Week 2

Question 1

what is corporate governance?

Answer 1

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 and to satisfy themselves that an
appropriate governance structure is in place (cadbury committee, 1992).

Question 2

what is the responsibilities of the board?

Answer 2

The responsibilities of the board include setting the company’s
strategic aims, providing the leadership to put them into
effect, supervising the management of the business and
reporting to shareholders on their stewardship. (cadbury committee, 1992)

Question 3

what is the significance of good governance to CSR?

Answer 3

the key roles for the board includes establishing the culture, values and ethics of the company. It is important that the board sets the correct ‘tone from the top’.
- The directors should lead by
example and ensure that good standards of behaviour permeate throughout all levels of the organisation. This will help prevent misconduct, unethical practices and
support the delivery of long-term success. (financial reporting council, 2016)

Question 4

what is corporate culture?

Answer 4

“the specific collection of values and norms that are shared by people and groups in an organisation and
that control the way they interact with each other and with stakeholders outside the organisation” Hill,C and
Jones,G (2001)

Question 5

what are the features of a manager- stakeholder relation?

Answer 5

1. There is an inherent conflict of interest between shareholders and managers. Shareholders want profits and increases in share price, which require major effort on the part of managers, and may suggest low salaries (i.e. the more managers are paid, the lower the resulting profit for shareholders). Managers want to have high salaries and might pursue power and prestige to the detriment of shareholder value.
2. The principal has only limited knowledge and insight into the qualifications, actions, and goals of the agent, something economists refer to as an informational asymmetry.

Question 6

what is the stakeholder theory?

Answer 6

the theoretical approach was popularized by Edward Freeman in the 1980s to promote a broader reading of business responsibility. Unlike the CSR approach, which strongly focuses on the corporation and its responsibilities, the stakeholder approach starts by looking at various groups to which the corporation has a responsibility. The main starting point is the claim that corporations are not simply managed in the interests of their shareholders alone, but that there is a whole range of groups, or stakeholders, that have a legitimate interest in the corporation as well.

Question 7

what Freeman’s is first argument for why other groups have claim on a corporation?

Answer 7

1. not true to say that the only group with a legitimate interest in the corporation is shareholders. From a legal perspective, there are far more groups apart from shareholders that appear to hold a legitimate ‘stake’ in the corporation, such as consumers, employees, or suppliers, since their interests are already protected in some way. There are not only legally binding contracts to such stakeholders, but also an increasingly dense network of laws and regulations enforced by society, which make it simply a matter of fact that a large spectrum of different stakeholders have certain rights and claims on the corporation.

Question 8

what is Freeman’s second argument for why groups have legitimate claim on a corporation?

Answer 8

2. it comes from an economic perspective. An important aspect here is the agency problem: one of the key arguments for the traditional model is that shareholders are seen as the owners of the corporation, and consequently managers have their dominant obligation to them. This view, however, only reflects the reality of shareholders’ interests in a very limited number of cases (Stout 2012).
   - The majority of shareholders do not invest in shares predominantly to ‘own’ a company (or parts of it), nor do they necessarily seek for the firm to maximize its long-term profitability.
   - shareholders often buy shares for speculative reasons, and it is the development of the share price that is their predominant interest—and not ‘ownership’ in a physical corporation.

Question 9

what is the development of CSR?

Answer 9

1. good governance (leadership, integrity, responsibility)
2. corporate culture (values, ethics)
3. corporate social responsiblity

Question 10

what are sustainable development goals SDG?

Answer 10

• 17 goals established by the UN to achieve sustainability, within this the idea of ESG (environmental, social and governance) indicators can be used to report to stakeholder on the corporations contribution to ESG

Question 11

what is the background of RBS?

Answer 11

• its a world bank, operated in over 100 countries
• in october 2008, had to be bailed out by the UK taxpayer, cost £43 billion
• established in 1727, seen as a pillar of scotland, most of its board was scottish
• in 1990s, banks focused on friedman’s ideals of making money for shareholders -> RBS became concerned for its survival
• Fred Goodwin appointed chief executive but had a bad reputation as he was unable to admit mistakes

Question 12

what was the management style and culture of RBS?

Answer 12

• within RBS there was a culture of fear, a ‘rank and yank’ approach was taken were staff were ranked in terms of their effectiveness and the bottom % were fired
• this approach put many under pressure and forced them to focus more on results than good practice. this lead to prioritisation of short term results which meant customers suffered accordingly as ‘sales over ethics’ occured
• this approach was shaped by fred goodwins ideology which affected the culture and the way people did business
• Goodwin was seen as someone who transformed RBS into a dictatorship

Question 13

what was the regulation like during this time?

Answer 13

• in 1997 labour was in power and eased back on governance
• britain became more deregulated as a response to US’ increase in regulation

Question 14

what was the governance like at RBS?

Answer 14

• at a macro level, governments eased on businesses’ in terms of protection and regulation with the banking system, which gave banks the opportunity to take risks
• companies act identifies a firms responsibility to look at risk, which happened after the RBS scandal
• Goodwin wasnt held back by governance process, board members were also influenced by him
• the board rarely challenged him which goes against good governance as you should be able to challenge decisions and whether things are being done well

Question 15

what were the role of auditors?

Answer 15

their role is to check the financial reporting has been done properly and fairly, they protect shareholders

Question 16

describe the expansion of RBS?

Answer 16

• RBS developed a taste for growth and so acquisitions, they bought up other companies
• Fred led this policy as Matherson appointed Goodwin the sense of independence between their roles of chief executive and chairman were blurred
• RBS acquired banks in the USA, where they got involved in sub-prime market, a mortgage schemes that involved people not being able to pay their mortgages. this exposed RBS to risks
• they also acquired Ulster Bank, acquired 10% stake in bank of china and in 2007, acquired ABN AMRO (dutch bank)

Question 17

what happened in 2008?

Answer 17

• in 2007/ 2008 the sub-prime market collapsed and RBS weren’t prepared for the losses, this angered shareholders as they bought more but their value declined
• in Oct 2008, RBS were in freefall as a bank, the other banks refused to transfer money to them
• the chancellor stepped in, the government had purchase shares of RBS with the condition that Goodwin and the current chairman left the bank
• the board agreed to a large pension for Goodwin as he left without contest, which caused mixed reviews in the media

Question 18

what were RBS’ failures?

Answer 18

1. it allowed its capital funds to be too low and the leveraging to up 60 times
2. due-diligence was poor when analysing their acquisitions eg AB AMRO they didnt do it well
3. their involvement in sub-prime USA
4. didnt understand the risks they were taking
5. poor governance by the board, too much groupthink, directors didnt make up their own mind enough
6. no one challenged Goodwin as he was seen as successful
7. bonuses encouraged short term risks to be taken
8. critics were removed from the company, which goes against governance as you should be able to talk about concerns
9. investors acted too `late

Question 19

what is the conclusion about RBS?

Answer 19

• they became detached from customer values and highlighted what happened when a firms culture prioritises greed over other values.

Question 20

what is the background of VW?

Answer 20

In 2015 Volkswagen Group became the largest car
manufacturer in the world

Question 21

describe the governance of VW?

Answer 21

• German companies have two tiers of Boards: a Supervisory Board (all non executive directors),
  which represents shareholders and employees and a
  Management Board (all executives)
• The two boards, between them, carry out the
  responsibilities of the single board structure (eg U.K) but
  in different ways
• The German Management Board sets the strategy
  and takes decisions. The Supervisory
  Board is meant to monitor what is going on but it
  does so removed from the decision making process.
• At VW that function of oversight was not robust and
  the non executives were not part of the decision
  making process, as they would be in the UK.
• Workers and owner interests may not always be
  aligned with good practice elsewhere

Question 22

who was Ferdinand piech?

Answer 22

• grandson of founder
• An engineer who was determined that VW would
  become the largest in the world through expansion
  of diesel technology, in particular Tdi (turbo diesel
  injection)
• In order to do so VW needed to break into the US
  car market which was not a significant user of
  diesels

Question 23

what was the issue with diesel for VW?

Answer 23

• Its great advantage is fuel economy so producing
  less CO2 gases
• Its disadvantage is that it also produces nitrogen
  oxide (NOx) emissions, far more than petrol
• To break into the US market VW needed to
  address Nox emissions without losing fuel economy, It did not want to spend extra money or lose space in the car

Question 24

what were the emission tests?

Answer 24

• In the USA the Environmental Protection Agency (EPA) introduced more rigorous limits on emissions
  gases at the same time, that VW wanted to increase sales.
• Tests on fuel economy were carried out on the road BUT tests on emissions were carried out in a
  laboratory.
• VW diesels did very well in the tests and the cars were marketed as being environmentally friendly

Question 25

what was the VW scandal?

Answer 25

• In 2013 a group of researchers from West Virginia University carried out emission tests on the road
• Those tests kept showing a difference of up to forty times between the Nox emissions recorded in the lab and on the road
• In 2014 California Air Resources Board started to challenge VW and in 2015 it emerged that VW had been
  using a “defeat device” and the EPA in 2015 charged VW with criminal offences (fraud + pollution)

Question 26

what was VW’s behaviour post findings?

Answer 26

• For a year (2014-15) VW engineers, challenged the
  findings and admitted to nothing, leading the
  authorities astray
• In September 2015 the company admitted that it had
  deployed a cheat device, however it initially blamed
  a small group of engineers. The Chief Executive in spite of his reputation for attention to detail (re engineering), denied all knowledge until 2015.

Question 27

what was the management style at VW?

Answer 27

Focus on growth for its own sake, concerned with competition and possible threat of takeover
- “Engineers pushed to the limits”, workers in pressured environment, threat of sacking if solutions not found (cf RBS/BP)
- Subordinates intimidated by Piech and Winterborn
and an authoritarian culture developed, that governance allowed

Question 28

what were the governance issues at VW?

Answer 28

1. Piech moved from Chief Executive to Chair, affecting the independence of roles
2. Management Remuneration packages given in spite of
   scandal unfolding
   3, Little financial and ethical oversight at VW, board didnt acknowledge ethical issues
3. Lack of transparency and accountability for activities of senior management.
4. No protection for whistleblowers
5. Basic codes of conduct in the firm more advisory than
   mandatory
6. Lack of technical expertise in those charged with oversight
7. Lack of external oversight, Management Board all male, only German, which causes problems with knowing what’s good practice
    External shareholders poorly briefed

Question 29

what is the conclusion of VW?

Answer 29

• Although the technical work to create the defeat device was undertaken by middle management
  engineers, the culture that allowed this to happen was the responsibility of the Management and
  Supervisory Boards.
• Responsible governance is the starting point for sustainable Corporate Social Responsibility
• caused damage to environment, cost to car owners who believed that their car was clean, cost to VW workers who believed in the company and their livelihood was from it