Chapter 7 – The governing body and strategy

Question 1

What is corporate governance?

Answer 1

Corporate governance is the ‘system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors role is to satisfy themselves that an appropriate governance structure is in place’.

Bob Tricker (1984) – ‘if management is about running business, governance is about seeing that it is run properly. All companies need governing as well as managing.’

Question 2

Name the two types of governance structure.

Answer 2

Shareholder primacy theory - focuses on maximising the value of shareholders – critics: inappropriate stewardship, short termism, decline in average holding periods of shares

Stakeholder theory – meet the objectives of everyone that has an interest in the company – companies should act as ‘good corporate citizens’

Question 3

Stakeholders can be further classified as which three categories?

Answer 3

• Internal: owners and employees – those who have a close and dependent relationship with the business and a vested interest in its success
• Market: suppliers and customers – those who have a direct trading relationship with the business
• External: all other stakeholders of the business with either direct (e.g. banks) or indirect (e.g. government, environmental) relationships with and expectations from the business

Question 4

Non-commercial organisations e.g. charities and public sector will often involve their stakeholders to a much greater extent than commercial organisations - what is the issue with this?

Answer 4

can create many conflicts, therefore conflict register required

Question 5

Name different types of organisational risk?

Answer 5

• Financial risk – gearing – combination of shareholder equity and debt – high geared = higher debt > insolvency > reputational damage – low geared = higher equity > market reaction to announcements
• Operational risk – Volkswagen emissions falsifications, KFC (2018) unable to provide chicken for a few weeks
• Competition risk – mitigation needed e.g. Tesco/Asda/Sainsburys price matching Aldi/Lidl
• Environment risk
• People risk – behaviour and words of the leaders (and employees) – policies on social media/comm outside

Question 6

According to Principle P - ‘the board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives.’ - it is generally accepted that any such control process will include which three dimensions?

Answer 6

1. Identification: how do we know what the risks are and how frequently are we able to perceive new or different risks?
2. Evaluation: the establishment of potential impact from the alignment of probability and materiality
3. Mitigation: the progress of measures taken to control and reduce potential impact while recognising that risk is still a necessary and intrinsic part of the strategic growth of an organisation

Question 7

Name some different tools to manage risks?

Answer 7

• KPIs – evaluate the success of an organisation or of a particular activity in which it engages
• Risk register – should be a living and vibrant tool – to be reported regularly
• Risk matrix – analyse the severity of a risk against its probability – RAG ratings
• Balanced scorecard – turns a company’s strategy into a set of goals and performance indicators by looking at four perspectives: Financial, Learning and growth, internal business and customers