Questionnaire developed by J. D. Hunger from the article “Influence and Information: An Exploratory Investigation of the Boundary Role Person’s Bases of Power” by Robert Spekman, Academy of Management Journal, March 1979. Copyright © 2004 by J. David Hunger.
B. Now think of the worst manager for whom you have ever worked. What was it about this person that made him or her such a poor manager? Please consider the statements earlier as they pertain to that person. Please place a number after each statement with one of the val- ues, from 5 = strongly agree to 1 = strongly disagree.
C. Add the values you marked for the best manager within each of the five categories of power below.
Then, do the same for the values you marked for the worst manager.
BeST MANAger
reward Coercive Legitimate referent expert
3. 4. 5. 1. 2.
9. 7. 8. 11. 6.
15. 12. 13. 14. 10.
total total total total total
WOrST MANAger
reward Coercive Legitimate referent expert
3. 4. 5. 1. 2.
9. 7. 8. 11. 6.
15. 12. 13. 14. 10.
total total total total total
D. Consider the differences between how you rated your best and your worst manager. How different are the two profiles? In many cases, the best man- ager’s profile tends to be similar to that of transfor- mational leaders in that the best manager tends to score highest on referent, followed by expert and
reward, power—especially when compared to the worst manager’s profile. The worst manager often scores highest on coercive and legitimate power, fol- lowed by reward power. The results of this survey may help you answer discussion question 2-7 for this chapter.
N O t e S
1. A. G. Monks and N. Minow, Corporate Governance (Cambridge, MA: Blackwell Business, 1995), pp. 8–32.
2. Ibid., p. 1.
3. C. Corsi, G. Dale, J. H. Daum, J. W. Mumm, and W. Schoppen, “5 Things Boards of Directors Should Be Thinking About,” Point of View: A special issue focusing on today’s board and CEO agenda (2010), Spencer Stuart.
© 2010 Spencer Stuart. All rights reserved. For informa- tion about copying, distributing, and displaying this work, contact [email protected].
4. Reported by E. L. Biggs in “CEO Succession Planning: An Emerging Challenge for Boards of Directors,” Academy of Management Executive (February 2004), pp. 105–107.
5. A. Borrus, “Less Laissez-Faire in Delaware?” Business- Week (March 22, 2004), pp. 80–82.
6. L. Light, “Why Outside Directors Have Nightmares,” Busi- nessWeek (October 23, 1996), p. 6.
7. J. Stempel, “Zynga must face U.S. lawsuit alleging fraud tied to IPO,” Reuters, March 26, 2015. (www.reuters.com/article/
2015/03/26/us-zynga-lawsuit-IdUSKBN0MM1XP20150326 accessed January, 2016), www.zynga.com.
8. C. Bhagat, M. Hirt, & C. Kehoe, “Improving board gov- ernance: McKinsey Global Survey results,” McKinsey
& Company Insigts & Publications, August 2013. (www .mckinsey.com/insights/strategy/improving_board_
governance_mckinsey_global_survey_results).
9. Nadler proposes a similar five-step continuum for board involvement ranging from the least involved “passive board”
to the most involved “operating board,” plus a form for mea- suring board involvement in D. A. Nadler, “Building Better Boards,” Harvard Business Review (May 2004), pp. 102–111.
10. H. Ashbaugh, D. W. Collins, and R. LaFond, “The Effects of Corporate Governance on Firms’ Credit Ratings,”
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11. Current Board Practices, American Society of Corporate Secretaries, 2002 as reported by B. Atkins in “Directors Don’t Deserve such a Punitive Policy,” Directors & Boards (Summer 2002), p. 23.
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