Business organisation structure, functions and governance

05 Business organisation structure and strategy 

Section 1 examines the importance of informal networks
in shaping organisational culture.
There are various influences on organisational structure
(
Section 2). Most firms have some sort of organisation
hierarchy
reflecting the levels of strategy making (Section
3
). We can see the strategic apex (eg Board of Directors)
at the top, through ranks of
middle managers to the
operating core where the work is done.
Businesses may need to group employees into
departments on some basis, which may involve choices
as to the degree of centralisation needed (
Section 4).

  Study Guide Intellectual level  

 

 

                             B1 The formal and informal business organisation

(a) Explain the informal organisation and its relationship with the formal organisation.

 

K

                             (b) Describe the impact of the informal organisation on the business. K  
                              B2 Business organisation structure and design

(a) Describe Mintzberg’s components of the organisation and explain the different ways in which organisations may be structured:

(i)        Entrepreneurial

(ii)       Functional

(iii)      Matrix

(iv)      Divisional: (geographical, by product, or by customer type)

(v)       Boundaryless: (virtual, hollow or modular)

 

K

 

 

                             (b) Explain basic organisational structure concepts: (I) Separation of ownership and management

(II) Separation of direction and management

(iii)      Span of control and scalar chain

(iv)      Tall and flat organisations

(v)        Outsourcing and offshoring

(vi)      Shared services approach

K  
                             (c) Explain the characteristics of the strategic, tactical and operational levels in the organisation in the context of the Anthony hierarchy. K  
                             (d) Explain centralisation and decentralisation and list their advantages and disadvantages. K  
       

 

  1   The informal organisation

 

An informal organisation always exists alongside the formal one. This consists of social relationships, informal communication networks, behavioural norms and power/influence structures, all of which may ‘by-pass’ formal organisational arrangements. This may be detrimental or beneficial to the organisation, depending how it is managed.

1.1 What is the ‘informal organisation’?

An informal organisation exists side by side with the formal one, whose key structural characteristics and features were examined in detail in Chapter 1. When people work together, they establish social relationships and customary ways of doing things. Unlike the formal organisation, the informal organisation is loosely structured, flexible and spontaneous. It embraces such mechanisms as:

  • Social relationships and groupings (eg cliques) within – or across – formal structures
  • The ‘grapevine’, ‘bush telegraph’, or informal communication which by-passes the formal reporting channels and routes
  • Behavioural norms and ways of doing things, both social and work-related, which may circumvent formal procedures and systems (for good or ill). New members must ‘learn the ropes’ and get used to ‘the way we do things here’
  • Power/influence structures, irrespective of organisational authority: informal leaders are those who are trusted and looked to for advice

1.2 Benefits (or the role of) the informal organisation

Benefits of the informal organisation for managers include the following.

  • Employee commitment. The meeting of employees’ social needs may contribute to morale and job satisfaction, with benefits in reduced absenteeism and labour turnover.
  • Knowledge sharing. The availability of information through informal networks can give employees a wider perspective on their role in the task and the organisation, potentially stimulating ‘big picture’ problem-solving, cross-boundary co-operation and innovation.
  • Speed. Informal networks and methods may sometimes be more efficient in achieving organisational goals, where the formal organisation has rigid procedures or lengthy communication channels, enabling decisions to be taken and implemented more rapidly.
  • Responsiveness. The directness, information-richness and flexibility of the informal organisation may be particularly helpful in conditions of rapid environmental change, facilitating both the mechanisms and culture of anti-bureaucratic responsiveness.
  • Co-operation. The formation and strengthening of interpersonal networks can facilitate team working and co-ordination across organisational boundaries. It may reduce organisational politics – or utilise this positively by mobilising effective decision-making coalitions and bypassing communication blocks.

1.3 Managerial problems of informal organisation

Each of the positive attributes of informal organisation could as easily be detrimental if the power of the informal organisation is directed towards goals unrelated to, or at odds with, those of the formal organisation.

  • Social groupings may act collectively against organisational interests, strengthened by collective power and information networks. Even if they are aligned with organisational goals, group/network maintenance may take a lot of time and energy away from tasks.
  • The grapevine is notoriously inaccurate and can carry morale-damaging rumours.
  • The informal organisation can become too important in fulfilling employees’ needs: individuals can suffer acutely when excluded from cliques and networks.
  • Informal work practices may ‘cut corners’, violating safety or quality assurance measures.

Managers can minimise problems by:

  • Meeting employees’ needs as far as possible via the formal organisation: providing information, encouragement, social interaction, and so on
  • Harnessing the dynamics of the informal organisation – for example by using informal leaders to secure employee commitment to goals or changes
  • Involving managers themselves in the informal structure, so that they support information sharing, the breaking down of unhelpful rules, and so on

1.4 Group norms

A work group establishes norms or acceptable levels and methods of behaviour, to which all members of the group are expected to conform. This group attitude will have a negative effect on an organisation if it sets unreasonably low production norms. Groups often apply unfair treatment or discrimination against others who break their rules.

Norms are partly the product of role and role expectations of how people in certain positions behave, as conceived by people in related positions.

The general nature of group pressure is to require the individual to share in the group’s own identity, and individuals may react to group norms and customs in a variety of ways.

  • Compliance – toeing the line without real commitment
  • Internalisation – full acceptance and identification
  • Counter-conformity – rejecting the group and/or its norms There are some circumstances which put strong pressure on the individual.
  • The issue is not clear-cut.
  • The individual lacks support for their own attitude or behaviour.
  • The individual is exposed to other members of the group for a length of time.

Norms may be reinforced in various ways by the group.

  • The group’s power to induce conformity depends on the degree to which the individual values his membership of the group and the rewards it may offer, or wishes to avoid the negative sanctions at its disposal.
    Identification: the use of badges, symbols, perhaps special modes of speech, in-jokes, and so on – the marks of belonging, prestige and acceptance. There may even be initiation rites which mark the boundaries of membership.
  • Sanctions of various kinds. Deviant behaviour may be dealt with by ostracising or ignoring the member concerned, by ridicule or reprimand, even by physical hostility. The threat of expulsion is the final sanction.

1.4.1 The Hawthorne Studies

The work of the human relations school of management theory sheds light on the importance of groups within an organisation. Interesting findings emerged from studies conducted at the Hawthorne plant of the Western Electric Company by Professor Elton Mayo of the Harvard Business School (Mayo, 1933). One conclusion was that informal groups exercise a powerful influence in the workplace: supervisors and managers need to take account of social needs if they wish to secure commitment to organisational goals. The studies also showed that people tend to perform better when they believe they are being treated well and are valued.

  2   Organisational structure

2.1 Components of the organisation (Mintzberg)

Mintzberg believes that all organisations can be analysed into five components, according to how they relate to the work of the organisation, and how they prefer to co-ordinate.

Component Job Preferred means of coordination
Strategic apex Ensures the organisation follows its mission Manages the organisation’s relationship with the environment Direct supervision (especially in small businesses)
Operating core People directly involved in the process of obtaining inputs, and converting them into outputs Mutual adjustment; standardisation of skills
Middle line Converts the desires of the strategic apex into the work done by the operating core Standardisation of outputs

(results)

Technostructure •     Analysers determine the best way of doing a job

•     Planners determine outputs (eg goods must achieve a specified level of quality)

•     Personnel analysts standardise skills (eg training programmes)

Standardisation of work processes or outputs
Support staff Ancillary services such as public relations, legal counsel, the cafeteria. Support staff do not plan or standardise production. They function independently of the operating core. Mutual adjustment

 

2.2 Categories of organisation (Mintzberg, 1979)

Based on the organisational model above, Mintzberg described five categories of organisation structure. 2.2.1 Simple structure

The simple structure is centralised and often autocratic, with power concentrated at the strategic apex. Typically, control is exerted by the chief executive or a small executive team. This structure can be very flexible and informal, but it is also very vulnerable, with so much power and control concentrated in the hands of a few people.

2.2.2 Machine bureaucracy

This structure relies heavily on a good technostructure. Strategic planners and financial controllers are influential, with multiple layers of management, formal (often rigid) procedures and standardised production processes. Motivation can be difficult, and organisations of this type tend to be inflexible.

2.2.3 Professional bureaucracy

The professional bureaucracy is based on clear lines of authority and standard practices. The practices are often built on standards set by law, regulations or independent external bodies, such as professional associations (eg law, accountancy). The operating core is the major coordinating influence and people are usually well motivated.

2.2.4 Divisionalised

In a divisionalised structure, a small central core provides guidelines for business units that enjoy a high degree of autonomy. The middle line forms a strong coordinating influence, as it translates the demands of the central core into the objectives of the operating core.

2.2.5 Adhocracy

The adhocracy is task or project-based, and needs to respond quickly to changing demands such as rapidly evolving markets, or technological innovation. Defined processes are less important as a result. Research and development is usually the primary driver of adhocracies.

So, in most organisations, tasks and people are grouped together in some way: on the basis of specialisation, say, or shared technology or customer base. This is known as departmentation. Different patterns of departmentation are possible, and the pattern selected will depend on the individual  circumstances of the organisation.

2.3 Functional departmentation

Organisations can be departmentalised on a functional basis (with separate departments for production, marketing, finance, etc), a geographical basis (by region or country), a product basis (eg worldwide divisions for product X, Y, etc), a brand basis, or a matrix basis (eg someone selling product X in country A would report to both a product X manager and a country A manager). Organisation structures often feature a variety of these types, as hybrid structures.

Functional organisation involves grouping together people who do similar tasks. Primary functions in a manufacturing company might be production, sales, finance and general administration. Subdepartments of marketing might be market research, advertising, PR, and so on.

Advantages include:

  • Expertise is pooled thanks to the division of work into specialist areas.
  • It avoids duplication (eg one management accounts department rather than several) and enables economies of scale.
  • It facilitates the recruitment, management and development of functional specialists.
  • It suits centralised

Disadvantages include:

  • It focuses on internal processes and inputs, rather than the customer and outputs, which are what ultimately drive a business. Inward-looking businesses are less able to adapt to changing demands.
  • Communication problems may arise between different functions, which each have their own jargon.
  • Poor co-ordination, especially if rooted in a tall organisation structure. Decisions by one function/department involving another might have to be referred upwards, and dealt with at a higher level, thereby increasing the burdens on senior management.
  • Functional structures create vertical barriers to information and work flow.

Geographic departmentation 

Where the organisation is structured according to geographic area, some authority is retained at Head Office but day-to-day operations are handled on a territorial basis (eg Southern region, Western region). Many sales departments are organised territorially.

There are advantages to geographic departmentation.

  • There is local decision-making at the point of contact between the organisation (eg a salesperson) and its customers, suppliers or other stakeholders.
  • It may be cheaper to establish area factories/offices than to service markets from one location (eg costs of transportation and travelling may be reduced).

But there are disadvantages too.

  • Duplication and possible loss of economies of scale might arise. For example, a national organisation divided into ten regions might have a customer liaison department in each regional office. If the organisation did all customer liaison work from head office (centralised) it might need fewer managerial staff.
  • Inconsistency in methods or standards may develop across different areas.

Product / brand departmentation 

Some organisations group activities on the basis of products or product lines. Some functional departmentation remains (eg manufacturing, distribution, marketing and sales) but a divisional manager is given responsibility for the product or product line, with authority over personnel of different functions.

Advantages include:

  • Accountability. Individual managers can be held accountable for the profitability of individual products.
  • Specialisation. For example, some salespeople will be trained to sell a specific product in which they may develop technical expertise and thereby offer a better sales service to customers.
  • Coordination. The different functional activities and efforts required to make and sell each product can be co-ordinated and integrated by the divisional/product manager.

Disadvantages include:

(a)        It increases the overhead costs and managerial complexity of the organisation. (b)       Different product divisions may fail to share resources and customers.

A brand is the name (eg ‘Persil’) or design which identifies the products or services of a manufacturer or provider and distinguishes them from those of competitors. (Large organisations may produce a number of different brands of the same basic product, such as washing powder or toothpaste.) Branding brings the product to the attention of buyers and creates brand recognition, differentiation and loyalty: often customers do not realise that two ‘rival’ brands are in fact produced by the same manufacturer.

  • Because each brand is packaged, promoted and sold in a distinctive way, the need for specialisation may make brand departmentation effective. As with product departmentation, some functional departmentation remains but brand managers have responsibility for the brand’s marketing and this can affect every function.
  • Brand departmentation has similar advantages/disadvantages to product departmentation.

An organisation may organise its activities on the basis of types of customer, or market segment.

  • Departmentation by customer is commonly associated with sales departments and selling effort, but it might also be used by a jobbing or contracting firm where a team of managers may be given the responsibility of liaising with major customers (eg discussing specifications and completion dates, quality of work, progress chasing etc).
  • Many businesses distinguish between business customers and consumers.

QUESTION                                                                                         Types of organisation

Looking at the ‘Product/Brand Organisation’ chart following Section 2.4 above, what types of organisation can you identify, and why are these appropriate for their purposes? What added type of organisation might this firm use, and in what circumstances?

ANSWER

  • At the head office level, there is functional This enables standardisation of policy and activity in key ‘staff’ or support functions shared by the various divisions.
  • At divisional level, there is product/brand This allows the distinctive culture and attributes of each product/brand to be addressed in production processes and marketing approach.
  • For each product/brand, there is functional organisation, enabling specialist expertise to be directed at the different activities required to produce, market and distribute a product.
  • This firm may further organise its marketing department by customer, if its customer base includes key (high-value, long-term) customer accounts with diverse service needs, for example.
  • It may further organise its sales and distribution departments by geographical area, if the customer base is internationally or regionally dispersed: local market conditions and values, and logistical requirements of distribution, can then be taken more specifically into account.

 

2.7 Divisionalisation

In a divisional structure some activities are decentralised to business units or regions.

Divisionalisation is the division of a business into autonomous regions or product businesses, each with its own revenues, expenditures and capital asset purchase programmes, and therefore each with its own profit and loss responsibility.

 

Each division of the organisation might be:

  • A subsidiary company under the holding company
  • A profit centre or investment centre within a single company
  • A strategic business unit (SBU) within the larger company, with its own objectives Successful divisionalisation requires certain key conditions.
  • Each division must have properly delegated authority, and must be held properly accountable to head office (eg for profits earned).
  • Each unit must be large enough to support the quantity and quality of management it needs.
  • The unit must not rely on head office for excessive management support.
  • Each unit must have a potential for growth in its own area of operations.
  • There should be scope and challenge in the job for the management of each unit.
  • If units deal with each other, it should be as an ‘arm’s length’ transaction.

The advantages and disadvantages of divisionalisation may be summarised as follows.

Advantages Disadvantages
Focuses the attention of management below ‘top level’ on business performance In some businesses, it is impossible to identify completely independent products or markets for which separate divisions can be set up.
Reduces the likelihood of unprofitable products and activities being continued Divisionalisation is only possible at a fairly senior management level, because there is a limit to how much discretion can be used in the division of work. For example, every product needs a manufacturing function and a selling function.
Encourages a greater attention to efficiency, lower costs and higher profits There may be more resource problems. Many divisions get their resources from head office in competition with other divisions.
Gives more authority to junior managers, and so grooms them for more senior positions in the future (planned managerial succession)  
Reduces the number of levels of management, meaning that the top executives in each division should be able to report directly to the chief executive of the holding company  

2.8 Hybrid structures

Organisation structures are rarely composed of only one type of organisation. ‘Hybrid’ structures may involve a mix of functional departmentation, ensuring specialised attention to key functions, with elements of (for example):

  • Product organisation, to suit the requirements of brand marketing or production technologies
  • Customer organisation, particularly in marketing departments, to service key accounts
  • Territorial organisation, particularly of sales and distribution departments, to service local requirements for marketing or distribution in dispersed regions or countries

2.9 The simple structure (or entrepreneurial structure)

The strategic apex exerts a pull to centralise, leading to the simple structure.

The strategic apex wishes to retain control over decision-making, and so exercises a pull to centralise (Mintzberg, 1979). Mintzberg believes that this leads to a simple structure.

  • The simple structure is characteristic of small, young organisations. The strategic apex is a small group, or possibly one person, which exercises direct control over the people making up the operating core. There is little, if any, role for technical or support staff.

  • 2.10 Matrix and project organisation

    In small firms, a single entrepreneur or management team will dominate (as in the power culture). If it grows, the organisation might need more managerial skills than the apex can provide. Strategies might be made on the basis of the manager’s hunches.
  • Centralisation is advantageous, as it reflects management’s full knowledge of the operating core and its processes. However, senior managers might intervene too much.
  • It is risky, as it depends on the expertise of one person. Such an organisation might be prone to succession crises. This problem is often encountered in family businesses.
  • This structure can handle an environment that is relatively simple but fast moving, where standardisation cannot be used to co-ordinate activities.
  • Co-ordination is achieved by direct supervision, with few formal devices. It is thus flexible.
  • This structure has its own particular characteristics: wide span of control; no middle line and hence minimal hierarchy; and no technostructure, implying little formalisation or standardisation of behaviour.

Where hybrid organisation ‘mixes’ organisation types, matrix organisation actually crosses functional and product/customer/project organisation.

The employees represented by the dot in the above diagram, for example, are responsible to:

  • The finance manager for their work in accounting and finance for their functional department; and
  • The project manager C for their work on the project team: budgeting, management reporting and payroll relevant to the project, say.

Advantages of matrix organisation include:

  • Greater flexibility of:
    • People. Employees develop an attitude geared to accepting change, and departmental monopolies are broken down.
    • Workflow and decision-making. Direct contact between staff encourages problem solving and big-picture thinking.
    • Tasks and structure. The matrix structure may be readily amended, once projects are completed.
  • Inter-disciplinary co-operation and a mixing of skills and expertise, along with improved communication and co-ordination
  • Motivation and employee development: providing employees with greater participation in planning and control decisions
  • Market awareness: the organisation tends to become more customer/quality focused
  • Horizontal workflow: bureaucratic obstacles are removed, and department specialisms become less powerful

There are disadvantages, however.

  • Dual authority threatens a conflict between functional managers and product/project/area managers.
  • An individual with two or more bosses may suffer stress from conflicting demands or ambiguous roles.
  • Cost: product management posts are added, meetings have to be held, and so on.
  • Slower decision-making due to the added complexity.

2.11 The new organisation

Some recent trends have emerged from the focus on flexibility as a key organisational value.

  • Flat structures. The flattening of hierarchies does away with levels of organisation which lengthened lines of communication and decision-making. Flat structures are more responsive because there is a more direct relationship between the organisation’s strategic centre and the operational units serving the customer.
  • ‘Horizontal structures’. There is increased recognition that functional versatility (through multifunctional project teams and multi-skilling, for example) is the key to flexibility.
  • ‘Chunked’ and ‘unglued’ structures. So far, this has meant team working and decentralisation, or empowerment, creating smaller and more flexible units within the overall structure.
  • Output-focused structures. The key to all the above trends is the focus on results, and on the customer, instead of internal processes and functions for their own sake.
  • ‘Jobless’ structures. The employee becomes not a job-holder but a seller of skills. This is a concrete expression of the concept of employability, which says that a person needs to have a portfolio of skills which are valuable on the open market.
  • Virtual organisations. The organisation may consist of individuals, teams, companies or stakeholders. Members are geographically dispersed and the organisation usually only exists electronically on the internet, without any physical premises. This creates cost savings from not having the costs associated with physical locations, such as rent. For example, Amazon operates

 

as a virtual retailer without incurring the cost of retail premises. These organisations are entirely reliant on their technology and any problems could affect the operation of the organisation.

  • In a hollow organisation people and activities are split between core and non-core competencies. All non-core processes and activities are outsourced. For example, the sports shoe and clothing manufacturer Nike outsources production to sub-contractors – but the activity seen as core and key, product design, is retained in-house. Such organisations can then focus on their core activities, but this structure depends on being able to find reliable subcontractors.
  • In modular organisations different elements or components of the product or service the organisation produces are outsourced to different suppliers. The retained people within the organisation assemble or combine these elements to produce the final product or service. This structure enables the organisation to be more flexible and to respond to market needs more quickly, but also depends on reliable suppliers. For example, a motor vehicle dealership may recognise that its sales, repair and customer service modules are performing well, but that its finance and accounting services are inefficient. The dealership may, as a result, outsource that module.
  • Boundaryless organisations remove both the internal barriers that separate the hierarchy levels, different functions and different departments, and also remove the barriers between the organisation and its suppliers, customers and competitors. To help eliminate boundaries, managers may use virtual, hollow or modular structures. This helps to eliminate bureaucracy and helps to reduce costs.

2.12 Span of control

 

In other words, if a manager has five subordinates, the span of control is five.

A number of factors influence the span of control.

  • A manager’s capabilities limit the span of control: there are physical and mental limitations to any single manager’s ability to control people and activities.

The nature of the manager’s workload

The more non-supervisory work in a manager’s workload:

  • The narrower the span of control
  • The greater the delegation of authority to subordinates

The geographical dispersion of subordinates: dispersed teams require

  • require more effort to supervise.

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2.13 Tall and flat organisations

Recent trends have been towards delayering organisations of levels of management. In other words, tall organisations (with many management levels, and narrow spans of control) are turning into flat organisations (with fewer management levels, and wider spans of control) as a result of technological changes and the granting of more decision-making power to front-line employees.

The span of control concept has implications for the length of the scalar chain

  • The scalar chain is the chain of command from the most senior to the most junior.
  • A tall organisation is one which, in relation to its size, has a large number of levels of management hierarchy. This implies a narrow span of control.
  • A flat organisation is one which, in relation to its size, has a small number of hierarchical levels. This implies a wide span of control.

The advantages and disadvantages of these organisational forms can be summarised as follows.

Tall organisation

For Against
Narrow control spans Inhibits delegation
Small groups enable team members to participate in decisions Rigid supervision can be imposed, blocking initiative
A large number of steps on the promotional ladders – assists management training and career planning The same work passes through too many hands

Increases administration and overhead costs  Slow decision making and responses, as the strategic apex is further away

Flat organisation

For Against
More opportunity for delegation Requires that jobs can be delegated. Managers may only get a superficial idea of what goes on. If they are overworked they are more likely to be involved in crisis management
Relatively cheap Sacrifices control
In theory, speeds up communication between strategic apex and operating core Middle managers are often necessary to convert the grand vision of the strategic apex into operational terms

2.14 Delayering

 

Many organisations are delayering. Middle-line jobs are vanishing. Organisations are increasing the average span of control, reducing management levels and becoming flatter.

  • Information technology. This reduces the need for middle managers to process information.
  • Empowerment. Many organisations, especially service businesses, are keen to delegate authority down the line to the lowest possible level. Front-line workers in the operating core are allowed to take decisions, in order to increase responsiveness to customer demands.
  • Economy. Delayering reduces managerial/supervisory costs.
  • Fashion. Delayering is fashionable: if senior managers believe that tall structures are inherently inflexible, they might cut the numbers of management levels.

This topic was also covered in Chapter 2, when discussing the impact of technology on the organisation.

2.15 Outsourcing and offshoring 

Outsourcing, as explained in Chapter 2, is the contracting out of specified operations or services to an external vendor. Outsourcing impacts organisation structure by removing the outsourced activity from the organisation.

A related concept to outsourcing is offshoring. Whereas outsourcing involves an organisation sending work to an external organisation, offshoring involves sending work overseas. Work sent overseas may still be done within the organisation; for example, if a UK bank sets up its own call centre in India, that is offshoring but is not outsourcing. If, on the other hand, a UK business contracts with an external call centre based in India to deal with customer service telephone enquiries, that is both outsourcing and offshoring.

 

Offshoring is often used by organisations who want to make use of cheaper labour in overseas markets. The disadvantages of offshoring come from possible cultural and language barriers and a loss of customer focus if the offshoring company no longer has day-to-day contact with its customers.

2.16 Shared services approach 

Under a shared services approach, a single service centre is established to provide a support function across an organisation. Previously, the service may have been provided in a more fragmented way.

The shared services business unit, created within the company, is accountable for delivering the service to agreed service levels. Although the service provider is part of the organisation, the relationship it has with other parts of the organisation is similar to that of an external service provider. The shared services unit has the mindset of a business and views the rest of the organisation as their customers.

The shared services approach aims to enable better use of resources across the organisation, resulting in lower costs but with the protection of agreed service levels.

IT and HR are two functions often seen as suitable for the shared services approach, but the approach could be applied to a wide range of activities.

The disadvantages to the shared services approach are that services are likely to be less tailored and more generic and also that there is less job diversity within the organisation.

  3   Levels of strategy in the organisation
 

There are many levels of strategy in an organisation.

•              Corporate: the general direction of the whole organisation

•              Business: how the organisation or its SBUs tackle particular markets

•              Operational/functional: specific strategies for different departments of the business

Any level of the organisation can have objectives and devise strategies to achieve them. The strategic management process is multi-layered.

It is generally agreed that there are three levels of strategy: corporate, business and functional/operational. The distinction between corporate and business strategy arises because of the development of the divisionalised business organisation, which typically has a corporate centre and a number of strategic business units (SBUs).

3.1 Corporate strategies

Corporate strategy is concerned with what types of business the organisation is in.

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Levels of strategy                                        CORPORATE STRATEGY

What businesses are we (or want to be) in?

Unit (SBU)    
           
F UNCTIONAL STRATEGI ES  
     

How do we enter or exit?

Defining aspects of corporate strategy

Characteristic Comment
Scope of activities Strategy and strategic management impact on the whole organisation: all parts of the business operation should support and further the strategic plan.
Environment The organisation counters threats and exploits opportunities in the environment (customers, clients, competitors).
Resources Strategy involves choices about allocating or obtaining corporate resources now and in future.
Values The value systems of people with power in the organisation influence its strategy.
Timescale Corporate strategy has a long-term impact.
Complexity Corporate strategy involves uncertainty about the future, integrating the operations of the organisation and change.

3.2 Business strategy

Business strategy: how an organisation approaches a particular product market area

 

Business strategy can involve decisions such as whether to segment the market and specialise in particularly profitable areas, or to compete by offering a wider range of products.

As we noted earlier, some large, diversified firms have separate strategic business units (SBUs) dealing with particular areas. Business strategy for such large organisations is strategy at the SBU level.

3.3 Functional/operational strategies

Functional/operational strategies deal with specialised areas of activity.

Functional area Comment
R&D New products and techniques
Purchasing Ensuring that the firm acquires the raw materials and other supplies that it needs at the best price possible, and with assurances over quality and delivery in accordance with production schedules
Production Factory location, manufacturing techniques, outsourcing, and so on
Direct service provision The provision of services to customers (as opposed to the production of goods) encompassing a range of activities, depending on the business concerned – eg consultancy, accounting, payroll services, tax advice, facilities management etc
Marketing Devising products and services, pricing, promoting and distributing them, in order to satisfy customer needs at a profit. Marketing and corporate strategies are interrelated
Administration General support to other business functions in their day to day activities – call handling, reception duties, maintenance of records etc
Finance Ensuring that the firm has enough financial resources to fund its other strategies by identifying sources of finance and using them effectively. The full role of the finance and accounting function is covered in detail in Chapter 8
Human resources management Secure personnel of the right skills in the right quantity at the right time, and to ensure that they have the right skills and values to promote the firm’s overall goals
Information systems A firm’s information systems are becoming increasingly important, as an item of expenditure, as administrative support and as a tool for competitive strength. Not all information technology applications are strategic, and the strategic value of IT will vary from case to case

3.4 The Anthony hierarchy

Managerial activity can be described in the following hierarchy (Anthony, 1965).

  • Strategic management (carried out by senior management) is concerned with direction setting, policy making and crisis handling. The time frame of decisions made at strategic management level would typically have implications for three to five years.
  • Tactical management (carried out by middle management) is concerned with establishing means to the corporate ends, mobilising resources and innovating (finding new ways to achieve business goals). Decisions made at this level would have medium-term implications.
  • Operational management (carried out by supervisors and operatives) is concerned with routine activities to carry out tactical plans. Decisions at this level would deal with short-term matters.

 

  4   Centralisation and decentralisation

4.1 What is centralisation?

 

A centralised organisation is one in which authority is concentrated in one place.

We can look at centralisation in two ways.

  • Geography. Some functions may be centralised rather than ‘scattered’ in different offices, departments or locations.

So, for example, secretarial support, IT support and information storage (filing) may be centralised in specialist departments (whose services are shared by other functions) rather than carried out by staff/equipment duplicated in each departmental office.

  • Authority. Centralisation also refers to the extent to which people have to refer decisions upwards to their superiors. Decentralisation therefore implies increased delegation, empowerment and autonomy at lower levels of the organisation.

4.2 Advantages and disadvantages of centralisation

Centralisation offers greater control and co-ordination; decentralisation offers greater flexibility.

The table below summarises some of the arguments in favour of centralisation and decentralisation.

Pro centralisation Pro decentralisation/delegation
Decisions are made at one point and so are easier to co-ordinate. Avoids overburdening top managers, in terms of workload and stress
Senior managers can take a wider view of problems and consequences. Improves motivation of more junior managers who are given responsibility
Senior management can balance the interests of different functions – eg by deciding on the resources to allocate to each. Greater awareness of local problems by decision makers (geographically dispersed organisations are often decentralised on a regional/area basis for this reason)
Quality of decisions is (theoretically) higher due to senior managers’ skills and experience. Greater speed of decision-making, and response to changing events, since no need to refer decisions upwards. This is particularly important in rapidly changing markets.
It is possibly cheaper, by reducing number of managers needed and so lower costs of overheads. Helps develop the skills of junior managers:

supports managerial succession

Crisis decisions are taken more quickly at the centre, without need to refer back. Separate spheres of responsibility can be identified: controls, performance measurement and accountability are better.
Policies, procedures and documentation can be standardised organisation-wide. Communication technology allows decisions to be made locally, with information and input from head office if required.

 

N An informal organisation always exists alongside the formal one. This consists of social relationships, informal communication networks, behavioural norms and power/influence structures, all of which may ‘by-pass’ formal organisational arrangements. This may be detrimental or beneficial to the organisation, depending how it is managed.
N Mintzberg believes that all organisations can be analysed into five components, according to how they relate to the work of the organisation, and how they prefer to co-ordinate.
N Organisations can be departmentalised on a functional basis (with separate departments for production, marketing, finance, etc), a geographical basis (by region or country), a product basis (eg worldwide divisions for product X, Y, etc), a brand basis, or a matrix basis (eg someone selling product X in country A would report to both a product X manager and a country A manager). Organisation structures often feature a variety of these types, as hybrid structures.
N In a divisional structure some activities are decentralised to business units or regions.
N The strategic apex exerts a pull to centralise, leading to the simple structure.
N Span of control or ‘span of management’ refers to the number of subordinates responsible to a superior.
N Recent trends have been towards delayering organisations of levels of management. In other words, tall organisations (with many management levels, and narrow spans of control) are turning into flat organisations (with fewer management levels, and wider spans of control) as a result of technological changes and the granting of more decision-making power to front-line employees.
N

 

 

 

There are many levels of strategy in an organisation.

–             Corporate: the general direction of the whole organisation

–             Business: how the organisation or its SBUs tackle particular markets

–             Operational/functional: specific strategies for different departments of the business

N A centralised organisation is one in which authority is concentrated in one place.

 

 

  • List the potential benefits of the informal organisation.
  • What, in Mintzberg’s view, are the five component parts of an organisation?
  • Grouping people together who do similar tasks is called

A Task departmentation

C Product departmentation

B Geographic departmentation

D Functional departmentation

4 Fill in the blanks.

Divisionalisation is the division of a business into ………………….. regions or products each with its own ……………………… and ……………………… responsibility.

  • The span of control refers to the chain of command from the most senior to the most junior.

Is this true or false?

  • *Delete as appropriate
    • tall organisation has a large number of levels of management. This implies a narrow*/wide* span of control.
  • Delayering would:
    • Make an organisation taller B             Make an organisation flatter

 

 

1             Meeting of employee needs offering morale and job satisfaction; knowledge sharing; speed of operation; responsiveness to change; support for team working and co-ordination 2               Strategic apex; technostructure; support staff; middle line; operating core.

  • D This is the definition of functional departmentation.
  • autonomous; profit; loss
  • This refers to the scalar chain. The span of control refers to the number of subordinates responsible to a superior.
  • A tall organisation has a large number of levels of management. This implies a narrow span of control.
  • B Delayering is the reduction of the number of management levels from bottom to top so this would make an organisation flatter.

 

 

 

 

 

 

 

 

Now try …
Attempt the questions below from the Practice Question Bank

Q23

Q24

Q25

Q26

Q27

   

 

06 Organisational culture and committees 

Firms which employ many people need to group people
into departments (
Section 1).
Organisation culture is, broadly, the distinctive way an
organisation does things: its particular ‘style’. We explore
how this reveals itself in
Sections 2 and 3 of this chapter.
Like
structure, the concept of culture gives us a way of
talking about how organisations ‘work’. The contributions
of Schein, Handy and Hofstede are specifically mentioned
in the Study Guide. Particular structures suit particular
cultures – as we see in
Section 4: Handy’s is a useful
model, which should be learned in detail. The impact of
national culture on organisational culture outlined by
Hofstede is useful when discussing management in multinational and cross-cultural contexts. With increasing
globalisation and workforce diversity, this is useful
awareness.
The chapter concludes with a discussion of the work of
committees (
Section 5). Committees are one of the main
mechanisms for organisational consultation and
communication.
At this point in your studies, you may find it helpful to
reread Chapter 2, Section 9 on the impact of technology
on organisations.

Organisational culture and committees

  Study Guide Intellectual level  

 

 

                              B2 Business organisation structure and design

(e) Describe the roles and functions of the main departments in a business organisation:

 

K

(i)        Research and development

(ii)      Purchasing

(iii)     Production

(iv)     Direct service provision

(v)      Marketing

(vi)     Administration

(vii)    Finance

(f) Explain the role of marketing in an organisation:

 

 

 

 

 

 

 

K

 

 

 

 

 

 

 

 

(i)        The definition of marketing

(ii)      The marketing mix

(iii)     The relationship of the marketing plan to the strategic plan

 B3 Organisational culture in business  (a) Define organisational culture.

 

 

 

 

K

 

 

 

 

 

                             (b) Describe the factors that shape the culture of the organisation. K  
                               (c) Explain the contribution made by writers on culture: K  
(i)                Schein – determinants of organisational culture

(ii)              Handy – four cultural stereotypes

(iii)             Hofstede – international perspectives on culture            B4 Committees in business organisations       (a) Explain the purposes of committees.

 

 

 

 

K

 

 

 

 

                             (b) Describe the types of committee used by business organisations. K  
                                (c) List the advantages and disadvantages of committees. K  
                                                (d) Explain the roles of the Chair and Secretary of a committee. K  
                             C1 The relationship between accounting and other business functions

(a) Explain the relationship between accounting and other key functions within the business, such as procurement, production and marketing.

 

K

 

 

                             (b) Explain financial considerations in production and production planning. K  
                               (c) Identify the financial issues associated with marketing. S  
                             (d) Identify the financial costs and benefits of effective service provision. S  
                               C2 Accounting and finance functions within business

(a) Explain the contribution of the accounting function to the formulation, implementation, and control of the organisation’s policies, procedures and performance.

 

K

 

 

                             (b) Identify and describe the main financial accounting functions in business:

(i)        Recording financial information

(ii)      Codifying and processing financial information

(iii)     Preparing financial statements

K

 

 

 

 

 

 

 

www.ACCAGlobalBox.com

  Study Guide Intellectual level  
                             (c) Identify and describe the main management accounting and performance management functions in business: K
(i)        Recording and analysing costs and revenues

(ii)      Providing management accounting information for decision-making

(iii)     Planning and preparing budgets and exercising budgetary control

(d) Identify and describe the main finance and treasury functions:

(i)        Calculating and mitigating business tax liabilities

(ii)      Evaluating and obtaining finance

(iii)     Managing working capital

(iv)     Treasury and risk management

 

 

 

K

 

 

 

 

 

 

 

 

 

 

 

 

       

 

  1   Organisational departments and functions

1.1 Research and development

Research may be pure, applied or development. It may be intended to improve products or processes.

R&D should support the organisation’s strategy and be closely co-ordinated with marketing.

  • Pure research is original research to obtain new scientific or technical knowledge or understanding. There is no obvious commercial or practical end in view.
  • Applied research is also original research work like pure research, but it has a specific practical aim or application (eg research on improvements in the effectiveness of medicines etc).
  • Development is the use of existing scientific and technical knowledge to produce new (or substantially improved) products or systems, prior to starting commercial production operations.

Many organisations employ specialist staff to conduct research and development (R&D). They may be organised in a separate functional department of their own. In an organisation run on a product division basis, R&D staff may be employed by each division.

1.1.1 Product and process research

There are two categories of R&D.

  • Product research is based on creating new products and developing existing ones; in other words, the organisation’s ‘offer’ to the market.
  • Process research is based on improving the way in which those products or services are made or delivered, or the efficiency with which they are made or delivered.

 

 

Product research – new product development 

The new product development process must be carefully controlled; new products are a major source of competitive advantage but can cost a great deal of money to bring to market. A screening process is necessary to ensure that resources are concentrated on projects with a high probability of success.

Process research

Process research involves attention to how the goods/services are produced. Process research has these aspects.

  • Processes. These are crucial in service industries (eg fast food), as part of the services sold.
  • Productivity. Efficient processes save money and time.
  • Planning. If you know how long certain stages in a project are likely to take, you can plan the most efficient sequence.
  • Quality management. Performed effectively, this leads to enhanced quality.

R&D should be closely co-ordinated with marketing

  • Customer needs, as identified by marketers, should be a vital input to new product developments.
  • The R&D department might identify possible changes to product specifications so that a variety of marketing mixes can be tried out and screened.

 

Purchasing makes a major contribution to cost and quality management in any business and in retail is a vital element of strategy. The purchasing mix is:

•              Quantity                 Quality

•              Price                       Delivery

1.2 Purchasing

 

1.2.1 Importance of purchasing

Cost. Raw materials and subcomponents purchases are a major cost for many firms.

Quality. The quality of input resources affects the quality of outputs and the efficiency of the production function.

Strategy. In retailing, buying goods for resale is one of the most important activities of the business.

Position of purchasing within the organisation

Where purchasing is of strategic importance, the most senior purchasing executive may be on the board of directors or, at least, report to the managing director.

Where raw materials are an important cost, the purchasing officer may work in the production function.

In any event, the purchasing officer must liaise with the finance department, especially with regard to payment of payables.

The purchasing manager’s responsibilities include:

  • Inputs for production. Acquiring raw materials, components, sub-assemblies, consumable stores and capital equipment for the production function.
  • Inputs for administration. Purchasing supplies and equipment for all areas of the business (eg microcomputers, motor cars, telephone systems, office furniture, paper and other stationery items).
  • Cost control. Ensuring that the organisation obtains value for money over the long term consistent with quality.
  • Liaison with the R&D department. to find suppliers for materials which are to the specifications required by the designers.
  • Supplier management. Locating suppliers and dealing with them (eg discussing prices, discounts, delivery lead times, specifications; chasing late deliveries; sanctioning payments).
  • Evaluating purchasing alternatives. Obtaining information on availability, quality, prices, distribution and suppliers for the evaluation of purchasing alternatives.
  • Ensuring co-ordination between purchasing and inventory control. Ensuring appropriate levels of inventory.

1.2.2 The purchasing mix

The purchasing manager has to obtain the best purchasing mix.

  • Quantity              Price
  • Quality              Delivery
  • Quantity. The size and timing of purchase orders will be dictated by the balance between two things.
    • Delays in production caused by insufficient inventory
    • Costs of holding inventory: tied up capital, storage space, deterioration, insurance, risk of pilferage

A system of inventory control will set optimum reorder levels (the inventory level at which supplies must be replenished so as to arrive in time to meet demand) to ensure economic order quantities (EOQ) are obtained for individual inventory items.

  • Quality. The production department will need to be consulted about the quality of goods required for the manufacturing process, and the marketing department about the quality of goods acceptable to customers. Purchased components might be an important constituent of product quality.
  • Price. Favourable short-term trends in prices may influence the buying decision, but purchasing should have an eye to the best value over a period of time – considering quality, delivery, urgency of order, inventory-holding requirements, and so on.
  • Delivery. The lead time between placing and delivery of an order can be crucial to efficient inventory control and production planning. The reliability of suppliers’ delivery arrangements must also be assessed.

1.2.3 Purchasing and profits

The professionalism of the purchasing function affects profit in three ways. Effective purchasing does three things.

  • It obtains the best value for money, giving the company more flexibility in its pricing strategy.
  • It assists in meeting quality targets, with an impact on a firm’s long-term marketing strategy if quality is an issue.
  • It minimises the amount of purchased material held as inventory, so minimising inventory-holding costs.

1.3 Production

The production function plans, organises, directs and controls the necessary activities to provide products and services, creating outputs which have added value over the value of inputs.  
  Activity Example
  Obtain inputs to the production ‘system’, such as plant facilities, materials and labour Inputs: timber, screws, nails, adhesives, varnish, stain, templates, cutting tools, carpenters
  Adding of value. The activities below occupy most of the production manager’s attention.

•      Scheduling jobs on machines

•      Assigning labour to jobs

•      Controlling the quality of production and/or service delivery

•      Improving methods of work

•      Managing materials and equipment, to avoid waste

Operations: sawing, sanding, assembly, finishing
  Create outputs, ie finished products and services Outputs: tables, chairs, cabinets, and so on

1.3.1 Production management decisions

These are related to setting up the production organisation.
Longer-term decisions

  • Selection of equipment and processes
  • Job design and methods
  • Factory location and layout
  • Ensuring the right number and skills of employees

Short-term decisions 

These are concerned with the running and control of the organisation.

  • Production and control              Labour control and supervision
  • Quality management              Inventory control
  • Maintenance

1.3.2 Relationships with other functions

Longer-term decisions, particularly relating to design and the innovation of improved products, cannot be taken by the production department alone; its activities must be integrated with other functions in the firm.

  • Product design is co-ordinated with R&D. Production should advise R&D as to the consequences of particular designs for the manufacturing process.
  • Job design will involve consultation with human resources
  • The quantities needed to be produced will be notified by the sales department.
  • The human resources department will be involved in managing the workforce.
  • The finance department might indicate the resources available for new equipment.

1.4 Service operations         

Services are intangible, cannot be stored, are inherently variable in quality and nature and their purchase results in no transfer of property. The people and processes involved in providing them are therefore of paramount importance.

Many products have a service element. Service businesses include health care, restaurants, tourism, financial services, education and all the professions.

1.4.1 The nature of services

Intangibility. Unlike goods, there are no substantial material or physical aspects to a service. A service cannot be packaged in a bag and carried home, such as a live musical performance.

Inseparability. Many services are created at the same time as they are consumed, for example dental treatment. Associated with this is perishability. Services cannot be stored. The services of a dentist are purchased for a period of time. The service they offer cannot be used later.


Ownership
. Services differ from consumer goods: they do not normally result in the transfer of property. The purchase of a service only confers on the customer access to, or a right to use, a facility, not ownership.
Variability. It may be hard to attain precise standardisation of the service offered. The quality of the service may depend heavily on who (or what) delivers the service, and exactly when it takes place.

1.4.2 Implications of service provision

Poor service quality on one occasion (eg lack of punctuality of trains, staff rudeness, a bank’s incompetence) is likely to lead to widespread distrust of everything the organisation does.

Services often have added complexity. For example, if the service is intangible offering a complicated future benefit then attracting customers means promoting an attractive image and ensuring that the service lives up to its reputation, consistently.

Pricing of services is often complicated, especially if large numbers of people are involved in providing the service.

Human resources management is a key ingredient in the services marketing mix, as so many services are produced and consumed in a specific social context.

Dimensions of service operations

Determinants Comments
Tangibles The physical evidence, such as the quality of fixtures and fittings of the company’s service area, must be consistent with the desired image.
Reliability Getting it right first time is very important, not only to ensure repeat business but, in financial services, as a matter of ethics, if the customer is buying a future benefit.
Responsiveness The staff’s willingness to deal with the customer’s queries must be apparent.
Communication Staff should talk to customers in non-technical language which they can understand.
Credibility The organisation should be perceived as honest, trustworthy and acting in the best interests of customers.
Security This is specially relevant to medical and financial services organisations. The customer needs to feel that the conversations with bank service staff are private and confidential. This factor should influence the design of the service area.
Determinants Comments
Competence All the service staff need to appear competent in understanding the product range and interpreting the needs of the customers. In part this can be achieved through training programmes.
Courtesy Customers (even rude ones) should perceive service staff as polite, respectful and friendly. This basic requirement is often difficult to achieve in practice, although training programmes can help.
Understanding customers’ needs The use of computer-based customer databases can be very impressive in this context. The service personnel can then call up the customer’s records and use these data in the service process, thus personalising the process.

Service staff need to meet customer needs rather than try to sell products.

This is a subtle but important difference.

Access Minimising queues, having a fair queuing system and speedy but accurate service are all factors which can avoid customers’ irritation building up. A pleasant, relaxing environment is a useful design factor in this context.

1.5 Marketing

The marketing function manages an organisation’s relationships with its customers.

Marketing is ‘the management process which identifies, anticipates and satisfies customer needs

profitably’.                                                                                          (Chartered Institute of Marketing, 2015)

 

1.5.1 Models of marketing

Marketing activities in organisations can be grouped broadly into four roles.

  • Sales support. The emphasis in this role is essentially reactive: marketing supports the direct sales force. It may include such activities as telesales or telemarketing, responding to inquiries, co-ordinating diaries, customer database management, organising exhibitions or other sales promotions, and administering agents. These activities usually come under a sales and marketing director or manager.
  • Operational marketing activities
    Marketing communications. The emphasis in this role is more proactive: marketing promotes the organisation and its product or service at a tactical level. It typically includes activities such as providing brochures and catalogues to support the sales force.
  • Operational marketing. The emphasis in this role is for marketing to support the organisation with a co-ordinated range of marketing activities including marketing research; brand management; product development and management; corporate and marketing communications; and customer relationship management. Given this breadth of activities, planning is also a function usually performed in this role but at an operational or functional level.
  • Strategic marketing. The emphasis in this role is for marketing to contribute to the creation of competitive strategy. As such, it is practised in customer-focused and larger organisations. In a large or diversified organisation, it may also be responsible for the co-ordination of marketing departments or activities in separate business units.
  • Research and analysis
  • Contributing to strategy and marketing planning
  • Managing brands
  • Implementing marketing programmes
  • Measuring effectiveness
  • Managing marketing teams

The operational marketing role, where it exists, will be performed by a marketing function in a business.

1.5.2 Marketing strategy and corporate strategy

So, what is the relationship between marketing and strategic management? The two are closely linked since there can be no corporate plan which does not involve products/services and customers.

Corporate strategic plans aim to guide the overall development of an organisation. Marketing planning is subordinate to corporate planning but makes a significant contribution to it and is concerned with many of the same issues. The marketing department is probably the most important source of information for the development of corporate strategy. The corporate audit of product/market strengths and weaknesses, and much of its external environmental analysis is directly informed by the marketing audit.

Specific marketing strategies will be determined within the overall corporate strategy. To be effective, these plans will be interdependent with those for other functions of the organisation.

  • The strategic component of marketing planning focuses on the direction which an organisation will take in relation to a specific market, or set of markets, in order to achieve a specified set of objectives.
  • Marketing planning also requires an operational component that defines tasks and activities to be undertaken in order to achieve the desired strategy. The marketing plan is concerned uniquely with products and markets.

Marketing management aims to ensure the company is pursuing effective policies to promote its products, markets and distribution channels. This involves exercising strategic control of marketing, and the means to apply strategic control is known as the marketing audit. Not only is the marketing audit an important aspect of marketing control but it can also be used to provide much information and analysis for the corporate planning process.

Different organisations have different orientations towards the customer.

Orientation Description
Production orientation ‘Customers will buy whatever we produce – our job is to make as many as we can’. (Demand exceeds available supply.)
Product orientation, a variant  of production orientation ‘Add more features to the product – demand will pick up’. Such firms do not research what customers actually want.
Sales orientation Customers are naturally sales resistant so the product must be sold actively and aggressively and customers must be persuaded to buy them.
Marketing orientation The key task of the organisation is to determine the needs, wants and values of a target market and to adapt the organisation to delivering the desired satisfactions more effectively and efficiently than its competitors.

4 Satisfying customer needs: the marketing mix

Before you continue, recall the Chartered Institute of Marketing’s definition at the beginning of this section. The last word is profitably. After all, customers would be absolutely delighted if you were to satisfy all their needs for exotic holidays, caviar, champagne, private jets and so forth, for nothing. The marketing orientation is a way of doing business that seeks to provide satisfaction of customer wants at a profit.

The marketing mix is the set of controllable variables and their levels that an organisation uses to influence the target market. According to McCathy (1964), these variables are product, price, place and promotion and are known as the 4Ps.

 

There is thus a balance to be achieved between organisational capacity and customer requirements. This balance is expressed in the marketing mix, which is the framework in which the customer and the business deal with each other.

Product

The product element of the marketing mix is what is being sold, whether this be widgets, power stations, haircuts, holidays or financial advice. (A product could be a service.) Product issues include:

  • Design (size, shape)  Safety
  • Features              Ecological friendliness
  • Quality and reliability              What it does
  • Packaging  Image

The implication of the marketing orientation is that the product or service is not a ‘thing’ with ‘features’ but, from the customer’s point of view, is a package of benefits, which meets a need or provides a solution to a problem.

Core and augmented product

  • The core product is a product’s essential features. The core product of a credit card is the ability to borrow up to a certain limit and pay off in varied instalments.
  • Augmentations are additional benefits. Most credit cards offer travel insurance, for instance.

Marketing managers make the following distinction.

  • Product class. This is a broad category of product, such as cars, washing machines and so forth. This corresponds to the core or generic product identified above.
  • Product form. This category refers to the different types of product within a product class. The product class ‘cars’ may have several forms, including five-door hatchbacks, four-wheel drive vehicles, hearses and so forth.
  • Brand or make. This refers to the particular brand or make of the product form. For example, the Nissan Micra, Vauxhall Corsa and Rover 100 are, broadly speaking, examples of the same product form.

When considering the marketing mix, the product life cycle is relevant. A product may be expected to go through the life cycle stages of introduction, growth, maturity, decline and senility. A different marketing approach is appropriate to each stage, and different levels of sales and profit can be expected. Note that the product life cycle is a model of what might happen, not a law prescribing what will happen. In other words, not all products go through these stages or even have a life cycle.

Marketing personnel do not decide how the product appears. Production and design staff must also be consulted.

Place: distribution

Place covers two main issues.

  • Where products are sold, for example in supermarkets and shops.
    • For most consumer goods, this involves one or more intermediaries, such as wholesalers, and then retailers.
    • Direct distribution occurs when a firm runs its own shops or, via mail order, uses the postal service to bypass intermediaries.
  • Logistics

Even where intermediaries are used, a manufacturer still has to distribute products to wholesalers and retailers. Logistics involves managing how resources are obtained, moved and stored.

Promotion: marketing communications

Promotion in the marketing mix includes all marketing communications, by which the public knows about the product or service.

Promotion is traditionally the main responsibility of marketing personnel, and is their most visible role. Promotion is intended to stimulate the potential customer through four behavioural stages.

  • Awareness of the product
  • Interest in the product
  • Desire to buy
  • Action: an actual purchase    (AIDA)

Some types of promotion

  • Advertising: newspapers, TV, cinema, internet websites
  • Sales promotion: money-off coupons, ‘two for the price of one’ offers
  • Direct selling: by sales personnel
  • Public relations: crisis management, obtaining favourable press coverage

Price

Products have to be sold at a price which meets the organisation’s profit objectives. Pricing is a very practical matter and important part of marketing work.

  • The price element of the mix itself covers the basic price, discounts, credit terms and interest free credit.
  • Price is influenced by demand and the product’s stage in its life cycle.
    • Penetration pricing: a low price is charged to persuade as many people as possible to buy the product in its early stages.
    • Skimming: prices are set to cream off the highest level of profits even though this restricts the number of people able to afford the product.
  • Price is also part of the image of the product: rightly or wrongly, a high-priced product is often assumed to be of better quality than a cheaply priced product. A high price also conveys an image of exclusivity.
  • Price is a weapon against competitors.

Service marketing

In addition, for services (eg hospital care, air travel) there are three more Ps.

  • The people who deliver the service (eg smiling or surly staff).
  • The processes by which the service is delivered (eg queuing systems at Disney World). (c) The physical evidence of the service (such as a glossy brochure).

This extended marketing mix can also be applied to the supply of goods.

QUESTION                                                                                             Marketing concept

‘An accounts department is not making goods and selling them and so does not need the marketing concept.’ Is this a fair comment?

ANSWER

No.

  • The accounts department supplies information to various other parts of the organisation. Providing information is its service, and the other parts of the organisation are, effectively, its customers.
  • An accounts department deals with customers all the time, especially credit customers: after all, it sends out the bills and collects the money. As its activities are directly involved with customers, it must take the marketing philosophy on board, too.

 

1.5.5 The ideal marketing mix

The ideal marketing mix is one which holds a proper balance between each of these elements.

  • One marketing activity in the mix will not be fully effective unless proper attention is given to all the other activities. For example, if a company launches a costly promotion campaign which emphasises the superior quality of a product, the outlay on advertising, packaging and personal selling will be wasted if the quality does not live up to customer expectations.
  • A company might also place too much emphasis on one aspect of the marketing mix, and much of the effort and expenditure might not be justified for the additional returns it obtains. It might, for example, place too much importance on price reductions to earn higher profits, when in fact a smaller price reduction and greater spending on sales promotion or product design might have a more profitable effect.

1.5.6 Market segmentation

Market segmentation occurs when the market can be broken up into different segments whose customers have common needs and preferences for products and/or services. Segmentation could be on bases such as geography, age, gender or income level. Separate identification of segments means that customers may be charged a different amount.

Mass marketing occurs when a business decides to ignore market segments and go to the market as a whole with one standard offering.

Targeted marketing happens when a business targets one particular market segment, eg geographic (a country or area), age or gender, similar lifestyles, degree of loyalty.

In differentiated marketing, a business decides to target several segments with different marketing mix strategies, whereas undifferentiated marketing is the same as mass marketing.

1.6 Administration

In many organisations administrative functions are carried out at head office as much as possible. When this is the case, the administration function is said to be centralised. A centralised administration department involves as many administrative tasks as possible being carried out at a single central location.

1.6.1 Advantages of a centralised administration office

  • It provides consistency, for example the same account codes are likely to be used no matter which part of the organisation submits an invoice. Everyone uses the same data and information.
  • It gives better security/control over operations and it is easier to enforce standards.
  • Head office is in a better position to know what is going on.
  • There may be economies of scale available, for example in purchasing computer equipment and supplies.
  • Administration staff are in a single location and more expert staff are likely to be employed.

Career paths may be more clearly defined.

1.6.2 Disadvantages of a centralised administration office

  • Local offices might have to wait for tasks to be carried out.
  • There is a reliance on head office as local offices are less self-sufficient.
  • A system fault or hold-up at head office will impact across the organisation.

1.7 The finance function

In many companies, the finance function is one of the most important expert roles in the organisation.

Note that Chapter 8 also looks at the role of the finance function in the context of the specific role of accounting in the organisation.

Role

  • Raising money, ensuring it is available for those who need it
  • Recording and controlling what happens to money, eg payroll and credit control
  • Providing information to managers to help them make decisions
  • Reporting to stakeholders, such as shareholders and tax authorities

1.7.1 The importance of finance and finance management

A distinction can be made between ‘financial management’ and ‘management of finance’.

(a)  Financial management

  • Investment decisions
  • Financing decisions (how to pay for investments)
  • Dividend decisions (how much to give to shareholders)
  • Operating decisions that affect profits (such as decisions on cost reductions or price increases).

(b)        Management of finance is the responsibility for the handling of cash, invoices and other financial documents and for recording the affairs of the business in the books of account.

1.7.2 Raising money: sources of finance

A company might raise new funds from the following sources, using the expertise in its treasury department if it has one.

  • The capital markets, such as the Stock Exchange or the Alternative Investment Market, are markets for trading long-term financial instruments such as equities and debentures. Companies will go to them for three services.
    • New share issues, for example by companies acquiring a stock market listing for the first time
    • Rights issues (ie when existing companies issue shares to investors for money)
    • Issues of loan capital
  • Money markets, on the other hand, are markets for trading short-term financial instruments, bills of exchange and certificates of deposits.
  • Retained earnings, when profits earned in a year may be kept in the company as opposed to being distributed to shareholders.
  • Bank borrowings (on a short- or long-term basis). Interest payments cannot be reduced to reflect changed circumstances.
  • Government sources (grants, tax reliefs)
  • Venture capital
  • The international money and capital markets (eurocommercial paper, eurobonds and eurocurrency borrowing)

QUESTION                                                                                                Finance function

What sources of finance are available to a public sector organisation?

ANSWER

  • Taxation of incomes and company profits, excise, sales tax (VAT) receipts (central government)
  • Sale of gilts (government securities) to investors
  • Borrowing from external sources (eg issuing eurobonds)
  • Council tax
  • User fees (eg charge for using a leisure facility)
  • Retail prices (eg train fares)
  • Other special charges (eg the ‘nuclear levy’ on electricity bills)
  • Charging overseas users (eg universities for overseas students)
  • Funds from central government
  • Issuing of municipal bonds (on the money markets)  Long-term loan finance (eg for local authorities)

 

Management at this level involves:

  • Decisions as to the right mix of share and loan capital
  • Decisions as to when that capital should be raised (eg to fund a major acquisition)
  • Keeping these important shareholders and lenders informed about the company and its prospects

Much of the internal financial management of a company is conducted with the shareholders’ return in mind. For example, a company embarking on an investment project will assess its worth by the return or value expected.

1.7.3 Financial accounting

  • Recording financial transactions. Financial accounting covers the classification and recording of transactions in monetary terms in accordance with established concepts, principles, accounting standards and legal requirements. It presents as accurate a view as possible of the effect of those transactions over a period of time and at the end of the time. In the UK the Companies Act requires directors of companies to maintain adequate records to show transactions, assets and liabilities and from which accounts can be prepared to show profit or loss for the accounting reference period and a statement of financial position (balance sheet), detailing assets and liabilities and capital at the end of that reference period.
  • Reporting to shareholders. In addition, the information must be reported to the shareholders in accordance with the detailed disclosure requirements of the Companies Act. All this information will be subject to statutory audit. Other organisations, such as building societies and charities, are subject to similar legislation.

1.7.4 Treasury management

Treasury management plans and controls the sources and uses of funds by the organisation. This is achieved by a range of techniques.

  • Cash budgeting, daily, weekly, monthly, quarterly and annually
  • Arranging a bank overdraft facility; borrowing funds in the money markets and capital markets
  • Repaying sums borrowed when the loans mature
  • Comparing actual cash flows against budget
  • Possibly, the cashier’s duties of making payments to suppliers, paying wages and banking receipts
  • Managing foreign currency dealings, to limit the firm’s exposure to the risk of losses arising from changes in exchange rates

1.7.5 Working capital and other matters

A company’s management of its working capital is vital for business success. Working capital consists of cash, accounts receivable, accounts payable and inventory.

Receivables. Receivables can be managed by effective credit control. Poor credit control has its own penalties.

  • Irrecoverable debts. Sales revenue is not received for goods sold. If the purchaser does not pay for goods received, and no effort is made to recover the debt, the goods have, in effect, been given away.
  • A company which cannot collect its debts in time might have to use bank overdraft finance to pay its bills. If the bank is concerned about the security of its loan, this might mean the company is vulnerable to increases in interest rates, and the bank’s credit decisions.

Payables. Many companies delay paying suppliers as long as possible. In effect, they are using suppliers as a sort of credit finance. Payments to suppliers are an outflow of funds. However, in the long term it may be more important to establish reliable commercial relationships with them than squeeze every pound out of them in the short term. Large companies are now required to disclose their policies on paying suppliers in their annual financial statements.

Inventory. Inventory levels are a focus of some of the production systems discussed earlier. Inventory holding costs must always be managed.

The finance department is often responsible for payroll. HR and production provide details of wage rates, time sheets and so forth.

1.7.6 Management accounting information

The finance function plays a critical role in providing information to management to assist in planning, decision-making and control. This is called management accounting.

  • Planning
    • The finance function draws up budgets which direct and allocate resources. (ii) The finance function also produces forecasts of anticipated future results.
  • Decision-making. The finance function is often involved in assessing and modelling the expenditure and cash flow implications of proposed decisions.
  • Control
    • Budgets are also used to monitor performance. The finance function regularly provides information comparing budgeted revenues and costs for a period, with actual results and comparisons from previous months.
    • Management accountants are involved in assessing the contribution which products, services, processes and other operations make to overall profitability.
    • Costing based on predetermined standards provides the information which enables managers to identify weaknesses and look for remedies all in a timely manner.

The success of management accountants in meeting their job objectives will depend on two things.

  • The quality of the information they provide
  • Whether the information they provide to other managers is used properly

1.7.7 Co-ordination with other departments

Instead of being seen as helpers and advisers to other managers, management accountants are sometimes regarded as an adversary who tries to find fault. However, close co-ordination with other departments is essential.

  • The payables ledger section relies on the purchasing department to send copies of purchase orders and confirm the validity of invoices received from suppliers, and also to inform the payables ledger staff about any despatches concerning goods received, or purchases returns. The section also relies on the cashier to inform it of all payments of invoices.
  • The receivables ledger section relies on sales staff to send copies of sales order or confirmations of goods delivered to customers, and on the cashier to pass on information about payments received.
  • The receivables ledger section must also co-operate with debt collection staff, by helping to prepare monthly statements and lists of aged receivables. Credit control work and the work of the debt collection staff are also closely interdependent, relying on the free exchange of information between them.
  • The financial accounting staff responsible for the preparation of the annual accounts might rely on the management accounting staff for data about inventory records, so as to place a value on closing inventory in the accounts.

As information providers to other managers in other departments in the organisation, accountants cannot be fully effective unless they work in co-operation with these other managers.

1.7.8 The finance department and strategic planning

The role of finance is threefold.

  • Finance is a resource, which can be deployed so that objectives are met.
  • A firm’s objectives are often expressed in financial or semi-financial terms.
  • Financial controls are often used to plan and control the implementation of strategies. Financial indicators are often used for detailed performance assessment.

As a planning medium and tool for monitoring, financial management makes a variety of strategic contributions.

  • Ensuring that resources of finance are available. Issues of raising equity or loan capital are important here. The amount of resources that the strategy will consume needs to be assessed, and the likely cost of those resources established. Cash flow forecasting will also be necessary.
  • Integrating the strategy into budgets for revenues, operating costs and capital expenditure over a period. The budgeting process serves as a planning tool and a means of financial control and monitoring.
  • Establishing the necessary performance measures, in line with other departments for monitoring strategic objectives.
  • Establishing priorities if, for example, altered conditions make some aspects of the strategy hard

to fulfil.

  • Assisting in the modelling process. Financial models are simplified representations of the business. It is easier to experiment with models, to see the effect of changes in variables, than with the business itself.

1.8 Human resources

Human resource management (HRM) is the process of evaluating an organisation’s human resource needs, finding people to fill those needs, and getting the best work from each employee by providing the right incentives and job environment – with the overall aim of helping achieve organisational goals.

 

1.8.1 Scope of human resource management

Human resource management (HRM) is concerned with the most effective use of human resources. It deals with organisation, staffing levels, motivation, employee relations and employee services.

Human resource management (HRM) is concerned with a strategic approach to people at work and their relationships as they arise in the working environment.

The objectives of HRM

It is possible to identify four main objectives of HRM.

  • To develop an effective human component for the organisation which will respond effectively to change.
  • To obtain and develop the human resources required by the organisation and to use and motivate them effectively.
  • To create and maintain a co-operative climate of relationships within the organisation.
  • To meet the organisation’s social and legal responsibilities relating to the human resource.

1.8.2 Why is HRM important?

Effective human resource management and employee development are strategically necessary for the following reasons.

  • To increase productivity. Developing employee skills might make employees more productive, hence the recent emphasis on public debate on the value of training.
  • To enhance group learning. Employees work more and more in multi-skilled teams. Each employee has to be competent at several tasks. Some employees have to be trained to work together (ie in team working skills).
  • To reduce staff turnover. Reducing staff turnover, apart from cutting recruitment costs, can also increase the effectiveness of operations. In service businesses, such as hotels or retail outlets, reductions in staff turnover can be linked with repeat visits by customers. As it is cheaper to keep existing customers than to find new ones, this can have a significant effect on profitability.
  • To encourage initiative. Organisations can gain significant advantage from encouraging and exploiting the present and potential abilities of the people within them.

1.8.3 The human resource cycle

A relatively simple model that provides a framework for explaining the nature and significance of HRM is the human resource cycle (Fombrun et al 1984).

Human resource cycle

Selection is important to ensure the organisation obtains people with the qualities and skills required.

Appraisal enables targets to be set that contribute to the achievement of the overall strategic objectives of the organisation. It also identifies skills and performance gaps, and provides information relevant to reward levels.

Training and development ensure skills remain up to date, relevant, and comparable with (or better than) the best in the industry.

The reward system should motivate and ensure valued staff are retained.

Performance depends on each of the four components and how they are co-ordinated.

These topics are all covered in Part D of the Interactive Text.

HRM planning should be based on the organisation’s strategic planning processes, in relation to analysis of the labour market, forecasting of the external supply and internal demand for labour, job analysis and plan implementation.

1.8.4 The HR plan

Human resource planning concerns the acquisition, utilisation, improvement and return of an enterprise’s human resources. Human resource planning deals with:

  • Recruitment
  • Retention (company loyalty, to retain skills and reduce staff turnover)
  • Downsizing (reducing staff numbers)
  • Training and retraining to enhance the skills base

The process of human resources planning

  1. STRATEGIC ANALYSIS
  • Of the environment
  • Of the organisation’s manpower strengths and weaknesses, opportunities and threats  Of the organisation’s use of employees
  • Of the organisation’s objectives

 

  1. FORECASTING
  • Of internal demand and supply
  • Of external supply

1.8.5 Control over the HR plan

Once the HR plan has been established, regular control reports should be produced.

  • Actual numbers recruited, leaving and promoted should be compared with planned Action may be required to correct any imbalance – depending on the cause.
  • Actual pay, conditions of employment and training should be compared with assumptions in the HR plan. Do divergences explain any excessive staff turnover?
  • Periodically, the HR plan itself should be reviewed and brought up to date.
  2   What is culture?

2.1 Spheres of culture

Culture is ‘the collective programming of the mind which distinguishes the members of one category of people from another’ (Hofstede). It may be identified as ways of behaving, and ways of understanding, that are shared by a group of people.

Edgar Schein (Schein, 1985) defines organisational culture as ‘the set of shared, taken-for-granted implicit assumptions that a group holds and that determines how it perceives, thinks about and reacts to its environment’. He also suggests that the culture of an organisation is grounded in the founder’s basic beliefs, values and assumptions, and embedded in the organisation over time – what Schein calls ‘the residue of success’.

Culture may therefore be identified as ways of behaving, and ways of understanding, that are shared by a group of people. Referring to it as: ‘The way we do things round here’, Schein (Schein, 1985) says that organisational culture matters because cultural elements determine strategy, goals and modes of operating.

Culture can be discussed on many different levels. The ‘category’ or ‘group’ of people whose shared behaviours and meanings may constitute a culture include:

  • A nation, region or ethnic group
  • If you are a male (or female) accountant in an organisation operating in a given business sector in a particular region of your country of residence (which may not be your country of origin), you may be influenced by all these different spheres of culture!
    Women versus men (‘gender culture’)
  • A social class (eg ‘working class culture’)
  • A profession or occupation
  • A type of business (eg ‘advertising culture’)  An organisation (‘organisational culture‘)

2.2 Elements of culture

 Elements of culture include:

•              Observable behaviour

•              Underlying values and beliefs which give meaning to the observable elements

•              Hidden assumptions, which unconsciously shape values and beliefs

It is suggested that there are different levels at which culture can be understood (Schein, 1985). For Schein, culture is the most difficult organisational attribute to change, outlasting products, founders and leaders as the organisation grows. His model describes three determinants of culture.

  • The first level. The observable, expressed or ‘explicit’ elements of culture
    • Behaviour: norms of personal and interpersonal behaviour; customs and rules about behaviour that is acceptable or unacceptable.
    • Artefacts: concrete expressions such as architecture and interior design (eg of office premises), dress codes and symbols.
    • Attitudes: patterns of collective behaviour such as greeting styles, business formalities, social courtesies and ceremonies.

 

  • The second level. Beneath these observable phenomena lie values and beliefs and the professed culture, which give the behaviour and attitudes their special meaning and significance. For example, the design of office space may imply status and honour, or reflect the importance of privacy within a culture: it ‘means’ more than the observable features. Values and beliefs may be overtly expressed in slogans or the mission statement.
  • The third level. Beneath values and beliefs lie assumptions: foundational ideas (‘unspoken rules’) that are no longer consciously recognised or questioned by the culture, but which ‘program’ its ways of thinking and behaving.

  3   Organisation culture

3.1 Manifestations of culture in organisations

 

Organisation culture is ‘the way we do things round here’ (Schein, 1985).

Examples of organisation culture include the following.

Item Example
Beliefs and values, which are often unquestioned ‘The customer is always right’.
Behaviour In the City of London, standard business dress is still generally taken for granted and even ‘dress down Fridays’ have their rules.
Artefacts Microsoft encourages communication between employees by setting aside spaces for the purpose.
Rituals In some firms, salespeople compete with each other, and there is a reward, given at a ceremony, for the salesperson who does best in any period.
Symbols Corporate logos are an example of symbols, but they are directed outwards. Within the organisation, symbols can represent power: dress, make and model of car, office size and equipment and access to facilities can all be important symbols.

Manifestations of culture in an organisation may thus include:

  • How formal the organisation structure is
  • Communication: are senior managers approachable?
  • Office layout
  • The type of people employed
  • Symbols, legends, corporate myths
  • Management style
  • Freedom for subordinates to show initiative
  • Attitudes to quality
  • Attitudes to risk
  • Attitudes to the customer  Attitudes to technology

              QUESTION                                                                         Manifestations of culture

What do you think would differentiate the culture of:

            A regiment in the Army?               An advertising agency?

ANSWER

Here are some hints. The Army is very disciplined. Decisions are made by officers; behaviour between ranks is sometimes very formal. The organisation values loyalty, courage and discipline and teamwork. Symbols and artefacts include uniforms, medals, regimental badges, and so on. Rituals include corporate expressions such as parades and ceremonies.

An advertising agency, with a different mission, is more fluid. Individual flair and creativity, within the commercial needs of the firm, is expected. Artefacts may include the style of creative offices, awards or prizes, and the agency logo. Rituals may include various award ceremonies, team meetings and social gatherings.

 

3.2 What shapes organisation culture?

Influences on organisational culture include:

  • The organisation’s founder. A strong set of values and assumptions is set up by the organisation’s founder, and even after they have retired, these values have their own momentum. Or, to put it another way, an organisation might find it hard to shake off its original culture.
  • The organisation’s history
    • Culture reflects the era when the organisation was founded.
    • The effect of history can be determined by stories, rituals and symbolic behaviour. They legitimise behaviour and promote priorities.
  • Leadership and management style. An organisation with a strong culture recruits and develops managers who naturally conform to it and who perpetuate the culture.
  • The organisation’s environment. As we have seen, nations, regions, occupations and business types have their own distinctive cultures, and these will affect the organisation’s style.
 

Cultural values can be used to guide organisational processes without the need for tight control. They can also be used to motivate employees, by emphasising the heroic dimension of the task. Culture can also be used to drive change, although – since values are difficult to change – it can also be a powerful force for preserving the status quo.
  4   Culture and structure                                                                                  
 

Handy (2007) classifies four types of culture, to which he gives the names of Greek deities.

•              Power culture (Zeus) is shaped by one individual.

•              Role culture (Apollo) is a bureaucratic culture shaped by rationality, rules and procedures.

•              Task culture (Athena) is shaped by a focus on outputs and results.

•              Existential or person culture (Dionysus) is shaped by the interests of individuals.

The four types are differentiated by their structures, processes and management methods. The differences are so significant as to create distinctive cultures, to each of which Handy gives the name of a Greek God.

Zeus                     Power culture

The organisation is controlled by a key central figure, owner or founder. Power is direct, personal, informal. Suits small organisations where people get on well.

  Apollo                     Role culture

Classical, rational organisation: bureaucracy.

Stable, slow-changing, formalised, impersonal.

Authority based on position and function.

 

Athena                  Task culture

Management is directed at outputs: problems solved, projects completed. Team based, horizontally structured, flexible, valuing expertise – to get the job done.

  Dionysus               Person culture

The purpose of the organisation is to serve the interests of the individuals who make it up:

management is directed at facilitating, administering.

4.1 Power culture

Zeus is the god representing the power culture or club culture. Zeus is a dynamic entrepreneur who rules with snap decisions. Power and influence stem from a central source, perhaps the owner-directors or the founder of the business. The degree of formalisation is limited, and there are few rules and procedures. Such a firm is likely to be organised on a functional basis.

  • The organisation is capable of adapting quickly to meet change.
  • Personal influence decreases as the size of an organisation gets bigger. The power culture is therefore best suited to smaller entrepreneurial organisations, where the leaders have direct communication with all employees.
  • Personnel have to get on well with each other for this culture to work. These organisations are clubs of ‘like-minded people introduced by the like-minded people, working on empathetic initiative with personal contact rather than formal liaison.’

4.2 Role culture

Apollo is the god of the role culture or bureaucracy. There is a presumption of logic and rationality.

  • These organisations have a formal structure, and operate by well-established rules and procedures.
  • Individuals are required to perform their job to the full, but not to overstep the boundaries of their authority. Individuals who work for such organisations tend to learn an expertise without experiencing risk; many do their job adequately, but are not over-ambitious.
  • The bureaucratic style, as we have seen, can be very efficient in a stable environment, when the organisation is large and when the work is predictable.

4.3 Task culture

Athena is the goddess of the task culture. Management is seen as completing a succession of projects or solving problems.

  • The task culture is reflected in project teams and task forces. In such organisations, there is no dominant or clear leader. The principal concern in a task culture is to get the job done. Therefore the individuals who are important are the experts with the ability to accomplish a particular aspect of the task.
  • Performance is judged by results.
  • Task cultures are expensive, as experts demand a market price.
  • Task cultures also depend on variety, and to tap creativity requires a tolerance of perhaps costly mistakes.
    • Person culture

Dionysus is the god of the existential or person culture. In the three other cultures, the individual is subordinate to the organisation or task. An existential culture is found in an organisation whose purpose is to serve the interests of the individuals within it. These organisations are rare, although an example might be a partnership of a few individuals who do all the work of the organisation themselves (with perhaps a little secretarial or clerical assistance): for example, barristers (in the UK) working through chambers.

Management positions in these organisations are often lower in status than the professionals and are labelled secretaries, administrators, bursars, registrars or clerks.

The organisation depends on the talent of the individuals; management is derived from the consent of the managed, rather than the delegated authority of the owners.

  • A contingency approach

When thinking about these four types of culture, remember that they do not necessarily equate to specific organisation types, though some styles of organisation culture may accompany particular organisation structures. Also, it is quite possible for different cultures to prevail in different parts of the same organisation, especially large ones with many departments and sites. In other words, as the contingency approach says: ‘it all depends’.

Handy also matched appropriate cultural models to Robert Anthony’s classification of managerial activity, which we discussed in Chapter 5.

  • Strategic management (carried out by senior management) is concerned with direction setting, policy making and crisis handling. It therefore suits a power culture.
  • Tactical management (carried out by middle management) is concerned with establishing means to the corporate ends, mobilising resources and innovating (finding new ways of achieving goals). It therefore suits a task culture.
  • Operational management (carried out by supervisors and operatives) is concerned with routine activities to carry out tactical plans. It therefore suits a role culture.

              QUESTION                                                                          Classifications of culture

Review the following statements. Ascribe each of them to one of Handy’s four corporate cultures.

People are controlled and influenced by:

  • The personal exercise of rewards, punishments or charisma
  • Impersonal exercise of economic and political power to enforce procedures and standards of performance
  • Communication and discussion of task requirements leading to appropriate action motivated by personal commitment to goal achievement
  • Intrinsic interest and enjoyment in the activities to be done and/or concern and caring for the needs of the other people involved

ANSWER

(a) Zeus/power culture (c) Athena/task culture (b) Apollo/role culture (d) Dionysus/person culture

 

4.6 The impact of national culture 

 

National culture influences organisation culture in various ways. One model of these effects is the ‘Hofstede model’ which describes four dimensions on which cultures differ.

•              Power distance                                     Individualism/collectivism

•              Uncertainty avoidance                         Masculinity/femininity

Different countries have different ways of doing business, and different cultural values and assumptions which influence business and management styles.

4.7 The Hofstede model

Hofstede (2011) carried out cross-cultural research at 66 national offices of IBM and formulated one of the most influential models of work-related cultural differences.

The Hofstede model describes four main dimensions of difference between national cultures, which impact on all aspects of management and organisational behaviour: motivation, team working, leadership style, conflict management and HR policies.

  • Power distance: the extent to which unequal distribution of power is accepted
    • High PD cultures (as in Latin, near Eastern and less developed Asian countries) accept greater centralisation, a top-down chain of command and closer supervision. Subordinates have little expectation of influencing decisions.
    • Low PD cultures (as in Germanic, Anglo and Nordic countries) expect less centralisation and flatter organisational structures. Subordinates expect involvement and participation in decision-making. (Japan is a medium PD culture.)
  • Uncertainty avoidance: the extent to which security, order and control are preferred to ambiguity, uncertainty and change
    • High UA cultures (as in Latin, near Eastern and Germanic countries and Japan) respect control, certainty and ritual. They value task structure, written rules and regulations, specialists and experts, and standardisation. There is a strong need for consensus: deviance and dissent are not tolerated. The work ethic is strong.
    • Low UA cultures (as in Anglo and Nordic countries) respect flexibility and creativity. They have less task structure and written rules, more generalists and greater variability. There is more tolerance of risk, dissent, conflict and deviation from norms.
  • Individualism: the extent to which people prefer to live and work in individualist (focusing on the

‘I’ identity) or collectivist (focusing on the ‘we’ identity) ways

  • High individualism cultures (as in Anglo, more developed Latin and Nordic countries) emphasise autonomy and individual choice and responsibility. They prize individual initiative. The organisation is impersonal and tends to defend business interests: task achievement is more important than relationships. Management is seen in an individual context.
  • Low individualism (or collectivist) cultures (as in less developed Latin, near Eastern and less developed Asian countries) emphasise interdependence, reciprocal obligation and social acceptability. The organisation is seen as a ‘family’ and tends to defend employees’ interests: relationships are more important than task achievement. Management is seen in a team context. (Japan and Germany are ‘medium’ cultures on this dimension.)
  • Masculinity: the extent to which social gender roles are distinct (Note that this is different from the usual sense in which the terms ‘masculine’ and ‘feminine’ are used.)
    • High masculinity cultures (as in Japan and Germanic and Anglo countries) clearly differentiate gender roles. Masculine values of assertiveness, competition, decisiveness and material success are dominant. Feminine values of modesty, tenderness, consensus, focus on relationships and quality of working life are less highly regarded, and confined to women.
    • Low masculinity (or Feminine) cultures (as in Nordic countries) minimise gender roles. Feminine values are dominant – and both men and women are allowed to behave accordingly.

              QUESTION                                                      National culture and management style

According to the Hofstede model, what issues might arise in the following cases?

  • The newly appointed Spanish (more developed Latin) R&D manager of a UK (Anglo) firm asks to see the Rules and Procedures Manual for the department.
  • A US-trained (Anglo) manager attempts to implement a system of Management by Objectives (MbO) in Thailand (less developed Asian).
  • A Dutch (Nordic) HR manager of a US (Anglo) subsidiary in the Netherlands is instructed to implement downsizing measures.

ANSWER

  • A high-UA manager, expecting to find detailed and generally adhered-to rules for everything, may be horrified by the adhocracy of a low-UA organisation: if they attempt to impose a high-UA culture, there may be resistance from employees and management.
  • A high-individuality manager may implement MbO on the basis of individual performance targets, results and rewards: this may fail to motivate collectivist workers, for whom group processes and performance is more important.
  • A low-masculinity manager may try to shelter the workforce from the effects of downsizing, taking time for consultation, retraining, voluntary measures, and so on: this may seem unacceptably ‘soft’ to a high-masculinity parent firm.

 

 

 

 

              QUESTION                                                                                               Hofstede

Research has indicated that workers in country A display characteristics such as toughness and the desire for material wealth and possessions, while workers in country B value personal relationships, belonging and the quality of life.

According to Hofstede’s theory, these distinctions relate to which of the following cultural dimensions?

A          Masculinity/femininity C            Individualism-collectivism
B          Power distance D          Uncertainty avoidance

ANSWER

A          Many questions in the exam will refer to management theories or need knowledge of management theories. Make sure that you learn your theories!

 

  5   Committees
 

Within an organisation, committees can consist entirely of executives or may be instruments for joint consultation between employers and employees. They are a key part of organisational communication processes, which are covered in Chapter 18.

5.1 Purposes of committees

  • Creating new ideas. Group creativity may be achieved by a brainstorming committee or think tank.
  • Communication. They can be an excellent means of communication. For example, they can be used to exchange ideas and get feedback before a decision is taken or to inform managers about policies, plans, actual results, and so on.
  • Democratic. They are democratic, because they allow for greater participation in the decision-making process. Problem solving can be facilitated by consultations between interested parties.
  • Combining abilities. Committees enable the differing skills of its various members to be brought together to deal with a problem. In theory, the quality of committee decisions should be of a high standard.
  • Co-ordination. Committees should enable the maximum co-ordination of all parties involved in a decision to be achieved, for example in co-ordinating the budgets of each department and compiling a master budget.
  • Representation. Committees enable all relevant interests to be involved in the decision-making process and they bring together the specialised knowledge of working people into a working combination.
  • Recommendations. Making recommendations for others to follow is a key output from committee processes.

5.1.1 The committee Chair

There are a number of recognised qualities of a good Chair (though common sense may dictate many others, varying with circumstances).

  • The Chair will have to give immediate rulings on points of dispute or doubt, so they should have:
    • A sound knowledge of the relevant issues
    • An ability to make up his/her mind
    • Skill in communicating clearly, but tactfully and in a courteous manner
  • The Chair should be and be seen to be impartial. There will be times when criticism is expressed which they personally may find unfair, or when there is a strong clash of opinion between other committee members. In either situation, whatever their personal views, the Chair should treat opponents with equal fairness.
  • The Chair should have the discretion to know when to insist on strict observance of correct procedure, and when a certain amount of relaxation will ease the tension.
  • The Chair should be punctual and regular in attendance at meetings. If they cannot give the duties the appropriate amount of time and attention, they should consider resigning.

5.1.2 The committee secretary

  • Duties before committee meeting:
    • Fixing the date and time of the meeting
    • Choosing and preparing the location of the meeting
    • Preparing and issuing various documents
  • Duties at the meeting: assisting the Chair, making notes
  • Duties after the meeting: preparing minutes, acting on and communicating decisions

5.2 Types of committee

Committees can be classified according to the power they exercise.

  • Executive committees have the power to govern or administer. The board of directors of a limited company is itself a ‘committee’ appointed by the shareholders, to the extent that it governs or administers.
  • Standing committees are formed for a particular purpose on a permanent basis. Their role is to deal with routine business delegated to them at weekly or monthly meetings.
  • Ad hoc committees are formed to complete a particular task (eg fact-finding and reporting on a particular problem before being wound up).
  • Sub-committees may be appointed by committees to relieve the parent committee of some of its routine work.
  • Joint committees may be formed to co-ordinate the activities of two or more committees; for example, representatives from employers and employees may meet in a Joint Consultative Committee. This kind of committee can either be permanent or appointed for a special purpose.
  • Management committees in many businesses contain executives at a number of levels, not all the decisions in a firm need to be taken by the Board.

5.3 Advantages of committees

  • Consolidation of power and authority. The pooled authority of a committee may enable a decision to be made for which an individual’s authority would not be sufficient. Examples of a plural executive include a Board of Directors or the Cabinet of the Government.
  • Delegation. A committee can further delegate responsibility, for example to a subcommittee.
  • Blurring responsibility. When a committee makes a decision, no individual will be held responsible for the consequences of the decision.
  • Delay. A committee is used to gain time (eg a manager may set up a committee to investigate a problem when they want to delay their decision, or a company may refer a labour relations problem to a committee to defer a crisis with a trade union).

5.4 Disadvantages of committees

  • They are apt to be too large for constructive action, since the time taken by a committee to resolve a problem tends to be in direct proportion to its size.
  • Committees are time consuming and expensive. In addition to the cost of highly paid executives’ time, secretarial costs will be incurred.
  • Delays may occur if matters of a routine nature are entrusted to committees; committees must not be given responsibilities which they would carry out inefficiently.
  • Operations may be jeopardised by the frequent attendance of executives at meetings, and by distracting them from their real duties.
  • Incorrect or ineffective decisions may be made, if members are unfamiliar with the issues. Occasionally, there may be a total failure to reach any decision at all.
  • The fact that there is no individual responsibility for decisions might invite compromise instead of clear-cut decisions. Moreover, members may avoid responsibility for poor results arising from decisions taken by the committee. Weak management can hide behind committee decisions.

5.5 Using committees successfully

  • Well-defined areas of authority, timescales of operations and purpose should be specified in writing.
  • The Chair should have the qualities of leadership to co-ordinate and motivate the other committee members.
  • The committee should not be so large as to be unmanageable.
  • The members of the committee should have the necessary skills and experience to do the committee’s work; where the committee is expected to liaise with functional departments, the members must also have sufficient status and influence with those departments.
  • Minutes of the meetings should be taken and circulated by the Secretary, with any action points arising out of the meetings notified to the members responsible for doing the work.
  • In order to conduct business and make decisions there is usually a minimum number of members required to be in attendance at the meeting. This minimum number of members is known as a quorum and it is usually over 50% of members.
  • Above all, an efficient committee must provide benefits that justify its cost.
  • Finally, if at all possible, the committee should be allowed plenty of time to reach decisions, enabling members to form sub-groups.

 

N Research may be pure, applied or development. It may be intended to improve products or processes.
N R&D should support the organisation’s strategy and be closely co-ordinated with marketing.
N

 

 

Purchasing makes a major contribution to cost and quality management in any business and in retail is a vital element of strategy. The purchasing mix is:

•              Quantity                 Quality

•              Price                       Delivery

N The production function plans, organises, directs and controls the necessary activities to provide products and services, creating outputs which have added value over the value of inputs.
N Services are intangible, cannot be stored, are inherently variable in quality and nature and their purchase results in no transfer of property. The people and processes involved in providing them are therefore of paramount importance.
N The marketing function manages an organisation’s relationships with its customers.
N Human resource management (HRM) is concerned with the most effective use of human resources. It deals with organisation, staffing levels, motivation, employee relations and employee services.
N HRM planning should be based on the organisation’s strategic planning processes, with relation to analysis of the labour market, forecasting of the external supply and internal demand for labour, job analysis and plan implementation.
N Culture is ‘the collective programming of the mind which distinguishes the members of one category of people from another’ (Hofstede). It may be identified as ways of behaving, and ways of understanding, that are shared by a group of people.
N

 

 

 

Elements of culture include:

–             Observable behaviour

–             Underlying values and beliefs which give meaning to the observable elements

–             Hidden assumptions, which unconsciously shape values and beliefs

N Organisation culture is ‘the way we do things round here‘.
N Cultural values can be used to guide organisational processes without the need for tight control. They can also be used to motivate employees, by emphasising the heroic dimension of the task. Culture can also be used to drive change, although – since values are difficult to change – it can also be a powerful force for preserving the status quo.
N

 

 

 

Handy classifies four types of culture, to which he gives the names of Greek deities.

–             Power culture (Zeus) is shaped by one individual.

–             Role culture (Apollo) is a bureaucratic culture shaped by rationality, rules and procedures.

–             Task culture (Athena) is shaped by a focus on outputs and results.

–             Existential or person culture (Dionysus) is shaped by the interests of individuals.

N

 

 

 

 

National culture influences organisation culture in various ways. One model of these effects is the ‘Hofstede model’ which describes four dimensions on which cultures differ.

–             Power distance

–             Uncertainty avoidance

–             Individualism/collectivism

–             Masculinity/femininity

N Within an organisation, committees can consist entirely of executives or may be instruments for joint consultation between employers and employees. They are a key part of organisational communication processes, which are covered in Chapter 18.

 

  • What is the main intention behind R&D?
  • What are the elements of the purchasing mix?
    • Place, product, price, promotion C             Product, quality, price, delivery B       Quantity, quality, price, delivery        D             Place, product, price, delivery
  • Choose the correct word to fill in the blank: planning, production, promotion

The ……………….. function plans, organises and controls the necessary activities to provide products and services.

  • Marketing is the management process which identifies, anticipates and satisfies customer needs, regardless of expense.

Is this true or false?

  • Which two of the following are roles of the finance function?         To provide information to managers for decision-making

To ensure compliance with social and legal responsibilities

To record and control what happens to money

  • What are the four main objectives of HRM?
  • Selection is important to ensure that the organisation obtains people with the qualities and skills required.

Is this true or false?

  • What are the elements of culture?
  • ‘Bureaucracy’ is another name for a:
    • Power culture C             Task culture
    • Role culture D Existential culture
  • A project team is most likely to be a role culture. True or false?
  • According to Hofstede, the extent to which security, order and control are preferred to ambiguity and change is called
    • Masculinity C             Power distance
    • Individualism D             Uncertainty avoidance
  • What is the name of a committee with the power to govern or administer?
    • Joint committee C Executive committee B Ad hoc committee D Standing committee

 

 

 

www.ACCAGlobalBox.com

  • To improve products or processes and so support the organisation’s strategy.
  • Note that A is the marketing mix.
  • Production
  • Marketing must be done profitably.

 

  • ü To provide information to managers for decision-making

 ü       To record and control what happens to money

  •  To develop an effective human component for the company
    • To obtain, develop and motivate staff
    • To create positive relationships
    • To ensure compliance with social and legal responsibilities
  • True
  • Observable phenomena (behaviour, artefacts, rituals), values and beliefs, assumptions
  • B Role culture
  • It is most likely to be a task culture.
  • D Uncertainty avoidance
  • C Executive committee. Committees can be classified according to the power that they exercise.
 

 

 

 

 

 

Now try …
Attempt the questions below from the Practice Question Bank

Q28

Q29

Q30

Q31

   

07Corporate governance and social responsibility

There have been a number of reports worldwide on
corporate governance, but understanding the underlying
principles of corporate governance are more important
than getting to grips with the detailed provisions laid
down in each report.
Sections 1 and 2 of this chapter
cover the main areas of corporate governance.
Section 3 and 4 go on to discuss the role of the board
and how it communicates with shareholders.
Corporate social responsibility is covered in
Sections 5
and 6
of the chapter. While some argue that business has
a social responsibility for the cost of its activities, this is
controversial. However, there does now seem to be
widespread acceptance that commercial organisations
should devote some of their resources to the promotion of
wider social aims that are not necessarily mandated by
either law or the rules of ethics.

  Study Guide Intellectual level  

 

 

                              B5 Governance and social responsibility in business

(a) Explain the agency concept in relation to corporate

 

governance.

 

K

(b) Define corporate governance and social responsibility and

 

explain their importance in contemporary organisations.

K  
(c) Explain the responsibility of organisations to maintain

 

appropriate standards of corporate governance and corporate social responsibility.

K  
(d) Briefly explain the main recommendations of best practice in

 

effective corporate governance:

K  
(i)                Executive and non-executive directors

(ii)              Remuneration committees

(iii)             Audit committees                 (iv) Public oversight

(e) Explain how organisations take account of their social

 

responsibility objectives through analysis of the needs of internal, connected and external stakeholders.

 

 

 

 

K

 

 

 

 

 

(f) Identify the social and environmental responsibilities of

 

business organisations to internal, connected and external stakeholders.

K  
       

 

 

  1   Principles of corporate governance
  Most corporate governance reports are based around the principles of integrity, accountability, independence and good management but there is disagreement on how much these principles need to be supplemented by detailed rules.  

 

1.1 What is corporate governance?

 

Most countries adopt a principles-based approach to corporate governance, meaning that ‘best practice’ guidelines are set out for companies to follow. The Organisation for Economic Co-operation and Development published the latest version of its ‘Principles of Corporate Governance’ in 2015 (OECD, 2015). In summary the principles are:

  • Principle 1: The corporate governance framework should promote transparent and fair markets, and the efficient allocation of resources. It should be consistent with the rule of law and support effective supervision and enforcement.
  • Principle 2: The corporate governance framework should protect and facilitate the exercise of shareholders’ rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.
  • Principle 3:The corporate governance framework should provide sound incentives throughout the investment chain and provide for stock markets to function in a way that contributes to good corporate governance.
  • Principle 4: The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
  • Principle 5: The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
  • Principle 6: The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.

Although mostly discussed in relation to large quoted companies, governance is an issue for all corporate bodies; commercial and not for profit.

There are a number of elements in corporate governance.

  • The management and reduction of risk is fundamental in all definitions of good governance.
  • Overall performance enhanced by good supervision and management within set best practice guidelines underpins most definitions.
  • Good governance provides a framework for an organisation to pursue its strategy in an ethical and effective way from the perspective of all stakeholder groups affected, and offers safeguards against misuse of resources, physical or intellectual.
  • Good governance is not just about externally established codes; it also requires a willingness to apply the spirit as well as the letter of the law.
  • Accountability is generally a major theme in all governance frameworks. There is a free flow of information in the form of accounts and other reports. However, issues of commercial confidentiality can get in the way of too much ‘openness’.

Extensive abuses have led to a variety of measures intended to improve the quality of corporate governance.

  • The development of accounting standards has been driven in part by the need to prevent abuses in financial reporting.
  • The various professional bodies all have their own codes of professional conduct.
  • A series of major financial scandals has led to government intervention in the UK in the form of commissions on standards of behaviour, each producing its code of conduct.

1.2 Definitions

  • Integrity

Integrity in business means dealing honestly with employees, customers and all business contacts.

  • Accountability

Accountability means the business being answerable for its actions.

1.2.3 Independence

Independence in this context means that there must be independent people within the organisation checking that the business is complying with its code of governance.

1.2.4 Good management

Good management in business means setting best practice guidelines.

In a small business the shareholders (ie owners) are likely to be the directors and so the owners and the managers are the same and there are no issues.

In larger businesses the shareholders (ie owners) will not necessarily be involved in the day-to-day running and management of the business. The owners and the managers will not be the same and so there may be a conflict of interest.

1.3.1 The agency concept

When applied to corporate governance, the agency concept refers to the organisation owners (the shareholders) as the ‘principal’ and those managing the company (the company directors) as their ‘agents’.

The corporate governance framework should therefore aim to ensure that those running the company do so in a way that best serves the interests of shareholders (rather than pursuing their own interests). Ensuring that the way in which managers and directors are rewarded encourages them to act in a way that benefits shareholders is also important (see agency theory below).

Debates about the place of governance are founded on three differing views associated with the ownership and management of organisations.

The agency concept is particularly relevant for large organisations, where there is a greater degree of separation between ownership and management. This is particularly the case for public listed companies.

1.3.2 Stewardship theory

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

Other interest groups take little or no part in the running of the company and receive relevant information via established reporting mechanisms (audited accounts, annual reports, etc). Technically, shareholders or members/owners have the right to dismiss their stewards if they are dissatisfied by their stewardship, via a vote at an annual general meeting.

1.3.3 Agency theory

Under agency theory, it is recognised that management are likely to pursue their own interests. It is important therefore that management interests (including their remuneration) are aligned with the organisation’s goals. Only when these goals are aligned and consistent will managers act in a way that benefits shareholders and other stakeholders.

1.3.4 Stakeholder theory

The stakeholder approach takes a much more ‘organic’ view of the organisation, imbuing it with a ‘life’ of its own, in keeping with the notion of a separate legal personage. Stakeholder theory is effectively 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 maximising shareholder value, but also to the wider community of interest, or stakeholders.

1.4 Governance principles

As mentioned above, most corporate governance codes are based on a set of principles founded upon ideas of what corporate governance is meant to achieve. This list is based on a number of reports.

  • To minimise risk, especially financial, legal and reputational risks, by requiring compliance with accepted good practice in the jurisdiction in question and ensuring appropriate systems of financial control are in place, in particular systems for monitoring risk, financial control and compliance with the law
  • To ensure adherence to and satisfaction of the strategic objectives of the organisation, thus aiding effective management
  • To fulfil responsibilities to all stakeholders and to minimise potential conflicts of interest between the owners, managers and wider stakeholder community, however defined and to treat each category fairly
  • To establish clear accountability at senior levels within an organisation
  • To maintain the independence of those who scrutinise the behaviour of the organisation and its senior executive managers. Independence is particularly important for non-executive directors, and internal and external auditors
  • To provide accurate and timely reporting of trustworthy/independent financial and operational data to both the management and owners/members of the organisation to give them a true and balanced picture of what is happening in the organisation
  • To encourage more proactive involvement of owners/members in the effective management of the organisation through recognising their responsibilities of oversight and input to decisionmaking processes via voting or other mechanisms.
  • To promote integrity; that is, straightforward dealing and completeness.

1.5 Principles vs rules

The UK came out very firmly in favour of a principles-based approach in the FRC’s UK Corporate Governance Code (2018). The FRC preferred relaxing the regulatory burden on companies and was against treating the corporate governance codes as sets of prescriptive rules. The Code contains guidelines which will normally be appropriate but the differing circumstances of companies meant that sometimes there are valid reasons for exceptions.
A continuing debate on corporate governance is over whether the guidance should predominantly be in the form of principles, or whether there is a need for detailed laws or regulations.

Some critics believe that the principles set out in the Code are so broad that they are of very little use as a guide to best corporate governance practice.

In the US, the emphasis is on a rules-based approach and this is typified by the Sarbanes-Oxley Act (2002), see Section 2.4.1 of this chapter.

  2   Developments in corporate governance 
  Good corporate governance involves risk management and internal control, accountability to stakeholders and other shareholders and conducting business in an ethical and effective way.  

2.1 The driving forces of governance development

Corporate governance issues came to prominence in the UK and Europe in the late 1980s. The main, but not the only, drivers associated with the increasing demand for the development of governance were as follows.

  • Increasing internationalisation and globalisation meant that investors, and institutional investors in particular, began to invest outside their home countries.
  • The differential treatment of domestic and foreign investors, both in terms of reporting and associated rights/dividends, caused many investors to call for parity of treatment.
  • Issues concerning financial reporting were raised by many investors and were the focus of much debate and litigation. Shareholder confidence in many instances was eroded and, while focus solely on accounting and reporting issues is inadequate, the regulation of practices such as offbalance sheet financing has led to greater transparency and a reduction in risks faced by investors.
  • The characteristics of individual countries may have a significant influence in the way corporate governance has developed. The King report emphasises the importance of qualities that are fundamental to the South African culture such as collectiveness, consensus, helpfulness, fairness, consultation and religious faith in the development of best practice. (Note that you will not be examined on individual reports.)
  • An increasing number of high profile corporate scandals and collapses prompted the development of governance codes in the early 1990s. However, scandals since then have raised questions about further measures that may be necessary.

2.2 Features of poor corporate governance

The scandals over the last 25 years have highlighted the need for guidance in order to tackle the various risks and problems that can arise in organisations’ systems of governance.

2.2.1 Domination by a single individual

A feature of many corporate governance scandals has been boards dominated by a single senior executive, with other board members merely acting as a rubber stamp. Sometimes the single individual may bypass the board to action their own interests.

Even if an organisation is not dominated by a single individual, there may be other weaknesses. The organisation may be run by a small group centred round the chief executive and chief financial officer, and appointments may be made by personal recommendation rather than a formal, objective process.

2.2.2 Lack of involvement of board

Boards that meet irregularly or fail to consider systematically the organisation’s activities and risks are clearly weak. Sometimes the failure to carry out proper oversight is due to a lack of information being provided.

2.2.3 Lack of adequate control function

One possible weakness is a lack of an internal audit function, or an ineffective internal audit function. Another is a lack of adequate technical knowledge in key roles, for example in the audit committee or in senior compliance positions. A rapid turnover of staff involved in accounting or control may suggest inadequate resourcing, and will make control more difficult because of lack of continuity.

2.2.4 Lack of supervision

Employees who are not properly supervised can create large losses for the organisation through their own incompetence, negligence or fraudulent activity. The behaviour of Nick Leeson, the employee who caused the collapse of Barings bank, was not challenged because he appeared to be successful, whereas he was using unauthorised accounts to cover up his large trading losses. Leeson was able to do this because he was in charge of dealing and settlement, a systems weakness or lack of segregation of key roles that featured in other financial frauds.

2.2.5 Lack of independent scrutiny

External auditors may not carry out the necessary questioning of senior management because of fears of losing the audit, and internal audit do not ask awkward questions because the chief financial officer determines their employment prospects. Often corporate collapses are followed by criticisms of external auditors where poorly planned and focused audit work failed to identify illegal use of client monies.

2.2.6 Lack of contact with shareholders

Often board members may have grown up with the company but lose touch with the interests and views of shareholders. One possible symptom of this is the payment of remuneration packages that do not appear to be warranted by results.

2.2.7 Emphasis on short-term profitability

Emphasis on success or getting results can lead to the concealment of problems or errors, or manipulation of accounts to achieve desired results.

2.2.8 Misleading accounts and information

Misleading figures are often symptomatic of other problems (or are designed to conceal other problems) but clearly poor quality accounting information is a major problem if markets are trying to make a fair assessment of the company’s value. Giving out misleading information was a major issue in the UK’s Equitable Life scandal where the company gave contradictory information to savers, independent advisers, media and regulators.

QUESTION                                                                                                      Governance

Techpoint plc is a medium-sized public company that produces a range of components used in the manufacture of computers.

The board of directors consists of chairman Max Mallory, chief executive Richard Mallory and finance director Linda Mallory, all of whom are siblings. There are five other unrelated executive directors. All directors receive bonuses based on sales. The company’s sales are made by individual salesmen and women, each of whom have the authority to enter the company into contracts unlimited in value without the need to refer to a superior or consult with other departments. It is this flexibility that has enabled the company to be very profitable in past years. However, a number of bad contracts in the current year have meant that the finance director has reclassed them as ‘costs’ to maintain healthy sales and to protect the directors’ bonuses.

What are the corporate governance issues at Techpoint plc?

ANSWER

The main corporate governance issues are:

  • Domination by a small group

All the key directors are related which gives them power over the other executives.

  • Short-term view

Directors’ bonuses are based on short-term sales and have resulted in the manipulation of accounts to achieve them.

  • Lack of supervision

The sales force can tie the company into large loss-making contracts without any checks. There is no authorisation or communication with other departments which means the company may take on contracts that it cannot fulfil. The company has been hit hard with bad contracts in the current year.

 

  • Risks of poor corporate governance

Clearly the ultimate risk is of the organisation making such large losses that bankruptcy becomes inevitable. The organisation may also be closed down as a result of serious regulatory breaches, for example misapplying investors’ monies. 

  • Reports on corporate governance

A number of reports have been produced in various countries aiming to address the risk and problems posed by poor corporate governance.

2.4.1 US

In the US, corporate scandals have led to the Sarbanes-Oxley Act 2002. The Act established the Public Company Accounting Oversight Board (PCAOB). Its aim is to protect investors and other stakeholders by ensuring that the auditor of a company’s financial statements has adhered to strict guidelines. While this applies chiefly to US auditing firms, the principle of public oversight is applicable to other countries in that regulation of the auditing profession (whether through registration and inspection, or self-regulation) is seen as very important, both in improving audit quality and emphasising the importance of compliance with standards in a company’s control environment (Deloitte, 2002).

QUESTION                                                                                               Codes of practice

In most countries, what is the usual purpose of codes of practice on corporate governance?

  • To establish legally binding requirements to which all companies must adhere
  • To set down detailed rules to regulate the ways in which companies must operate
  • To provide guidance on the standards of best practice that companies should adopt D To provide a comprehensive framework for management and administration

ANSWER

C          A principles-based approach (rather than a rules-based approach) is normally used in codes of practice, so the words ‘legally binding’ and ‘detailed rules’ should have told you that options A and B were incorrect. Corporate governance standards are set at the highest level in an organisation, so option D is incorrect, as it refers to lower levels of management and administration.

 

  3   Role of the board                                                                                         
  The board should be responsible for taking major policy and strategic decisions.

Directors should have a mix of skills and their performance should be assessed regularly.

Appointments should be conducted by formal procedures administered by a nomination committee.

 

3.1 Scope of role

Note that some countries have one-tier boards (the unitary system) and others have two-tier boards. In the unitary system the board of directors is legally charged with the responsibility to govern the company,  serving together on one board comprising both executive and non-executive directors. In the two-tier system there is an executive management board of directors and this is monitored by a supervisory board of directors. For your exam we will concentrate on a one-tier board system.

The King report provides a good summary of the role of the board.

  • to define the purpose of the company
  • to define the values by which the company will perform its daily duties
  • to identify the stakeholders relevant to the company
  • to develop a strategy combining these factors
  • to ensure implementation of this strategy

If the board is to act effectively, its role must be defined carefully. The Cadbury report suggests that the board should have a formal schedule of matters specifically reserved to it for decision. Some would be decisions such as mergers and takeovers that are fundamental to the business and hence should not be taken just by executive managers. Other decisions would include acquisitions and disposals of assets of the company or its subsidiaries that are material to the company and investments, capital projects, bank borrowing facilities, loans and their repayment, and foreign currency transactions, all above a certain size (to be determined by the board).

Other tasks the board should perform include:

  • Monitoring the chief executive officer  Overseeing strategy
  • Monitoring risks and control systems
  • Monitoring the human capital aspects of the company in regard to succession, morale, training, remuneration, etc
  • Ensuring that there is effective communication of its strategic plans, both internally and externally
    • Role of chairman

The chairman is the leader of the board of directors. It is the chairman’s responsibility to ensure that the board operates efficiently and effectively, promoting regular attendance at meetings, and full involvement by all members. The chairman decides the scope of each meeting and is responsible for ensuring that all matters are discussed fully.

  • Role of chief executive

The chief executive officer (CEO) is the leader of the executive team and is responsible for the day-to-day management of the organisation. As well as attending board meetings, the CEO will usually chair the management committee or executive committee. While most companies have monthly board meetings, it is common for management/executive committee meetings to be held more often.

  • Role of company secretary

The company secretary is effectively the chief administrative officer and is appointed by the company’s directors. He or she is legally responsible for acting on the company’s behalf to undertake specific requirements, which are written into the Companies Act.

The duties of a company secretary include preparing and filing the following documents with Companies House each year.

  • Confirmation statements – giving details of share capital and directorships held
  • Financial statements – outlining the company’s assets and liabilities
  • Director’s reports which, depending on the company’s turnover, may also require a full business review and details of the individual responsible for approving accounts
  • Depending on company turnover, the company secretary may also need to file an auditor’s report Other duties which fall under the remit of the company secretary include:
  • Maintaining statutory books and records ie a register of directors and shareholders and any charges held on the company assets
  • Safeguarding legal documents including share certificates, certificates of incorporation and other official documentation
  • Organising board meetings of shareholders and taking formal minutes

In addition to these duties, the company secretary is required to establish and maintain a registered office for official communications.

3.5 Attributes of directors 

In order to carry out effective scrutiny, directors need to have relevant expertise in industry, company, functional area and governance. The board as a whole needs to contain a mix of expertise and show a balance between executive management and independent non-executive directors. The King report stresses the importance also of having a good demographic balance.

New and existing directors should also have appropriate training to develop the knowledge and skills required.

3.5.1 Nomination committee

In order to ensure that balance of the board is maintained, the UK Corporate Governance Code (FRC, 2018) states that the board should set up a nomination committee to oversee the process for board appointments and make recommendations to the board. The nomination committee needs to consider the balance between executives and independent non-executives, the skills possessed by the board, the length of service of directors and their diversity, as well as the need for continuity and the desirable size of the board.

3.6 Possession of necessary information

In many corporate scandals the board was not given full information. The UK Corporate Governance Code (FRC, 2018) stresses that directors should have access to appropriate, timely and clear information to make sound judgements. 

3.7 Performance of board 

Appraisal of the board’s performance is an important control over it. The UK Corporate Governance Code (FRC, 2018) recommends that performance of the board should be assessed once a year. Separate appraisal of the chairman and chief executive should also be carried out, with links to the remuneration process.

3.8 Increased accountability and responsibility

These standards have raised public expectations of directors’ conduct, and widened the range of stakeholders taking an interest in a company’s governance.
Corporate governance rules have created standards of ‘best practice‘ that all companies, not just listed ones, are encouraged to follow.

Directors now face increased risk of:

  • Legal action, as they are now more accountable for their actions and responsible to a wider range of stakeholders
  • Dismissal, as service contracts are shorter in length and directors must stand for re-election by the shareholders regularly

Directors have had to alter their behaviour to counter these increased risks. They are devoting more time to meeting the requirements of ‘best practice, and to investor/stakeholder relations.

However, this would result in directors’ attention being diverted away from making the company profitable, potentially damaging the long-term success of the business.

  • Division of responsibilities

For best performance, it is important for a company to have a division of responsibilities at the head of an organisation. The simplest way to do this is to require the roles of Chair and chief executive to be held by two different people.

This division has not been made legally mandatory in the UK but the UK Corporate Governance Code (FRC, 2018) states that the roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board.

 

Division of responsibilities at the head of an organisation is most simply achieved by separating the roles of Chair and chief executive.

Independent non-executive directors have a key role in governance. Their number and status should mean that their views carry significant weight.

  • Non-executive directors

 

Non-executive directors are not employees of the company but they do take part in decision-making at board meetings. They do not take part in the day-to-day running of the company.

Non-executive directors should provide a balancing influence, and play a key role in reducing conflicts of interest between management (including executive directors) and shareholders. They should provide reassurance to shareholders, particularly institutional shareholders, that management is acting in the interests of the organisation.

3.10.1 Role of non-executive directors

The role of non-executive directors includes:

  • Strategy: non-executive directors should contribute to, and challenge the direction of, strategy.
  • Performance: non-executive directors should scrutinise the performance of management in meeting goals and objectives, and monitor the reporting of performance.
  • Risk: non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust.
  • Directors and managers: non-executive directors are responsible for determining appropriate levels of remuneration for executives, and are key figures in the appointment and removal of senior managers and in succession planning.

3.10.2 Benefits of effective non-executive directors

Non-executive directors can bring a number of benefits to a board of directors.

  • They may have external experience and knowledge which executive directors do not possess.
  • Non-executive directors can provide a wider perspective than executive directors who may be more involved in detailed operations.
  • Good non-executive directors are often a comfort factor for third parties such as investors or suppliers.
  • The most important advantage perhaps lies in the dual nature of the non-executive director’s role. Non-executive directors are full board members who are expected to have the level of knowledge that full board membership implies. At the same time they are meant to provide the so-called strong, independent element on the board. This should imply that they have the knowledge and detachment to be able to assess fairly the remuneration of executive directors when serving on the remuneration committee, and to be able to discuss knowledgeably with auditors the affairs of the company on the audit committee.

3.10.3 Problems with non-executive directors

Nevertheless, there are a number of difficulties connected with the role of non-executive director.

  • In many organisations, non-executive directors may lack independence. (For example, potential non-executive directors are more likely to agree to serve if they admire the company’s Chair or its way of operating.)
  • There may be a prejudice in certain companies against widening the recruitment of nonexecutive directors to include people proposed other than by the board or to include stakeholder representatives.
  • Non-executive directors may have difficulty imposing their views upon the board. It may be easy to dismiss the views of non-executive directors as irrelevant to the company’s needs.
  • Perhaps the biggest problem which non-executive directors face is the limited time they can devote to the role. If they are to contribute valuably, they are likely to have other, time-consuming commitments.

3.10.4 Independence of non-executive directors

Various safeguards can be put in place to ensure that non-executive directors remain independent. Those suggested by the corporate governance reports include:

  • Non-executive directors should have no business, financial or other connection with the company, apart from fees and shareholdings. Recent reports such as the UK’s Higgs report have widened the scope of business connections to include anyone who has been an employee or had a material business relationship over the last few years, or served on the board for more than ten years.
  • They should not take part in share option schemes and their service should not be pensionable, to maintain their independent status.
  • Appointments should be for a specified term and reappointment should not be automatic. The board as a whole should decide on their nomination and selection.
  • Procedures should exist whereby non-executive directors may take independent advice, at the company’s expense if necessary.

 

Directors’ remuneration should be set by a remuneration committee consisting of independent nonexecutive directors.

Remuneration should be dependent on organisation and individual performance.

Accounts should disclose remuneration policy and (in detail) the packages of individual directors.

3.11 Remuneration, nomination, audit and risk committees

3.11.1 Need for guidance

Directors’ being paid excessive salaries and bonuses has been seen as one of the major corporate abuses for a large number of years. It is thus inevitable that the corporate governance provisions have targeted it.

The following are principles of what a good remuneration policy should involve.

  • Directors’ remuneration should be set by independent members of the board.
  • Any form of bonus should be related to measurable performance or enhanced shareholder value.
  • There should be full transparency of directors’ remuneration including pension rights in the annual accounts.

3.11.2 Standing committees

The term ‘standing committee’ refers to any committee that is a permanent feature within the organisation. In the context of corporate governance, it refers to committees made up of members of the board with specified duties. There are four committees usually appointed by public companies:

  • Remuneration committee
  • Audit committee
  • Nominations committee
  • Risk committee

The remuneration committee plays the key role in establishing remuneration arrangements. In order to be effective, the committee needs to determine both the organisation’s general policy on the remuneration of executive directors and specific remuneration packages for each director.

3.11.4 Audit committee
Measures to ensure that the committee is independent include not just requiring that the committee is staffed by non-executive directors, but also placing limits on the members’ connection with the organisation. Measures to ensure independence include stating that the committee should have no personal interests other than as shareholders, no conflicts of interest and no day-to-day involvement in running the business.

Audit committees of independent non-executive directors should liaise with external audit, supervise internal audit, and review the annual accounts and internal controls.

The main duties of the audit committee are as follows.

  Duty Committee’s task  
  Review of financial statements and systems They should review both the quarterly (if published) and annual accounts.  
  Liaison with external auditors They appoint and remove external auditors and should help external auditors resolve any problems they may encounter.  
  Review of internal audit They should look at the objectivity, technical knowledge and professional standards of the internal auditors. They should also review the scope, resources and results of the audit.  
  Review of internal control They should play a significant role in reviewing the adequacy of internal controls.  
  Investigations They will be involved in implementing and reviewing the results of one-off investigations.  
  Review of risk management They must ensure that there is a formal policy in place and review the arrangements for risk management. (This may be carried out by a separate risk committee instead, see below.)  
  4   Reporting on corporate governance
  Annual reports must convey a fair and balanced view of the organisation. They should state whether the organisation has complied with governance regulations and codes, and give specific disclosures about the board, internal control reviews, going concern status and relations with stakeholders.  

4.1 Reporting requirements 

Listed companies are required to make the following general disclosures.

  • A narrative statement of how they have applied the principles set out in the UK Corporate Governance Code (FRC, 2018), providing explanations which enable their shareholders to assess how the principles have been applied
  • A statement as to whether or not they complied throughout the accounting period with the provisions set out in the UK Corporate Governance Code (FRC, 2018). Listed companies that did not comply throughout the accounting period with all the provisions must specify the provisions with which they did not comply, and give reasons for non-compliance.

The corporate governance reports also suggest that the directors should explain their responsibility for preparing accounts. They should report that the business is a going concern, with supporting assumptions and qualifications as necessary.

In addition, further statements may be required depending on the jurisdiction, such as:

  • Information about the board of directors: the composition of the board in the year, information about the independence of the non-executives, frequency of and attendance at board meetings, and how the board’s performance has been evaluated.
  • Brief report on the remuneration, audit and nomination committees covering terms of reference, composition and frequency of meetings
  • Information about relations with auditors including reasons for change and steps taken to ensure auditor objectivity and independence when non-audit services have been provided
  • A statement that the directors have reviewed the effectiveness of internal controls, including risk management
  • A statement on relations and dialogue with shareholders
  • Sustainability reporting, including the nature and extent of social, transformation, ethical, safety, health and environmental management policies and practices (h) An operating and financial review.
    A statement that the company is a going concern

Furthermore, the information that organisations provide cannot just be backward looking. Companies will need to weigh the need to keep commercially sensitive information private with the expectations that investors will receive full and frank disclosures.

  5   Corporate social responsibility
  There is a fundamental split of views about the nature of corporate responsibility.

•              The strong stakeholder view that a range of goals should be pursued

•              The view that the business organisation is a purely economic force, subject to law

Expectations about the exercise of social responsibility by organisations are subject to the same split of views as corporate ethical responsibility. One definition of corporate social responsibility is that set of actions which the organisation is not obliged to take, taken for the well-being of stakeholders and the public.

 

5.1 Corporate social responsibility

Businesses, particularly large ones, are subject to increasing expectations that they will exercise social responsibility. This is an ill-defined concept, but appears to focus on the provision of specific benefits to society in general, such as charitable donations, the creation or preservation of employment, and spending on environmental improvement or maintenance. A great deal of the pressure is created by the activity of minority action groups and is aimed at businesses because they are perceived to possess extensive resources. The momentum of such arguments is now so great that the notion of social responsibility has become almost inextricably confused with the matter of ethics. It is important to remember the distinction. Social responsibility and ethical behaviour are not the same thing.

In this context, you should remember that a business managed with the sole objective of maximising shareholder wealth can be run in just as ethical a fashion as one in which far wider stakeholder responsibility is assumed. On the other hand, there is no doubt that many large businesses have behaved irresponsibly in the past and some continue to do so.

5.1.1 Strategies for social responsibility

Proactive strategy A strategy which a business follows where it is prepared to take full responsibility for its actions. A company which discovers a fault in a product and recalls the product without being forced to, before any injury or damage is caused, acts in a proactive way.
Reactive strategy This involves allowing a situation to continue unresolved until the public, government or consumer groups find out about it.
Defence strategy This involves minimising or attempting to avoid additional obligations arising from a particular problem.
Accommodation strategy This approach involves taking responsibility for actions, probably when one of the following happens.

•      Encouragement from special interest groups

•      Perception that a failure to act will result in government intervention

5.2 Against corporate social responsibility

Milton Friedman (1970) argued against corporate social responsibility along the following lines.

  • Businesses do not have responsibilities; only people have responsibilities. Managers in charge of corporations are responsible to the owners of the business, by whom they are employed.
  • These employers may have charity as their aim, but ‘generally [their aim] will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.’
  • If the statement that a manager has social responsibilities is to have any meaning, ‘it must mean that he is to act in some way that is not in the interest of his employers.’
  • If managers do this they are, generally speaking, spending the owners’ money for purposes other than those they have authorised.

5.3 The stakeholder view

How much organisations consider the interests of other stakeholders will depend on their legal responsibilities and their view of stakeholders as partners.

The stakeholder view is that many groups have a stake in what the organisation does. This is particularly important in the business context, where shareholders own the business but employees, customers and government also have particularly strong claims to having their interests considered. This is fundamentally an argument derived from natural law theory and is based on the notion of individual and collective rights.

  6   Ethics, law, governance and social responsibility
  • A brief recap

This chapter has developed the concept of corporate governance and business social responsibility. Since the management and owners of companies are not necessarily the same people, it is important for management to be encouraged to act in the best interests of the owners and other stakeholders.

  • Interaction of ethics, law, governance and social responsibility

By pulling together all we have already studied, we find:

          Ethics are values and principles that society expects companies and individuals to follow.             Laws are rules that a company and individuals must follow.

Corporate governance requirements and social responsibility may be viewed as additional rules and guidance for companies and individuals. They bridge the gap between what the law requires and what society expects. This is because the law does not always encourage them to behave in an ethical or socially responsible manner.

6.2.1 Levels of regulation

One way of examining how the subjects are related is to look at how regulated they are.

The relationship between law, governance, social responsibility and ethics
Law Corporate governance Social responsibility Ethics
Rules individuals and companies must follow.

The minimum level of behaviour society allows.

Publicly listed companies only are regulated. Others are encouraged to follow ‘best practice’. No regulation. Individuals and companies have a free choice.

Some social pressure to act in a socially responsible manner.

Values and principles.

Individuals and companies are expected to follow.

Adopting an ethical position is down to free choice.

More regulation, less freedom of choice Less regulation, more freedom of choice

From the table above, we can see that the law is highly regulated, corporate governance is less regulated and, social responsibility and ethics have no regulation, as adoption is down to free choice.

6.2.2 Effect on corporate behaviour

Perhaps more importantly, we should examine the effect each has on corporate behaviour.

An important point to remember is that companies do not make decisions by themselves. Human individuals (usually the directors) make the significant policy choices.

The following diagram demonstrates the interaction of law, ethics and social responsibility on the company.

We can see that many factors will influence the behaviour of a company. The main external influence is the law, as it sets the minimum level of behaviour expected. Society’s ethical views and needs for social responsibility will have an influence, as companies will respect them as far as necessary to remain profitable.

Directors are greatly influenced by the need to deliver the results that shareholders require, for example increasing the company’s share price or dividend. To achieve this may require breaking their own personal ethical beliefs.

Remember, businesses do not necessarily have to act ethically. In most cases they are run for the benefit of the owners (the shareholders) rather than for the benefit of society as a whole.     

 

N Most corporate governance reports are based around the principles of integrity, accountability, independence and good management but there is disagreement on how much these principles need to be supplemented by detailed rules.
N Good corporate governance involves risk management and internal control, accountability to stakeholders and other shareholders and conducting business in an ethical and effective way.
N

 

 

The board should be responsible for taking major policy and strategic decisions.

Directors should have a mix of skills and their performance should be assessed regularly.

Appointments should be conducted by formal procedures administered by a nomination committee.

N

 

Division of responsibilities at the head of an organisation is most simply achieved by separating the roles of Chair and chief executive.

Independent non-executive directors have a key role in governance. Their number and status should mean that their views carry significant weight.

N

 

 

Directors’ remuneration should be set by a remuneration committee consisting of independent nonexecutive directors.

Remuneration should be dependent on organisation and individual performance.

Accounts should disclose remuneration policy and (in detail) the packages of individual directors.

N Audit committees of independent non-executive directors should liaise with external audit, supervise internal audit, and review the annual accounts and internal controls.
N Annual reports must convey a fair and balanced view of the organisation. They should state whether the organisation has complied with governance regulations and codes, and give specific disclosures about the board, internal control reviews, going concern status and relations with stakeholders.
N

 

 

 

There is a fundamental split of views about the nature of corporate responsibility.

–             The strong stakeholder view that a range of goals should be pursued

–             The view that the business organisation is a purely economic force, subject to law

Expectations about the exercise of social responsibility by organisations are subject to the same split of views as corporate ethical responsibility. One definition of corporate social responsibility is that set of actions which the organisation is not obliged to take, taken for the well-being of stakeholders and the public.

 

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  • Choose the correct word from the following to fill the gap: cost/internal control/risk.

The management and reduction of ………………………………….  is fundamental in all definitions of good governance.

  • Features of good corporate governance include the following.

                                                                                                     

Splitting the roles of Chair and chief executive

Appointing a majority of executive directors on the board

  • Audit committees are generally staffed by executive directors.

 

  • Which of the following is a nomination committee responsible for?
    • Review of financial statements C Recommending potential board members B       Review of internal control
  • Which two of the following are symptoms of poor corporate governance?
    • Lack of board involvement
    • Bonuses for directors
    • The finance director also performing the role of company secretary
    • Inadequate supervision
  • What is ‘the stakeholder view’?
  • A strategy for social responsibility which involves allowing a situation to continue unresolved until the public finds out about it is a:
    • Proactive strategy C             Defence strategy
    • Reactive strategy D             Accommodation strategy
  • The management and reduction of risk is fundamental in all definitions of good governance.

 

Splitting the roles of chair and chief executive                                ü

 

Appointing a majority of executive directors on the board                                     ü

Governance principles suggest that there should be a balance between executive and non-executive directors.

  • They should be staffed by non-executive directors (excluding the chair).
  • C The audit committee would be responsible for A and B.
  • A Lack of board involvement            D   Inadequate supervision
  • This view is that many groups have a stake in what the organisation does.
  • B Reactive strategy
 

 

 

 

 

 

Now try …
Attempt the questions below from the Practice Question Bank

Q32

Q33

Q34

Q35

   

 

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