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AFM 182 > Chapter 4: Corporate Governance & Organizational Structure > Flashcards

Chapter 4: Corporate Governance & Organizational Structure Flashcards

Define corporate governance and the role of a board of directors Describe corporate governance as a system for public companies Describe corporate governance items that a public company needs to consider Describe important factors that management should consider when establishing an organizational structure Identify common organizational structures, including advantages and disadvantages of each Differentiate between traceable fixed costs and common fixed costs Prepare a segmented contribution m

1
Q

What is corporate governance

A

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

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2
Q

what should companies aim to do in terms of making a good corporate system

A
  • Companies should aim to create a good corporate system to set rules, practices, and processes
  • System should encourage employees to comply with the laws & regulations & have them act ethically & care about the planet & positively contributing to the communities
  • Tone from the top
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3
Q

what are board of directors

A
  • A group of highly qualified and experienced individuals that serve as advisors and provide oversight for public companies
  • They influence corporate governance
  • Usually have a chair of the board
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4
Q

who is a Chair of the Board (COB)

A
  • An individual that holds the most power and authority on the board of directors
  • Selected by board members
  • Don’t have more votes than board members
  • Main responsibility is to set agendas for the board meetings
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5
Q

private companies dont need a BOD, but what are reasons they do have one

A
  • Boards improve a company’s governance structure & give advice for private companies as they grow into larger businesses
  • If a private company is getting ready for an IPO, they put a formal independent BOD to improve their level of corporate governance before the IPO
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6
Q

what does a BOD look like in a private company

A

The owner or majority of shareholders can put a board in place and appoint members to its board

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7
Q

is it common for private companies to have a BOD

A

Many private companies have an advisory board or formal BOD

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8
Q

how are BODs formed for public companies

A

Selected by shareholders (votes)
- Majority of board members need to be independent
- BOD should have an odd number of people - to have majority when voting

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9
Q

what does it mean for board members to be independent

A
  • No material relationship with the company (No significant ownership of the company/or any)
  • Not apart from the company’s executive team
  • Not involved with the day-to-day operations of the company
  • Free from any obligation/interest in the company they’re serving in fact & appearance
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10
Q

what is the responsibility of BODs

A

BOD (whether for private or public companies) has the responsibility to make sure the senior management team makes decisions that will maximize the value of shares

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11
Q

who are senior management

A

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

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12
Q

what does senior management do

A
  • When major business decisions need to be made, senior management brings recommendations to the board, and board votes to accept or reject the decisions
  • Main objective of the board: oversight & responsibility to ensure the senior management team is acting in the best interests of the shareholders
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13
Q

how many members should BODs have for smaller companies

A
  • The more a company grows, the more they need corporate governance
  • Boards are usually small with 3-6 members
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14
Q

how many members should BODs have for larger companies

A
  • Larger public companies would have more board members
  • Having 10 members would be considered a large board
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15
Q

what is the level of corporate governance needed for a start-up private company

A

no BOD

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16
Q

what is the level of corporate governance needed for a growing private company

A

small advisory board

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17
Q

what is the level of corporate governance needed for a small/medium/large private company

A

advisory board or formal BOD (independent)

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18
Q

what is the level of corporate governance needed for a public company (recently issued IPO)

A

Formal BOD (independent)

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19
Q

what is the level of corporate governance needed for a mature public company

A

mature formal BOD (independent)

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20
Q

what is a board committee

A

A smaller group of directors in charge of subcomponents of the overall board responsibilities

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21
Q

do private companies have board committees

A

Private companies that have a BOD can also have board committees

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22
Q

do public companies have board committees

A

Public companies must have board committees

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23
Q

what are common board committees

A

audit and compensation

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24
Q

what is the audit committee

A
  • A major operating committee of the BOD that oversees financial reporting and disclosure
  • Every public company should have this committee
  • ensures the integrity of financial reporting and corporate governance of the company
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25
Q

what are the requirements of an audit committee

A
  • At least 3 members in the committee need to be independent and financially literate
  • Independent: no material relationship with the company, or other relationship that the board could see as bias
  • Financial literacy: being able to read and understand financial statements that are comparable and contain complex accounting issues
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26
Q

what is the compensation committee

A

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

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27
Q

what if companies need more board committees

A

Other committees are formed as needed when companies mature

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28
Q

why should a company have good corporate governance system

A

for shareholders to think that the company has their best interests at heart

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29
Q

what are the key groups in the corporate governance system

A
  • Board of Directors
  • CEO & Senior Management
  • External Stakeholders
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30
Q

what do BODs do

A
  • Led by the chair of the board
  • Selected by shareholders to represent them in the decision-making process
  • Selected by a vote that happens during the Annual General Meeting (AGM)
  • They need to hire the right CEO to lead the company
  • If the CEO isn’t good, they will replace the CEO with a better one
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31
Q

what does the CEO & senior management do

A
  • CEO hires senior management team to help lead the company
  • Senior management team sets corporate strategy
  • Also does day-to-day operations
  • CEO & senior management periodically (usually quarterly) updates BOD
  • Board votes to approve or reject major business decisions
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32
Q

who are external stakeholders and what does senior management do for them

A
  • Investors
  • Those that bought shares of the company
  • Senior management uses the capital (cash) from the shares to grow the company
  • Shareholders expect accurate and transparent financial reporting on a quarterly & yearly basis to understand the company’s performance and operations
  • Senior management gives financial statements & MD&A to investors for them to understand company performance
  • Public company must file AIF
  • Senior management needs to give transparent reports, give good results, and avoid surprising investors to attract more
  • If investors expect the company to do well, but they don’t, shareholder confidence is loss
  • If this continues to happen, it can reduce investors = lower share price
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33
Q

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

A

Discussion document that shows quarterly and yearly financial statements that explain the company’s performance in more detail

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34
Q

what is an Annual Information Form (AIF)

A

Disclosure document that talks about relevant background information about current operations and future plans

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35
Q

what is the relationship between BOD and CEO & senior management

A
  • BODs provide oversight for the business & hire/fire the CEO
  • CEO & senior management give BOD period updates and strategic direction
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36
Q

what is the relationship between BOD and external shareholders

A
  • BODs represent shareholders and protect their interests
  • external shareholders select board members (by voting)
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37
Q

what is the relationship between external shareholders and CEO & senior management

A
  • external shareholders give CEO & senior management capital (cash
  • CEO & senior management provide transparent reporting to shareholders
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38
Q

what are the differences in corporate governance between public and private companies

A
  • Compliance with Securities Regulations
  • Annual General Shareholder’s Meeting (AGM)
  • Management’s Discussion & Analysis (MD&A) & Annual Information Form (AIF)
  • Board of Directors (BOD)
  • Independent Board Members
  • Chair of the Board (COB)
  • Audit Committee
  • Compensation Committee
  • Investor Relations (IR) Team
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39
Q

what are the difference in compliance with securities regulations between public and private companies

A

private: NOT REQUIRED; not listed in stock exchanges
public: MUST comply with regulations

40
Q

what are the difference in annual general shareholder’s meeting (AGM) between public and private companies

A

private: NOT REQUIRED
public: REQUIRED

41
Q

what are the difference in management’s discussion & analysis (MD&A) and Annual information form (AIF) between public and private companies

A

private: NOT REQUIRED, but sometimes done for external stakeholders
public: REQUIRED

42
Q

what are the difference in BOD between public and private companies

A

private: NOT REQUIRED, but often have advisory board of formal BOD
public: REQUIRED

43
Q

what are the difference in independent board members between public and private companies

A

private: NOT REQUIRED, unless getting ready for an IPO
public: REQUIRED; majority must be independent

44
Q

what are the difference in COB between public and private companies

A

private: NOT REQUIRED, but some have them
public: REQUIRED, recommended they are independent

45
Q

what are the difference in audit committees between public and private companies

A

private: NOT REQUIRED, unless getting ready for an IPO
public: REQUIRED; at least 3 independent & are financially literate

46
Q

what are the difference in compensation committees between public and private companies

A

private: NOT REQUIRED
public: RECOMMENDED, to ensure senior management is fairly compensated and retained

47
Q

what are the difference in investor relations (IR) teams between public and private companies

A

private: NOT COMMON; they manage relationships with public investor groups
public: RECOMMENDED, to attract public investments

48
Q

what do public companies need to comply with

A
  • need to comply with the securities regulations they list their stocks on
  • Many requirements and regulations public companies need to comply with = a lot of work to make sure they comply with them
49
Q

who are securities regulators

A

Group of individuals that design policies and regulations public companies must comply with to protect investors that purchase securities (stocks) in capital markets

50
Q

who makes the securities regulations in Canada

A

the Canadian Securities Administrators (CSA) are responsible for making the regulations across the country

51
Q

who’s responsible for securities regulation

A

Securities regulation in Canada is a provincial responsibility (each province has their own regulator)

52
Q

what is an independent director

A

A member on the board of directors who:
1. Don’t have material relationship with the company
2. Not a part of the company’s executive team
3. Not involved with day-to-day operations of the company

53
Q

why is it important to have independent BOD

A

so they make unbiased decisions that can help the company & protect shareholders’ interest

54
Q

who can the non independent BOD members be

A

senior management team

55
Q

can the CEO be the COB

A

If directors have a lot of trust in the company’s CEO, they can make the CEO the COB

56
Q

why is it not the best idea to have the CEO be the COB

A
  • Since BOD can hire and fire the CEO, if the CEO is the COB, it can = conflict of interest
  • Investors will have more confidence in the board’s ability to be objective and represent their best interests if the COB is independent
57
Q

what is Investor Relations (IR)

A
  • Team that is responsible for building strong relationships with investor groups and providing them with transparent and accurate information to keep them well-informed on the company
  • They are important to attract more investors
  • Their job is to “sell” more company shares to investors, so the company has more capital (cash) to grow
58
Q

what is another part of senior management/executive team’s job

A

to put in place an organizational structure that helps the company achieve its goals and objectives

59
Q

what is an organizational structure

A

System that outlines how certain activities (rules, roles, responsibilities) are directed to achieve the goals of an organization

60
Q

what kind of organizational structure does a company want

A
  • an organizational structure that promotes accountability, efficiency, and timely decision-making
  • Better decisions made = stronger performance
  • Most successful companies are organized in ways that = good decision-making at all levels of the company
61
Q

what are different factors that management team needs to consider when making the organizational structure

A
  • Identify key decisions that need to be made for the company to be successful
  • Put high-quality and experienced leaders in positions that require for key decisions, making sure they are responsible and accountable for decisions they made
  • Leaders at various levels of the companies should be able to make decisions for areas they are responsible for while minimizing the need to get many approvals to get a decision
  • Communicate clear policies that outline decisions that need approval/sign-offs from leaders, senior management, and BOD
  • Provide decision makers with timely and accurate data & information to help make informed decisions
  • Provide decision makers with resources to make good decisions (ex. HR, training, systems, data sources, etc.)
62
Q

what is a functional structure

A
  • Organizational Structure that is organized by department
    Ex. Human resources, finance, marketing, etc
63
Q

how does the functional structure work

A
  • there’s a leader for each function that usually has many years of experience working in that field
  • Department leaders report to the CEO
64
Q

what type of companies does the functional structure work best for

A

Structure works for small/medium-sized companies with simple, predictable, and stable business

65
Q

what are advantages of functional structure

A
  • Builds teams with those who are experts in their own fields
  • Facilitates communication within each functional area
  • Reduces function duplication
  • Allows each leader to be accountable & fully responsible for functional decisions
66
Q

what are disadvantages of functional structure

A
  • More limited perspective with the risk of operation in functional “silos”
  • Focus on routine tasks instead of long-term strategy
67
Q

what is a product/service structure

A

Organizational Structure that is organized by the various products/services offered

68
Q

how does the product/service structure work

A
  • In this structure, there’s a leader for each product/service or group of related products/services
  • CEO has executives as part of the top management team that each leads different products/services
69
Q

what type of companies does the product/service structure work best for

A

Structure works for large, dynamic companies with many different products/services that can change and evolve

70
Q

what are advantages of product/service structure

A
  • Each executive owns & has full rights to make decisions for their product/service lines
  • Clear accountability exists by product/service line
  • Increases ability for business to react to fast changes to products/services
  • Creates product/service experts in the organization
  • Can improve product development cycles
71
Q

what are disadvantages of product/service structure

A
  • Can create competition between products/services
  • Can challenge coordination between different products/services to implement best practices
  • Could have duplication & increase in costs since each product/service line needs their own departmental functions
72
Q

what is a customer structure

A

Organizational Structure that is organized by different customer segments

73
Q

how does the customer structure work

A
  • In this structure, there’s a leader for each customer segment
  • CEO has executives for different types of customers
  • Each executive is responsible and fully accountable for the success/failure of attracting new customers and retaining existing ones
74
Q

what type of companies does the customer structure work best for

A
  • Structure works for companies with different customer profiles that have different needs
  • If customers’ demands usually change quickly, this would be best for efficient decision-making
75
Q

what are advantages of customer structure

A
  • Executives own customer strategy & has rights to make decisions for different customer segments
  • Clear accountability by segment
  • Specializes in consumer needs & expectations, making it easier to put customers first
  • Increases ability to react to fast customer changes & demand
76
Q

what are disadvantages of customer structure

A
  • Can create competition between customer segments
  • Can make coordination hard between different customer segments to implement best practices
  • Can cause duplication and increase costs since each customer segment has its own departmental functions
77
Q

what is a geographical structure

A

Organizational Structure that is organized by geographical location

78
Q

how does the geographical structure work

A
  • In this structure, there’s a leader for each geographical segment
  • Each segment acts as a separate business with the ability to make decisions in the area they are working in
  • CEO has different executives that lead distinct geographical markets
  • Each geographical segment have their own local management team
79
Q

what type of companies does the geographical structure work best for

A

Structure works for companies that work in different geographical locations with significant differences in customers, product/services, regulations, suppliers, etc.

80
Q

what are advantages of geographical structure

A
  • Gives local management teams right 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 to react to changes within markets
81
Q

what are disadvantages of geographical structure

A
  • 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
82
Q

what is a matrix structure

A
  • Organizational structure that is the combination of two structures
  • Usually it’s a functional structure combined with another structure
83
Q

how does the matrix structure work

A
  • This structure is cost-efficient but can add complexity
  • Important to set clear roles & responsibilities for every team member to maintain accountability for decisions that are made
84
Q

what type of companies does the matrix structure work best for

A

Structure works for large companies where interdependence between cross-functional teams is essential for innovation and success

85
Q

what are advantages of matrix structure

A
  • Improves organizational collaboration & flexibility to create a culture of knowledge-sharing & innovation
  • Opportunities to earn new skills and develop career across organization
  • Efficient way to use human resources & save costs
86
Q

what are disadvantages of matrix structure

A
  • Makes it hard to determine who to report to
  • Takes up more time to coordinate activities
  • More complex to monitor and control
  • Can be hard to determine who is accountable for something if the roles & responsibilities are not properly defined
87
Q

what is segment financial reporting

A

After deciding an organizational structure, each segment that reports to the CEO prepares their own financial reports to understand the financial performance of each segment

88
Q

what is the purpose of segment financial reporting

A
  • Allows accountability
  • Each executive that leads each segment is responsible for the financial results of their segment
  • Ex. In a geographical organizational structure each executive for each location is accountable for the performance of their geographical segment
89
Q

what is a contribution margin

A

Difference between revenue and variable costs
Is the amount that is left over from revenue to cover fixed costs

90
Q

what is the formula for a regular CM income statement

A

CM - fixed costs = Operating Income/EBIT - interest/taxes/(+) other income = net income (or net loss)

91
Q

how does segmented CM income statements differ from a normal one

A

need to differentiate fixed expenses into traceable & common fixed expenses

92
Q

what are traceable fixed expenses

A
  • Costs that directly relate to a specific segment
  • Are expenses that wouldn’t exist if the segment didn’t exist
  • Ex. Advertising costs for products of a specific segment is traceable to the segment. If the segment didn’t exist, there wouldn’t be these expenses
93
Q

what are common fixed expenses

A
  • Costs that are incurred to support all segments of the company but are not traceable to any specific segment
  • Are expenses that would exist even if a segment was removed
  • Ex. administrative salaries, rent, utilities, insurance
94
Q

what would be the CM income statement be for a company with segments at a company level

A

Total Revenue - Total Variable Expenses = Total Contribution Margin -
Total Traceable Fixed Expenses = Total Segment Operating Income - Common Fixed Expenses = Operating Income (EBIT) - Interest, Taxes, Other Income = Net Income (Net Loss)

95
Q

what would be the CM income statement be for a segment of a company

A

Segment A Revenue - Segment A Variable Expenses = Segment A Contribution Margin - Segment A Traceable Fixed Expenses = Segment A Operating Income

AFM 182 (11 decks)

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