Introduction
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. It also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. Good corporate governance (GCG) is a mandatory requirement in today's complex and dynamic business environment to ensure equity and transparency to every stakeholder and enhance the required values to different stakeholder groups. GCG is, however, not only relevant to sizable or listed companies but covers all sizes of businesses. Corporations that demonstrate a commitment to high standards of corporate governance will benefit from the availability and lower cost of capital; improved competitiveness and financial performance; and truly sustainable long-term growth. The proliferation of scandals and crises arising from poor corporate governance strengthen strong demand of GCG to ensure long-term sustainability of corporations. So, GCG should be cultivated and practiced regularly within the current structure of the business.
Implications for Corporate Governance Regulation
Corporate governance has been seen at the forefront of establishing standards of corporate ethics aimed at reducing unscrupulous corporate practices while preserving a fair business environment. Equally important, GCG instills the core values of transparency, fairness, accountability, and responsibility. Corporations may devise their own codes on corporate governance practices on the terms as they may consider appropriate. Proper governance programs must educate corporate directors in fundamental corporate governance principles; educate shareholders on their rights and responsibilities; and raise public awareness of the need for effective corporate governance practices. Moreover, GCG practices reinforce investors' confidence by building transparency and trust through greater disclosure and better accountability and responsibility thereby bringing in stability and growth of corporation. Thus, investors are demanding better financial reporting and greater transparency and also demanding more GCG practices. GCG is a way towards healthy and sustainable business growth, adapting to good practices in governance can ensure responsible and accountable leadership and management are in place to further drive the business forward on quality and reputation.
Hong Kong Regulatory Environment
Fundamental corporate governance in Hong Kong is currently governed by laws and regulations - listed companies regulated by Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing Ltd (HKEx) and core legal rules contained in the Companies Ordinance. The regulatory framework of corporate governance includes both statutory and non-statutory requirements:
- Statutory provisions - the Companies Ordinance, Securities Ordinance (Insider Dealing), Future Ordinance (Disclosure of Interest) and Takeover Codes; and
- Non-statutory regulations - those provisions specified under the Listing Rules covering the composition of the board, the number of independent nonexecutive directors, disclosures of connected transactions, and disclosures of the different components of directors' remuneration.
NB: Rule 3.25 of Main Board Listing Rules and Rule 5.34 of Growth Enterprise Market Listing Rules in which a corporate governance report must be included in the annual and interim financial report by the boards. Companies are required to apply the principles and adhere to the code provisions in the Code on Corporate Governance Practices (the "CG Code") set out in Appendix 14 to the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange as amended from time to time (the "Listing Rules").
Developing Corporate Governance Framework
In any establishment, GCG starts with the owners and percolates down through the board and different management levels to the employees. No matter what the ownership is, there is a need for transparency and accountability in its relationship with other stakeholders. In this context, all rules that define the governance responsibilities, incentives and sanctions facing the board, management and staff must be well articulated. Board members must be held accountable and liable for their decisions and actions that have impact on the interests of other stakeholders.
The guiding principles of corporate governance are threefold:
- Transparency;
- Accountability; and
- Corporate control.
Figure 1: Corporate Governance Framework
Corporate governance concerns the control of a corporation, vested in the board of directors who play a crucial coordinating role to balance the interests of various stakeholders (both internal and external) and achieve sustainable profits. Therefore, corporate governance may consist of relational as well as structural system of management control, improving the governance process.
In general, corporate governance highlights the important principles of oversight and control over the executive management's performance and strategic directions; and their accountability to the shareholders. A code of ethics, which clarifies and stipulates adherence to some of more abstract ideals of trust and accountability, is essential for GCG. Effective codes of ethics might spell out who must adhere to the rules, division of power between management and its board of directors, etc.
Transparency is one of the key steps to corporate governance. A key element of 'good' governance is "transparency" (projected through a code of governance), which incorporates a system of checks and balances among the board of directors, senior level management, auditors and other stakeholders. All in all, disclosure and transparency enhance the control and behavior that support effective accountability for performance outcomes. An entity is more likely to achieve better result when corporate governance practices of disclosure and transparency are given prominence within the organization. Conversely, firms with poor corporate governance strategies are more likely to underperform in the long term.
Mechanisms and Controls
Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and managers' opportunistic behavior. Corporate governance plays a significant role for many corporations as it spells out governance rules and guidelines which could assist all parties to know how to manage the corporation. GCG practices should assist and encourage their governing boards, councils and management to establish and maintain a clear focus on performance, transparency and accountability. Moreover, GCG leads to improved internal control systems which result in more accountability. As a result, internal conflicts would be better managed and more attention given to achieve the corporation's growth objectives and support profitability.
Rigorous corporate governance should include proper supervision over the management. Management control is that critical aspect for maximizing corporation effectiveness, as it helps obtain results in line with expectations of the shareholders. The highest management level in the corporation is the board, where the directors have to "run the show". But in reality it is often the management which runs the show. A fair control of these management members by the board (see Table 1 below) is therefore one of the essential aspects of corporate governance.
| Table 1: Internal Governance Controls Mechanisms Ownership Concentration
|
Important focus should be given on balancing power of the board and the management. Board independence from management continues to be affected by directors who have limited accountability to shareholders, and are ill-equipped in exercising management oversight. It is important to have directors in the board who have the necessary expertise and experience to contribute effectively to management oversight.
A board should not only run the daily affairs of the company, but it must have a good knowledge of the sector of the company's strategic position and competitive edge in order to appraise its operations and decisions. A competent, informed board supports the chief executive in defining the strategic direction. Thus, corporate governance tends to strive for a decent, fair and reliable direction: "to do the right (good) things and to do things right (well) and achieves quality of governance. All in all, the aim of corporate governance is to give management sufficient latitude to use its expertise whilst ensuring it recognizes its responsibility to the owners.
Guiding Principles of Good Corporate Governance
Corporate governance has attracted considerable attention over the past decades, leading to recommended codes of practice, conceptual models, and empirical studies. A growing number of empirical studies have demonstrated that GCG contributes to better investor protection, lower costs of capital, reduced earnings manipulations, increased company market value, improved stock returns, and even economic growth. In essence, GCG practice is about achieving the stakeholders' goal and delivering success in an ethical way. Thus, it must entail a holistic application of best management practice.
It is important to take a wide perspective when considering GCG because we cannot emphasize that common management practices, as described below, will ensure GCG. On the other hand, the proper implementation of GCG does not necessarily guarantee success of the corporation. Moreover, a bad corporate governance practice is certainly a common syndrome causing failure in many corporations.
Composition of the Board
Corporate power is vested in the hands of the board of directors and senior management who are appointed by the shareholders to act in a way so as to maximize shareholders' value. The board should be made up of directors who have the necessary knowledge, judgment and experience to perform their tasks effectively. Moreover, the composition of the board constitutes a key issue of corporate governance in many enterprises for the purpose of accountability. In Hong Kong, the Chairman of the board is commonly the Chief Executive Officer (CEO) of the company, which means that the incumbent becomes accountable to himself/herself. This will create the potential issue of abuse of power by the Chairman and CEO and also issues in effective corporate governance since accountability forms a critical part of regulations for corporations. Thus, the positions of the Chairman and the CEO should be held by different persons. An effective board should consist of executive directors and a number of independent non-executive directors who contribute special expertise to the company. The independent board majority is a key mechanism to fulfill its objective oversight role and holds management accountable to shareholders.
Cultivation of Corporate Culture
As corporations grow in size and increase in complexity, implementing GCG becomes increasingly difficult and important. In managing change for growth, corporations need to cultivate a new corporate culture in support of reforms and innovations. The core values of transparency and accountability would be embedded in their corporate culture should corporate governance be applied. This culture of transparency and accountability would also indicate professional management and GCG is a key foundation for successful and well organized corporations. However, many entrepreneurs still manage their businesses with traditional modes of operation and are not ready for change. Some entrepreneurs lack a good understanding of the concept of corporate governance and therefore fail to apply modern management skills and introduce timely reforms to their mode of governance. As the new governance culture is likely to be incompatible with the existing culture, it is impossible for changes to take place overnight. Nor can it expect the changes to occur naturally. Instead, the changes must be top down, complemented with appropriate training and support with a view to building a new corporate culture to reform the corporate governance in order to meet the challenges of the corporation.
Integrity of Financial Reporting
Accounting can play a vital role for ensuring and continuing with GCG. As accounting is an important discipline and the practice of accounting is harmonized and aligned with the varied needs of stakeholders, it can be used as a tool for ensuring and enhancing GCG within a corporation. Management is responsible for the integrity of the corporation's financial reporting system. It is management's responsibility to put in place and supervise the financial reporting system that allows the corporation to produce financial statements that fairly present the corporation's financial position and thus allow investors to understand the business and financial risk of the corporation. Since corporate governance is a significant component of equity risk, it must be measured and taken into consideration by the investors. A corporation should have effective internal control systems ensuing that the corporation's books and records are accurate, that its assets are safeguarded and that it complies with applicable laws.
Conclusion
In Hong Kong, the issue of GCG is an imperative for ensuing successful corporate performance. The corporate governance principles of the corporation emphasize an effective board, prudent internal control, transparency and accountability to its shareholders. A high standard of GCG practices and procedures are essential for effective management to enhancing shareholders' value. Building GCG is a shared responsibility among all stakeholders, each of whom may exert pressure to move forward a corporation. It is reasonable to expect that managers of the modern corporations must satisfy a larger range of stakeholders than shareholders alone and accept the need for strong corporate governance. It is strongly believed that corporations that exercise GCG will deliver good returns for their shareholders over the long term. The use of corporate governance as a management technique is crucial to its long term sustainability.
About the Author
Dr Fung is currently Senior Lecturer of Caritas Francis Hsu College teaching Accounting and Corporate Management courses. Dr Fung has over 20 years' working experience in corporate banking and has expertise in corporate governance, internal control and risk management.
Email: wmfung2010@gmail.com
Managing Your Boss
In dealing with a boss effectively, there are several levels of accomplishments as shown below.
-
Level 1: Just do what the boss says and likes
In this level, there is little communication or relationship, excepting just doing the job assigned. At the same time, one must avoid any behavior disliked by the boss. One must complete the job as requested. It is important to present your job in such a way your boss likes it. You should like what he likes, and hate what he hates. At this level and nay level, you need to cover up your boss's mistakes. If your boss made a mistake, he might transfer his anger to you or any other ones. Also failing is a loss to everybody regardless who is the culprit.
-
Level 2: Sharing interests and casual cares
It is important to accept your boss as who he is. Do not fight against him. Just work with him or work around him. Many famous and successful people in the world do this when they were at a junior position. It is a learning everyone has to do it. Once you are the boss, you can setup your own rules. If you are not the boss, you have to obey your boss.
At this level, there is some relationship between the boss and you. Your boss may want to share his ideas and interests with you. You achieve this level mainly by doing most things what the boss likes and avoiding anything he does not like. People need to talk and communicate with each other. You may probe your boss by talking things which he is interested, such as his favorite sports, movies, cosmetics etc. Find a common interest areas and talk about this when your boss and you have a spare time together.
The next level is casual cares. Care about your boss's well beings, his health, his job, and his family members. Support each other.
-
Level 3: Caring for each other; supporting each other
Once level 2 is achieved, there is a tendency for each to care more about each other. This means caring about each other and helping each other to achieve goals and overcoming problems. This is not difficult, every person wants to find a right person in caring and supporting with each other.
-
Level 4: Propose Ideas
Once the boss has accepted you because you care with each other, you can propose ideas to your boss. At this level, the boss would know your proposed ideas are for his own goods. Therefore he shall listen to it, rather than putting doubts on it.
When you propose ideas to your boss, you have to put yourself into his shoes. You should propose alternatives which would help him achieve his goals, values, and in his culture. Of course, the idea has to be powerful and working.
-
Level 5: Intimacy Development
After you have proposed good ideas with success, there would be an intimacy development between your boss and yourself. Your boss may tell you his secrets and hidden agendas. He may even talk with you his fears. You should help him like a brother or sister, You should keep his secrets and protect his interests.
-
Level 6: Change your boss's mind and behavior
This is the highest level of accomplishment if you can change your boss's mind and behavior. Usually, do not try this because there could be conflicts and misunderstanding. Most often you do not change your boss's mind or behaviors unless there your boss does the wrong way.
Managing Colleagues
-
Level 1: Do your own job and protect yourself
The first thing to do is to be a productive member amongst your colleagues. Do not rub against others. Do not do things people do not like. Do more things which people like. Be likable.
At this level, you may not interact with each other much. However, you need to protect yourself well. You protect yourself by carefully releasing limited information about yourself. The less they know about you the less they can harm you, or the less they dare to harm you. You may win a few friends, so that you are not alone. If there are someone who wants to harm you, your friends may stand by you or warn you ahead of the time.
Try not to be speared head, because some colleagues may treat as a rival and kill you early literally. Play low profile.
The most important thing is to win the support of your boss, which is mainly doing an excellent job of your post and do what the boss likes you to do.
-
Level 2: Sharing and Caring
This is a higher level, such that are some interactions amongst your colleagues. You may share ideas, information, skills, resources and networks. You may care about each other. Your colleagues like you because you are valuable and helpful. You may win supports and then earn powers from them. However, do not spear head yourself unless you are ready. You are at a balance of being a co-worker and also a competitor to your colleagues.
-
Level 3: Teamwork
At the level, there is a lot of interactions amongst members. Your organization may require a strong team spirit and teamwork to achieve high performance. You should help each other rather than competing on each other. Don't spear head yourself as a leader. A leader is someone who helps each colleague achieves his goal quietly. Let the leadership comes naturally. If you have the leader quality, then become a leader. If you do not, then, do not fight for that, unless you are pushed against a corner to fight back.
-
Level 4: Consultant
Be knowledgeable and helpful so that your colleagues come to you for your advice and helps.
-
Level 5: Resourceful
If you are resourceful, you will be highly valued in your team. Resources could be access of information, resources, authorities, supports, knowledge, skills, ideas, solutions, networks etc.
-
Level 6: Leader
You are a leader due to assignment or by natural acceptance.
If you are an assigned leader, then, use your authority properly and exploit the resources and powers of your followers.
If you are a natural leader, such that you do not hold a position, but your colleagues listen to you. What you need to do is to support your assigned leader to help succeed. Beware of power of information, authority, knowledge, resource, collective supports, and proximity to power.
The path to become a leader
The best learning is from the Pearl TV Series of "Apprentice", which Donald Trump hosted the show. Usually there were about 10 people in each show, which were split into two groups. The voted team leader of each team has to plan and motivate his team members to win over the other team, yet his team members might be reluctant because they might give the credits to the team leader by doing so, while they want to be a team leader themselves. The game is to win over the team members in such a dilemma. It is a great learning on how to become a leader within a company in a realistic world. We should note that the President Hu of PRC said that he did not think about becoming the president. It was other people who wanted him to be the president.
Author: Dr Mike Fung, Email: dr.mikefung@yahoo.com.hk Mobile: 536-28-567
About the Author
Dr Fung is a Professional Engineer of Canada with more than 20 years experiences in project management of application software development. In addition, he had supervised numerous industrial projects as well. He is an international WHO's WHO of Professional of USA (1988).
Email: dr.mikefung@yahoo.com.hk
Introduction
In today's competitive market, many companies try hard to stay afloat, yet some of them ignore the active practice of cost reduction until they are enmeshed into financial difficulties. The reason for practicing an active cost reduction process is quite simple. A company may work extremely hard to get an extra dollar of revenue which may lead to an increase of profit, say 10%. Yet a one dollar cost reduction, at a 10% profit margin is equivalent to 10 dollars of extra revenue. In addition, gaining an extra dollar of revenue may be uncertain, whilst a one dollar cost reduction is entirely within the company's control. An active cost reduction practice has the merits of increasing profits, reducing costs, and improving competitiveness. In addition, it is entirely within the company's control. We shall discuss one of the techniques on continual cost reduction in the following paragraphs.
Background
Value analysis was first introduced by L.D. Miles at General Electric in 1945. His successful results at General Electric attracted the US Navy Bureau of Ships which invited Miles to train their military personnel on the value process in 1947. Miles modified his value analysis process in training the engineering department of the US Navy. The technique was renamed value engineering and subsequently applied to other US military projects and aero-space programs which required successive functional improvements and high degree of reliability. The technique was also used by the British defense departments and was introduced into Japan in 1955. The Japanese companies took great interest in it and used or modified the technique to complement with its production and quality management.
Value Concept
The value concept stresses upon the key success factors of developing and applying an attitude of "challenge" and a constructively critical evaluation on all cost elements of the products including its components and parts.
There are three objectives in the value concept:
- To reduce the prime costs
- To promote cost consciousness
- To improve departmental co-operation in cost savings
Since its introduction in 1945, the value concept has evolved into value analysis and value engineering. The process of value analysis is a critical evaluation on the on the value and cost of the product, aiming at improving the value and reducing the costs of the product. Distinctively, the objective of value engineering is to ensure that unnecessary costs are avoided at the design stage, and maximized value can be achieved while the project is still on the drawing board. The same process can be applied to the existing products. By challenging accepted principles, methods, production process, materials, components, packaging, etc. the costs of the next version of the existing products can be minimized.
Value Committee
On top management commitment, the successful application of the value concept requires the collaboration of many departments. This prerequisite leads to the formation of a "Value Committee" which is a group of experienced managers selected from individual departments which have direct or indirect impact on the various cost elements of producing the products and services. Although the largest cost elements of any product originate in the design department, many other departments can influence the overall cost. Bringing staff of different departments together to focus on a problem (product cost) enable them to view it from different angles such that ideas could be fertilized.
The value committee is headed by a chairperson, usually a member of the top management. The jobs of the chairperson is to encourage committee members' active participation in raising problems, challenges, and objective criticism; to facilitate the committee during each meeting; to monitor its progress against various milestones set; and to conclude the results and solutions to be recommended to the top management for approval. Ideally, the chairperson should cultivate collective performance to the value committee members so that mutual accountability can be ingrained.
A simple structure and process of a "Value Committee" is depicted as follows:
In order to better foster ideas, the value committee may consist of selected representatives from various departments such as design, research and development, production, sales and marketing, maintenance, as well as representatives from accounting and finance, human resources. With representatives selected from staff function departments such as accounting, human resources, etc. it may be beneficial to invite these representatives to attend some in-house working sessions conducted by the operations management on the company's products, production processes, and even specific components. These in-house working sessions are intended to cultivate the staff function representatives to be "on the same page" with the operations members. In addition, these working sessions can be viewed as some warm-up occasions or "get-to-know-each-other' gatherings for the value committee members. These sessions would enhance the development of team spirit among the committee members.
To foster interaction, if the number of members exceeds 10 persons, it is beneficial to divide the value committee into groups of four to five persons, assigning tasks and milestones for each group, and with group members changed at each stage of product development.
Value Analysis
There are two objectives of value analysis: (1) to improve its value, and (2) to reduce its cost. The principle of value analysis asserts that at a given value and cost, quality (function) must be improved at each successive stage of development or in the next version of product produced. If quality (function) is satisfied and maintained, then cost must be reduced to enhance its value.
In essence, the value analysis stipulates: Value = Function/Cost
The term "function" as depicted in the above formula is a relative term that refers to style, performance, workmanship, features, reliability, and usefulness of the product as perceived by the customers.
The idea behind value analysis is that each product has certain functions to perform to meet the needs of its customers. Any products produced must meet its basic function. This basic function, if eliminated from the product, would render it useless in terms of its intended objective. The product also has its secondary functions which are added to permit the accomplishment of its basic function and to enhance its perceived value and acceptance to its customers. The amount of its value is measured by the ratio of these functions (or quality required) to their costs. In this connection, it is necessary that the functions of each product, its parts and components are examined and clarified and its associated costs are quantified. Attention will then be focused on the associate costs of materials, parts and components used. Similar to the process undertaken in value engineering, the value committee would review the product until the next version of the product emerged.
We would use a pencil as an example to illustrate how value analysis works:
| Description | Function | B | S |
| Pencil | To write and to make marks | x | |
| Eraser | Remove marks | x | |
| Body | Support lead, support grip, and transmit force | x | |
| Paint | Improve appearance and protect the body | x | |
| Lead | To write and make marks | x | |
| B = Basic function | S = Secondary function | ||
The basic function of a pencil is to write and make marks. The material "lead" performs the basic function, consequently, it can be substituted, but not eliminated; otherwise, it would render the pencil useless. All other functions: eraser, body, and paint are secondary. These functions can be combined, consolidated, substituted, or even eliminated. For example, paint can be eliminated without severely damaging the basic function of the pencil.
The competitors' products are now compared and evaluated with the company's product- pencil. The value committee would then determine what functions are to be improved and/or the associated cost of each function is to be reduced. The design and engineering departments would have to come up with a new version of the product which should give better value or at a reduced price than its competing products. If needed, the new product would go through the value engineering process before product launching. The value engineering process will be discussed in "Cutting Costs through Value Concept- Part 2".About the author
A seasoned manager, having employment with several medium to large corporations, multinational and listed companies and with several years of management and financial experience in China; specialized in cost control, resources management, and project assessment; and with in-depth knowledge and practice in the PRC tax and labour law and regulations.
Email: lokleo@gmail.com
Reference
Peter Fatharly, The Value Concept, Management Techniques, Pp. 145-155, Coles Publishing Co. Ltd. 1980
Roger G. Schroeder, Susan Meyer Goldstein, M. Johnny Rungtusanatham, Operations Management: Contemporary Concepts and Cases, Fifth Edition, McGraw-Hall Companies, Inc. 2011
Steven M. Bragg, Cost Reduction Analysis, John Wiley & Sons Inc. 2010