Strategic Management: Formulation and Implementation

Changes In Control

Control changes occur when a new set of players challenge the dominant coalition governing the organization, the group that makes decisions about both the organization's character and the distribution of benefits that flow from its operations.

Control changes imply a shift in the makeup of the dominant coalition and the structure of the organization's mechanism for governance, for adjudicating among interest groups.

Both internal micro forces (life cycle pressures) and external macro forces (e.g., new relationships between organizations and their organized stakeholders) can make organizations vulnerable to control changes.

Existing stakeholders seek changes in control in order to protect or enhance their interests to get more of the organization's benefits or more power to shape its future. For much of twentieth century, the major control battles, and therefore control changes in industrial nations, involved labor relations the role to be played by unions and other employees associations in governing the organization, and how much of the benefits employees could capture.

Other control changes were effected by government as the representative of public interests, through regulating operations, monitoring management, or in some cases outright seizing of assets or ownership of the organization. Industrial developments caused the areas represented by leaders to shift (Flingstein, 1990). There were also battles between financiers or family empires for control of organizations.

In 1980s, governance controversies involving financial stakeholders took center stage. The "new class struggle" between aggressive, entrepreneurial corporate raiders and "entrenched" management of established corporations was dominating the news.

Moreover, economists were recognizing the profound organizational changes occurring as "owners" (holders of equity and debt) took a more active role in determining the form and strategy of the organization. Boards of Directors took center stage (Lorsch and MacIver,1989). What is at issue in today's control changes, in the United States and Great Britain at least, are financial interests; those with an ownership stake govern the organization.

Other stakeholders community members and even customers might try exercise political power, but only as owners could they exercise control. They would have to take over the company to change its direction. An increase in control changes in the 1980, especially in the United States has been welldocumented. Of the hundred largest merger and acquisition transactions in American history, ninetyeight occurred between 1980 and 1989, and the stockholders of more than onefourth of the Fortune 500 received at least one tender offer to buy their shares, most resisted by management (Davis and Stout, 1991). This activity was stimulated or made possible by a variety of environments forces:

the professional investors hold large equity or debt positions, sit on boards of directors, get involved with longterm strategy, monitor management closely, and sometimes even act as managers (Jensen, 1989).

Agency theory locates the immediate cause of takeovers or control changes in the conflicts between owners and managers. Managers resist distributing cash to shareholders because cash reserves (1) increase their autonomy with respect to the capital markets; (2) increase the size of their companies and therefore their compensation (which tends to be related to company size rather than value), their ability to reward middle managers through promotion, and their public prominence and political power (Jensen, 1989). But when managers stop protecting the interests of owners, then owners may assert their rights by seeking a shift in control. Some recent data (e.g. Davis and Stout, 1991) support agency theory's promises: the market for corporate control involves alternative managerial teams competing for the rights to manage corporate resources (Jensen and Ruback, 1983)

Takeovers have corrosive effects on employees and the surrounding community which hurt economic efficiency (see Paul Hirsh 1987). However, they also enhance economic efficiency by replacing management teams (Jensen 1989).

The issue of organizational ownership and control has a strong legal and institutional component. For example, the United States developed the public stock market dominated by individual investors to a greater degree than other countries. Share ownership allowed individual investors to participate in equity returns and get the benefits of liquidity and diversification (Light, 1989).

The public arena is the only place where excluded constituencies can voice their interests. The situation is similar in other countries under AngloSaxon law, such as Britain, Canada, and Australia.

Contrast this with the situation in Germany. Under codetermination, each major company has a board of management; a supervisory board, which includes owner and employee representatives but none of the members of the board of management; and elected workers' councils at each significant organizational level that must agree on important matters affecting their constituents.

Decisions of the management board to be collegial, made by consensus. The role of the supervisory board is oversight. It has the sole power to appoint members of the management board, generally for terms of four years or more. It also participates on decisions that significantly affect employment, such as plant closings or foreign facilities.

The employee members represent both hourly and salaried employees; some may be chose by national unions. The owner representatives are elected by shareholders, including the German banks, which are permitted to vote the shares that they hold as custodians, giving German banks a much larger role in corporate governance than banks in the United States can play (Lorsch, 1991).

Still another model operates in Japan. Japanese ownership is based on reciprocal shareholdings between companies and their banks, and Japanese companies are tied together in business groups know as keiretsu. Owners have multiple relationships, so they can provide help of a number of kinds during times of trouble (Kester, 1990).

The success with which organizations change their form depends on the extent to which every aspect of the system formal structure, information flow, rewards, recruitment, etc. support the new definition of what the organization is to be and how it its to operate.