management decision should be based on careful consideration of all the factors

7/31/2019 Management Decision Should Be Based on Careful Consideration of All the Factors

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Management decision should be based on careful consideration of all the factors, including

implication as regard to tax liability. Keeping view various tax implications that are relevant

while taking some specific management decision under different provision of Income tax Act

have dealt with:

Make or Buy:

One of the vital investment subject to the influence of tax factor is Make or buy decision. Most

of the companies have to decide sometimes or the other whether they should buy a part from a

market and stop making it themselves or whether they should stop buying it and start making it.

There are various consideration affecting this decision, chief of which is cost. In other words, in

making this sort of decision the various cost of making the product or part component of product

is compared with its purchase price in market. A host of other consideration such as capacity

utilization, supply position of the article to be bought, terms of purchase, ill effect of layoffs etc.

are kept in view while taking such decision. Tax planning can be helpful in decision as regards

making or buying a particular product, component etc.

Broadly speaking, business can be of following three types:

(1)Trading Business

(2)Manufacturing Business

(3)Service Sector

The decision tomake or buy is a costing decision and is also influenced by many general

factors which are as follows:

Availability of financial resources Investment required in fixed assets

Availability of skilled and unskilled labour

Availability of suppliers

Existence of idle capacity in organization

Price at which the product is available in the market

Other miscellaneous factors

Apart from costing considerations following factors also go in decision making process:

Utilization of Capacity

Inadequacy of funds

Latest Technology

Dependence of Supplier

Labor problem in the factory


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What are the cost involved in making of a part

Fixed Cost

Variable Cost

What are the cost involved in buying of a part from outside agency:

Buying cost

Inventory cost

Comparision of both the cost shall determine which decision the company shall follow,

therefore tax saved in both the cases are same.

Tax Consideration

Establishing a new unit: If the decision to manufacture a part or a component involves

a setting up separate industrial unit than tax incentives available u/s 10a,10b, 32, 80 IA,80

IB should be considered.

Export: If Make or Buy decision is taken for exporting goods then tax incentives

available under section 80 HHC depends upon whether goods manufactured by tax player

himself are exported or goods manufactured by others are exported by tax players.

Sale of plant and machinery: If buying is cheaper than manufacturing and the assessee

decides to buy parts or components for a long period of time, he may like sell the existing

plant and machinery. Tax implications as specified by section 50 has to be considered.

If the decision is taken to produce a part, then any other industrial unit to be established. When a

separate industrial unit is established then the company may get tax benefits and also deductions

under various sections to a company which decides to produce a part, are:

1. Deduction in respect of profits and gains from newly established small scale

undertakings in rural area (Sec 80 HHA)

A tax players deriving a profits and gains from a new small scale industries undertaking

set up in rural area will entitled to deduction of an amount equal to 20% of such profits

and gains. The deduction will be admissible for a period of 10 previous years in which

the small scale industrial undertaking commences production of any article.

2. Deduction in respect of profits and gains from industrial undertaking (Ship or Hotel

etc.): (Sec 80-1)

Under sction-80-1, a deduction will be allowed in respect of profits and gain derived

from industrial undertakings, ship or hotel established after a certain date. The deduction


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will be of an amount equal to 30% of such industrial undertakings or Ship or Hotel, If its

company and 25% in categories of assesses.

3. Deduction in respect of profits and gains from newly established small scale

undertakings or Hotel business in Backward area (Sec 80 HHA)

All assesses are entitled to a deduction of 20% of the profit derived by them for new

industrial undertakings and Hotel setup in backward area. The deduction will be allowed

in respect of the ten assessment year relevant to previous year in which the industrial

undertaking begins to manufacture or produce articles.

4. Depreciation Allowance

A company which produce a part or a component will be allowed an allowance in respect

of depreciation of buildings, machinery, plant or furniture owned and used the assesee for

the purpose of business and profession.

Two primary factors which have a decisive influence on the choice of make or buy are

the cost and availability of production capacity. Facilities are made available and other

things being equal cost consideration assumes primacy. If the cost of making an item in-

house is going to be higher than the cost of acquiring it from an outside supplier, the

choice is to buy it. On the other hand, if the cost of making the item in ones own plant is

cheaper than buying it from the supplier, the choice is to make it. A good make-or-buy

decision, nevertheless, requires the evaluation of several less tangible factors in addition

to the two basics ones.

Considerations which favor making the parts are:

1. Cost considerations less expensive to make the part

2. Desire to integrate plan operations

3. Productive use of excess plant capacity to help absorb fixed overheads.

4. Needs to exert direct control over production and/or quality

5. Design secrecy.

6. Unreliable suppliers.


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7. No suitable supplier quotation

8. Desire to maintain a stable workforce in periods of declining sales

Considerations which favor buying the part:

1. Cost considerations less expensive to buy the part

2. Suppliers research and specialized know-how

3. Small volume requirements

4. Limited production facilities

5. Desire to maintain stable workforce in periods of rising sales.

6. Desire to maintain multiple source policy.

7. Government policy favoring ancillary industries.

8. Monopoly items which are rationed by the government and on which, the buyer has no option.

Other Factors

Some companies, by tradition, prefer to make almost every component of their products. Others

prefer to buy as much as possible from outside suppliers. In general, an aggressive company in

an industry that is expanding rapidly with many technological changes (e.g. electronics), will

prefer to buy many of its components from outside suppliers. In such industries, the company has

many opportunities to employ its capital profitably through horizontal diversification, expanding

its line of finished products.

*Tax Consideration in Make or Buy decision:

I. If a business house/company decides to make a product/part instead of buying it and

the making of product involves setting up of new industrial undertaking then a

business house should make a detailed analysis of following tax incentives available

to new industrial undertaking under Income-Tax Act:

(a)Tax holiday u/s 10 A

(b)Tax holiday u/s 10 B


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(c)Tax holiday u/s 80 1A

(d)Deduction u/s 80 1B

If the decision to buy the product or component will render the plant machinery, furniture,

land and building etc; earlier used in manufacturing the product, idle then the business

house may have to sell these assets. In such a case, before taking decision to buy, theprovision related to capital gain tax should also be studied.

TAX PLANNING IN CASE OF FOREIGN

COLLABORATIONS AND JOINT VENTURE

TAX PLANNING IN CASE OF FOREIGN

COLLABORATIONS AND JOINT VENTURE

There are two types of foreign collaborations:

a) Financial collaboration (foreign equity participation) where foreign equity alone isinvolved .

b) Technical collaboration (technology transfer) involving licensing of technology by

the foreign collaborator on due compensation. -There are two approving authorities

1) Reserve Bank of India, and

2) Department of Industrial Development in the Ministry of Industry, Government

of India.

Government PolicyThe Government of Indias policy on foreign private investment is based mainly on the

Approach adopted in 1949. The basic policy is to welcome foreign private investment on a

selective basis in areas advantageous to the Indian economy. The conditions under whichforeign capital is welcome are as follows:a) All undertakings (Indian or foreign) have to conform to the general requirements of the

Governments Industrial Policy.

b) Foreign enterprises are to be treated at par with their Indian counterparts.

c) Foreign enterprises would have the freedom to remit profits and repatriate capital subject to

foreign exchange considerations.The Industrial Policy 1991, is based on the view that while freeing Indian Industry from official

controls, opportunities for promoting foreign investments in India should also be fully exploited.It is felt that foreign investment would bring attendant advantages of technology transfer,

marketing expertise, introduction of modern managerial techniques and new possibilities for

promotion of exports.

Areas of Foreign Collaboration


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The Government of India issues from time to time a list of industries indicating where foreign

investments may be permitted. The lists so issued are illustrative only The Government of India(Foreign Investment Promotion Board) also considers import of technology in Industries listed in

Annexure A & Annexure B of Schedule 1 of Foreign Exchange Management (Transfer or issue

of security by a person resident outside India) Regulations, 2000 subject to compliance with the

provisions of the Industrial Policy and Procedures as notified by Secretariat for IndustrialAssistance (SIA) in the Ministry of Commerce and Industry Government of India from time to

time.

Technical CollaborationThe Industrial Policy, 1991, also provides that equity collaboration need not necessarily be

accompanied with technical collaborations. The salient features of the Policy relating to ForeignTechnology Agreements are outlined below:

Paragraph 39C - Foreign Technology Agreements.

Standard Conditions Attached to Approvals for Foreign Investment &Technology Agreements

1) The total non-resident shareholding in the undertaking should not exceed thepercentage(s) specified in the approval letter.

2) A) The royalty will be calculated on the basis of the net ex-factory sales price of theproduct, exclusive of excise duties, minus the cost of the standard bought-out components

and the landed cost of imported components, irrespective of the source of procurement,

including ocean freight, insurance, customs duties, etc. The payment of royalty will be

restricted to the licensed capacity plus 25% in excess thereof for such items requiringindustrial licence or on such capacity as specified in the approval letter. This restriction

will not apply to items not requiring industrial licence. In case of production in excess of

this quantum, prior approval of Government would have to be obtained regarding theterms of payment of royalty in respect of such excess production.

B) The royalty would not be payable beyond the period of the agreement if the orders had

not been executed during the period of agreement. However, where the orders themselvestook a long time to execute or were executed after the period of agreement, then in such

cases the royalty for an order booked during the period of agreement would be payable

only after a Chartered Accountant certifies that the orders in fact were firmly booked and

execution began during the period of agreement and the technical assistance wasavailable on a continuing basis even after the period of agreement.

C) No minimum guaranteed royalty would be allowed.

3) The lumpsum shall be paid in three instalments as detailed below, unless otherwise stipulatedin the approval letter:-

i. First 1/3rd after the approval for collaboration proposal is obtained from Reserve Bank ofIndia and collaboration agreement is filed with the Authorised Dealer in Foreign

Exchange.ii. Second 1/3rd on delivery of know-how documentation.

iii. Third and final 1/3rd on commencement of commercial production, or four years after theproposal is approved by Reserve Bank of India and agreement is filed with the


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Authorized Dealer in Foreign Exchange, whichever is earlier. The lumpsum can be paid

in more than three instalments, subject to completion of the activities as specified above.1) All remittances to the foreign collaborator shall be made as per the exchange rates

prevailing on the date of remittance.

2) The applications for remittances may be made to the Authorised Dealer in Form A2 with

the undernoted documents:-a) A No Objection certificate issued by the Income-tax authorities in the standard form or acopy of the certificate issued by the designated bank regarding the payment of tax where

the tax has been paid at a flat rate of 30% to the designated bank.b) A certificate from the Chartered Accountant in Form TCK/TCR (depending upon the

purpose of payment).

c) A declaration by the applicant to the effect that the proposed remittance is strictly inaccordance with the terms and conditions of the collaboration approved by

RBI/Government.

3) The agreement shall be subject to Indian Laws.4) A copy of the foreign investment and technology transfer agreement signed by both the

parties may be furnished to the following authorities:-a) Administrative Ministry/Department.b) Department of Scientific and Industrial Research, New Delhi.c) Concerned Regional Officer of Exchange Control Department, RBI.d) Authorised Dealer designated to service the agreement.

5) All payments under the foreign investment and technology transfer agreement includingrupee payments (if any) to be made in connection with the engagement/deputation of

foreign technical personnel such as passage fare living expenses, etc. of foreign

technicians, would be liable for the levy of ces under the Research and Development

Cess Act, 1986 and the Indian Company while making such payments should pay thecess prescribed under the Act.

6) A return (in duplicate) in Form TCD should be submitted to Regional Office of theReserve Bank of India in the first fortnight of January each year.

Depreciation and interest deductions:

Depreciation rates

ASSETS RATES (%)

Buildings 5-10

Plant and Machinery 25-100

Furniture and Fittings 15

Vehicles(other than for commercial use) 20

Pollution control Equipment 80Energy Saving Devices 80

Ships 25

Intangible assets 25

Withholding Tax for NRIs and Foreign Companies:

Withholding Tax Rates for payments made to Non-Residents are determined by the


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Finance Act passed by the Parliament for various years. The current rates are:

i) Interest 20%ii) Dividends paid by domestic companies : Niliii)Royalties 10%iv)Technical Services 10%

v) Any Other Services Individuals: 30% of the income Companies: 40% of the netincomeThe above rates are general and in respect of the countries with which India does not have

a Double Taxation Avoidance Agreement (DTAA).

DOUBLE TAXATION RELIEF

Agreement with foreign countries for avoidance or relief against Double Taxation (Section

90)

Section 90 of the Income Tax Act, 1961, empowers the central government to enter into

agreements with the Government of any country for the grant of relief against double taxation or

for the avoidance of double taxation. This section also empowers the Central Government tomake such provisions as may be necessary for implementation of such agreement and such

provisions may be published in the Official Gazette. Under this section, the central government

may enter into agreement with foreign countries:

1. For the granting of relief in respect of income on which have been paid both income-tax

under this act and income-tax in that country , or

2. For the avoidance of double taxation of income under this act and under the

corresponding law in force in that country , or

3. For exchange of information for the prevention of evasion or avoidance of income-tax

chargeable under this act or under the corresponding law in force in that country, orinvestigation of cases of such evasion or avoidance, or

4. For recovery of income-tax under this act and under the corresponding law in force in

that country.

The Central government has so far entered into agreements for relief against or avoidance

of double taxation with many countries and these agreements are in operation.

These agreements may be classified into two parts:

(a)Agreement for relief from Double taxation

(b)Agreement for avoidance of Double taxation

AGREEMENT FOR RELIEF FROM DOUBLE TAXATION

Under this category assessments provide for payment of tax in both the countries under the

respective laws of those countries but later on rebate of tax is given in both the countries on

doubly assessed income. In such case assessee must show that the identical income has been

doubly taxed and that he has paid tax both in India and in the foreign country.


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AGREEMENTS FOR AVOIDANCE OF DOUBLE TAXATION

Under these agreements the assessee has first to pay the tax and then apply for relief in the form

of a refund. Each country recovers tax only on that portion of income which accrued within that

country and takes into account the income accruing in other country only for rate purposes. In

such cases no refund arises.

SECTION 91 provides:

(a)UNILATERAL RELIEF IN RESPECT OF FOREIGN INCOME TAXED

ABROAD (SECTION 91(1))

Subject to following conditions unilateral relief is granted in cases where section 90 is not

applicable:

(a)Assessee should be resident of India in the previous year

(b)The income , in fact , should have accrued outside India and should not be deemed underany provision of this Act to accrue in India

(c)The income should be taxed both in India and a foreign country with hich India has no

agreement for relief against or avoidance of double taxation; and

(d)The assessee should have paid the tax in such foreign country by deduction or otherwise.

(b)RELIEF IN CASE OF AGRICULTURAL INCOME FROM

PAKISTAN(SECTION 91(2))

In case a resident of India has paid any tax on agricultural income which accrued or arose to

him during that previous year in Pakistan, he shall be entitled to a deduction from the Indian

income tax payable by him of the amount of tax paid in Pakistan or sum calculated at theIndian rate of tax whichever is less.

(c)RELIEF IN CASE OF SHARE IN THE FOREIGN INCOME OF A REGISTERED

FIRM (SECTION 91(3))

An assesse receiving share in foreign income of a registered firm shall be entitled to the

relief of tax on such share provided the firm receives income from a foreign country with

which no agreement exists under Section 90 and assessee has paid tax in that foreign

country.

Relief will be allowed only on doubly assessed income at the rate of the said country or

Indian rate of tax, whichever is lower.

General Tax Incentives for Industries

100% deduction of profits and gains for ten years is available in respect of the following:

i) Development or operation and maintenance of ports, airports, roads, highways,bridges, rail systems, inland waterways, inland ports, water supply projects, water


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treatment systems, irrigation projects, sanitation and sewage projects, solid waste

management systems.ii) Generation, distribution and transmission of power which commence before

31.3.2006.

iii) Development, operation and maintenance of an Industrial Park or Special Economic

Zone before 31.3.2006.

Following tax exemptions are available in different sectors:

Deduction of 100% of the profit from business ofa) Development or operation and maintenance of ports, air ports, roads, highways, bridges

etc.

b) Generation, distribution and transmission of powerc) Development, operation and maintenance of an Industrial Park or SEZd) By undertakings set up in certain notified areas or in certain thrust sector industries in the

North-eastern states and Sikkim.

e) By undertakings set up in certain notified areas or in certain thrust sector industries in

Uttaranchal & Himachal Pradeshf) Derived from export of articles or software by undertakings in FTZ / EHTP / STPg) Derived from export of articles or software by undertakings in SEZh) Derived from export of articles or software by 100% EOUi) An offshore banking unit situated in a SEZ from business activities with units located in

the SEZ.j) Derived by undertakings engaged in the business of developing and building housing

projects. Deduction of 50% of profits derived from the business of building, owning and

operation of multiplex theatres of convention centre is also available.

k) Derived by an undertaking engaged in the integrated business of handling, storage andtransportation of food grains.

l) Derived by an undertaking engaged in the commercial production or refining of mineraloil

m)Derived by an undertaking from export of woodbased handicraft

years and 30% (for persons other than

Companies) 25% in subsequent five years is available in respect of the following:

a) Company which starts providing telecommunication services whether basic orcellular including radio paging, domestic satellite service, network or trunking, broad

band network and internet services before 31.3.2003.

b) anddistricts.

c) agricultural producebefore 31.3.2003.

d)grains.


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business

of building, owning and operating multiplex theatres or convention centres constructed before31.3.2005.

-10, for new industries

located in EHTPs and STPs and 100% Export Oriented Units. For units set up in SpecialEconomic Zones (SEZs), 100% deduction of export income for first five years followed by 50%

for next two years, even beyond 2009-10.

Integrated Infrastructure Development Centres or Industrial Growth Centres of the North Eastern

Region.

be

restricted to 30% for financial year 2003-04 and no deduction is allowable subsequently.

ction from the gross total income of 50% of foreign exchange earnings by hotels andtour operators. The deduction would be restricted to 30% for financial year 2003- 04 and no

deduction is allowable subsequently.

port of computer software or film software,

television software, music software, from the gross total income. Deduction in respect of certaininter-corporate dividends to the extent of dividend declared.

est or long term capital gains of an

infrastructure capital fund or an infrastructure capital company from investment made by way of

shares or long term finance in any enter

According to Armstrong and Baron (1998), Performance Management is both a strategic and an integrated approachto delivering successful results in organizations by improving the performance and developing the capabilities ofteams and individuals. The term performance management gained its popularity in early 1980s when total qualitymanagement programs received utmost importance for achievement of superior standards and quality performance.Tools such as job design, leadership development, training and reward system received an equal impetus along withthe traditional performance appraisal process in the new comprehensive and a much wider framework. Performancemanagement is an ongoing communication process which is carried between the supervisors and the employeesthrough out the year. The process is very much cyclical and continuous in nature. A performance managementsystem includes the following actions.

Developing clear job descriptions and employee performance plans which includes the key result areas(KRA') and performance indicators.

Selection of right set of people by implementing an appropriate selection process.

Negotiating requirements and performance standards for measuring the outcome and overall productivityagainst the predefined benchmarks.

Providing continuous coaching and feedback during the period of delivery of performance.

Identifying the training and development needs by measuring the outcomes achieved against the setstandards and implementing effective development programs for improvement.

Holding quarterly performance development discussions and evaluating employee performance on thebasis of performance plans.


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Designing effective compensation and reward systems for recognizing those employees who excel intheir jobs by achieving the set standards in accordance with the performance plans or rather exceed theperformance benchmarks.

Providing promotional/career development support and guidance to the employees.

Performing exit interviews for understanding the cause of employee discontentment and thereafter exitfrom an organization.

A performance management process sets the platform for rewarding excellence by aligning individual employeeaccomplishments with the organizations mission and objectives and making the employee and the organizationunderstand the importance of a specific job in realizing outcomes. By establishing clear performance expectationswhich includes results, actions and behaviors, it helps the employees in understanding what exactly is expected outof their jobs and setting of standards help in eliminating those jobs which are of no use any longer. Through regularfeedback and coaching, it provides an advantage of diagnosing the problems at an early stage and taking correctiveactions.

To conclude, performance management can be regarded as a proactive system of managing employee performancefor driving the individuals and the organizations towards desired performance and results. Its about striking aharmonious alignment between individual and organizational objectives for accomplishment of excellence inperformance.

According to Lockett (1992), performance management aims at developing individuals with the required commitment and compfor working towards the shared meaningful objectives within an organizational framework. Performance management framewo

designed with the objective of improving both individual and organizational performance by identifying performance requiremenproviding regular feedback and assisting the employees in their career development. Performance management aims at buildinperformance culture for both the individuals and the teams so that they jointly take the responsibility of improving the business on a continuous basis and at the same time raise the competence bar by upgrading their own skills within a leadership framewfocus is on enabling goal clarity for making people do the right things in the right time. It may be said that the main objec tive ofperformance management system is to achieve the capacity of the employees to the full potential in favor of both the employeeorganization, by defining the expectations in terms of roles, responsibilities and accountabilities, required competencies and thexpected behaviors. The main goal of performance management is to ensure that the organization as a

system and its subsystems work together in an integrated fashion for accomplishing optimum results or outcomes.

The major objectives of performance management are discussed below:

To enable the employees towards achievement of superior standards of work performance.

To help the employees in identifying the knowledge and skills required for performing the job efficiently asthis would drive their focus towards performing the right task in the right way.

Boosting the performance of the employees by encouraging employee empowerment, motivation andimplementation of an effective reward mechanism.

Promoting a two way system of communication between the supervisors and the employees for clarifyingexpectations about the roles and accountabilities, communicating the functional and organizationalgoals, providing a regular and a transparent feedback for improving employee performance andcontinuous coaching.

Identifying the barriers to effective performance and resolving those barriers through constant monitoring,coaching and development interventions.

Creating a basis for several administrative decisions strategic planning, succession planning, promotionsand performance based payment.

Promoting personal growth and advancement in the career of the employees by helping them in acquiringthe desired knowledge and skills.

Some of the key concerns of a performance management system in an organization are:

Concerned with the output (the results achieved), outcomes, processes required for reaching the resultsand also the inputs (knowledge, skills and attitudes).

Concerned with measurement of results and review of progress in the achievement of set targets.


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Concerned with defining business plans in advance for shaping a successful future.

Striving for continuous improvement and continuous development by creating a learning culture and anopen system.

Concerned with establishing a culture of trust and mutual understanding that fosters free flow ofcommunication at all levels in matters such as clarification of expectations and sharing of information onthe core values of an organization which binds the team together.

Concerned with the provision of procedural fairness and transparency in the process of decision making.The performance management approach has become an indispensable tool in the hands of the corporates as itensures that the people uphold the corporate values and tread in the path of accomplishment of the ultimatecorporate vision and mission. It is a forward looking process as it involves both the supervisor and also the employeein a process of joint planning and goal setting in the beginning of the year.

The term performance management gained its importance from the times when the competitive pressures in

the market place started rising and the organizations felt the need of introducing a comprehensive

performance management process into their system for improving the overall productivity and performance

effectiveness.Any effective performance management system includes the following components:

1. Performance Planning: Performance planning is the first crucial component of any performancemanagement process which forms the basis of performance appraisals. Performance planning is jointlydone by the appraisee and also the reviewee in the beginning of a performance session. During this period,the employees decide upon the targets and the key performance areas which can be performed over a yearwithin the performance budget., which is finalized after a mutual agreement between the reporting officerand the employee.

2. Performance Appraisal and Reviewing: The appraisals are normally performed twice in a year in anorganization in the form of mid reviews and annual reviews which is held in the end of the financial year. Inthis process, the appraisee first offers the self filled up ratings in the self appraisal form and also describeshis/her achievements over a period of time in quantifiable terms. After the self appraisal, the final ratings areprovided by the appraiser for the quantifiable and measurable achievements of the employee beingappraised. The entire process of review seeks an active participation of both the employee and theappraiser for analyzing the causes of loopholes in the performance and how it can be overcome. This hasbeen discussed in the performance feedback section.

3. Feedback on the Performance followed by personal counseling and performancefacilitation: Feedback and counseling is given a lot of importance in the performance management process.This is the stage in which the employee acquires awareness from the appraiser about the areas ofimprovements and also information on whether the employee is contributing the expected levels ofperformance or not. The employee receives an open and a very transparent feedback and along with thisthe training and development needs of the employee is also identified. The appraiser adopts all the possiblesteps to ensure that the employee meets the expected outcomes for an organization through effectivepersonal counseling and guidance, mentoring and representing the employee in training programmes whichdevelop the competencies and improve the overall productivity.

4. Rewarding good performance: This is a very vital component as it will determine the work motivation of anemployee. During this stage, an employee is publicly recognized for good performance and is rewarded.This stage is very sensitive for an employee as this may have a direct influence on the self esteem andachievement orientation. Any contributions duly recognized by an organization helps an employee in copingup with the failures successfully and satisfies the need for affection.

5. Performance Improvement Plans: In this stage, fresh set of goals are established for an employee and

new deadline is provided for accomplishing those objectives. The employee is clearly communicated aboutthe areas in which the employee is expected to improve and a stipulated deadline is also assigned withinwhich the employee must show this improvement. This plan is jointly developed by the appraisee and theappraiser and is mutually approved.

6. Potential Appraisal: Potential appraisal forms a basis for both lateral and vertical movement of employees.By implementing competency mapping and various assessment techniques, potential appraisal isperformed. Potential appraisal provides crucial inputs for succession planning and job rotation.


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What is Field review a traditional method of performance appraisal?

In this method the appraisal is conducted by a person outside the concerned department, usually

from the HR department. Field reviews are usually conducted in matters of promoting an

executive to the managerial level. The advantage of the field review method is that since the rater

in an "outsider" the chances of bias are reduced. The rater is usually extensively trained toconduct the appraisal interview. Disadvantage of the field review method is that the "outsider"

may not be aware of the job requirements, work culture and work environment. The outsider hasnot observed the employee at work and does not know his on-field behavior and performance,

except from the report submitted by the employee's supervisor, which may be biased. This

method is also time consuming.

Performance Evaluation

What It Is?

Performance Evaluation is a tool you can use to help enhance the efficiency of the work unit. This tool

is a means to help ensure that employees are being utilized effectively. Employees can use it as a

clear indication of what is expected of them before you tell them how well they are doing, and then as

feedback of how well they did.

Purpose

Performance Evaluation is a multi-purpose tool used to:

Measure actual performance against expected performance

Provide an opportunity for the employee and the supervisor to exchange ideas and feelings about

job performance

Identify employee training and development needs, and plan for career growth

Identify skills and abilities for purposes of promotion, transfer, and reduction in force

Support alignment of organization and employee goals

Provide the basis for determining eligibility for compensation adjustments based on merit

Provide legal protection against lawsuits for wrongful termination

The primary purpose of Performance Evaluation is to provide an opportunity for open communication

about performance expectations and feedback. Most employees want feedback to understand the

expectations of their employer and to improve their own performance for personal satisfaction. They

prefer feedback that is timely and given in a manner that is not threatening.

Benefits

Many benefits result from the Performance Evaluation process:

Control of the work that needs to be done

Enhancement of employee motivation, commitment, and productivity

Identification of goals and objectives for the employee

Satisfaction of the basic human need for recognition

Identification of process improvement opportunities

Identification of employee development opportunities


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Employee Involvement

Performance evaluation is most effective when employees are actively involved in open discussion

about their own performance expectations and about how they are doing in meeting those

expectations.

Involving the employee in the performance evaluation process will make it a meaningful, worthwhileexperience for you, the employee, and the organization because employees:

need and want to have their voices heard,

are more likely to consider the system as being fair if they have involvement and understand the

process, and

are more likely to demonstrate genuine commitment to goals and performance.

Ultimate benefits realized by the organization will be increased productivity, efficiency, job

satisfaction, and morale and decreased turnover.

Performance Expectations The Basis for Effective Performance Evaluation

System

AsNDAC 4-07-10-03states each employee must be informed of the level of performance that is

needed to successfully perform his or her work. These are performance expectations describing the

conditions that exist when a job is done well. They usually come from an agencys strategic plan and

are communicated down through departmental goals, objectives, and individual position descriptions.

Performance expectations should tie in with essential functions and qualifications required for the

position as stated in the position description. (SeeThe Position Description.) "Think SMART when

developing performance expectations." Expectations should be Specific, Measurable, Achievable,

Realistic, and Time-bound.

Specific The performance expectation should be one that can be witnessed or observed, defined,

and concrete.

Measurable You should be able to assess, evaluate, and distinguish between different performance

levels. The end result can be identified in terms of quantity, quality, time lines, acceptable standards,

or procedures. Many say the work they do is not measurable. But if it is not measurable, how then do

they know if a goal has been met and if their contributions have value? Definitive results can be

identified for all work.

Achievable Each performance expectation should be one that can be achieved by the employee

without barriers that hinder its completion. However, it should not be so easily achieved that the

employee is not challenged nor so difficult that the employee becomes frustrated. It should be

reasonable.

RealisticEach expectation should be an actual requirement of the employees job and within the

parameters of the position description.

Time Bound Each expectation should have a time frame associated with it daily, weekly, etc.

Some factors for which expectations may be set forth and measured are:

Job Knowledge

Quality of Work

Quantity of Work

Work Habits
http://www.legis.nd.gov/information/acdata/pdf/4-07-10.pdfhttp://www.legis.nd.gov/information/acdata/pdf/4-07-10.pdfhttp://www.legis.nd.gov/information/acdata/pdf/4-07-10.pdfhttp://www.nd.gov/hrms/managers/guide/posdescrip.htmlhttp://www.nd.gov/hrms/managers/guide/posdescrip.htmlhttp://www.nd.gov/hrms/managers/guide/posdescrip.htmlhttp://www.nd.gov/hrms/managers/guide/posdescrip.htmlhttp://www.legis.nd.gov/information/acdata/pdf/4-07-10.pdf


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Cooperation or Ability to Work with Others

Oral and Written Communications

Steps of Effective Performance Evaluation

- Review

Look at the previous evaluation for:

Previous deficiencies in performance.

Have they been corrected or do they continue to be a problem? If deficiencies continue, note them

in the evaluation. Omitting a continued deficiency in subsequent evaluations can be interpreted as

a sign that the deficiency has been corrected.

Dramatic change in performance.

Determine whether your rating of the employee is consistent or whether the performance actually

has changed. When there is a significant negative change in performance, the supervisor should

give the employee notice, prior to the annual evaluation, that the next evaluation will be

significantly lower unless substantial improvement is made.

- Analysis

Analyze performance to identify gaps between expected performance and actual performance

Analyze the causes of gaps

o Organization or work environment-related causes

o System or process-related causes

o Personal causes

Select and design an action plan to close the gaps a plan that meets business needs,

performance needs, training needs, or work environment needs

Implement the plan

Follow up - Measure and evaluate the impact of the plan on the performance

Analyzing Causes of Gaps

Management often assumes that where actual performance falls short of expected performance,

employees must try harder. However, it is very important to analyze why a gap exists between

expected performance and actual performance to determine if there is a cause other than inadequate

employee efforts. Most causes will fall into three categories:

Organization or Environment-Related These gaps can stem from the organizational

culture, leadership style or management practices, organizational structure, reporting

relationships or chain of command, inadequate resources (funds, staff, equipment, training,

information, etc.) and so forth. Some examples: employee reports to more than one supervisor,

performance expectations were not communicated, or expectations were not met because the

employee was overburdened due to staff cuts.

System or Process-RelatedSystem or process-related causes can relate to any process

within an organization that becomes a roadblock to an employee meeting performance

expectations. Some examples: time frames or procedures are burdensome, procedures conflict,

someone else didnt meet their time frames, or the information reporting system is inadequate.

Personal These are gaps that are within the employees realm of control. They can, for

example, deal with situations that are going on in home life that affect work performance or

depend on the employees physical or emotional abilities. Lack of effort, motivation, or concern for

the agencys efficiency can also fall under this category. Exercise caution when dealing with


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personal issues remember to keep it job related, focusing on how job performance is affected. If

an employee alleges that a medical condition is the cause of poor performance, contact your

human resource officer or legal counsel at once. Do not attempt to resolve employees personal

problems.

The cause of a performance gap may overlap a couple categories. It is imperative that you and your

employee communicate to identify the cause of the gap and arrive at solutions to eliminate or

minimize the gap.

The Evaluation Meeting

Before the performance evaluation meeting:

At least one week in advance, schedule a meeting with the employee and inform him or her of

what to prepare for, i.e. self-appraisal, etc.

Complete your review and documentation of the employees performance, considering

observations, records, and feedback from others. Focus on what the employee did and didnt do,

not the employees character or personality, unless the character or personality affects job

performance and the employees effectiveness to the organization.

Arrange for a private office or room free of distractions for the meeting.

During the meeting:

Put the employee at ease through informal conversation. This will enhance the free exchange of

information. You can also discuss the purpose of the meeting and what you hope to accomplish.

Go through your evaluation. Be specific and candid in presenting your evaluation. Listen to

employee feedback, take notes, and ask questions.

Share feedback received from others.

Explore areas of disagreement and attempt to reach consensus so that the employee will be

motivated to change his or her behavior.

Discuss areas for improvement and performance expectations for the next period.

Establish a realistic and appropriate improvement plan if performance is below expectations.

Encourage the employee to record his/her comments about the evaluation, and have the

employee sign the copy to be filed. If the employee refuses to sign, the agency head or the

agency heads designated representative should, in the presence of the employee and a witness,

indicate on the copy that the employee was shown the material, was requested to sign

acknowledging that the material was read, and that the employee refused to sign (NDCC 54-06-

21). By signing the copy, the employee does not indicate agreement only that the material has

been read.

Provide the employee with a copy and place a copy in the employees official personnel file.

Strategies and Techniques

Not all performance evaluation methods work equally well in every organization one size does not fitall! It is important to consider the categories of employees to be appraised (i.e. managers vs non-

managers), the types of jobs performed, the nature of the relationship between employees and

managers, the purpose(s) which the evaluation is intended to serve. Other factors are the availability

of in-house expertise, developmental costs, and how easy is it to use.

At the core of all successful evaluation formats are clearly defined and explicitly communicated

standards or expectations of employee performance. Employees must understand what is expected of

them.
http://www.legis.nd.gov/cencode/T54C06.pdfhttp://www.legis.nd.gov/cencode/T54C06.pdfhttp://www.legis.nd.gov/cencode/T54C06.pdfhttp://www.legis.nd.gov/cencode/T54C06.pdfhttp://www.legis.nd.gov/cencode/T54C06.pdfhttp://www.legis.nd.gov/cencode/T54C06.pdf


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Descriptions of the various performance evaluation methods can be found in theAppendixof this

section.

You, as a supervisor, should visit with your human resources office or a representative from Human

Resource Management Services regarding implementing a strategy or using a technique that will best

serve your needs.

Employee Involvement

Performance evaluation is most effective when employees are actively involved in open discussion

about their own performance expectations and about how they are doing in meeting those

expectations.

Involving the employee in the performance evaluation process will make it a meaningful, worthwhile

experience for you, the employee, and the organization because employees:

need and want to have their voices heard,

are more likely to consider the system as being fair if they have involvement and understand the

process, and are more likely to demonstrate genuine commitment to goals and performance.

Ultimate benefits realized by the organization will be increased productivity, efficiency, job

satisfaction, and morale and decreased turnover.

Performance Expectations The Basis for Effective Performance Evaluation

System

AsNDAC 4-07-10-03states each employee must be informed of the level of performance that is

needed to successfully perform his or her work. These are performance expectations describing the

conditions that exist when a job is done well. They usually come from an agencys strategic plan and

are communicated down through departmental goals, objectives, and individual position descriptions.Performance expectations should tie in with essential functions and qualifications required for the

position as stated in the position description. (SeeThe Position Description.) "Think SMART when

developing performance expectations." Expectations should be Specific, Measurable, Achievable,

Realistic, and Time-bound.

Specific The performance expectation should be one that can be witnessed or observed, defined,

and concrete.

Measurable You should be able to assess, evaluate, and distinguish between different performance

levels. The end result can be identified in terms of quantity, quality, time lines, acceptable standards,

or procedures. Many say the work they do is not measurable. But if it is not measurable, how then do

they know if a goal has been met and if their contributions have value? Definitive results can be

identified for all work.

Achievable Each performance expectation should be one that can be achieved by the employee

without barriers that hinder its completion. However, it should not be so easily achieved that the

employee is not challenged nor so difficult that the employee becomes frustrated. It should be

reasonable.

RealisticEach expectation should be an actual requirement of the employees job and within the

parameters of the position description.
http://www.nd.gov/hrms/managers/guide/perfeval.html#appendixhttp://www.nd.gov/hrms/managers/guide/perfeval.html#appendixhttp://www.nd.gov/hrms/managers/guide/perfeval.html#appendixhttp://www.legis.nd.gov/information/acdata/pdf/4-07-10.pdfhttp://www.legis.nd.gov/information/acdata/pdf/4-07-10.pdfhttp://www.legis.nd.gov/information/acdata/pdf/4-07-10.pdfhttp://www.nd.gov/hrms/managers/guide/posdescrip.htmlhttp://www.nd.gov/hrms/managers/guide/posdescrip.htmlhttp://www.nd.gov/hrms/managers/guide/posdescrip.htmlhttp://www.nd.gov/hrms/managers/guide/posdescrip.htmlhttp://www.legis.nd.gov/information/acdata/pdf/4-07-10.pdfhttp://www.nd.gov/hrms/managers/guide/perfeval.html#appendix


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Time Bound Each expectation should have a time frame associated with it daily, weekly, etc.

Some factors for which expectations may be set forth and measured are:

Job Knowledge

Quality of Work

Quantity of Work

Work Habits

Cooperation or Ability to Work with Others

Oral and Written Communications

Steps of Effective Performance Evaluation

- Review

Look at the previous evaluation for:

Previous deficiencies in performance.

Have they been corrected or do they continue to be a problem? If deficiencies continue, note them

in the evaluation. Omitting a continued deficiency in subsequent evaluations can be interpreted as

a sign that the deficiency has been corrected.

Dramatic change in performance.

Determine whether your rating of the employee is consistent or whether the performance actually

has changed. When there is a significant negative change in performance, the supervisor should

give the employee notice, prior to the annual evaluation, that the next evaluation will be

significantly lower unless substantial improvement is made.

- Analysis

Analyze performance to identify gaps between expected performance and actual performance

Analyze the causes of gaps

o Organization or work environment-related causes

o

System or process-related causeso Personal causes

Select and design an action plan to close the gaps a plan that meets business needs,

performance needs, training needs, or work environment needs

Implement the plan

Follow up - Measure and evaluate the impact of the plan on the performance

Analyzing Causes of Gaps

Management often assumes that where actual performance falls short of expected performance,

employees must try harder. However, it is very important to analyze why a gap exists between

expected performance and actual performance to determine if there is a cause other than inadequate

employee efforts. Most causes will fall into three categories: Organization or Environment-Related These gaps can stem from the organizational culture,

leadership style or management practices, organizational structure, reporting relationships or

chain of command, inadequate resources (funds, staff, equipment, training, information, etc.) and

so forth. Some examples: employee reports to more than one supervisor, performance

expectations were not communicated, or expectations were not met because the employee was

overburdened due to staff cuts.


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System or Process-Related System or process-related causes can relate to any process within an

organization that becomes a roadblock to an employee meeting performance expectations. Some

examples: time frames or procedures are burdensome, procedures conflict, someone else didnt

meet their time frames, or the information reporting system is inadequate.

Personal These are gaps that are within the employees realm of control. They can, for example,

deal with situations that are going on in home life that affect work performance or depend on theemployees physical or emotional abilities. Lack of effort, motivation, or concern for the agencys

efficiency can also fall under this category. Exercise caution when dealing with personal issues

remember to keep it job related, focusing on how job performance is affected. If an employee

alleges that a medical condition is the cause of poor performance, contact your human resource

officer or legal counsel at once. Do not attempt to resolve employees personal problems.

The cause of a performance gap may overlap a couple categories. It is imperative that you and your

employee communicate to identify the cause of the gap and arrive at solutions to eliminate or

minimize the gap.

The Evaluation Meeting

Before the performance evaluation meeting:

At least one week in advance, schedule a meeting with the employee and inform him or her of

what to prepare for, i.e. self-appraisal, etc.

Complete your review and documentation of the employees performance, considering

observations, records, and feedback from others. Focus on what the employee did and didnt do,

not the employees character or personality, unless the character or personality affects job

performance and the employees effectiveness to the organization.

Arrange for a private office or room free of distractions for the meeting.

During the meeting:

Put the employee at ease through informal conversation. This will enhance the free exchange of

information. You can also discuss the purpose of the meeting and what you hope to accomplish.

Go through your evaluation. Be specific and candid in presenting your evaluation. Listen to

employee feedback, take notes, and ask questions.

Share feedback received from others.

Explore areas of disagreement and attempt to reach consensus so that the employee will be

motivated to change his or her behavior.

Discuss areas for improvement and performance expectations for the next period.

Establish a realistic and appropriate improvement plan if performance is below expectations.

Encourage the employee to record his/her comments about the evaluation, and have the

employee sign the copy to be filed. If the employee refuses to sign, the agency head or the

agency heads designated representative should, in the presence of the employee and a witness,

indicate on the copy that the employee was shown the material, was requested to sign

acknowledging that the material was read, and that the employee refused to sign (NDCC 54-06-

21). By signing the copy, the employee does not indicate agreement only that the material has

been read.

Provide the employee with a copy and place a copy in the employees official personnel file.

Strategies and Techniques

Not all performance evaluation methods work equally well in every organization one size does not fit

all! It is important to consider the categories of employees to be appraised (i.e. managers vs non-
http://www.legis.nd.gov/cencode/T54C06.pdfhttp://www.legis.nd.gov/cencode/T54C06.pdfhttp://www.legis.nd.gov/cencode/T54C06.pdfhttp://www.legis.nd.gov/cencode/T54C06.pdfhttp://www.legis.nd.gov/cencode/T54C06.pdfhttp://www.legis.nd.gov/cencode/T54C06.pdf


21/33

managers), the types of jobs performed, the nature of the relationship between employees and

managers, the purpose(s) which the evaluation is intended to serve. Other factors are the availability

of in-house expertise, developmental costs, and how easy is it to use.

At the core of all successful evaluation formats are clearly defined and explicitly communicated

standards or expectations of employee performance. Employees must understand what is expected of

them.

Descriptions of the various performance evaluation methods can be found in theAppendixof this

section.

You, as a supervisor, should visit with your human resources office or a representative from Human

Resource Management Services regarding implementing a strategy or using a technique that will best

serve your needs.

Critical Control Points, StandardsFor a manager careful personal observation of subordinate is not possible because of the complexity of the

operations and the fact that a manager has far more to do than personally observe performance for a

whole day. A manager must choose points for special attention. The points selected for control should be

critical, in the sense either of being limiting factors in the operation or of showing better than other

factors whether plans are working out. The principle of critical point control is: Effective control requires

attention to those factors critical to evaluating performance against plan. Another way of controlling is

comparing company performance with that of other firms through benchmarking.

Types of Critical-Point Standards

Standards to be of following points: physical standards, cost standards, capital standards, revenue

standards, program standards, intangible standards, goals as standards and strategic plans as control

points for strategic control.

Physical Standards: Physical standards are non-monitory measurements and are common at the

operating level. This may reflects quantities such as labor hours per unit of output. Physical standards

may also reflect quality, such as hardness of bearings.

Cost Standards: Cost standards are monitory measurements and, like physical standards, are common

at the operating level. They attach monitory values to specific aspects of operations such as direct or

indirect costs per unit produced, labor cost per unit or per hour, etc.

Capital Standards: There are a variety of capital standards, all arising from the application of monetary

measurements to physical items. They have to do with the capital invested in the firm rather than with

operating costs and are therefore primarily related to the balance sheet rather than to the income

statement. Most widely used standard is return on investment. Other capital standards are ratio of currentassets to current liabilities, debt to net worth, fixed investment to total investment, cash and receivables to

payables.

Revenue Standards: Revenue standards arise from attaching monetary values to sales.

Program Standards: A manager may be assigned to install a variable budget program, a program for

formally following the development of new products or a program for improving the quality of a sales
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force.

Intangible Standards: More difficult to set are standards not expressed in either physical or monetary

measurements e.g. determining whether the advertising program meets both short and long term

objectives.

Goals as Standards: Modern managers are finding that through research and thinking it is possible todefine goals that can be used as performance standards.

Strategic Plans as Control Points for Strategic Control: Strategic Control requires systematic

monitoring at strategic control points and modifying the organizations strategybased on this evaluation.

Since controls facilitate comparisons of intended goals with actual performance, they also provide

opportunities for learning, which, in turn, is the basis for organization change.

WHAT kind of bias is this?

TYPES of rater bias

Rater biases are conscious or unconscious tendencies that affect how supervisors ratetheir employees. Ideally, ratings are based on actual performance and the ratingsthemselves are accurate reflections of that performance. Rater biases, however,operate to systematically distort the ratings. Some of the more common types of raterbias are the following:

Leniency The rater tends to evaluate everyone positively.

Severity The rater tends to avoid giving highly positive ratings.

Halo The person being rated has one very positive attribute that causes the rater to

rate other attributes more positively than deserved; the rating of that one attribute spillsover to influence the other attributes.

Horns The person being rated has one very negative attribute that causes the rater torater other attributes more negatively than warranted.

Stereotyping Because the person being rated is perceived to belong to a particulargroup (for example, female, Hispanic, accountant, from the mountains, a casual dresser,a smoker, a vegetarian, etc.), the rater assumes that the individual possesses all thestereotypic traits associated with that group and allows these assumptions to color therating of the person.

Recency The rater remembers best what has happened most recently and allowsthese recent recollections to unduly influence the ratings, rather than taking into accountperformance over the entire cycle.

Similarity Because the person being rated shares some attribute with the rater (forexample, both graduated from NC State, wear similar fashions, enjoy the same music,etc.), the rater rates the person more favorably.


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Negative event The rater allows a single negative event to influence the perception ofthe persons performance, even long after the event has passed into history.

Comparison The rater rates the person based on comparisons with other employees,past or present, rather than basing the evaluation on how the person performedcompared to the expectations set in the work plan.

I. Halo/Horn EffectHalo/Horn error is the tendency to rate a person high on all performance factors or low on all of them

because of a global impression one has.

Causes:

Compatibility. This is the tendency to rate people whom we find pleasing of manner and

personality higher than they deserve on all factors, not just interpersonal skills. Thos who agree with

us, nod their heads when we talk, etc., get better ratings than their performance justifies.

The one-asset person. The glib talker, the person with the nice looks, the person with

advanced degrees, or the graduate of our alma mater usually has the advantage of an upward bias

when he or she is evaluated.

The high-potential effect. We often judge the persons credentials rather than what theperson has actually done for the organization.

The contrary person. The boss may find it difficult to be objective and ignore his or her

private irritations with a person who disagrees too often on too many things.

Cures:

Attend to differences across performance factors. Develop a very clear idea of the nature ofeach performance factor and the kind of behavior it describes. Focus on differences, not similarities.

Attend to all aspects of a persons performance. When an individual is particularlyimpressive/disappointing in one area, avoid the tendency to categorize other performance areas

similarly.

Organizational Values & Their Impact on

Strategy

ORGANIZATIONAL VALUES:Organizational values define the acceptable standards which govern the

behaviour of individu als within the organiza t ion. Without such

val ues , in div idu als wil l pu rsu e behaviours that are in line with their

own individual value systems, which may lead to behaviours that theorganization doesn't wish to encourage.

In a smaller, co-located organization, the behaviour of individuals is

much more visible than in larger, disparate ones. In these smaller groups,

the need for articulated values is reduced, since unacceptable

behaviours can be chal lenged openly. However , for the larger


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organization, where desired behaviour is being encouraged by different

individualsin different places with different sub-groups, an articulated statement of

values can drawan organization together.

Clearly, the organization's values must be in line with its purpose or

mission, and thevision that it is trying to achieve. So to summarize, articulated

values of an organizationcan provide a framework for the collective

leadership of an organization to encouragecommon norms of behaviour

which will support the achievement of the organization 'sgoals and mission.

STRATEGIC FRAMEWORK:Every organization has a vision or picture of what it desires for its future, whether

foggy or crystal clear. The current mission of the organization or the purpose for its

existence is also understood in general terms.

Values form the foundation for everything that happens in your workplace. If you

are the founder of an organization, your values permeate the

wo rkp la ce. You nat ura ll y hir e people who share your values.

Whatever you value, wil l largely govern the act ions of your workforce.

The values members of the organiza t ion manifes t in da i ly

decision making, and the norms or relationship guidelines which informally

define how people interact with each o t h e r a n d c u s t o m e r s , a r e a l s o

v i s i b l e . B u t a r e t h e s e u s u a l l y v a g u e a n u n s p o k e n

understandings enough to fuel your long term success? I dont think so.

Every organization has a choice. You can allow these fundamental underpinnings

of your orga niza tion to deve lop on t heir own with each indi vidu al

acting in a self-defined vacuum. Or, you can invest the time to proactively

define them to best serve members of the organization and its customers.Many

successful organizations agree upon and articulate their vision, mission or purpose,

v a l u e s , a n d s t r a t e g i e s s o a l l o r g a n i z a t i o n m e m b e r s c a n

enrol l in and own their achievement .

Valuesa r e t r a i t s o r q u a l i t i e s t h a t a r e c o n s i d e r e d w o r t h w h i l e ; t h e y

r e p r e s e n t a n individuals highest priorities and deeply held driving forces.

Value statementsare grounded in values and define how people want to behave with each

other in the organization. They are statements about how the organization will

value customers, suppliers, and the internal community. Value statements describe


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actions that are the living enactment of the fundamental values held by

most individuals within the organization.

Visionis a statement about what the organization wants to become. The vision

should resonate with all members of the organization and help them feel proud,

excited, and part of something much bigger than themselves. A vision

should stretch the organizations capabilities and image of itself. It gives shapeand direction to the organizations future.

Mission/Purposeis a precise description of what an organization does. It should describe the

business the organization is in. It is a definition of "why" the

organization exists curr entl y. E ach memb er of an orga niza tion

sho uld b e ab le t o ver ball y exp ress this mission.

Strategies

are the broadly defined four or five key approaches the organization will usetoaccomplish its mission and drive toward the vision. Goals and action

plans usually flow from each strategy. One example of a strategy is employee

empowerment and teams. Another is to pursue anew worldwide market in Asia.

Another is to streamline your current distribution system using lean management

principles. This strategic framework must be developed by identifying the

organizations values. Create an opportunity for as many people as possible toparticipate in the process. All the rest of the strategic framework would grow from

living these.

WHY IDENTIFY AND ESTABLISH VALUES?Effect ive organiza t ions ident i fy and develop a c lear , concise and

shared meaning of values/beliefs, priorities, and direction so that everyone

understands and can contribute. Once defined, values impact every aspect of your

organization.You must support and nurture this impact or identifying

values will have been a wasted exercise. People will feel fooled and

misled unless they see the impact of the exercise within your organization.

If you want the values you identify to have an impact, the following must occur.

P e o p l e d e m o n s t r a t e a n d m o d e l t h e v a l u e s i n a c t i o n i n

t h e i r p e r s o n a l w o r k behaviors, decision making, contribution, andinterpersonal interaction.

Organizational values help each person establish priorities in their dailywork life.


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Values guide every decision that is made once the organization hascooperatively created the values and the value statements.

Rewards and recognition within the organization are structured to recognizethose people whose work embodies the values the organization embraced.

Organizational goals are grounded in the identified values.

Adopt ion of the values and the behaviors tha t resu l t i sre co gni zed i n regu lar performance feedback.

People hire and promote individuals whose outlook and actions arecongruent withthe values.

Only the active participation of all members of the organization will ensure a

trulyorganization-wide, value-based, shared culture.

The term strategic management is used to refer to the entire scope of strategic-decision making

activity in an organization. Strategic management as a concept has evolved over time and willcontinue to evolve. As result there are a variety of meanings and interpretations depending on the

author and sources. For example, some scholars and practitioners the term strategic planningconnote the total strategic management activities. Moreover, sometimes managers use the terms

strategic management, strategic planning, and long-range planning interchangeable. Finally,

some of the phrases are used interchangeably with strategic management are strategy and policy

formulation, and business policy.

To purpose of this thesis I use the terminology strategy management, as opposed to the morenarrow term business policy.

The following statements serve as a number of workable definitions ofstrategic management:

Strategic management is the process of managing the pursuit of organizational mission

while managing the relationship of the organization to its environment (James M. Higgins).

Strategic management is defined as the set of decisions and actions resulting in the

formulation and implementation of strategies designed to achieve the objectives of the

organization (John A. Pearce II and Richard B. Robinson, Jr.).

Strategic management is the process of examining both present and future environments,

formulating the organization's objectives, and making, implementing, and controlling

decisions focused on achieving these objectives in the present and future environments(Garry D. Smith, Danny R. Arnold, Bobby G. Bizzell).


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Strategic management is a continuous process that involves attempts to match or fit the

organization with its changing environment in the most advantageous way possible (LesterA. Digman).

Characteristics of strategic management

They are:

1. Uncertain :Strategic management deals with future-oriented non-routine situation.They create

uncertainly.Managers are unaware about the consequences of their decisions.

2. Complex :Uncertainly brings complexity for strategic management.Managers face environment

which is difficult to comprehend.External and internal environment is analysed.

3. Organization wide:Strategic management has organization wide implication.It is not operation

specific.It is a systems approach.It involves strategic choice.

4. Fundamental :Strategic management is fundamental for improving the long-term performance

of the organization.

5. Long-term implication :Strategic management is not concerned with day-to-day operation.It

has long-term implications.It deal with vision,mission and objective.6. Implication :Strategic management ensure that strategic is put into action,implementation is

done through action plans.

7. Moreover, an Independent Director has been defined under various committee reports, afew examples being; the Cadbury Committee Report which recommended that majority of

the Directors of the Company should be independent and independent from management

and free from any business or other relationship which could materially interfere with the

exercise of their independent judgment. Secondly the Kumarmangalam Birla Committee

Report states that Independent Directors are directors who apart from receiving the

Directors remuneration do not have any other material pecuniary relationship or

transactions with the company, its promoters, its management or its subsidiaries, which in

the judgment of the board may affect their independence of judgment.

8. To conclude the above stated definitions of Independent Directors means directors whoapart from receiving the remuneration, do not have any other material or pecuniary interestin the company.

9. NEED FOR INDEPENDENT DIRECTORS IN INDIAAn effective Board of Directors is the most essential characteristic of all successful

Companies. The Non-Executive Directors play a crucial role in implementing the

principles of effective corporate governance. The business activities of the corporations

are crossing the national boundaries and involve shareholders and investors from all

around the globe. Therefore, there is an urgent need for appointment of independentofficers at the top levels of company. The need for of Independent Directors has also

arisen due to gradual changes in the mindset of the investors and shareholders. A commonfeature of such Companies is that they have systems in place, which allow sufficient

freedom to the boards and management to take decisions towards the progress of their

Companies and innovation, while remaining within a framework of effectiveaccountability. In other words they have a system of good corporate governance. It is

important that insiders do not take undue advantage of their position and take unfair
http://businessofaccouting.blogspot.in/2010/02/characteristics-of-strategic-management.htmlhttp://businessofaccouting.blogspot.in/2010/02/characteristics-of-strategic-management.htmlhttp://businessofaccouting.blogspot.in/2010/02/characteristics-of-strategic-management.html


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advantage. In order to prevent such situation, the demand for Independent Directors has

risen during the recent years in India. Independent Directors can counterbalancemanagerial infirmities in the company. They would ensure legal and ethical behavior of

the company. They are the source of well conceived long term decisions for the company.

They are deemed to provide the necessary personal and technical expertise in order to

abate fraud, misappropriation by the company or its directors.10.C. SELECTION OF THE INDEPENDENT DIRECTORSThe process of appointing Independent Directors must be different from those of whole

time directors under the Companies Act. The selection and appointment of theIndependent Directors must be transparent and value based. The appointment of

independent directors should be made by the company from amongst persons, who in the

opinion of the company are persons with integrity, possessing relevant expertise andexperience. The Companies should have independent nominations committees which

would determine the qualifications and other requirements for the independent directors.

The candidates should be rigorously scrutinized before making nominations to the board.

It would be more appropriate if company itself prescribe the rules and regulations

regarding qualifications and appointment of independent directors in their article ofassociations or code of corporate governance.

11.In considering the independence, the focus should be on whether he can truly actindependently of the management i.e. qualitative independence besides his qualifications

and background. They should question intelligently, debate constructively, challengerigorously and decide dispassionately and they should have the ability to listen sensitively

to the views of others, inside and outside the board. They must acquire the relevant

expertise and knowledge and must be well-informed about the business.

12.D. ROLE OF INDEPENDENT DIRECTORSa. Role in Corporate Governance: A corporation is the congregation of various

stakeholders such as customers, employees, investors, shareholders etc. A corporation

should be fair and transparent to its stakeholders in all transactions. This has become

imperative in todays globalized business world where corporations need to access globalpools of capital, need to attract and retain the best human capital from various parts of the

world, need to partner with vendors on mega collaborations and need to live in harmony

with the community. Unless a corporation embraces and demonstrates ethical conduct, itwill not be able to succeed.

13.Corporate governance is about the ethical conduct in business. In this regard, the managersmake decisions based on a set of principles influenced by the values, context and culture

of the organization. In India, the companies fill the Boards with the representatives of the

promoters. These Directors may derive personal benefits rather than work for the benefit

of the Company. This has posed great difficulties in the functioning of the company and isin contradiction of the principles of corporate governance. Independence of the Board is

critical to ensuring that the Board fulfils its oversight role objectively and holds the

management accountable to the shareholders. Therefore, ensuring some independentmembers on the Board can uphold corporate governance principles.

14.b. Protection of the Minority shareholder: The shareholders, especially the minorityshareholders prefer coming to independent directors who provide transparency in respect


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of the disclosures in the working of the company as well as maintain a balance towards

resolving conflict areas. In evaluating the boards or management decisions in respect ofemployees, creditors and other suppliers of major service providers, independent directors

have a significant role in protecting the stakeholders interests.

15.c. Risk Management and Review: It means identification, analysis and economiccontrol of all such risks that may threaten assets, resources and earning capacity of thecompany. The risk may be financial, strategic or any other risks . The role of the

Independent Director is to ensure that all the investment, funds, business transaction etcare heading in a right way and critically scrutinize the decision making process. .

16.d. Role in relation to the board: As members of Board, their role is similar to any otherdirector; Independent Directors primarily provide inputs to all key-decisions, such as

strategies, performance evaluation and risk evaluation, affecting the company. Significant

contribution is expected when matters relating to the committee on which they are

members are being discussed. They should ensure that the Board addresses areas of

concern on the running of the company and assist them in resolving the issuesharmoniously.

17.While the legal duties and objectives are the same as Executive Directors, the timedevoted by independent Non-Executive Directors to the companys affairs is significantly

less and therefore the degree of care, skill and diligence is lower than that expected fromExecutive Directors, and this can be seen as a disadvantage by some. However, certain

standard of care has to still be ensured. As members of the Board, an Independent

Directors should, not only comply with the code of conduct but also establish, implement,

monitor its adherence by other senior management and set an example for others.

18.e. Improving Internal Control : The consummate internal control is the imperativerequirement of the company. It activates the overall management policies and keeps them

under the feasible ranges. The process of the internal control commences right from thebirth of new policies by the Board of directors and continues to the bottom the

organizational structure. It includes development and operation of the management

policies, administrative regulations, manuals, directives and decision, internal auditing etc.The responsibility of the independent directors is to act as supervisory body and monitor

the internal control system. They must identify the imperfection in the internal control

system and present them before the board to find suitable solutions to obviate them.

19.f. Statutory Compliances: To maintain high standards in the market and excellentreputation in the public or investors, stricter adherence to the statutory laws is a pre-

requisite for the company. The postulates of good corporate governance require theCompanies to enforce the multiple statutes and rules and regulations given there under.

This facilitates the ultimate objective of protection of investors interest.

20.All the directors including the Independent Directors owe liability equally for noncompliance of laws. The Independent Directors do not have an excuse in this regard.


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21.CONCLUSION

In India, the appointment of Independent Directors on the Board is a mandatory requirement for

the listed Companies only. The non- listed Companies can still exercise their discretion whether

to appoint them or not. However, the role and importance of the Independent Directors has

been constantly reminded by the various committee reports on national as well as international

scene. For example, in the United States, the Sarbanes Oxley Act was introduced after the stock

market crash and scandals in 2002 for better governance of the Companies. It requires 50% of

the Board members must be independent which reduces the threat of fraud or misappropriation

by the Board members or the Companies to minimal. The sole purpose of app

management decision should be based on careful consideration of all the factors

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