FACULTY OF BUSINESS
STRATEGIC LEADERSHIP – CASE STUDY 2
Semester 3 2011
27 January 2012
CASE STUDY 2 – STRATEGIC LEADERSHIP
Positive Agency Theory
It is imperative that as the CEO of Chipco, you are aware of Positive agency Theory. Essentially Positive Agency theory predicts a strong pay for performance association and focuses on the relationship between principals (shareholders) and agents (top managers). It assumes that managers are presumed to be self-interested and, unless somehow constrained, will inevitably behave in self-interested ways (Cannella Jr.,A.& Monroe, M J) Although most leaders realize strong systems of governance provide the stability needed for a company, as time passes and CEO’s increasingly take control of their boards, winning the board’s confidence by establishing credibility and producing results, they start to see both governance and management as their own personal responsibility. They start to make decisions outside of their authority and this can create a huge risk for any corporation. (George,B, 2003) Therefore, in essence, it is imperative that in these situations the power of the boards and directors be restored to govern the corporations. It is ultimately the board’s responsibility to preserve and build the institution by establishing a line between the role of governance and management. The board provides the oversight to make sure the management is doing its job and acts as an essential check against executives who take excessive risks or cut corners in search of short-term gain. (George,B, 2003) Eisenhardt (1989) has basically created two propositions for Positive Agency Theory: 1. When the contract between the principal and agent is outcome based, the agent is more likely to behave in the interests of the principal. 2. When the principal has information to verify agent behaviour, the agent is more likely to behave in the interests of the principal. (Nyberg) His review of agency theory suggests that control devices do indeed result in better alignment of shareholder and manager interests. (Cannella Jr.,A. A., Monroe, M J) Roles between Boards and CEO
The healthiest Board/CEO relationships occur when both parties work closely together with a common aim of furthering the organisation's goals and broadening both its financial and customer base. <http://www.ourcommunity.com.au/boards/boards_article.jsp?articleId=1377> While the Board and the CEO are on the same team, they do not have the same roles. The CEO is charged with running the company and the board is charged with making sure that the company is being run properly. It is important that both the Board and the CEO are fully aware of where their roles begin and end. If there is any confusion in an organisation about roles and responsibilities, it can lead very quickly to conflict, inefficiency and low morale. <http://www.ourcommunity.com.au/boards/boards_article.jsp?articleId=1377> A close and trusting partnership between the Board and the CEO is essential for good governance. Directors govern the strategic choices and actions of the management of the firm. Corporate governance is about managing top management and building in checks and balances to ensure that the senior executives pursue strategies that are in accordance with the corporate mission. From a strategic perspective the interplay of the BOD and the CEO has been the subject of some debate in the literature. Although some experts argue the BOD should take a strong role in strategy-making, the alternative point of view is that the CEO is the key man. (O'Shannassy, T, 2012) In fact, various corporations view the involvement of the board in company strategy differently and it is important that as a new CEO, you fully comprehend the BOD of Chipco’s involvement in this process. Traditionally the Chipco BOD have always played a key role in any decisions that had to be made that...
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