Download - Corporate Strategy and Corporate Governance
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Corporate strategy and corporate governanceare two important tools of functioning of anycompany
Corporate governance is more operational andno strategy can succeed without operationalsupport
No governance can achieve organizationalobjectives without a strategic managementsystem
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The board of directors represents the interest ofthe shareholders who are the owners of thecompany
CEO and other managers represent themanagement of the company
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Corporate governance ensures that long termstrategic objectives and plans are establishedand that the proper management structure
(organization, systems and people) is in placeto achieve those objectives while at the sametime, making sure that the structure functionsto maintain the corporates integrity, reputation
and responsibility to its various constituencies
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CORPORATEGOVERNANCE CORPORATE STRATEGY
Objectives have moregovernance orientation
Primarily guided by theshareholders and result ingood returns oninvestment ofshareholders and theirhappiness
Concentrates onorganizational structure,rules, procedures andsystems for bettergovernance
Objectives have morestrategic focus
Focuses more on marketshare , long termgrowth anddevelopment
Focusses more onstrategic planning andresource allocations
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CORPORATEGOVERNANCE CORPORATE STRATEGY
Attempts to streamlineoperations for goodgovernance
Guiding force behindcorporate governance isthe shareholders
Depends more onstrategic functions (Manufacturing, finance,marketing and HR) andstrategicimplementation
It is dictated by market,competition andcustomers
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A strong demand for evolving a goodcorporate governance system is emerging fromthe corporate sector itself.
The board of directors expects the corporate torun transparently
Over the years, organizations have witnessedfrequent violations of organizational andgovernmental regulations
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Shareholders are also becoming moredemanding and more conscious about theirrights and privileges
They expect efficient management, goodgovernance, high profit and large dividends
They look for transparency and public image tomaximize shareholders value
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What is the purpose corporate objective orphilosophy or goal of an organization
Whom the organization should be serving
How best to serve their interests
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Stakeholders are those individuals or groups orinstitutions, who depend on the organization tofulfil their own objectives or goals, and on
whom, in turn, the organization depends forachievement of its objectives
Internal stakeholders are stockholders,employees of a company different
departments, staff union etc.
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External stakeholders include creditors ( banksand financial institutions), vendors or suppliersand customers
Many internal and external stakeholders havehigh stakes in formulation of corporategovernance policies and strategies of acompany
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Stockholders supply capital and expect anappropriate return on their investment
Employees provide labour, skill and
management and want fair wages and jobsatisfaction
Creditors give financial support and expectmore value and timely repayment
Suppliers of raw materials and inputs expectthe company to keep its commitment
Customers buy a companys products andservices and want value for their purchases
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Every company should take into account theinterests of all these stakeholders whileformulating its policies and strategies
A company should send a clear message thatits policies and strategies would be formulatedwith shareholders interests in mind
This brings us to corporate social responsibilty
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A number of developed countries havedocumented corporate codes appropriate totheir business, economic and social systems
Treadway report, Greenbury report, Cadburyreport and vienot report are some of theexamples of the development of countryspecific codes of corporate governance
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The Anglo-American system tends to focus onshareholders and various creditors
Continental Europe, Japan and south korea
believe that companies should also dischargetheir obligations towards employees, localcommunities, suppliers and ancillary units
In India, Kumaramangalam Birla Committeedeliberated on corporate governance practices
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Corporate Governance extends beyondCorporate Law.
Its fundamental objective is not the mere
fulfilment of the requirement of law, but,ensuring the boards commitment to managingthe company in a transparent manner formaximizing long term shareholder value
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CII had taken a special initiative to set up aNational Task Force on Corporate Governancein 1996
It focusses on the context of liberalization ofIndias economy, its integration with the globaleconomy and Indias internationalcompetitiveness
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Commitment achieving the highest internationalstandards
Board structure Gives adequate representation toall stakeholders
Business policy Fair market practices andtransparency in appointment of agents, consultantsetc.
Transparency and disclosure Believes in
information sharing Corporate ethics focus on integrity, efficiency
and interpersonal relationships
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STRATEGIC GOVERNANCE
Long term growth
Cost efficiency throughtechnology or newinvestment
Expanding into massmarket; product andprice strategy
Sacrifice of short termprofitability
Job losses in theorganization
Decline in qualitystandards
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To resolve or mitigate the conflicts betweencorporate strategy and corporate governance,empowerment of the board may be a useful
tool The board, by virtue of its position, is the single
entity, which can influence both corporategovernance and corporate strategy and also
strike a balance between their conflictingrequirements or demands
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Empowerment of board means that outsidedirectors have the independence and also thecapability to monitor the performance of top
management and the company; to influencemanagement to change the strategic directionof the company if its performance does notmeet the boards expectations; and, in extreme
cases, to change corporate leadership.
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Many investors do not like to be on the boardand play a direct role in governing companies,but would like to keep pressure on the board to
control or monitor the management of thecompany through nominated directors
The move to empower directors has beeninitiated by some stakeholders because of a
controversy about CEO compensation Examples are General motors, IBM, AT&T, ITC
and Hindustan Unilever
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Monitoring will result to crisis management.First the board will remain passive till a crisisdevelops and then acts according to it
But in board empowerment outside directorsshould anticipate and prevent changes
In many cases board suggest to remove theCEOs for poor corporate performance
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To ensure legal and ethical conduct by thecompanys managers and employees toapprove companys strategic direction and
evaluate its progress To select, evaluate, reward and, if necessary
remove the CEO
To ensure that appropriate top managementsuccession plans are in position
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Full time functional directors with executivepowers representing areas like manufacturing,marketing, finance and HR
Non-executive directors nominated by and torepresent or protect the interests of financialinstitutions or banks who may be holdingsubstantial equity shares of the company
Professional directors provide professionalinputs and expertise in management of thecompany, but do not directly represent theinterests of the shareholders
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Professional directors , rightly appointed , canplay significant roles in giving directions to thecompany both in governance and strategic
matters Some issues like , number of companies a
professional director should servesimultaneously
There is a issue of leakage of information orstrategic details and conflicting decisions
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The Cadbury committee has prescribed a codeof best practice to serve as a guidelines to thosecompanies which want to achieve higher
standards of corporate governance Separate positions of chairman and CEO
Role clarity of chairman and CEO
Professional inputs from independent directors
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Strategic audit is a formal strategic reviewprocess, which imposes its own discipline onboth the board and the management verymuch like the financial audit process
Five elements of strategic unit
Establishing criteria for performance
Database design and maintenance
Strategic audit committee Relationship with the CEO
Alert to duty ( by board members)
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THE MANAGEDCORPORATION
THE GOVERNEDCORPORATION
Boards role is to hire,monitor and when
necessary change failedmanagement
Power sufficient tocontrol the CEO and the
performance evaluation process
Boards role is to fostereffective decisions and
monitor and reversefailed policies
Expertise sufficient toallow the board to add
value to the decisionmaking process and performance
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The objective of corporate governance is toprotect the interests of the stockholders whose
primary concern is maximization of return oninvestment or short term profitability
The objective of corporate strategy is more tofocus on long term growth and profitability,which gives sustenance to the company
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The strategic management process ofcompanies are also trying to find ways to strikea balance between corporate social
responsibility and profitability, realizing thatideally both should coexist for optimal/properorganizational growth.
This is one area where both corporate strategy
and governance are showing a common focus. Bajaj auto, Tata motors and Nirma are good
examples
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It is defined as the alignment of businessoperations with social values
People think issues like pollution, waste
disposals, environment safety conservation ofnatural resources are considered forformulation of policy and strategic decisionmaking
An organizations social policy should beintegrated into all management activitiesincluding the mission statement and objectives
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Infosys, Wipro, ITC, Dr.Reddys, Godrej,Mahindra & Mahindra and Tata steel
The Infosys foundation works for both
economic and social upliftment of the villagesit has adopted
ITCs E-choupals have not only helped to meetthe information requirements of ruralhouseholds, but also immensely contributed tothe establishment of better relations withcustomers and rural suppliers
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How much and how far have they shown theirsocial responsibility, i.e., what is their socialperformance against stated social objectives
It improves its public image and socialstanding
Also to scan the external environment
To improve the relations with the governmentand public bodies
First carried out for Tata steel by the socialaudit committee by the company