The governing body and strategy Flashcards
CORPORATE GOVERNANCE AND STRATEGY - THE GOVERNANCE MATRIX
There is always an interaction between the governance of an organisation and its operation. How could this be displayed?
What is the differentiation between governance and operational management?
As a Venn diagram = ‘operational management’ and ‘governance’ overlap with executive directors in the intersection, NEDs within governance and managers within operational management (Cosec always sits in intersection)
Governance = involves responsibility and accountability for the satisfaction of stakeholder expectations
Operational management = involves responsibility and accountability for the delivery of process
CORPORATE GOVERNANCE AND STRATEGY - THE GOVERNANCE MATRIX
In the development of strategy, what is the biggest differentiator between the roles of those in operational management and governance?
What will operational management have responsibility and accountability for? (4)
What will those empowered with governance have responsibility and accountability for? (3)
Timeframe involved
Operational management have responsibility and accountability (to those empowered with governance) for (1) the short- to medium-term timeframe of strategy, (2) the action required to fulfil the strategic objectives, (3) the delivery of the perceived strategic outcomes, and (4) a review of the effectiveness and sustainability of the required strategic approach
Those empowered with governance will have responsibility and accountability (to the ultimate owners) for (1) the medium- to long-term timeframe, (2) the establishment of strategic objectives, and (3) control to ensure that the ultimate strategic objectives are satisfied
CORPORATE GOVERNANCE AND STRATEGY - STRATEGY, AT THE HEART OF GOVERNANCE
A core focus of effective governance is the alignment of strategy with what? (2)
What does this require those empowered with governance to do?
What does this align to? (Need to understand the realities of what?)
risk and control as stated in Principle O of 2018 UK CG Code = strategy, risk, and control are in a triangulation
Those empowered with governance need to understand the strategic objectives of the organisation, the risks associated with the achievement of those objectives and how to then control and mitigate the identified risks.
The need to understand the realities of ‘today’ as the starting point for the development of our vision of the ‘future’
= all strategy is a leap into the unknown and therefore will involve at least a degree of risk
CORPORATE GOVERNANCE AND STRATEGY - TYPES OF GOVERNANCE STRUCTURE
What are the 2 models/approaches to governance?
What factor will influence which one is used?
Which one does the UK use?
Under this, what 6 things must UK boards have regard to? (S.172)
A stakeholder approach (stakeholder model) and a shareholder approach (ownership model)
type and size of organisation:
(1) shareholder model usually controlled by a unitary board of directors acting on behalf of shareholders (UK and USA)
(2) stakeholder model often associated with 2-tier board system (supervisory board and management board) (Germany and Japan)
s.172 CA2006 has shifted UK corporate economy from a shareholder to a stakeholder approach
Board must have regard to:
1. The likely long term consequences
2. Employees’ interests
3. The need to foster business relationships with suppliers, customers and others
4. The impact of operations on the environmental and community
5. The desirability of maintaining a reputation for high standards of business conduct
6. The need to act fairly as between members
CORPORATE GOVERNANCE AND STRATEGY - TYPES OF GOVERNANCE STRUCTURE
What are the 6 differences between the shareholder model of governance and the stakeholder model of governance?
- Wealth
Shareholder = primary interest of shareholders is financial, and wealth is created for them through the organisation (have a priority claim on the wealth of the organisation).
Stakeholder = wealth is created by and for a variety of different stakeholders, each of whom has a claim to an equitable proportion of the wealth of the organisation. - Investors (and returns)
Shareholder = investors are more likely to receive a higher rate of return through dividend and/or increase in share value.
Stakeholder = the return to investors is likely to be diluted by the wider interests of differing stakeholders. - Timeframe
Shareholder = Shorter-term perspective = ‘cash-in-hand’
Stakeholder = longer-term perspective - Decision-making
Shareholder = focused DM
Stakeholder = slower DM with wider stakeholder involvement. - Objectives
Shareholder = focused objectives.
Stakeholder = breadth of differing strategic objectives. - Return
Shareholder = focus on market return expectations
Stakeholder = development of own levels of acceptable stakeholder returns.
CORPORATE GOVERNANCE AND STRATEGY - TYPES OF GOVERNANCE STRUCTURE
What are the benefits of the shareholder model for investors (2), the economy (2), and managers(1)?
What are the disadvantages for investors (1) and the economy (2)?
BENEFITS
For investors = (1) higher rate of return, (2) reduced risk
For the economy = (3) encouragement of entrepreneurship, and (4) encouragement of inward investment
For management = (5) independence
DISADVANTAGES
For investors = (1) difficult to monitor management
For the economy = (2) risk of short-termism, and (3) risk of senior management greed
CORPORATE GOVERNANCE AND STRATEGY - TYPES OF GOVERNANCE STRUCTURE
What are the benefits of the stakeholder model for investors (2) and stakeholders (1)?
What are the disadvantages for management (3) and the economy
(1)?
BENEFITS
For investors = (1) closer monitoring of management, and (2) longer-term decision horizons
For stakeholders = (3) deterrent to high-risk decision
DISADVANTAGES
For management = (1) potential interference, (2) slower decision-making, and (3) reduced independence
For the economy = (4) reduced financing opportunities for growth
STAKEHOLDER EXPECTATIONS - TYPES OF STAKEHOLDERS
What is a stakeholder?
What do each of the following stakeholders provide for a company, and what do they expect to receive in return:
1. Members
2. Employees
3. Suppliers
4. Customers
5. Community and environment
6. Government
What are the primary (1) and secondary (2) expectations of these differing groups as identified by Lynch (2015)?
stakeholder = anyone who has an interest or concern in the business, is rightly expecting some form of return, response or action from the business, and if this is not received has the ability to disrupt the business in some manner
Members = invest funds in shares to obtain voting rights, dividends, and increase in share value. (1) financial return, (2) added value
Employees = input their time, experience, knowledge, and labour in return for appropriate remuneration, safe working conditions, and workplace benefits. (1) pay, (2) work satisfaction/training
Suppliers = provide supplies to the business in return for payment and potential for continuity of supply. (1) payment, (2) LT relationships
Customers = purchase products/services in return for satisfaction of their perceived expectations. (1) supply of goods and services, (2) quality
Community and environment = in return for the right to operate, the business will need to comply with national and local laws and CSR expectations (local/national authority could refuse to licence business operations) (1) safety and security, (2) contribution to community
Government = (1) compliance (2) increased competition
STAKEHOLDER EXPECTATIONS - STAKEHOLDER MAPPING
The levels of power, influence and strategic impact of different stakeholder groups can be mapped to help to identify what?
Johnson (2017) suggested that the 2 core dynamics for mapping are what?
Explain his table.
identify when and where a business needs to consider the potential impact of not satisfying the stakeholder expectations
(1) the ability to disrupt, and (2) the levels of interest that the stakeholder would take in its ‘stake’
Stakeholder mapping = where low power to disrupt the business and:
(1) low interest in the business = minimal effort require by the organisation
(2) high interest in the business = stakeholders must be kept informed
Stakeholder mapping = where high power to disrupt the business and:
(1) low interest in the business = stakeholders must be kept satisfied
(2) high interest in the business = these are the key players
STAKEHOLDER EXPECTATIONS - STAKEHOLDER MAPPING
How can stakeholders be classified? (3)
Why is it important for those empowered with governance to take into consideration the needs and expectations of the differing stakeholder groups?
- 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.
Required under s.172 CA2006 and companies defined as ‘large’ under the Act are required to explain in their annual directors’ report how they have fulfilled their requirements under this section, and how they have actively considered the differing demands of their stakeholders
RISK, REPUTATION, AND STRATEGY - THE MEANING OF RISK APPETITE
What is risk appetite?
How may someone who is risk averse behave? What is the downside?
How may someone who is a risk-seeker behave? What is the downside?
What is risk capacity?
What is risk tolerance?
Risk appetite = defines the approach of an organisation to risk. Where do they sit on the spectrum that exists between risk-aversion and risk-seeking?
A RISK-AVERSE person looks for certainty of outcome and is therefore prepared to sacrifice opportunities that might exist for change.
(Risk aversion can often lead to an intolerance of challenge and therefore an
overreaction to any threat to the status quo)
A RISK-SEEKING person accepts that life is full of options and uncertainty, and such a person has confidence in using their abilities to counter whatever they may face.
(Risk seeking can often lead to a dangerous dismissal of the realities that confront a person or organisation)
Risk capacity = 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 describe the difference between actual risk being taken and the higher or lower levels of tolerance.
Risk tolerance defines the lower and upper level of risk that can be taken by an organisation, irrespective of its risk appetite = suggests the limits beyond which it would be dangerous for an organisation to go, under normal operating conditions
RISK, REPUTATION, AND STRATEGY - THE MEANING OF RISK APPETITE
What is a risk-tolerance matrix?
What is a problem with a risk-tolerance matrix?
What is risk intelligence as suggested by Evans (2012)?
He suggests that anyone involved in the assessment of risk must develop what?
Risk-tolerance matrix = risks are plotted on a graph (relative impact on the y-axis and relative likelihood on the x-axis) = acceptable levels of tolerance are measured from the interaction of relative impact and relative likelihood
Problem = the origin of the criteria by which individual risks are judged, and therefore their position on the chart = judgement may be biased
Risk intelligence = operates in the area that exists between certain knowledge and complete ignorance = our job to find our place along this momentum for each risk scenario faced
develop the ability to gauge the limits of their own knowledge
RISK, REPUTATION, AND STRATEGY - PERSPECTIVES OF DIFFERENT TYPES OF ORGANISATIONAL RISK
What are the 5 main types of risk?
ENVIRONMENT RISK
A range of reputational risks could be aligned against many aspects of environmental risk. Name an example.
How can this be mitigated?
- Financial
- Operational
- Competition
- Environment
- People
A multinational organisation, with sites in many countries, is potentially open to the reputational risk of using transfer pricing to aggressively minimise its taxation, ‘fixing’ its tax affairs e.g., Apple and Amazon
The mitigation is to promote and adhere to clean, transparent operations
RISK, REPUTATION, AND STRATEGY - PERSPECTIVES OF DIFFERENT TYPES OF ORGANISATIONAL RISK - OPERATIONAL RISK
Reputational damage can potentially affect what in terms of operations?
How can the risk of loss of reputation be mitigated from both perspectives?
Name 3 examples of reputational damage.
potentially affect both ends of the operational supply chain = (1) customers buy based upon perceived quality or product/service which is closely aligned to company’s reputation, and (2) suppliers are often keen to be associated with a company that has a positive reputation AND company can leave itself open to reputational damage if it fails to secure its supply base and cannot complete production
Customer perspective = use of customer-relationship management (CRM) systems, customer surveys and feedback and other such tools
Supplier perspective = sensible, calculated terms and a choice of potential suppliers
Examples of reputation damage from customer perspective = (1) Volkswagen emissions falsification and the (2) Starbucks corporation tax coverage
Examples of reputation damage from supplier perspective = KFC mishandled a strategic switch of logistics suppliers and was unable to serve chicken for a few weeks
RISK, REPUTATION, AND STRATEGY - PERSPECTIVES OF DIFFERENT TYPES OF ORGANISATIONAL RISK - COMPETITION RISK
Why do all organisations face competition?
When can reputational damage arise? (2)
How can this be mitigated?
Name an example of mitigation in this area.
If a product or service is selling and generating profit/wealth, then other organisations will see an opportunity to compete and try to gain a share in that market.
can arise from (1) negative media reporting of the demise of a company’s share of a market, and (2) from competitors letting it be known that an alternative exists.
Mitigation can be in the form of assertive promotion or advertising, or a reliance on existing reputation
Example = in reaction to the loss of food-retail market share by Tesco/Asda/Sainsbury to Aldi/Lidl, mitigation seen through marketing campaigns asserting difference in quality and price matches
