External governance control mechanisms include

Strategic Control and Corporate Governance

After reading this chapter, you should have a good understanding of the following learning objectives:

LO9.1 The value of effective strategic control systems in strategy implementation.

LO9.2 The key difference between “traditional” and “contemporary” control systems.

LO9.3 The imperative for “contemporary” control systems in today’s complex and rapidly changing competitive and general environments.

LO9.4 The benefits of having the proper balance among the three levers of behavioral control: culture, rewards and incentives, and boundaries.

LO9.5 The three key participants in corporate governance: shareholders, management (led by the CEO), and the board of directors.

LO9.6 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives.

Learning from Mistakes

Hewlett-Packard (HP) is one of the largest firms in the world and also one of the most dysfunctional. Sitting #10 on the Fortune 500 list with $120 billion in sales in 2012, it is a titan in the computer hardware market.1 However, it is a struggling titan that lost $12.6 billion in 2012, in contrast to earnings of almost $9 billion only two years earlier. But HP’s struggles go back much farther than the last two years. Their inability to effectively respond to the dramatic shifts that have transformed the computing industry in the last several years has been, at least partly, driven by their toxic corporate governance culture.

The dynamics in the board of directors has resembled a soap opera for over 10 years. Going back to 2002, HP’s CEO, Carly Fiorina, was pushing hard for HP to acquire one of its main rivals, Compaq. Standing in her way to get this deal done was Walter Hewitt, the son of one of the firm’s founders. The members of the board took sides in this debate and started leaking corporate secrets to the press to bolster their side of the argument. HP eventually did acquire Compaq, but the toxic culture in the boardroom was set.

Fiorina stayed at the helm of HP until early 2005, when she was forced out by the board—but only after board

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members leaked documents damaging to Fiorina in the press. She was replaced by Mark Hurd, but the troubles with the board continued. The chairwoman of the board was accused in 2006 of hiring private investigators to obtain the phone records of board members and reporters to try to get at the root of leaks from the board. The scandal was investigated by both the State of California and the U.S. Congress and resulted in Patricia Dunn, the chairwoman, being forced from her position. Hurd, the firm’s CEO, was fired in 2010 when it came to light that he had an inappropriate affair with a subordinate and had charged expenses related to his affair to the firm. His departure only served to exacerbate the tension on the board. He had been dismissed on a 6-4 vote by the board, and the tension between the pro- and anti-Hurd factions on the board spilled over to the search for his replacement. It got so bad that some board members refused to be in the same room with other directors. The board settled on Leo Apotheker to replace Hurd, but only after the search firm vetting Apotheker didn’t fully disclose issues related to Apotheker that led to his firing from his position of co-CEO at SAP, an enterprise software firm. Apotheker lasted all of 11 months as CEO at HP before he was fired, receiving a $13.2 million dollar severance package from the board. He was replaced by Meg Whitman, the former CEO of eBay, in 2011.

All of the drama in the boardroom has had a devastating effect on HP’s businesses. The strategic direction of the firm has been inconsistent over time, moving from traditional hardware, to mobile devices, to computing services, and finally to cloud computing. HP announced it was planning to spin off its PC business only to quickly move away from that plan once the market reacted to the announcement by pummeling the firm’s stock. The drama also infested the rest of the company. Both Apotheker and Whitman have had to deal with employees leaking important and damaging information to the press, much like the board has done for years. As a result, there has been very little information sharing within the organization, because no one knows who they can trust and who will leak important information to the press.