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Posts Tagged ‘Shareholders’

How governance works in practice !

In corporate governance on April 25, 2017 at 11:28 pm

 

Corporate-Governance

Establishing good corporate governance is a new desired objective for corporates. I am curious to explore how it works in practice. From institutional theory perspective, large institutions should become isomorphic over time. Another contradictory perspective is ‘how institutions differ from each other’. Simply put, there are three types of institutions: shareholder-focused, management-focused and stakeholder focused based on three prominent theories: agency theory (focus on shareholder), managerial hegemony theory (focus on management) and stakeholder theory (focus on stakeholder) respectively. I found issues with all three types of corporate governance during practice. My key question is: What should be the focus of Corporate Governance during practice?

Management-focused

When CEO has control over all management information and he/she reveals the minimal information to board. In such case, CEO has power to influence board decision making.  Enron is an example for this type of leadership. The major issues for Enron bankruptcy were lack of good corporate culture and adherence to poor corporate governance standards. When a high-performance company is not thinking about its employees’ welfare and development rather it conceals the frauds/misconducts in the race of the achievement of targets, the outcomes are different. This type of company often does not believe in investing in risk management. Several projects are delayed and from CEO to workers, all are working hard to deliver projects on time. Workers are paid overtime salaries, executives enjoy high bonuses, celebrations take place, awards are won, agents receive trips to Australia and Thailand and shareholders are provided high dividend. Is this approach good?

Shareholder-focused

In another company without board approval, even small decisions are not taken. All information is revealed to board, practically board is flooded with ambiguous information and clueless about what to do, how to do with a notion to safeguard their own position. Employees are indulged in monotonous work for decades, tired of filling same forms, similar reports and same weekly meetings with boss. Shareholder value maximization is the major agenda. Royal Bank of Scotland (RBS) is a recent example for this where decision for investment in IT is side-lined for years to maximise profits of shareholders in short term. In this situation, board is not concerned for management issues rather they want getting thing done. Executives work as agents for shareholders and their representative board. Delay in decision making or no decision making is one of the challenge of such organisation. To implement a single decision which is a non-priority issue for board may take years in execution. Operation losses, errors and delays become deep rooted in such culture. Adaptation, innovation and change in process and systems become very challenging for implementation.

Stakeholder-focused

In my research on large institutions, I observed that organisational values are deep rooted in large institutions. Plethora of new management approaches have been adopted to provide high value to stakeholders in short term and long term: Total Quality Management, Employee empowerment, Continuous improvement, reengineering, kaizen and team building. Value based management (VBM) provides value to all stakeholders upon which entire metrics can be built. In this method, value of company is determined by its discounted cash flows and companies like to invest capital at returns that exceed its cost of capital. VBM has influenced companies’ major strategic and operational decision making. Now my questions arise: what is the long-term value of communication, informal meetings, networking, and risk management? Fraud could result due to operational negligence and it may cost first year $500. It can easily be ignored by board and management as it is not worth value discussion. Next year, it becomes $5000, it is discussed within management. Third year, it is deeply penetrated and costed $500000. Now board, regulator, media, credit rating agencies, shareholders, customer and you name any other stakeholder suddenly become worried. It shows, values are not only financial in nature rather, values are ethical and professional. It also guides dos and don’ts.

I believe in these three types of organisations that there is misalignment between management and governance. If management performance is simply not evaluated based on the targets given, rather than it should also be based on following ethics, corporate governance code of conduct, good organisational culture, employee and team development, a part of the problems can be reduced. Another approach could be rather than giving annual targets and predicting long term targets, company can set vision for achievement of long-term goals and break down it in yearly targets with greater degree of flexibility or believe in continuous learning. Remember, vision without implementation has no value. Share goal, collaborative working and team efforts can be linked to performance in new era where governance and management will work together to achieve organisational goals. I feel still many questions remain unanswered. Kindly share your thoughts what you feel as good governance during practice.

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Owner of my own Risk – Me or others ?

In Banking, Finance, Insurance, Risk Management on February 25, 2013 at 8:11 am

When an individual see the Risk – it looks 4 letter words. It is well said “This will not happen to me”, it is unusual not to avoid it. Actually what is the risk? It is a threat, loss of opportunity, unexpected happening of loss. Who is the owner of the risk – individuals themselves? It is the duty of risk owner is to prevent, reduce, transfer and control the risk.

 

It is just a Four letter word – RISK

Corporates also own the risk; risk manager owns the risk of each department. He/she may set procedures/systems to prevent/reduce the risk, he may transfer the risk to the insurance companies. Insurance companies owns the risk of various corporates and individuals but here the system works little different. Although insurance companies manage the risk however the risk lies in the hands of insured, It is also in the hand of GOD which can be seen any time in floods, earthquake. Its invisible based on set of calculations and predictions.

These insurance companies retain certain part of the risk in their hand and transfer the risk to the Reinsurance companies. Now situation changes dramatically – Reinsurance companies accepts the risk of same individuals/corporates from Insurance companies without knowing who actually they are, only based on set of terms and conditions and documentation submitted by insurance companies. The ownership of the risk is still in the hands of insured.

The reinsurance companies transfers this risk to Retrocession companies who practically don’t know the country of origin of the insured at the time of acceptance of risk, only a set of group risk based on certain conditions are accepted. The ownership does not change hands, insured still can increase or reduce own risk. Finally the set of risk reached through derivative market eg; CAT bond to the public. Individual own their own risk. “its better not to avoid risk rather deal with that”

Who are the parties affected by Risk in the organization?

In Risk Management on May 3, 2012 at 7:51 am

In every organization from top to bottom, senior to junior, creditor to customer every body is affected by risk.  Example – Satyam Computers, the liability arise for auditors to pay for misleading financial reports which ultimately affected whole organization and various parties involved with organization at different levels and overall affect country risk as well. The parties who affect insurance contract are –

  • Employees – Employees of the organization are affected in many ways. If a risk of fire arises then they need to safeguard the personal property, organizational property and liability risk. They provide information to external agencies. Daily wagers loose their jobs. Environment, pollution norms, safety norms and other regulatory guidelines are taken into consideration by employees.
  • Suppliers – Suppliers are affected when the supplies are suddenly stopped. Example – Due to fire, factory close down for 2 months. Therefore, supplies are closed down for 2 months.
  • Customers and other recipient of services – Customers are directly affected from the risk arise out of the organization. In the above example, the customers will not get the products from the company for next 2 months which will create shortage of the good.
  • Distributors –   Distributors face market competition and deals with retailers for product penetration. Distributor is a link between retailer and Company. Distributor is affected by delay in delivery, affect on quality, loss in reputation of the company due to risk arise.
  • Regulators – Regulators could be IRDA, RBI, Pollution control board, Waste disposal board which provides guidelines to reduce the risk from time to time.,
  • The Media – Media provides information to public regarding various risk and hazard related to companies.
  • Private investors – the shareholders and the private investors are affected by the valuation of the company. Various credit rating agencies analyse the risk of companies and publish the rating through the media which is used by private investor to analyze the risk of the companies.
  • Banking industry – The companies take debt from banking institution to run its business. Risk associated with the companies are first analysed by the banks before giving loans.
  • Business partners – Business tie ups, partners are affected by each and every risk associated with business as their reputation is also affected.
  • The environment – Risk and hazard in the organization affects environment. Example – Fire spread in the industry and resulted in burning of most of plant which produces chemical oil which resulted heavy pollution and produced gases harmful for masses.

Others – Risk from Politics, Industrial associations and competition also plays vital role.