Chapter 16 - Governance and Social Responsibility

Chapter 16 Governance and Social Responsibility

Part 1 The Separation of Ownership and Control

The separation of ownership and control refers to the situation in a company where the people who own the company (eg: shareholders) may not be the same people as those who control the company. (eg: the board of directors)

Reasons:

• Specialist management can run the business better than those who own the business
• The original shareholders cannot personally contribute all the capital needed to run the business, so they have to bring in external capital from people whoa re not interested in the day-to-day operations

Win-win situation for both parties because:

• Managers can get on with full-time management of the business
• Shareholders are interested in the return from their investment and do not have the skills, time or the inclination to concern themselves with day-to-day matters

However, the separation of ownership and control will lead to the agency problem in a company.

The Agency Problem

- Directors are not operating in the company's best interests but to their own benefits. However, this can be solved by aligning the interests of the directors and the interests of the company.

Part 2 The Meaning of Corporate Governance

Corporate Governance is the set of processes and policies by which a company is directed, administered and controlled.

Stewardship Theory

Steward: Someone who manages property or other affairs of someone else

Some approaches to good governance view the management of an organisation as the stewards of its assets, charge with their employment and deployment in ways consistence with the overall strategy with the overall strategy of the organisation. With this approach, power is seen to be vested in the stewards, that is the executive managers.

Agency Theory

Agency: The state of serving as an official and authorized delegate/agent

Another approach to governance is agency theory. This takes the stance that, rather than acting as stewards, management will act in an agency capacity, seeking to service their own interest and looking after the performance of the company only where its goals coincident with their own.

Stakeholder Theory

Effectively stakeholder theory is a development of the notion of stewardship, stating that management has a duty of care, not just to the owners of the company in terms of maximizing shareholder value, but also to the wider community of interest, or stakeholder.

Governance Principles

1. To minimize risk especially financial risk, legal and reputation-al risk by requiring compliance with accepted good practice in the jurisdiction in question and ensuring appropriate system of financial control are in place, in particular system for monitoring risk, financial control and compliance with the law.

2. To ensure adherence to and satisfaction of the strategic objectives of the organisation, thus aiding effective management.

3. To fulfill responsibilities to all stakeholders and to minimize potential conflict of interest between the owners, managers, and wider stakeholder community. However, define and to treat each category fairly.

4. To establish clear accountability at senior levels within an organisation.

5. To maintain the independence of those who scrutinize the behaviour of the organisation and its senior executive managers. Independence is particularly important for non-executive directors and internal and external auditors.

6. To provide accurate and timely reporting of trustworthy/independent financial and operational data to both the management and the owners of the organisation to give them a true and balance picture of what's happening in an organisation.

7. To encourage more proactive involvement of owners in the effective management of the organisation through recognizing their responsibilities of oversight and input to decision making processes via voting or other mechanism.

8. To promote integrity that is straight toward dealing completeness.

Part 3 The Meaning of Corporate Social Responsibility

- a company should be sensitive to the needs and wants of all of the stakeholders in its business operations, not just the shareholders
- sustainable developement - companies should make decisions based not only on financial factors, but also on the social and environmental consequences of their actions

- the WBCSD see CSR fitting into overall corporate responsibility as follows:
Corporate Responsibility (sustainable developement)
~ Corporate Financial Reaponsibility
~ Corporate Environmental Responsibility
~ Corporate Social Responsibility

- key issues in CSR debate are employee rights, enrironmental protection, supplier relations, and community involvement

Part 4 The Importance of CSR to a Company's Success

- a coherent CSR strategy can offer business benefits by enabling a company to:
~ monitor changing social expectations
~ manage operational risks
~ identify new market opportunities
~ retain key employees

Part 5 The Impact of Corporate Governance and CSR on the Organisation

Enhanced performance reporting methods including the following:

The balanced scorecard

• financial perspective- reports the traditional information of profits, capital employed, etc.
• customer perspective- reports how well customer wants have been satisfied.
• internal perspective- reports on the internal efficiency of the business
• innovation and learning perspective- reports on the development of new products and services

Triple bottom line reporting

• People
• Planet
• Profit
• Financial outcomes
• Environmental performances
• Social performances

Part 6 Non-Executive Directors (NEDs)

• not part of employee of the company but they do take part in decision making
• do not take part in day-to-day running of the company
• balancing influences and play a key role in reducing conflict of interest between management and shareholders
• provide assurance to shareholder that management is acting in the interest of the organisation.

a) STRATEGY: NED should contribute to and challenge the direction of, strategy

b) PERFORMANCE: NED should scrutinise the performance of management in meeting goal and objective and monitor the reporting of performances

c) RISK: NED should satisfy themselves that financial informantion is accurate and that financial controls and systems of risk management are robust.

d) DIRECTOR AND MANAGER: NED are responsible for determining appropriate levels of remuneration for executive, and are key figures in the appointment and removal of the senior manager and procession planning.

Part 7

Part 8

Part 9 Public Oversight of Corporate Governance

Public has a
- "right to know" how such company is being governed
- right to be involved in the governance process

Public can oversight via publication by company of their annual report and accounts.
By law, company required to send a copy to shareholders.

Important matters required to be disclosed in Annual report
-Eg: the audit committee and remuneration must describe their role and actions during the year

Part 10 Stakeholders Needs Analysis

To identify stakeholder needs, possible methods are :
(a) questionnaires
(b)Focus groups
(c) Direct interviews or interviews with representatives