Module 1 – Corporate Governance and the Role of Managers in Value Creation

Three types of Innovation:

Performance-improving innovations replace old products with new and better models. They generally create few jobs because they’re substitutive: When customers buy the new product, they usually don’t buy the old product.

Efficiency innovations help companies make and sell mature, established products or services to the same customers at lower prices. Some of these innovations are what we have elsewhere called low-end disruptions, and they involve the creation of a new business model.

Market-creating innovations, our third category, transform complicated or costly products so radically that they create anewclass of consumers, or a new market.


What do managers do?

The Symbolic Role of Management: maintaining the belief that managerial action is responsible for organizational outcomes.

The Responsive Role of Management: evaluating & assessing the demands and constraints confronting the organization

The Discretionary Role of Management: taking action to modify the future activities of the organization


Managers need to answer following question:

Who should contribute and how much to the collective resource pool? (Resource Acquisition)

For which activities should the collective resources be used? (Resource Utilization)

To whom should the benefits of the collective activities be distributed? (Outcome Allocation)


Capitalist’s Dilemma

Question: Why do companies invest primarily in efficiency innovations, which eliminate jobs, rather than market-creating innovations, which generate jobs?

Answer: Because firms and their investors believe that corporate performance should be focused on , and measured by, how efficiently capital is used. This belief has an extraordinary impact on how both investors and managers assess opportunities. And it’s at the root of what we call the capitalist’s dilemma.

Solution to the Capitalist’s Dilemma:

  • Repurposing capital by making investors to stay with the firm
    • Change tax policy and have tax on financial transactions
    • Reward shareholder loyalty, L-Shares
  • Rebalancing Business Schools by making resource allocation decisions to be more integrated
  • Realigning strategy and resource allocation by bringing transparency to R&D spending through the creation of an “innovation scorecard”
  • Emancipating Management by making them focus on the long-term


Corporate Governance

Governance involves the management of relationships between the management and the firm’s critical constituences.

Who are these critical constituencies?

1. Shareholders (Capital Markets)
2. Clients / Customers (Product / Service Market)
3. Employees (Labor Markets)
4. Managers (Managerial Labor Market)
5. Creditors (Credit market)
6. Suppliers (Materials Market)



Who are Managers responsible to?

Shareholders or Stakeholders


Who should monitor the actions of Executives?

Boad of Directors. Actions of the board of directors is the concrete manifestation of corporate governance.


What is the core mission of corporate directors?

– provide strong oversight
– strategic support for management’s efforts to create long-term value

How can managers make Board of Directors more effective?

– Appoint directors with extensive knowledge of their industries
– Apply retirement rules to balance experience with fresh perspective
– Facilitate longer and richer strategic conversations
– Get boards to engage more with key long-term investors
– Pay directors more, especially for long-term performance


What is an organization or a firm?

A firm or an organization is a consciously put together bundles of economic, technological, and social practices, such as:
– Accounting practices
– Financial practices
– Legal practices
– Employment practices
– Production practices

This is in contrast to traditional layperson definition of an organization as a group of people working together to accomplish a common objective.


How do we start designing and managing effective organizations?

It starts with the process of value creation:
Business model: understanding how your industry works (how it makes money)
Strategy: Finding ways to be better than your competitors
Organization: Differentiating and integrating tasks, authority, and resources
Execution: understanding how to shape human behavior by structuring decision making, organizational culture, and change


International Corporate Governance Network (