CIMA E1: Organisational Management Study session 2

3 Session Governance, regulation, ethics and corporate social responsibility

Overview Session Three Governance, regulation, ethics and CSR Stakeholders Ethics Corporate social responsibility and sustainable development Corporate governance The impact of regulation on the firm Business/ government relations

Stakeholders A stakeholder is a group or individual, who has an interest in what the organisation does, or an expectation of the organisation. There are three categories of stakeholder: Internal, e.g. employees and managers Connected, e.g. shareholders, customers and suppliers External, e.g. local community, government Who is the dominant stakeholder?

Mendelow’s power-interest matrix TYU 1 p72

discuss “The recent financial crisis and issues such as climate change, food security and poverty mean that business as usual is no longer an option. Leading companies are asking themselves what part they can play in ensuring equitable and sustainable growth for generations to come. A critical requirement for this is to shift the organisational focus to the long term.” – Paul Polman, Chief Executive Officer, Unilever

Approaches to Ethics Consequentialists Egoist Utilitarian Pluralist Relativists Absolutists

Ethics Ethics is the system of moral principles that examines the concept of right and wrong. Business ethics is the application of ethical values to business behaviour. In order to achieve the objectives of the accountancy profession, CIMA qualified accountants have to observe five fundamental principles: 1 Integrity 2 Objectivity 3 Professional competence and due care 4 Confidentiality 5 Professional behaviour

Corporate Social Responsibility CSR ‘CSR is the continuous commitment buy business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large’. WBCSD, 1998 TYU 4 p82

CSR and sustainable development Sustainable development: aims to balance economic, environmental and social needs. Corporate social responsibility: the company is sensitive to the needs of all stakeholders and not just shareholders. Benefits to the company include: Method of differentiation Attract and retain quality staff Brand strengthening Lower costs Identify new market opportunities and changing social expectations Increase in profitability as a result of the above

Corporate governance Corporate governance is the set of processes and policies by which a company is directed, administered and controlled. It includes the appropriate role of the board of directors and the auditors of the company. The need for corporate governance arises because of the separation of ownership and control. – AGENCY PROBLEM It helps the business to achieve its objectives in a way that is acceptable to ALL stakeholders. Governance should lead to sustainable wealth creation.

Corporate governance continued Systems of corporate governance UK principles-based approach: guidance on the role of the chairman and CEO, NEDs, remuneration , nomination and audit committees US rules-based approach: the Sarbanes-Oxley Act requires auditor independence, an audit committee, an internal control report, increased financial disclosures and adherence to the US stock exchange regulations TYU 6,7 p88

Activity How is a NED independent? What is the role of the Audit committee? What are the advantages of a remuneration committee? Discuss the benefits of good corporate governance

The impact of regulation on the firm Regulation should be: Effective – ensuring a safe and effective product/service is delivered, whilst not inhibiting the function of the business Efficient– the total benefit to the nation should be greater than the total cost

Regulation continued Regulation in the UK TYU 12 p92 Regulation of the level of competition: Competition Act prohibits anti-competitive agreements or abuse of a dominant position Office of Fair Trading investigates businesses suspected of breeching Competition Act The Competition and Markets Authority deals with cases referred by the Office of Fair Trading Regulation of people in business: To prevent insider trading To prevent trading if the company is insolvent Regulation of externalities: i.e. costs or benefits of production experienced by society but not by producers or consumers themselves. Regulation using: 1. max/ min prices 2. taxes/ subsides 3. fines and quotas TYU 12 p92

International regulation Regulation continued International regulation The US Sarbanes-Oxley Act 2002: only impacts UK companies that are registered on the US stock exchange Regulation of trade: Free trade supported by the World Trade Organisation Regional trading organisations, e.g. EU and NAFTA, allow free trade between specific countries

Business/government relations Corporate political activity (CPA) refers to the involvement of firms in the political process, with the aim of securing particular policy preferences. Two types of CPA: . Buffering – proactive political actions on behalf of firms, e.g. by employing lobbying Bridging – a more reactive form of behaviour, e.g. tracking the development of new laws/regulations so that compliance is in place when the legislation is passed

Activity Explain the relationship between stakeholders and corporate governance. (5 marks)