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company Herbalife is “an illegal pyramid scheme.” Although typically activist investors push
companies to improve short-term value through leadership changes, stock buybacks, and
break-ups, others want the opposite to happen; they “short” the stock and make arguments
that create turmoil and perceived weakness that result in the lowering of the company share
price increasing the value of a short position. Such negative commentary has brought Herbalife
under investigation by the SEC and the Federal Trade Commission (FTC). Of course, Herbalife’s
stock price has come down. Most short-sellers don’t broadcast their position because it might
cause a government backlash and investigation focused on them. Nonetheless, some such as
Mr. Ackman’s attacks on Herbalife, have brought this controversy into focus.
Although all of this activism has caused some chaos in the board room, it has made for
overall better, albeit more intense, governance and has given more voice for shareholders into
strategy issues which are pertinent to the topic of our book. As you go through this chapter,
these issues will become clearer as the various governance devices are defined and their
purpose explained to foster better understanding.
Sources: A. Ackerman & J. S. Lublin, 2015, Activists win ground in major boardrooms, Wall Street Journal, March 17, 215 B1,
B2; R. Bender, 2015, Shareholder presses Vivendi further, Wall Street Journal, March 15, B3; D. Benoit, 2015, Herbalife fracas
puts activist risk right in the spotlight, Wall Street Journal, March 17, C3; D. Benoit & D. Clark, 2015, Activists puts pressure
on Qualcomm, Wall Street Journal, April 13, B1, B2; J. Bunge & C. Dulaney, 2015, DuPont posts declines ahead of vote, Wall
Street Journal, April 22, b4; S. Gandel, 2015, In DuPont fight, Nelson Peltz pushes for open proxy, Fortune, http://www.fortune.
com, March 13; A. Gara, 2015, DuPont spinoff fans flames in Trian Management’s scorched earth fight. Forbes, http://www.forbes.
com, March 30; L. Hoffman & D. Benoit, 2015, Activist investors ramp up, and boardroom rifts ensue, Wall Street Journal,
April 17, C1, C2; B. Levisohn, 2015, Activism’s Dark Side, Barron’s, March 2, 11; A. VanderMey, 2015, Actively mediocre:
Activist investors scold CEOs over stock prices, but their returns are just so-so, Fortune, May 1, 12.A
s the Opening Case suggests, corporate governance is complex and designed to
provide oversight of how firms operate. At a broader level, it reflects the type of
infrastructure provided by individual nations as the framework within which companies
compete. Given that we are concerned with the strategic management process firms use,
our focus in this chapter is on corporate governance in companies (although we do also
address governance at the level of nations). The complexity and the potential problems
with corporate governance, such as having true checks and balances in the system of gov-
ernance, are shown by the example of activist shareholders in the Opening Case.
Comprehensive in scope and complex in nature, corporate governance is a responsi-
bility that challenges firms and their leaders. Evidence suggests that corporate governance
is critical to firms’ success and dealing appropriately with this challenge is important.
Because of this, governance is an increasingly important part of the strategic management
process.^1 For example, if the board makes the wrong decisions in selecting, governing,
and compensating the firm’s CEO as its strategic leader, the shareholders and the firm
suffer. When CEOs are motivated to act in the best interests of the firm—in particular,
the shareholders—the company’s value is more likely to increase. Additionally, effective
leadership succession plans and appropriate monitoring and direction-setting efforts by
the board of directors contribute positively to a firm’s performance.
Corporate governance is the set of mechanisms used to manage the relationships
among stakeholders and to determine and control the strategic direction and perfor-
mance of organizations.^2 At its core, corporate governance is concerned with identifying
ways to ensure that decisions (especially strategic decisions) are made effectively and that
they facilitate a firm’s efforts to achieve strategic competitiveness.^3 Governance can also
be thought of as a means to establish and maintain harmony between parties (the firm’s
owners and its top-level managers) whose interests may conflict.
In modern corporations—especially those in nations with “Westernized” infrastruc-
tures and business practices such as in the United States and the United Kingdom—
ensuring that top-level managers’ interests are aligned with other stakeholders’ interests,Corporate governance is
the set of mechanisms used
to manage the relationships
among stakeholders and
to determine and control
the strategic direction and
performance of organizations.