Chapter 7 - The governing body and strategy

Question 1

Corporate governance and strategy

What is corporate governance?

Answer 1

The conduct of senior officers and the structure, direction, and control of an organization, setting objectives, and regulating relationships between management, the board, and shareholders.

Question 2

Corporate governance and strategy

What is the UK Corporate Governance Code?

Answer 2

A shareholder-led code guiding effective board practices based on principles like accountability, transparency, integrity, and sustainable success.

Question 3

Corporate governance and strategy

Name the five main sections of the UK Corporate Governance Code.

Answer 3

Leadership, Effectiveness, Accountability, Remuneration, and Relations with Shareholders.

Question 4

Corporate governance and strategy

What is the role of non-executive directors (NEDs)?

Answer 4

To bring independence, scrutinize management performance, ensure financial integrity, set executive remuneration, and support succession planning.

Question 5

Corporate governance and strategy

Define the shareholder model of governance.

Answer 5

A model where shareholders have the primary right to the organization’s wealth, common in the UK and USA, focusing on returns and reduced risk for investors.

Question 6

Corporate governance and strategy

Define the stakeholder model of governance.

Answer 6

A model where wealth is distributed among various stakeholders for long-term benefit, more common in Germany.

Question 7

Corporate governance and strategy

What are the advantages of the shareholder model?

Answer 7

Higher returns, reduced risk, entrepreneurship, and inward investment.

Question 8

Corporate governance and strategy

What are the disadvantages of the shareholder model?

Answer 8

Risk of short-termism, top management greed, and difficulty in monitoring management.

Question 9

Corporate governance and strategy

What are the advantages of the stakeholder model?

Answer 9

Long-term decisions, closer management monitoring, and deterrence of high-risk choices.

Question 10

Corporate governance and strategy

Describe the pluralistic governance model.

Answer 10

An approach where the organization is seen as belonging to all stakeholders, focusing primarily on employees’ interests, commonly seen in Japan.

Question 11

Corporate governance and strategy

What is Principle O of the 2018 UK Corporate Governance Code?

Answer 11

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.

Question 12

Stakeholder Expectations

What is a stakeholder?

Answer 12

Anyone with an interest or concern in a business who expects a return, response, or action, and has the ability to disrupt the business if their needs aren’t met.

Question 13

Stakeholder Expectations

What are the three categories of stakeholders?

Answer 13

Internal (human resources), Connected (financially linked), and External (other interested parties).

Question 14

Stakeholder Expectations

What is stakeholder mapping?

Answer 14

A tool to assess stakeholders based on their level of power and interest in the organization, guiding how to manage relationships with them.

Question 15

Stakeholder Expectations

According to Mendelow’s matrix, who are “Key Players” in stakeholder mapping?

Answer 15

Stakeholders with high power and high interest, such as major clients or investors, who must be fully engaged in strategy decisions.

Question 16

Stakeholder Expectations

How should stakeholders with high power but low interest be managed?

Answer 16

They should be kept satisfied to prevent them from becoming more involved in strategy, like large institutional shareholders.

Question 17

Stakeholder Expectations

Describe the best approach for stakeholders with low power but high interest.

Answer 17

Keep them informed, as they may influence powerful stakeholders through channels like lobbying; examples include community representatives.

Question 18

Stakeholder Expectations

What type of effort is needed for stakeholders with low power and low interest?

Answer 18

Minimal effort, as they have limited influence and interest; part-time staff often fall into this category.

Question 19

Stakeholder Expectations

List some internal sources of stakeholder power.

Answer 19

Hierarchy and status, informal relationships, control of resources, knowledge or skills, and decision-making authority.

Question 20

Stakeholder Expectations

List some external sources of stakeholder power.

Answer 20

Control over resources, involvement in strategic processes, knowledge, external dependencies, social position, and legal rights.

Question 21

Stakeholder Expectations

Why do non-commercial organizations engage stakeholders more extensively

Answer 21

Due to social or public missions, which strengthens community ties but may also restrict strategic growth due to extensive involvement in decision-making.

Question 22

Stakeholder Expectations

What is the significance of stakeholder analysis?

Answer 22

To recognize ongoing forces impacting the organization and its stakeholders, such as laws, best practices, societal expectations, and visibility.

Question 23

Stakeholder Expectations

How does societal expectation impact an organization?

Answer 23

Organizations are expected to align with societal values, and failure to do so can lead to media criticism and reputational damage.

Question 24

Stakeholder Expectations

What is the role of visibility in stakeholder relations?

Answer 24

Determining what information to share publicly can influence demands on governance and impact the organization’s transparency and reputation.

Question 25

Risk, reputation and
strategy

What is risk in the context of risk management?

Answer 25

Risk is the combination of the likelihood of an event occurring and its consequences, which can be positive or negative.

Question 26

Risk, reputation and
strategy

How does the UK Corporate Governance Code define risk management in relation to strategy?

Answer 26

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.

Question 27

Risk, reputation and
strategy

What are the three aspects of risk management in the governance context?

Answer 27

Identification (knowing current and emerging risks),
Evaluation (assessing risk size), and Mitigation (controlling or reducing impact).

Question 28

Risk, reputation and
strategy

What is ‘risk appetite’?

Answer 28

The level of risk an organization is willing to accept to achieve its goals.

Question 29

Risk, reputation and
strategy

Define ‘risk capacity’ and ‘risk tolerance’.

Answer 29

Risk capacity is the maximum risk a company can bear without financial instability, and risk tolerance is the risk level the board permits.

Question 30

Risk, reputation and
strategy

List different types of organizational risk.

Answer 30

Financial, Operational, Competition, Environmental, People, and Reputation risks.

Question 31

Risk, reputation and
strategy

What is a risk register?

Answer 31

A formal list that prioritizes organizational risks, notes responsible parties, and tracks actions, helping in decision-making and control analysis.

Question 32

Risk, reputation and
strategy

What is a risk matrix?

Answer 32

A tool that assesses risk by comparing the likelihood of an event to its severity, helping in risk categorization and management.

Question 33

Risk, reputation and
strategy

Define reputation risk.

Question 34

Risk, reputation and
strategy

Answer 34

The risk of losing business due to the organization’s character or quality being questioned, affecting stakeholder trust.

Question 35

Risk, reputation and
strategy

What are key performance indicators (KPIs) in risk management?

Answer 35

Measurable factors that track progress on objectives, ensuring actions are taken to mitigate risk.

Question 36

Risk, reputation and
strategy

What are the core requirements of KPIs for risk management?

Answer 36

Clearly defined measures, accurate and current data, strategic relevance, and actionable outcomes.

Question 37

Risk, reputation and
strategy

What are the three relationship-based capabilities for competitive advantage, according to John Kay?

Answer 37

Architecture (connections with stakeholders), Reputation (brand trust), and Innovation (industry-leading advancements).

Question 38

Risk, reputation and
strategy

What are the types of risks that may impact an organization’s reputation?

Answer 38

Economic, Natural, Operational, People, Governance, and Human risks.