Essay on Ineffective Corporate Governance: The Case of Martha Stewart Living Omnimedia

Introduction

The framework of corporate governance outlines the rights of different stakeholders, their responsibilities, and the guidelines for managing organizations. In the case study, Martha Stewart Living Omnimedia (MSO) has ineffective corporate governance, an aspect that has adversely impacted its financial performance. The company has not been able to separate managerial control and ownership. This situation is not only detrimental to MSO, but it also violates the principles of corporate governance that require the establishment of independent management.

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There are significant conflicts of interest at SMO since Stewart is a majority shareholder and the company's Chief Executive Officer (CEO) sitting in the board of directors. In this regard, Stewart has been using her voting rights to reconstitute the board by sacking directors that proposed policies against her interests. However, the principles of corporate governance require the protection of the minority shareholders to prevent dominating ones from voting for their "personal interests rather than mutual goals" (Mostepaniuk, 2017, p. 7).

Effectiveness of the Company's Board of Directors

MSO has an ineffective board of directors that has failed to monitor and control the company. Asahak et al. (2018) said that successful organizational performance is an indicator of a board of directors that function effectively. MSO has been recording a loss over several years, with directors failing to implement processes and systems that govern, control, and direct organizational strategies. This phenomenon indicates that the directors could not give MSO a strategic direction that could have enhanced its success in the long-run.

Other dimensions of assessing the effectiveness of the board are oversight of strategic direction and risk management (Asahak et al., 2018). MSO's directors did not challenge the CEO's strategic and operational decisions in running the company, thus an indication that they were not able to control and monitor the firm. Again, the board did not pass policies to promote compliance with the principles and procedures for managing new appointments to management.

Martha Stewart's Compensation

Executive compensation is a critical tool that shareholders can use to motivate the management to maximize the value of the firm. Low or unfair compensation package can produce managers that lack the incentive to boost the company's share price and also increase profits. However, corporate decision-makers must align compensation or pay package with the culture, goals, and business strategies of a company (Madhani, 2014).

CEO'S compensation at SMO is infective since it does not reflect the performance of the company. In 2009, the board approved a remuneration scheme that saw the total pay of the CEO increase to $9.8 million despite the company posting a loss of $14.6 million (Hitt et al., 2016). This way, the CEO's pay has adverse impacts on the future performance of SMO. Steward also received $2.8 million in addition to $2 million miscellaneous income (Hitt et al., 2016).

MSO's Financial Trouble

MSO is in a financial problem; thus, management should implement immediate strategic plans to save the company. Two factors show that the organization is in a financial crisis. First, its revenue and profitability have been declining continuously. MSO's net revenues dropped by 67% in 2002, following the investigation of the CEO, and the trend has been the same for years (Hitt et al., 2016). Secondly, the organization has been reducing its employees in an attempt to minimize costs. Also, it closed the television production studio as a strategy to cut costs. Even with these measures, SMO's revenue has been falling, suggesting that the company cannot sustain its operations, and it is a target of a takeover. In the market for corporate control, the acquisition would most likely be attractive since MSO's financial problems are a result of inefficient management. Stock and share prices would increase with competent management.

MSO's Next Move

Through market expansion and growth strategy, MSO ought to find new uses of its products as an approach to increase sales and profits. Managers should also invest in markets with fair competition to cushion the company against more risks. This expansion and growth strategy best fits MSO since it does not require investments in a new line of products.

Moreover, the company should add new features to its existing commodities or expand the product line if there are prospects of growth. Growth through diversification is also another recommendation, but the company should plan it carefully because it is a risky approach for companies with inadequate resources. However, directors ought to invest in market research to know the reactions of consumers in the new market and whether they will like SMO's products.

MSO's International Strategy

The board of directors strategized on growth and expansion of operations as a way to address the company's financial troubles. The CEO proposed new merchandising deals, expanded Stewart's crafts offerings, and also launched a new line of products. However, the company's international strategy is not sustainable since it requires significant resources. SMO will most likely encounter aggressive competition, as several companies have leveraged technology to reduce costs. Such organizations offer low-cost products, implying that it would be challenging for SMO to enter international markets. The best strategy for SMO is to improve the quality of the existing products and enter into a business alliance with a reputable company. In this regard, partnerships provide an opportunity to expand product lines and also improve the quality of the existing products by combining the resources and skills with other organizations.

References

Asahak, S., Albrecht, S. L., De Sanctis, M., & Barnett, N. S. (2018). Boards of directors: Assessing their functioning and validation of a multi-dimensional measure. Frontiers in Psychology, 9(1). https://doi.org/10.3389/fpsyg.2018.02425

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2016). Strategic management: Concepts and cases: Competitiveness and globalization. Cengage Learning.

Madhani, P. M. (2014). Aligning compensation systems with organizational culture. Compensation and Benefits Review, 46(2), 103-115. https://doi.org/10.1177/0886368714541913

Mostepaniuk, A. (2017). Corporate governance: Corporate governance and strategic decision making. Addison-Wesley Longman Ltd. https://doi.org/10.5772/intechopen.69704