Corporate Strategy and Corporate Governance

8/3/2019 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

Corporate Strategy and Corporate Governance

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