Strategic Choice Making

8/3/2019 Strategic Choice Making

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Factors That Determine Strategic Choice:

Strategic analysis and choice are two important components of the implementation stage of the

strategic management plan. These two components are crucial links in the strategic management

implementation procedure. Strategic analysis involves a number of steps.

About Strategic Analysis and Choice

Strategic implementation is the penultimate stage of strategic management and strategic analysis and

choice are two significant constituents of that process.

The strategy of a company refers to its all-inclusive plan or program for the purpose of accomplishing its

aims and targets in the long run. Different types of strategies include business unit strategy, corporate

strategy, operational strategy and others.

Strategic analysis implies the examination of the present condition of a business and consequently

developing an appropriate business strategy.

Strategic analysis carries higher importance with regards to conglomerates that offer a wide range ofdiversified products. Strategic choice refers to the selection of the appropriate business strategy.

At the time of performing strategic analysis and arriving at strategic choices, long term goals are fixed

and different types of strategies are chosen that are most appropriate for the mission of the company

and the variable conditions.

Strategic analysis and choice of strategies are done with the help of a number of techniques. If the

appropriate strategy is chosen, a company would become more efficient to establish sustainability in

competitive advantage and maximize firm valuation.

Factors Taken into Consideration for Strategic Analysis and ChoiceKey Internal Factors

y Marketingy Managementy Operations/Productiony Accounting/Financey Computer Information Systemsy Research and Development

Key External Factors

y Political/Governmental/Legaly Economyy Technologicaly Social/Demographic/Cultural/Environmentaly Competitive


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Techniques Used in Strategic Analysis

The following devices or techniques are used in the procedure of strategic analysis:

y Five Forces Analysisy PEST Analysis (Political, Economic, Social and Technological Analysis)y Market segmentationy Scenario planningy Competitor analysisy Directional policy matrixy SWOT Analysis (Strength, Weaknesses, Opportunities, and Threats Analysis)y Critical Success Factor Analysis

Characteristics of Strategic Analysis and Choice

Following are the features of strategic analysis and choice:

y Establishment of long term goalsy Producing strategy optionsy Choosing strategies to act ony Selecting the best option and accomplishing mission and goals

Strategic Choice Approach

The Strategic Choice Approach is used in face to face workshops of a decision making group.

Strategic choice is viewed as an ongoing process in which the planned management of uncertainty plays

a crucial role.

The Strategic Choice Approach:

1. Focuses on decisions to be made in a particular planning situation, whatever their timescale andwhatever their substance.

2. Highlights the subtle judgments involved in agreeing how to handle the uncertainties whichsurround the decision to be addressed - whether these be technical, political or procedural.

3. The approach is an incremental one, rather than one which looks towards an end product of acomprehensive strategy at some future point in time. This principle is expressed through a

framework known as a commitment package'. In this, an explicit balance is agreed between

decisions to be made now and those to be left open until specified time horizons in the future.

4. The approach is interactive, in the sense that it is designed not for use by experts in a backroomsetting, but as a framework for communication and collaboration between people with different

backgrounds and skills.

The Essential Framework.

There are three key elements of analysis which are used in structuring problems and working towards

decisions


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y The Decision Areay The Comparison Areay The Uncertainty Area - divides into three broad

categories

o Uncertainties to do with the workingenvironment

o Uncertainties to do with guiding valueso Uncertainties to do with related choices

There are four modes of strategic choice

y Shapingy Designingy Comparingy Choosing

A Managerial Philosophy

Unasked questions can lead to dangerous assumptions, however unanswered questions are far less

dangerous than unquestioned answers.

The best definition of a manager I know is based on a Harvard Business School text.

A manager is someone who gets results through other people.

To this I would add, by making them successful.

Results? Of course, why else would you employ him/her?


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Through other people? Yes, because people are the stock-in-trade for the manager.

By making them successful? Certainly, for it is this single factor that separates the good

manager from the others.

Based on this definition, heres a simple nine-point philosophy that might fit for some.

Manage processes not people let people manage themselves while you manage the

interfaces between them where interests are shared and connections are needed.

Develop strategy driven by objectives where focus is on outcomes not methods,

eliminating silos by linking functions horizontally, and by streamlining the work.

Define the value-added opportunities create a service chain from the individual

contributions of all involved that will deliver client satisfaction through synergy.

Manage change continuously since all processes must adapt and evolve to meet the

demands of a changing market, but start with the perceptions/beliefs of individuals.

Encourage self management by providing each person with a mandate a license to

act/contribute and a set of agreed critical measurement indices for ongoing reporting.

Facilitate communication the life blood of the organization and fuel for processes, that

should flow horizontally, elegantly and spontaneously to support objectives.

Create a success environment where recognition and rewards are immediate, and

people are encouraged to learn and grow as an integral part of their responsibilities.

Monitor and measure progress through use of a visible scoreboard, showing both

organizational and personal achievements in the form of contributions and learnings.

Keep a dynamic balance with equal emphasis on planning, performance and pulse-point

awareness that allows all to see the big picture and relate to a shared future.

This could serve as a template for any individual in a managerial role. Feel free to adapt the


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sequence, words and emphases to suit yourself, which is where the fuller version can assist you.

A sound management philosophy or strategy will become a source of both inspiration and comfort

to you, especially when you are up to your keester in alligators and asking yourself, What am I

supposed to be doing about this?PERSONALMANAGEMENT STRATEGY

1. Shift from managing people to managing a process

Let individuals own the responsibility for managing themselves

Allow them to worry about the knowledge/skills/attitudes relating to their function

Work on the series of interfaces or value added points manage the white space

Focus on the delivery of client satisfaction as a collective responsibility

Manage the connections / the hand-off points

Enable, facilitate, coach, encourage breed success.

2. Develop and implement strategy, driven by Objectives, to produce satisfaction

Define outcomes/end results, not methods

Eliminate non-value adding work, waste and inefficiencies through collaborative effort

Encourage cooperation/collaboration eliminate boundaries

Strive for simplicity/elegance, involvement and commitment in operations

Broaden activity bases, accountabilities and contributions

Make information and resources easily available

3. Define the process in value-added and real contribution terms

Start with the client view your internal boss as your main supplier

Build a service chain that delivers client satisfaction

Serve the client, or serve some one who is


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Fix the processes, not the people, and get staff to assist you

Manage change, response and effectiveness through objectives and goals

4.Manage the Changes

Change is emotionally based and uncomfortable for most so it is resisted

Change requires new knowledge, skills, habits and, most of all, a new mindset.

It is necessary to address significant adjustments to the beliefs and behaviors of

others

Individuals have to adjust in the node in order to accommodate a new process

The necessary leverages are in measurements and goals as well as in functions

To achieve change, individuals need consistent support / encouragement from you.

5.Measurement is critical

What gets measured, gets fixed so design the new processes with this in mind.

Measurement has to happen at the interface (internal/external; hard/soft) (CMIs) Measurement

information must flow, and be highly visible to all who could be

affected

Good measurements are timely, accurate, focused, consistent and accessible

Organizational strategic intent; Individual measures : locus of control (Vertical)

All processes require built-in monitoring devices that include client inputs (Horizontal)

6. Focus on the Environment

The best investment is to focus on system changes rather than on changing individuals

In a rapidly changing market, all processes are eroded and will break down over time

People can fix themselves given the right environment; processes need attention

Inadequate/ broken systems will impede individual performance few can surmount

them.


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What most affects the client is lateral or cross-functional effectiveness/efficiencies

Those individuals who relate to a role in the process will manage themselves

successfully.

7. Encourage Self-Management

Theres little future in trying to manage people, so manage the white space between

them

Assist those performing the node functions to manage their own responsibilities

AMandate - a license to contribute (Scope; Resources/Restraints; Deliverables; Time

lines)

Create / insist upon self-sufficient performance in the node; you focus on connections

Allow room to move, experiment, learn and even to fail safely theyll thank you for

it

Reward both outcomes and constructive effort both pay-out and investment.

8. Communication is the Life Blood

Information must flow to support the new processes, or essential decisions wont be

made

Spontaneous teamwork is necessary to make the right things happen when they should

Reduce communication paths/ relay points to the minimum, thus reducing

errors/delays

Continuously review communications at every white space, especially those close to

clients Invest your coaching / training efforts in communication competencies theyre

lifeblood.

Communication lubricates change; it wont guarantee success - it will guarantee


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failure.

9. Processes require Balance

Planning Performance Pulse-awareness - the three vital components for your

attention

Planning (front-end effort) focuses the right things and makes your strategies

coherent

Performance shifts focus to efficiency doing things in the right way for optimal

results

Pulse awareness (back-end effort) ensures that your efforts are valuable to the client

Everyone should be involved in all three aspects (see the big picture) so to contribute

Those who are focused on contributing to common objectives are a joy to manage.

Management philosophy: Don't be stupid, keep your management philosophy simple

The familiar, famous acronym KISS adds a further word to the above title: Stupid. The underlying

thought is either that, because managers are none too bright, the greater the complexity, the more

likely they are to make a mess of their management: or that it's stupid not to concentrate your efforts

on the main and all-important theme. Hence the instruction which worked such electoral wonders for

President Clinton: 'It's the economy, stupid'.

In fact, the two propositions go hand-in-hand. The Clinton dictum is akin to the stipulation of Pareto's

Law, which tells managers to concentrate on the significant few rather than the insignificant many. The

virtue of devoting most of your efforts to the 20% of the customers who account for 80% of sales, or the

20% of components which create 80% of costs, is that the concentration simplifies as well as

strengthens. Even very bright managers will manage more effectively as a result.

That supports another basic concept: that simplifying in most cases generates better performance. In

Total Quality Management and other programmes for business improvment, taking out any superfluous

processes or stages has the same impact as cutting down the attention paid to superfluous products.

Costs come down, and margins go up. You don't have to be super-intelligent to understand the rationale


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of the results. Stupidity comes into the picture if, having understood, you ignore the lessons - as do all

too many managers.

EMOTIONAL STUPIDITY

The stupidity is emotional rather than intellectual. Heike Bruch and SumantraGhoshal explain this

admirably in a Harvard Business Review article (February 2002) which places managers in four

compartments, depending on the 'focus' and the 'energy' they bring to their tasks. The manager with

high focus and low energy is described as 'disengaged': lack of commitment means loss of effectiveness.

The manager with low focus and low energy is a 'procrastinator', who puts off until tomorrow what

should be done today - and tomorrow, all too often, never comes.

The high-energy, low-focus type is 'distracted'. This is the manager who throws himself into Pareto's

80% of time-wasters. But Bruch and Ghoshal's research has a painful message. These three ineffective

types are in an overwhelming majority: they account for 90% of all the managers studied. That leaves a

tiny tenth of the managerial workforce whose high energy and focus make them 'purposeful' people,

who are committed activists - 'making it happen'.

Those last three words were chosen by Sir John Harvey-Jones for the title of a book based on his

experiences at the grandly named Imperial Chemical Industries. At the time, ICI was as grand as its name

- Britain's industrial colossus and a company large and able enough to joust with the Big Three of

German chemicals and America's Du Pont. But ICI also enshrined the corpocratic management which

blunts purpose and lets procrastination, disengagement and distraction spread throughout the system.

Harvey-Jones, promoted to the chair when ICI fell into traumatic losses, changed the climate of

corpocracy by simple means - like actually visiting the plants and talking to the people. A woman who

worked for the company in those heady days remembers the remarkable impact that this one

straightforward activist had right through the company. But when he left - after the five years that took

him to retirement age - the corpocracy again took charge. ICI is now only a third of the size of BASF,

having spun off the jewel in its crown (the pharmaceutical business) and found no replacement strategy.

REVENUES, COSTS, QUALITY

After his retirement, Harvey-Jones made a big hit as The Troubleshooter, visiting small to medium firms

(SMEs) for a BBC TV series. The willing victims turned out to be as purposeless, procrastinating,

disengaged and distracted as the worst corpocracies. In working with SMEs, though, my colleague in the

Leading Change Partnership, Paul Spenley, and I have found that keeping it simple holds the key to

success.


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In the final analysis, management comes down to three simple words: REVENUES, COSTS, QUALITY. The

purposes of any manager must surely include raising revenues, reducing costs per unit of output, and

notably improving the quality of internal processes and external perceptions. Get these three right, and

much else will fall neatly into place. The RCQ formula is essentially simple, but it does involve asking

some penetrating questions and getting answers which imply and demand action. Try these Ten Key

Questions yourself:

1. Do you have a business plan to raise revenues, reduce costs and improve quality? YES/NO If not, do

you want one? YES/NO

2. Do you know why your customers choose to buy from you, rather than from anybody else? YES/NO. If

not, would you like to? YES/NO

3. Do you know what percentage of the customers you had a year ago still buy from you today? YES/NO

If not, would you like to? YES/NO

4. Do you have plans to enter new markets, either in new regions or new product lines? YES/NO If not,

do you want to? YES/NO

5. Do you know whether your profit margins are rising, static or falling? YES/NO If yes, do you have plans

to increase them? YES/NO

6. Do you know how your costs compare with best practice by competitors and others? YES/NO If not,

would you like to? YES/NO

7. Do you know which 20% of activities account for 80% of your direct costs? YES/NO If yes, do you

concentrate on making them lower? YES/NO

8. Do you know how many of your customers regard your goods and/or services as good or excellent?

YES/NO If not, would you like to? YES/NO

9. Do you know which of your critical processes could be speeded up and made more cost-effective?

YES/NO If not, would you like to? YES/NO

10. Do you plan to introduce new or radically improved goods/services over the next year? YES/NO If

not, do you want to? YES/NO

THE DDP FACTOR

The sad fact is that, while it's very easy to get ten positive answers to the first halves of the questions,you rarely get ten negatives to the second halves. In other words, managers in the main want to be

purposeful, but fail because, time and again, distraction, disengagement and procrastination (DDP) get

in the way - possibly all three at once.Once you realise this sorry truth, however, the remedy is within

easy grasp. Again, it's simple stuff. You are not locked into disengagement, distraction and

procrastination. You become purposeful by having a purpose.


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That's the starting point for the Leading Change Partnership's work. What business does the client think

he's in? The first answer might be something apparently straightforward - like 'consultant'. But what

kind of consultant? In what important way (important to the customers, that is) does its business differ

from that of other consultancies? How is that difference reflected in the value offered to clients? Does

the business model - the way the business obtains income and incurs costs - derive from the definition?

Question Two applies: why should the customer buy from you rather than anybody else?

As previously reported in Thinking Managers, when the Royal Society of Arts in London interviewed chief

executives for its Tomorrow's Company survey, the questioners found that none of the bosses could

explain how his own organisation differed from the competition. Judging by experience in the field, it

doesn't take very long to emerge from a state in which ignorance is not bliss. Get a convincing answer to

the above questions, and you can move purposefully to the next stage: what Spenley calls 'Winning

Market Acceptance'.

FOUR KEY ELEMENTS

As he says, the 'customers rarely buy "the product" alone...They take into account either deliberately or

subconsciously other, more intangible factors, all of which go into making a buying decision'. The

process that he recommends has four key elements, expressed in four very simple-sounding questions:

1. Who are the customers?

2. What are they like?

3. What do they need?

4. How do we persuade them?

The simplicity is deceptive, but only because most managers have not considered these basic issues in

any kind of depth. The second question, for instance, is answered by 'value mapping'. You divide the

people or firms targeted into three groups: Visionaries (the entrepreneurs and innovators), Pragmatists

('I'll see whether it works for other firms') and Conservatives ('it will never work/sell'). There's a parallel

division between Philes (who love you and your products and/or services: Phobes (who hate you and all

your works): and Promiscuous buyers, who jump into bed with any supplier who catches their fancy.

The consequences of this simple analysis are equally simple. You concentrate maximum effort on trying

to convert the Promiscuous Pragmatists into Visionary Philes, who you look after with the tenderest

loving care, and you don't waste time on the Conservative Phobes. It's an overall anti-DDP strategy of

which Pareto would have approved.


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But what about yourself and your own, personal strategy? The first step towards the Purposeful target,

after deciding on your purpose, is to adopt effective habits that will counter the time-wasting, dilly-

dallying and remoteness that do neither you nor the organisation any good. The basic time management

techniques offer an excellent solution. Start by keeping a time-log and finding out exactly how little of

your days and weeks are spent on purposeful activities.

With this knowledge, you can plan your activities so that the balance shifts decisively towards the

purposes to which you are now committed. Again, there are four simple questions, adapted from a well-

known Peter Drucker catechism:

1. What is my purpose?

2. What am I doing to achieve that purpose that can only be done by me?

3. What am I doing that can be done by others?

4. What am I doing that need not be done at all?

CHALLENGE AND CHOICE

You obviously delegate (3), scrap (4) and concentrate on (2). That will accomplish less than you need,

however, unless you can also fully identify your delegates and other colleagues with your purpose.

Bruch and Ghoshalemphasise the power of 'challenge and choice' in achieving this outcome. Lufthansa is

their case in point. The airline was heading for a financial crash in 1992. The CEO called in 20 senior

managers, admitted that he had no solution, and gave them three days 'to develop ways to save

Lufthansa. If they determined that it could not be saved', then he would accept bankruptcy.

Once initial shock had been absorbed, the managers quickly formed ambitious purposes, adopted 130

proposals for radical change (of which 70% were enacted), and turned Lufthansa round from loss to

profit. As the authors observe, 'Presented with a challenge for which their contributions are essential,

managers feel needed. Asked for their choices, they feel emboldened'. You couldn't ask for two simpler

or more powerful truths. Keeping it simple isn't for the stupid: it's for the highly intelligent, too.

Five bases of power

Social psychologists John R. P. French and Bertram Raven, in a now-classic study (1959, developed a

schema of sources of power by which to analyze how power plays work (or fail to work) in a specific

relationship.


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According to French and Raven, power must be distinguished from influence in the following way:

power is that state of affairs which holds in a given relationship, A-B, such that a given influence attempt

by A over B makes A's desired change in B more likely. Conceived this way, power is

fundamentally relative it depends on the specific understandings A and B each apply to their

relationship, and, interestingly, requires B's recognition of a quality in A which would motivate B to

change in the way A intends. A must draw on the 'base' or combination of bases of power appropriate to

the relationship, to effect the desired outcome. Drawing on the wrong power base can have unintended

effects, including a reduction in A's own power.

French and Raven argue that there are five significant categories of such qualities, while not excluding

other minor categories. Further bases have since been adduced in particular byMorgan (1986:

ch.6), who identifies 14, while others have suggested a simpler model for practical purposes for

example, Handy (1976),who recommends three.

Positional power

Also called "legitimate power", it is the power of an individual because of the relative position

and duties of the holder of the position within an organization. Legitimate power is formal

authority delegated to the holder of the position. It is usually accompanied by various attributes

of power such as uniforms, offices etc. This is the most obvious and also the most important

kind of power.

Referent power

Referent power is the power or ability of individuals to attract others and build loyalty. It's based

on the charisma and interpersonal skills of the power holder. A person may be admired because

of specific personal trait, and this admiration creates the opportunity for interpersonal

influence. Here the person under power desires to identify with these personal qualities, and

gains satisfaction from being an accepted follower. Nationalism and patriotism count towards

an intangible sort of referent power. For example, soldiers fight in wars to defend the honor of

the country. This is the second least obvious power, but the most effective. Advertisers have

long used the referent power of sports figures for products endorsements, for example. The

charismatic appeal of the sports star supposedly leads to an acceptance of the endorsement,

although the individual may have little real credibility outside the sports arena.

Expert power

Expert power is an individual's power deriving from the skills or expertise of the person and the

organization's needs for those skills and expertise. Unlike the others, this type of power is


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usually highly specific and limited to the particular area in which the expert is trained and

qualified.

Reward power

Reward power depends on the ability of the power wielder to confer valued material rewards, itrefers to the degree to which the individual can give others a reward of some kind such as

benefits, time off, desired gifts, promotions or increases in pay or responsibility. This power is

obvious but also ineffective if abused. People who abuse reward power can become pushy or

became reprimanded for being too forthcoming or 'moving things too quickly'.

Coercive power

Coercive power is the application of negative influences. It includes the ability to demote or to

withhold other rewards. The desire for valued rewards or the fear of having them withheld that

ensures the obedience of those under power. Coercive power tends to be the most obvious but

least effective form of power as it builds resentment and resistance from the people who

experience it.

Corporate Social Responsibility (CSR Policy)

Corporate Social

Responsibility is a concept

whereby companies

integrate social and

environmental concerns

into their business

operations and in their

interaction with their

stakeholders (employees,

customers, shareholders,

investors, local

communities, government),

on a voluntary basis.


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Sustainability

CSR is closely linked with

the principles of

Sustainability, which argues

that enterprises shouldmake decisions based not

only on financial factors

such as profits or dividends,

but also based on the

immediate and long-term

social and environmental

consequences of their

activities.

A Global Issue

CSR has become prominent in the language and strategy of business and by the growth of

dedicatedCSR organisations globally. Governments and international governmental organisations

are increasingly encouraging CSR and forming CSR partnerships.

CSR is rapidly becoming a major part of all business management courses and a key global issue.

In response to these issues we have incorporatedCSR into IndustryPlayer.

How companies benefit from the CSR concept

No matter the size of an organisation or the level of its involvement with CSR, every contribution

is important and provides a number of benefits to both the community and business. Contributing

to and supporting CSR does not have to be costly or time consuming and more and more

businesses active in their local communities are seeing significant benefits from their

involvement:

y Reduced costsy Increased business leadsy Increased reputationy Increased staff morale and skills developmenty Improved relationships with the local community, partners and clientsy Innovation in processes, products and servicesy Managing the risks a company faces

How does IndustryPlayer integrate CSR into it's Simulation?

y Every Product has its CSR rating based on its Carbon Footprint and other ecologicalfactors.


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(An emissions trade calculator shows the impact of the underlying CO2 Emissions on the

holding's profit)

y The handling of wages and product quality each contributes 1/3 to the holding's CSRrating.

y For each game holding a CSR rating is calculated and shown.y The CSR driven tax system gives companies a tax discount of up to 50% based on their CSR

rating.

corporate governance

Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses

are operated, regulated, and controlled. The term can refer to internal factors defined by the officers,

stockholders or constitution of a corporation, as well as to external forces such as consumer groups,

clients, and government regulations.

A well-defined and enforced corporate governance

provides a structure that, at least in theory, works for the benefit of everyone concerned by ensuring

that the enterprise adheres to accepted ethical standards and best practices as well as to formal laws.

To that end, organizations have been formed at the regional, national, and global levels.

In recent years, corporate governance has received increased attention because of high-profile scandals

involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers.

An integral part of an effective corporate governance regime includes provisions for civil or criminal

prosecution of individuals who conduct unethical or illegal acts in the name of the enterprise.

Principles of corporate governance

Rights and equitable treatment of shareholders:Organizations should respect the rights ofshareholders and help shareholders to exercise those rights. They can help shareholders exercise

their rights by openly and effectively communicating information and by encouraging shareholders

to participate in general meetings.

Interests of other stakeholders:Organizations should recognize that they have legal, contractual,social, and market driven obligations to non-shareholder stakeholders, including employees,

investors, creditors, suppliers, local communities, customers, and policy makers.


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Role and responsibilities of the board: The board needs sufficient relevant skills and understandingto review and challenge management performance. It also needs adequate size and appropriate

levels of independence and commitment to fulfill its responsibilities and duties.

Integrity and ethical behavior: Integrity should be a fundamental requirement in choosingcorporate officers and board members. Organizations should develop a code of conduct for their

directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency: Organizations should clarify and make publicly known the roles andresponsibilities of board and management to provide stakeholders with a level of accountability.

They should also implement procedures to independently verify and safeguard the integrity of the

company's financial reporting. Disclosure of material matters concerning the organization should be

timely and balanced to ensure that all investors have access to clear, factual information.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action to accomplish

organisational goals. Examples include:

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fireand compensate top management, safeguards invested capital. Regular board meetings allow

potential problems to be identified, discussed and avoided. Whilst non-executive directors are

thought to be more independent, they may not always result in more effective corporate

governance and may not increase performance. Different board structures are optimal for different

firms.Moreover, the ability of the board to monitor the firm's executives is a function of its access

to information. Executive directors possess superior knowledge of the decision-making process and

therefore evaluate top management on the basis of the quality of its decisions that lead to financial

performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond

the financial criteria.

Internal control procedures and internal auditors: Internal control procedures are policiesimplemented by an entity's board of directors, audit committee, management, and other personnel

to provide reasonable assurance of the entity achieving its objectives related to reliable financial

reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are

personnel within an organization who test the design and implementation of the entity's internal

control procedures and the reliability of its financial reporting


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Balance of power: The simplest balance of power is very common; require that the President be adifferent person from the Treasurer. This application of separation of power is further developed in

companies where separate divisions check and balance each other's actions. One group may

propose company-wide administrative changes, another group review and can veto the changes,

and a third group check that the interests of people (customers, shareholders, employees) outside

the three groups are being met.

Remuneration: Performance-based remuneration is designed to relate some proportion of salary toindividual performance. It may be in the form of cash or non-cash payments such

as shares and share options, superannuation or other benefits. Such incentive schemes, however,

are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic

behavior, and can elicit myopic behavior.

In publicly-traded U.S. corporations, boards of directors are largely chosen by the President/CEO and the

President/CEO often takes the Chair of the Board position for his/herself (which makes it much more

difficult for the institutional owners to "fire" him/her). The practice of the CEO also being the Chair of

the Board is known as "duality". While this practice is common in the U.S., it is relatively rare elsewhere.

It is illegal in the U.K.

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the

organization. Examples include:

competition debt covenants demand for and assessment of performance information (especially financial statements) government regulations managerial labour market media pressure takeovers

Systemic problems of corporate governance

Demand for information: In order to influence the directors, the shareholders must combine withothers to form a voting group which can pose a real threat of carrying resolutions or appointing

directors at a general meeting.


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Monitoring costs: A barrier to shareholders using good information is the cost of processing it,especially to a small shareholder. The traditional answer to this problem is the efficient market

hypothesis (in finance, the efficient market hypothesis (EMH) asserts that financial markets are

efficient), which suggests that the small shareholder will free ride on the judgments of larger

professional investors.

Supply of accounting information: Financial accounts form a crucial link in enabling providers offinance to monitor directors. Imperfections in the financial reporting process will cause

imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the

working of the external auditing process.

Financial reporting and the independent auditor

The board of directors has primary responsibility for the corporation's external financial

reporting functions. The ChiefExecutive Officer andChief Financial Officer are crucial participants and

boards usually have a high degree of reliance on them for the integrity and supply

ofaccounting information. They oversee the internal accounting systems, and are dependent on the

corporation's accountants and internal auditors.

Current accounting rules under International Accounting Standards and U.S. GAAP allow managers some

choice in determining the methods of measurement and criteria for recognition of various financial

reporting elements. The potential exercise of this choice to improve apparent performance (see creative

accounting and earnings management) increases the information risk for users. Financial reporting

fraud, including non-disclosure and deliberate falsification of values also contributes to users'

information risk. To reduce these risk and to enhance the perceived integrity of financial reports,

corporation financial reports must be audited by an independent external auditor who issues a report

that accompanies the financial statements (see financial audit). It is

One area of concern is whether the auditing firm acts as both the independent auditor and management

consultant to the firm they are auditing. This may result in a conflict of interest which places the

integrity of financial reports in doubt due to client pressure to appease management. The power of the

corporate client to initiate and terminate management consulting services and, more fundamentally, to

select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted

in the United States in the form of theSarbanes-Oxley Act (following numerous corporate scandals,

culminating with the Enron scandal) prohibit accounting firms from providing both auditing and

management consulting services. Similar provisions are in place under clause 49 ofSEBI Act in India.


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Executive Remuneration/Compensation

Research on the relationship between firm performance and executive compensation does not identify

consistent and significant relationships between executives' remuneration and firm performance. Not all

firms experience the same levels of agency conflict, and external and internal monitoring devices may

be more effective for some than for others.

Some researchers have found that the largest CEO performance incentives came from ownership of the

firm's shares, while other researchers found that the relationship between share ownership and firm

performance was dependent on the level of ownership. The results suggest that increases in ownership

above 20% cause management to become more entrenched, and less interested in the welfare of their

shareholders.

Some argue that firm performance is positively associated with share option plans and that these plans

direct managers' energies and extend their decision horizons toward the long-term, rather than the

short-term, performance of the company. However, that point of view came under substantial criticism

circa in the wake of various security scandals including mutual fund timing episodes and, in particular,

the backdating of option grants as documented by University of Iowa academic Erik Lie and reported by

James Blander and Charles Forelle of the Wall Street Journal.

Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of

options faced various criticisms. A particularly forceful and long running argument concerned the

interaction of executive options with corporate stock repurchase programs.Numerous authorities

(including U.S. Federal Reserve Board economist Weisbenner) determined options may be employed in

concert with stock buybacks in a manner contrary to shareholder interests. These authors argued that,

in part, corporate stock buybacks for U.S. Standard &Poors 500 companies surged to a $500 billion

annual rate in late 2006 because of the impact of options. A compendium of academic works on the

option/buyback issue is included in the study Scandalby authorM. Gumport issued in 2006.

A combination of accounting changes and governance issues led options to become a less popular

means of remuneration as 2006 progressed, and various alternative implementations of buybacks

surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of

implementing a share repurchase plan.

ETHICS?


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To manage all our relationships, both internal and external, with total integrity and with a view to the

long term.1

This statement is not offered as a definition of business ethics, but rather to indicate the territory to

which moral considerations are applied throughout this piece.

Values2 have become serious business. The term appears to be everywhere. It is a sign that large

organizations are thinking deeply about their standards of behaviour, about the principles underlying

the ways in which they operate. It could also be construed, cynically at that, as another attempt to pull

the wool over the eyes of a gullible public. Continuing on this note, it could also stem from the creative

imagination of an advertising executive. But, equally without a doubt, there are an ever-increasing

number of major organizations around the world treating their corporate values very seriously indeed.

Business ethics can be divided into two separate areas, which, in turn, have two separate sets of issues,

problems, and dilemmas. The first is called managerialmischief, and is concerned with the illegal,

unethical, or questionable practices of individual managers or organizations, as well as the causes of

such behaviour and remedies available to eradicate them. The second is called, moral mazes in

management, and is concerned with the numerous ethical quandaries managers must wrestle with,

which are part of daily business decision making. Questions dealing with plant closing, AIDS policies,

promotion decisions, and whistle blowing are representative concerns of the moral mazes managers

must resolve. Taken together, these two sets of concerns comprise the field of business ethics.3

Corporate ethics is a subject to be dealt with at three levels, each more specific than the last.4

1. The corporate mission.2. Constituencyrelations.3. Policies and practices.

1

M

urray, David,E

thics In Organizations, (1997), Kogan Page, p.21.2 The terms values and principles are interchangeable. Both terms are extremely, flexible, and with the inclusionof the term ideals, the three can be construed as coterminous.

Values are basically a sustained and deeply held preference for a mode of acting, being or achieving.

A person may, for example, wish to act with integrity, or to be free or to achieve material prosperity. Integrity,

freedom and material prosperity are equally, by this definition, values.3Essentials Of BusinessEthics, Eds. PeterMadsen and Jay M.Shafritz, (1990), Meridian, Pp. 1-2.

4Ibid., p.15.


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The various issues in the areas of corporate ethics can be enumerated as Equity, Rights, Honesty and the

Exercise of corporate power.

Equity is generally used to mean basic fairness, apart from any established legal or human right.

Rights are treatments to which a person has a just claim. The origin of the claim may be legislation, legal

precedent, or community notions of dignity. Modern views of rights are generally protective in nature.

They seek to defend individual autonomy from encroachment by powerful institutions or the

community at large. Societies have started accepting the concept of rights to varying degrees.

Honesty in corporate ethics relates to integrity and truthfulness of a companys actions or policies.

Issues of honesty arise both in connection with corporate behaviour and with employees acting under

the companys nominal supervision. Misleading advertisements, questionable financial and cash

management procedures, gifts for foreign officials, and waste or fraud in the performance of

government contracts are examples of corporate behaviour that may be labeled dishonest.

Other honesty issues arise in connection with companys responsibility to supervise those who act in its

name, and the reciprocal obligation of employees to observe company and community standards in

their business dealings. The misappropriation of proprietary information for personal enrichment, or to

help a competitor, is an abuse of trust. Acceptance of inappropriate gifts can corrupt the purchasing

process. Conflicts of interest between employee activities outside the workplace and company interests

can create situations of divided loyalty. In all of these circumstances it is the employee who has an

ethical responsibility, but a company cannot escape the consequences of lack of proper supervision.

Corporations recognize a responsibility to contribute to community enterprises that are consistent with

their mission and with their commitments to the various constituencies they serve. Corporate financial

and executive assistance and efforts to generate public support for programs are believed to be an

important element of the companys ethical profile.

Business organizations also acknowledge the ethical component of adhering to standards for workplace,

product, and environmental safety..

DRAFTING A MODEL CODE

For the purpose of developing a truly useful code, there are certain points that need to be considered. In

order of priority, they are:


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1. A clear purpose. One must know why it is being done.2. A development process that involves people who will be affected by the Code.3. An understanding of existing predecessor Codes and how they function- especially external Codes

to which the organization and/or its individual people have subscribed.

4. A family of vital values or principles on which the Code will be based.5. A structure of content which is practical and relevant to people in the organization.6. A two-way promotional process to help with communicating and implementing the Code, and also

with obtaining feedback to help review and update it.

There are three basic characteristics in most professions that go in to contributing to the formation of a

sound Code.5 They can be listed as:

The member of the profession is required to have an acceptable standard of excellence. He is required to follow a code of conduct developed within the profession and not imposed

externally. He is required to accept the fact that the interests of the society should come first, before his own

personal interests.

Business management must meet the above requirements if it needs to be at par with other

professions.

The concept of business ethics is a multidimensional field evading a uni-dimensional definition. It is a

discipline that addressed numerous issues, problems and dilemmas, doing so from a variety of

perspectives and methodologies.

There exist three main issues that can be employed in the analyses of ethical questions about business

organizations and business executives.6 They are:

y Identifying practical issues and assigning responsibilities.y Critiquing the ethics of various business practices.y Raising fundamental philosophical problems and offering suggested resolutions to them.

These approaches are among the most prevalent in the field of business ethics, and the reflective work

done by business ethicists and others in this discipline manifest one or more of these three forms of

analyses.


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As we approach the end of the twentieth century, and organizations face new problems, many are

choosing to articulate and publicize their corporate values. The aim is to enable people throughout their

many departments and locations to make decisions based on common principles. This is not quite the

same as having a code of conduct. Codes tend to specify behaviour in greater detail. Values, orprinciples, are what underlie codes. Codes can never cover every eventuality, but a set of basic values

can help people make decisions in areas which the code does not touch, even new kinds of situations

which have never been faced before. Values can often cross national boundaries, while rule- books

usually reflect closely the traditions and laws of the society in which they were initially formulated.

Whereas a rule-book is cold, a set of shared values can generate emotional commitment to a way of

thinking and working.

It is sometimes argued that there can never be a consensus about values because they are so intensely

personal and culture-specific. Experience shows otherwise. Worldwide, although there may be

differences in detailed implementation and in the relative importance given to them, values such as

honesty, respect for life and property, fairness and loyalty are admired and sought after.

Managers need to be aware of the forces shaping society and to plan strategies to meet the challenges

to come. Predictions of the future are becoming more difficult as the pace of change accelerates. The

shibboleth the future is now could well be adopted for this last decade of the twentieth century as

well as those in time to come. Technological change has become so commonplace that no one shows

surprise at space exploration, the wonders of micro-electronics, telecommunications, be borne in mindthat in sph

Personnel managers will inevitably have to face up to social changes, in their consultancy, problem-

solving and resourcing roles.

The future issues for personnel management will become such that they will require extreme flexibility

and imagination in formulating solutions on the part of personnel managers.

The ethical change agenda for the new millenium could be7:

j Re-inventing the organization.j Experimenting with new approaches to top-level guidance and governance of the organization.


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j Building a values-driven organization.j Incorporating the values into all decision processes at all levels, in all areas and aspects of the

organization.

The future must be viewed not as a threat, but as an opportunity for growth and human development.

Strategic Choice Making

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