P3-05 Organisational Influences PDF

Session 5
Organisational Influences
FOCUS
This session covers the following content from the ACCA Study Guide.
A. Strategic Position
6. The expectations of stakeholders and the influence of ethics
and culture
a) Advise on the implications of corporate governance on organisational
purpose and strategy.
b) Evaluate, through stakeholder mapping, the relative influence of
stakeholders on organisational purpose and strategy.
c) Assess ethical influences on organisational purpose and strategy.
d) Explore the scope of corporate social responsibility.
e) Assess the impact of culture on organisational purpose and strategy.
f) Prepare and evaluate a cultural web of an organisation.
g) Advise on how organisations can communicate their core values
and mission.
h) Explain the role of integrated reporting in communicating strategy and
strategic performance.
C. Strategic Action
2. Managing strategic change
b) Determine and diagnose the organisational context of change using the
cultural web.
Session 5 Guidance
Identify a company's ethical stance (s.2). You do not need to be an expert on ethics and corporate
governance but you need to know the basics.
Recognise how corporate governance models attempt to prevent too much power in the hand of a
single person (s.3).
Understand how various corporate governance standards attempt to protect minority shareholder
rights (s.4).
(continued on next page)

P3 Business Analysis Becker Professional Education | ACCA Study System
Ali Niaz - ali.niaz777@gmail.com

P3 Business Analysis Session 5 • Organisational Influences
VISUAL OVERVIEW
Objective: To understand the influence ethics, corporate governance, stakeholder
expectations and culture have on organisations and to outline the importance of
stakeholder mapping.
ORGANISATIONAL INFLUENCES
BUSINESS ETHICS CORPORATE CULTURE

AND SOCIAL GOVERNANCE
RESPONSIBILITY • Introduction
• Purpose • Organisational
• Ethical Stance • Ownership Iceberg
• Corporate Social Structure • The Cultural
Responsibility • Poor Governance Web
• Environmental
• Culture and
Lobby
Structure
• Culture and
Strategy
CORPORATE GOVERNANCE STAKEHOLDERS

STANDARDS
• Stakeholder Groups
• UK Combined Code • Managing Conflict
• Sarbanes-Oxley Act • Integrated Reporting
• OECD
Session 5 Guidance
Know how to use stakeholder mapping to identify power groups (s.5).
Focus on the concept of the "cultural web" as an important tool to understand an organisation's
culture, the way its members behave and how its strategy develops (s.6).
© 2014 DeVry/Becker Educational Development Corp. All rights reserved. 5-1

Session 5 • Organisational Influences P3 Business Analysis
1 Organisational Influences
 This session looks at the complex role people play in
developing strategy:
 what people expect of the organisation; and
 what influence they can have over an organisation's
purposes.
 Corporate governance addresses stakeholder accountability
and supervising senior management decision-making
processes.
 Ethical and social responsibility issues can affect an
organisation's purpose and thus define its stakeholders.
 Power and interests determine key stakeholder roles in the
organisation.
CORPORATE GOVERNANCE BUSINESS ETHICS

• Whom should the • Which purposes should
organisation serve? be prioritised?
• How should purposes be • Why?
determined?
ORGANISATIONAL PURPOSES
• Corporate Value
• Mission
• Objectives
STAKEHOLDERS CULTURAL CONTEXT

• Whom does the • Which purposes are
organisation serve? prioritised?
• Why?
5-2 © 2014 DeVry/Becker Educational Development Corp. All rights reserved.

2 Business Ethics and Social Responsibilities
"A moral or ethical statement may assert that some particular

action is right or wrong; or that some actions of certain kinds are
so; it may offer a distinction between good and bad characters or
dispositions; or it may propound some principle from which more
detailed judgements of these sorts might be inferred (e.g. that we
ought always aim at the general happiness or try to minimise the total
suffering of all sentient beings, or ... that it is right and proper for
everyone to look after himself). All such statements express first order
ethical judgements of different degrees of generality."
—J. L. Mackie, 1977
Social responsibility refers to the expectation that business firms
will act in the public interest.
2.1 Ethical Stance

Ethics in general is about what's right and wrong. Business ethics
has three contexts:
 The organisational interaction with national and
international society; Ethical stance—the
 The effects of organisations' routine operations; and extent to which an
 The behaviour of individual members of staff. organisation will
meet or exceed its
Business ethics also deals with the regulatory environment minimum obligations
and corporate governance issues that determine the minimum to stakeholders and
obligations of an organisation towards its stakeholders. society at large.
Different organisations take very different ethical stances and
there is likely a strong relationship between the ethical stance,
the character of an organisation and how strategy is managed.
There are four possible ethical stances.

2.1.1 Short-Term Shareholder Interest

If a company limits its ethical stance to taking responsibility for
short-term shareholder interests, it expects government to take
care of corporate governance and social responsibility issues. The
company will follow the laws but not more.
2.1.2 Long-Term Shareholder Interest

A company might take a wider view on ethical responsibilities
because it expects to gain advantages from a focus on long-term
shareholder interests. In other words, such a company sees long-
term financial benefits for its shareholders through well-managed
relationships with other stakeholders. Examples include:
Attracting business partners with a better corporate image
(e.g. Co-operative Bank, www.co-operativebank.co.uk);
Sponsoring (e.g. Mercedes-Benz sponsoring the Masters
Tournament); and
Avoiding "shady" marketing practices (e.g. inappropriate
marketing to children and subliminal advertising).
2.1.3 Multiple Stakeholder Obligations

This stance emphasises stakeholders' interests rather than
shareholder interests only. Companies taking this view see the
need for incorporating stakeholder interests and expectations in
the organisation's purposes and strategies beyond the minimum
legal obligations (e.g. keeping uneconomic jobs, offering socially
responsible investment products, etc).
2.1.4 Shaper of Society

The shaper of society stance is clearly a difficult stance for
businesses. Financial considerations are secondary to shaping
society. Therefore this concept may be better suited for
privately owned companies that are not accountable to external
shareholders and public services.
Businesses have always provided employment for individuals
and services for customers. Today, however, there is a wider
expectation that a business will seek to preserve the environment,
sell safe products, meet its financial obligations, treat its
employees equitably, be truthful with its customers, train the
long-term unemployed, contribute to education and the arts, and
help revitalise urban areas of deprivation.
2.2 Corporate Social Responsibility

Corporate Social Responsibility (CSR) addresses how an
organisation exceeds the minimum obligations to stakeholders. *A firm that fails to
invest in costly anti-
In reality, each business exists as part of society and its actions pollution equipment
have both economic and social effects. It would be practically harms the quality of
impossible to isolate the business decisions of corporations from life for society and
their economic and social consequences. Managers may find a its stakeholders.
number of areas: Businesses that do not
invest in training and
 in which their interests, various stakeholders' interests and educating staff will
society's interests are mutually compatible; or experience a decline
 in which there might exist an "ethical dilemma" such as in the workforce
conflicting objectives, bribery, falsified performance data, quality and high labour
rationing.* turnover.

2.2.1 Ethical Dilemma

An organisation facing an ethical dilemma should consider the:
 magnitude of consequences arising from a situation;
 probability of the effect on people;
 social consensus or degree of social agreement on how the
issue should be resolved;
 immediacy of a need for a decision versus waiting for further
developments or advice;
 proximity of the decision-maker to those affected by the
decision; and
 number of people likely to be affected and to what extent they
will be affected.
This framework allows a manager to assess the size of the
problem and also to consider the implications of a decision.
Further questions to help the decision-making process are:
 Is the problem/dilemma really what it appears to be?
 Is the action legal? Is it ethical?
 What is the position of those who oppose the action and is
their opposition reasonable?
 Whom does this action benefit? Harm? How much?
How long?
 Would those involved be willing to allow everyone to do what
they are considering doing?
 Has the opinion of others, who are more knowledgeable on the
subject and who would be objective, been sought?
 Would those involved be embarrassed if the action were made
known to family, friends, co-workers or superiors? Would
they be comfortable defending their actions to an investigative
reporter on the evening news?
2.2.2 Code of Ethics

Government regulations over business operations often come *Many firms in their
into being because firms are found to have acted in a socially annual reports write
irresponsible manner. Environmental damage, sales of unsafe about their codes of
products, employee discrimination and untruthful advertising are ethics and express,
a few examples in which laws have been enacted to encourage at least in general
terms, their socially
and regulate a company's operations in a manner consistent with
responsible actions.
the good of society.* General Motors,
Kitson & Campbell's code of ethics suggests that an organisation's for instance, has
leaders: published an annual
Public Interest Report
Conduct themselves in a manner that will merit the respect of for more than 20
the community; years. A recent issue
Uphold the reputation of the organisation and the dignity of described GM's efforts
the profession; in such areas as clean
air, ozone depletion,
Ensure professional duties are carried out with integrity; global warming,
Collect facts without bias; waste management,
Exercise care over the degree to which the views of others automotive safety,
minority programs,
are allowed to influence professional judgements and the
philanthropic activities,
presentation of material; higher-quality products
Prevent unauthorised staff or third parties from access to and greater operating
confidential information; efficiency.

Discourage staff from using information acquired during a

previous employment in ways that are detrimental to their
former employer; and
Declare all material benefits enjoyed by employees.
2.3 Environmental Lobby

Businesses frequently lobby against community regulation
constraining freedom of action over:
 the use of natural resources (e.g. water, land, air, the living
environment); and
 its treatment of the wastes from its operations.
Business decisions may unleash potentially damaging technology.
New productive technologies adopted in 19th- and 20th-century
industrialisation have increased waste products and substantially
affected the fabric of the biosphere (e.g. mining, fishing and
drilling exploits). Some organisations discard harmful chemical
residues. Weapons, new bacteria and pollutants affect the health
of specific groups of people, fauna and flora, and raise the level
of risk to life. In general, business has a greater responsibility for
environmental stewardship than does an average citizen simply
because the level of damage can be so much greater.
Illustration 1 The Body Shop
Business can act to protect and improve the welfare of society

in areas such as urban affairs, consumer affairs, environmental
affairs and employment practices. The Body Shop provides an
encouraging example of environmental stewardship.
Anita Roddick was the founder of The Body Shop, a world-wide chain
of successful cosmetics shops headquartered in Great Britain. The
Body Shop campaigned against animal testing as its prelude to
educating the public in other areas of environmental concern.
In 1985, The Body Shop sponsored posters for Greenpeace and
used its own shop premises as campaign platforms to raise public
consciousness about endangered species, the burning of tropical
rainforests, acid rain and the receding ozone layer. The Shop has an
environmental projects department which actively encourages trade
with the countries of the developing world, and many of the products
are derived from materials used by the people in these countries.
The Body Shop seeks to be socially responsible in the way it conducts
business. Customers are discouraged from using conventional
plastic carrier bags. Reusable cotton bags are on sale, and recycled
polythene is now used for free carrier bags. Recycled paper is always
used, whether it is toilet paper for staff rooms or headed stationery
for commercial purposes.

3 Corporate Governance
3.1 Purpose
Corporate governance has become an issue for companies
because of:
 high-profile business scandals (BCCI, Maxwell, Enron) over
recent years;
Corporate
 increasing globalisation and international investments; and governance
 the demand for international financial reporting standards. framework—
To address issues such as those, companies and governments describes whom the
realise the need to: organisation serves
and how the purposes
 separate ownership and management control; and priorities of the
 establish clear principal-agent relationships (agents working organisation should
in the best interest of the principal at each point in the be decided.
chain); and —JS&W
 provide visible accountability to a wider range of stakeholders.
3.2 Ownership Structures

There are important differences in corporate ownership schemes
among countries, which lead to differences regarding the role,
composition and modus operandi of the board of directors.
3.2.1 Anglo-Saxon Model (UK, US and Australia)

There is a single level of board membership, which includes
both executive and non-executive directors (NEDs). The board
supervises the activities and performance of managers.
3.2.2 Rhine Model (Germany, The Netherlands and Switzerland)

A two-tier board is often mandatory. The "upper-tier board"
(supervisory board) oversees the work of the "lower-tier board"
(executive board), which deals with the day-to-day management
of the company. Shareholders elect half of the supervisory board
and employees elect the other half.
3.3 Poor Corporate Governance

Company is dominated by a single senior executive who uses
his power to pursue his own interests.
Lack of segregation of key roles.
Board members meet irregularly and have no proper overview
of the activities and risks of the company.
Lack of proper internal audit, knowledge and supervision of
the organisation's activities.
Lack of independent scrutiny by external auditors who possibly
advise the company on many areas.
No contact with shareholders.
Misleading figures reported to stakeholders and the
investment community.

4 Corporate Governance Standards

4.1 UK Combined Code on Corporate
Governance
The UK Corporate Governance Code ("the Code") sets out
best practices in relation to leadership, board effectiveness, its
accountability, remuneration and relations with shareholders.*
The most recent edition of the Code was published in 2012 by
*The Code is available
the Financial Reporting Council. The Code is the successor to the
at www.frc.org.uk.
Combined Code, which in turn brought together best practices
founded on the work of several government-sponsored committees.
Listed companies on the London Stock Exchange are required
to report on how they have applied the principles of the Code,
and either to confirm that they have complied with the Code's
provisions or, when they have not, to provide an explanation.
4.1.1 "Comply or Explain"

Although the Code does not have legal force, it is a requirement,
under the Listing Rules of the London Stock Exchange, that all
listed companies either:*
 comply with its recommendations; or *According to the
 explain to the shareholders the reasons for non-compliance. Integrated Prudential
The main principles of the Code are set out in five sections: sourcebook (PRU),
financial services
A: Leadership providers that are not
B: Effectiveness so listed should also
follow the Code as best
C: Accountability practice.
D: Remuneration
E: Relations with shareholders
A: Leadership
 Every company should be led by an effective board,
collectively responsible for the long-term success of the
company.
 There should be clear division of responsibility between
those responsible for the direction of the company (the
board) and those responsible for day-to-day operations
(the executive).
 No individual should have unfettered powers of decision.
In arriving at these principles, the Code takes account of the
*It has not been
need to avoid some of the problems that underpinned the unusual for powerful,
demise of large companies such as Maxwell Communications autocratic individuals
and Polly Peck.* to be in charge of
The Code stresses that the role of the chairman is to lead some organisations,
particularly in the
the board of directors and ensure its effectiveness. It also
financial services
highlights the duty of NEDs in constructively challenging and industry.
helping to develop proposals on strategy.

B: Effectiveness
 The board of directors and its standing committees
should be made up of an appropriate number of persons
with an appropriate balance of skills, experience,
independence and knowledge to enable them to
discharge their duties effectively.
 The procedures for the appointment of new directors
should be formal, rigorous and transparent.
 Directors should be prepared to commit sufficient time
to the company.
 New directors should receive induction on joining
the board.
 Directors' knowledge and skills should be updated on a
*Historically, in the
regular basis. UK, directors retired
 To discharge their duties effectively, directors should be "by rotation" and
supplied with timely and good-quality information. stood for re-election
every three years.
 The board should undertake a formal, rigorous
Since 2010, the FTSE
evaluation of its performance and that of its standing
350 companies have
committees, annually. committed to annual
 To ensure accountability to the shareholders, directors re-election of all
should be submitted for re-election on a regular basis, directors.
subject to satisfactory performance.*
C: Accountability*
 The board should present a balanced and understandable
assessment of the company's position and prospects.
This commitment relates to the information that the
*Means taking
company provides to its shareholders and others.
ultimate responsibility
 The board must decide the nature and extent of the for the effect of the
significant risks it will take in pursuing its objectives. company on others.
To this end, it must maintain appropriate risk
management and internal control systems.
 There should be formal and transparent arrangements for
considering how the board will apply corporate reporting
and risk management and internal control principles,
and for maintaining an appropriate relationship with the
external auditor.
D: Remuneration
 Remuneration offered and paid to directors should be
sufficient to attract, retain and motivate directors of the
quality required to run the company successfully, but the
directors should not be paid too much.
 A significant proportion of executive directors'
remuneration should be performance-related in order to
align the long-term interests of the company with those
of the recipient.
 There should be a formal and transparent procedure for
developing policy on remuneration and for setting the *Focus on individual
performance rather
remuneration of individual directors.*
than on collective pay
 Consistent with best practices in human resources awards "across the
management generally, no individual should be able to board".
decide his or her own remuneration.

E: Relations with Shareholders

 It is the collective responsibility of the board to
encourage dialogue with shareholders based on mutual
understanding of objectives.
 The board should use the Annual General Meeting (AGM)
to communicate with investors and encourage their
participation.*
4.1.2 Roles of the Chairman and CEO *This is a shift from

the old "rubber stamp"
 Organisations should separate the roles of chairman and CEO approach to AGMs,
to avoid unlimited power falling into the hands of a single when meetings were
individual. routinely short and
 The chairman leads the board by: lacking in meaningful
 helping the board achieve its potential; dialogue.
 setting the board's agenda; and
 ensuring the board's effectiveness.
 In order to effectively lead the board, the chairman must
ensure that:
 the board meets regularly;
 all directors have access to relevant information; and
 all directors have the opportunity to speak at board
meetings.
 The CEO runs the company's daily operations by:
 setting objectives and developing the strategy;
 examining major investments;
 executing risk management responsibility; and
 recommending future directors' employment.
 Separating the roles of chairman and CEO:
"frees up" the CEO to fully concentrate on operations
management by insulating the position from shareholders.
The chairman represents shareholders. Some governance
codes also require the chairman to represent the interests
of other stakeholders (e.g. employees).
removes the risk of "unfettered powers" being concentrated
in a single individual. This is an important safeguard for
investors concerned about excessive secrecy or lack of
transparency and accountability. In the case of media
mogul Robert Maxwell, a dominating executive chairman
was unchallenged and was able to act illegally.
reduces the risk of the conflict of interest that arises when a
single person who is responsible for company performance
also reports on that performance to markets.
allows the chairman to address concerns of NEDs who,
in turn, provide an important representation of external
concerns on boards of directors.

 Separation of chairman and CEO roles can, in practice, be

difficult to achieve because:
 business practises in various parts of the world are different;
 it does not necessarily lead to better corporate governance
or financial performance;
 high-calibre managers may not agree to have the role split;
 some companies just do not see the necessity to have the
role split; and
 excellent managers/leaders are not easily found and
invariably come at a high price.
4.1.3 The Role of Non-executive Directors
 Non-executive directors ("NEDs") should be independent of
influences from company executives. Directors have a legal
duty to act in the best interest of a company but that does not
mean they will always do so in an objective way. "… except for
smaller companies,
 Threats to independence may occur where a director:
at least half the
 was a former employee of the company within the last board, excluding
five years; the chairman,
 was paid additional money (apart from the director's fee) by should comprise
the company; non-executive
 has very close ties with the company's other directors; directors …."
 has had a material business relationship with the company UK Corporate
in the past three years; Governance Code,
section B1.2,
 has been a member of the board for more than 10 years;
Composition of
 is a major shareholder; the Board
 holds too many non-executive directorships in various
companies and might not be able to devote enough time to
the tasks in hand.

 NEDs have four main roles:

1. Strategy: "As part of their role as members of a unitary
board, NEDs should constructively challenge and help
develop proposals on strategy".
The strategy role recognises that NEDs are full members
of the board and thus have the right and responsibility to
contribute to the strategic success of the organisation for
the benefit of shareholders. The enterprise must have
a clear strategic direction and NEDs should contribute
considerable life and business experience to ensure sound
strategic planning. In this role they may challenge any
aspect of strategy and offer advice or input to help develop
successful strategies.
2. Scrutiny: "They should scrutinise the performance of
management in meeting agreed goals and objectives and
monitor the reporting of performance …".
In the scrutinising performance role, NEDs are required to
hold executive colleagues to account for decisions taken
and company performance achieved. NEDs represent the
shareholders' interests against the possibility that agency
issues arise that could reduce shareholder value.
3. Risk: "They should satisfy themselves on the integrity
of financial information and that financial and risk
management controls are robust and defensible".
The risk role involves NEDs ensuring that the company has
an adequate system of internal controls and systems of risk
management in place. This is often informed by prescribed
codes (e.g. the Turnbull guidelines or the COSO framework)
but some industries (e.g. chemicals) have other systems in
place, some of which fall under ISO standards. In this role,
NEDs should satisfy themselves on the integrity of financial
information and that financial controls and systems of risk
management are robust and defensible.
4. People: Boards should consider assigning a sufficient
number of non-executive board members capable of
exercising independent judgement to tasks where there
is potential for conflict of interest. Examples of such key
responsibilities are financial reporting, nomination and
executive and board remuneration.
The people role involves NEDs overseeing a range of
responsibilities with regard to the management of the
executive members of the board. This typically involves
issues on appointments and remuneration, but might also
involve contractual or disciplinary issues and succession
planning. Increasingly, companies are using an appointed
NED as a confidential channel through which the concerns
of whistle-blowers may be reported.

4.1.4 Board Standing Committees

 The Code requires a board to have three committees:
remuneration, audit and nomination. It does not specifically
require a separate risk committee although many companies
either establish a risk committee or an audit and risk
committee.
 An audit committee oversees the firm's accounting and
reporting processes, monitors application of accounting
principles, and oversees hiring, independence and
performance of the internal auditors.
 A remuneration committee has the board's delegated
authority to set the executive directors' pay, regardless of
any general policy agreed with the board or any proposals
discussed with the chairman and/or CEO.
 The nomination committee is concerned with the current
and future composition of the board, and has particular
responsibility for identifying future potential board
members, paying due regard to the necessary knowledge,
skills and experience required.
 The committees should be made up only of independent NEDs.
Neither the chairman (whose independence is automatically
assumed to be compromised after appointment) nor any
executive director should be a member.
 Nothing in the Code prevents executive directors, or indeed
any other employee or outside adviser, from being invited to
attend a particular committee meeting. The finance director's
presence often will be necessary and desirable, so the finance
director may commonly sit in on audit committee meetings.
Likewise, the head of HR often will be needed at remuneration
and nomination committee meetings. But neither has the
right to attend or vote; they are only there by invitation.
 The board may appoint further committees as necessary,
either on a continuing basis to deal with ongoing matters (e.g.
risk committee) or ad hoc to deal with a particular acquisition
or matter of strategy. Many companies will have an executive
committee made up of the chief executive and those who
report directly to him but which excludes the chairman and the
NEDs. The committee may meet monthly or weekly and will
have daily executive responsibility for the company's affairs.
4.2 Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 ("SOX"), also known as the
Public Company Accounting Reform and Investor Protection
Act of 2002, is the US answer to a number of major corporate
and accounting scandals, including those affecting Enron and
WorldCom. These scandals cost investors billions of dollars when
the share prices of the affected companies collapsed and shook
public confidence in the nation's securities markets.
The legislation establishes new or enhanced standards for all
US public company boards, management, and public accounting
firms. It does not apply to privately held companies. Every
company listed on the New York Stock Exchange must comply
with SOX.

4.3 Organisation for European Co-operation and

Development (OECD)
OECD developed a set of corporate governance standards and
guidelines that companies should work towards achieving. The
guidelines mainly address the rights and equal treatment of
shareholders:
 Shareholders' rights: Basic shareholders' rights include the
right to:
 secure methods of ownership registration;
 convey or transfer shares;
 obtain relevant information on the corporation on a timely
and regular basis;
 participate and vote in general shareholder meetings;
 elect members of the board; and
 share in the profits of the corporation.
 Equitable treatment of shareholders: All shareholders of
the same class should be treated equally.
 Within any class, all shareholders should have the same
voting rights. All investors should be able to obtain
information about the voting rights attached to all classes of
shares before they purchase. Any changes in voting rights
should be subject to shareholder vote.
 Votes should be cast by custodians or nominees in a manner
agreed upon with the beneficial owner of the shares.
Processes and procedures for general shareholder meetings
should allow for equitable treatment of all shareholders.
Company procedures should not make it difficult or expensive to
cast votes.

5 Stakeholders
5.1 Stakeholder Groups

Stakeholders describe individuals and groups who have some
interest in the future of the organisation. Stakeholders can
influence or be influenced by what an organisation does. In the context of
Stakeholders are usually classified into the following groups: integrated reporting,
stakeholders are
 Internal stakeholder; specifically defined
 Connected stakeholders; as those who have
an interest in the
 External stakeholders.
organisation's ability
An organisation is likely to have difficulty balancing the to create value over
conflicting interests and levels of power that exist in the various time.
stakeholder groups.
Example 1 Major Stakeholders

Suggest the major stakeholders in a typical business.
Solution
Major Stakeholders
(a) Internal stakeholders:
(b) Connected stakeholders:
(c) External stakeholders:
5.2 Managing Stakeholder Conflict

5.2.1 Stakeholder Conflicts
Organisations experience common conflicts among stakeholders:
Conflict Stakeholders
Profitability v Growth Shareholders v Managers
Cost efficiency v Jobs Shareholders v Employees
Growth v Independence Shareholders v Managers
Service level v Customers v Shareholders

Profitability/Costs or Managers
Profits v Environmental effects Shareholders/Managers

v Regulators/Society

5.2.2 Stakeholder Mapping

A company must manage its stakeholder relationships in
accordance with their bargaining strength, influence, power and
degree of interest.
Mendelow suggested that the influence of each stakeholder on
a key strategic decision could be "mapped" by looking at two
aspects of the stakeholder's relationship with the organisation:
1. Stakeholder power—the power held by the stakeholders;
how many bargaining tools they are able to exert, and their
position in the hierarchy.
2. Level of interest—the likelihood of the stakeholder showing
an interest in the organisation.
Stakeholder mapping identifies stakeholder expectations and
helps in understanding political priorities. A stakeholder map can
be drawn up as shown below.
Level of Interest
Low High
Low
A B
Stakeholder
Power
C D
High
Segment D: Stakeholders in this segment are key players.

The strategy must be acceptable to them (e.g.
major customers).
Segment C: Stakeholders in this segment must be treated
with care and kept satisfied. They are capable
of moving into segment A if they do not like what
the company is doing (e.g. large institutional
shareholders).
Segment B: Stakeholders in this segment do not have great
ability to influence the strategy. Nevertheless,
their views might be important in influencing
more powerful stakeholders (e.g. green lobbying
groups) and they need to be kept informed.
Segment A: Minimal effort is required (e.g. individual
shareholders with low ownership levels).

5.3 Communicating Strategy and

Integrated Reporting
5.3.1 <IR> Framework
Integrated report—a concise communication about how an

organisation's strategy, governance, performance and prospects, in
the context of its external environment, lead to the creation of value
over the short, medium and long term.
 The International Integrated Reporting Council (IIRC) is a

global coalition of regulators, investors, companies, standard
setters, the accounting profession and non-government
organisations. It has a vision of a business environment in
which integrated thinking is ingrained in mainstream business *The IIRC launched
practice, in both public and private sectors. This would be a new <IR>
facilitated by integrated reporting.* Framework in
 The purpose of the <IR> Framework is to provide principles December 2013.
and content elements that help:
 to shape the information provided; and
 to explain why the inclusion of the information provided is
important.
 The guiding principle related to the communication of strategy
to stakeholders is Strategic Focus and Future Orientation.
 The content elements that address this guiding principle are:
 Strategy and Resource Allocation; and
 Outlook.
 To address strategic focus and future orientation, the <IR>
should provide insight into:
 the organisation's strategy; and
 how the strategy relates to the organisation's ability to
create value over time and affect the organisation's capitals.
5.3.2 Communicating Strategy and Resource Allocation*
 The <IR> should communicate to stakeholders the intended
direction of the organisation and how it plans to get there by *The <IR>
communicates the
identifying the following:
organisation's values
 the organisation's short-, medium- and long-term and vision in far
strategic objectives; more detail than can
 the strategies in place, or to be implemented, to achieve be conveyed by a
those strategic objectives; mission statement and
provides an insight
 the organisation's resource allocation plans to implement its
into progress made
strategy; and towards strategic
 how the organisation will measure achievements and goals.
target outcomes.

5.3.3 Communicating Outlook*

 The <IR> should communicate to stakeholders:
 the challenges and uncertainties likely to be encountered in
pursuing the organisation's strategy; and *The <IR> provides a
 the potential implications of these challenges and vehicle for illustrating
uncertainties for its business model and future performance. progress through
relevant measures of
 To address these challenges and uncertainties, the <IR> strategic performance.
should identify the following: Failure to meet
 the organisation's expectations about the external set targets can be
environment in which it operates and will operate commented on and
in the future; remedial actions, if
 how the external environment will affect the
appropriate, can be
outlined.
organisation; and
 how the organisation is equipped to respond to critical
challenges and uncertainties that are likely to arise.

6 Culture
6.1 Introduction
An organisation's culture is the collective behaviour of the
individuals which derives from their values, beliefs, habits, work
rules, symbols and visions. Clearly, some of these cultural "In organisations there
influences come from within the organisation (internal) and some are deep-set beliefs
from outside the organisation (external). Culture may predispose about the way work
an organisation towards or away from a particular course of action. should be organised,
the way authority
Organisational culture consists of the beliefs, attitudes, practices
should be exercised,
and customs to which people are exposed during their interaction people rewarded,
with an organisation. people controlled …
these are all aspects
6.2 Organisational Iceberg of the culture of an
organisation."
The iceberg metaphor (French and Bell) shown below can be used
—Charles Handy
to depict the contrasting aspects of organisational life:
FORMAL ORGANISATION
• Goals and strategy
• Structure, standards and procedures
• Products and services
• Management and financial resources
INFORMAL ORGANISATION
• Values, attitudes and beliefs
• Leadership style and behaviour
• Organisational culture and norms of behaviour
• Power, politics and conflicts
• Informal groupings
The visible part of the iceberg shows the formal aspects of

an organisation; the informal aspects of an organisation hide
underwater. The informal part can act to help or hinder an
organisational process of change.

6.3 The Cultural Web
The concept of
the cultural web
represents common
assumptions and
beliefs that decision-
makers in an
organisation hold.
In other words,
managers make
sense of a given
situation based on the
paradigm represented
by their collective
experience.
JS&W identify the following relationships between the cultural web

and strategy:
Aspects of the
Cultural Web Some Useful Questions
Stories and • What core beliefs do the stories reflect?

myths • How strongly held are these beliefs with power holders?
• How pervasive are the beliefs throughout the organisation?
• How do the beliefs relate to strengths and weaknesses?
• Who are the heroes?
• Do the heroes conform to, or challenge, the beliefs?
Rituals and • What behaviour is expected and rewarded (e.g. risk

symbols taking)?
• What language is used to describe the organisation and its
activities?
• What is the dominant attitude towards each stakeholder
group?
Leadership • What are the core beliefs of the leadership?

and • Which aspects are stressed in public (e.g. annual reports)?
management • How do they regard structures (e.g. centralists or
style devolutionists)?
• What type of strategy is favoured (e.g. defensive or
speculative)?
• What attributes are sought in new recruits?
Structure and • Do structures and systems encourage collaboration or

systems competition?
• Which aspects of strategy are most closely monitored and
controlled?
• What kind of training is provided?

6.4 Culture and Structure

Charles Handy, in his book Understanding Organisations, suggests
four classifications of culture which are differentiated by:
 the individual;
 the type of work the organisation does;
 the culture of the organisation; and
 the environment.
These differences are so important as to create four distinctive
cultures. Organisational effectiveness will depend on how the
culture fits the needs of the organisation.
1. Power culture (ZEUS) 3. Task culture (ATHENA)
There is one main source of power within Teams are established to achieve specific
the organisation and decision-making is tasks and values are objective-oriented.
centralised. Other decisions are made People describe their position in terms of
by reference to precedent. This culture their objectives or the results they are
is also characterised by few formal rules. achieving. The organisation is flexible
2. Role culture (APOLLO) and constantly changing.
There is a highly formalised structure 4. Person (or existential) culture

(DIONYSUS)
with clear job descriptions, well-defined
rules and many procedures. This This culture is quite rare and exists
structure determines the authority and to serve the individual's goals. It is
responsibility of individuals, and individual characterised by a highly participative
views or personalities are unimportant. It organisation. Formalised roles are
is also characterised by a high degree of deliberately avoided.
specialisation in job roles.
Entrepreneurial behaviour is regarded as
dysfunctional.
6.5 Culture and Strategy

Miles and Snow (1978) argue that managers create their
environment by making strategic decisions. This shapes the
organisation's optimum structure and processes, which in turn
affects future strategic choices.
 Defenders like low risks, secure niche markets and tried and
trusted solutions.
 Historical
continuity;
 Low risk/high security;
 Formal decision-making.
 Prospectors prefer doing the right things and focus on
effectiveness. They seek to expand and move into new areas.
 Results oriented;
 Decentralised;
 Plan-driven outcomes.
 Analysers try to balance risk and profit. They follow change
but do not initiate it.
 Use mature products to provide funds for innovative
products;
 Re-active to market/industry change.
 Re-actors simply exist without a viable strategy.

Summary
 Stakeholders are determined by people's expectations and the power they bring to bear
on an organisation's activities. Corporate governance determines the stakeholders and how
the organisation purposes its resources within a cultural context. Business ethics prioritises
these purposes.
 Social responsibility refers to the expectation that business firms will act in the public
interest. The firm's ethical stance describes how far beyond society's minimum expectations
the firm will extend its purposes.
 The Anglo-Saxon model for board governance describes a single-level board membership
with both executive and non-executive members (unitary board). The Rhine model features
a lower-tier executive board which deals with day-to-day management and an upper-tier
supervisory board which oversees the executive board (dual board).
 The board sets the organisation's goals and develops strategies to achieve the goals. It
selects the CEO to lead the organisation, communicates its plans externally and internally
and ensures stakeholder accountability by monitoring progress.
 CEO and chairman roles should be separated to avoid concentration of power. The chairman
leads the board. The CEO develops strategy, examines major investment, executes risk
management and recommends director candidates.
 The UK Combined Code requires boards to have remuneration, audit and nomination
committees. Firms typically will either put a risk committee in the audit function or have a
separate risk committee. The Sarbanes-Oxley Act (SOX) addresses board requirements in
the US.
 The organisation's culture determines how it treats stakeholder groups. Culture may
be described as the organisation's stories and myths, rituals and symbols, leadership
and management style, and structure and systems. These attributes tend to lead the
organisation into a culture that may be described as power-, role-, task- or person-oriented.
These types of cultures greatly affect the organisation's strategy development.

P3 Business Analysis
Session 5
Session 5 • Organisational Influences
Session 5 Quiz
Estimated time: 10 minutes
1. Define ethical stance. (2.1)
2. Distinguish between the ethical stances of short-term and long-term shareholder interests.
(2.1.1 and 2.1.2)
3. State THREE goals of corporate governance. (3.1)
4. Describe stakeholder characteristics in terms of the FOUR quadrants of a stakeholder

map. (5.2.2)
5. List THREE examples of the relationship between the cultural web and strategy according
to JS&W. (6.3)
Study Question Bank

Estimated time: 40 minutes
Priority Estimated Time Completed
Q8 Concrete Solutions 40 minutes
Additional
Q7 Bethesda Memorial
Hospital

EXAMPLE SOLUTION
Solution 1—Major Stakeholders
(a) Internal stakeholders: Employees, management
(b) Connected stakeholders: Shareholders, customers, suppliers, lenders
(c) External stakeholders: The government, the public, the tax office

NOTES

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Session 5

(continued on next page)

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BUSINESS ETHICS CORPORATE CULTURE

CORPORATE GOVERNANCE STAKEHOLDERS

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CORPORATE GOVERNANCE BUSINESS ETHICS

STAKEHOLDERS CULTURAL CONTEXT

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2 Business Ethics and Social Responsibilities

"A moral or ethical statement may assert that some particular

2.1 Ethical Stance

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2.1.1 Short-Term Shareholder Interest

2.1.2 Long-Term Shareholder Interest

2.1.3 Multiple Stakeholder Obligations

2.1.4 Shaper of Society

2.2 Corporate Social Responsibility

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2.2.1 Ethical Dilemma

2.2.2 Code of Ethics

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Discourage staff from using information acquired during a

2.3 Environmental Lobby

Illustration 1 The Body Shop

Business can act to protect and improve the welfare of society

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3.2 Ownership Structures

3.2.1 Anglo-Saxon Model (UK, US and Australia)

3.2.2 Rhine Model (Germany, The Netherlands and Switzerland)

3.3 Poor Corporate Governance

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4 Corporate Governance Standards

4.1.1 "Comply or Explain"

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E: Relations with Shareholders

4.1.2 Roles of the Chairman and CEO *This is a shift from

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 Separation of chairman and CEO roles can, in practice, be

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 NEDs have four main roles:

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4.1.4 Board Standing Committees

4.2 Sarbanes-Oxley Act

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