Chapter 3 - Impact of corporate governance on strategy Flashcards
Define corporate governance
The system by which organisations are directed and controlled
Provide some core principles of corporate governance:
- Integrity - straightforward dealing, honestly
- Fairness - respecting rights of other groups
- Transparency - open and clear disclosure
- Accountability - answer for consequences of actions
How does a principles approach work?
- UK based
- Broad principles
- Comply or explain why non-compliant
- Deviations require disclosure
How does a rules approach work?
- US based - S-Ox
- Compliance is required
- Pass or fail
- Requires third party to enforce rules
What are the advantages of a principles based approach?
- Greater flexibility - cost savings
- Applies across different legal jurisdictions
- Forces boards and shareholders to think about consequence of governance
What are the disadvantages of a principles based approach?
- So broad that of very little use as a guide
- Investors cannot be certain of consistency
- Incorrectly viewed as voluntary
What are the advantage of a rules based approach?
- Easy compliance - unambiguous
- Constant minimum standard for investor confidence
What are the disadvantages of a rules based approach?
- No leeway or deviation allowed
- Enforcement can be difficult if not covered explicitly in rules
What are the board responsibilities?
- Monitor CEO
- Oversee strategy
- Monitor risks, control systems
- Manage potential conflicts of interest
- Ensure effective communication of strategic plans
What are the responsibilities of the chair?
- Leadership to board
- Ensure board receives accurate and timely info
- Ensure effective communication with shareholders
- Meet NEDs without executives present
- Encourage active engagement by members
What are the responsibilities of the CEO?
- Provide leadership to business
- Provide accurate and timely info
- Communicate with significant stakeholders
- Co-operate with board members
What is a unitary board?
Board structure with one board of directors
What are the advantages of a unitary structure?
- All participants have equal legal responsibility for management
- Easier co-operation
- Presence of NEDs lead to better decisions
- NEDs less likely to be excluded
What are the disadvantages of a unitary structure?
- An NED cannot be expected to both manage and monitor
- Time requirements on NEDs
- No provision for employees to be represented on board
What is the structure of a multi-tier board?
- Supervisory board with no executive function - reviews direction and strategy
- Management/executive board - entirely executives responsible for running business
What are the advantages of a multi-tier board?
- Clear separation of duties
- Supervisory board is an effective guard against management inefficiency
- Encourages transparency
What are the disadvantages of a multi-tier board?
- Confusion over authority - lack of accountability
- Management board may restrict information passed to supervisory board
- Supervisory board may not be as independent as wished
What are the different committees?
- Audit committee - liaising with external audit, supervise internal audit
- Remuneration committee
- Nominations committee - new directors
- Risk committee
What are the roles of NEDs?
- Strategy
- Risk
- Scrutiny
- People - remuneration
What is the purpose of directors’ remuneration?
- Attract and retain individuals of sufficient calibre
- Motivate them to achieve performance in best interest of shareholders
What is an insider system?
When companies are owned by a small number of dominant investors e.g. family owned
What are the advantages of insider systems?
- Establish ties between owner and manager - agency problem reduced
- Easier to influence management
- Smaller base of shareholders - longer term view
- Culture
What are the disadvantages of insider systems?
- Discrimination against minority shareholders
- Don’t develop formal governance until forced to
- Reluctant to employ outsiders
- Misuse of funds
What are the advantages of outsider systems?
- Separation of ownership and management - governance structure
- Shareholders have voting rights
- Hostile takeovers - threat acts as discipline for management
What are the disadvantages of outsider systems?
- More likely to have agency problem
- Larger shareholders - short term priority
What are the value for money 3 E’s?
- Economy - inputs of appropriate quality at lowest price
- Efficiency - delivering service at minimum cost, time, effort
- Effectiveness - achieving desired objectives
What is a QuANGO?
A quasi-autonomous non-governmental organisation - it supports government even if not government department
