Chapter 4

Question 1

define corporate governance

Answer 1

the system of rules, practices, and processes by which a company is directed and controlled

Question 2

what should corporate governance encourage?

Answer 2

encourage employees to comply with laws and regulations, act ethically + with integrity, be mindful of the planet and positively contribute to the communities the company operates in

Question 3

define a board of directors

Answer 3

a group of highly qualified and experienced individuals that serve as advisors and provide oversight for public companies

Question 4

define a chair of the board

Answer 4

an individual that holds the most power and authority on the board of directors

Question 5

even though it’s not required for private companies to have a BoD, why do they have one?

Answer 5

board improves a company’s governance structure and provides advice as private companies grow to become larger corporations

• if the private company is getting ready for an IPO, it’s common for it to put in place a formal independent board of directors to improve their level of corporate governance pre-IPO

Question 6

what’s the role/responsibility of a BoD in public companies

Answer 6

the board has a responsibility to ensure the senior management team makes decisions that will maximize the value of the share purchased by a company’s investors

Question 7

define senior management

Answer 7

a group of executives that lead a company’s day-to-day operations + when major business decisions need to be made, senior management brings forward recommendations to the board and the board memebrs must vote to accept or reject these decisions

Question 8

what’s the relationship between the board and senior management

Answer 8

the board provides oversight to ensure senior management makes decisions that will ultimately benefit shareholders

Question 9

what’s the relationship between the level of corporate governance and a company’s life cycle?

Answer 9

as companies grow, the level of corporate governance usually increases

Question 10

what’s considered a large or a small board of directors?

Answer 10

small = 3-6
large = 10

Question 11

define a board committee

Answer 11

a smaller group of directors that are in charge of sub-components of the overall board responsibilities

Question 12

define an audit committee

Answer 12

major operating committee of a company’s BoD that oversees financial reporting and disclosure

Question 13

define compensation committee

Answer 13

a group of directors that oversee and determine how much the company should pay senior management

Question 14

why must public companies establish a good corporate governance system

Answer 14

for shareholders to have confidence that their best interests are being considered and protected

Question 15

how to get on the BoD?

Answer 15

election process - selected by shareholders to represent them in a company’s decision-making process during the Annual General Meeting

Question 16

What’s the most important job of the BoD?

Answer 16

BoD must hire the right CEO for the company

Question 17

What are the senior management team responisbility?

Answer 17

lead the company - sets corporate strategy and responsible for company’s day to day operations

Question 18

what’s a management discussion and analysis (MD&A)?

Answer 18

a discussion document that accompanies quarterly + yearly financial statements which explains a company’s performance in greater detail

Question 19

what’s an Annual Information Form (AIF)

Answer 19

a disclosure document that discusses relevant background information regarding the company’s operations and its future plans - required document that the public company must file

Question 20

how to attract investors?

Answer 20

senior management teams need to provide transparent reports, deliver good results, and avoid surprising investors

Question 21

what happens when a company continously misses targets

Answer 21

result in loss of shareholders confidence, lead to a loss of investors and often lowers a company’s share price

Question 22

do public companies have to comply with securities regulations

Answer 22

yes, they must in the stock exchange in which they list their shares

Question 23

define securities regulators

Answer 23

a group of individuals that are responsible for designing policies + regulations that public companies must comply for designing policies and regulations that public companies must comply with to protect investors that purchase securities in capital market

Question 24

define securities

Answer 24

shares or stocks (or even debt/bond)

Question 25

what’s the Canadian Securities Administrators (CSA) responsible for?

Answer 25

developing a harmonized approach to securities regulation across the country - give Canada a securities regulators system that protects investors from unfair, improper, or fraudulent practices and fosters fair, efficient and vibrant capital markets by developing a national system of harmonized securities regulation, policy and practice

Question 26

define an independent directors + do most BoD members have to be independent?

Answer 26

yes most have to be independent

def: a member of the board of directors who do not have a material relationship with the company, is not part of the company’s executive team and is not involved with the day-to-day operations of the company

Question 27

why do BoD have to be independent members

Answer 27

to bring an objective perspective to the board that benefits the company and protects shareholders’ interests

Question 28

is it common to have some members for the senior management team as part of the BoD as non-independent directors

Answer 28

yes

Question 29

how is a chair of board chosen?

Answer 29

voted by other members of BoD

Question 30

what are the following requirements for an audit committee of a public company

Answer 30

every public company must have an audit committee with a minimum of 3 members who are independent and financially literate
directors are independent if they do not have material relationship with the company or a relationship that could, in the board’s view, reasonably interfere with exercise of independent judgement
financial literacy is defined as the ability to read and understand a set of financial statements with comparable breadth + complexity of accounting issues, the role + responsibilities of audit committees are more demanding than ever in ensuring the integrity of financial reporting and corporate governance of the company

Question 31

define a investor relations (IR) team

Answer 31

a team responsible for building strong relationships with investor groups + providing them with transparent and accurate information to keep them well-informed on the company - the team is critical to attract additional investors to the company - their job = to “sell” the company’s shares to investors so the company has capital to grow

Question 32

define an organizational structure

Answer 32

a system that outlines how certain activities are directed to achieve the goals of an organization - the activities can include rules, roles + responsibilities

to achieve great results, companies should adopt an organizational structure that promotes accountability, efficiency, and timely decision-making

Question 33

what are some important factors that will lead to good decision-making for a company to develop its organizational structure

Answer 33

identify key decisions that need to be made for the company to be successful
place high-quality and experienced business leaders in positions that require them to make key decisions, ensuring they’re responsible + accountable for decisions made
provide leaders at various levels of the company with autonomy to call the shots and make decisions that are appropriate for their level of responsibility while minimizing lengthy processes that require many steps/approvals to get a final decisions (bottleneck)
communicate clear policies that outline decisions that need approval/sign-off from leaders, senior management, and board of directors
provide decision makers with timely + accurate data and information that will enable them to make well-informed decisions
provide decision makers with the resources they need to make good decisions

Question 34

define a functional strucutre

Answer 34

organizational structure where a company organizes itself by department - there is a leader for each function, who is a subject-matter expert

this structure might work for small/medium sized company with relatively simple, predictable and stable business

Question 35

what are the advantages and disadvantages of a functional structure

Answer 35

pros:
- builds a team of subject-matter experts in their respective fields
- facilitates communication within each functional area
- reduces function duplication within the company
- enables each leader to be accountable + fully responsible for functional decisions

cons:
- more limited perspective with the risk of operating in functional ‘silos’
- more limited perspective with the risk of operating in functional ‘silos’
- focus on routine tasks instead of long-term strategy

Question 36

define a product/service structure

Answer 36

an organizational structure where a company organizes itself by the various products or services it offers - there’s a leader for each product/service or group of related products/services
- the structure might work well for a large dynamic company with many distinct products and/or services that are subject to change + evolve

Question 37

what are the advantages + disadvantages of a product/service structure

Answer 37

pros:
- each executive owns + has full autonomy to make decisions for their products or service lines
- clear accountability exists by product or service line
- increases ability for business to react to rapid changes to products or services
- creates product + service experts within the organization
- can improve product development cycles

cons:
- may create compeittion between products or services
- may challenge coordination between different products or services to implement best practices
- could cause duplication and increase in costs as each product and service line may have their own departmental functions

Question 38

define customer structure

Answer 38

an organizational structure where a company organizes itself by different customer segments - there’s a leader for each customer segment
- might work well in companies that have significantly different customer profiles which have distinct customer needs
if customer demands tend to rapidly change, a customer structure may be the best to enable efficient decision-making - leader is responsible + accountable for the success or failure of attracting new customer and retaining existing customers

Question 39

what are the pros + cons of customer segment structure

Answer 39

pros:
- executives own customer strategy and have autonomy to make decisions for different customer segments
- claer accountability by customer segment
- specializes in consumer needs + expectations, making it easier to implement a customer first approach
- increases ability for business to react to rapid customer changes + demands

cons:
- may create competition between customer segments
- may challenge coordination between different customer segments to implement best practices
- could cause duplication + increase in costs as each customer segment may have their own departmental functions

Question 40

define a geographical structure

Answer 40

an organizational structure where a company organizes itself be geographical location - there’s a leader for each geographical segment + each segment acts as a separate standalone business with autonomy to make decisions - might work well in companies that operate in various geographical locations with significant differences in terms of customers, products/services, regulations, suppliers

Question 41

what are the pros + cons of geographical structure

Answer 41

pros:
- gives local management autonomy to react to local market changes
- clear accountability by geography and encourage geographic growth
- creates a team specialized in geographical markets that understand custos, customers, local competitors, + overall market environment
- increases ability for business to react to changes within markets

cons:
- causes duplication and increase in costs as each geographical segment has their own management team and departmental functions
- implementing best practices and consistency in reporting, systems, definitions, processes, etc. - can become very challenging
- geographical management teams might not want to share knowledge with other segments
- lack of focus + control over products + customers

Question 42

define a matrix structure

Answer 42

an organizational structure where a company combines 2 structures to organize itself - typically a functional structure is combined with a product/service/customer/geographical structure
- having a matrix structure can be very cost efficient but it can add complexity to the organization
- very important to set clear roles + responsibilities for every team member to maintain accountability for decisions that are made
- might work well for a large company where interdependence between cross-functional teams is essential for innovation + success

Question 43

what are the pros + cons of matrix structure

Answer 43

pros:
- improves organizational collaboration + flexibility to create a culture of knowledge-sharing + innovation
- opportunities to learn new skills + develop career across the organization
- efficient way for organization to use its human resources + save costs

cons:
- can create complexity relating to reporting relationships
- additional time may be required for coordinating activities
- more complex to monitor + control
- can create accountability issues if roles + responsibilities are not clearly defined

Question 44

why would a company choose to do segment financial reporting?

Answer 44

to understand the financial performance of each segment - promotes accountability

Question 45

define controbution margin

Answer 45

difference between revenue + variable costs
- contribution = the amount of revenue that contributes to the coverage of fixed costs

Question 46

define traceable fixed expenses

Answer 46

costs which directly relate to a specific segment - these expenses wouldn’t be incurred if the segment didn’t exist (e.g. advertising costs)

Question 47

define common fixed expenses

Answer 47

costs that are incurred by a company to support all segments but aren’t traceable to any specific segments - these expenses would continue to be incurred even if the company eliminated a segment