Business Management: MBA Essentials

1. Corporate Policy and Management

1.1 Corporate Policy

1.1.1 Economic Principles and Corporate Objectives

1.1.2 Corporate Policy and Management

1.1.3 Corporate Governance Process and Management

1.1.4 Current and future Megatrends

1.2 Instruments of Corporate Policy

1.2.1 Corporate Governance and Corporate Guidelines

1.2.2 Stakeholder Survey

1.2.3 Corporate Identity and Design

1.2.4 Annual Report, General Meeting, Investor Relations

1.1 Corporate Policy

1.1.1 Economic Principles and Corporate Objectives

The Principle of Profitability (so-called economic principle) requires the best possible effort (e.g. costs) in relation to the benefit (e.g. yield). Traditionally it is differentiated:

Maximum principle: achieve the highest possible return with a given effort (e.g. for private companies), or

Minimum principle: achieve a certain return with the least possible effort (e.g. public sector, NGOs).

The Optimum principle: social criticism today leads to the combination of these both approaches as a possibly favourable relation between Input (e.g. costs, resources) and Output (e.g. earnings, goods, services, sustainability).

Example Criticising the Principle of Profitability

Even the most successful entrepreneurs repeatedly question the sole maximisation of profits.

Henry Ford, already over hundred years ago, realized that doing business on the basis of making money is a highly uncertain thing (...) the job of business is to produce for consumption, but not for profit or speculation. Production for consumption requires that the quality of the production article is good and that the price is low – that the article in question serves the people and not only the producer.¹

In our times almost 200 of the leading US-entrepreneurs (e.g. from Apple to Pepsi and Walmart) are moving away from maximizing profits in a public statement. They distanced themselves from a pure shareholder-value approach by defining new principles of corporate management: … we know that many Americans have problems. Too often hard work is not rewarded and enough is not done to allow workers to adapt to the rapid pace of economic change. In the future, the focus will be more on investing in employees, in environmental protection and in fair and ethical dealings with suppliers.²

Even seemingly rational economic action is often based on incomplete information. It is not certain whether the goals or advantages later prove to be correct or sufficient, whether alternative approaches would have been more efficient, or whether the socio-political framework remains unchanged until the assessment. The Maximization of the individual performance as a guiding principle must also be viewed critically today, as it often leads to social problems (e.g. unemployment) or environmental damage.

Typical corporate objectives often relate to dimensions as performance (sales, market share, product quality), successes and finance (costs, profits, profitability, liquidity, investments) as well as individual (small businesses: e.g. subsistence economy, shareholders: e.g. power), and if applicable ethical goals (NGOs: non-profit).

In fig. 1.1 typical corporate policy objectives (e.g. profit and rentability) are operationalised step by step (example: production) from the general corporate to the individual workplace objectives.

Fig. 1.1: Operationalisation of Corporate Objectives

NGOs and Social Business

Non-Governmental Organisations (NGOs) primarily non-profit oriented (e.g. working in sectors like social welfare, human rights, nature and environmental protection, international development cooperation or cultural support and education). They must also be managed efficient in order to fulfil their mission in the interests of their sponsors. Accordingly, NGO-Management can be compared to traditional management in many areas: Differences are usually the criteria for success (quality, benefits, etc. instead of profit) and in some in functions as well, for example fundraising in marketing or in HR Management employment of volunteers.

Big NGOs often have profit-oriented subsidiaries (service, consulting, trade and retail) and transfer the profit into the parent NGO.

Example German Caritas

(see example chap. 5.2.3)

Cooperative and non-/limited-profit oriented businesses have a long tradition e.g. in Europe since the 1860s – e.g. as concept of production, trade or banks in form of a cooperative, in health care by public law or churches – and has been somewhat forgotten in the recent past or was a niche sector.

Social Business, structured like a traditional business organisation, is understood with the main inter-dependent features solving important social problems and the investors forego speculative profits following a double bottom line principle (economic thinking plus social impact).

Example FLOCERT GmbH

... est. 2003, based in Bonn/Germany, is a 100% subsidiary of the Fairtrade Labelling Organisation FLO e.V. as an independent audit and certification company for Fairtrade standards. In more than 120 countries FLOCERT works for more than 5,000 customers – from small producers in developing countries up to global resellers (as of 2019).

Because CSR programs in companies often are not really sustainable, there are more and more new approaches to social business are coming up in all industries, they differ from country to country due to national corporate and tax laws (for examples and differentiations see chap. 2.1.5 Ethics, CSR and Social Business).

1.1.2 Corporate Policy and Management

Corporate Policy (policy: consciously enforcing will) is decision making and design of the long-term corporate goals and their adaptation to internal and external framework conditions or influences – as basis for following operationalized divisional, department etc. planning activities (see fig. 1.1).

The management is transferring these decisions with designing corporate structures and systems and behaviour to form the corporate policy goals,

institutionally as the Management (e.g. Board, Department Head, Team Manager or Project Manager), and

functionally as manager’s activities (e.g. planning, decision making, controlling or leadership) in their different hierarchic and functional competencies.

Influences on Corporate Policy

The diversity and complexity of the influences on corporate policy are resulting from the many different internal and external stakeholders, guided by the company's activities (e.g. company history and shareholders, location, employees and works council), from the environment (e.g. natural resources, markets, politics, legal system) and megatrends (technology, changing values, demography).

Claims of internal and external interest groups on companies:

Manager (job satisfaction, high income, prestige and power, self-development and career opportunities ...),

Employees (job and social security, healthy work conditions, education and career opportunities, social contacts ...),

Shareholder (high dividends, growth of assets, influence on the corporate’s development ...),

Banks (secure loans/interest payment, long-term relation),

Customers (price/performance ratio, security in delivery and service, additional services, advice, customer loans ...),

Suppliers (solvency, long-term relation ...),

Competitors (e.g. fair competition, keep industry image, possibly cooperation),

Public sector (e.g. taxes, job security, environmental protection, compliance with laws, political and social interests, support public economic policy),

Collective partner (compliance with and participation in a collective agreement, fairness of the negotiations ...),

other interest groups are e.g. Political Parties, Churches, Unions, NGOs, Cartel Partner and Associations which formulate claims on companies from their individual perspectives.

Influence of the corporate environment

Economy (markets, supplier/customer, investors, branch development ...),

Compliance environment (tax and duties, laws ...),

Ecology (climate change, natural resources, ecological balance ...),

Social environment (values, education system, demography and diversity, income distribution ...),

Technology (innovation and ICT development ...),

Politics (political will formation and stability, development of political and social systems ...).

Example Relevant developments in Corporate Management³

(Fresenius SE, excerpt)

Environmental developments

Healthcare remains one of most important global economic sectors.

Above-average growth in health sector over past few years.

Significant growth drivers, esp. in the emerging countries.

Extensive stability of the framework conditions relevant for the operating business.

Constantly increasing healthcare costs in OECD countries.

…

Company developments

Diversification in four business areas.

Spatial distribution of the subsidiaries across 80 countries.

Main sales markets: North America (46%) and Europe (38%).

Leading market positions in the company's product groups.

Concentration on selected areas of the healthcare system, esp. the treatment of seriously and chronically ill people.

Geographical expansion of the business.

Selective small and medium-sized acquisitions.

…

Shareholder Value- and Stakeholder orientation

A Shareholder Value orientated Corporate Policy is mainly stability-oriented and conservative:

Secure existence and survival of the company,

Shareholder interests are in the foreground: short-term in-crease in value or maximization of profit as their dividends,

invest in the existing success potentials and take advantage – this is best working in known and relatively stable markets.

The traditional one-dimensional Shareholder-oriented policy focused on return on equity is becoming increasingly critical, not only because of the discussion about sustainability and corporate ethics, but also of the relatively high proportion of borrowed capital (which are loans from savings of the society) compared to the corporate equity capital.

The Stakeholder orientated policy is seen as a rather long-term and a progressive policy:

primary goal is long-term corporate development, incl. searching and creating new potential for success,

in addition to banks as borrow-capital lenders, esp. the interests of the other stakeholders like employees, customers and suppliers, the neighbourhood, politics, etc. are in focus of corporate management,

supporting situational factors are dynamic and complex markets and trends.

Companies often move between these polarities due situational factors and corporate policy dynamics, or larger ones follow different policies parallel in their different business areas.

Example Criticism of the Shareholder Value approach

Until the beginning 21th cent. shareholder value was the main focus of successful corporate management for almost all private companies, often measured e.g. in terms of stock market value or cash flow.⁴

Henry Ford, one of the most important entrepreneurs in the 20th cent. over 100 years ago already formulated: The real guiding principle does not mean earning money. The industrial guiding principle requires creating a useful idea and multiplying it thousands of times that it benefits everyone ... I don't think it is right to make excessive profits from our cars. A moderate profit is justified, a too high one is not ... My ambition is rather to employ more and more workers ... we want to help create livelihoods and build houses. For this it is necessary that the greater part of the profit flows back into a productive company.

Long-time Daimler-Benz Board Edzard Reuter wrote: In reality, the value of a company cannot be measured by stock prices ... but on valuation criteria that are based on corporate development.

Management researcher Fredmund Malik becomes even clearer: The majority of German top management and its consulting entourage have been following US American management practices uncritically for years. Instead of thinking about what proper management is, every fashion is imitated ... Shareholder value doctrine for corporate governance, is one of the most harmful diseases ever developed, which reached the opposite what she promised: An orgy of balance sheet manipulations, disinformation of the public, destruction of values and excesses of personal enrichments ... The purpose of a company is transformation of re-sources into benefits for the customer, which directly contradicts common theories of maximizing or increasing company profits.

Today qualitative, socio-cultural and sustainability objectives belong as well as the traditional economic quantitative cost and profit-efficiency dimensions, e.g. product quality and sustainability, fair competition, and socio-ethical goals like healthy and fair working standards and social responsibility in the whole global supply chain.

1.1.3 Corporate Governance Process and Management

The fundamental orientations of the company, which are influenced by in- and external framework conditions and changes, are formulated in the company policy (decision from share-holders will or in discussion with the board). The management should then successfully implement corporate strategies, which then are operationalized by middle and lower management (as seen in fig. 1.1).

Fig. 1.2: Management Process

Example Management Process

Figure 1.2 illustrates the process of Corporate Governance and Management (starting clockwise with 1. Corporate Policy). The outer circle shows in keyword typical tasks to manage, the inner circle shows the regarding management tools. Basic corporate policy (1.) orientations are defined: profit orientation in a private enterprise, cost minimization in the non-profit organisation and for example, companies are confronted with challenges (e.g. internal innovations, external influences) as corporate environment (2.) to which they