F1_Session3_notes

Lecture Notes 2010 Session 3 C16, C9 Kris-1 Governance and social responsibility The separation of ownership and control  Refers to the situation in a company where the people who own the company (the shareholders) may not be the same people as those who control the company (the board of directors).  In a small company, the directors are also likely to own all the shares in the company, so there is no separation of ownership and control.  In a large company there is likely to be a large number of external shareholders who play no role in the day-to-day running of the company. There is then a separation of ownership and control and the potential for a conflict of interest. ( agency problem) What is corporate governance?  It is the set of processes and policies by which a company is directed, administered and controlled. It includes the appropriate role of the board of directors and of the auditors of a company.  OECD( Organization for Economic Co-operation and Development) definition: “the system by which business corporations are directed and controlled”  Key issues  The membership of the board of directors – both executive and nonexecutive directors (NEDs).  The role of the board of directors – purely to make money for the shareholders or are there wider responsibilities?  How directors’ remuneration is decided and disclosed.  The role of both internal audit and external audit. What is corporate social responsibility?  CSR refers to the idea that a company should be sensitive to the needs and wants of all of the stakeholders in its business operations, not just the shareholders. ( liked to sustainable development)  Stakeholders: Are all those who are influenced by, or can influence, the company’s decisions and actions  Shareholders • directors Lecture Notes 2010 Session 3 C16, C9 Kris-2  Other employees • customers  Suppliers • the government  Lenders of funds  Community organizations, especially in the local neighborhood. What is sustainable development?  Corporate social responsibility is closely related to sustainable development  Sustainable development  Companies should make decisions based not only on financial factors, but also on the social and environmental consequences of their actions.  Example: Marks and Spencer • products – throughout the three stages of each product’s life (production, selling and usage), the aim is to encourage ethically and environmentally responsible behavior • People – everyone who works at the company is entitled to a mix of benefits. • Places – the company recognizes its obligations to the communities in which it trades. Successful retailing requires economically healthy and sustainable communities. The importance of CSR to an organization's success  Traditional view (losing support these days)  Corporate social responsibility offers no business benefits, and destroys shareholder value by diverting resources away from commercial activity.  Companies pay taxes to government, and it is governments and charities that should be responsible for social matters.  Modern view ( CSR enables company to increase its reputation which leads to long te rm future)  Monitor changing social expectations  Manage operational risks  Indentify new market opportunities  Retain key employees  Note: Cost of CSR should be thought as an investment in an intangible strategic asset rather than as an expense. The impact of corporate governance and CSR on the organization Lecture Notes 2010 Session 3 C16, C9 Kris-3  Enhanced performance reporting methods including the following:  The balanced scorecard  Financial perspective  Customer perspective  Internal perspective  Innovation and learning perspective  Triple bottom line reporting  People  Planet  Profit Nonexecutive directors (NEDs)  Types of directors  Executive directors : Involved in the day-to-day execution of management decisions  NEDs : Are those who primarily only attend board meetings (and the meetings of board committees) • Should as far as possible be ‘independent’ so that their oversight role can be effectively and responsibly carried out. – Not acting for a prolonged period of time – Having enough time to carry out the role properly – Having no links to the executives. NEDs- Typical recommendations  At least half the board (excluding the chairman) should comprise independent NEDs.  A smaller company should have at least two independent NEDs.  One of the independent NEDs should be appointed to be the ‘senior independent di rector’. • Available to be contacted by shareholders who wish to raise matters outside the normal executive channels of communication. Remuneration committees  Stated principle in most codes on Corporate Governance  No director should be involved in deciding the level of their own remuneration.  The board of a listed company  Should establish a remuneration committee of at least three (or two in the case of smaller companies) people who should all be independent NEDs.  Responsibility  The remuneration committee should set the remuneration of all the executive directors and the chairman, including pension rights and any compensation payments.  The whole board of directors should determine the remuneration of the NEDs, or the board could delegate this responsibility to a committee of the board. Audit committees  An audit committee consists of independent NEDs who are responsible for monitoring and reviewing the company’s internal financial controls and the integrity of the financial statements.  The audit committee acts as an interface Lecture Notes 2010 Session 3 C16, C9 Kris-4 Auditor’s closeness to directors can lead to  External auditors become too close (familiar) to the executive directors (who run the company).  External auditors are not comfortable reporting errors, frauds, etc. to the very people who have done them!  Internal auditors are not comfortable reporting systems weaknesses to the very people who designed the systems!  A board might choose to have internal auditors to give a good appearance to the outside world – but then underfund them, or give them work to do that ensures they go nowhere near areas where the directors know there are mistakes or frauds. Audit committees structure  An audit committee is a subset of the main board.  It should comprise at least three NEDs, and should act as the fi rst point of contact for both internal and external auditors 1. Being available for internal and external auditors (e.g. audit committee meetings are likely to include both sets of auditors). 2. Requiring executive directors to attend as necessary. 3. Reviewing accounting policies and financial statements as a whole to ensure that they are appropriate and balanced. 4. Reviewing systems of internal controls. 5. Agreeing agenda of work for the internal audit department. 6. Receiving results of internal audit work. 7. Short listing firms of external auditors when a change is needed. Reviewing independence of external audit firm. 8. Considering extent to which external auditors should be allowed to tender for ‘other services’. Advantages and disadvantages of Audit committee  Advantages 8. 1-8(previous slide) 9. Improved independence and overall quality of internal and external audit functions.  Disadvantage 8. They add another tier/level to decision making by directors, and this could slow a company’s activities down. Public oversight of corporate governance  Public is a legitimate stakeholder  Public have a ‘right to know’ how a company is being governed and a right to be involved in the governance process. Lecture Notes 2010 Session 3 C16, C9 Kris-5  Public oversight of corporate governance is via the publication by companies of their Annual Report and Accounts.  Companies are required by law to send a copy (or a summarized version) to each shareholder  Post a copy on their website or  Will provide a paper-based copy free of charge to any member of the public who requests one. Stakeholder needs analysis  CSR philosophy is based on the idea of being sensitive to the needs and wants of all the stakeholders in the business, not just the shareholders.  A stakeholder needs analysis can be carried out to bring some structure to the implementation of a CSR programme.  Who are the key stakeholders in the business?  What are their needs?  Possible methods to identify stakeholders needs  Questionnaires  Focus groups  Direct interviews or interviews with representatives. Political & legal factors Pest analysis (PEST/STEP)  Firms carry out external(SWOT) analysis as part of their strategic planning. It includes  Political / legal factors • Legal : influence of taxation, employment law, monopolies legislation, environmental protection laws  Economic factors • Interest rates, inflation, business cycles, unemployment, disposable income and energy availability and cost  Social / demographic factors • Population, demographics, social mobility, income distribution, lifestyle changes, attitudes of work and leisure, levels of education and consumerism  Technological factors • Government spending on research, new discoveries and development, Govt and industry focus of technological effort, speed of technological transfer and rates of obsolescence  Competitive factors Lecture Notes 2010 Session 3 C16, C9 Kris-6 Practice  Factors such as recession or inflation are termed as: 1. Political factors 2. Legal factors 3. Technological factors 4. Economic factors Political systems  A complete set of  Institutions  Political organizations  Interest groups ( trade unions, lobby groups)  The relationships between those institutions and  The political norms and rules that govern their function ( constitution, election law)  Political systems concerning firms  Global – e.g. WTO, EU legislation  National – national government policy, national legislation, government departments  Local – local government departments, councils. Government policy  Governments can influence firms through legislation and government policy decisions  Housing : Create new communities -> opportunity for firms  Crime : Affect firms that specialize in security  Education : Availability of workforce  Defense : Affect arms manufactures  Healthcare : Implications for equipment manufactures & hospitals  Energy : Choice of energy sources(wind, coal,…)  Environmental : Gas emissions controls  Farming : Subsides  Town planning : Influence business location Lecture Notes 2010 Session 3 C16, C9 Kris-7  Domestic: Attract new employers  Foreign : Protectionism Legislation  Firms need to comply with legislation  Failure to do so results in fines, closure, bad publicity and/or loss of customers.  Legislation specific to industries ( food labeling in the food industry)  Key areas of legislation that affect all firms • Protecting employee rights • Protecting consumers • Protecting the environment • Health and safety • Data protection Sources of legal authority  Supra-national  United Nations resolutions, International Court of justice, WTO, European Parliament, European courts  National  National Governments through acts of parliament, Senior courts (e.g. House of Lords in UK, The Supreme Court in USA), Other major courts through the principles of case law and the setting of precedents  Regional  Regional / Federal Government ( e.g. Welsh assembly in the UK)  Local councils can issue bye-laws in many countries. Practice 2. Legal factors refer to: a) Changing demographic patterns b) Macroeconomic factors c) The legislative framework d) The role of government 3. Most counties are divided into a set of separate regions. Each regional legal authority or government can set laws for a) The entire country b) All the regions of the country c) Its neighboring regions d) Its own particular region 4. Supra-national bodies often have to settle disputes between two or more: a) Regions of a country b) Organizations within a country c) Nations d) All of the above Data protection and data security  Data comprises of information on the organization’s Lecture Notes 2010 Session 3 C16, C9 Kris-8  Resources (e.g. property, plant and equipment)  Strategies (e.g. long and short-term objectives)  Operations (e.g. day to day activities) and  employees  Data protection is concerned with protecting individuals against the misuse of information about them held by organizations.  Data security is concerned with keeping data safe from various hazards  Physical risks: Fire or flood  Human risks: hacking, virus infection and fraud Data protection and security  The data an organization holds on its employees will include both official and personal information  Official information : Job profile and designation, salary and benefits, performance evaluations  Personal information: Data about employees who can be identified from that information ( religion, background, financial information)  Note: Law requires personal information to be kept private and confidential  Principles of data protection ( personal information)  Obtained only for a specified and lawful purpose  Relevant to that purpose  Accurate and up-to date  Kept no longer than necessary and  Always kept securely and not disclosed to any third party without the employee’s consent.  Example  Security  Security over all the information is a top priority for almost all organizations  Information in today's world is a key resource for an organization.  It must be protected and secured.  Principle of security  Security involves setting systems in place that ensure that sets of information are only available to employees who are authorized to see and use that particular information.  Example  Three main ways to keep information secure 1. Having a restricted secure access system in place Lecture Notes 2010 Session 3 C16, C9 Kris-9 • Prevents unauthorized employees or outsiders from being able to access particular sets of information that the organization feels should be kept confidential. • Common method used is the passwords system. 2. Having anti-virus detection and removal programs in place • Computerized organizations that use internet need to have anti-virus detection and removal programs. 3. Having a system of “firewalls” in place. • Firewalls are a collection of components (both hardware and software) that control and restrict the information of an organization that outside parties can have access to. How law protects the employee and the implications of employment legislation for the manager and the organization?  Main purpose of the law:  Organizations treat all employees equally  No employee suffers discrimination- when an employee is evaluated on factors other than his work or integrity at the hands of an organization.  The law protects individuals from discrimination during each of the stages of employment 1. Interviewing 2. Selection 3. Work and 4. Termination  Discrimination is illegal and occurs when an employee is judged upon factors such as her gender, race, age, religion or even marital status  The law dictates that an organization cannot hire a qualified candidate on the basis of one of these types of factors.  Upon selection of a candidate, the law prohibits organizations from paying different people different pay packages for the same work ( as long as the candidates are equally qualified)  Managers and organizations must keep these equal opportunity laws firmly in mind when selecting and recruiting employees.  The law also protects individuals from suffering from acts of discrimination when they are in the employment of an organization. It does this through the concept of direct discrimination Direct discrimination: It is said to occur when a person is treated less favorably than others because of factors such as his gender, race or marital status. Example:  An employee also has the right to be free from any sexual or racial harassment in the workplace. Sexual or racial harassment occurs when an employee is negatively treated by other employees or her seniors because of gender or race. • Example: Lecture Notes 2010 Session 3 C16, C9 Kris-10  An organization is also not allowed to practice indirect discrimination.  The concept of indirect discrimination is used to prevent conduct or policies which although do not appear to discriminate on the surface, have a greater impact on the particular gender or racial group. • Example:  Note: if an organization discriminates against or harass or unfairly terminate an employee it would be “vicariously liable”  Liable for damages or compensation to the employee even if it did not know such actions were taking place. ( Ignorance is not a defense)  Most organizations document code of conduct which should be followed by employees.  Example Legal obligations of managers and organizations to provide hospitable work environment  Establishing a clear set policy of having no tolerance for acts of discrimination or harassment  Having a system in place which will immediately investigate and if necessary take action on any reports of harassment and/o discriminatory behavior  Providing training or sensitivity programs on discrimination and harassment for all employees( these programs outline what constitute acceptable and unacceptable behavior) Practice 5. The law in regards to the individual and employment prohibits organizations from paying different people a) Different pay packages for the same work b) The same pay package for the same work c) The same pay package for different work d) Different pay package for different work 6. Organizations have a clear legal obligation to ensure that their employees can work in a hospitable work environment a) True b)False How law promotes and protects health and safety in the workplace?  All organizations have a responsibility to maintain a “duty of care” towards their employees The duty requires organizations to put in the necessary systems in place so that employees will not have to take any unnecessary risks. Lecture Notes 2010 Session 3 C16, C9 Kris-11 If an employee is injured because of the lack of such precautions being in place or because of the actions of another employee, the organization is responsible and therefore liable ( to pay damages/compensation to the injured employee)  Three main precautions organizations are required to take are 1. All employees are competent  Organizations must ensure that all employees have the necessary qualifications, skills and if necessary training to competently perform their work. This reduces the risk of an employee injuring others whilst performing his tasks.  Example 2. All machines and equipment are safe • All machines being used b the organization should be in good and working order along with any safety equipment that usage of these machines requires. • Example 3. A safe working environment is maintained at all times • Every organization is required to have a safety policy as well as set of safety procedures in place that all employee