Chapter 4 Corporate Strategy and Corporate Governance

7/28/2019 Chapter 4 Corporate Strategy and Corporate Governance

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Corporate Strategy and

Corporate Governance


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Corporate Strategy and Corporate

Governance

Corporate Governance is concerned with servinginterest of the owners (stockholders) and, is muchbroader in perspective than corporate management

Corporate Governance

Denotes direction and control of the affairs of thecompany

Directors are subject to their duties

Obligation and responsibilities to act in the best interest of

their company

To give direction and remain accountable to theirshareholders and other beneficiaries for their action


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Importance of Corporate Governance

Corporate governance refers to the rules,

procedures, and administration of the firm's

contracts with its shareholders, creditors,

employees, suppliers, customers, and

government.

Shareholders are becoming more demanding

and more concerned about their rights andprivelages

They expect high profit and large dividents


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Different Model of Corporate

Governance

In the UK and the US, corporate governancemechanisms emphasize the relationshipbetween shareholder and management.

In countries such as France, Germany and theNetherland, the corporate governancemechanisms take a stakeholders' approach togovernance, aiming to balance the interests ofowners, managers, major creditors andemployees.


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Governance

Anglo-Saxon Model (US and UK)

Strengths Weaknesses

Dynamic market orientations Volatility and instability

Fluid Capital Short term approach

Internationalization possible approach Inadequate governance structure


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Governance

European Model (Germany)


Long term Industrial Strategy Internationalization difficult

Very stable Capital Vulnerability of companies to global

market

Strong governance procedures


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Governance

Asian Model (Japan)


Long term Industrial Strategy Growth of Institutional investor activism

Stable Capital Growth of financial speculation

Overseas Investments Secretive procedures


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Corporate Strategy and Corporate

Governance: Complementarity and

ConflictCorporate Strategy Conflict Corporate GovernanceLong term Growth Sacrifice of short term profitability, cash

flow and pay level/ hikes

Development/ diversification to require

additional funding (share issue or loan)

Financial independence may be sacificed

Expanding capital base: public ownership

of shares

More openness and accountability from

the management

Cost efficiency through technology or new

investment

Job losses in the organisation

Expanding into mass market; product andprice strategy Decline in quality standards

Family businesses to grow; induction of

professional managers

Owners may lose control


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Sarbanes-Oxley Act

The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federalgovernment in the United States to legislate several of the principles recommended in the Cadburyand OECD reports.

Rights and equitable treatment of shareholders:[14][15][16] openly and effectively communicating information and by encouraging shareholders to participate in general

meetings.

Interests of other stakeholders:[17] Organizations should recognize that they have legal, contractual,social, and market driven obligations to non-shareholder stakeholders, including employees,

investors, creditors, suppliers, local communities, customers, and policy makers. Role and responsibilities of the board:[18][19] The board needs sufficient relevant skills and

understanding to review and challenge management performance. It also needs adequate size andappropriate levels of independence and commitment

Integrity and ethical behaviour:[20][21] Integrity should be a fundamental requirement in choosingcorporate officers and board members. Organizations should develop a code of conduct for theirdirectors and executives that promotes ethical and responsible decision making.

Disclosure and transparency:[22][23] Organizations should clarify and make publicly known the roles

and responsibilities of board and management to provide stakeholders with a level of accountability.They should also implement procedures to independently verify and safeguard the integrity of thecompany's financial reporting. Disclosure of material matters concerning the organization should betimely and balanced to ensure that all investors have access to clear, factual information.

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Chapter 4 Corporate Strategy and Corporate Governance