Strategic management
5. Corporate governance and
concepts of responsible
management
Influences on organisational purposes
Corporate Governance
Who should the organisation
serve?
How should purposes be
determined?
Business Ethics
Which purposes should
be prioritised?
Why?
Organisational purposes
Mission
Objectives
Stakeholders
Whom does the
organisation
serve?
Cultural context
Which purposes are
prioritised?
Why?
What is a corporation?
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from individual to collective ownership
and enterprise
limited liability as essential element
risk taking
The owners delegate the responsibility
of taking decisions, or actions
flexibility in determining capital and
governance structure
role of the state is only registration
Early concepts of the corporation
municipalities, universities
 first joint stock companies,17th
century, Britain, Holland
 private sector
The corporate form became the
governments’ ally. The level of
independence of corporate form
made more acceptable the authority
of governments’.

Evolution of the Modern Corporation
The business
environment
Strategic
changes
Organizational
consequences
Early
19th
century
Local markets
Transport slow
Limited mechanization
Firms specialized &
focused on local
markets
Small firms.
Simple management structures
Late
19th
century
Introduction of
railroads, telegraph
industrialization
Geographical and
vertical expansion
Functional structures. Line/staff
separation. Accounting systems
Early
20th
century
Excess capacity in
distribution. Growth
of financial institutions & world trade
Product &
multinational
diversification
Development of
multidivisional
corporation
Separation of ownership and control
exclusive control of stocks by shareholder
 shareholders’ communities interest limited
to the price of the stock
 control rights of corporation’s properties
delegated to management
 certificate of proportional share of corp.
THE CORP. ITSELF IS THE OWNER OF
ITS OWN PROPERTY!!!
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Types of owners
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active/ interested in the operation of
corporation too, not only in the profit
(professional investors, majority
owners)
passive / interested in simply the
income (profit)
Corporate Governance
The corporate governance is a
framework
• whom the organisation serves
• how the purposes and priorities
should be decided
• how an organisation should function
• how power is distributed among
stakeholders
General Assembly
Supervisory Board
Level of governance:
Corporate strategy,
Corporate reponsibility,
Mission of the corporation
Level of the management:
Organizing activities
Implemetation of strategy
Controling day-to day
activities
Board
Chairman
CEO
Management team
Employees
Independent external auditor
Governance – management by
bodies
The corporate governance is
 Collective
 Democratic
 Responsible
 Legally framed
 Well structured
management
Key forms of CG : the bodies
What is „a” body?
Body is a team, members created by
delegation, nomination or election
(voting)
Body has a leader (heading), named
chairperson
Bodies have legal background
Body has a bylaw
Bodies have responsibilities by law
or by the status of the body
Classical rights of shareholders
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the right to sell the
stock
the right to vote
the proxy
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the right to bring
suit for damages if
the managers or
directors fail to
meet their
obligations
the right to have
certain information
from the company
The takeover era I
Limited liability+ trading with shares =
loosening connection between
ownership +control
Issuing millions of shares
Result: ” THE WALL STREET RULE”
Evolution of the corporate-governance structure
Beneficiaries
Trustees of funds
Investors
Invetment funds
General assembly
Ownermanager
1800
Investors
General Assembly
Owners’s
representatives
Executive
management
1900
General assembly
Board
Board (Directors)
Executive
managers
Executive commity
Managers
1950
2000
The takeover era II
Wave of takeovers in the 80s. Instead of
previous checks and balances, no system
of checks and CG got out of balance.
REASON: institutional investors
stepped in.
Who are they?
- bank trusts
- mutual funds
- insurance companies
- universities and foundations
- pension funds
The Chain of Corporate Governance
Market for Corporate Control
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Definition: Shares of public firms
are traded, and in large enough
blocks this means control over
corporations is traded.
That puts some pressure on
managers to perform, otherwise their
corporation can be taken over, and
they will be fired.
Bodies in the international
corporate governance
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General Assembly, the body of owners
(shareholders)
Board; members are elected by the
General Assembly. (In Germany board
members are elected by the Supervisory
Board)
Supervisory Board; members are
elected by the General Assembly. (In
US/UK no Supervisory Board)
Management team (not defined by law)
Special bodies
Committees of the Board
 Executive C.
 Financial C.
 Audit C.
 Nominations C.
 Remunerations C.
 Strategic C.
 Ad Hoc C. (e.g. for project, M&A)
Collective Responsibilities of Owners
(General Assembly)
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Creation and change of the Incorporation
Charter, Deed of Foundation (strictly
regulated by Corporate Act)
Voting for Board (Supervisory Board)
members
Creating discussion issues of General
Assembly
Accepting (or not) Board’s reports
Electing the chairperson of the General
Assembly
Key Actors of Bodies
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Chairwoman/chairman of the General
Assembly, elected by the owners
Chairperson of the Board/Supervisory
Board, elected by body members
Board Committee leaders, nominated by
the Board
Top management (executives), nominated
by the Board
Independent external auditor, contracted
by the management or the Board,
accepted by the General Assembly
New corporate governance rules between 1994-2006
The different rules
1994
1998
2002
2006
Renumeration pay by performance
May
May
MUST
MUST
Renumeration disclosure
May
May
May
MUST
Audit committee creation
May
MUST
MUST
MUST
Audit committee independence
May
MUST
MUST
MUST
Board independence
May
MUST
MUST
MUST
Removal of cross-shareholding
May
May
MUST
MUST
Liability of the Board
May
May
May
MUST
Comply or explain
May
May
May
MUST
Separation of Chairman and CEO
May
May
May
May
Two side of the governance: business
judgement rule and checks/balances
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Rule granting directors of publicly listed
companie’s immunity from liability if their actions
were executed in good faith, using sound
business judgement and exercised with resonable
care.
It also refers to the defence of corporate
sovereignty, which means that courts do not
intervene into company’s affaires until the
decisions of the company are in accordance with
good faith and resonable care.
On the other hand there are rules and processes
for governance and control of private sector
companies, which balance the authonomy
The balancing institutions
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The most important balances are the
corporate governance rules, and
bodies, and structures,
The other types of important
balances are rules determining fair
behavior in business relations:
• The code of ethics, and
• The business culture
The stories of corporate disasters
Dominant CEO („one
man” show)
Poor strategy
Conformist culture
Ill-judged acquisitions,
over-expansions
Greed, hubris,
irresponsibility
Accidental external trigger
Disaster
Inadequate control environment
Inadequate control environment
Ineffective board
Responsibility of the Board of
Directors
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The Board is the operational and
strategic management body of the
Corporation (firm)
Election of Board’s Chairperson
Nomination of management (President,
CEO, etc.)
Creation reports to General Assembly,
presenting the Annual Report
Sharing all duties with the management –
bylaw regulation
Representing officially the Corporation
Primary functions of the Board
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SELECT (CEO, board members,
management compensation)
REVIEW AND APPROVE (financial
objectives, strategic plan, adequacy of the
system to law)
ADVICE AND COUNCEL (to the top
management)
EVALUATE (board processes, performance)
OTHERS („umbrella definition)
Responsibility of the Supervisory
Board
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Control over the Board and
Management team in order to save
and preserve the owner’s interests
Control the legal conformity of the
firm and they activity with laws,
rules and prescriptions
Not a decision making body
Responsibility of Board’s
Committees
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Committee is not a decision making
body
Consulting, foundation of business
decisions, controlling function
Committee members are Board
members and experts
Analysis for the Board and General
Assembly
Board level decisions
The Board –as the highest level decision
making body of the corporation – sets
direction, vision, strategy.
Makes decisions in major investment,
financial, organizational, market
questions and appoints the very leading
persons of management.
The Board’s relationship to the
management process
Decisions related to:
 strategic planning
 long range goals
 capital allocation
 performance appraisal
 manpower planning
 distribution of profit
Typical board of today I
The structure and composition of
boardrooms have changed little in 100
years.
Average board size has remained at about 15.
Board committees have great importance:
- social committee
- assessment committee
- nomination committee
- compensation committee
- financial committee,
etc.
Typical board of today II
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written guidelines
board meeting
scope of decision making activity
(duties)
relationship with management
separation of CEO and chairman
(conflict of interest in performance
assessment!)
board is „served” by management
Hierarchy of decisions
Decision of the Board
is the manifestation
of common will and
power.
The board-level
decision is a „product”
of collective action.
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resolution
case of resolution
standpoint
individual opinion
proposal
recommendation
remark
understanding
veto
review
Responsibility of Management
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Shared responsibility with the Board
Management of day-to-day operation
Functional and structural organization of
business
Management of key processes and
functions (e.g. production, marketing,
controlling, logistic, human resources,
sales, finances, organizational
development)
Expertise for the Board and General
Assembly
Key Actors of Bodies
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Chairwoman/chairman of the General
Assembly, elected by the owners
Chairperson of the Board/Supervisory
Board, elected by body members
Board Committee leaders, nominated by
the Board
Top management (executives), nominated
by the Board
Independent external auditor, contracted
by the management or the Board,
accepted by the General Assembly
SECURITY SYSTEM OVER
CORPORATE GOVERNANCE I
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INTERNAL SECURITIES
Supervisory board
Internal audit, audit committee
Management control
Bylaws, rules
Corporate code of governance
Corporate code of ethics
SECURITY SYSTEM OVER
CORPORATE GOVERNANCE II
EXTERNAL SECURITIES
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Court of registration
Obligatory legal advisory service over critical
documents (e.g. statutes, written agreements,
articles of incorporation must meet some criteria)
Pre-forming corporation – special Hungarian form
of business, living corporation before registration
External audit, conformity with tax and
accounting rules, GAAP
Civil responsibility of directors (by civil law)
Official obligatory forms of documents
SECURITY SYSTEM OVER
CORPORATE GOVERNANCE III
EXTERNAL SECURITIES
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Ability to publicity (higher requirement for
public corporations)
Stock exchange norms, rules and Codes of
Responsible Corporate Management
Investment and Creditor Defense Act
Competition law
State supervisory and controlling system
over accounting, securities operations
State financial and tax supervision
Recommendations for the future
Proposals to improve the performance of the
Board:
- improving director compensation (stock
options)
- increasing authority of independent director
- separation CEO and chairman positions
- Sarbanes – Oxley
- more executive session meeting
- more independence and transparency in
decisions
- closer connection with the performance of
company
Management and decisions
Owners, shareholders delegate
substantial power to the management.
Decision making rights are well defined,
regulated, limited and controlled.
Typical management related decisions:
- preparation of Board’s decisions
- main business processes
- operative management of „daily”
business
Some other aspects
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decisions and responsibility
decisions + pressure + lobby activity
decisions and follow up
decision-power tree
decisions and committees (Anglo-Saxon
practice)
corporate decision table
Decision making tree (sample)
Owners
Board of Directors
Management (ExCo)
Directors
Head of Departments
Group leaders
etc.
The six dimensions of governance of the countries
1. Voice and Accountability (VA) – measuring the extent to which
a country's citizens are able to participate in selecting their
government, as well as freedom of expression, freedom of
association, and a free media.
2. Political Stability and Absence of Violence (PV) – measuring
perceptions of the likelihoood that the government will be
destabilized or overthrown by unconstitutional or violent
means, including domestic violence and terrorism.
3. Government Effectiveness (GE) – measuring the quality of
public services, the quality of the civil service and the degree
of its independence from political pressures, the quality of
policy formulation and implementation, and the credibility of
the government's commitment to such policies
The six dimensions of governance of the countries
4. Regulatory Quality (RQ) – measuring the ability of the
government to formulate and implement sound policies and
regulations that permit and promote private sector
development
5. Rule of Law (RL) – measuring the extent to which agents
have confidence in and abide by the rules of society, and in
particular the quality of contract enforcement,the police, and
the courts, as well as the likelihood of crime and violence,
6. Control of Corruption (CC) – measuring the extent to which
public power is exercised for private gain, including both petty
and grand forms of corruption, as well as "capture" of the state
by elites and private interests
Exam questions
1. What is the Corporate Governance? What are the most important bodies in
the international corporate governance? What are the collective
responsibilities of Owners (General Assembly), the Board of
Direnctorsm, the Supervisory Board, and the Management? .
2. What is the corporate social responsibility? What are the most important
concepts on the continuum of social responsibility. What are The most
important areas of the corporate social responsibility?
Fractionated ownership
Other differences
between notions of
traditional and
modern share
ownership:
- numerical
- legal
- functional
- personal
Duty and Responsibility
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Duty is a legal
(official) obligation,
a job what must to
do
Responsibility is a
moral category
with a lot of legal
consequences
The Nature of Responsibility
Responsibility is a need to answer
(responder)
Some sort of responsibilities:
1.
Moral responsibility (conscience)
2.
Status responsibility (consequence of the
position)
3.
Professional responsibility (the art of
profession)
4.
Legal responsibility (by regulation)
5.
Situational responsibility (acting in the
event)
What kind of responsibility?
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Personal, individual responsibility
Collective and joint responsibility
Shared responsibility
Special opinion
Nonconformity with a decision
Main types of decisions at the
corporations
short term – medium term – long term
 strategic – operational
 business (economic) – „political”
 national – international ( regional, cluster, etc.) –
global
 related to business and support processes
The basic documents of the corp. regulate exactly
the decision making processes and
mechanisms.
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What is ownership?
Definition: Ownership is a combination
of rights and responsibilities with
respect to a specific property.
„Ownership” of a „Property” includes 4
elements:
- O has the right to use P
- O has the right to regulate use of P
- O has the right to transfer rights to P
- O is responsible for non-damaging
with P
Separation ownership and control (I)
Owner
Intangible interest
entity
in
Intangible
HIGH TRANSFERABILITY OF SHARES!
Rights of contemporary
shareholders
Control and economic rights no longer
attach to the same individual or group.
The shareholder surrendered control over
his wealth.
The shareholder is a supplier of capital and
a risk taker.
Ultimate responsibility and authority of
ownership is attached to stock ownership.
Role of owners in this decade
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to participate in forming of corporate
strategy
not to interfere to daily operations
assessment of directors
to keep the company in operation
to improve results of company
to use profit for interests of
himself/herself and that of company
Main forms of ownership of this
decade
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state owned
privately owned
employee owned
(ESOP, MRP in
Hungary)
foreign ownership
professional
investors
institutional
investors
Corporate Governance - OECD
definition
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CG is the system by which business corporations
are directed and controlled. The CG structure
specifies the distribution of rights and
responsibilities among different participants in
the corporation, such as, the board, managers
,shareholders and other stakeholders and spells
out the rules and procedures for making
decisions on corporate affairs. By doing this, it
also provides the structure through which the
company objectives are set, and the means of
attaining those objectives and monitoring
performance.