Chapter 2: Corporate Objectives and Values

Question 1

CORPORATE MISSION

Answer 1

Mission= firms identity and personality. Must answer this question: what is the essence of our business and what do we want it to be?

Mission’s definition includes following variables:

• Definition of the scope of the firm
• Identification of core capabilities
• Values, beliefs, and other ingredients of corporate culture

Mission can be general or specific. Both have pros and cons to them.

Question 2

CORPORATE VISION

Answer 2

Vision answers this question: what will we be, what should we be and what do we want to be in the future?

Vision must fulfil 3 requirements:

• Incorporate a profound sense of success
• Stability over time
• Make the workforce’s effort and commitment to its achievement worthwhile

Vision should not be addressed in terms of profit or value creation for shareholders.

Question 3

STRATEGIC OBJECTIVES

Answer 3

Strategic objectives answer this question: how will we become what we want to be?

Question 4

Strategic objectives must fulfil the following criteria:

Answer 4

• Measurable
• Specific
• Appropriate
• Successive
• Realistic
• Challenging
• Set in time

Question 5

Strategic objectives can be identified:

Answer 5

• According to the nature of the objectives: distinction between financial and strategic objectives
• According to the timeframe: refers to preference between long and short term objectives
• According to the degree of precision: open ended objectives or set targets
• According to the scope: line drawn between ambitious and impossible objectives
• According to the level of implementation: need to define corporate, competitive and functional objectives.

Question 6

VALUE CREATION AS A FIRMS MAIN OBJECTIVE

Answer 6

Firms’ main objective is to create value for its shareholders.

But limitations: presence of stakeholders in the firm that don’t have same objectives as shareholders.

Whatever the limitations though, firms objective must be formulated in terms of maximisation of value.

Question 7

CORPORATE STAKEHOLDERS

Answer 7

Stakeholders= people or groups of people who are related to a firm and have their own objectives, whereby the achievement of these objectives is linked to the firm’s operations/objectives.

Conflict exists between stakeholders because of the inability to meet all their expectations fully.

Decision-making depends on who has the greatest power: they will impose their objectives and restrictions on others who will have to accept that.

Question 8

2 arguments that show how important it is to include a strategic analysis of stakeholders:

Answer 8

• Resources of a firm can be scarce: need of stakeholders.
• Stakeholders may not be satisfied with their objectives, and withdraw their financial help.

Question 9

Strategic analysis of stakeholders include following points:

Answer 9

• Identification of stakeholders and their objectives. Must distinguish between:
  
  1. Internal stakeholders: shareholders, managers, workforce
  2. External stakeholders: customers, suppliers, financial institutions, labour organisations, local community, social organisations, state.
• Evaluate each group’s importance: stakeholder map: presence of 3 significant characteristics
  
  1. Power= possibility of imposing one’s own objectives on other stakeholders. Can be formal authority (hierarchical position) or informal authority (ability to influence).
  2. Legitimacy=objectives of stakeholder must be acceptable and fall in line with social system’s rules, values and beliefs. Social acceptance in an environment.
  3. Urgency= associated with stakeholders interest in exerting influence.
• Implications for management: degree of attention gi ven to each stakeholder depends on their importance. So priority will be given to those objectives. But firm need to keep balance.

Stakeholder map can be used in any conflict.

Question 10

Stakeholders map

Answer 10

P/L/U = latent

P+L/P+U/L+U = expectant

P/L/U the 3= crucial and decisive

Question 11

CORPORATE GOVERNANCE

Answer 11

Issue of shareholder control over management and the mechanisms available for exercising that control.

Each company will choose governance mechanisms/series of mechanisms it thinks most suitable bearing in mind cost – in terms of money, time and resources.

Question 12

INTERNAL MECHANISMS OF MANAGEMENT CONTROL

2 types:

Answer 12

1. direct supervision
2. incentive schemes

Question 13

Direct supervision: the Board of Directors

Answer 13

Direct supervision= consists of the continuous control shareholders exercise over their behaviour as managers in order to ensure they conduct themselves in keeping with their interests.

• Control Board of Directors
• Control of large shareholders
• Hiring of independent auditors or consultants to perform control duties
• Mutual observance between managers

Question 14

Key instrument for the control of management is the Board of Directors. 3 main duties:

Answer 14

• Orienting and driving company policy: strategic responsibility
• Controlling the management echelons: surveillance responsibility
• Acting as a go-between with shareholders: reporting responsibility

Question 15

Board of directors: different kinds of directors exist:

Answer 15

• Inside directors= are also top managers of the firm
• Outside directors= represent shareholders and not holding a management position
  
  1. Proprietary= represent major or reference shareholders
  2. Independent= represent minority shareholders or the company’s floating capital.
• Outside and especially independent directors are in better position to act on behalf of shareholders interest as they defend general objectives.

Question 16

Unified Code of Good Governance/Conthe Code, 2006:

Answer 16

• Applies to companies from 2008 onwards
• Based on 58 recommendations

Main ones feature:

1. Composition of the board: majority of outside directors v 1/3 independent ones
2. Definition of an independent director: 4 instances directors will not be considered independent:
   
   • Have previously been employee or executive (unless haven’t worked for 3 or 5 years)
   • Have been an independent auditor in the last 3 years
   • Have had a business deal with company in the last year
   • Haven’t been nominated by appointments committee for at least 1 year
3. Size of the board: 5 minimum, 15 maximum
4. Female presence: 50/50
5. Chair: must not be the same person as CEO
6. Special committees: should be set up to monitor special areas like:
   
   • Executive, auditing, appointments, remunerations committees
7. Remuneration of directors: must provide detailed report
8. Operating rules: recommendations included on frequency of meetings, criteria of selection of directors, their rights and duties, etc.
9. Restriction on voting: none for shareholders.

Question 17

Incentive schemes:

Answer 17

Purpose: link top managers’ interest to those of shareholders through the arrangement of contracts that associate managements own objectives with value creation in the company.

Different types:

• Systems of direct variable remuneration: linking managers salaries to the posting of profits or to value creation.
• Systems based on shareholding: through the delivery to top management of fully or partially paid-up stock (= actiones). Mayor sea la creacion de valor mayor sera el incentive del directivo.
• Profesional promotion because of successes achieved
• Others form of remuneration: payment in kind, contributions…

Question 18

EXTERNAL MECHANISMS OF MANAGEMENT CONTROL

Answer 18

4 types: Market for corporate control, capitals market, top management labour market, market for goods and services

1. The Market for corporate control

If managers do not maximise a firm’s value, the outside investors could be encouraged to purchase the firm and replace its current management

1. The capital market

If managers perform well, this will be mirrored in the capitals market by an increase in the company’s valuation, but if the market value is lower, the current shareholders may act to remove the firm’s top management

1. The labour market for top management

Managers who have made a significant contribution to the firm’s performance will tend to be more highly valued on the market

1. The market for goods and services

The objective is the maximisation of value, whereby, if it is not fulfilled, the firm’s very survival will be compromised.

Question 19

CORPORATE VALUES

Answer 19

Social responsibility + Business ethics

Question 20

CORPORATE SOCIAL RESPONSIBILITY

Key aspects:

Answer 20

• Transform the classical governance bilateral relationship (shareholders + Management) => multilateral relationship (all stakeholders)
• Modifies the decision making process by extending the criteria economic efficiency to include environmental and social impact of the firm’s operation
• Voluntary application

Question 21

CORPORATE SOCIAL RESPONSIBILITY

3 areas:

Answer 21

• Economic-functional area: related to the company’s normal operations in terms of the productions of good and services society requires
• Quality of life area: related to how a firm is raising or lowering the general standard of living in society
• Social actions or social investment area:

This area refers to the degree to which a firm use both its financial and human resources to

resolve issues in the community. (education, sports, culture).

Question 22

Factors with an influence on corporate social responsibility:

Answer 22

• Legal factors: Laws and regulations -> Minimum companies are required to observe
• Political factors: Need to consider a firm’s stakeholders (employees + consumers)
• Strategic and Competitive factors: Can improve competitive positioning and create value
• Ethical moral factors: Firm’s may adapt to the social responsibility of the society

Question 23

Five basics mechanism through which a firm may generate value:

Answer 23

1. Create valuable intangible assets such as legitimacy or reputation
2. Differentiate products and processes to imbue them with attributes or specifications that are positively valued by consumers
3. Improve the competitive context within which the firm operates
4. Reduce risks in stakeholder relations and thereby avoid the costs of socially irresponsible behaviour
5. Access valuable resources in better conditions than other company such as skilled personnel or financial resources from socially responsible investment in mutual funds

Question 24

BUSINESS ETHICS

Answer 24

Refer to the moral fundaments that characterise the relationships that firms maintain with social agents or stakeholders

Question 25

Ethical code might include:

Answer 25

• Behaviour expressly forbidden
• Promotion of positive values
• Procedural guidelines
• Sanction