Corporate Governance – Principles, Policies and Practices 3e

1. Corporate Governance – Principles, Policies and Practices 3e Chapter 7 Functions of the Board

2. Functions of the Board In which we consider: • what the board does • balancing the board’s performance and conformance roles • board committees - functions and authority • delegating board functions to management • corporate transparency.

3. Functions of the board Figure 7.2: Board functions working through management

4. conformance performance Functions of the board The conformance and performance roles of the unitary board

5. Functions of the board • The Board’s Performance Roles • Strategy formulation - the board’s responsibility • strategic management and leadership • Policy making - the board’s responsibility • ensuring corporate polices are adequate • risk management (e.g. takeover, failed leadership, disaster) • contingency plans.

6. Mission statements J. Sainsbury, a UK retailer: "Our mission is to be the consumer's first choice for food, delivering products of outstanding quality and great service at a competitive cost through working faster, simpler, and together." Would these mission statements help in the making of strategic decisions?

7. Mission statements The Ford Motor Company: "To become the world's leading consumer-company for automotive products and services“ General Electric (a conglomerate): "We bring good things to life“ Would these mission statements help in the making of strategic decisions?

8. Mission statements Microsoft changed its mission statement from: "To empower people through great software – any time, any place, and on any device" to "To enable people and businesses throughout the world to realize their full potential". Would these mission statements help in the making of strategic decisions?

9. Mission and corporate values Microsoft values statement “As a company, and as individuals, we value: • integrity and honesty • passion for customers, for our partners, and for technology • openness and respectfulness • taking on big challenges and seeing them through • constructive self-criticism, self-improvement, and personal excellence • accountability to customers, shareholders, partners, and employees for commitments, results, and quality”.

10. Vision and mission statements Coca Cola has an exhortatory mission statement "Everything we do is inspired by our enduring mission: • To refresh the world... in body, mind, and spirit • To inspire moments of optimism... through our brands and our actions • To create value and make a difference... everywhere we engage." “To achieve sustainable growth, we have established a vision with clear goals: • Profit: maximizing return to shareowners while being mindful of our overall responsibilities • People: being a great place to work where people are inspired to be the best they can be • Portfolio: bringing to the world a portfolio of beverage brands that anticipate and satisfy peoples’ desires and needs • Partners: nurturing a winning network of partners and building mutual loyalty • Planet: being a responsible global citizen that makes a difference.”

11. Vision and mission statements McDonald's vision is “to be the world's best quick service restaurant experience. Being the best means providing outstanding quality, service, cleanliness, and value, so that we make every customer in every restaurant smile." McDonald's mission is to: • be the best employer for our people in each community around the world • deliver operational excellence to our customers in each of our restaurants • achieve enduring profitable growth by expanding the brand and leveraging the strengths of the McDonald's system through innovation and technology.”

12. Strategy formulation • Long range planning • SWOT analysis • Five forces model • Resource based approach

13. Five forces key issues • Who is currently competing in our market? • How are they currently competing - price, service, quality etc.? • How do their costs compare with the value added by this business? • What strategic power do our upstream suppliers have over us? • Are they able to exercise strategic influence on us - by pricing, supply etc.? • Who are our customers? - types, location, volume etc. • What customer needs do we satisfy? • What strategic powers do our downstream distributors and ultimate customers have? Are they able to exercise strategic influence on us - by price demands etc.? • Could our customers' needs be met by substitute goods or services? • Could other firms enter the market? • What is keeping them out - high entry costs, know-how, low margins etc.?

14. Functions of the board • Policy – the rules, systems and procedures laid down by the board to guide and constrain executive management • financial policies • employment and labour relations policies • marketing policies • Product/service policy • Pricing policy • Distribution policy • risk management policies • etc…

15. Functions of the board • Reserved powers of the board (board mandates) • Remuneration and selection of auditors • Approval of interim and final financial statements • Significant changes to accounting policies • Board appointments and removals • Directors’ remuneration policy • Major business acquisitions or disposals • Approval of investment projects (more than $xm) • Terms of reference for board committees • Appointments to board committees • Approval of overall corporate strategy and direction • Terms and appointment of top executives • Fundamental changes to pension scheme rules • Main treasury policies, including debt/equity mix, major borrowings and currency exposure • Corporate risk management • Major changes to company business.

16. Functions of the board The Conformance Roles of the Board • The board’s responsibility for monitoring and supervising executive management • relationships with managers and supervisors • The board’s responsibility for accountability • statutory reporting, reporting to shareholders, regulators, other stakeholders • avoiding fraud and illegal activities • non-financial reporting.

17. Monitoring and supervising management The Board’s responsibility for monitoring and supervision of executive management Routine, regular management reports • Budgetary control systems • Ensuring conformance with budgetary plans • Management control systems • Performance measures • Gross profit, net profit, revenue • ROI, ROE • Multiple performance measures.

18. Multiple measures of performance Performance measures – expenditure, revenues, profit, multiple measures • profitability - return on investment in that division • growth in market share, revenues and profit • customer satisfaction • capital expenditure project performance • management development and succession planning • product and service development • employee training, labour turnover and employee attitudes • contributing to the group's corporate social responsibility • risk monitoring and management • balancing the short term with the long term.

19. Accountability The Board’s responsibility for accountability Reporting to shareholders Statutory and mandatory reporting • Companies’ Registry • Regulators • SEC, FSA, SFC • NYSE, LSE, HKSE Non-financial reporting Reporting to other stakeholders Corporate Social Responsibility (CSR) reporting.

20. Board committees Board committees in most CG codes • audit committee • remuneration committee • nomination committee Other board committees for the oversight of management • governance and compliance committee • Corporate ethics committee Committees to spread the work of the board • executive committee • finance committee • strategic planning committee • risk management committee • ad hoc committees for specific issues or projects.

21. Functions of the board

22. Balancing the board’s efforts How should boards spend their time? Figure 7.4: Normative balance of board functions: how directors suggest boards should balance their activities

23. Balancing the board’s efforts How do boards spend their time? Figure 7.5: Reported balance of board functions: how directors believe boards do balance their activities

24. Corporate transparency A sound narrative report will contain at least: • a balanced review of the business of the company • a comprehensive analysis of key financial and operating performance indicators • an explanation of the principal risks facing the company • details of any significant events that the company has experienced recently • an indication of any planned future developments • a statement about the company's relationships with key stakeholders, including employees, customers and suppliers • a report on the company's policies on corporate social responsibility and sustainability.

25. Corporate transparency Crucial questions for a corporate narrative report: • what creates value in the company? • what makes it profitable? • what is the risk in the business? • what is affecting the company's prospects?

26. Functions of the Board We have considered: • what the board does • balancing the board’s performance and conformance roles • board committees - functions and authority • delegating board functions to management • corporate transparency.