Strategic management

1. Strategic management 5. Corporategovernance and concepts of responsible management

2. Influences on organisational purposes Corporate Governance Business Ethics Who should the organisation serve? Which purposes should be prioritised? How should purposes be determined? Why? Organisational purposes Mission Objectives Cultural context Stakeholders Whom does the organisation serve? Which purposes are prioritised? Why?

3. What is a corporation? • from individual to collective ownership and enterprise • limited liability as essential element • risk taking • The ownersdelegatetheresponsibility of takingdecisions, oractions • flexibility in determining capital and governance structure • role of the state is onlyregistration

4. 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 authorityof governments’.

5. Evolution of the Modern Corporation Strategic changes The business environment Organizational consequences Early 19th century Local markets Firms specialized & Small firms. Transport slow focused on local Simple manage- Limited mechanization markets ment structures Introduction of Geographical and Functional struct- railroads, telegraph vertical expansion ures. Line/staff industrialization separation. Accou- nting systems Late 19th century Excess capacity in Product & Development of distribution. Growth multinational multidivisional of financial institut- diversification corporation ions & world trade Early 20th century

6. 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!!!

7. Types of owners • active/ interested in the operation of corporation too, not only in the profit (professional investors, majority owners) • passive / interested in simply the income (profit)

8. Corporate Governance The corporategovernance 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

9. General Assembly Supervisory Board Independent external auditor Level of governance: Corporate strategy, Corporate reponsibility, Mission of the corporation Board Chairman Level of the management: Organizing activities Implemetation of strategy Controling day-to day activities CEO Management team Employees

10. Governance – management by bodies The corporate governance is • Collective • Democratic • Responsible • Legally framed • Well structured management

11. 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

12. the right to sell the stock the right to vote the proxy 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 Classical rights of shareholders

13. The takeover era I Limited liability+ trading with shares = loosening connection between ownership +control Issuing millions of shares Result: ” THE WALL STREET RULE”

14. Evolution of the corporate-governance structure Beneficiaries Trustees of funds Invetment funds General assembly Board Executive managers Managers Investors General assembly Board (Directors) Executive commity Investors General Assembly Owners’s representatives Executive management Owner- manager 1900 1800 1950 2000

16. 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

17. The Chain of Corporate Governance

18. Market for Corporate Control • Definition:Shares of publicfirmsaretraded, and inlargeenoughblocksthismeanscontrol over corporations is traded. • Thatputssomepressureonmanagerstoperform, otherwisetheircorporationcan be taken over, and theywill be fired.

19. Bodies in the international corporate governance • 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)

20. 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)

21. Collective Responsibilities of Owners(General Assembly) • 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

22. Key Actors of Bodies • 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

23. New corporate governance rules between 1994-2006

24. Two side of the governance: business judgement rule and checks/balances • 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

25. The balancing institutions • 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

26. The stories of corporate disasters Ineffective board Inadequate control environment Inadequate control environment Dominant CEO („one man” show) Poor strategy Conformist culture Ill-judged acquisitions, over-expansions Greed, hubris, irresponsibility Accidental external trigger Disaster

27. Responsibility of the Board of Directors • 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

28. Primary functions of the Board • SELECT (CEO, board members, management compensation) • REVIEW AND APPROVE (financial objectives, strategicplan, adequacy of the system to law) • ADVICE AND COUNCEL (to the top management) • EVALUATE (board processes, performance) • OTHERS („umbrella definition)

29. Responsibility of the Supervisory Board • 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

30. Responsibility of Board’s Committees • 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

31. 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.

32. 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

33. 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.

34. Typical board of today II • 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

35. Decision of the Board is the manifestation of common will and power. The board-level decision is a „product” of collective action. resolution case of resolution standpoint individual opinion proposal recommendation remark understanding veto review Hierarchy of decisions

36. Responsibility of Management • 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

37. Key Actors of Bodies • 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

38. SECURITY SYSTEM OVER CORPORATE GOVERNANCE I INTERNAL SECURITIES • Supervisory board • Internal audit, audit committee • Management control • Bylaws, rules • Corporate code of governance • Corporate code of ethics

39. SECURITY SYSTEM OVER CORPORATE GOVERNANCE II EXTERNAL SECURITIES • 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 withtax and accounting rules, GAAP • Civil responsibility of directors (by civil law) • Official obligatory forms of documents

40. SECURITY SYSTEM OVER CORPORATE GOVERNANCE III EXTERNAL SECURITIES • 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

41. 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

42. 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

43. Some other aspects • decisions and responsibility • decisions + pressure + lobby activity • decisions and follow up • decision-power tree • decisions and committees (Anglo-Saxon practice) • corporate decision table

44. Decision making tree (sample) Owners Board of Directors Management (ExCo) Directors Head of Departments Group leaders etc.

45. The six dimensions of governance of the countries • 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

46. 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

47. 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?

48. Fractionated ownership Other differences between notions of traditional and modern share ownership: • numerical • legal • functional • personal

49. Duty and Responsibility • Duty is a legal (official) obligation, a job what must to do • Responsibility is a moral category with a lot of legal consequences

50. The Nature of Responsibility Responsibility is a need to answer (responder) Some sort of responsibilities: • Moral responsibility (conscience) • Status responsibility (consequence of the position) • Professional responsibility (the art of profession) • Legal responsibility (by regulation) • Situational responsibility (acting in the event)