Chapter 4

Question 1

what is corporate governance

Answer 1

Corporate governance is “the system of rules, practices, and processes by which a company is directed and controlled”

Question 2

what is the board of directors

Answer 2

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

Question 3

who is the chair of the board (COB)

Answer 3

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

Question 4

what is the responsibility of the board for public vs private companies

Answer 4

Private:
- not required
- may have an advisory board or formal board
- help a company’s governance (allows it to grow)

Public:
- required to have a board of directors
- directors must be mostly independent
- ensures senior management makes decisions that will max value of shares

Question 5

who is senior management?

Answer 5

are a group of executives that lead a company’s day-to-day operations.

Question 6

how does the board and senior management interact?

Answer 6

When major business decisions need to be made, senior management brings forward recommendations to the board, and the board members must vote to accept or reject these decisions. The board provides oversight to ensure senior management makes decisions that will ultimately benefit shareholders.

Question 7

what is a board committee?

Answer 7

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

example: audit committee

Question 8

what is an audit committee?

Answer 8

one of the major operating committees of a company’s board of directors that oversees financial reporting and disclosure

Question 9

what is a compensation commitee?

Answer 9

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

Question 10

how does corporate governance work as a system?

Answer 10

external shareholders –> BOD:
select board members through a vote
BOD –> external shareholders:
represent shareholders and protect interests

BOD –> CEO / Senior Management:
company oversight and hire/fire CEO
CEO / Senior Management –> BOD:
periodic updates and strategic direction

external shareholders –> CEO / Senior Management:
contributes capital to business
CEO / Senior Management –> External shareholders: transparent reporting

Question 11

What is a Annual General meeting (AGM)

Answer 11

when shareholders select board members for decision-making process

Question 12

what is the role of a CEO?

Answer 12

• to lead the company
• responsible for hiring senior management team
• provide updates to the board

Question 13

what are the responsibilities of senior management

Answer 13

• running day-to-day operations
• provide financial statements and management’s discussion and analysis

Question 14

what is Management’s Discussion and Analysis (MD&A)

Answer 14

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

Question 15

what is the Annual Information Form

Answer 15

a disclosure document that discusses relevant background information regarding the company’s operations and its future plans.

Question 16

who are securities regulators

Answer 16

a group of individuals that are responsible for designing policies and regulations that public companies must comply with to protect investors that purchase securities (i.e., shares or stocks) in capital markets.

Question 17

who is the Canadian Securities Administrators (CSA)

Answer 17

“responsible for developing a harmonized approach to securities regulation across the country”. The CSA’s mission is “to give Canada a securities regulatory 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 18

what are public companies required to do in regards to regulations?

Answer 18

Public companies in Canada must comply with IFRS, hold annual general meetings, prepare a management’s discussion and analysis (MD&A), an annual information form (AIF), and much more.

Question 19

what does it mean to be an independent director?

Answer 19

is “a member of the board of directors who (1) do not have a material relationship with the company, (2) is not part of the company’s executive team, and (3) is not involved with the day-to-day operations of the company

Question 20

why is it important to be an independent director?

Answer 20

It is important for most of the board directors to be independent as they bring an objective perspective to the board that benefits the company and protects shareholders’ interests. It is common to have some members of the senior management team as part of the board as non-independent directors.

Question 21

what is the chair of board?

Answer 21

The chair of the board is voted to this position by the other directors. In some cases, the directors have so much trust in the company’s CEO, that they choose them to also be the chair. However, if you recall, we discussed that the Board’s job is to hire and fire the CEO. If the CEO and the chair of the board is the same person, this can create a conflict of interest.

Question 22

what are the requirements for an audit committee?

Answer 22

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

Question 23

what is the purpose of a compensation committee?

Answer 23

recommended as executive compensation disclosure is required for public companies. Other committees might be formed depending on the size and complexity of the company and its operations.

Question 24

what is an investor relations team?

Answer 24

responsible for building strong relationships with investor groups and providing them with transparent and accurate information to keep them well-informed on the company. This team is critical to attract additional investors to the company. They are story tellers, and their job is to “sell” the company’s shares to investors, so the company has capital (i.e., cash) to grow.

Question 25

what is an organizational structure

Answer 25

is a system that outlines how certain activities are directed to achieve the goals of an organization.

Question 26

what factors influence good decision making:

Answer 26

- 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 are responsible and 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 to a final decision (a.k.a. bottlenecks) - Communicate clear policies that outline decisions that need approval / sign-off from leaders, senior management, and board of directors - Provide decision makers with timely and 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 (e.g., human resources, training, systems, data sources etc.)

Question 27

what are the types of organizational structures?

Answer 27

- functional - product / service - customer - geographical - matrix

Question 28

what is a functional structure

Answer 28

organizational structure where a company organizes itself by department such as Human Resources, Finance, Marketing, etc. In this structure there is a leader for each function, who is a subject-matter expert, typically with many years of experience working in that field. This structure might work for a small or medium-sized company with a relatively simple, predictable, and stable business.

Question 29

what are the advantages of a functional structure?

Answer 29

- 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 and fully responsible for functional decisions

Question 30

what are the disadvantages of a functional structure?

Answer 30

- More limited perspective with the risk of operating in functional ‘silos’ - Focus on routine tasks instead of long-term strategy

Question 31

what is a product / service structure

Answer 31

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

Question 32

what are the advantages of a product / service structure?

Answer 32

- Each executive owns and has full autonomy to make decisions for their product or service lines - Clear accountability exists by product or service line (e.g., executive 1 is accountable for decisions made relating to products A, B, and C) - Increases ability for business to react to rapid changes to products or services - Creates product and service experts within the organization - Can improve product development cycles

Question 33

what are the disadvantages of a product / service structure?

Answer 33

- May create competition 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 (e.g., each department needs a marketing team to sell their products/services)

Question 34

what is a customer structure?

Answer 34

organizational structure where a company organizes itself by different customer segments. In this structure there is a leader for each customer segment. This structure might work well in companies that have significantly different customer profiles which have distinct customer needs. If customers' demands tend to rapidly change, a customer structure may be the best to enable efficient decision-making.

Question 35

what are the advantages of a customer structure?

Answer 35

- Executives own customer strategy and have autonomy to make decisions for different customer segments - Clear accountability by customer segment - Specializes in consumer needs and expectations, making it easier to implement a customers-first approach - Increases ability for business to react to rapid customer changes and demands

Question 36

what are the disadvantages of a customer structure?

Answer 36

- May create competition between customer segments - May challenge coordination between different customer segments to implement best practices - Could cause duplication and increase in costs as each customer segment may have their own departmental functions (e.g., each segment needs a pricing, marketing, and sales team)

Question 37

what is a geographical structure?

Answer 37

organizational structure where a company organizes itself by geographical location. In this structure there is a leader for each geographical segment and each segment acts as a separate standalone business with autonomy to make decisions for the geography they oversee. This structure might work well in companies that operate in various geographical locations with significant differences in terms of customers, products/services, regulations, suppliers, etc.

Question 38

what are the advantages of a geographical structure?

Answer 38

- Gives local management teams autonomy to react to local market changes - Clear accountability by geography and encourages geographic growth - Creates a team specialized in geographical markets that understands customs, customers, local competitors, and overall market environment - Increases ability for business to react to changes within markets

Question 39

what are the disadvantages of a geographical structure?

Answer 39

- 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 and control over products and customers

Question 40

what is a matrix structure?

Answer 40

organizational structure where a company combines two structures to organize itself. Typically, a functional structure is combined with a product/service, customer, or geographical structure. Having a matrix structure can be very cost efficient, however it can also add complexity to the organization. In this structure is very important to set clear roles and responsibilities for every team member to maintain accountability for decisions that are made. This structure might work well for a large company where interdependence between cross-functional teams is essential for innovation and success.

Question 41

what are the advantages of a matrix structure?

Answer 41

- Improves organizational collaboration and flexibility to create a culture of knowledge-sharing and innovation - Opportunities to learn new skills and develop career across the organization - Efficient way for organization to use its human resources and save costs

Question 42

what are the disadvantages of a matrix structure?

Answer 42

- Can create complexity relating to reporting relationships - Additional time may be required for coordinating activities - More complex to monitor and control - Can create accountability issues if roles and responsibilities are not clearly defined

Question 43

what is a contribution margin?

Answer 43

is the difference between revenue and variable costs. The term derives its name from the idea that “contribution” represents the amount of revenue that contributes to the coverage of fixed costs.

Question 44

what are tracible fixed expenses?

Answer 44

are costs which directly relate to a specific segment. These expenses would not be incurred if the segment did not exist. For example, advertising costs for products of a specific segment would be traceable to this segment. If this segment (and products sold within the segment) did not exist, these advertising costs would not be incurred.

Question 45

what are common fixed expenses?

Answer 45

are costs that are incurred by a company to support all segments but are not traceable to any specific segments. These expenses would continue to be incurred even if the company eliminated a segment. For example, administrative salaries, rent, utilities, and insurance are typically considered common fixed expenses.