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Strategic Management

Written by Nina F Collins, June 2011.

Introduction 

Since the publication of the Strategic Management learning text in June 2010  there has been a number of developments in corporate governance and management thinking in the UK. I discuss a few of the key developments.

Topic 1 Governance and organisational strategy

Corporate governance reviews, codes and guidance - Table 1.1 of the learning text

In the last 18 months there have been a number reviews undertaken, and codes and guidance published that relate to corporate governance. Some key ones are listed in Table 1.

Table 1 Developments in UK corporate governance 2009 to 2011

As a result of the financial crisis that came to a head between 2008 and 2009, a number of reviews were undertaken in the UK, most notably Sir David Walker’s review of corporate governance arrangements of the banking and financial services sector. The results of Walker’s review were published in document entitled A review of corporate governance in UK banks and other financial industry entities. The document addresses the composition and functioning of the board, the role of institutional investors in governance, risk governance, and senior executive remuneration. Whilst Walker’s review focused on banking and financial institutions, many of his recommendations are aimed at firms more generally, and he saw the Combined Code on Corporate Governance as the appropriate place to embed his recommendation. As a result of Walker’s review, the Financial Reporting Council brought forward its review of the Combined Code. And following a consultation, the Code was updated and published in May 2010 under a new name, the UK Corporate Governance Code. The principles are clustered into five sections as set out in Table 2.

The key changes (apart from the name) are:

Strategic governance and board leadership:

• The financial crisis raised concerns that directors prioritised short-term success at the expense of organisational sustainability and the long-term health of the organisation. Thus, the UK Corporate Governance Code emphasises the board’s responsibility for the ‘long-term success of the company’ (Principle A.1, emphasis added). Further, a new provision (C.1.2) within ‘Accountability’ requires directors to explain in the annual report the basis on which the company ‘generates or preserves value over the longer term (the business model) and the strategy for delivering the objectives of the company’.
• Guidance relating to the chairman has been brought together under a new main principle stating the chairman's responsibility for leading the board (Principle A.3). This has been done to address concerns that the 2008 Combined Code did not adequately stress the important role of the chairman in leading the board and setting the appropriate ‘tone at the top’. This tone includes promoting ‘a culture of openness and debate’.
• To emphasise the importance of independent scrutiny and challenge by non-executive directors, the Code has set out the role of non-executive directors under a new main principle stating their responsibility in providing ‘constructive challenge’ of executive management (Principle A.4).
• The Code introduces a new main principle that all directors must be able to allocate sufficient time to perform their responsibilities effectively (B.3). This change is intended to address concerns that non-executive directors are not giving the requisite amount of time required to the job. However, the Code stops short of following Walker’s recommendation to provide indicative time commitments.

Performance management and evaluation:

• A new provision (B.6.2) has been included stating that the evaluation of the board of FTSE 350 companies should be externally facilitated at least every three years.
• Walker recommended that the chair of the board should be subject to annual re-election. However, this requirement has not been embedded in the UK Corporate Governance Code. Instead the Code recommends that all directors of FTSE 350 companies should be subject to annual election by shareholders, and that directors more widely should be subject to re-election at intervals of no more than three years (Provision B.7.1). The introduction of annual elections for FTSE 350 directors is aimed at increasing accountability and stakeholder engagement. However, it has been criticised in some quarters for encouraging short-termism (see, for example, S. Baker, 2010). In addition, there are concerns that there is a lack of firms to provide high quality board evaluation services.
• The banking crisis of 2008 to 2009 raised concerns that performance-related payment models, which included annual bonuses for executives, encouraged high-risk strategies and short-termism that jeopardised the long-term health of organisations. The UK Corporate Governance Code has attempted to address these concerns by stipulating that remuneration packages should be designed to promote the long-term success of the company (Principle D.1). In addition, the Code includes reference to the need for a link between remuneration and the company's risk policies and systems (schedule A of the Code).

Effectiveness:

Engagement and communication with stakeholders:

• The new Code has extended the principle pertaining to ‘Dialogue with Shareholders’ to making the chairman responsible for ensuring that all directors are made aware of shareholders’ concerns (supporting principle to E.1).
• The 2008 Combined Code included a principle relating to engagement with institutional shareholders. This was not  included in the UK Corporate Governance Code as such guidance was to be published in the UK Stewardship Code later in July 2010.

Topic 2 Ethics and values

Ethical leadership - section 2.2.2 of the learning text

Following the publication of the UK Corporate Governance Code in 2010, the Financial Reporting Council released a document entitled Guidance on Board Effectiveness. The document stresses the  importance of ethical leadership, clearly linking it with board effectiveness.

Embedding ethical awareness and reasoning skills - section 2.3 of the learning text

In June 2011, the Institute of Business Ethics published a guide entitled Ethics in Decision-making. The guide provides a framework for embedding ethical awareness and reasoning skills based on four key elements:

1. Organisational context and culture
2. Rigorous reasoning at the point of decision-making
3. Ability to apply decisions
4. Reflection 

The authors argue that ethics can be considered a skills issue as much as a knowledge one, and tools and processes can be put in place to support people apply 'ethical thinking' in decision-making. The Institute of Business Ethics believes that its so-called EiDM framework can be embedded at all levels of an organisation and the guide provides specific guidance for applying the framework at operational, management and more senior levels.

Other resources: FRC Guidance | Ethics resources

References