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Chapter 7

BU481 Chapter Notes - Chapter 7: Decision-Making, Corporate Social Responsibility, Sunk Costs

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Karin Schnarr

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Chapter 7 Management Preference Analysis: The Strategy-
Management Preference Linkage
Value Creation, Capture, and Distribution
The GM’s ole is to eate, aptue, ad distiute alue
However, who are they creating value for? Need to identify which stakeholders are
Reconciling Stakeholder Interests
Every stakeholder has different interests, and they are usually conflicting i.e.
customers want low prices but employees want high wages, and it might be difficult to
attain both at the same time
Thee a e ialaes i the shot te, ut that’s ot sustaiale i the log te
You need to consider how much power the stakeholder has (i.e. is it an investor who
expects a high return eause ou a’t fid a soues of fudig
Corporate Governance
Rooted in the concern that managers will act in their own interest
Corporate governance mechanisms:
o Checks and balances
o Board of directors
There has been a lot of reform with the BOD recently
BODs are usually internal management, or friends of the internal
management athe tha at a a’s eah ould e est to aoid ias
ut the do’t know enough about the business)
How to solve this: separate role of CEO and chairman of the board
and appoint outside directors (increase diversity)
Another way to solve: line up compensation to correlate with
performance of the firm so they are motivated to act in the best
interest of the firm
o Regulatory constraints
o The market
Underperforming firms become takeover targets
If the oad a’t uestio aageet o shotoigs eause the lak epetise
then this can lead to major economic crisis
o Very hard for board members to question the decisions made by management
Poud’s 5 eoedatios:
1. Board members should be expert
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