Chapter 7

Question 1

7.1: Define the difference between the governance oversight of an organisation and the operational oversight of an organisation, suggesting which organisational roles might be involved in each.

Answer 1

Governance oversight is the accountability for the satisfaction of stakeholder expectations. The board of directors are
directly accountable to the shareholders and stakeholders for the governance, but their effectiveness will be determined
by the understanding and actions of people throughout an organisation. Non-executive directors (NEDs) have a
particular focused governance role with no operational involvement.

Operational oversight is the accountability for the delivery of successful business process, transforming inputs into
saleable outputs. Executive directors and management are accountable to the board of directors for the running of the
operation. Executive directors have both a governance and an operational accountability.

Question 2

7.2: Suggest three different dimensions of the shareholder and stakeholder models of governance

Answer 2

Shareholder model of governance:

1. focus on financial return for investors
2. likely to focus on the shorter term
3. perceived success driven by market reputation as well as by the direct success of the organisation itself.

Stakeholder model of governance:

1. different stakeholders will have differing value output expectations
2. likely to hold a longer-term focus
3. the organisation will help to determine the acceptable output success levels.

Question 3

7.3: Identify the input (stake) in an organisation and the differing output expectations of four different stakeholder groups

Answer 3

Shareholders (owners) will input their own money into the organisation and will expect a return through dividend and/or
an increase in the value of their shares.

Employees give their time and expertise to an organisation and in return will expect remuneration, sustainability of
employment and other benefits as appropriate within different organisations.

Customers will buy from the company, paying for the receipt of goods or services; in return they will expect quality, safety
and that the product or service at least matches their expectations.

Local and national government will provide the right to operate and the legal and economic infrastructure; in return they
will expect compliance with laws and the payment of taxes as appropriate.

Question 4

7.4: Differentiate between risk appetite, risk tolerance and risk capacity.

Answer 4

Risk appetite defines the approach of an organisation to risk. Where do they sit on the spectrum that exists between riskaversion and risk-seeking? How hungry are they to risk the assets of the organisation?

Risk tolerance defines the lower and upper level of risk that can be taken by an organisation, irrespective of its risk
appetite. The tolerance suggests the limits beyond which it would be dangerous for an organisation to go, under normal operating conditions.

Risk capacity is the maximum level of risk that can be taken, and often that is required to be taken, to achieve the intended strategic goals; it might also describe the difference between the actual risk being taken and the higher or lower levels of tolerance.