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afm 182 > unit 4 | corporate governance & organizational structures > Flashcards

unit 4 | corporate governance & organizational structures Flashcards

1
Q

Corporate Governance

A

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

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2
Q

Another phrase to describe corporate governance

A

Tone from the top

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3
Q

Board of Directors

A

A group of highly qualified & experienced individuals that serve as advisors & provide oversight for public companies

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4
Q

How is BOD formed?

A

Selected by shareholders (vote)

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5
Q

Examples of BOD

A

Retired CEO, CFO, senior management team, senior executive

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6
Q

What does a BOD do for a company?

A

Objective: oversight & responsibility to ensure the senior management team is acting in the best interest of the shareholders
- Improves a company’s governance structure

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7
Q

Chair of the Board (COB)

A

An individual that holds the most power & authority on the BOD
- Voted by BOD
- Sometimes also CEO > conflict of interest

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8
Q

Senior Management

A

A group of executives that lead a company’s day-to-day operations & set corporate strategy

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9
Q

Senior Management’s mission

A

Makes decisions that will maximize the share value of a company

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10
Q

What does SM do

A
  • Introduces recommendations to the board → board members vote to accept/reject
  • Attracting investors → provides transparent reports, delivers good results & avoids surprising investors
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11
Q

Board Committees

A

A smaller group of directors that are in charge of sub-components of the overall board responsibilities
- Optional for private, required for public

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12
Q

Audit Committee

A

Oversees financial reporting & disclosure (major committee)

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13
Q

Compensation Committee

A

Oversee & determine how much the company should pay senior management

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14
Q

How does BOD come to be and why?

A

Board members are selected by shareholders to represent them in a company’s decision-making process

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15
Q

Annual General Meeting (AGM)

A

shareholder vote for board members

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16
Q

Who does BOD hire?

A

The right CEO to lead the company

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17
Q

Who does CEO hire?

A

CEO hires a senior management team to lead the company

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18
Q

What does CEO & SM do for the BOD?

A

CEO & SM team provide periodic (quarterly) updates to BOD

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19
Q

Management’s Discussion & Analysis (MD&A)

A

A discussion document that accompanies quarterly & yearly FS to explain a company’s performance in greater detail

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20
Q

Who is MD&A made for?

A

Provided to investors by SM team

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21
Q

Annual Information Form (AIF)

A

Disclosure document that discusses relevant background information regarding the company’s operations & its future plans

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22
Q

Difference b/w Private & Public: Compliance w/ Securities Regulations

A

Private: Not required → not listed in stock exchanges

Public: Must comply with regulations

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23
Q

Difference b/w Private & Public: Annual Greeting Shareholder’s Meeting (AGM)

A

Private: Not required

Public: Required

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24
Q

Difference b/w Private & Public: Management’s Discussion & Analysis (MD&A) & Annual Information Form (AIF)

A

Private: Not required → some prepare for external stakeholders (bondholders, banks)

Public: Required

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25
Q

Difference b/w Private & Public: Board of Directors

A

Private: Not required → often have an advisory board/formal board of directors

Public: Required

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26
Q

Difference b/w Private & Public: Independent Board Members

A

Private: Not required → unless is getting ready to IPO

Public: Mandatory → majority of directors must be independent

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27
Q

Difference b/w Private & Public: Chair of the Board

A

Private: Not required → some do have a board with a chair

Public: Required → only recommended for the COB to be an independent director

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28
Q

Difference b/w Private & Public: Audit Committee

A

Private: Not required → unless is getting ready to IPO

Public: Required → at least 3 independent directors that are financially literate

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29
Q

Difference b/w Private & Public: Compensation Committee

A

Private: Not required → some do have a board with a chair

Public: Recommended to ensure senior management is compensated fairly & is retained (disclosure)

30
Q

Difference b/w Private & Public: Investor Relations (IR) Team

A

Private: Not common as IR teams manage relationships with public investor groups

Public: Recommended to attract public investments (sell company shares to public)

31
Q

Securities Regulators

A

A group of individuals responsible for designing policies & regulations that public companies must comply with to protect investors that purchase securities (shares or stocks) in capital markets

32
Q

Canadian Securities Administrators (CSA)

A

Responsible for developing a harmonized approach to securities regulation across the country

33
Q

Independent Director

A

A member of the BOD who:
1. Do not have a material relationship with the company
2. Is not part of the company’s executive team
3. Is not involved with the day-to-day operations of the company

“Free of any obligations to the company”

34
Q

Why is it important for a director to be independent?

A

Objective perspective that benefits the company & protect shareholder’s interests

35
Q

Investor Relations (IR) Team

A

Responsible for building strong relationships with investor groups & providing them with transparent & accurate information to keep them well-informed on the company

36
Q

Why is IR team important?

A
  • Critical to attract additional investors
  • “Sell” company shares to investors to get capital for growth
37
Q

Organizational Structure

A

A system that outlines how certain activities are directed to achieve the goals of an organization

38
Q

Mission of an organizational structure

A

Should promote accountability, efficiency, & timely decision-making
- Give rules, roles, responsibilities

39
Q

Who establishes organizational structures?

A

Established by senior management team

40
Q

Types of organizational structures

A
  • Functional
  • Product/Service
  • Customer
  • Geographical
  • Matrix
41
Q

Effective Organizational Structures:

A
  1. Identify key business decisions for success
  2. Place high-quality & experienced business leaders in key roles & provide them with appropriate decision-making autonomy
  3. Communicate clear policies (ie. rules) that outline decision-making process
  4. Provide decision-makers with timely & accurate data & information & other resources to make good decisions
42
Q

Functional Structure

A

An organizational structure where a company organizes itself by department (HR, Finance, Marketing)
- Leader for each function (subject-matter expert)

43
Q

Functional Structure example companies

A

Starbucks, Amazon, Apple

44
Q

When is a functional structure suitable for a company?

A

Work for small or medium-sized company with relatively simple, predictable, & stable business

45
Q

Advantages of functional structure

A
  • Builds a team of subject-matter experts in their respective field
  • Facilitates communication within each functional area
  • Reduces function duplication within the company
  • Enables each leader to be accountable & fully responsible for functional decisions
46
Q

Disadvantages of functional structure

A
  • More limited perspective with the risk of operating in functional ‘silos’ → working in isolation from each other
  • Focus on routine tasks instead of long-term strategy
47
Q

Product/Service Structure

A

An organizational structure where a company organizes itself by the various products or services it offers
- Leader for each product/service or group of related product/service

48
Q

P/S Structure example companies

A

IKEA, Tech field companies

49
Q

When is a P/S structure suitable for a company?

A

Work well for a large dynamic company with many distinct products/services that are subject to change & evolve

50
Q

Advantages of P/S structure

A
  • Each executive owns & has full autonomy to make decisions for their product/service lines
  • Clear accountability exists by product/service line
  • Increases ability for business to react to rapid changes to products or services
  • Creates products/service experts within the organization
  • Can improve product development cycles
51
Q

Disadvantages of P/S structure

A
  • May create competition between products/services
  • May challenge coordination between different products/services to implement best practices
  • Could cause duplication & increase costs as each product/service line may have their own departmental functions (each department needs a marketing team to sell their products/services)
52
Q

Customer Structure

A

An organizational structure where a company organizes itself by different customer segments
- Leader for each customer segment
> Each leader is responsible & fully accountable for the success/failure of attracting new customers & retaining existing customers

53
Q

Customer Structure example companies

A

Hospital, Specialist/health-care products, pharmaceutical companies

54
Q

When is a customer structure suitable for a company?

A

Work well in companies with significantly different customer profiles which have distinct customer needs

55
Q

Advantages of customer structure

A
  • Executives own customer strategy & have autonomy to make decisions for different customer segments
  • Clear accountability by customer segment
  • Specializes in consumer needs & expectations, making it easier to implement a customers-first approach
  • Increases ability for business to react to rapid customer changes & demands
56
Q

Disadvantages of customer structure

A
  • May create competition between customer segments
  • May challenge coordination between different customer segments to implement best practices
  • Could cause duplication & increase costs as each customer segment may have their own departmental functions (each segment needs a pricing, marketing, & sales team)
57
Q

Geographical Structure

A

An organizational structure where a company organizes itself by geographical location
- Leader for each geographical segment & each segment acts as a separate standalone business with autonomy to make decisions for the geography they oversee

58
Q

Geographical Structure example companies

A

MCD, auto companies

59
Q

When is a geographical structure suitable for a company?

A

Work well in companies that operate in various geographical locations with significant differences in terms of customers, products/services, regulations, suppliers, etc

60
Q

Advantages of geographical structure

A
  • Gives local management teams autonomy 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, & overall market environment
  • Increases ability for business to react to changes within markets
61
Q

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 (not consistent
62
Q

Matrix Structure

A

An organizational structure where a company combines 2 structures to organize itself
- Example: Functional + P/S, customer, or geographical
- Cost efficient, but complex

63
Q

Matrix Structure example companies

A

Nike, philips electronics

64
Q

What should company keep in mind when using a matrix structure?

A

Important to set clear roles & responsibilities for every team member to maintain accountability

65
Q

When is a matrix structure suitable for a company?

A

Work well for large company where interdependence b/w cross-functional teams is essential for innovation & success

66
Q

Advantages of matrix structure

A
  • Improves organizational collaboration and flexibility to create a culture of knowledge-sharing and innovation
  • Opportunities to learn new skills & develop careers across the organization
  • Efficient way for an organization to use its human resources and save costs
67
Q

Disadvantages of matrix structure

A
  • Can create complexity relating to reporting relationships
  • Additional time may be required for coordinating activities
  • More complex to monitor and control
  • Can create accountability issues if roles & responsibilities are not clearly defined
68
Q

Segment Financial Reporting

A

After an organizational structure is decided, each segment should prepare financial reports to understand the financial performance of each segment
- Promotes accountability

69
Q

Contribution Margin

A

The difference between revenue & variable costs

70
Q

Traceable Fixed Expenses

A

Costs which directly relate to a specific segment
- Example: Advertising costs for products of a specific segment

71
Q

Common Fixed Expenses

A

Costs that are incurred by a company to support all segments but are not traceable to any specific segments
- Example: Administrative salaries, rent, utilities, & insurance

afm 182 (11 decks)

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