VI.Summary
For firms to be successful, they must implement their strategies by means of effective
We began the chapter with the key role of informational control. We contrasted two types
of control systems: what we termed “traditional” and “contemporary” information control
Behavioral controls are also a vital part of effective control systems. We argued that firms
must develop the proper balance between culture, rewards and incentives, and boundaries and
constraints. Additionally, where there are strong and positive cultures and rewards, employees
With regard to corporate-level strategies, we discussed the need for firms following
related diversification strategies to develop cultures and incentives that reward information and
In the final section of this chapter, we addressed corporate governance, which can be
defined as the relationship between the various participants in determining the direction and
performance of the corporation. The primary participants include shareholders, management (led
by the chief executive officer), and the boards of directors. We reviewed studies that indicated a
Chapter 9: Strategic Control and Corporate Governance
Select an organization with which you are familiar. How effective are its behavioral
controls—rewards, culture, and boundaries? How could these controls be improved? What
trade-offs may be involved?
Teaching suggestions:
You can organize the discussion around the following:
*What is “behavioral control” and how is it different from “informational control?”
Informational control:
-concerned with whether or not the organization is “doing the right things”
-addresses how well the organization’s goals and strategies still “fit” within the
Behavioral Control:
-is focused on implementation i.e., “doing things right”
-deals with culture, rewards and boundaries within the organization that help in
“doing things right”
You might want to discuss each of these terms: “culture,” “rewards,” and “boundaries.” A quick
recap of these is given below:
Organizational culture is a system of shared values (what is important) and beliefs (how
Rewards and incentive systems are important means of influencing an organization’s
Boundaries and constraints are the rules laid down for appropriate conduct of business.
They are important to focus individual efforts on strategic priorities, providing short-term
You can ask the students to describe the organizational culture, rewards and boundaries in
*Will a strong organizational culture substitute for rewards and boundaries?
The key point to be emphasized here is that none of these aspects of behavioral control
can be totally substituted by any other one. A strong culture would certainly help in
improving the motivation and morale of employees and can help in reducing the need for
You might want to ask if the students would be willing to work for a very reputed organization
known for its culture, offering a very low pay, or for an organization with no emphasis on culture,
but with very high pay. You can expect to see a split in the students’ responses; some of them will
*Can all organizations place equal emphasis on all three aspects of behavioral control in all kinds
of environments?
Here you must emphasize the role of situational factors, both external and internal, in
As explained in the text, in organizations where individual performance is difficult to
measure accurately (for example, high-technology firms operating in highly uncertain
A key point to be made is that while it is easy to suggest improvements to organizational culture
and incentives and reward systems, which of the improvements are really necessary given the
End of Chapter Teaching Notes
Chapter 9: Strategic Control and Corporate Governance
Summary Review Questions
1. Why are effective strategic control systems so important in today’s economy?
Response:
In today’s economy there have been a number of problems related to unchecked behavior by
executives. The recession starting in 2008 was due in part to banks, mortgage brokers, and bond
2. What are the main advantages of contemporary control systems over traditional control
systems? What are the main differences between these two systems?
Response:
Traditional control systems are a sequential method of organizational control in which (1)
strategies are formulated and top management sets goals, (2) strategies are implemented, and (3)
There have been a number of problems with this system. First, the volatility of the business
environment makes it difficult for top managers to accurately set effective strategies that will be
Contemporary control systems emphasize continuous monitoring of the internal and external
environment for trends and events that signal the need to make modifications to a firm’s
3. Why is it important to have a balance between the three elements of behavioral control—
culture; rewards and incentives; and, boundaries?
Response:
Organizational culture is a system of shared values and beliefs that shape a company’s people,
organizational structures, and control systems to produce behavioral norms. The organizational
A balance between these three elements is needed. Organizational culture is essential for
motivating employees and their identification with the organization and its goals. Culture
establishes behavioral norms and therefore implicitly sets boundaries and reduces monitoring
4. Discuss the relationship between types of organizations and their primary means of
behavioral control.
Response:
Culture is an effective form of behavioral control in situations where individuals’ contribution to
organizational performance is difficult to measure. For example, professional organizations, high-
In organizations where individuals’ output or performance is quantifiable and straightforward,
rewards may be an effective method of control. Sales managers are often motivated by
For organizations in stable industries with stable output, and organizations with routine and
5. Boundaries become less important as a firm develops a strong culture and reward
system. Explain.
Response:
Strong culture and effective rewards systems establish norms that constrain undesirable behavior.
Individuals in the organization internalize and accept the norms. Organizations can facilitate such
6. Why is it important to avoid a “one best way” mentality concerning control systems?
What are the consequences of applying the same type of control system to all types of
environments?
Response:
Control systems that are not aligned with the organizational environment will not be effective. For
example, if individuals in an organization have a lot of autonomy, such as a research lab, and a
firm installs a rewards control system, then it would have to install a system of performance
(Note to instructor) Students will come up with examples of consequences, which is very useful
7. What is the role of effective corporate governance in improving a firm’s performance?
What are some of the key governance mechanisms that are used to ensure that managerial
and shareholder interests are aligned?
Response:
Corporate governance is the relationship among shareholders, management, and the board of
directors that determines the corporation’s performance. Corporate governance is, in a way, a
control system for top management. Corporate governance refers to a system for measuring top
Governance mechanisms include an active board of directors who regularly evaluate the CEO,
replacing him/her if necessary, review the vision, mission, and strategic objectives of the
corporation, provide advice to top management, manage the board judiciously, and review various
systems that ensure that the corporate office complies with laws and regulations. Shareholder
In addition to these internal methods, there are external corporate governance methods, or
methods used by groups outside the corporate governance system. These include the market for
8. Define principal-principal (PP) conflicts. What are the implications for corporate
governance?
Response:
Principal-principal conflicts are between two classes of principals—controlling shareholders and
minority shareholders—within the context of a corporate governance system. Often, the
controlling shareholders belong to families or other business groups, and prefer to have the firm
Experiential Exercise
McDonald’s Corporation is the world’s largest fast-food restaurant chain, with 2014
revenues of $27 billion, but the firm has stumbled recently. Sales in 2014 dropped by 2
percent, and its shareholder value declined by 4 percent from May 2014 to May 2015. Using
the Internet, evaluate the quality of the corporation in terms of management, the board of
directors, and shareholder activism. Are the issues you list favorable or unfavorable for
sound corporate governance?
Response:
The corporate website contains ample information on corporate governance. It highlights some
governance strengths but also some weaknesses. Some highlights are below:
Management
Positives
1. The CEO, Stephen Easterbrook, has a diverse background in McDonald’s, having worked
2. Prior CEO, Don Thompson, was also an experienced manager at McDonald’s and rose to
3. Diversity on the top management team
Potential issues
1. Both Easterbrook and Thompson have little experience outside of McDonald’s.
Board of directors
Positives
1. High caliber of executives as members
2. Written corporate governance policies including code of conduct, ethics, compensation,
3. Staggered board
4. CEO is the only member of the board
5. None of the board members have a clear tie to the CEO
6. Board members are required to own significant stock in the firm
Possible issues
1. At 13 members, the board is quite large.
2. Board tenure is fairly high, with 7 of the 13 members being on the board for over 10 years.
3. Little experience on the board from the restaurant or hospitality industry.
Shareholder activism
Possible issue
1. No large ownership stakes by activist shareholders. Largest owners are indexed mutual
funds.
Some discussion questions may include:
The Chair is an outsider? Does this leave him at a position of information deficiency
compared to the CEO?
The written policies seem very ethical and appropriate. But how would a shareholder
know if they are being followed?
If the top management were to choose between a profitably opportunity and social
Application Questions and Exercises
1. The problems of many firms may be attributed to a traditional control system that failed
to continuously monitor the environment and make necessary changes in their strategy and
objectives. What companies are you familiar with that responded appropriately (or
inappropriately) to environmental change?
Response:
(Note to instructors) For each company the students provide, ask the following:
What environmental change did the company not respond to?
How did the company respond?
How should the company have responded?
Why did the company not respond appropriately?
The answer to the last question may highlight the deficiencies of the traditional control system and
2. How can a strong, positive culture enhance a firm’s competitive advantage? How can a
weak, negative culture erode competitive advantages? Explain and provide examples.
Response:
A strong, positive culture will provide a supportive work environment, motivate employees to
work together to achieve organizational goals, and set norms for positive behavior. Firms with
strong, positive cultures will therefore tend to have a sustainable competitive advantage in human
(Note to instructor) It is an important lesson for students to understand the kind of organizational
culture that they want to have in their organizations. In discussion, ask students to identify the
3. Use the Internet to research a firm that has an excellent culture and/or reward and
incentive system. What are this firm’s main financial and nonfinancial benefits?
Response:
(Note to instructor) The purpose of the assignment is to increase student awareness of effective
rewards systems. Ask students to identify what the firm’s financial and nonfinancial benefits are.
Then ask which is more important, the financial or nonfinancial components and why. What does
the provision of nonfinancial benefits tell about the firm’s values and about its work environment?
And again, what questions should you ask in a job interview to ensure that you will join an
appropriate firm?
4. Using the Internet, go to the website of a large, publicly held corporation in which you
are interested. What evidence do you see of effective (or ineffective) corporate governance?
Response:
One approach is to examine the corporate governance policies, procedures, ethical codes,
independence of the Board, management representation on the board, and other observable
characteristics. A second approach is to look at top management behavior and compensation.
(Note to instructor) Corporate websites are probably full of mostly good news about the
corporation, and the evidence from there is likely to be one-sided. Some evidence that might raise
Ethics Questions
1. Strong cultures can have powerful effects on employee behavior. How does this create
inadvertent control mechanisms? That is, are strong cultures an ethical way to control
behavior?
Response:
Culture can control behavior through social censure. Individuals who have internalized an
organizational culture will behave appropriately in order to preserve their status in the
organization. Possible problems with strong cultures are that they stifle creativity, or reinforce
Reinforcing unethical behavior is a more apparent problem. If a corporate culture, say, allows
individuals to leave at 4 pm yet be paid as if they were at work until 5 pm, then the corporation is
2. Rules and regulations can help reduce unethical behavior in organizations. To be
effective, however, what other systems, mechanisms, and processes are necessary?
Response:
Rules and regulations must be enforced. Someone in the organization has to both monitor
behavior and sanction unethical behavior. This implies a need for an independent internal affairs