Meaning of Mergers & Acquisitions ions are defined as consolidation of companies. Differentiating the two terms, Mergers is the combination of two companies to form one, while Acquisitions is one company taken over by the other. Mergers and acquisitions is one of the major aspects of corporate finance world. The reasoning behind Mergers and acquisitions generally given is that two separate companies together create more value compared to being on an individual stand, With the objective of wealth maximization, companies keep evaluating different opportunities through the route of merger or acquisition. Forms of Business Combinations There is some disagreement on the precise meaning of various terms relating to the forms of business combinations namely merger, amalgamation, absorption, consolidation, acquisition, takeover etc., we have discussed the above terms in the following was keeping in mind the relevant legal framework in India Merger or Amalgamation A merger is a combination of two or more companies into one company. The term amalgamation means liquidation of two or more companies of same nature and forming a new company to take over the businesses of the liquidating companies is called amalgemation.spsorton or Acquisition when one existing company acquires the business of one or more existing companies is as absorption or acquisition, yw dation Aconsolidation is a combination of two or more companies into a new company. In this of merger, all the existing companies, which combine, go into liquidation and form new with different entity. company An essential feature of merger through absorption or consolidation is the combination of the companies. The acquiring company takes over the ownership of one or more other companies and combine their operations Holding Companies The other form of partial consolidation is a holding company. A holding company is one which acquires the majority of shares of other company is known as subsidiary company. The majority of directors of subsidiary company are the directors of holding company. Reasons for Mergers and Acquisitions 1. Financial synergy for lower cost of capital Synergy refers to the greater combined value of merged firms than the sum of the values of individual units. It is something like two plus two more than four. It results from benefits other than those related to economies of scale. Operating economies are one of the various synergy benefits of merger or consolidation. The other instances which may result into synergy benefits include, strong R& D facilities of the one firm merged with better organized production facilities of another unit, enhanced managerial capabilities, substantial financial resources of ‘one being combined with profitable investment opportunities of the other etc., 2 Improving company’s performance and accelerate growth The company may not grow rapidly through internal expansion. Merger or amalgamation cnable satisfactory and balanced growth ofa company. It can cross many stages of growth at one time through amalgamation. Growth through amalgamation or merger is also cheaper and less risky, A number of costs and risks of expansion and taking on new product lines are ‘oided by acquisition of a going concern. By acquiring other companies a desired level of "owth can be maintained by an enterprise. @ & Economies of Scale An amalgamated company will have more resources at its command than the individual : This will help in increasing the scale of operations and economies of la 1 "Stet ris eects il cot Sent tpties, distribution network, Research and Development facilities, etc., These economieg will be available in horizontal mergers. 4. Operating Economies A number of operating economies will be available with merger of two or more Companies, Duplicating facilities in accounting, purchasing, marketing ,etc.,will be climinated. Operating inefficiencies of small concern will be controlled by the strong management emerging from the amalgamation. The amalgamated companies will be in a better position to operate than the amalgamating companies individually. 5. Diversification for higher growth products or Markets Two or more companies operating in different lines can diversify their activities through amalgamation. Since different companies already dealing in their respective lines there will be less risk in diversification, When a company tries to enter new lines of activities then it ma face a number of problems in production, marketing etc., 6. Increase Value One of the main reasons of merger or amalgamation is the increase in value of merged company. The value of the merged company is greater than the sum of the independent values of the merged ‘company. 7. Tax Considerations When accumulated losses merges with a profit making company it is able to utalise tax shields. A company having losses will not be able set off losses against future profits, because it is not a profit earning unit. On the other hand if it merges with the concern earning profit than the accumulated losses of one unit will be set off against the future profits of the other unit. 8. Elimination of Competition The merger or amalgamation of two or more companies will eliminate competition among them. The companies will be able save the advertising expenses thus enabling them to reduce their prices. The customers will also benefit in the form cheap or goods being made available to them. 9. Better financial planning The merged companies will be able to plan their resources in a better way. The collective finances of merged companies will be more and their utilization may be better than in the separate concerns. : 3 10. Economics necessity Economic necessity may force the merger of some units. If there are two sick units, government may force their merger to improve their financial position and overall working. A sick unit may be required to merge with a healthy unit to ensure better utalization of resources, improve returns and better management.stages Involved In any Mergers and Acquisition Phase 1: Pre-acquisition review: This would include self assessment of the acquiring company with regards to the need for M&A, ascertain the valuation (undervalued is the key) and chalk out the growth plan through the target Phase 2: Search and screen targets: takeover candidates. This process is maini company. Phase 3: Investigate and valuation of the target: Once the appropriate company is shortlisted through primary screening, detailed analysis of the target company has to be done. This is also referred to as due diligence, Phase 4: Acquire the target through negotiations: Once the target company is selected, the next step is to start negotiations to come to consensus for a negotiated merger or a bear bug. a both the companies to agree mutually to the deal for the long term working of the M&A. Phase 5: Post merger integration: If all the above steps fall in place, there is a formal announcement of the agreement of merger by both the participating companies. Reasons for the failure of M&A Poor strategic fit: Wide difference in objectives and strategies of the company This would include searching for the possible apt ly to scan for a good strategic fit for the acquiring Poorly managed Integration: Integration is often poorly managed without planning and design. This leads to failure of implementation Incomplete due diligence: Inadequate due diligence can lead to failure of M&A as it is the crux of the entire strategy. Types of Mergers and Acquisitions Merger or amalgamation may take two forms: merger through absorption or merger through consolidation. Mergers can also be classified into three types from an economic Perspective depending on the business combinations, whether in the same industry or not, into horizontal (two firms are in the same industry), vertical (at different production stages or value chain) and conglomerate (unrelated industries). From a legal Perspective, there are different types of mergers like short form merger, statutory merger, subsidiary merger and merger of equals. 1, Horizontal Mergers When two or more companies dealing in same product or service join together, it is known orizontal merger. The idea behind this type of merger is to avoid competition between the saits, Besides avoiding competition, there are economies of scale, marketing economies, he ts. ition of duplication of facilities etc., elimina!2. Vertical Mergers A vertical merger takes place between a company and its supplier or a customer along its supply chain. The company aims to move up or down along its supply chain, thus consolidating its position in the industry. A vertical merger represents a merger of firms engaged at different stages of production and distribution of the same product or service. In this case two or more companies dealing in the same product but at different stages ma join to carry out the whole Process itself. For example a petroleum producing company may merge with a distribution company. 3. Conglomerate Mergers This type of transaction is usually done for diversification reasons and is between companies in unrelated industries, When two companies dealing in totally different activities join hands it will be a case of conglomerate merger. For example a software company may merge with a soft drink company in order to diversify their business. Mergers and Acquisitions — Forms of Integration 1. Statutory Statutory mergers usually occur when the acquirer is much larger than the target and acquires the target's assets and liabilities. After the deal, the target company ceases to exist as a separate entity. 2. Subsidiary In a subsidiary merger, the target becomes a subsidiary of the acquirer but continues to maintain its business. 3. Consolidation In a consolidation, both companies in the transaction cease to exist after the deal, and a completely new entity is formed. Mergers and Acquisitions can take place: a. by purchasing common shares b. by purchasing assets c. by exchange of shares for assets d. by exchanging shares for shares Forms of Acquisition There are two basic forms of mergers and acquisitions : 1. Stock purchase Ina stock purchase, the acquirer pays the target firm’s shareholders cash and/or shares in exchange for shares of the target company. Here, the target's shareholders receive compensation and not the target. There are certain aspects to be considered in a stock purchase:a. The acquirer absorbs all the assets and liabilities of the target — even those that are * not on the balance sheet, pb. Toreceivethe compensation from the r acquirer, the target’s shareholders must approve the transaction through a Majority v ote, which can be a long process. c. Shareholders bear the tax liability as they receive the compensation directly. , Asset purchase Inan asset purchase, the acquirer Purchases the target’s There are certain aspects to be considered in an asset pu a. Since the acquirer purchases onl liabilities. b. As the payment is made directly to the target, generally, no shareholder approval is Tequired unless the assets are significant (c.g., greater than 50% of the company). c, The compensation received is taxed at target. 3, Method of Payment s assets and pays the target directly. chase, such as: ly the assets, it will avoid assuming any of the target’s the corporate level as capital gains by the There are two methods of. Payment — stock and cash. However, in many instances, Merger and Acquisition transactions use a combination of the two, which is called a mixed offering. 4. Stock Ina stock offering, the acquirer issues new shares that are paid to the target’s shareholders. The number of shares received is based on an exchange ratio, which is finalized in advance due to stock price fluctuations. 5. Cash "Ina cash offer, the acquirer simply pays cash in return for the target’s shares. Mergers and Acquisitions - Valuation In an Merger and Acquisition transaction, the valuation process is conducted by the acquirer, as well as the target. The acquirer will want to purchase the target at the lowest price, while the target will want the highest price. Thus, valuation is an important part of mergers and acquisitions, as it guides the buyer and seller to reach the final transaction price. Below are three major valuation methods that are used to value the target: Discounted cash flow (DCF) method: The target’s value is calculated based on its future cash flows. Comparable company analysis: Relative valuation metrics for public companies are used to determine the value of the target.Comparable transaction analysis: Valuation metrics for past comparable transactions in the industry are used to determine the value of the target. Differences between Merger and Acquisition a) Two companies of similar size combine to form a new entity in a merger. A larger company acquires a smaller company and absorbs smaller company business in an acquisition. b) A merger occurs when two companies combine forces to create one joint company, ‘An acquisition takes place when one company takeovers the business of another company. c) Ina merger, the merged companies work under a new name. In an acquisition, the acquired company works under the parent company name. a) A merger leads to the issue of new shares to the shareholders of both companies. No new shares are issued to the acquired company shareholders in an acquisition. Management Buyout (MBO) The term management buyout refers to a financial transaction where someone from corporate management or the team, purchases the business from the owners. When a company is not being run successfully by its present owners it may be purchased by its management i.e., directors and or managers. The management may consists of one or more directors, employees or even associates from outside. In a management buyout the management acquires a substantial controlling interest from its existing owners. The existing owners do not want to continue the line of business and thus sell the same to the management which knows the strength and weakness of the firm. Such a buy-out usually offers a better bargain because of the inside information available to the management. Reasons for an MBO Management buyouts are risky ventures. That’s because they may or may not work. So why would a company’s management consider doing one? The following are some of the main reasons that corporate management may consider undertaking an MBO. a) Gaining control. Members of management may not agree with the direction of the company. By executing an MBO, they may feel as though they have more control of the business, its success, and its future. b) Financial gain. Members of the management team may not feel as though they aren’t getting the full financial benefit just by managing the company. By acquiring the company, they can reap the benefits. c) They have the expertise. Management may feel as though the owner(s) doesn’t have the knowledge or ability to lead the company. Corporate management may have the educational or work experience to help them guide the company to new heights and they may feel that the only way to do that is through an MBO.ween pert gperits and demerits of MBO ) Good investment opportunity for management and private equity/hedge funds i Private equity funds may pay a good price depending on the circumstances pemerits ) Transition for owners and employees may be tough i) Can result in a conflict of interest, peveraged buyout A leveraged buyout may be defined as the acquisition or buy-out of ownership financed jargely of debt, Ina management buyout, when the potential management does not have sufficient resources to pay the acquisition price, It may approach outside sources such as banks, financial institutions, venture funds and others to finance the buy-out. Thus, a leveraged buy-out occurs when the buyer of a company takes on a Significant amount of debt as part of the purchase. The buyer will use assets from the purchased company as collateral and plan to pay off the debt using future cash flow. Ina leveraged buyout, the buyer takes a controlling interest in the company. Leverage buyouts are conducted for three main reasons: a) To take a public company private b) To spin offa portion of an existing business by selling it ¢) To transfer private property, as is the case with a change in small business ownership. However, itis usually a requirement that the acquired company or entity, in each scenario, is profitable and growing. Valuation of firms The question of valuing the business to be acquired and consolidated poses a problem at the very outset. All parties try to convince about their viewpoint and want to tilt the values in their favour. The valuation issue should be settled impartially because it will affect the whole financial management after merger and consolidation. Some of the important methods for valuing Property of companies and determining the share exchange ratios are discussed as follows: i) Asset Approach ii) Market Value Approach iii) Barnings Approach Asset Approach Asset approach is the commonly used method of valuation, The assets may be taken at book values, reproduction values and liquidation values. In book value method, the values ofETHICS AND GOVERNANCE ISSUES Introduction to Ethical and Governance issues In today’s complex and rapidly evolving business environment, the importance of ethics in finance and management cannot be overstated. Ethical practices play a crucial role in promoting trust, ensuring long-term sustainability, and fostering a positive corporate culture. The ethics of finance refers to the values and principles that influence financial behaviour and decision- making. Finance managers must have the skills to handle large sums of other peoples’ money, but skill alone isn’t enough. The potential for financial managers to line their own pockets or ruin a client or company through bad judgment is immense. It’s essential to have a code of ethics in finance and to live up to those principles every day. Taking company supplies for personal use, accepting gifts or favors as a means to help gain financial advantage, and inaccurate reporting are all examples of ethical issues. Any opportunity where a personal gain could be made unfairly at the expense of others is considered an ethical issue. Ethical issues in Finance The ethical issues in finance include: 4. In accounting - window dressing, misleading financial analysis. b Related party transactions not at arm length ©. Insider trading, securities fraud leading to manipulation of the financial markets.d. Bribery, kickbacks, over billing of expenses and facilitation payments. e. Fake reimbursements. Fundamental Ethical Principles In Business 1. Honesty Honesty requires a commitment to telling the truth, regardless of the consequences, It encourages trust among colleagues and between a business and the public. Everyone in an organization benefits from honesty. Employees want to work for honest leaders, business owners want honest employees and clients want to do business with honest partners. This means sharing favorable and unfavorable news with the same candor and directness, leading to a teputation of reliability. 2. Integrity Integrity means adhering to a set of moral standards at all times, even if no one is aware of your choices. Others notice when you live and work with integrity, which leads to respect and confidence in your decisions. This applies to people who work with others and those who work alone, as strong integrity can influence your honesty and obedience to rules and regulations. 3. Loyalty Loyalty means remaining faithful to business partners, coworkers and clients to demonstrate your commitment. You can develop lasting partnerships and a firm foundation for future success when you prove your alliance and honor these agreements. This can extend to maintaining relationships with suppliers, sharing a promotion opportunity with coworkers in your department or honoring financial commitments to the community. 4. Creation of ethical practices Companies must do more than hope for their organization to operate ethically, Leaders might develop a defined code of ethics for their business practices and share. this with all employees. Consider using a consulting firm to help craft a thorough and specific set of ethical practices. Explaining exactly what a company expects of employees reduces stress and confusion, creating clear expectations and a shared mission for everyone. 5. Implementation of ethical practices Beyond writing a code of ethics, companies must include protocols to implement and enforce these policies. Consider regular training on the company’s practices incorporating scenarios that team members can discuss and work through. You can also create a recognition program and incentives for those with high ethical standards. 6. Compliance The most basic level of ethical business practices means complying with any laws related to your business. From international trading regulations, state tax codes and local buildingsna companies must ensure all practices adhere to these guidelines. Often, of ations can serve as the beginning framework for an organization’s code of ethic: ting the macro level, companies can use these industry regulations as an outline to s Mt specific policies and procedures, 1 Fairness Being fair in the workplace involves treating everyone equally, from assistants and interns tothe CEO. Fairness also means avoiding preferential treatment and encouraging everyone to share their thoughts and ideas. A fair workplace promotes inclusion and equity in-house as well as for clients and customers. Fairness in the workplace creates a unified environment where employees feel comfortable, which increases engagement. legal s. By devise Fairness might encompass the following areas: hiring new employees, promoting team work, delegating tasks and reviewing performance. 8 Respect Treating others with respect is a core principle in business ethics. Each team member deserves a voice and the ability to share opinions and ideas in a supportive environment. Workplaces that promote individual respect can experience enhanced collaboration and teamwork among employees. Showing respect includes:listening to clients and coworkers with an open mind, showing kindness and courtesy,remaining polite even during disagreements, refraining from personal attacks, monitoring your nonverbal communication including bod language and facial expressions. 9%. Trustworthiness Trustworthy workers keep their word to customers, colleagues and business partners. Honoring commitments proves. that others can count on you, making you a trusted employee and coworker, Trustworthiness also involves being dependable and meeting your obligations. You can demonstrate trustworthiness at work by arriving on time, meeting deadlines, showing 4 to scheduled meetings,establishing consistency in words and actions 10. Responsibility __ Being responsible in the workplace means taking ownership of your tasks, Responsibility Tocludes thinking about how your actions can affect those around you and making choices that 1tsider other people, Employers and employees depend on responsible workers to make the “St decisions without requiring constant supervision. Being responsible demonstrates maturity, “ability and discipline. n Accountability tog °°OUntabilty is important for employees to be held to a company’s ethical standards, If “team members support a business’s ethical code, they will expect others to behave thesame way. This creates a culture of high moral expectations that encourages all team members to act ethically in areas such as: managing time, using company resources,producing an appropriate quantity and quality of work. A business can also increase accountability by the public for its actions. With numerous ways to connect with companies, including email, and social media, consumers can easily communicate their support or opposition to a company’s actions. This accountability encourages businesses to act efficiently and ethically. 12. Compassion People who display compassion genuinely care about the well-being of others. In business, compassion can mean that organizations increase involvement in charitable causes and interpersonal interactions between colleagues. It involves taking the time to understand the thoughts and feelings of another person. People often want to work in an environment where they feel valued and cared for and do business with companies that display compassion towards consumers and the community. Consider these examples of compassion in the workplace:A restaurant holds a fundraiser for a local child in the hospital, A group of employees organizes a meal delivery schedule for a coworker who has lost a loved one, Company leaders schedule a day off for workers after a particularly busy season. 13. Social consclousness . The world becomes increasingly connected, social issues receive more and more attention. Consumers look for businesses that use their platform to bring awareness to and support change on social issues.socially conscious business practices include: follow fair trade practices,working with business partners and suppliers that source ethically grown products, paying fair wages.customers might prefer to do business with companies that take these extra steps to impact society positively. 14, Environmental consciousness The global climate crisis remains a focus for business owners, employees and clients. Ethical business practices include making choices to limit or reduce your negative impact on the environment, such as: Reducing carbon emissions from transportation and factories, Limiting trash and waste production, Encouraging energy-saving practices,Creating more sustainable, cost-saving strategies etc. 15. Transparency Creating transparency in the workplace is one way to promote ethical operations. Some companies may offer financial transparency to investors or employees to show how the company runs. Transparency can also refer to organizational structure, criteria for hiring and firing and addressing mistakes when they occur, For example, if a business must raise prices, it c4Pate the reasons directly and honestly to consumers. This openness is another way to ns among employees and customers. evel é al Issues In Financial Management Ic . Sore soking company supplies for personal use, accepting gifts or favors as a means to help _. gnancial advantage, and inaccurate reporting are all examples of ethical issues. Any gti gnity where a personal gain could be made unfairly at the expense of others is considered 101 0 ethical issue. ethics of Finance Manager Financial managers must have the skills to handle large sums of other peoples’ money, but skill alone isn’t enough. The potential for financial managers to line their own pockets or ruin a et or company through bad judgment is immense. It’s essential to have a code of ethics in erence and 10 live upto those principles every day. ‘The role of ethics in financial management is to balance, protect and preserve stakeholders’ interests. For example, says its code of ethics in finance covers obligations to management, {alow employees, business partners, the public and shareholders. Typical standards found ina cade of ethics in finance include: 1. Act with honesty and integrity. 2. Avoid conflicts of interest in professional relationships. Also, avoid the appearance of such conflicts. 3, Provide people with accurate, objective, understandable information. Disclose all relevant information, positive and negative, so that your listeners have an accurate picture. 4, Comply with all rules and regulations governing your position and your company. 5. Act with good faith and independent judgment. Don’t allow self-interest or other factors to sway your recommendations. 6. Never share confidential information or use it for personal gain. 7. Maintain an internal controls system to guard against unethical behavior. 8. Report anyone you see violating the code. Understanding Agency Theory ie Seency, in broad terms, is any relationship between two parties in which one, the ie ae the other, the principal, in day-to-day transactions. The principal or principals autor the agent to perform a service on their behalf. Principals delegate decision-making he re ‘0 agents.Because many decisions that affect the principal financially are made by tants » differences of opinion, and even differences in priorities and interests, can arise, This ig g “ory assumes that the interests of a principal and an agent are not always in alignment. Ometimes referred to as the principal-agent problem.By definition, an agent is using the resources of a principal. The principal has entrusteq money but has little or no day-to-day input. The agent is the decision-maker but is incurring little or no risk because any losses will be borne by the principal. Financial planners and portfolio managers are agents on behalf of their principals and are given responsibility for the principals’ assets. A lessee may be in charge of protecting ang safeguarding assets that do not belong to them. Even though the lessee is tasked with the job of taking care of the assets, the lessee has less interest in protecting the goods than the actual owners. What is Agency Theory? Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents. Areas of Dispute In Agency Theory Agency theory addresses disputes that arise primarily in two key areas: A difference in goals or a difference in risk aversion. For example, company executives, with an eye toward short-term profitability and elevated compensation, may desire to expand a business into new, high-risk markets. However, this could pose an unjustified risk to shareholders, who are most concerned with the long-term growth of earnings and share price appreciation. Another central issue often addressed by agency theory involves incompatible levels of risk tolerance between a principal and an agent. For example, shareholders in a bank may object that management has set the bar too low on loan approvals, thus taking on too great a risk of defaults. Reducing Agency Loss Various proponents of agency theory have proposed ways to resolve disputes between agents and principals. This is termed “reducing agency loss.” Agency loss is the amount that the principal contends was lost due to the agent acting contrary to the principal's interests. Chief among these strategies is the offering of incentives to corporate managers to maximize the profits of their principals. The stock options awarded to company executives have their origin in agency theory. These incentives seek a way to optimize the relationship between principals and agents. Other practices include tying executive compensation in part to shareholder returns. These are examples of how agency theory is used in corporate governance. These practices have led to concerns that management will endanger long-term company growth in order to boost short-term profits and their own pay. This can often be see in budget planning, where management reduces estimates in annual budgets so that they are guaranteed to meet performance goals. These concerns have led to yet another compensationbe «in which executive pay is partially deferred and to be determined according to long- sperm en g00l ; (er gpese solutions have their parallels in other agency relationships. Performance-based ensation is one example. Another is requiring that a bond is posted to guarantee delivery onhe desired result. And then there is the last resort, which is simply firing the agent. ol whet Disputes Does Agency Theory Address? Agency theory addresses disputes that arise primarily in two key areas: A difference in als ot a difference in risk aversion. Management may desire to expand a business into new arkets, focusing on the prospect of short-term profitability and elevated compensation. rare, this may not sit well with a more risk-averse group of shareholders, who are most concerned with long-term growth of earnings and share price appreciation. There could also be incompatible levels of risk tolerance between a principal and an agent. For example, shareholders in a bank may object that management has set the bar too low on Joan approvals, thus taking on too great a risk of defaults. What Is the Principal-Agent Problem? The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf. An agent may act in a way that is contrary to the best interests of the principal. The principal-agent problem is as varied as the possible roles of principal and agent. It can occur in any situation in which the ownership of an asset, or a principal, delegates direct control over that asset to another party, or agent. For example, a home buyer may suspect that a realtor is more interested in a commission than in the buyer’s concerns, What Are Effective Methods of Reducing Agency Loss? Agency loss is the amount that the principal contends was lost due to the agent acting Contrary to the principal’s interests. Chief among the strategies to resolve disputes between “gents and principals is the offering of incentives to corporate managers to maximize the profits of their Principals. The stock options awarded to company executives have their origin in agency theory and seek to optimize the relationship between principals and agents. Other practices ‘sclude tying executive compensation in part to shareholder returns. Transaction Cost Theory The transaction cost theory states that the goal of any organization is to minimize costs St with transactions, Therefore, the organization will either choose to manage these ‘ices externally or internally, depending on transaction costs. assTypes of Transaction Costs There are three main types of transaction costs. Let us explore each with the help of an example. Suppose a person is trying to buy a house. Here the transaction costs include: 1. Search Costs These are the costs of searching for information on sellers or availing services that can help a person find the best commodity. Some examples are communication and consulting fees, advertising expenses, travel expenses, etc. The individual trying to buy the house pays a rea} estate agent to help them find the perfect property. Here, they incur search costs to find the right commodity (a house). 2. Bargaining Costs These are the costs related to negotiation and conflicting interests regarding trading until the transacting parties agree. An individual has to spend time and labor looking at different houses and negotiating the price with the owners. Here they are incurring bargaining costs. 3. Enforcement Costs These are the expenses one incurs to verify and ensure that the parties involved in a contract comply with its terms. It relates to the time, money, and effort taken by a person to ensure that everyone meets the terms of the agreement. The person who is finally planning to purchase hires a lawyer has to draw up the paperwork for sale. In this case, they are paying for the enforcement costs. Corporate Governance Structure and Pollcies The creation of a formal or informal organizational system for decision-making and project management is known as corporate governance structure development. Organizational design and reporting structure, as well as the structure of committees and charters, are sub-components of structure. 1. Corporate governance guarantees that the critical and correct decisions are made by the proper individuals. 2. A good corporate structure can help guarantee that an organization runs smoothly and that duties are clearly defined. 3. Having defined procedures and processes in place can help ensure that the organization grows smoothly. Governance frameworks are the foundation of how a company or organization is run, and they should be developed to ensure that: + Boards are successful + Duties and responsibilities are transparent + _ Foster sustainable business practicestion and Delegation of Authority getting UP # Process that conveys clear boun decisions they can and cannot make on their o bios ‘and codes are all part of corporate governai ublicati ni nce between corporate needs and stakeholder engagement, Depending eases ri beynstances of organizations, the types of documents and the number of doemneria al vary crea 5 It also includes creating rules and procedures to achieve c ‘ ocument must also be adequate, up-to-date, and accurate. daries of power so tl wn is part corporate nce structures. These hat employees know Bovernance. Policies, tion of Policies and Procedures ‘ompany objectives. These Policies and guidelines are vital because they cover important concerns such as day-to- ay operational norms and principles. They guarantee that laws and regulations are followed, that the organization’s culture is reflected, that decision-making is guided, that risk appetite is managed, and that internal processes are streamlined. These rules and guidelines should be current and aligned with the organization’s goals and strategy, as well as. applicable laws and regulations. Furthermore, these should be easily accessible to ensure that everyone understands how things should be done and how they should act. When established policies and procedures are in place, management and staff will make better decisions. In a firm, policies and processes produce three positive outcomes: « They give credibility to decisions. + They help people to behave in a certain way by following a set of rules. * They help to reduce risk in the business. Employee Management and Accountability When it comes to making decisions, current policies and procedures allow all employees to feel more accountable and at ease. The leadership can focus on other essential management activities that can help them succeed by streamlining policies and processes. Social and Environmental Issues Air emissions and air quality. Energy use and conservation. Wastewater and water quality. Water use and conservation. Hazardous materials use. Wastes, Land contamination. Biodiversity and natural resources. eI AAP YDPurpose and contents of integrated report An integrated report is a concise communication about how an organization's strategy governance, performance and prospects, in the context of its external environment, lead to the creation, preservation or erosion of value over the short, medium and long term. Contents of Integrated report ‘The integrated reporting framework has outlined 8 content clements that are fundamentally linked to each other and are not mutually exclusive. This means that all these elements are required to be reported but not necessarily in the same order that they have been presented, 1. Organizational overview and external environment This is the very first question that all integrated reports should answer. This includes stating the company’s culture, ethics, values, and position in the value chain. Certain other quantitative key information is also to be disclosed such as the number of employees, revenue, and any significant changes that occurred in the company’s external environment. 2. Governance In this section, the company details its leadership structure, specific processes that it may have implemented, the relationships it holds with its stakeholders, and its governance policies, 3. Business model This part of the report explains the business model of the company in depth — including its inputs, activities, outputs, and outcomes. Its inputs are the material resources that the company utilizes to create value in the short, medium, and long term. The business activities of the organization include all the initiatives that the company undertakes to differentiate itself, generate revenue, innovate and adapt. The output is the products and services produced by the company and also includes by-products and waste. The company’s outcome can be either negative or positive and is the external consequence that the company has on the 6 defined capitals of integrated reporting. 4. Risks and opportunities The risks and the opportunities that affect the company can be mix of both. Although identifying these is a crucial exercise for assessing the company, there is an element of uncertainty involved in this process as it is difficult to predict the magnitude of the given risk or opportunity. Further, companies can also state the risk mit igation measures they have employed and the value creation plan they have in place to utilize the available opportunities. 5. Strategy and resource allocation This content element entails the company’s short, medium, and long-term strategie: strategies, resource allocation plan, and the method it will use to measure its overall performance. It can also include details about how al its activities are linked together and point out factors that differentiate it from its competitors.performance ‘The companies should demonstrate their progress with the use of quantitative and qualitative _emation. They can also highlight their key performance indicators that combine their financial iforM™es with non-financial measures to illustrate the Connectivity between the 6 capitals, am if any change in regulation has had a significant impact on the company, they can report it here. 1 Outlook In this section, the company lays down anticipated changes in the company’s external environment and the manner in which the company plans to address the change. It also lays down the reasons for predicting the said changes while ensuring a realistic evaluation of its competitive landscape, market positioning, and risks, 8. Basis of presentation The report also includes a summary of the company’s materiality determination process, a description of its reporting boundary, and the frameworks and methods used to quantify material information. Preparing an integrated annual report requires a specialized team that can effectively convey your message and create the desired impact.