SBL Notes – Summary of Models The cultural web Control system – what is rewarded Organisation structure- formal and informal relationship and who you can ask for help.Power structures- Where the real power lies Stories and myths – Symbols – titles, who has an office ?Routines – how members of the organisation behave.Symbols – organisations are represented by symbols, such as logos, offices, dresses etc. Symbols are the organisation indicate how the managing director wants to be perceived: Ron wants to be called the commander, he uses naval terminology, his cruiser is a symbol of his success.Power and Structure- look at who hold the real power at the organisation. Ron holds all the power and his leadership style come from strong opinion and beliefs. He does not value others opinions and when Ann was hired and tired to implement new systems and structures to help the company, Ron did not agree.Organisational structure- there is little structure at the organisation, and attempts to implement formal organisational structures by Ann were dismissed by Ron.Control system- Ron the owner is obsessed with control and management. He is very strict on his employees; he is obsessed with navy history and he treats his employees as if they were in the navy. He does it by being at work at the start and end of the work day to ensure that no employee is late or leaves work early. Lateness has consequences if explanation does not satisfy the Ron’s criteria in a form of wage cut. This form of control system by the management can be damaging to employee morale as the employees might fear the owner. They might feel like the job does not offer work life balance and they might feel threatened that if they are late, they will receive a lower wage, which may result in their efficiency being lower. The control system is based on punishments and not rewards.Routines and rituals – the daily routine and rituals of stuff, of what the organisation considers acceptable. At the organisation there is one rule for the managing director ( flexible hours, extended holidays, high pay) and another for everyone else (minimum holidays, no flexibility, wage deductions for arriving late) Stories – the people and past events tabled about in an organisation can illustrate the value of the organisation and the behaviour it encourages. He is the hero of the organisation who constantly has to deal with numerous villains, lazy suppliers, poor quality suppliers , tax authority
Shareholder matrix - RDC
A- Minimum effort B- Keep informed C- Keep satisfied D- Key Players 1 / 4
Agency cost Agency costs, in the context of finance and accounting, refer to the expenses and conflicts of interest that arise when one party (the principal) delegates decision-making authority or control over assets to another party (the agent). These costs typically occur in situations where the agent's actions may not align with the best interests of the principal. The concept of agency costs is relevant to understanding corporate governance, particularly in the context of shareholders (principals) and company managers (agents).Principals need to introduce mechanisms to control the agent and above normal analysis.Both finding out and introducing mechanisms will incur costs that can be viewed in terms of money spent, resources consumed or time taken.-Risk attitude – the first reason for increased agency costs is attitude to risk.
- Management issues/ unwillingness of Chair to be monitored or provide information about strategies and policies. This
- Inadequacy of existing mechanisms - Lack of risk committee, not enough NEDs on the board to question decisions made
means that shareholders might have to find out from other places or hire NED. They might contact other shareholders to pressure the chair to provide information.
by the chair. There is information asymmetry between shareholders and the company due to management not efficiently shares information with shareholders. The Chair dismissed a phone call. There should be regular meetings between major shareholders and the chair to keep shareholders in the look which would increase agency costs.Rules and principles-based approach Rules based approach Organisations are required to comply with a detailed and rigid code. Non-compliance cannot be justified. Investors often rely on third party for non-compliance.Easier compliance with rules as they are clear and can be evidenced. Provides a consistent minimum standard of governance for investors’ confidence.Rules based approach emphasises aspects of governance that can be verified easily, such as whether there is an audit committee. They place less emphasis on areas such as organisational culture that cannot be governed by clear rules.Non-compliance with the rules is penalised. Enforcement can be difficult for situations that are not covered explicitly in the rules.Favoured in legal jurisdictions and cultures where laws are important.Principals based approach Sets out broad principals. Works as comply or explain. Allows for investors to decide if non-compliance is appropriate.Allows greater flexibility and potential cost savings. Applies across different legal jurisdictions, which makes governance of international corporations easier.The principles are just guidance, they can be interpreted in various ways. Investors cannot be confident of consistency in approach.
Advantages of Rules-Based Approaches:
Clarity and Specificity: Rules provide clear, specific, and detailed guidelines for compliance. This can reduce ambiguity and make it easier for entities to understand and follow the regulations.Enforceability: Rules are typically easier to enforce because they leave less room for interpretation. Regulators and enforcement agencies can more easily identify violations and take appropriate action.Consistency: Rules promote uniformity in compliance and reporting. Entities in the same industry or sector are more likely to follow the same set of rules, which can aid comparability.Prescriptive Guidance: Rules can be helpful for complex or high-risk areas where detailed guidance is necessary to prevent misconduct or fraud.
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Disadvantages of Rules-Based Approaches:
Rigidity: The strict nature of rules can lead to inflexibility. They may not adapt well to changing circumstances or evolving business practices.Unintended Consequences: Overly prescriptive rules can lead to "box-ticking" compliance, where entities focus on meeting the letter of the law rather than its spirit. This may lead to unethical behavior within the confines of the rules.Complexity: In an attempt to address every potential scenario, rules can become lengthy and complex, making it challenging for entities to understand and comply with them.
Advantages of Principles-Based Approaches:
Flexibility: Principles provide a framework for ethical behavior and decision-making without being overly prescriptive. This allows entities to adapt to changing circumstances and exercise judgment.Ethical Emphasis: Principles focus on the underlying values and ethics, encouraging entities to act in a manner consistent with the spirit of the regulations.Prevention of Regulatory Arbitrage: Principles can be applied more broadly, making it harder for entities to exploit regulatory gaps or engage in "creative" compliance.Circumstances - A principals-based approach can extend more widely compared to rules-based approach, and can focus on areas where it would be unrealistic to apply rules. A principal’s approach may require directors to take a course for development without stating how many courses.Costs - A principal-based approach is less costly in terms of time and money compared to rules based approach. Companies which are located in jurisdictions that require rules based approach need to develop systems and understand the rules in order to apply them meaning it requires more time and money compared to principals based approach
Disadvantages of Principles-Based Approaches:
Subjectivity: The lack of specific rules can lead to interpretation differences. Entities may have varying interpretations of what constitutes compliance with a principle, which can create uncertainty.Enforcement Challenges: Regulators may find it more challenging to enforce principles-based regulations due to their flexibility and subjectivity. It can be more difficult to identify and prove violations.Risk of Ethical Erosion: In some cases, entities may prioritize profit over ethical considerations, taking advantage of the lack of specific rules to engage in questionable practices.Explanations for non compliance might not be adequate for shareholders. Shareholders might not understand the reason for and the consequences of non-compliance.Integrated reporting
Advantages of Integrated Reporting:
Comprehensive View: Integrated reporting provides a holistic view of an organization's performance, combining financial, environmental, social, and governance (ESG) aspects. This comprehensive perspective helps stakeholders better understand the organization's value creation.Transparency and Accountability: Integrated reporting promotes transparency by sharing a more complete picture of an organization's activities and their impact. This transparency enhances accountability to stakeholders, including investors, regulators, and the public.Better Decision-Making: By providing a broader set of information, integrated reporting enables more informed decision- making by management, investors, and other stakeholders. It allows for a deeper understanding of an organization's strengths and weaknesses.Long-Term Value Creation: Integrated reporting encourages a focus on long-term value creation rather than short-term financial gains. It helps organizations consider sustainability, ESG issues, and stakeholder interests, which can lead to more sustainable growth. 3 / 4
Risk Management: Integrated reporting identifies and assesses various risks, including environmental, social, and governance risks, which can affect an organization's long-term viability. This helps in developing effective risk mitigation strategies.Enhanced Reputation: Demonstrating a commitment to transparency, sustainability, and ethical business practices through integrated reporting can enhance an organization's reputation, attracting responsible investors and customers.Efficient Reporting: Integrated reporting streamlines the reporting process by consolidating various reports into a single comprehensive document. This reduces duplication of effort and simplifies the reporting cycle.
Disadvantages of Integrated Reporting:
Complexity: Preparing integrated reports can be complex, requiring organizations to gather and analyze a wide range of non-financial data. This complexity may lead to higher reporting costs.Standardization Challenges: The lack of standardized guidelines for integrated reporting can make it challenging for organizations to develop consistent reports. This can result in varying levels of quality and comparability across reports.Data Collection and Verification: Gathering and verifying non-financial data can be resource-intensive. Organizations may face difficulties in obtaining accurate, relevant, and auditable information for their reports.Resistance to Change: Organizations may encounter resistance from within when transitioning to integrated reporting.Employees and management may need training and time to adapt to the new reporting framework.Potential Greenwashing: There is a risk that organizations may use integrated reporting to portray a more positive image of their ESG and sustainability practices than is actually the case, which is commonly referred to as "greenwashing."
Capitals:
Financial Capital: This includes the monetary resources that an organization uses to operate and grow. It encompasses cash, investments, debt, and other financial assets.Manufactured Capital: Manufactured capital refers to the physical and tangible assets created, acquired, or developed by an organization. This includes infrastructure, buildings, machinery, equipment, and technology.Intellectual Capital: Intellectual capital represents the knowledge, intellectual property, technology, and intangible assets that contribute to an organization's value. It includes patents, trademarks, copyrights, data, software, and the expertise of employees.Human Capital: Human capital encompasses the skills, knowledge, experience, and capabilities of an organization's workforce. It emphasizes the value of people as contributors to the organization's success.Social and Relationship Capital: This capital includes the organization's relationships, networks, and social resources. It extends to relationships with customers, suppliers, communities, and other stakeholders. It emphasizes the importance of a positive reputation, trust, and collaborative partnerships.Natural Capital: Natural capital encompasses the environmental resources and ecosystem services that an organization depends on or impacts. This includes air, water, land, biodiversity, and the organization's environmental footprint.Potential answer Aims of integrated reporting in effective communication If we are to implement an integrated reporting approach, we should do so with the aim to improve the quality of information we provide to our stakeholders and to promote a more efficient approach to our corporate reporting activities.The benefits of integrated reporting The benefits include (amongst others): an improved relationship between HiLite and our investors, a greater insight for our hotel customers and our hotel staff into our organisation’s business model and the benefits we can offer them, strategy and long-term outlook, as well as a greater understanding of our use and dependence on different resources and ‘capitals’ and our access to and effect on them.HiLite’s investors in particular would benefit from such information which informs investment decision-making. Using a broader set of information can also benefit them by providing a greater understanding of the drivers of our performance
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