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Chapter 10

Chapter Outlines

Strategic Leadership

A firm may possess all the resources necessary to achieve competitive advantage, but without the right leadership these resources will never be used correctly. This chapter discusses key features necessary for leadership to succeed, as well as demonstrating how critical good leadership is to the performance of a firm.

A Leader in Banking

Bank of America Homepage
Bank of America Heritage Center
Bank of America's interactive history center from the Bank of America website

Hugh McColl: Vision in Balance
In this video, citizens of Charlotte, North Carolina discuss Hugh McColl's talents as a leader

Despite laws that limited banks' ability to operate in multiple states, North Carolina National Bank was successfully able to acquire other banks in other states through its use of its non-bank subsidiaries. As a result of its shrewd lobbying and other business dealings, NCNB was ultimately able to do business from coast to coast, revolutionizing the banking industry. NCNB became NationsBank and then Bank of America, which now operates in over 20 countries and is worth trillions of dollars. Much of that growth and success is attributable to the leadership of Hugh McColl.

Strategic Leadership

Applying Lessons Learned from Research about Strategic Research Development
Robert M. Fulmer and Jared L. Bleak weigh issues in strategic leadership and outline steps for improvement

The story of McColl and Bank of America provides a great example of strategic leadership, which is a catalyst for strategic management. It involves all of the elements of strategic management, but with the added foresight of recognizing a need or opportunity in a market before the competition, or even the consumer. The danger is that failed strategies and poor leadership can ruin a firm.

A general definition of leadership is the influencing of others towards a common goal, yet behind this simple definition is the complex nature of leadership that has been vigorously studied and debated. The most important and common aspects of leadership are:

  1. casting a vision or purpose
  2. communicating with and motivating others
  3. catalyzing innovation and change
  4. driving for results
The Basics of Leadership

Why Should Anyone be Led by You? Rob Goffee and Gareth Jones discuss main ideas from their book Why Should Anyone be Led by You?

Measuring Institutionalization
David Piper's multimedia presentation explains how to properly apply the institutionalization process in a business

Casting a vision is determining a common principle or logic for the organization and its actions. It is finding a unifying theme that all branches of an organization operate under. Simply having a vision is not enough though; it must effectively inspire fellow members within the organization. This is where the second aspect of leadership, communicating and motivating, comes in. A leader's ability to connect with his or her followers, and influence them in a positive way is critical. This positive influence will then spread throughout the organization.

The third aspect of leadership: catalyzing innovation and change, emphasizes the importance for an organization to not become stuck in its ways. An organization must constantly be changing and adapting to its competitive environment in order to survive. This change does not happen without a catalyst, and this responsibility often rests in the hands of leadership. It is up to leaders to make sure their followers do not become too set in their habits, and this is where the final aspect of leadership, driving for results, comes in. A leader must constantly be pushing those he or she leads towards his vision. It is the leader's job to continue forging ahead, and to prevent complacency. At the heart of this is the idea of institutionalization. Every organization has an identity, and a leader must shape this identity effectively.

Corporate Governance

Best Practices in Corporate Governance
Anil Shivdasani and Marc Zenner interpret two decades of research and make conclusions on how to best govern a corporation

Risk and Return of Publicly Held Versus Privately Owned Companies
Simon H. Kwan weighs the pros and cons of both public and private ownership in the banking industry

The Joint Determinants of Managerial Ownership, Board Independence, and Firm Performance
Jeffrey L. Coles, Michael L. Lemmon, and Yan (Albert) Wang describe the optimal elements of managerial and independent governance within a firm in order to achieve optimal performance

In practical terms, when people think of the leader of a corporate organization, they think of the CEO. While this is understandable, in reality there are many people who assume roles of leadership, and the responsibility it entails within an organization. Corporate governance is the area of strategy concerned with who assumes leadership roles, and how they go about it.

One area where corporate governance practice diverges significantly is between privately and publicly owned firms. Privately owned firms tend to have simpler governance structures since a smaller number of owners means less dissonance amongst ownership. Because of this, privately owned firms often follow more closely the desires of their owners.

The problem in large, publicly owned firms is the difference between ownership and control. The people who actually own the firm do not oversee its day-to-day operations, this is left in the hands of hired professional managers, and these managers' visions may be different from the owners' visions. Mechanisms such as a board of directors are put in place to help make decisions on behalf of all the owners. Decisions such as hiring chief executive officers and determining their pay are made by the board acting in the best interest of the owners. Because of this power, seats on a board are highly coveted, and they are often held by high ranking officers within a firm. This raises a complex dilemma. These high ranking officers are certainly qualified with great knowledge of the company's operations, and they all have vested interest in the firm's success, but will they monitor their own performance objectively and punish or reward themselves accordingly? Board independence is especially important, but often not easily achieved.

Good governance is an intangible resource effective in the creation and maintenance of competitive advantage. It helps to create an environment of trust and high morale within an organization. Perhaps most importantly, good governance can help keep a firm from collapsing in the face of difficult adversity.

Summary

At its root, the key to good leadership is strategy. Being a good leader requires more than a vision; it requires a knowledgeable strategy to effectively bring that vision to fruition. It is no good leading a firm down a path already taken by others, as this will not provide competitive advantage in a changing market. Success requires a leader who can think strategically and take a firm in directions that are not obvious or easily imitated by others.

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Key Terms

Agency problems

The set of issues and complications arising from the separating of ownership and control — in particular the asymmetries in decision-making power and information between owners and managers.

Board of directors

The group of individuals who oversee a company or organization. In publicly traded firms, the board has the fiduciary duty of representing the owners in hiring the CEO, setting policy, and monitoring the activities of the firm.

Duality

Exists when the CEO of a firm is also the chair of that firm's board of directors. This one individual then holds these dual offices simultaneously.

Fiduciary responsibility

Refers to a relationship of trust or obligation where a party in power is charged with the obligation to act on behalf of and in the interests of another, more vulnerable party.

Imprinting

The term used to describe the institutionalization of practices and beliefs within an organization. Significant events, such as founding conditions or radical changes, are said to leave an imprint on an organization's strategy and practices.

Institutional investors

Aggregate funds from individual investors and then invest collectively. Mutual funds and retirement funds are common institutional investors. Because they represent such large sums of money, these investors can be powerful actors in corporate governance.

Institutionalization

A term coined by Philip Selznick (1957) and refers to the process of infusing an organization with value, over and above the tangible value of its assets.

Interlocks

Exist when multiple board members sit simultaneously on the boards of different companies. By creating reciprocal interdependence among the board members, interlocks are thought to mitigate independence.

Leader–member exchange (LMX)

Refers to a body of academic research focusing on the dyadic relationships between leaders and their immediate followers. At the crux of this work is the understanding that leaders relate differently to different followers and that the nature of these relationships is key to leadership effectiveness.

Moral hazard

Occurs when decision makers are separated from the risks associated with their decisions. In the principle–agent relationship, for instance, the agent has the bulk of the decision-making discretion and yet the principal bears the bulk of the risk of bad decisions.

Top management team

The small group of managers at the highest levels of the organization who make the majority of the strategic decisions and control the firm's operations. The CEO is typically the leader of the team.

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