Gordon Jenkins
Need for Sound Corporate Governance Practices
Need for Corporate Governance:
1. Wealth Maximization:
The gamut of financial turf gyrates around the vital facets of Financial, Investment, and Dividend decisions, reciprocating to the intrusive queries of
- Where to invest funds and in what amounts?
- What are the optimal and feasible sources of funds to finance the firm’s projects/ proposals and in what proportions?
- And how much to payout and what percentage of amount to be retained from profits?
Pragmatically speaking, the objective of profit maximization does not clinch the ever-changing and volatile market drifts in its ambit whereas the wealth maximization does. The focal point of ‘Profit Maximization’ grooves for the elevation of net returns. The maximization of profits alone doesn’t in-turn will lead to the rise in the value of the shares. There will be many factors putting impact on the market price of the company’s shares. The factors said above can be grouped under systematic/unavoidable and unsystematic/avoidable risk facets. The segregation obviates the only possibility of control, which could be executed is on the tilting facets of unsystematic risk. The encrusted gamut of the profit concept itself doesn’t even elevate the pragmatic feasibility of it to reciprocate to the tribulations of unsystematic risk. And, the facets of systematic risk by its very nature are uncontrollable or unavoidable. But the concept of wealth maximization speaks of maximizing the value or market price of shares. It takes into consideration all the facets of risk, cuddling both systematic and unsystematic risk. And the craggy business turf drifted by the wealth maximization is/will only be the best measurer of the corporate advancement and the strongest driving force, which neutralizes the intricate and fickle dynamics, pressurizing the value/wealth maximization process.
2. Globalization and Liberalization:
At the wedge of Globalization and Liberalization, the corporate turf is unbolted to numerous vicarious-perils. The universal marketplace is getting fused into a dreadful and unique business turf. In practice, the market-product expansion strategies, including market penetration, market expansion, product expansion, and diversification strategies executed by the concerns are jeopardized to various competitive advantages garnered by other players in the market. The liberalized market will certainly signal the entry opportunities to the global giants, which in turn will multiply the vying facets creating the disharmonized turf for market participants and harmonized environment for customers or end-users offering them the more valuable and almost customized augmented-product.
3. Just In Time:
Pioneered by TAILCHI OHNO of Toyota Motor Corporation, Japan in 1950s and 1960s, Just-In Time production systems (JIT in short) has evolved into a manufacturing philosophy, which is one of the foundation stones of Japanese management systems along with the concept of TQC. ZIPS (ZERO INVENTORY PRODUCTION SYSTEMS), NOT (NICK OF TIME) and MAN (MATERIAL AS NEEDED) are variations of the same basic concept of JIT.
In the broader sense, the concept of JIT is all about “produce and deliver finished goods just in time to be sold, sub-assemblies just in time to be assembled into finished goods, fabricated parts just in time to go into sub-assemblies and purchased material just in time to be transformed into fabricated parts.”
The concept was coined from the necessity to develop a system for manufacturing a small number of automobiles with the distinguished features. The system calls out for the direct unloading of the components & parts in the production unit, eliminating the necessity for warehouse in the production premises.
The Toyota Production System has drawn greater attention in Japan and abroad. This approach classified the waste incurred in the production process into:
-
- Excess Production.
- Waiting time spent at the machine
- Waste in transportation
- Waste in process
- Waste in motion
- Waste in the form of defective units.
The concept of ‘Just-in-Time’ bases its stature to the noticeable extent on the scientific management principle of ‘Motion Study’, coined by F.W. Taylor. Pragmatic feasibility of the concept calls out for the well-harmonized relationships between the company and its stakeholders. The harmonized relations can only be built through a well groomed and nurtured lations can only be build ut for the ple of Motion Study, laid down by F.W. Taylor
4. Best Practices and Bench Marking
The companies, which identify and deliver to the customers the product and service expectations to a level of satisfaction that, will ensure them a position of ‘first-choice provider/marketer of the product/service’, and at the same time, optimizes the production process leading to the higher profitability, thereby maximizing the shareholders returns, are termed as effective companies. Two viable concepts, which are worth noticeable in the above companies, are Best Practices and Bench-marking. Best Practice is widely considered to be about doing things in the most effective manner, usually focusing upon a specific activity or operation (a critical success factor), such as strategic decision making, customer relationship management, enterprise resources planning and so on. Bench-Marking helps understand the business, its process and performance, and identifies gaps between best practice and the current operating environment.
The strategic gap between the Best Practicing companies and others can better be heaved and obviated from reoccurrence through an establishment of fortified governance turf. The Best Practiced governance principles and practices will fortify the stature of the company making it stubborn enough to face jeopardizes and in-turn make it the Best Practicing Company with Bench-Marked policies and practices.
5. Management of Systematic risk
The portion of risk or variability in an expected outcome that is caused by factors, which affect the returns on all securities, is termed as Systematic Risk. Major political, economic and social phenomena, for instance, would affect all stocks, which imply that systematic risk cannot be eliminated by diversification.
A properly governed company will stand tranquil, against all the probable risk factors making its position affirm by ruling out all the imminent gaffes. The market share of a well governed company will persistently build on, notwithstanding the tuff vying in the relevant industry.
6. Effective Supply chain Management
The vigorous, capricious and absurdly murky business defies, implore for an apprehensive and instigative strategic actions. The universal marketplace is getting fused into a dreadful and unique business turf. The unified business mesh as engraved enormous intrusions for abreast and abrupt firms, clinching political, economical, financial, strategic, and social synergies to erupt. The growing arms of exploring giants have literally raised the echelon of vying at every stratum of Supply-Chain, cuddling in-bound logistics, production, out-bound logistics, marketing and sales, and service additions.
7. Competitive Advantage
When a firm sustains profit that exceeds the average for its industry, the firm is said to possess a competitive advantage over its rivals. Every firm intends to attain a sustainable competitive advantage-turf, which facilitates it to galvanize from every sprouting opportunity and be abreast with the volatile trends in the capricious business world.
Michael Porter identified two basic types of competitive advantage:
- Cost Advantage
- Differentiation Advantage
Porter’s Generic Strategies
TARGET SCOPE
BROAD INDUSTRY WIDE
LOW COST ADVANTAGES
PRODUCT UNIQUENESS
ADVANTAGE
COST LEADERSHIP STRATEGY
DIFFERENTIATION STRATEGY
FRAGMENTED MARKET
FOCUS STRATEGY
(LOW COST)
FOCUS STRATEGY (DIFFERENTIATION)
COMPETITIVE ADVANTAGE FACETS
A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefit that exceed those of competing product (differentiation advantage). Thus, a competitive advantage enables the firm to create superior profit for itself.
Cost & differentiation advantage are known as positional advantage since they describe the firm’s position in the industry as a leader in either cost or differentiation.
A resource-based view emphasizes that a firm utilizes its resources & capabilities to create a competitive advantage that ultimately result in superior value creation.
8. Diminution of Unsystematic risk
A company, which moves in a trachea of levelheaded and principled governance practices and stature, taking the welfare of various stakeholders, including investors, customers, suppliers, employees and society as a whole into consideration, would certainly be in a comfortable position to ramify the impact of unsystematic risk factors and in-turn will trim down the impact of total risk on the process of value creation. A value oriented step by the company towards its stakeholders will build the trachea of obligatory commitment from stakeholders in favor of the company; it in turn will harmonize the relationship between the company and its stakeholders.
The market recital drift of a firm, which is wrapped by the stern pressure of an unsystematic jeopardy, can better be exemplified through a glimpse on the depletion ich is lagged by the serious influence of an unsystematic risk can better be understood its depleting market capitalization. The whispered depletion in a firm’s market capitalization trails from a cyclical process, which could wisely be named as ‘Looped Trachea’. The investor, who sets out to make an investment in the capital market with a prejudice to play safely as a risk-averter, will certainly plunk an utmost endeavor to diversify his investment. The diversification is usually done to reduce the impact of unsystematic risk. In the process of upgrading his portfolio, investor will reap-out his investments from the highly unsystematic risk inclined securities to invest in other securities with a lesser impact of unsystematic risk or to make value investing. Thus, the short position on the securities of a company inclined by severe impact of unsystematic risk, will lead to the attenuation in the market value of that particular security. This in turn will lead to the depletion of firm’s market capitalization.
9. Brand Loyalty
Branding is an important strategy to distinguish the company’s product from its competitor’s offerings, which virtually assists it in making an alluring impact on the predilections of the clientele. To be more pragmatic, the want satisfying capacity of the product is the crucial feature that helps out the firm in building the market share and stature. It leads the firm through the trachea of fickle attacks of vies and transforming capricious business drifts. It was finely whispered by the gigantic business tycoon, Michael Dell that if one intends to be in the whimsical business world, for that matter offering whatever product that vies in its market segment catering to a particular want of the buyer, should look to stand ahead of all others in the supposed segment. In simple the firm should aim to be a market leader. And the firm, which had thus reached the mark of supremacy, should be exceptional in all its moves by setting benchmarks for all others to follow it.
In the supposed progression, branding evidently plays an unmatchable role by galloping the stature and success of the firm with it. The success spurred from a company’s product will create a recognition and loyalty in the market for the firm, which is clasped by the company’s brand. Sequentially, the stature so gained and clasped by the brand will get imparted to all the offerings, which the company makes under same brand. A gist of dynamic and gargantuan brands that replicate the said dogma, include Microsoft, General Motors, Dell, IBM and so on.
And finally coming to the tenet that proper governance practices will assist the firm in building its brand reputation and stature is an absolute truth. A firm that aligns its stature by getting more agile and adaptable to the customers’ wants and endeavors to cater to those wants will certainly make a strong position in the market.
10. Employees Participation in Management
As the renowned axioms ‘Unity is knowledge, diversity is ignorance’ and ‘United we stand, divided we fall’ go, collective effort makes even the most difficult task easier. Even the widely used idea generation techniques, such as Brain Storming Session, coined by Alex Osborne in 1939 and Synectics, developed by William J.J. Gordon as a further refinement of brain storming session, stress on the premise of group involvement or participation. A person with concomitant experience on the floor could better resolve the quandaries associated with the production process rather than a person who lacks technical and/or functional knowledge associated with the supposed process.
The capitalist idea of “workers’ participation” has now been extended to the idea of “worker directors” on the board of the company, under certain conditions. The CBI has been pleasantly surprised at the “success” of worker directors in the British Steel Corporation! This is not so surprising when you read the comments of those 10,000 worker directors, as reported in the Sunday Times (November 7, 1971):
“Of course we are not really directors at all… We don’t have anything to do with policy”.
“I see myself as an ordinary manager too; not as a worker”.
“A tub-thumping shop steward on the board would be disastrous. We have to be free to take management’s side if we think it is right”.
“I feel unofficial strikes are never justified”.
“I am a socialist, but not your Michael Foot type. I am more of a Jenkins man; Roy, of course not Clive”. [Roy Jenkins was a leading representative of the right wing of the Labor Party leadership at the time, while Clive Jenkins was a trade union leader, Editor's note].
Clearly “workers’ participation” will bring nothing to workers in industry if it means no more than worker-directors like those in British Steel, which the TUC recommended to the Donovan Commission on trade unions in 1968.
In general the attitude of the trade union leaders is not clear. Jack Jones, in 1970 wrote a pamphlet; “The Right to Participate: key to Industrial Progress” in which he advocated a form of “representative participation” where “managers and stewards would act in co-operation.”
Such vague pronouncements seem to deny the very existence of class conflict on the factory floor, and Jack Jones went no further than to support the reforms in ICI where the shop stewards took over the role of the employee representatives in works councils.
In the last six months, the CBI has published a report on employee participation, and both the TUC and the Labor Party have come forward with new proposals.
All the ideas expressed in these pamphlets revolve around the system introduced in West Germany known as “co-determination”. Under this scheme, workers elect one third or one half of the members of a supervisory board which directs general policy and appoints a management board underneath it to run things from day to day. In West Germany, until this year, only mining and steel had one half of the board, and the right to elect directly from the trade unions some of the members, instead of from the employees as a whole. The rest of industry has no direct trade union representation and only one-third representation on the boards.
The congruency among the various levels of organizational hierarchy, as depicted through a ‘Scalar Chain’ will on the pinnacle strike out the misdemeanors heaped in the way to glory. This harmonious approach towards the hierarchical tribulations is on the contrary an endemic of bench marked Corporate Governance practices.
11. Market Penetration
The company prefers to go with a market penetration strategy, when it anticipates intensive competition or other entry barriers in the market place where it is planning to schedule its operations or when it moves with an objective to build market share by maximizing the value of its shareholders in a long run. Initially this strategy was adopted by Japanese firms when they launched their product in North America and Europe. Later in the 1980’s South Koreans, Taiwanese, and Hong Kong firms used the same strategy to uproot Japanese and other local competitor firms from these markets. And now the same strategy is being adopted by the South East Asian firms to penetrate into the Indian market.
Ansoff’s Grid
PRODUCT
CURRENT
CURRENT
NEW
PENETRATION STRATEGY
MARKET DEVELOPMENT
NEW
PRODUCT DEVELOPMENT
DIVERSIFICATION
MARKET
Slow Penetrating Strategy
This strategy delivers results when the threat from competitive is minimal, market size is large market is predominantly price sensitive and majority of market is familiar with the product. The firm’s objective is to maximize sales or profits in the long run.
Rapid penetration strategy
If the objective is market share and profit maximization in the long run market is characterized by intensive competition or other entry barriers a firm may choose to entry the market with this strategy .Japanese firm adopted this strategy to launch their product in North America and Europe later in the 1980 South Koreans Taiwanese and Hong Kong firm used the same strategy to uproot Japanese and other local competitor firm from these markets .The same strategy is now being used by this firm from South East Asia to penetrate the Indian market .The leading example of Indian firm having adopted this strategy is one of Nirma and Tseries audio cassette. Both these firm have successfully used high promotion of low price strategy to grow in the price sensitive Indian market
SLOW PENETRATION STRATEGY
This strategy delivers results when the threat from competition is minimal, market size is large, market is predominantly price sensitive, and majority of market is familiar with the product .The firm’s objective is to maximize sales or profits in the long run. Thus some of the considerations at the introduction stage revolve around the pricing and promotional levels. A firm offers only a limited version of the product at this stage, considering an example from the Indian Market, MARUTI UDYOG offered only one version of Suzuki 800cc car and priced it at the range, which obviously sounded out of common mans cuddle. The firm offered tangible benefits of fuel efficiency and safety over the existing products, which made firm, go short of demand generated in the market with its initial production levels and literally speaking people made money on their Suzuki allotment letters.
The role of bench marked governance practices in the company’s strategic hallucination is absolutely remarkable. A well governed company juggles the heck ups buried in the strategic delirium with its palpable approach towards various stakeholders.
12. Customer Managed Relationship
Customer Managed Relationship factually articulates the level of agility, adaptability, and eminency by which the company reciprocates to the desires of ‘the Customer’ i.e. the real-time sovereign. In other way round, Customer Managed Relationship speaks of absolutely prudent marketing trends .i.e. to identify and respond with utmost testament to the wants of the customer. The vigorous, capricious and absurdly murky business defies, implore for an apprehensive and instigative strategic actions. At the wedge of globalization and liberalization, the universal marketplace is getting fused into a dreadful and unique business turf. The unified business mesh as engraved enormous intrusions for abreast and abrupt firms, clinching political, economical, financial, strategic, and social synergies to erupt. In fact, the sense of prudent marketability was in existence since times of yore, during which the marketing conceptualization had reverted through mass marketing, product-variety marketing to target marketing.
13. Six Sigma
The company with a spruce corporate practices heads to the convivial business turf through a trachea of plumy hand-outs by the responsible stakeholders. The concept of ‘Six Sigma’ had its birth in 1979 at Motorola. It primarily focuses on the prevention of problems by building quality into processes, which in turn elucidates the way crammed with the plethora of perils. The method calls out for utilizing the full-time dedicated Black Belts (project managers) who receive a month of formal classroom training in process analysis and statistical methods as well as mentoring by Six Sigma experts.
The method sets off by asking the fundamental question: What is critical to our customers? Then rigorous analysis is applied to all processes in the business to assess whether they are delivering what customers require. But, to be pragmatic they don’t, that is a defect. Six Sigma is passionate about using data to uncover the root causes of those defects and eliminates them from the gross roots of the processes. Its ultimate objective is to deliver to customers what is critical to them, that is, to reach “virtual perfection” from the customer’s perspective.
Error trachea of sigma horde
3 Sigma
Admits 66,800 defects per one million opportunities
4 Sigma
Admits 6,210 defects per one million opportunities
5 Sigma
Admits 233 defects per one million opportunities
6 Sigma
Admits 3.4 defects per one million opportunities
Common sense and force of personality are not means to reach dramatic improvements. The only way is to ask the tough questions and to use rigorous statistical and financial analysis. When problems are reduced, costs decline and customer satisfaction improves.
14. Incredible Strategic Financial Nudge
The severance between ownership and management is the vital feature of corporate giants and as a corollary of that the latter enjoys the substantial autonomy with regard to the affairs of the firm. With an extensively diffused ownership, strewn and ill-organized shareholders barely exercise any control on the management, which may be inclined to act in its own interest rather than those of the owners. However, shareholders as owners of the enterprise have the right to change the management. Owing to the threat of getting dislodged for poor performance, the management would have a natural proclivity to achieve a minimum acceptable level of performance to satisfy the shareholders requirements/goals, while focusing primarily on their own personal goals. Thus, stooping to their objective of survival, management would aim at satisfying instead of maximizing shareholders wealth.
In order to ensure that management would take optimal decisions compatible with shareholders interests of value maximization and minimize agency problems in terms of conflict of interests, two remedial measures commend themselves, including Monitoring of managers/agents and Provision of appropriate incentives. Incentives to the management may take various forms, such as stock options, performance shares, cash bonus, perquisites etc.
In practice normally, the incentives offered are always intimately linked to the stake of the management in the ownership of the company. It sequentially endorses congruence between the personal goals of management and the interests of the owners or shareholders. This sense of analogy between the personal goals of the management and the interests of the shareholders will instigate the trachea of well fabricated governance practices, which in-turn will evacuate the enigma of fickle repercussions in the strategic financial decision making process.
About the Author
Gordon Jenkins – Caravan
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