Business Environment Obective: To understand the business scene & factors & trends for strategic policy formulation What is business? • An organised effort • Complex field of commerce and industry • Uses socially acceptable ways • Involves conversion of raw into finish • Forms of business activities • Types of business activities • Business exists within an environment Emerging issues in today’s business environment • Change is inevitable • Gary Hamel & C.K. Prahalad • Response to change- a challenge • How to move from here to there • Changes are massive • Look around your company Questions you must ask • Clear understanding beyond 5-10 years • Clearly defined short term policies • better understanding than competitors • Setting up new rules of competition • evolving new ways of doing business • be a rule maker and not a rule taker • Challenge the status quo • Be open to the unconventional rivals • Identify potential threats • Reinvent the current business model • Regenerate core strategies rather than just reengineer core processes • Keep balance between hope and anxiety Three major questions for top management • %age of time spent on external rather than internal issues • of this, %age of time spent on developing an understanding of the future rather than meeting current targets • of these, %age of time spent in consultation with colleagues as opposed to having a personal view Response of an strategist What new core competencies will we need to build? What new product concepts should we pioneer? What alliances will we need to form? What recent development programmes should we protect?, and What long-term regulatory initiative should we pursue? Characteristics of today’s business: • Change • bigness • Diversification • Globalization
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Science Information Competition Government interference
Change • Single word • New technologies replace old products • Theodore Levitt • It makes business more complex • It makes it knowledge based • It makes consumers learners Bigness • Mass production and mass marketing are the order of the day • Get you economies of scale • benefits can be extended to the consumers • Government wants to make it simpler to increase size Diversification • orientation to move ahead with stability and endurance, • have diversified product portfolios • Look at the Tata group • go for product proliferation - HLL • Aditya Birla -to depend on any one sector for growth or profits- cyclical phases. • No such rule in the western countries Takeovers have increased Year No. of takeovers 1988 15 1989 18 1990 25 1991 33 1992 30 1993 114 1994 150 Globalization • Going international: a quality of modern business. • Political boundaries are no barriers • globalization is fast becoming imperative. • Internationalization of business is a means of sustaining a strong domestic base in terms of technology, product, market and capital over a long period Science Science is also occupying a major role. massive contributions being made to business by science. And many more are to come. Future scientific breakthroughs will offer attractive opportunities to alert businessmen. Current means of manufacturing and selling will be scraped in order to remain competitive, and new means of financing these tremendous changes will be developed. Information the recognition of and need of information. The complexity of modern businesses and government requirements has spearheaded
this growth. Freedom from the drudgery of the paper work. IT itself is a subject to revolutionary change. The advancement in IT is breathtaking. As business gets globalized, it will have to heavily rely on the means of IT. Competition Gone are the days of sheltered markets, Businessmen are asked to eliminate inefficiency, cut down costs and improve productivity. It is now the question of survival of the fittest Inefficient and marginal firms will be asked to wind up. Competition not only benefits the competing firms but is also beneficial to the consumers. Porter has said that companies benefit from having strong domestic rivals. Government Interference:
Interference in business is common The government interferes in various ways The interference is necessary in order to enable the government to exercise control There is no country in the world where the government does not interfere in the business In India it performs dual role However, starting from 1980’s there came a new wave of reforms. However, no economy is totally free from government interference. Are you a strategist or just a manager? • • • • • • HBR article by Hans Hinterhuber and Wolfgang Pop. Helmuth von Moltke- 1858-88. One of the greatest strategists He was a prolific writer Two characteristics: General electric’s CEO once said that strategy follows people.
Strategy cannot be taught • Helmuth von Moltke’s strategies won the wars • He said strategy is applied common sense • it can’t be taught • School essentially aims at mediocrity • The best it may do is to offer managers ways to develop themselves 1. Do I have an entrepreneurial vision- alike north star? • Job Steves and Woznaik Steves’ vision • Gottlieb Duttweiler’s migras cooperative • Enrico Mattei- founder Italy’s State owned petroleum company • President of a swiss technological institute had a peculiar vision • Stephen Davison Bechtel’s construction comopany had a remarkable vision. 2. Do I have a corporate philosophy? • When a vision is put to concrete terms it becomes a corporate philosophy • George Bernard Shaw- a good battle cry is half the battle • Frank Stronach- Canadian Co.Megna International has a concrete philosophy • An entrepreneur locked in cut throat competition should know the opponent’s corporate philosophy.
3. Do I have a competitive advantage? Strategy is the evolution of the original guiding idea according to changing circumstances The central element of a strategy is to create a permanent competitive advantage examples are: price performance ratio, better service, unique product design German ski manufacturer- “the one that builds the skis slowest builds the fastest skis” 4. Do my employees use their ability to act freely in the interest of the company? A strategically managed company is a confederation of entrepreneurs, with management responsibility vested in strategic business units. These micro enterprises are the centres for integrated action Issue directions and not detailed instructions for them Let the have courage to stand up to their own convictions. They however, must first know the vision & philosophy of their company 5.Have I built an organization that builds my vision? Have I filled up all managerial positions with people who can think and act entrepreneurially? Are their duties, authority and responsibilities such that they can take autonomous decisions in the interest of the company? 6. Are the line managers involved in the strategic planning? Strategic planning is the job of those line managers who are responsible for implementing a strategy. Therefore the key to successful strategy implementation is to involve them in this process Train them, if required. Tell them what is the vision of the top management An Italian textile company uses a strategic controller to quash the views of those who disagree with the personal priorities of the top management. 7. Is the corporate culture in harmony with the strategies? The more they are in harmony, the greater is the strategic management competence. Can you develop your company as a management school, and just keep it as a school of life? In later type, employees tend to project an active and involved work style 8. Do I point out directions and take new approaches? What is permanent about competent strategic management? You set the directions and not the limits You raise the questions, not your answers You take the path and not the targets attained You select employees to carry out their vision and not the buildings they erect. What matters most is the person’s understanding of who he or she really is 9. Have I been lucky in my life so far? Moltke observed good strategist also needs good luck Hence, put yourself in a position that favours being lucky However, it is better to judge the competence of a strategist by the number of set backs and his ability to absorb the shocks without being deterred. 10. Do I make contribution to the development of the society and myself? Robert Lewis Stevenson: “You have success in your life if you have lived decently, laughed frequently, and loved a lot, won the respect of the clever men and love of children, filled out your place and accomplished your task,if you left the world a better place than you found it…if you saw the best among other people and always did your best” The strategist as a student, teacher and symbol How to measure the strategic competence of the managers:-The vision they had; the way they modified it; and the way they led others to follow and accomplish their mission This way one can distinguish an average manager from a good manager. Good strategists have the ability to make employees and the outside world embrace their visions
Linkage between environmental analysis and strategic management Analysis provides an understanding of the current and potential changes It provides inputs for strategic decision making. It should facilitate and foster strategic thinking in organizations William Gluek and Lawrence Jauch’s negative theory Firms which systematically analyse the environment are more effective than those which do not Environmental analysis - an input to the strategic management Typologies of Environment Organization-environment trade-off Understanding Environment Levels of environment: Linkages of macro environment and a company Process of environmental Analysis Scanning Monitoring Forecasting Assessment Sources for scanning
Session – 3 : Business Environment
Political Environment and its impact on business The Government plays an important role Irrespective of the economic system Yet the degree of interference in business varies depending on the nature and stage of development of the economy the behaviour of the private sector the political philosophy social attitude etc. Types of roles played by the government Regulation – Direct, Indirect Promotion – Support, Infrastructure Entrepreneurship – Commanding Heights of the economy, Reversal of Role Planning – Particularly in the Developing Countries, State as a custodian of the welfare of society Modern Concept of the State Complete Sovereignty in its defined territory It has legislative and coercive powers It can raise taxation and distribute proceeds It has to be above sectional interests State’s actual autonomy is limited WTO,GATT,IMF,WB Public Sector- the rationale Why public sector companies? Heavy investment required Big gestation period Control over the commanding heights of the economy Infrastucture – low yield Defence – strategic importance
Public utilities – to improve quality of life Financial sector- Development finance institutions Has Public sector grown to unmanageable size? Mounting losses Administered prices Over-staffing Red tapism Slow bureaucratic style of decision making Why Privatization? To raise additional resources To be used elsewhere To make them more efficient To get rid of the sick units To allow private sector to work as the Partners to growth Political Influences over business Through taxation and interest policies Through public spending on goods and services Through regulation Through taxation and interest policies Inflation – High tax rates- Low Disposable income Recession- Low tax rates – High disposable income Interest rates- high in the inflation and low in the recession Through public spending on goods and services Inflation- curb public spending Recession- increase public spending Through regulation Issue of licences Annual reports FEMA SEBI SCRA RBI Elements of state policy: Equity it implies an equitable distribution of resources which is regarded as fair either in income distribution or in getting access to the services Providing the safety net- minimum standards so that everyone can enjoy a minimum amount of the consumption of a particular good Market Failure Imperfect competition Externalities Public goods Imperfect information
Objectives of the State Policy Economic Growth Full Employment Price Stability – keep inflation under check Main policies of the Government
Fiscal Policy Taxation and other sources of income Government Spending Debt Management Monetary Policy Interest Rates Exchange rates Control over money supply Selective controls over the credit given by the commercial banks Foreign Trade Policies import substitution export promotion promotion of foreign investment in India Economic Planning Full Partial Government Initiative as regards Global Markets: Protectionism High Import Tariffs Import Quotas Preferential Procurement Restrictions as to how much profit you can repatriate Globalization Removal of Tariff Removal of Quotas Allow Foreign Equity Participation Allow freedom to repatriate Profits Do away with subsidies Government’s Influence on competition in an industry: Government can bring in considerable influence on competition in an industry as- Buyer, Controller, Supplier The Government can influence the timing and extent of structural changes: Telecom industry,Cable TV, Insurance sector Major Legislation Regulation of competition – IDR Act, BIS, Standards of Weights and Measurements Act MRTP Act Companies Act Food Industry- Food inspectors Subsidies to Backward areas CENVAT
Income Tax Act Workmen’s Compensation Act Minimum Wages Act ESI Act Provident Fund Act Information Technology Act
Session 4 : Ecological Issues
Ecological Environment and its Impact over Business • Earth is the only planet that has life support systems • Life support systems worked well in the pre-modern era • Modern humans have worked to master the nature and caused ecological imbalance State of Environment in India • Definition • Issues • Environmental Concern • Concept of Sustainable Development • Policy Responses of the Indian Government Definition Environment includes water, air and land and the interrelationship which exists among and between water, air, land, and human beings, other living creatures, plants, micro organisms and property. Issues: Population, Urban-Rural mix, Land, Forests, Wildlife, Water, Air, Industrial Pollution, Electric Power, SSD Project, Toxic Waste, Hazardous Waste, Environmental Refugees. 1. Population • 16% of the World’s Population Lives in India • Its area is only 2.42% of the World’s Total Surface Area. • In 1947: 1/7th of it lived in the cities • Now 1/4th of it lives in the cities 2. Urban Rural Mix • 1951- Urban Population was 62.44 million • 1991- 217.17 million • Metropolis faced population explosion • This created environmental problems 3. The Land • Extent of degradation is alarming • Planning Commission estimates: 174m.hec.affected by soil erosion
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deforestation, overgrazing, faulty agricultural practices, and constant search for firewoodmain causes
4. Forests • Part of India’s heritage • They help in maintaining balance in Eco-system • Loss of forest cover led to floods, water logging, soil erosion and other problems 5. Wildlife • Very rich in India • Over 75000 species of fauna and 4500 of flora • Poaching and trade led to damage to wildlife 6. Water Quality • Severity of problem increased • The rivers are all polluted • The community and industrial waste are not properly treated 7. Air Quality • Air pollution is a threat to the environment • Issue highlighted through Mathura Oil Refinery Project • Recent Survey discovers that air pollution trebled in major cities between year 1970 and 1984. 8. Industrial Pollution Industry-wise information 9. Electric Power Increasing need for generation of power Hydroelectric, thermal, nuclear power plants have potential for pollution Led to several moves against them Sardar Surover Dam Controversy 10.Toxic Chemicals, Fertilizers and Pesticides 1960 Green Revolution contributed to this There is a need to increase the production of foodgrains and protect the crops from insects But this also adds to the problem of the contaminated food Metal pollution is another variant 11. Hazardous Waste A waste substance is classified as hazardous and damaging to human health or the environment if it has one of these characteristics:Ignitability at low temperature corrosivity reactivity radioactiviy The problem is astounding in proportions 12. Environmental Refugees Large scale hydroelectric projects, in addition to projects Problem of rehabilitation Environmental Concern Mass Poverty Population Explosion Need to industrialize quickly
Environment, Ecology, and Development need to be balanced VIII Plan: Sustainable development needs measures to preserve and conserve nature, the fragile and critical eco-system Concept of Sustainable Development Defined as state where development meets the needs of the present without compromising the ability of the future generations to meet their needs. The rich countries have an obligations to help the Third World countries adopt strategies for sustainable development. Elements of Environmentally sustainable development Policy Instruments Institutional Change legislation national Environmental Standards Environmental Risks Laboratory testing and QA/QC procedures Environmental Enforcement and compliance Environmental Audits Economic Incentives and disincentives 1. Environmental Protection Policies and Programmes in India Major Religions of the country have stressed the need to live in harmony with the nature King Asoka: Protection of animal life and the protection of environment is the sacred duty of the king Government of India: Environment poses a great challenge The national conservation strategy and policy statement: The purpose…reinforce the traditional ethos and…build a conservation society…in harmony..nature Environmental Policy Objectives To protect and improve the quality of the environment for the well-being of India’s people To carry out development programmes according to environmentally sound principles To ensure the conservation of natural resources through its rational use for various purposes 2. Institutional Changes The year 1972 marked a water shed in the history of environment management in India. UN-Conference on human environment was held in 1972. The need to set up a national body to tackle these issues was realized. NCEPC was set up as an appex advisory body Department of Environment was set up in 1980 Central Pollution Control Board, SPCBs set up 3. Environmental Legislation Main Law is the Environment Protection Act (1986) Water (Prevention & Control of Pollution) Act (1974) Air (Prevention & Control of Pollution) Act (1981) Wildlife Protection Act(1972) Forest Conservation Act(1980) They are designed to ensure adherence to the rules and regulations set for the protection and conservation of environment 4.National Environmental Standards EPA of 1986, empowers the Central Govt. to set standards for the quality of environment in its various aspects and for emission and effluents. If high standards have to be achieved there would be a concerted and well coordinated effort necessary on the part of the govt., public and the industry
5. Environmental Risks These arise or transmitted through air, water, soil or food chains to the humans The source could be technology or natural calamities Estimate, assess and evaluate and combat these risks though proper policies The approach could be general or case-by case specific. In India, there is considerable overlap on environmental risk assessment job between ministries 6.Laboratory Testing and QA/QC Procedures EPA empowers the CG to establish or authorize such labs Sec-23 CG can delegate these powers to the states Over 70 such Labs Authorized for the analysis of air and water samples Drawbacks: Poor monitoring to ensure the necessary QA/QC procedures & Lack of uniform Training Program for all technical and professional personnel in such Labs 7. Mechanisms for enforcement and compliance Enforcement requires regular inspection, monitoring and investigation of violation Policies are there right, but proper implementation holds the key Judicial resort by the concerned industries often delays the implementation Need to make the enforcement machinery more effective and early expedition of the matters by the judiciary. 8. Environmental Audits 13.3.1992: EPA Rules were amended To require any person engaging in the industrial activity to submit an environmental audit report for the financial year ending March 31st on a form issued by the SPCB Information sought: Qty of raw material used, Air and water pollution generated, Amount of solid waste generated, Recycling and reuse of such waste Objective:To Promote environmental accountability at the point of source. 9.Economic Incentives and disincentives Basic essence of the Environment Policy is to ensure compliance to the various rules and regulations by monitoring the behaviour of the industries. 100% depreciation allowance for Pllution Control Equipments lower customs and excise duties on such devices Financial assistance by the term financial institutions to install such devices Not much impact, however Prospects for Management Alternative Sources of energy Combating Pollution Toward Sustainability Regreening the planet Alternative Sources of energy Reduce reliance on expensive and polluting fossil fuels Nuclear-plants are high cost alternatives plus there are safety concerns Newer options are natural energy sources Solar energy and hydroelectricity are important among them. Solar energy and wind power are cost effective and efficient source of energy These alternatives are better as they are renewable, cheap and less damaging to the environment. Combating Pollution Make laws and implement them effectively Reduce the use of fertilizers and pesticides Crate plastics which are less chemically complex and can be recycled without potential hazards set emission norms
Prosecute the defaulters The production of one ton of steel in India creates 6-8times more pollution than in Japan The solution lies in the adoption of energy saving measures and adoption of cleaner fuels. Toward Sustainability This implies that non-renewable sources of energy should not be wasted Wide disparities in the income and wealth be reduced Organic fertilizers should replace the artificial ones Intensive agriculture techniques be adopted Arrive at international agreement on preservation of environment Regreening the planet
Humans do have techniques through which they can mitigate or even reverse son of the negative impact of their activities plant more trees Feed animals in designated areas reduce consumption of items that require wood or animal skin old mining sites can be cleaned and trees can be planted on them. Develop market for Eco-friendly and recycled products.
Session - 6&7 : Business Environment
Political Environment and its impact on business The Government plays an important role Irrespective of the economic system Yet the degree of interference in business varies depending on the nature and stage of development of the economy the behaviour of the private sector the political philosophy social attitude etc. Types of roles played by the government Regulation Direct, Indirect Promotion Support, Infrastructure Entrepreneurship Commanding Heights of the economy, Reversal of Role Planning Particularly in the Developing Countries, State as a custodian of the welfare of society Modern Concept of the State Complete Sovereignty in its defined territory It has legislative and coercive powers It can raise taxation and distribute proceeds It has to be above sectional interests State’s actual autonomy is limited WTO,GATT,IMF,WB Public Sector- the rationale Why public sector companies? Heavy investment required Big gestation period Control over the commanding heights of the economy Infrastucture – low yield
Defence – strategic importance Public utilities – to improve quality of life Financial sector- Development finance institutions Has Public sector grown to unmanageable size? Mounting losses Administered prices Over-staffing Red tapism Slow bureaucratic style of decision making Why Privatization? To raise additional resources To be used elsewhere To make them more efficient To get rid of the sick units To allow private sector to work as the Partners to growth Political Influences over business Through taxation and interest policies Through public spending on goods and services Through regulation Through taxation and interest policies Inflation – High tax rates- Low Disposable income Recession- Low tax rates – High disposable income Interest rates- high in the inflation and low in the recession Through public spending on goods and services Inflation- curb public spending Recession- increase public spending Through regulation Issue of licences Annual reports and returns Vat- MODVAT _ CENVAT FEMA SEBI SCRA RBI Elements of state policy: Equity Market Failure Equity it implies an equitable distribution of resources which is regarded as fair either in income distribution or in getting access to the services Providing the safety net- minimum standards so that everyone can enjoy a minimum amount of the consumption of a particular good Market Failure Imperfect competition Externalities Public goods
Imperfect information Objectives of the State Policy Economic Growth Full Employment Price Stability – keep inflation under check Main policies of the Government
Fiscal Policy Monetary Policy Foreign Trade Policy Economic Planning Fiscal Policy Taxation and other sources of income Government Spending Debt Management Basics of fiscal policy Fiscal Policy is basically the revenue and expenditure policy of the Government with the help of which the govt. tries to achieve its various socio-economic objectives Main Objectives of the fiscal policy
Ensure socio-economic justice Curb conspicuous consumption Encourage savings by the households Encourage investments Develop backward areas Raising revenue Protect indigenous industry Control Production and Prices How the fiscal policy works Stabilization Refers to steady non-inflationary expansion Recognized in 1929-Public works Taxes are built in stabilizers Distributive justice Progressive Income Tax High Tax on capital Transfer Higher tax on transfer of property Subsidies in food and fertilizers Anti poverty Programmes Promotion of economic growth Stability gives a boost to the production Encourages investment Monetary Policy Interest Rates Exchange rates Control over money supply Selective controls over the credit given by the commercial banks
Basics of Monetary Policy Formulation and Execution by the RBI Objectives: Controlled Expansion of money& Sectoral Deployment of funds Instruments: OMO, Interest Rates, Selective controls Limitations Serious failure- In the allocation of credit to the neglected sectors Foreign Trade Policies import substitution export promotion promotion of foreign investment in India Economic Planning Full Partial Government Initiative as regards Global Markets: . Protectionism High Import Tariffs Import Quotas Preferential Procurement Restrictions as to how much profit you can repatriate Government Initiative as regards Global Markets: . Globalization Removal of Tariff Removal of Quotas Allow Foreign Equity Participation Allow freedom to repatriate Profits Do away with subsidies Government’s Influence on competition in an industry: Government can bring in considerable influence on competition in an industry asBuyer, Controller, Supplier The Government can influence the timing and extent of structural changes: Telecom industry,Cable TV, Insurance sector Major Policies: Regulation of competition – IDR Act, BIS, Standards of Weights and Measurements Act MRTP Act Companies Act Food Industry- Food inspectors Subsidies to Backward areas Excise Act Income Tax Act Workmen’s Compensation Act Minimum Wages Act ESI Act Provident Fund Act Information Technology Act Corporate Governance:
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What does Corporate Governance mean? Corporate Governance is the system by which the companies are directed and controlled by the management in the best interest of the stakeholders and others ensuring greater transparency and better and timely financial reporting. The Board of Directors is responsible for Governance of their companies.
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Had there been some reports on Corporate Governance published internationally before the Concept was adopted in India? Yes. A number of reports and codes of corporate governance have already been published internationally-notable among them are the Report of Cadbury Committee, the report of Greenbury Committee, the Combined Code of the London Stock Exchange, the OECD Code on Corporate Governance, the Blue Ribbon Committee on Corporate Governance and the Hampel Committee on Corporate Governance.
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How the concept of Corporate Governance evolved in India? The Confederation of Indian Industry (CII) had published Desirable Corporate Governance – a code. The Securities and Exchange Board of India (hereinafter referred to as a SEBI) had set up a committee under the chairmanship of Shri Kumar Mangalam Birla to formulate the code of Corporate Governance. Based on this report, SEBI has by Circular No. SMDRP/POLICY/CIR-10/2000, dated on 21.2.2000 directed Stock Exchanges to amend the listing Agreement between them (i.e. Stock Exchange) and entities whose securities are listed on such Stock Exchange and include a new clause 49 in such listing Agreement. What is specified in Clause 49 of the Listing Agreement? As per paragraph VIII of Clause 49 of the listing Agreement, the entity is required to obtain a certificate from the auditors of the entity as regards compliance of conditions of Corporate Governance as stipulated in that Clause. This certificate is required to be annexed with the Directors’ Report, which is sent annually to all the shareholders of the entity. This certificate is also required to be sent to the Stock Exchange(s) along with the Annual Returns filled by the entity. The expression “auditors of the company” would mean the auditors appointed to audit the Financial Statements of the entity under the relevant statues.
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What is Management Responsibility? Management’s Responsibility for running its business implicitly requires it to take reasonable steps to ensure the implementation of the conditions of corporate governance in clause 49 of the Listing Agreement.
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What is Auditor’s Responsibility? The auditor’s responsibility in certifying conditions of corporate governance relate to verification and certifying factual implementation of conditions of corporate governance as conditions stipulated in clause 49 of the Listing Agreement. Such certification is neither an audit nor an expression of opinion on financial statements of the entity. The certificate from the auditor as regards compliance of conditions of corporate governance is neither an assurance as to the future viability of the entity nor the efficiency or effectiveness with which the management has conducted the affairs of the entity.
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As per the SAP issued by the ICAI, the auditor should comply with the “Code of Conduct” and the guidance note issued by the ICAI in certification of compliance of condition of corporate governance. What conditions of corporate governance are to be complied with as per the Listing Agreement? 1. The company agrees that the Board of Directors of the company shall have an optimum combination of executive and non-executive Directors with not less than 50% of the Board of Directors comprising of Non-Executive Directors. The number of independent directors would depend whether the Chairman is Executive or NonExecutive. In case a non-Executive Chairman, at least one-third of board should comprise of independent directors and in case of an executive chairman, at least half of board should comprise of independent directors. 2. The company agrees that all pecuniary relationship or transactions of the nonexecutive directors viz a viz. the company should be disclosed in the Annual Report. 3. The company agrees that a qualified and independent audit committee shall be set up and that; - The audit committee shall have minimum three members, all being nonexecutive directors, with the majority of them being independent , and with at least one directors having financial and accounting knowledge; - The chairman of the committee shall be an independent director. - The chairman shall be present at AGM to answer shareholder’s queries - The audit committee should invite such of the executives as it considers appropriate and (particularly the head of finance function) to be present at the meeting of the committee, but on occasions it may also meet without the presence of any executive of the company. The finance director, head of internal audit and when required a representative of the external auditor shall be present as invitees for the meeting of the audit committee. - The company secretary shall act as the secretary to the committee. 4. The audit committee shall meet at least thrice a year. One meeting shall be held before finalization of annual accounts and one every six months. The quorum shall be either two members or one third of the members of the audit committee, whichever is higher and minimum of two independent directors. The audit committee shall have powers which should include the following: - To investigate any activity within its terms of reference - To seek information from any employee - To obtain outside legal or other professional advice - To secure attendance of outsiders with relevant expertise, if it considers necessary
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6. The company agrees that the role of the audit committee shall include the following: - Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. - Recommending the appointment and removal of external auditor, fixation of audit fee and also approval for payment for any other services. - Reviewing with management the annual financial statements before submission to the Board, focussing primarily on; ? Any changes in accounting policies and practices
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Major accounting entries based on exercise of judgement by management ? Qualifications in draft audit report ? Significant adjustments arising out of audit. ? The going concern assumption ? Compliance with accounting standards ? Compliance with stock Exchange and Legal requirements concerning financial statements ? Any related party transactions that is transactions of the company of material nature, with promoters or the management, their subsidiaries or relatives etc. that may have potential conflict with the interests of the company at large. Reviewing with the management, external and internal auditors, the adequacy of internal control systems Reviewing the adequacy of internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the Department, reporting structure, coverage and frequency of internal audit. Discussion with internal auditors any significant findings and follow up there on. Reviewing the findings of internal investigations by the internal auditors into matters where there is suspected fraud or irregularities or a failure of internal control systems of a material nature and reporting the matter to the board. Discussion with External Auditors before the audit commences nature and scope of audit as well as has post-audit discussion to ascertain any area of concern. Reviewing the company’s financial and risk management policies To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors. ?
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If the company has set up an audit committee pursuant to provisions of company’s Act, the company agrees that the said audit committee shall have such additional functions/features as contained in the listing agreement. The remuneration of the non-executive directors shall be determined by the Board of Directors and disclosures on such remuneration shall be made in the section on corporate Governance of the annual report setting out the details regarding the entire remuneration package along with stock option details. The company agrees that as part of the Director’s Report or as an addition thereto, a Management Discussion Analysis should include discussion on the following matters within the limits by the company’s competitive position: Industry structure and developments. Opportunities and Threats. Segment-wise or product-wise performance. Outlook. Risks and Concerns. Internal control systems and their adequacy. Discussion on financial performance with respect to operational performance. Material developments in Human Resources / Industrial Relations front, including number of people employed. Disclosures must be made by the management to the board relating to all material financial and commercials transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in
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company shares, commercial dealing with bodies, which have shareholding of management and their relatives etc.) 11. The company agrees that in case of the appointment of a new director or reappointment of a director the share holders must be provided with the following information: A brief resume of the director; Nature of his expertise in specific functional areas; and Names of companies in which the person also holds the directorship and the membership of Committees of the board. The company further agrees that information like quarterly results, presentation made by companies to analysts shall be put on company’s web-site, or shall be sent in such a forms to enable the stock exchange on which the company is listed to put it on its own web-site. The company further agrees that a committee under the chairmanship of a nonexecutive director shall be formed to specifically look into the redressing of the shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends shares etc. This company will be designated as ‘Shareholders/ Investors Grievance Committee’. The company further agrees that to expedite the process of share transfers the board of the company shall delegate the power of share transfer to an officer or a committee or to the register and share transfer agents. The delegated authority shall attend to share transfer formalities at least once in a fortnight. The company agrees that there shall be a separate section on Corporate Governance in the annual reports of company, with a detailed compliance report on Corporate Governance. Non compliance of any mandatory requirement i.e. which is part of the listing agreement with reasons there of and the extent to which the nonmandatory requirements have been adopted should be specifically highlighted. The company agrees that it shall obtain a certificate from the auditors of the company regarding compliance of conditions of corporate governance as stipulated in this clause and annex the certificate with the Director’s report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual Returns filed by the company.
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Session - 9&10 : Social and cultural environment of business
Business Environment Understanding Social and Cultural environment of Business Social and cultural environment refers to the influence exercised by certain social factors which are ‘beyond the company’s gate’ What other factors the social environment comprises of? People’s attitude towards business Attitude of people to work Attitude to castes Family Collectivism and individualism Religion Education Social Responsibility of business People’s attitude towards business Largely determined by their culture Business systems are a product of beliefs and customs of the society in which they exist.Beliefs
and value systems concerning what is right and what is not, are basic to all business activity. Culture creates people Culture and globalization Culture determines goods and services Attitude of people to work How a worker looks at his work in the factory Indian Philosophy of renunciation does not contradict ‘Karma’ In a culture where work is worship the productivity has to be high However, where work is taken up on the basis of rewards expected, proper incentive schemes will have to be devised to make people work to the best of their abilities Attitude to castes Traditionally, Hindu, Islam And Christianity- have had caste system Hindu- Brahmins, Kshatriya, Vaish & Shudra Islam- ashraf and ajlaf Christianity- upper class and lower class Modern India- caste system is not as strict. They work together and that affects the way economic activities are carried out. Family Family is basic to all social organizations Family affects the child’s ultimate behavioral pattern It affects the inheritance and property rights and the transmission of cultural values Joint and nuclear family systems affect the ownership and share holding patterns of the corporate Example of Birlas, Mafatlals and Bajaj Collectivism and individualism It is related to such personnel aspect as the morale,multiplicity of trade unions and intra- or inter union rivalry Our culture talks about salvation and negation of the world Even if we do charity we do it for some gain for ourselves. Yet the spirit of collectivism is important and plays an important role in the determination of work relationships. Religion Rahu-ketu do play some role in corporate decision making Astrologers are regularly consulted Vastu-shilpies give consultancy for the way interiors or exteriors have to be designed Coconut is broken when new business is to begin Muhurut is checked before the shares are bought or sold after the Diwali Poojan Religion refers to a specific and institutioalized set or beliefs and practices generally agreed upon by a number of persons or sect. Education Education has to orient itself to look for solutions to the business problems. Education benefits people and business started to support education Toward a knowledge oriented society Businesses set up schools, donate generously, and even bear the cost of education Social Responsibility of business Business depends on society for the needed inputs. Business also depends on the society for the marketing of its products or services. Business then depends on the society for its existence and sustenance Social responsibility is the obligation of the business to take action which help to protect and benefit the society while pursuing its profit goals.
Social Responsibility Models Ackerman’s Model Caroll’s Model Arguments for Social Responsibility Changed Public Expectation of business Better Environment for business Public Image Avoidance of Legal Action balance of responsibility with power Business Has the resources Let business try Prevention is better than cure Moral Responsibility Citizenship Argument Arguments against Social Responsibility Profit Maximization Society has to pay the cost Lack of social skills Business has enough power Social Overhead cost Lack of accountability Lack of broad support views of Friedman and Levitt Barriers to Social Responsibility The Individual Manager The Organization The Industry Social Responsibility Implementation To whom the is accountable Business responsibility to society Social Responsibility Strategies Social Opposition Social Obligation Social Response Social Contribution Corporate Accountability Towards Employees Towards Consumers Towards Government Towards Owners The Limits of Social Responsibility Cost Efficiency Relevance Scope and complexity ? Family & Owner Managed Business It begins with you. Ideas give way to opportunities, and fueled by courage and hard work, your business continues to grow. When you first started out, you had no idea where the
future would lead. Would your ideas stand the test of time? As your business grows, so does the team around you, and strategic management decisions become more complex. Productive policies need to be established for your employees and customers to receive solid results. At Bose McKinney & Evans, we celebrate your courage and hard work, and will assist you with the difficult decisions of operating a business. In this complex marketplace, often the pressing issues of the moment take precedence over planning for the future. We want to help you take a longterm view, whether you are a small enterprise or an international operation. Whether managing the business privately, publicly, or as a family unit, we recognize the specific legal and business issues owner-managed companies face day to day. The inevitable difficulties and disputes that arise in every business endeavor become especially complex within close group dynamics. The owner quickly discovers that issues such as attracting, retaining, and compensating executives, resolving owner control disputes, granting ownership rights, owning or leasing commercial real estate, and hiring and firing employees are especially significant when dealing with long-time employees, family members or founding owners. To compound matters, key decisions regarding financing, business succession planning and estate planning are often ignored. These issues, left unresolved, have the power to destroy even the most exceptional business. Therapy for the Family Business by Julia Laylor The New York Times Money & Business November 22, 1998 After 25 years of running their own business, Jack and Alyce Schmidt had a vision. When they retired, their three children would take over and work together happily, each getting equal pay. Today, the kids are struggling to make the dream come true. In 1991, the Schmidts moved to Florida and handed over Spacesaver Systems, Inc., a $7 million storage-management company in Kensington, Md., to David Craig, 36, Alyce's son from a previous marriage, and Amy Hamilton, 35, and Carla Adam, 37, Jack's daughters from his previous marriage. But long-latent tensions among the three began bubbling to the surface, and this year they sought help when they found they could not resolve disagreements over pay. Ms. Adam, who had joined Spacesaver only three years ago and is now a sales representative, was earning considerably less than Craig, the company president, and Ms. Hamilton, an executive vice president, and she thought raises should be given more often. "When our parents were here, they called the shots," Craig said. "Now they've said, 'You guys figure it out.' And we're not sure how to do it." Instead of hiring a consultant or going to a lawyer to draw up a traditional partnership agreement, though, the three chose a path that lies somewhere between consulting and therapy: a "partnership charter" pioneered by David Gage, a clinical psychologist and founder of Business Mediation Associates in Washington. According to Gage, a partnership charter is aimed at driving hidden angers and resentments into the open before they can damage or even destroy a business. It is essentially a new way to address an old problem: staving off the sorts of disputes over money and power that have been the undoing of many family enterprises. Half of the owners of family firms in the United States expect their businesses to be jointly owned and managed someday by at least two of their children, Gage said. Yet the chances of that happening are slim, according to Joe Astrachan, editor in chief of Family Business Review. Seventy percent of family businesses are sold or liquidated before reaching the second
generation, he said. "People often spend a lot of energy avoiding issues because they imagine they won't be able to handle the intense feelings," Gage said. "They talk about money, but not in the depth they need to. They say they'll be equal partners, get equal pay, work full time. But what does full time really mean? Partners often run into problems because someone feels it's not fair that he's putting in more hours or bringing in more business than the other person." First, Gage gives a personality test to wrangling family members or other partners, to get clues on how they can best pool their talents and avoid tasks for which they are ill-suited. Ms. Hamilton and Ms. Adam were surprised to find that their scores were similar in one area—"dominance," or overcoming opposition to accomplish results—because Ms. Hamilton had always appeared to be bolder. "Carla is much more reserved and quiet than I am," Ms. Hamilton said. "People tell us we're like night and day. She may feel strongly about something, but she keeps it bottled up." Now that they are aware of Ms. Adam's strong drive to succeed, both Ms. Hamilton and Craig are more willing to let her try more responsible roles in the company. The test also showed that Ms. Hamilton scored high in persuasiveness and Craig in traits like conscientiousness. That helped to explain why the two worked so well together. Step 2 was for Gage and Martin to meet with each of their three clients separately, to talk about hopes and frustrations and then to put all three in the same room to air problems. The exercise brought all sorts of issues to the surface that the three had been loath to discuss: how, years ago, Ms. Hamilton had felt anxious about her own future, when it was clear that her stepbrother was being groomed to be president; how Craig had a tendency to avoid conflict; and how Ms. Adam felt like a fifth wheel in her stepbrother's and sister's smooth machine. "Amy and David had been working in the business together for so long, they were pretty close," Gage said. "Carla had a hard time breaking into that. They're just figuring out now how to be a three-person partnership." The three are now drawing up their partnership charter and hope by the end of the year to decide their roles and compensation. "It's remarkable how far we've gotten," Ms. Hamilton said. "We decided whatever comes out of this, we'll agree to go with it." From the personality test, for example, they said they learned that Ms. Hamilton did not need a lot of details in order to make a decision. So the charter will probably spell out that anyone presenting an issue to her should do so with broad-brush strokes rather than exhaustive specifics. The Schmidts' children went to Gage before problems had a chance to do real damage, but other clients find him after learning some hard lessons. Michael Hubert, for example, sought help after the breakup of his partnership with his father and brother in a dispute over the direction of their construction company in Gaithersburg, Md. To avoid repeating that fiasco, Hubert said, he and his new partner have spelled out their expectations, for each other and the business and their plans for dealing with disagreements or the desire of either to leave. "I wanted a partner because the burden isn't all on me; it spreads the risk," said Hubert, who is 39. "The last time I wasn't prepared. I want to make sure I'm never in that situation again."
Sadly, the painful experience he endured is all too common. "Family businesses don't want to admit they're having these problems," said Nina Paul, executive director of the Family Business Forum at American University in Washington. "The reality is, they all do." Catalysts for Conflict Seven common sources of dissension in family businesses: • The founder/owner's slowness in ceding control • A family member's failure to consult with others on important decisions • Inadequate response by the founder/owner on important decisions • Use of company funds to compensate inactive family members • Wide gaps in pay levels for active family members • Hired managers' resentment of family members • A lack of management direction because of the founder/owner's prolonged illness or heavy travel schedule Source: Sherrod Morehead and Peter Calfee, Family Business Advisory Partners, Inc., Cleveland
What's New The Raymond Family Business Institute awards grant for Harvard researcher's book on family business dynasties (ALFRED, N.Y., April 26, 2002) The George & Robin Raymond Family Business Institute has awarded a $20,000 grant to John Davis, a senior lecturer of business administration at the Harvard Business School. The grant will support Davis' research and book describing how some families stay in business for generations. The Raymond Institute also has named Davis a Raymond Institute Research Fellow. Davis' eight-year research effort examines the practices of several successful family companies: Ferragamo, Marriott, New York Times, SC Johnson & Son, Rothschild, DeKuyper and Kikkoman. Davis expects his book to appeal not only those involved in family businesses but also anyone interested in business or family topics or family biographies. "This long effort has allowed me to look at these successful companies and the families in a careful way and to identify factors that seem to account for the successful perpetuation of these firms and the families. My multi-disciplinary study is hopefully breaking new ground and that takes time and a lot of support," Davis said. "It could not have been possible without the incredible openness and patience of the families in the book and support from the Harvard Business School. The Raymond Institute grant will permit me to finish the last round of research and push this book to completion. It is a huge shot in the arm and an honor to receive this generous grant." At Harvard Business School, Davis teaches the MBA elective "Management of the Family Business," which explores the personal, family, career and business issues found in family-owned and managed companies. Davis is also the faculty chair for HBS' Executive Education International program, "Families in Business: From Generation to Generation." "The Raymonds are delighted to provide this grant to John Davis, their long-time colleague. They worked with John in the early 1980's in the formation of the Family Firm Institute and collaborated again in late 80's in the pioneering family business program at IMD (International Institute for Management Development) in Switzerland," said Dr. Carol Wittmeyer, president of the Raymond Institute. "They all share a passion for helping family businesses. John's new book will be an outstanding addition to his already impressive contributions to the body of knowledge on family firms."
"It is especially meaningful to be recognized as a research fellow of the Raymond Institute," said Davis. "George and Robin Raymond have nurtured the field of family business to help it grow into a respected discipline. They have always been supporting projects and people to see that the field keeps improving and George has contributed meaningfully to the literature with his own book on his family company, All in the Family Business." Davis is also a fellow of the Business Family Foundation in Montreal and the president of the Owner Managed Business Institute, a firm he founded which consults globally to family companies. The co-author of Generation to Generation: Life Cycles of the Family Business, published by Harvard Business School Press, Davis has published many articles on family business topics. His views on family business management have also been cited in The Wall Street Journal, The New York Times, Fortune and Family Business Magazine. The George & Robin Raymond Family Business Institute, based in Alfred, N.Y., is a not-for-profit corporation dedicated to serving current and future family business leaders. Founded in 2000, the Raymond Institute strives to promote greater understanding and appreciation for the rewards and challenges of family business ownership; to prepare the next generation to assume leadership roles in family businesses; and to enhance economic development initiatives in Upstate New York. The Raymond Institute creates and sponsors activities designed to assist family businesses, and supports interdisciplinary research and teaching initiatives on family business issues.
Not all Business! Mediating the personality differences behind internal business disputes This article has appeared in the following Journals: Summer 2001 edition of Dispute Resolution Magazine By David F. Gage and John A. Gromala Mediation is recognized as an excellent means to resolve disputes and pending litigation. But it is also being used to prevent disputes from arising among partners and shareholders of small businesses and professional groups, and among management teams. People become co-owners of a business because they believe they will be better off with a larger entity than as a sole owner or sole practitioner. They sign agreements that cover the details of accounting, finance and law. They are wearing their rose-colored glasses and have high expectations for a blissful and financially rewarding relationship. The history of small business tells us that these expectations are elusive. We have mediated the dissolution of many partnerships and closely held corporations. There was a common thread that ran through every conflict. Although the opening positions were couched in terms of lack of profits, broken agreements and so on, these disputes were seldom the real cause of the problem. Management teams in larger organizations are usually put together with existing staff to achieve a specified goal. Everyone makes a commitment to cooperate. Too often the team members get mired down in turf battles. The arguments are phrased in terms of disagreements about the best plan of action. Having mediated a number of management disputes, I have found the reality is something different. Case study Let us give you an example of a successful business whose owners were on the verge of getting into a big 'brouhaha.' They had been in business for six years. Each owned one-third. They took no salary and shared the profits equally. Bob was a 'golfaholic' who was at the plant about 20 to 25 hours per week. He brought in most of the new business. Jim was a workaholic. He worked 50 to 60 hours per week. He made sure
everything and everyone worked. Tom never ruffled anybody's feathers. He went about his assigned tasks quietly and was on site about 35 to 40 hours per week. The corporate attorney became aware of developing tensions and feared an impending explosion. He convinced the partners that disaster was around the corner if they did not get outside help. We were retained. Our initial confidential interviews came up with this picture. Jim, the workaholic, complained about low profits. In business meetings he talked about the need for faster growth to increase profits and his income. He believed that he had to put in the long hours because Bob and Tom were not carrying their fair share of the load but he never told them. He often hinted he should be entitled to a larger share of profit because he was putting in more effort than the other partners did. However, he never confronted the issue head on. He liked the others and did not want to risk a blow-up. In spite of it all, each of them was receiving around $175,000 per year from the business. He believed Tom would agree with him. Bob, the golfaholic, believed the company would die for lack of customers if he did not continue his marketing efforts on the golf course and social circuit. He believed Jim spent so much time at the plant because he was henpecked at home. He also believed that the company would be better off if some of what Jim did was delegated to employees. He suspected Jim wanted a bigger slice of profits but he was not going to open that can of worms. He believed Tom would agree with him. Tom just wanted to get along with everyone. He was happy with his share of the profits and the way business was developing. Tom could not understand why Jim and Bob kept asking him to straighten out the other guy but never talked to each other about their gripes. He would not take the side of either Jim or Bob but he never said that to either of them. He now recognized that his silence caused both of them to look to him as an ally. Business charters Our function is to help people design a program that will keep them focused and working together. We guide them as they, not we, draft a "business charter." This is the significant difference between the approach of consultants and mediators. Good consultants will analyze the situation and present the client with a solution or a plan of action. Even if it is flawless, inevitably someone will find something to hate. The difference is whether the participants can say that it is "my idea" or itís "his idea." Mediators help people develop a solution that is their idea. Thus, the chance for successful implementation is great, since everyone has a vested interest in seeing it succeed. A business charter addresses matters that are not discussed in partnership or shareholder agreements or in management structure and job descriptions. A charter is a non-binding memorandum, which clarifies what each person expects of the others and how they will operate together. We do not attempt to change personalities. We help people to understand their own interests, needs and goals and the interests, needs and goals of the others. Then, with our guidance, they work out a plan for working together. To implement this approach, we have separate confidential interviews with each person. We cannot disclose anything they tell us unless they authorize us to do so. During the interview we show them how to air their gripes in a non-adversarial and productive manner. When we complete the interviews, we have a complete picture of the relevant issues. We learn about each person's perceptions and the hidden agendas that seldom surface when they meet on their own. We therefore have a picture that none of the partners have seen. Our task is to help them develop this picture for themselves during our conference. Prior to the group meeting we give each person a set of questions, developed from what we learned in the individual interviews. We review their answers and prepare for the conference, in which we facilitate a discussion of all that was previously unspoken. The length of the conference depends upon the number of participants and the complexity of the relationships. Notice the reference to "complexity of relationships" rather than "complexity of the problems or disputes." Although people discuss problems in terms of financial issues, legal problems or poor management, these disputes are seldom the real cause of friction. The real cause is the people themselves. Communication skills
In many respects, a partnership is similar to a marriage without the benefit of the bed at night. There is very little emphasis, if any, in college or business courses on how to be a good partner. The result is that people enter into legally binding business relationships with little thought about how they will harness their differences into a positive force. Many individuals have not thought through their own short and long-term goals. By not knowing their own foibles and ignoring their different personalities, goals and values, they set themselves up for a lot of unnecessary grief and often failure. In our case study, the three partners learned new things about themselves as well as each other. Bob enjoyed most of his time on the course and socializing. However, he hated to golf and socialize with some of the customers. With some it was hard work just to be around them. He did so solely to generate business. One of the customers he disliked was also a pain-in-the-rear to everyone in the plant. This caused Jim great stress because the customer often disrupted production. He did not complain to Bob, believing the customer to be Bob's good friend. Once this was discussed openly, an avalanche of other hidden issues among all three of them flowed onto the table. All were addressed and resolved. More importantly, the partners learned how to communicate with each other on sensitive topics. This is the most important benefit of the charter process. The process showed them how to deal successfully with future conflict and minimized their need for future outside help. Their new charter addressed the current issues and set up a protocol for how they would interact with each other. The issues addressed may seem mundane to an outsider looking in. They are monumental to those who are living with them. Exhibit '1' is an excerpt from a table of contents in a charter for a professional firm covering the topics raised during their retreat. Exhibit 2 is an example of how detailed personal issues were addressed. By using two mediators with diverse but complementary expertise, the owners and managers are empowered to address issues which previously were taboo. They do it without bruising their egos. The clients receive the benefit of experienced mediators who bring to the table the ability to assist them with the myriad personality issues as well as business and law. The charter is an important living document. The most important benefit to the people we work with is that they learn how to harness their diverse personalities into a productive force. Having learned from the process, they will review the charter at least annually and make whatever changes are appropriate. EXHIBIT 1 1. EXPECTATIONS OF THE DIRECTORS A. EXPECTATIONS OF EACH OTHER PERSONALLY B. EXPECTATIONS FOR THE BOARD AS A GROUP C. EXPECTATIONS FOR THE SHAREHOLDERS AS A GROUP D. THE BOARD'S EXPECTATIONS FOR THE COMPANY 2. VALUES * 3. OWNERSHIP AND EQUITY INTERESTS 4. DIRECTORS' INTERPERSONAL EQUITY 5. EMPLOYMENT AND COMPENSATION 6. GOVERNANCE: THE BOARD OF DIRECTORS 7. MAINTAINING COMMUNICATION AND RESOLVING DISPUTES 8. GUIDELINES FOR DEALING WITH THE UNEXPECTED • Each of the numbered headings has a series of subtopics as in 1. Each charter addresses the issues raised by the participants. This exhibit should not be viewed as a recommendation for all charters. EXHIBIT 2 Excerpts from a table in a charter.
A. EXPECTATIONS OF EACH OTHER PERSONALLY We are aware that each director's unmet expectations of the other can be a source of friction. The problem often results from not knowing what each otherís expectations were in the first place. To lessen the likelihood of this problem, we are trying to be explicit about the expectations we have for ourselves and for one another. We have discussed the expectations listed below. Each of us is committed to living up to the expectations that are marked with an asterisk. The expectations with question marks are ones that we have not taken on for ourselves, are still under consideration or require future clarification: ROBERT Expectations I have for myself * Continue the growth and profitability of my district. * Personal and professional development. * Get better at listening to others and having reasonable expectations. * Learn to see the company picture and my part in it. * Get better at explaining why I am 'for' or 'against.' * Develop more patience. Expectations I think others may have of me * Be better at mentoring other staff. Expectations others said they have of me * Improve interaction on joint projects between other districts and my district * Retain key employees * Continue to develop positive image? * More accurate communication? * More physical presence at main office. * Expectation is reasonable and I will strive to achieve it. * Expectation is still under consideration or requires further clarification. DOROTHY Expectations I have for myself * Provide more mentoring in all districts. * Provide enjoyable working conditions for staff and peers. * Be responsive to co-workers and clients. * Be profitable, billable and carry my weight. * Be consistent. * Be respectful if it's warranted. * Don't procrastinate. * Improve my accountability. Expectations I think others may have of me * More marketing, less billable? * More community involvement. * Less critical of employees? * Improve communication skills. * Be open to ideas of others -- flexible. Expectations others said they have of me * Continue to learn about administrative side of company. * Be more involved in management and delegate more work? * Higher tolerance for risk (when delegating work)? * Be respectful even if it is not warranted. * Expectation is reasonable and I will strive to achieve it. * Expectation still under consideration or requires further clarification.
John Gromala can be reached at [email protected]
Mediation during Business formation or Reorganization What partners often leave unsaid: By creating a written charter, partners clarify what they expect of each other and how to operate together. Before they run into trouble. By David Gage, Dawn Martin, and John Gromala This article was published in "FAMILY BUSINESS" magazine Spring 1999. The concepts and principles apply to all closely owned partnerships and corporations. Jack and Alyce Schmidt started Spacesaver Systems Inc. in Kensington, Maryland, 25 years ago. A dozen years later the youngest of Jack's two daughters, Amy Hamilton, entered the business, which provides data storage equipment and records-management software to companies and government agencies in the Washington, D.C., area. In a couple more years Alyce's son, David Craig, left the Air Force to join the company. Then Jack's older daughter, Carla Adam, left a public relations career at Martin Marietta to roost at Spacesaver as well. In 1998, Jack and Alyce effectively shifted management and ownership to the three step-children, and remained on as board members and mentors. The step-siblings were operating like many partners in business--doing well on the family level, and running a growing company. Like many partners, too, however, they were functioning with the knowledge that they needed to address some significant issues that were bubbling beneath the surface. They were aware of a major parental expectation, too--that they agree on fair compensation. Jack told the children that he knew from experience how inequities, real or perceived, could creep into partnerships, especially when it came to money. He never wanted that to happen to them. Because the step-siblings had joined the company at different times and had varying levels of experience, they were not paid the same. But ultimately, Jack and Alyce thought, the three children should receive equal compensation. The parents never specified when that point should be reached. Furthermore, they knew that they could not make this decision for their offspring. Amy, David, and Carla would have to reach their own decisions about compensation. The children knew it, too. It was only a matter of time before they would be forced to grapple with the issue. After they heard a speech one of us gave to an audience of family business owners about conflict prevention, they also understood that trying to deal with compensation without examining other partnership issues would be unrealistic. They decided to use the process of creating a "partnership charter" as the way to address all the issues in their partnership, and contacted our office to act as a mediator. In a series of six half-day meetings held over two months, Amy, David, and Carla agreed on a document they would all sign that described their expectations for themselves and for each other, their company responsibilities, and how they would communicate, resolve disputes, and even handle a business or personal crisis. During the process, the siblings also discovered that because family partnerships are highly complex, any one issue was likely to be related to numerous others. Honoring their parents' request to struggle with the compensation issue meant they had to deal with roles and responsibilities, and sort out their different strengths and capabilities. When they did so, they found that the money issue was far less difficult to resolve than they had feared. In the end, they negotiated a system that offers not equal compensation, but a genuine sense of equity. They concluded that for the time-being they would keep their current responsibilities, but experiment with new roles and then assess how well it was working. They also agreed to periodically review the partnership charter, and refine it to match changing circumstances. This would prove particularly prescient; Jack unexpectedly passed away in March 1999. The process is the key The process of creating a partnership charter is useful for people going into a partnership, or into a corporation as co-owners, who want to test whether it's really a good idea. Partners-to-be can put themselves through the paces without taking the ultimate plunge. The process can be equally
eye-opening for people in established companies who are taking on a new family member or outside partner, and for existing partners who have never really talked to each other directly on how their relationship is going. The primary use of the process, however, is for people like Amy, David, and Carla at Spacesaver, who want to take preventative action before conflicts creep up on them. Unlike Amy, David, and Carla, most people do not tackle partnership problems before they arise. For the past decade we have been mediating disputes among family and nonfamily partners, listening to stories about what gets business partners into trouble. Inevitably, it comes down to a few recurring issues that most businesspeople know spell trouble for partnerships. Indeed, a poll of business people taken a few years ago by Inc. magazine and Xerox Corp. revealed that nearly two-thirds of the respondents thought that having a partner was a bad idea. Why? Their number one and number two reasons were the "inevitable conflict" and the "unmet expectations." Can it really be that bad? Yes. Nobody is taught in business school how to be a good partner. The main reason sharing ownership and decision-making frequently does not work is that business people fail to realize that the partnership itself requires as much attention and energy as the business. The most successful businesses can fail when the partnerships that run them become dysfunctional. Like cardiologists helping healthy people avoid future heart attacks, we attempted to design a prevention program that keeps partners out of trouble with one another. The program calls for the partners to prepare a partnership charter--a written document that gives them confidence and clarity about how they will operate and how the future will play out. And it works not so much because of the document itself, but because of the process partners go through to create it. The process is challenging because it demands that people think about the future in ways that they probably never have before. The process of creating a partnership charter involves a series of meetings in which all of the partners, or potential partners, talk explicitly about their thoughts on specific topics. Four to six half-day meetings spread over a number of weeks are usually required. Although there is no onecharter-fits-all design, partnership charters usually include agreements on most or all of 10 topics: expectations, values, interpersonal equity, ownership, communication (including personal styles and dispute resolution), employment and compensation, governance, management, scenario planning, and arrangements for leaving the partnership. The meetings are conducted by a third party. This is essential, because only an outsider can prompt the frank dialogue necessary to bring family members to terms with honest differences of opinion. We strongly suggest that professional mediators conduct the sessions; they are trained to help others speak their minds in an atmosphere of respect, and to help people conduct their own negotiations--which is fundamental if partners are to buy in to their charter once it has been agreed upon. Mediators are also skilled at varying the format of meetings to ensure that everything that needs to be said, gets said. The facilitator meets with each partner individually as well as the group as a whole. The individual meetings are critical, because partners are sometimes reluctant to tell each other what they really think. This is especially true for family members who have decades of history. By meeting privately, the facilitator elicits the "whole story"--information, perceptions, perspectives, and hidden agendas that seldom surface when partners meet on their own. Throughout the process, the facilitator works to bridge communication gaps by carefully scheduling individual and joint sessions, asking tough questions, and challenging rigidly held views. This process is necessary so that, months or years later, the partners are not shocked when they find that some critical information has gone unsaid. Co-owners have discovered that using their own attorneys, accountants, or other advisers to conduct such a process is not advisable. It is rare that all the owners or partners think that any of the company's regular advisers are truly neutral, since the advisers usually have had more contact with one family member. The adviser may also have a conflict of interest in working out different agendas among their clients. Furthermore, lawyers in particular are trained to vigorously represent one individual against another, a different mindset from working for the good of the entire group. Once the process is finished, the partnership charter finally becomes a product--a document that is signed by all partners. Requiring signatures helps ensure that each person has not glossed over issues. It also sends a message that everyone is committed to living by the provisions, and gives the partners something to rely on when memories fade or conflicts arise.
Not a partnership agreement How the partnership charter is used is up to the partners. When Mike Hubert of Glen Construction in Gaithersburg, Maryland, asked Bill Sharabi to join him and Ed Becraft as a partner in his family's business, the three men stated in the introduction to their charter that the ideas and agreements it contained were meant to capture their discussions about the partnership and how they will work together. They went on to say: "We also intend that it will help guide the drafting of the legal agreements we will have with one another regarding our joint ownership of Glen Construction, and do not intend for this Charter itself to be a legally binding document." Mike, Bill, and Ed were seeking clarity on every aspect of their arrangement before going to their attorneys. The attorneys reviewed the charter and used it to guide their drafting of a legally binding, financially oriented "partnership agreement" and ancillary legal documents. These documents would be used to drive and adjudicate specific ownership and control issues. Partners should be clear about the similarities and differences between partnership charters and partnership (or shareholder) agreements. Partnership charters are not meant to be legally binding or to replace partnership agreements. They are concerned with how partners will work with each other, maintain their partnership, and run the business. There are four primary objectives for creating a partnership charter: to achieve clarity about all issues that affect the partnership; to heighten understanding about the people involved; to strengthen the internal capacity for communication, planning, and decision-making; and to resolve issues that commonly produce conflict among partners, such as misperceptions and false expectations. The process of creating a charter deliberately requires intense work on the part of the partners, which itself creates a sense of teamwork and stronger buy-in. In contrast, a partnership agreement is a legal document drafted by lawyers, with minimal input from the partners on matters considered non-legal. Its purpose is strictly to serve as a legally binding contract about rights and duties related to specific items such as ownership shares. While these items are significant, they are less crucial to the success of the partnership than the relationship between the partners, as ironed out in the charter-making process. Although the two documents cover some similar items, partnership charters cover them in more depth. For example, a partnership agreement must spell out who will have which titles and how much equity each person will have, but it will typically contain only the details that are legally necessary. In the process of creating a partnership charter, the partners will talk about what each title means, including the responsibilities and authority that go with each title. Also, the charter language will usually include some way of measuring whether people are living up to their duties, and what will happen if they are not. Other issues such as managing the company, compensation, and ownership are worked out in the same thorough way. While the partnership agreement records who owns what percentages, the discussions about ownership in the partnership charter will delve into what those numbers mean to each person. For example, how was 50-50 decided upon? Was it because each person was agreeing tacitly to work as hard as the other? When and under what circumstances could that change? Is there agreement that new partners could be brought on board and under what circumstances? What are the implications of 50-50 ownership for managing the business? For resolving disputes? Clarifying expectations Unmet expectations are the most frequent cause of trouble in partnerships. This may have been most clearly expressed by Richard Hayman, president of Hayman Systems, a family business in Maryland, who has been in numerous partnerships over the years. At a recent Family Business Forum meeting at American University, he described his personal strategy for combating disappointment with one particular partner: "I went in with zero expectations and it worked beautifully. My partner didn't do much, but that was probably perfect given the circumstances. The company became a great success." Unrealistic expectations are a prescription for disappointment, and ambiguous expectations are a prescription for conflict. Having zero expectations is certainly rare. As a homework assignment during the process of creating a charter, partners are asked to list their expectations for each individual partner, for the business, and for the partnership as a group. They then bring in their lists and discuss them. The objective is to make sure that everyone
knows the other's expectations and accepts them. If they don't, more discussion must ensue. The expectations of the partners form the basis of their commitments to one another. In the process of clarifying expectations, Amy, David, and Carla managed to bring certain unclear or unstated matters to light. For example, David and Amy heard from Carla that in order to really get up to speed as a co-owner with them (one of her expectations for herself), she wanted more mentoring from them. Amy learned that Carla would appreciate more frequent communication about the progress of the software development team. David, in turn, wrote on his list that he expected Carla to "help bring and implement solutions to problems, and not simply identify the problems." In these discussions, family business members have to be sure to address a whole layer of expectation that is usually hidden: the expectations of those who have gone before--mothers, fathers, grandparents, and the ever-present founder, no matter how many generations ago he or she started the company. Even though founders die or retire from their businesses, their presence can remain alive in the form of their stated or unstated expectations for their offspring. Interpersonal equity The second fundamental topic addressed in a partnership charter is interpersonal equity. In business, as in life, the perception of a lack of fairness is a major source of conflict. Part of the problem lies in the difficulty people have in talking about what is fair and what is not. Disgruntled partners insist, "It is just a feeling I have." But what precedes the feeling is much more critical. From a little book written years ago by Richard Huseman and John Hatfield called "Managing the Equity Factor," we have developed a concept we call "partners' interpersonal equity." It puts meat on the bones of fairness and makes the issue easier to discuss. According to our concept, partners constantly, and perhaps unconsciously, monitor what they put into the partnership and what they get out of it. This is not just about money. It is about the expertise each person brings, the ability each has to control his or her own work life, how hard each is working, and how much each contributes to realizing the company's goals. What results from these comparisons is tantamount to an interpersonal balance sheet--which is based more on emotion than money, and more on perception than reality. This is an important concept that experienced partners appreciate more often than younger partners. When partners feel they get more out than they put in, they usually feel highly motivated. When the converse is true, we say a state of partnership distress exists. Partnership distress is eventually relieved in one of five ways: The disadvantaged partner puts in less time or effort; finds a way to create more "equity" by taking more sick days or vacation or perks; sabotages the partnership; tries to end the partnership or his or her role in it; or notifies the other partners that the partnership deal must be re-negotiated. Obviously, only the last option is healthy, but it is usually the one least taken. To avoid a sense of interpersonal inequity, partners who are creating a charter draft lists of what they think they each contributes to the partnership and the business, as well as what each wants to get out of it. Each partner develops lists for the other partners, too (see "Common complaints of family partners," p.24). Then they meet and discuss their ideas. This exercise is very important to the long-term health of the partnership because it gives everyone a way to appreciate what their partners value, and to see if it fits with their own notions of how they should be operating. By knowing what each other thinks is important and values, partners can attempt to give each other more of it, thereby increasing their partners' upside and ultimately their satisfaction with the partnership. Surprise scenarios The third fundamental item to be expressed in a partnership charter is scenario planning. It is a technique to help partners minimize surprises and create guidelines for how they will deal with the unexpected if it happens. Each person creates a list of all the crucial decision points the team could face. Then the whole group comes together, combines the individual lists, and brainstorms about other possibilities they may have missed. The siblings at Spacesaver had over 20 items, including such extreme business and personal events as a major downturn in the marketplace, a buyout offer from a competitor, and abysmal performance by one of them. They considered various alternative strategies to handle the
hypothetical situations, and created guidelines for what they would do as a team. One of the issues confronted at a later meeting was the unexpected death of a key person. When Jack died suddenly, all three of the children knew what to expect as far as the business was concerned. They were thus free to grieve over the loss of Jack without the confusion of what it meant for them as owners or executives. Scenario planning is particularly useful for partners who are just coming together and have little experience and knowledge of each other--the two building blocks of trust essential to a healthy partnership. Scenario planning helps jump-start partner trust by helping partners learn a lot about how each would operate in difficult circumstances. Even partners who have known each other for some time usually gain new insight into one another's judgment. Better communication Finally, partnership charters must spell out how the parties will communicate, also crucial to a working partnership. In order to hone their communication skills, Amy, David, and Carla took a brief personality test (the Personal Profile System), the results of which helped them expand on what they already knew about one another. In a nutshell, Amy is an inspirational type who thrives on working through people. That helps explain why she has been the driving force behind the company's rapid movement into the software products market. She is clear about the results she wants and effective at securing assistance with time-consuming details. Similarly, Carla likes achieving results by utilizing the strengths of others. She exhibits enthusiasm and friendliness and judges others by their ability to verbalize their ideas. Her outgoing manner is typical of people who are good sellers and can close a deal. In contrast, David is more easygoing, deliberate, and patient. His style is to be calm, steady, and persistent in accomplishing challenging assignments. He is strong on analyzing technical and logistical requirements of complex assignments, which is why he recently decided to take full control of Spacesaver's installation department and improve its overall efficiency. His conscientiousness serves him and the company well when he attends to the quality-control concerns of clients. Understanding their personalities helped the siblings appreciate their respective strengths more fully and enabled them to talk more articulately about their differences. This, in turn, provided the necessary information for discussions about how they could communicate and work more effectively together--that is, be a more effective team. Amy and Carla, for example, learned that to be more effective with David, they would do well to prepare and organize what they want to discuss with him; they would have to ease up on their sometimes impulsive style and present David with the pros and cons of ideas. David could try to be more direct with them--get to the point quickly and stress the results of his ideas and plans. He has discovered that they appreciate it when he is encouraging, and when he goes easy on the details. To maximize their chances of making these modifications in their day-to-day interactions stick, they chose to incorporate these notions into their charter. What if my partner resists? Committing to create a partnership charter is not something people do lightly. It requires time and energy and a willingness to be open and honest with one another--to hear things that may be difficult to hear. Often getting everyone involved is not easy. Five partners may think a charter is exactly what they need while a sixth may oppose the idea. When we recently discussed this issue with Rick Maurer, who wrote the book "Beyond the Wall of Resistance" (Bards Books, 1996), he offered the following insights: People who are opposed to sitting down with family members are likely to wish to retain the status quo, particularly if they happen to hold the most power. They may talk about the time and expense of creating a charter, or say that such preventative work is unnecessary. But deep down, Maurer says, the problem is often an unspoken fear. "Most people fear change, so any serious discussion about expectations for the future can feel threatening." He also points out, "When the need for change is greatest, the resistance to planning is strongest." To understand what may be behind a person's rational objections, Maurer recommends imagining what it is like for the person who does not want to talk. He suggests asking oneself: "If I were sitting in that person's seat, what would I be afraid of? Why would I be hesitant to try such a
process?" Once the resistance is understood, he says, then reassurance often will bring that person around. Another impediment to candid discussion among family members is the desire "not to hurt the feelings of those whom we love and respect." Families that appear to be happy can be avoiding sensitive topics. Left alone, matters fester until some unexpected event produces a gut-wrenching explosion. Controversy arises among business owners more often as a result of misunderstanding than malevolent motives. When owners get beyond the resistance and begin working together on a partnership charter, they discover that openly dealing with issues lessens the likelihood of misperception, builds trust and confidence, and improves their chances for long-term success. Natalie and Pete spell out their expectations Excerpts from an actual partnership charter between a sister and brother (with names changed). Expectations We are aware that partners' unmet expectations can be a source of friction. To lessen the liklihood of this problem, it is our goal to be explicit about our expectations... For ourselves: Natalie will take a management leadership role. Pete will represent the business with renewed pride and commitment. For each other: Natalie expects Pete to support her management initiatives vis-a-vis the employees. Pete expects Natalie to spport his decisions in public even if she disagrees privately. For the business: Natalie expects the business to become the no. 1 distributor in the service eare by 2000. Pete expects to diversify product lines by 2000. For the partnership: While responding and valuing our family relationship, we both expect to be guided by business interests in our partnership decision-making. VALUES Recognizing that partners sometimes have trouble with one another, we have taken a values test and discussed our values with each other. Personal values: We value treating others fairly and being upfront with each other. We value hard work and doing the best possible job. Pete's highest values include having authority and being recognized in the industry. Natalie's highest value is intellectual and professional development. Company values: We value servicing clients' needs. We value investing in employees who share our vision. PARTNERS INTERPERSONAL EQUITY (FAIRNESS) We recognize that each of us contributes a variety of things to the company that help it succeed. We want to be aware of the many things that each of us brings and recognize each other for them, knowing that this will help us both feel more satisfied and motivated... What Natalie brings: Stability. Reputation in the field. Contacts. What Pete brings: Relationships with manufacturers. Marketing abilities. We both recognize that our satisfaction in owning and running the company What Natalie wants: Ongoing opportunities for professional development. Flexibility. What Pete wants: Recognition as a leader within the organization. Time and support to develop expertise in financial analysis. COMMUNICATION We recognize the critical importance of healthy communication to a strong working relationship. We have discussed specific steps we can take for eacj other to ensure more open and clear communication... Natalie for Pete: I will... Be patient in drawing out your goals. Give you time to adjust to changes. Have things clearly spelled out in writing for you to see. Pete for Natalie: I will... Provide reassurance that no surprises will occur. Provide explanations in a patient and respectful way, free of critical and disparaging quips. Natalie and Pete: We will meet once weekly to discuss issues regarding our partnership and the business. We will meet quarterly to review and update our Partnership Charter. - D.G., D.M., J.G.
together is based on receiving many things from each other and the company, in addition to monetary compensation. David Gage is a mediator, psychologist, and founder and director of Business Mediation Associates (BMA) in Washington, D.C. He is writing a book titled "Tying Fortunes and Futures: Partners in Business." Dawn Martin is a lawyer, mediator, and associate at BMA. John Gromala, is a lawyer, mediator and former bank chairman in California. He is an associate of BMA.
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Science Information Competition Government interference
Change • Single word • New technologies replace old products • Theodore Levitt • It makes business more complex • It makes it knowledge based • It makes consumers learners Bigness • Mass production and mass marketing are the order of the day • Get you economies of scale • benefits can be extended to the consumers • Government wants to make it simpler to increase size Diversification • orientation to move ahead with stability and endurance, • have diversified product portfolios • Look at the Tata group • go for product proliferation - HLL • Aditya Birla -to depend on any one sector for growth or profits- cyclical phases. • No such rule in the western countries Takeovers have increased Year No. of takeovers 1988 15 1989 18 1990 25 1991 33 1992 30 1993 114 1994 150 Globalization • Going international: a quality of modern business. • Political boundaries are no barriers • globalization is fast becoming imperative. • Internationalization of business is a means of sustaining a strong domestic base in terms of technology, product, market and capital over a long period Science Science is also occupying a major role. massive contributions being made to business by science. And many more are to come. Future scientific breakthroughs will offer attractive opportunities to alert businessmen. Current means of manufacturing and selling will be scraped in order to remain competitive, and new means of financing these tremendous changes will be developed. Information the recognition of and need of information. The complexity of modern businesses and government requirements has spearheaded
this growth. Freedom from the drudgery of the paper work. IT itself is a subject to revolutionary change. The advancement in IT is breathtaking. As business gets globalized, it will have to heavily rely on the means of IT. Competition Gone are the days of sheltered markets, Businessmen are asked to eliminate inefficiency, cut down costs and improve productivity. It is now the question of survival of the fittest Inefficient and marginal firms will be asked to wind up. Competition not only benefits the competing firms but is also beneficial to the consumers. Porter has said that companies benefit from having strong domestic rivals. Government Interference:
Interference in business is common The government interferes in various ways The interference is necessary in order to enable the government to exercise control There is no country in the world where the government does not interfere in the business In India it performs dual role However, starting from 1980’s there came a new wave of reforms. However, no economy is totally free from government interference. Are you a strategist or just a manager? • • • • • • HBR article by Hans Hinterhuber and Wolfgang Pop. Helmuth von Moltke- 1858-88. One of the greatest strategists He was a prolific writer Two characteristics: General electric’s CEO once said that strategy follows people.
Strategy cannot be taught • Helmuth von Moltke’s strategies won the wars • He said strategy is applied common sense • it can’t be taught • School essentially aims at mediocrity • The best it may do is to offer managers ways to develop themselves 1. Do I have an entrepreneurial vision- alike north star? • Job Steves and Woznaik Steves’ vision • Gottlieb Duttweiler’s migras cooperative • Enrico Mattei- founder Italy’s State owned petroleum company • President of a swiss technological institute had a peculiar vision • Stephen Davison Bechtel’s construction comopany had a remarkable vision. 2. Do I have a corporate philosophy? • When a vision is put to concrete terms it becomes a corporate philosophy • George Bernard Shaw- a good battle cry is half the battle • Frank Stronach- Canadian Co.Megna International has a concrete philosophy • An entrepreneur locked in cut throat competition should know the opponent’s corporate philosophy.
3. Do I have a competitive advantage? Strategy is the evolution of the original guiding idea according to changing circumstances The central element of a strategy is to create a permanent competitive advantage examples are: price performance ratio, better service, unique product design German ski manufacturer- “the one that builds the skis slowest builds the fastest skis” 4. Do my employees use their ability to act freely in the interest of the company? A strategically managed company is a confederation of entrepreneurs, with management responsibility vested in strategic business units. These micro enterprises are the centres for integrated action Issue directions and not detailed instructions for them Let the have courage to stand up to their own convictions. They however, must first know the vision & philosophy of their company 5.Have I built an organization that builds my vision? Have I filled up all managerial positions with people who can think and act entrepreneurially? Are their duties, authority and responsibilities such that they can take autonomous decisions in the interest of the company? 6. Are the line managers involved in the strategic planning? Strategic planning is the job of those line managers who are responsible for implementing a strategy. Therefore the key to successful strategy implementation is to involve them in this process Train them, if required. Tell them what is the vision of the top management An Italian textile company uses a strategic controller to quash the views of those who disagree with the personal priorities of the top management. 7. Is the corporate culture in harmony with the strategies? The more they are in harmony, the greater is the strategic management competence. Can you develop your company as a management school, and just keep it as a school of life? In later type, employees tend to project an active and involved work style 8. Do I point out directions and take new approaches? What is permanent about competent strategic management? You set the directions and not the limits You raise the questions, not your answers You take the path and not the targets attained You select employees to carry out their vision and not the buildings they erect. What matters most is the person’s understanding of who he or she really is 9. Have I been lucky in my life so far? Moltke observed good strategist also needs good luck Hence, put yourself in a position that favours being lucky However, it is better to judge the competence of a strategist by the number of set backs and his ability to absorb the shocks without being deterred. 10. Do I make contribution to the development of the society and myself? Robert Lewis Stevenson: “You have success in your life if you have lived decently, laughed frequently, and loved a lot, won the respect of the clever men and love of children, filled out your place and accomplished your task,if you left the world a better place than you found it…if you saw the best among other people and always did your best” The strategist as a student, teacher and symbol How to measure the strategic competence of the managers:-The vision they had; the way they modified it; and the way they led others to follow and accomplish their mission This way one can distinguish an average manager from a good manager. Good strategists have the ability to make employees and the outside world embrace their visions
Linkage between environmental analysis and strategic management Analysis provides an understanding of the current and potential changes It provides inputs for strategic decision making. It should facilitate and foster strategic thinking in organizations William Gluek and Lawrence Jauch’s negative theory Firms which systematically analyse the environment are more effective than those which do not Environmental analysis - an input to the strategic management Typologies of Environment Organization-environment trade-off Understanding Environment Levels of environment: Linkages of macro environment and a company Process of environmental Analysis Scanning Monitoring Forecasting Assessment Sources for scanning
Session – 3 : Business Environment
Political Environment and its impact on business The Government plays an important role Irrespective of the economic system Yet the degree of interference in business varies depending on the nature and stage of development of the economy the behaviour of the private sector the political philosophy social attitude etc. Types of roles played by the government Regulation – Direct, Indirect Promotion – Support, Infrastructure Entrepreneurship – Commanding Heights of the economy, Reversal of Role Planning – Particularly in the Developing Countries, State as a custodian of the welfare of society Modern Concept of the State Complete Sovereignty in its defined territory It has legislative and coercive powers It can raise taxation and distribute proceeds It has to be above sectional interests State’s actual autonomy is limited WTO,GATT,IMF,WB Public Sector- the rationale Why public sector companies? Heavy investment required Big gestation period Control over the commanding heights of the economy Infrastucture – low yield Defence – strategic importance
Public utilities – to improve quality of life Financial sector- Development finance institutions Has Public sector grown to unmanageable size? Mounting losses Administered prices Over-staffing Red tapism Slow bureaucratic style of decision making Why Privatization? To raise additional resources To be used elsewhere To make them more efficient To get rid of the sick units To allow private sector to work as the Partners to growth Political Influences over business Through taxation and interest policies Through public spending on goods and services Through regulation Through taxation and interest policies Inflation – High tax rates- Low Disposable income Recession- Low tax rates – High disposable income Interest rates- high in the inflation and low in the recession Through public spending on goods and services Inflation- curb public spending Recession- increase public spending Through regulation Issue of licences Annual reports FEMA SEBI SCRA RBI Elements of state policy: Equity it implies an equitable distribution of resources which is regarded as fair either in income distribution or in getting access to the services Providing the safety net- minimum standards so that everyone can enjoy a minimum amount of the consumption of a particular good Market Failure Imperfect competition Externalities Public goods Imperfect information
Objectives of the State Policy Economic Growth Full Employment Price Stability – keep inflation under check Main policies of the Government
Fiscal Policy Taxation and other sources of income Government Spending Debt Management Monetary Policy Interest Rates Exchange rates Control over money supply Selective controls over the credit given by the commercial banks Foreign Trade Policies import substitution export promotion promotion of foreign investment in India Economic Planning Full Partial Government Initiative as regards Global Markets: Protectionism High Import Tariffs Import Quotas Preferential Procurement Restrictions as to how much profit you can repatriate Globalization Removal of Tariff Removal of Quotas Allow Foreign Equity Participation Allow freedom to repatriate Profits Do away with subsidies Government’s Influence on competition in an industry: Government can bring in considerable influence on competition in an industry as- Buyer, Controller, Supplier The Government can influence the timing and extent of structural changes: Telecom industry,Cable TV, Insurance sector Major Legislation Regulation of competition – IDR Act, BIS, Standards of Weights and Measurements Act MRTP Act Companies Act Food Industry- Food inspectors Subsidies to Backward areas CENVAT
Income Tax Act Workmen’s Compensation Act Minimum Wages Act ESI Act Provident Fund Act Information Technology Act
Session 4 : Ecological Issues
Ecological Environment and its Impact over Business • Earth is the only planet that has life support systems • Life support systems worked well in the pre-modern era • Modern humans have worked to master the nature and caused ecological imbalance State of Environment in India • Definition • Issues • Environmental Concern • Concept of Sustainable Development • Policy Responses of the Indian Government Definition Environment includes water, air and land and the interrelationship which exists among and between water, air, land, and human beings, other living creatures, plants, micro organisms and property. Issues: Population, Urban-Rural mix, Land, Forests, Wildlife, Water, Air, Industrial Pollution, Electric Power, SSD Project, Toxic Waste, Hazardous Waste, Environmental Refugees. 1. Population • 16% of the World’s Population Lives in India • Its area is only 2.42% of the World’s Total Surface Area. • In 1947: 1/7th of it lived in the cities • Now 1/4th of it lives in the cities 2. Urban Rural Mix • 1951- Urban Population was 62.44 million • 1991- 217.17 million • Metropolis faced population explosion • This created environmental problems 3. The Land • Extent of degradation is alarming • Planning Commission estimates: 174m.hec.affected by soil erosion
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deforestation, overgrazing, faulty agricultural practices, and constant search for firewoodmain causes
4. Forests • Part of India’s heritage • They help in maintaining balance in Eco-system • Loss of forest cover led to floods, water logging, soil erosion and other problems 5. Wildlife • Very rich in India • Over 75000 species of fauna and 4500 of flora • Poaching and trade led to damage to wildlife 6. Water Quality • Severity of problem increased • The rivers are all polluted • The community and industrial waste are not properly treated 7. Air Quality • Air pollution is a threat to the environment • Issue highlighted through Mathura Oil Refinery Project • Recent Survey discovers that air pollution trebled in major cities between year 1970 and 1984. 8. Industrial Pollution Industry-wise information 9. Electric Power Increasing need for generation of power Hydroelectric, thermal, nuclear power plants have potential for pollution Led to several moves against them Sardar Surover Dam Controversy 10.Toxic Chemicals, Fertilizers and Pesticides 1960 Green Revolution contributed to this There is a need to increase the production of foodgrains and protect the crops from insects But this also adds to the problem of the contaminated food Metal pollution is another variant 11. Hazardous Waste A waste substance is classified as hazardous and damaging to human health or the environment if it has one of these characteristics:Ignitability at low temperature corrosivity reactivity radioactiviy The problem is astounding in proportions 12. Environmental Refugees Large scale hydroelectric projects, in addition to projects Problem of rehabilitation Environmental Concern Mass Poverty Population Explosion Need to industrialize quickly
Environment, Ecology, and Development need to be balanced VIII Plan: Sustainable development needs measures to preserve and conserve nature, the fragile and critical eco-system Concept of Sustainable Development Defined as state where development meets the needs of the present without compromising the ability of the future generations to meet their needs. The rich countries have an obligations to help the Third World countries adopt strategies for sustainable development. Elements of Environmentally sustainable development Policy Instruments Institutional Change legislation national Environmental Standards Environmental Risks Laboratory testing and QA/QC procedures Environmental Enforcement and compliance Environmental Audits Economic Incentives and disincentives 1. Environmental Protection Policies and Programmes in India Major Religions of the country have stressed the need to live in harmony with the nature King Asoka: Protection of animal life and the protection of environment is the sacred duty of the king Government of India: Environment poses a great challenge The national conservation strategy and policy statement: The purpose…reinforce the traditional ethos and…build a conservation society…in harmony..nature Environmental Policy Objectives To protect and improve the quality of the environment for the well-being of India’s people To carry out development programmes according to environmentally sound principles To ensure the conservation of natural resources through its rational use for various purposes 2. Institutional Changes The year 1972 marked a water shed in the history of environment management in India. UN-Conference on human environment was held in 1972. The need to set up a national body to tackle these issues was realized. NCEPC was set up as an appex advisory body Department of Environment was set up in 1980 Central Pollution Control Board, SPCBs set up 3. Environmental Legislation Main Law is the Environment Protection Act (1986) Water (Prevention & Control of Pollution) Act (1974) Air (Prevention & Control of Pollution) Act (1981) Wildlife Protection Act(1972) Forest Conservation Act(1980) They are designed to ensure adherence to the rules and regulations set for the protection and conservation of environment 4.National Environmental Standards EPA of 1986, empowers the Central Govt. to set standards for the quality of environment in its various aspects and for emission and effluents. If high standards have to be achieved there would be a concerted and well coordinated effort necessary on the part of the govt., public and the industry
5. Environmental Risks These arise or transmitted through air, water, soil or food chains to the humans The source could be technology or natural calamities Estimate, assess and evaluate and combat these risks though proper policies The approach could be general or case-by case specific. In India, there is considerable overlap on environmental risk assessment job between ministries 6.Laboratory Testing and QA/QC Procedures EPA empowers the CG to establish or authorize such labs Sec-23 CG can delegate these powers to the states Over 70 such Labs Authorized for the analysis of air and water samples Drawbacks: Poor monitoring to ensure the necessary QA/QC procedures & Lack of uniform Training Program for all technical and professional personnel in such Labs 7. Mechanisms for enforcement and compliance Enforcement requires regular inspection, monitoring and investigation of violation Policies are there right, but proper implementation holds the key Judicial resort by the concerned industries often delays the implementation Need to make the enforcement machinery more effective and early expedition of the matters by the judiciary. 8. Environmental Audits 13.3.1992: EPA Rules were amended To require any person engaging in the industrial activity to submit an environmental audit report for the financial year ending March 31st on a form issued by the SPCB Information sought: Qty of raw material used, Air and water pollution generated, Amount of solid waste generated, Recycling and reuse of such waste Objective:To Promote environmental accountability at the point of source. 9.Economic Incentives and disincentives Basic essence of the Environment Policy is to ensure compliance to the various rules and regulations by monitoring the behaviour of the industries. 100% depreciation allowance for Pllution Control Equipments lower customs and excise duties on such devices Financial assistance by the term financial institutions to install such devices Not much impact, however Prospects for Management Alternative Sources of energy Combating Pollution Toward Sustainability Regreening the planet Alternative Sources of energy Reduce reliance on expensive and polluting fossil fuels Nuclear-plants are high cost alternatives plus there are safety concerns Newer options are natural energy sources Solar energy and hydroelectricity are important among them. Solar energy and wind power are cost effective and efficient source of energy These alternatives are better as they are renewable, cheap and less damaging to the environment. Combating Pollution Make laws and implement them effectively Reduce the use of fertilizers and pesticides Crate plastics which are less chemically complex and can be recycled without potential hazards set emission norms
Prosecute the defaulters The production of one ton of steel in India creates 6-8times more pollution than in Japan The solution lies in the adoption of energy saving measures and adoption of cleaner fuels. Toward Sustainability This implies that non-renewable sources of energy should not be wasted Wide disparities in the income and wealth be reduced Organic fertilizers should replace the artificial ones Intensive agriculture techniques be adopted Arrive at international agreement on preservation of environment Regreening the planet
Humans do have techniques through which they can mitigate or even reverse son of the negative impact of their activities plant more trees Feed animals in designated areas reduce consumption of items that require wood or animal skin old mining sites can be cleaned and trees can be planted on them. Develop market for Eco-friendly and recycled products.
Session - 6&7 : Business Environment
Political Environment and its impact on business The Government plays an important role Irrespective of the economic system Yet the degree of interference in business varies depending on the nature and stage of development of the economy the behaviour of the private sector the political philosophy social attitude etc. Types of roles played by the government Regulation Direct, Indirect Promotion Support, Infrastructure Entrepreneurship Commanding Heights of the economy, Reversal of Role Planning Particularly in the Developing Countries, State as a custodian of the welfare of society Modern Concept of the State Complete Sovereignty in its defined territory It has legislative and coercive powers It can raise taxation and distribute proceeds It has to be above sectional interests State’s actual autonomy is limited WTO,GATT,IMF,WB Public Sector- the rationale Why public sector companies? Heavy investment required Big gestation period Control over the commanding heights of the economy Infrastucture – low yield
Defence – strategic importance Public utilities – to improve quality of life Financial sector- Development finance institutions Has Public sector grown to unmanageable size? Mounting losses Administered prices Over-staffing Red tapism Slow bureaucratic style of decision making Why Privatization? To raise additional resources To be used elsewhere To make them more efficient To get rid of the sick units To allow private sector to work as the Partners to growth Political Influences over business Through taxation and interest policies Through public spending on goods and services Through regulation Through taxation and interest policies Inflation – High tax rates- Low Disposable income Recession- Low tax rates – High disposable income Interest rates- high in the inflation and low in the recession Through public spending on goods and services Inflation- curb public spending Recession- increase public spending Through regulation Issue of licences Annual reports and returns Vat- MODVAT _ CENVAT FEMA SEBI SCRA RBI Elements of state policy: Equity Market Failure Equity it implies an equitable distribution of resources which is regarded as fair either in income distribution or in getting access to the services Providing the safety net- minimum standards so that everyone can enjoy a minimum amount of the consumption of a particular good Market Failure Imperfect competition Externalities Public goods
Imperfect information Objectives of the State Policy Economic Growth Full Employment Price Stability – keep inflation under check Main policies of the Government
Fiscal Policy Monetary Policy Foreign Trade Policy Economic Planning Fiscal Policy Taxation and other sources of income Government Spending Debt Management Basics of fiscal policy Fiscal Policy is basically the revenue and expenditure policy of the Government with the help of which the govt. tries to achieve its various socio-economic objectives Main Objectives of the fiscal policy
Ensure socio-economic justice Curb conspicuous consumption Encourage savings by the households Encourage investments Develop backward areas Raising revenue Protect indigenous industry Control Production and Prices How the fiscal policy works Stabilization Refers to steady non-inflationary expansion Recognized in 1929-Public works Taxes are built in stabilizers Distributive justice Progressive Income Tax High Tax on capital Transfer Higher tax on transfer of property Subsidies in food and fertilizers Anti poverty Programmes Promotion of economic growth Stability gives a boost to the production Encourages investment Monetary Policy Interest Rates Exchange rates Control over money supply Selective controls over the credit given by the commercial banks
Basics of Monetary Policy Formulation and Execution by the RBI Objectives: Controlled Expansion of money& Sectoral Deployment of funds Instruments: OMO, Interest Rates, Selective controls Limitations Serious failure- In the allocation of credit to the neglected sectors Foreign Trade Policies import substitution export promotion promotion of foreign investment in India Economic Planning Full Partial Government Initiative as regards Global Markets: . Protectionism High Import Tariffs Import Quotas Preferential Procurement Restrictions as to how much profit you can repatriate Government Initiative as regards Global Markets: . Globalization Removal of Tariff Removal of Quotas Allow Foreign Equity Participation Allow freedom to repatriate Profits Do away with subsidies Government’s Influence on competition in an industry: Government can bring in considerable influence on competition in an industry asBuyer, Controller, Supplier The Government can influence the timing and extent of structural changes: Telecom industry,Cable TV, Insurance sector Major Policies: Regulation of competition – IDR Act, BIS, Standards of Weights and Measurements Act MRTP Act Companies Act Food Industry- Food inspectors Subsidies to Backward areas Excise Act Income Tax Act Workmen’s Compensation Act Minimum Wages Act ESI Act Provident Fund Act Information Technology Act Corporate Governance:
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What does Corporate Governance mean? Corporate Governance is the system by which the companies are directed and controlled by the management in the best interest of the stakeholders and others ensuring greater transparency and better and timely financial reporting. The Board of Directors is responsible for Governance of their companies.
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Had there been some reports on Corporate Governance published internationally before the Concept was adopted in India? Yes. A number of reports and codes of corporate governance have already been published internationally-notable among them are the Report of Cadbury Committee, the report of Greenbury Committee, the Combined Code of the London Stock Exchange, the OECD Code on Corporate Governance, the Blue Ribbon Committee on Corporate Governance and the Hampel Committee on Corporate Governance.
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How the concept of Corporate Governance evolved in India? The Confederation of Indian Industry (CII) had published Desirable Corporate Governance – a code. The Securities and Exchange Board of India (hereinafter referred to as a SEBI) had set up a committee under the chairmanship of Shri Kumar Mangalam Birla to formulate the code of Corporate Governance. Based on this report, SEBI has by Circular No. SMDRP/POLICY/CIR-10/2000, dated on 21.2.2000 directed Stock Exchanges to amend the listing Agreement between them (i.e. Stock Exchange) and entities whose securities are listed on such Stock Exchange and include a new clause 49 in such listing Agreement. What is specified in Clause 49 of the Listing Agreement? As per paragraph VIII of Clause 49 of the listing Agreement, the entity is required to obtain a certificate from the auditors of the entity as regards compliance of conditions of Corporate Governance as stipulated in that Clause. This certificate is required to be annexed with the Directors’ Report, which is sent annually to all the shareholders of the entity. This certificate is also required to be sent to the Stock Exchange(s) along with the Annual Returns filled by the entity. The expression “auditors of the company” would mean the auditors appointed to audit the Financial Statements of the entity under the relevant statues.
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What is Management Responsibility? Management’s Responsibility for running its business implicitly requires it to take reasonable steps to ensure the implementation of the conditions of corporate governance in clause 49 of the Listing Agreement.
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What is Auditor’s Responsibility? The auditor’s responsibility in certifying conditions of corporate governance relate to verification and certifying factual implementation of conditions of corporate governance as conditions stipulated in clause 49 of the Listing Agreement. Such certification is neither an audit nor an expression of opinion on financial statements of the entity. The certificate from the auditor as regards compliance of conditions of corporate governance is neither an assurance as to the future viability of the entity nor the efficiency or effectiveness with which the management has conducted the affairs of the entity.
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As per the SAP issued by the ICAI, the auditor should comply with the “Code of Conduct” and the guidance note issued by the ICAI in certification of compliance of condition of corporate governance. What conditions of corporate governance are to be complied with as per the Listing Agreement? 1. The company agrees that the Board of Directors of the company shall have an optimum combination of executive and non-executive Directors with not less than 50% of the Board of Directors comprising of Non-Executive Directors. The number of independent directors would depend whether the Chairman is Executive or NonExecutive. In case a non-Executive Chairman, at least one-third of board should comprise of independent directors and in case of an executive chairman, at least half of board should comprise of independent directors. 2. The company agrees that all pecuniary relationship or transactions of the nonexecutive directors viz a viz. the company should be disclosed in the Annual Report. 3. The company agrees that a qualified and independent audit committee shall be set up and that; - The audit committee shall have minimum three members, all being nonexecutive directors, with the majority of them being independent , and with at least one directors having financial and accounting knowledge; - The chairman of the committee shall be an independent director. - The chairman shall be present at AGM to answer shareholder’s queries - The audit committee should invite such of the executives as it considers appropriate and (particularly the head of finance function) to be present at the meeting of the committee, but on occasions it may also meet without the presence of any executive of the company. The finance director, head of internal audit and when required a representative of the external auditor shall be present as invitees for the meeting of the audit committee. - The company secretary shall act as the secretary to the committee. 4. The audit committee shall meet at least thrice a year. One meeting shall be held before finalization of annual accounts and one every six months. The quorum shall be either two members or one third of the members of the audit committee, whichever is higher and minimum of two independent directors. The audit committee shall have powers which should include the following: - To investigate any activity within its terms of reference - To seek information from any employee - To obtain outside legal or other professional advice - To secure attendance of outsiders with relevant expertise, if it considers necessary
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6. The company agrees that the role of the audit committee shall include the following: - Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. - Recommending the appointment and removal of external auditor, fixation of audit fee and also approval for payment for any other services. - Reviewing with management the annual financial statements before submission to the Board, focussing primarily on; ? Any changes in accounting policies and practices
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Major accounting entries based on exercise of judgement by management ? Qualifications in draft audit report ? Significant adjustments arising out of audit. ? The going concern assumption ? Compliance with accounting standards ? Compliance with stock Exchange and Legal requirements concerning financial statements ? Any related party transactions that is transactions of the company of material nature, with promoters or the management, their subsidiaries or relatives etc. that may have potential conflict with the interests of the company at large. Reviewing with the management, external and internal auditors, the adequacy of internal control systems Reviewing the adequacy of internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the Department, reporting structure, coverage and frequency of internal audit. Discussion with internal auditors any significant findings and follow up there on. Reviewing the findings of internal investigations by the internal auditors into matters where there is suspected fraud or irregularities or a failure of internal control systems of a material nature and reporting the matter to the board. Discussion with External Auditors before the audit commences nature and scope of audit as well as has post-audit discussion to ascertain any area of concern. Reviewing the company’s financial and risk management policies To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors. ?
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If the company has set up an audit committee pursuant to provisions of company’s Act, the company agrees that the said audit committee shall have such additional functions/features as contained in the listing agreement. The remuneration of the non-executive directors shall be determined by the Board of Directors and disclosures on such remuneration shall be made in the section on corporate Governance of the annual report setting out the details regarding the entire remuneration package along with stock option details. The company agrees that as part of the Director’s Report or as an addition thereto, a Management Discussion Analysis should include discussion on the following matters within the limits by the company’s competitive position: Industry structure and developments. Opportunities and Threats. Segment-wise or product-wise performance. Outlook. Risks and Concerns. Internal control systems and their adequacy. Discussion on financial performance with respect to operational performance. Material developments in Human Resources / Industrial Relations front, including number of people employed. Disclosures must be made by the management to the board relating to all material financial and commercials transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in
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company shares, commercial dealing with bodies, which have shareholding of management and their relatives etc.) 11. The company agrees that in case of the appointment of a new director or reappointment of a director the share holders must be provided with the following information: A brief resume of the director; Nature of his expertise in specific functional areas; and Names of companies in which the person also holds the directorship and the membership of Committees of the board. The company further agrees that information like quarterly results, presentation made by companies to analysts shall be put on company’s web-site, or shall be sent in such a forms to enable the stock exchange on which the company is listed to put it on its own web-site. The company further agrees that a committee under the chairmanship of a nonexecutive director shall be formed to specifically look into the redressing of the shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends shares etc. This company will be designated as ‘Shareholders/ Investors Grievance Committee’. The company further agrees that to expedite the process of share transfers the board of the company shall delegate the power of share transfer to an officer or a committee or to the register and share transfer agents. The delegated authority shall attend to share transfer formalities at least once in a fortnight. The company agrees that there shall be a separate section on Corporate Governance in the annual reports of company, with a detailed compliance report on Corporate Governance. Non compliance of any mandatory requirement i.e. which is part of the listing agreement with reasons there of and the extent to which the nonmandatory requirements have been adopted should be specifically highlighted. The company agrees that it shall obtain a certificate from the auditors of the company regarding compliance of conditions of corporate governance as stipulated in this clause and annex the certificate with the Director’s report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual Returns filed by the company.
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Session - 9&10 : Social and cultural environment of business
Business Environment Understanding Social and Cultural environment of Business Social and cultural environment refers to the influence exercised by certain social factors which are ‘beyond the company’s gate’ What other factors the social environment comprises of? People’s attitude towards business Attitude of people to work Attitude to castes Family Collectivism and individualism Religion Education Social Responsibility of business People’s attitude towards business Largely determined by their culture Business systems are a product of beliefs and customs of the society in which they exist.Beliefs
and value systems concerning what is right and what is not, are basic to all business activity. Culture creates people Culture and globalization Culture determines goods and services Attitude of people to work How a worker looks at his work in the factory Indian Philosophy of renunciation does not contradict ‘Karma’ In a culture where work is worship the productivity has to be high However, where work is taken up on the basis of rewards expected, proper incentive schemes will have to be devised to make people work to the best of their abilities Attitude to castes Traditionally, Hindu, Islam And Christianity- have had caste system Hindu- Brahmins, Kshatriya, Vaish & Shudra Islam- ashraf and ajlaf Christianity- upper class and lower class Modern India- caste system is not as strict. They work together and that affects the way economic activities are carried out. Family Family is basic to all social organizations Family affects the child’s ultimate behavioral pattern It affects the inheritance and property rights and the transmission of cultural values Joint and nuclear family systems affect the ownership and share holding patterns of the corporate Example of Birlas, Mafatlals and Bajaj Collectivism and individualism It is related to such personnel aspect as the morale,multiplicity of trade unions and intra- or inter union rivalry Our culture talks about salvation and negation of the world Even if we do charity we do it for some gain for ourselves. Yet the spirit of collectivism is important and plays an important role in the determination of work relationships. Religion Rahu-ketu do play some role in corporate decision making Astrologers are regularly consulted Vastu-shilpies give consultancy for the way interiors or exteriors have to be designed Coconut is broken when new business is to begin Muhurut is checked before the shares are bought or sold after the Diwali Poojan Religion refers to a specific and institutioalized set or beliefs and practices generally agreed upon by a number of persons or sect. Education Education has to orient itself to look for solutions to the business problems. Education benefits people and business started to support education Toward a knowledge oriented society Businesses set up schools, donate generously, and even bear the cost of education Social Responsibility of business Business depends on society for the needed inputs. Business also depends on the society for the marketing of its products or services. Business then depends on the society for its existence and sustenance Social responsibility is the obligation of the business to take action which help to protect and benefit the society while pursuing its profit goals.
Social Responsibility Models Ackerman’s Model Caroll’s Model Arguments for Social Responsibility Changed Public Expectation of business Better Environment for business Public Image Avoidance of Legal Action balance of responsibility with power Business Has the resources Let business try Prevention is better than cure Moral Responsibility Citizenship Argument Arguments against Social Responsibility Profit Maximization Society has to pay the cost Lack of social skills Business has enough power Social Overhead cost Lack of accountability Lack of broad support views of Friedman and Levitt Barriers to Social Responsibility The Individual Manager The Organization The Industry Social Responsibility Implementation To whom the is accountable Business responsibility to society Social Responsibility Strategies Social Opposition Social Obligation Social Response Social Contribution Corporate Accountability Towards Employees Towards Consumers Towards Government Towards Owners The Limits of Social Responsibility Cost Efficiency Relevance Scope and complexity ? Family & Owner Managed Business It begins with you. Ideas give way to opportunities, and fueled by courage and hard work, your business continues to grow. When you first started out, you had no idea where the
future would lead. Would your ideas stand the test of time? As your business grows, so does the team around you, and strategic management decisions become more complex. Productive policies need to be established for your employees and customers to receive solid results. At Bose McKinney & Evans, we celebrate your courage and hard work, and will assist you with the difficult decisions of operating a business. In this complex marketplace, often the pressing issues of the moment take precedence over planning for the future. We want to help you take a longterm view, whether you are a small enterprise or an international operation. Whether managing the business privately, publicly, or as a family unit, we recognize the specific legal and business issues owner-managed companies face day to day. The inevitable difficulties and disputes that arise in every business endeavor become especially complex within close group dynamics. The owner quickly discovers that issues such as attracting, retaining, and compensating executives, resolving owner control disputes, granting ownership rights, owning or leasing commercial real estate, and hiring and firing employees are especially significant when dealing with long-time employees, family members or founding owners. To compound matters, key decisions regarding financing, business succession planning and estate planning are often ignored. These issues, left unresolved, have the power to destroy even the most exceptional business. Therapy for the Family Business by Julia Laylor The New York Times Money & Business November 22, 1998 After 25 years of running their own business, Jack and Alyce Schmidt had a vision. When they retired, their three children would take over and work together happily, each getting equal pay. Today, the kids are struggling to make the dream come true. In 1991, the Schmidts moved to Florida and handed over Spacesaver Systems, Inc., a $7 million storage-management company in Kensington, Md., to David Craig, 36, Alyce's son from a previous marriage, and Amy Hamilton, 35, and Carla Adam, 37, Jack's daughters from his previous marriage. But long-latent tensions among the three began bubbling to the surface, and this year they sought help when they found they could not resolve disagreements over pay. Ms. Adam, who had joined Spacesaver only three years ago and is now a sales representative, was earning considerably less than Craig, the company president, and Ms. Hamilton, an executive vice president, and she thought raises should be given more often. "When our parents were here, they called the shots," Craig said. "Now they've said, 'You guys figure it out.' And we're not sure how to do it." Instead of hiring a consultant or going to a lawyer to draw up a traditional partnership agreement, though, the three chose a path that lies somewhere between consulting and therapy: a "partnership charter" pioneered by David Gage, a clinical psychologist and founder of Business Mediation Associates in Washington. According to Gage, a partnership charter is aimed at driving hidden angers and resentments into the open before they can damage or even destroy a business. It is essentially a new way to address an old problem: staving off the sorts of disputes over money and power that have been the undoing of many family enterprises. Half of the owners of family firms in the United States expect their businesses to be jointly owned and managed someday by at least two of their children, Gage said. Yet the chances of that happening are slim, according to Joe Astrachan, editor in chief of Family Business Review. Seventy percent of family businesses are sold or liquidated before reaching the second
generation, he said. "People often spend a lot of energy avoiding issues because they imagine they won't be able to handle the intense feelings," Gage said. "They talk about money, but not in the depth they need to. They say they'll be equal partners, get equal pay, work full time. But what does full time really mean? Partners often run into problems because someone feels it's not fair that he's putting in more hours or bringing in more business than the other person." First, Gage gives a personality test to wrangling family members or other partners, to get clues on how they can best pool their talents and avoid tasks for which they are ill-suited. Ms. Hamilton and Ms. Adam were surprised to find that their scores were similar in one area—"dominance," or overcoming opposition to accomplish results—because Ms. Hamilton had always appeared to be bolder. "Carla is much more reserved and quiet than I am," Ms. Hamilton said. "People tell us we're like night and day. She may feel strongly about something, but she keeps it bottled up." Now that they are aware of Ms. Adam's strong drive to succeed, both Ms. Hamilton and Craig are more willing to let her try more responsible roles in the company. The test also showed that Ms. Hamilton scored high in persuasiveness and Craig in traits like conscientiousness. That helped to explain why the two worked so well together. Step 2 was for Gage and Martin to meet with each of their three clients separately, to talk about hopes and frustrations and then to put all three in the same room to air problems. The exercise brought all sorts of issues to the surface that the three had been loath to discuss: how, years ago, Ms. Hamilton had felt anxious about her own future, when it was clear that her stepbrother was being groomed to be president; how Craig had a tendency to avoid conflict; and how Ms. Adam felt like a fifth wheel in her stepbrother's and sister's smooth machine. "Amy and David had been working in the business together for so long, they were pretty close," Gage said. "Carla had a hard time breaking into that. They're just figuring out now how to be a three-person partnership." The three are now drawing up their partnership charter and hope by the end of the year to decide their roles and compensation. "It's remarkable how far we've gotten," Ms. Hamilton said. "We decided whatever comes out of this, we'll agree to go with it." From the personality test, for example, they said they learned that Ms. Hamilton did not need a lot of details in order to make a decision. So the charter will probably spell out that anyone presenting an issue to her should do so with broad-brush strokes rather than exhaustive specifics. The Schmidts' children went to Gage before problems had a chance to do real damage, but other clients find him after learning some hard lessons. Michael Hubert, for example, sought help after the breakup of his partnership with his father and brother in a dispute over the direction of their construction company in Gaithersburg, Md. To avoid repeating that fiasco, Hubert said, he and his new partner have spelled out their expectations, for each other and the business and their plans for dealing with disagreements or the desire of either to leave. "I wanted a partner because the burden isn't all on me; it spreads the risk," said Hubert, who is 39. "The last time I wasn't prepared. I want to make sure I'm never in that situation again."
Sadly, the painful experience he endured is all too common. "Family businesses don't want to admit they're having these problems," said Nina Paul, executive director of the Family Business Forum at American University in Washington. "The reality is, they all do." Catalysts for Conflict Seven common sources of dissension in family businesses: • The founder/owner's slowness in ceding control • A family member's failure to consult with others on important decisions • Inadequate response by the founder/owner on important decisions • Use of company funds to compensate inactive family members • Wide gaps in pay levels for active family members • Hired managers' resentment of family members • A lack of management direction because of the founder/owner's prolonged illness or heavy travel schedule Source: Sherrod Morehead and Peter Calfee, Family Business Advisory Partners, Inc., Cleveland
What's New The Raymond Family Business Institute awards grant for Harvard researcher's book on family business dynasties (ALFRED, N.Y., April 26, 2002) The George & Robin Raymond Family Business Institute has awarded a $20,000 grant to John Davis, a senior lecturer of business administration at the Harvard Business School. The grant will support Davis' research and book describing how some families stay in business for generations. The Raymond Institute also has named Davis a Raymond Institute Research Fellow. Davis' eight-year research effort examines the practices of several successful family companies: Ferragamo, Marriott, New York Times, SC Johnson & Son, Rothschild, DeKuyper and Kikkoman. Davis expects his book to appeal not only those involved in family businesses but also anyone interested in business or family topics or family biographies. "This long effort has allowed me to look at these successful companies and the families in a careful way and to identify factors that seem to account for the successful perpetuation of these firms and the families. My multi-disciplinary study is hopefully breaking new ground and that takes time and a lot of support," Davis said. "It could not have been possible without the incredible openness and patience of the families in the book and support from the Harvard Business School. The Raymond Institute grant will permit me to finish the last round of research and push this book to completion. It is a huge shot in the arm and an honor to receive this generous grant." At Harvard Business School, Davis teaches the MBA elective "Management of the Family Business," which explores the personal, family, career and business issues found in family-owned and managed companies. Davis is also the faculty chair for HBS' Executive Education International program, "Families in Business: From Generation to Generation." "The Raymonds are delighted to provide this grant to John Davis, their long-time colleague. They worked with John in the early 1980's in the formation of the Family Firm Institute and collaborated again in late 80's in the pioneering family business program at IMD (International Institute for Management Development) in Switzerland," said Dr. Carol Wittmeyer, president of the Raymond Institute. "They all share a passion for helping family businesses. John's new book will be an outstanding addition to his already impressive contributions to the body of knowledge on family firms."
"It is especially meaningful to be recognized as a research fellow of the Raymond Institute," said Davis. "George and Robin Raymond have nurtured the field of family business to help it grow into a respected discipline. They have always been supporting projects and people to see that the field keeps improving and George has contributed meaningfully to the literature with his own book on his family company, All in the Family Business." Davis is also a fellow of the Business Family Foundation in Montreal and the president of the Owner Managed Business Institute, a firm he founded which consults globally to family companies. The co-author of Generation to Generation: Life Cycles of the Family Business, published by Harvard Business School Press, Davis has published many articles on family business topics. His views on family business management have also been cited in The Wall Street Journal, The New York Times, Fortune and Family Business Magazine. The George & Robin Raymond Family Business Institute, based in Alfred, N.Y., is a not-for-profit corporation dedicated to serving current and future family business leaders. Founded in 2000, the Raymond Institute strives to promote greater understanding and appreciation for the rewards and challenges of family business ownership; to prepare the next generation to assume leadership roles in family businesses; and to enhance economic development initiatives in Upstate New York. The Raymond Institute creates and sponsors activities designed to assist family businesses, and supports interdisciplinary research and teaching initiatives on family business issues.
Not all Business! Mediating the personality differences behind internal business disputes This article has appeared in the following Journals: Summer 2001 edition of Dispute Resolution Magazine By David F. Gage and John A. Gromala Mediation is recognized as an excellent means to resolve disputes and pending litigation. But it is also being used to prevent disputes from arising among partners and shareholders of small businesses and professional groups, and among management teams. People become co-owners of a business because they believe they will be better off with a larger entity than as a sole owner or sole practitioner. They sign agreements that cover the details of accounting, finance and law. They are wearing their rose-colored glasses and have high expectations for a blissful and financially rewarding relationship. The history of small business tells us that these expectations are elusive. We have mediated the dissolution of many partnerships and closely held corporations. There was a common thread that ran through every conflict. Although the opening positions were couched in terms of lack of profits, broken agreements and so on, these disputes were seldom the real cause of the problem. Management teams in larger organizations are usually put together with existing staff to achieve a specified goal. Everyone makes a commitment to cooperate. Too often the team members get mired down in turf battles. The arguments are phrased in terms of disagreements about the best plan of action. Having mediated a number of management disputes, I have found the reality is something different. Case study Let us give you an example of a successful business whose owners were on the verge of getting into a big 'brouhaha.' They had been in business for six years. Each owned one-third. They took no salary and shared the profits equally. Bob was a 'golfaholic' who was at the plant about 20 to 25 hours per week. He brought in most of the new business. Jim was a workaholic. He worked 50 to 60 hours per week. He made sure
everything and everyone worked. Tom never ruffled anybody's feathers. He went about his assigned tasks quietly and was on site about 35 to 40 hours per week. The corporate attorney became aware of developing tensions and feared an impending explosion. He convinced the partners that disaster was around the corner if they did not get outside help. We were retained. Our initial confidential interviews came up with this picture. Jim, the workaholic, complained about low profits. In business meetings he talked about the need for faster growth to increase profits and his income. He believed that he had to put in the long hours because Bob and Tom were not carrying their fair share of the load but he never told them. He often hinted he should be entitled to a larger share of profit because he was putting in more effort than the other partners did. However, he never confronted the issue head on. He liked the others and did not want to risk a blow-up. In spite of it all, each of them was receiving around $175,000 per year from the business. He believed Tom would agree with him. Bob, the golfaholic, believed the company would die for lack of customers if he did not continue his marketing efforts on the golf course and social circuit. He believed Jim spent so much time at the plant because he was henpecked at home. He also believed that the company would be better off if some of what Jim did was delegated to employees. He suspected Jim wanted a bigger slice of profits but he was not going to open that can of worms. He believed Tom would agree with him. Tom just wanted to get along with everyone. He was happy with his share of the profits and the way business was developing. Tom could not understand why Jim and Bob kept asking him to straighten out the other guy but never talked to each other about their gripes. He would not take the side of either Jim or Bob but he never said that to either of them. He now recognized that his silence caused both of them to look to him as an ally. Business charters Our function is to help people design a program that will keep them focused and working together. We guide them as they, not we, draft a "business charter." This is the significant difference between the approach of consultants and mediators. Good consultants will analyze the situation and present the client with a solution or a plan of action. Even if it is flawless, inevitably someone will find something to hate. The difference is whether the participants can say that it is "my idea" or itís "his idea." Mediators help people develop a solution that is their idea. Thus, the chance for successful implementation is great, since everyone has a vested interest in seeing it succeed. A business charter addresses matters that are not discussed in partnership or shareholder agreements or in management structure and job descriptions. A charter is a non-binding memorandum, which clarifies what each person expects of the others and how they will operate together. We do not attempt to change personalities. We help people to understand their own interests, needs and goals and the interests, needs and goals of the others. Then, with our guidance, they work out a plan for working together. To implement this approach, we have separate confidential interviews with each person. We cannot disclose anything they tell us unless they authorize us to do so. During the interview we show them how to air their gripes in a non-adversarial and productive manner. When we complete the interviews, we have a complete picture of the relevant issues. We learn about each person's perceptions and the hidden agendas that seldom surface when they meet on their own. We therefore have a picture that none of the partners have seen. Our task is to help them develop this picture for themselves during our conference. Prior to the group meeting we give each person a set of questions, developed from what we learned in the individual interviews. We review their answers and prepare for the conference, in which we facilitate a discussion of all that was previously unspoken. The length of the conference depends upon the number of participants and the complexity of the relationships. Notice the reference to "complexity of relationships" rather than "complexity of the problems or disputes." Although people discuss problems in terms of financial issues, legal problems or poor management, these disputes are seldom the real cause of friction. The real cause is the people themselves. Communication skills
In many respects, a partnership is similar to a marriage without the benefit of the bed at night. There is very little emphasis, if any, in college or business courses on how to be a good partner. The result is that people enter into legally binding business relationships with little thought about how they will harness their differences into a positive force. Many individuals have not thought through their own short and long-term goals. By not knowing their own foibles and ignoring their different personalities, goals and values, they set themselves up for a lot of unnecessary grief and often failure. In our case study, the three partners learned new things about themselves as well as each other. Bob enjoyed most of his time on the course and socializing. However, he hated to golf and socialize with some of the customers. With some it was hard work just to be around them. He did so solely to generate business. One of the customers he disliked was also a pain-in-the-rear to everyone in the plant. This caused Jim great stress because the customer often disrupted production. He did not complain to Bob, believing the customer to be Bob's good friend. Once this was discussed openly, an avalanche of other hidden issues among all three of them flowed onto the table. All were addressed and resolved. More importantly, the partners learned how to communicate with each other on sensitive topics. This is the most important benefit of the charter process. The process showed them how to deal successfully with future conflict and minimized their need for future outside help. Their new charter addressed the current issues and set up a protocol for how they would interact with each other. The issues addressed may seem mundane to an outsider looking in. They are monumental to those who are living with them. Exhibit '1' is an excerpt from a table of contents in a charter for a professional firm covering the topics raised during their retreat. Exhibit 2 is an example of how detailed personal issues were addressed. By using two mediators with diverse but complementary expertise, the owners and managers are empowered to address issues which previously were taboo. They do it without bruising their egos. The clients receive the benefit of experienced mediators who bring to the table the ability to assist them with the myriad personality issues as well as business and law. The charter is an important living document. The most important benefit to the people we work with is that they learn how to harness their diverse personalities into a productive force. Having learned from the process, they will review the charter at least annually and make whatever changes are appropriate. EXHIBIT 1 1. EXPECTATIONS OF THE DIRECTORS A. EXPECTATIONS OF EACH OTHER PERSONALLY B. EXPECTATIONS FOR THE BOARD AS A GROUP C. EXPECTATIONS FOR THE SHAREHOLDERS AS A GROUP D. THE BOARD'S EXPECTATIONS FOR THE COMPANY 2. VALUES * 3. OWNERSHIP AND EQUITY INTERESTS 4. DIRECTORS' INTERPERSONAL EQUITY 5. EMPLOYMENT AND COMPENSATION 6. GOVERNANCE: THE BOARD OF DIRECTORS 7. MAINTAINING COMMUNICATION AND RESOLVING DISPUTES 8. GUIDELINES FOR DEALING WITH THE UNEXPECTED • Each of the numbered headings has a series of subtopics as in 1. Each charter addresses the issues raised by the participants. This exhibit should not be viewed as a recommendation for all charters. EXHIBIT 2 Excerpts from a table in a charter.
A. EXPECTATIONS OF EACH OTHER PERSONALLY We are aware that each director's unmet expectations of the other can be a source of friction. The problem often results from not knowing what each otherís expectations were in the first place. To lessen the likelihood of this problem, we are trying to be explicit about the expectations we have for ourselves and for one another. We have discussed the expectations listed below. Each of us is committed to living up to the expectations that are marked with an asterisk. The expectations with question marks are ones that we have not taken on for ourselves, are still under consideration or require future clarification: ROBERT Expectations I have for myself * Continue the growth and profitability of my district. * Personal and professional development. * Get better at listening to others and having reasonable expectations. * Learn to see the company picture and my part in it. * Get better at explaining why I am 'for' or 'against.' * Develop more patience. Expectations I think others may have of me * Be better at mentoring other staff. Expectations others said they have of me * Improve interaction on joint projects between other districts and my district * Retain key employees * Continue to develop positive image? * More accurate communication? * More physical presence at main office. * Expectation is reasonable and I will strive to achieve it. * Expectation is still under consideration or requires further clarification. DOROTHY Expectations I have for myself * Provide more mentoring in all districts. * Provide enjoyable working conditions for staff and peers. * Be responsive to co-workers and clients. * Be profitable, billable and carry my weight. * Be consistent. * Be respectful if it's warranted. * Don't procrastinate. * Improve my accountability. Expectations I think others may have of me * More marketing, less billable? * More community involvement. * Less critical of employees? * Improve communication skills. * Be open to ideas of others -- flexible. Expectations others said they have of me * Continue to learn about administrative side of company. * Be more involved in management and delegate more work? * Higher tolerance for risk (when delegating work)? * Be respectful even if it is not warranted. * Expectation is reasonable and I will strive to achieve it. * Expectation still under consideration or requires further clarification.
John Gromala can be reached at [email protected]
Mediation during Business formation or Reorganization What partners often leave unsaid: By creating a written charter, partners clarify what they expect of each other and how to operate together. Before they run into trouble. By David Gage, Dawn Martin, and John Gromala This article was published in "FAMILY BUSINESS" magazine Spring 1999. The concepts and principles apply to all closely owned partnerships and corporations. Jack and Alyce Schmidt started Spacesaver Systems Inc. in Kensington, Maryland, 25 years ago. A dozen years later the youngest of Jack's two daughters, Amy Hamilton, entered the business, which provides data storage equipment and records-management software to companies and government agencies in the Washington, D.C., area. In a couple more years Alyce's son, David Craig, left the Air Force to join the company. Then Jack's older daughter, Carla Adam, left a public relations career at Martin Marietta to roost at Spacesaver as well. In 1998, Jack and Alyce effectively shifted management and ownership to the three step-children, and remained on as board members and mentors. The step-siblings were operating like many partners in business--doing well on the family level, and running a growing company. Like many partners, too, however, they were functioning with the knowledge that they needed to address some significant issues that were bubbling beneath the surface. They were aware of a major parental expectation, too--that they agree on fair compensation. Jack told the children that he knew from experience how inequities, real or perceived, could creep into partnerships, especially when it came to money. He never wanted that to happen to them. Because the step-siblings had joined the company at different times and had varying levels of experience, they were not paid the same. But ultimately, Jack and Alyce thought, the three children should receive equal compensation. The parents never specified when that point should be reached. Furthermore, they knew that they could not make this decision for their offspring. Amy, David, and Carla would have to reach their own decisions about compensation. The children knew it, too. It was only a matter of time before they would be forced to grapple with the issue. After they heard a speech one of us gave to an audience of family business owners about conflict prevention, they also understood that trying to deal with compensation without examining other partnership issues would be unrealistic. They decided to use the process of creating a "partnership charter" as the way to address all the issues in their partnership, and contacted our office to act as a mediator. In a series of six half-day meetings held over two months, Amy, David, and Carla agreed on a document they would all sign that described their expectations for themselves and for each other, their company responsibilities, and how they would communicate, resolve disputes, and even handle a business or personal crisis. During the process, the siblings also discovered that because family partnerships are highly complex, any one issue was likely to be related to numerous others. Honoring their parents' request to struggle with the compensation issue meant they had to deal with roles and responsibilities, and sort out their different strengths and capabilities. When they did so, they found that the money issue was far less difficult to resolve than they had feared. In the end, they negotiated a system that offers not equal compensation, but a genuine sense of equity. They concluded that for the time-being they would keep their current responsibilities, but experiment with new roles and then assess how well it was working. They also agreed to periodically review the partnership charter, and refine it to match changing circumstances. This would prove particularly prescient; Jack unexpectedly passed away in March 1999. The process is the key The process of creating a partnership charter is useful for people going into a partnership, or into a corporation as co-owners, who want to test whether it's really a good idea. Partners-to-be can put themselves through the paces without taking the ultimate plunge. The process can be equally
eye-opening for people in established companies who are taking on a new family member or outside partner, and for existing partners who have never really talked to each other directly on how their relationship is going. The primary use of the process, however, is for people like Amy, David, and Carla at Spacesaver, who want to take preventative action before conflicts creep up on them. Unlike Amy, David, and Carla, most people do not tackle partnership problems before they arise. For the past decade we have been mediating disputes among family and nonfamily partners, listening to stories about what gets business partners into trouble. Inevitably, it comes down to a few recurring issues that most businesspeople know spell trouble for partnerships. Indeed, a poll of business people taken a few years ago by Inc. magazine and Xerox Corp. revealed that nearly two-thirds of the respondents thought that having a partner was a bad idea. Why? Their number one and number two reasons were the "inevitable conflict" and the "unmet expectations." Can it really be that bad? Yes. Nobody is taught in business school how to be a good partner. The main reason sharing ownership and decision-making frequently does not work is that business people fail to realize that the partnership itself requires as much attention and energy as the business. The most successful businesses can fail when the partnerships that run them become dysfunctional. Like cardiologists helping healthy people avoid future heart attacks, we attempted to design a prevention program that keeps partners out of trouble with one another. The program calls for the partners to prepare a partnership charter--a written document that gives them confidence and clarity about how they will operate and how the future will play out. And it works not so much because of the document itself, but because of the process partners go through to create it. The process is challenging because it demands that people think about the future in ways that they probably never have before. The process of creating a partnership charter involves a series of meetings in which all of the partners, or potential partners, talk explicitly about their thoughts on specific topics. Four to six half-day meetings spread over a number of weeks are usually required. Although there is no onecharter-fits-all design, partnership charters usually include agreements on most or all of 10 topics: expectations, values, interpersonal equity, ownership, communication (including personal styles and dispute resolution), employment and compensation, governance, management, scenario planning, and arrangements for leaving the partnership. The meetings are conducted by a third party. This is essential, because only an outsider can prompt the frank dialogue necessary to bring family members to terms with honest differences of opinion. We strongly suggest that professional mediators conduct the sessions; they are trained to help others speak their minds in an atmosphere of respect, and to help people conduct their own negotiations--which is fundamental if partners are to buy in to their charter once it has been agreed upon. Mediators are also skilled at varying the format of meetings to ensure that everything that needs to be said, gets said. The facilitator meets with each partner individually as well as the group as a whole. The individual meetings are critical, because partners are sometimes reluctant to tell each other what they really think. This is especially true for family members who have decades of history. By meeting privately, the facilitator elicits the "whole story"--information, perceptions, perspectives, and hidden agendas that seldom surface when partners meet on their own. Throughout the process, the facilitator works to bridge communication gaps by carefully scheduling individual and joint sessions, asking tough questions, and challenging rigidly held views. This process is necessary so that, months or years later, the partners are not shocked when they find that some critical information has gone unsaid. Co-owners have discovered that using their own attorneys, accountants, or other advisers to conduct such a process is not advisable. It is rare that all the owners or partners think that any of the company's regular advisers are truly neutral, since the advisers usually have had more contact with one family member. The adviser may also have a conflict of interest in working out different agendas among their clients. Furthermore, lawyers in particular are trained to vigorously represent one individual against another, a different mindset from working for the good of the entire group. Once the process is finished, the partnership charter finally becomes a product--a document that is signed by all partners. Requiring signatures helps ensure that each person has not glossed over issues. It also sends a message that everyone is committed to living by the provisions, and gives the partners something to rely on when memories fade or conflicts arise.
Not a partnership agreement How the partnership charter is used is up to the partners. When Mike Hubert of Glen Construction in Gaithersburg, Maryland, asked Bill Sharabi to join him and Ed Becraft as a partner in his family's business, the three men stated in the introduction to their charter that the ideas and agreements it contained were meant to capture their discussions about the partnership and how they will work together. They went on to say: "We also intend that it will help guide the drafting of the legal agreements we will have with one another regarding our joint ownership of Glen Construction, and do not intend for this Charter itself to be a legally binding document." Mike, Bill, and Ed were seeking clarity on every aspect of their arrangement before going to their attorneys. The attorneys reviewed the charter and used it to guide their drafting of a legally binding, financially oriented "partnership agreement" and ancillary legal documents. These documents would be used to drive and adjudicate specific ownership and control issues. Partners should be clear about the similarities and differences between partnership charters and partnership (or shareholder) agreements. Partnership charters are not meant to be legally binding or to replace partnership agreements. They are concerned with how partners will work with each other, maintain their partnership, and run the business. There are four primary objectives for creating a partnership charter: to achieve clarity about all issues that affect the partnership; to heighten understanding about the people involved; to strengthen the internal capacity for communication, planning, and decision-making; and to resolve issues that commonly produce conflict among partners, such as misperceptions and false expectations. The process of creating a charter deliberately requires intense work on the part of the partners, which itself creates a sense of teamwork and stronger buy-in. In contrast, a partnership agreement is a legal document drafted by lawyers, with minimal input from the partners on matters considered non-legal. Its purpose is strictly to serve as a legally binding contract about rights and duties related to specific items such as ownership shares. While these items are significant, they are less crucial to the success of the partnership than the relationship between the partners, as ironed out in the charter-making process. Although the two documents cover some similar items, partnership charters cover them in more depth. For example, a partnership agreement must spell out who will have which titles and how much equity each person will have, but it will typically contain only the details that are legally necessary. In the process of creating a partnership charter, the partners will talk about what each title means, including the responsibilities and authority that go with each title. Also, the charter language will usually include some way of measuring whether people are living up to their duties, and what will happen if they are not. Other issues such as managing the company, compensation, and ownership are worked out in the same thorough way. While the partnership agreement records who owns what percentages, the discussions about ownership in the partnership charter will delve into what those numbers mean to each person. For example, how was 50-50 decided upon? Was it because each person was agreeing tacitly to work as hard as the other? When and under what circumstances could that change? Is there agreement that new partners could be brought on board and under what circumstances? What are the implications of 50-50 ownership for managing the business? For resolving disputes? Clarifying expectations Unmet expectations are the most frequent cause of trouble in partnerships. This may have been most clearly expressed by Richard Hayman, president of Hayman Systems, a family business in Maryland, who has been in numerous partnerships over the years. At a recent Family Business Forum meeting at American University, he described his personal strategy for combating disappointment with one particular partner: "I went in with zero expectations and it worked beautifully. My partner didn't do much, but that was probably perfect given the circumstances. The company became a great success." Unrealistic expectations are a prescription for disappointment, and ambiguous expectations are a prescription for conflict. Having zero expectations is certainly rare. As a homework assignment during the process of creating a charter, partners are asked to list their expectations for each individual partner, for the business, and for the partnership as a group. They then bring in their lists and discuss them. The objective is to make sure that everyone
knows the other's expectations and accepts them. If they don't, more discussion must ensue. The expectations of the partners form the basis of their commitments to one another. In the process of clarifying expectations, Amy, David, and Carla managed to bring certain unclear or unstated matters to light. For example, David and Amy heard from Carla that in order to really get up to speed as a co-owner with them (one of her expectations for herself), she wanted more mentoring from them. Amy learned that Carla would appreciate more frequent communication about the progress of the software development team. David, in turn, wrote on his list that he expected Carla to "help bring and implement solutions to problems, and not simply identify the problems." In these discussions, family business members have to be sure to address a whole layer of expectation that is usually hidden: the expectations of those who have gone before--mothers, fathers, grandparents, and the ever-present founder, no matter how many generations ago he or she started the company. Even though founders die or retire from their businesses, their presence can remain alive in the form of their stated or unstated expectations for their offspring. Interpersonal equity The second fundamental topic addressed in a partnership charter is interpersonal equity. In business, as in life, the perception of a lack of fairness is a major source of conflict. Part of the problem lies in the difficulty people have in talking about what is fair and what is not. Disgruntled partners insist, "It is just a feeling I have." But what precedes the feeling is much more critical. From a little book written years ago by Richard Huseman and John Hatfield called "Managing the Equity Factor," we have developed a concept we call "partners' interpersonal equity." It puts meat on the bones of fairness and makes the issue easier to discuss. According to our concept, partners constantly, and perhaps unconsciously, monitor what they put into the partnership and what they get out of it. This is not just about money. It is about the expertise each person brings, the ability each has to control his or her own work life, how hard each is working, and how much each contributes to realizing the company's goals. What results from these comparisons is tantamount to an interpersonal balance sheet--which is based more on emotion than money, and more on perception than reality. This is an important concept that experienced partners appreciate more often than younger partners. When partners feel they get more out than they put in, they usually feel highly motivated. When the converse is true, we say a state of partnership distress exists. Partnership distress is eventually relieved in one of five ways: The disadvantaged partner puts in less time or effort; finds a way to create more "equity" by taking more sick days or vacation or perks; sabotages the partnership; tries to end the partnership or his or her role in it; or notifies the other partners that the partnership deal must be re-negotiated. Obviously, only the last option is healthy, but it is usually the one least taken. To avoid a sense of interpersonal inequity, partners who are creating a charter draft lists of what they think they each contributes to the partnership and the business, as well as what each wants to get out of it. Each partner develops lists for the other partners, too (see "Common complaints of family partners," p.24). Then they meet and discuss their ideas. This exercise is very important to the long-term health of the partnership because it gives everyone a way to appreciate what their partners value, and to see if it fits with their own notions of how they should be operating. By knowing what each other thinks is important and values, partners can attempt to give each other more of it, thereby increasing their partners' upside and ultimately their satisfaction with the partnership. Surprise scenarios The third fundamental item to be expressed in a partnership charter is scenario planning. It is a technique to help partners minimize surprises and create guidelines for how they will deal with the unexpected if it happens. Each person creates a list of all the crucial decision points the team could face. Then the whole group comes together, combines the individual lists, and brainstorms about other possibilities they may have missed. The siblings at Spacesaver had over 20 items, including such extreme business and personal events as a major downturn in the marketplace, a buyout offer from a competitor, and abysmal performance by one of them. They considered various alternative strategies to handle the
hypothetical situations, and created guidelines for what they would do as a team. One of the issues confronted at a later meeting was the unexpected death of a key person. When Jack died suddenly, all three of the children knew what to expect as far as the business was concerned. They were thus free to grieve over the loss of Jack without the confusion of what it meant for them as owners or executives. Scenario planning is particularly useful for partners who are just coming together and have little experience and knowledge of each other--the two building blocks of trust essential to a healthy partnership. Scenario planning helps jump-start partner trust by helping partners learn a lot about how each would operate in difficult circumstances. Even partners who have known each other for some time usually gain new insight into one another's judgment. Better communication Finally, partnership charters must spell out how the parties will communicate, also crucial to a working partnership. In order to hone their communication skills, Amy, David, and Carla took a brief personality test (the Personal Profile System), the results of which helped them expand on what they already knew about one another. In a nutshell, Amy is an inspirational type who thrives on working through people. That helps explain why she has been the driving force behind the company's rapid movement into the software products market. She is clear about the results she wants and effective at securing assistance with time-consuming details. Similarly, Carla likes achieving results by utilizing the strengths of others. She exhibits enthusiasm and friendliness and judges others by their ability to verbalize their ideas. Her outgoing manner is typical of people who are good sellers and can close a deal. In contrast, David is more easygoing, deliberate, and patient. His style is to be calm, steady, and persistent in accomplishing challenging assignments. He is strong on analyzing technical and logistical requirements of complex assignments, which is why he recently decided to take full control of Spacesaver's installation department and improve its overall efficiency. His conscientiousness serves him and the company well when he attends to the quality-control concerns of clients. Understanding their personalities helped the siblings appreciate their respective strengths more fully and enabled them to talk more articulately about their differences. This, in turn, provided the necessary information for discussions about how they could communicate and work more effectively together--that is, be a more effective team. Amy and Carla, for example, learned that to be more effective with David, they would do well to prepare and organize what they want to discuss with him; they would have to ease up on their sometimes impulsive style and present David with the pros and cons of ideas. David could try to be more direct with them--get to the point quickly and stress the results of his ideas and plans. He has discovered that they appreciate it when he is encouraging, and when he goes easy on the details. To maximize their chances of making these modifications in their day-to-day interactions stick, they chose to incorporate these notions into their charter. What if my partner resists? Committing to create a partnership charter is not something people do lightly. It requires time and energy and a willingness to be open and honest with one another--to hear things that may be difficult to hear. Often getting everyone involved is not easy. Five partners may think a charter is exactly what they need while a sixth may oppose the idea. When we recently discussed this issue with Rick Maurer, who wrote the book "Beyond the Wall of Resistance" (Bards Books, 1996), he offered the following insights: People who are opposed to sitting down with family members are likely to wish to retain the status quo, particularly if they happen to hold the most power. They may talk about the time and expense of creating a charter, or say that such preventative work is unnecessary. But deep down, Maurer says, the problem is often an unspoken fear. "Most people fear change, so any serious discussion about expectations for the future can feel threatening." He also points out, "When the need for change is greatest, the resistance to planning is strongest." To understand what may be behind a person's rational objections, Maurer recommends imagining what it is like for the person who does not want to talk. He suggests asking oneself: "If I were sitting in that person's seat, what would I be afraid of? Why would I be hesitant to try such a
process?" Once the resistance is understood, he says, then reassurance often will bring that person around. Another impediment to candid discussion among family members is the desire "not to hurt the feelings of those whom we love and respect." Families that appear to be happy can be avoiding sensitive topics. Left alone, matters fester until some unexpected event produces a gut-wrenching explosion. Controversy arises among business owners more often as a result of misunderstanding than malevolent motives. When owners get beyond the resistance and begin working together on a partnership charter, they discover that openly dealing with issues lessens the likelihood of misperception, builds trust and confidence, and improves their chances for long-term success. Natalie and Pete spell out their expectations Excerpts from an actual partnership charter between a sister and brother (with names changed). Expectations We are aware that partners' unmet expectations can be a source of friction. To lessen the liklihood of this problem, it is our goal to be explicit about our expectations... For ourselves: Natalie will take a management leadership role. Pete will represent the business with renewed pride and commitment. For each other: Natalie expects Pete to support her management initiatives vis-a-vis the employees. Pete expects Natalie to spport his decisions in public even if she disagrees privately. For the business: Natalie expects the business to become the no. 1 distributor in the service eare by 2000. Pete expects to diversify product lines by 2000. For the partnership: While responding and valuing our family relationship, we both expect to be guided by business interests in our partnership decision-making. VALUES Recognizing that partners sometimes have trouble with one another, we have taken a values test and discussed our values with each other. Personal values: We value treating others fairly and being upfront with each other. We value hard work and doing the best possible job. Pete's highest values include having authority and being recognized in the industry. Natalie's highest value is intellectual and professional development. Company values: We value servicing clients' needs. We value investing in employees who share our vision. PARTNERS INTERPERSONAL EQUITY (FAIRNESS) We recognize that each of us contributes a variety of things to the company that help it succeed. We want to be aware of the many things that each of us brings and recognize each other for them, knowing that this will help us both feel more satisfied and motivated... What Natalie brings: Stability. Reputation in the field. Contacts. What Pete brings: Relationships with manufacturers. Marketing abilities. We both recognize that our satisfaction in owning and running the company What Natalie wants: Ongoing opportunities for professional development. Flexibility. What Pete wants: Recognition as a leader within the organization. Time and support to develop expertise in financial analysis. COMMUNICATION We recognize the critical importance of healthy communication to a strong working relationship. We have discussed specific steps we can take for eacj other to ensure more open and clear communication... Natalie for Pete: I will... Be patient in drawing out your goals. Give you time to adjust to changes. Have things clearly spelled out in writing for you to see. Pete for Natalie: I will... Provide reassurance that no surprises will occur. Provide explanations in a patient and respectful way, free of critical and disparaging quips. Natalie and Pete: We will meet once weekly to discuss issues regarding our partnership and the business. We will meet quarterly to review and update our Partnership Charter. - D.G., D.M., J.G.
together is based on receiving many things from each other and the company, in addition to monetary compensation. David Gage is a mediator, psychologist, and founder and director of Business Mediation Associates (BMA) in Washington, D.C. He is writing a book titled "Tying Fortunes and Futures: Partners in Business." Dawn Martin is a lawyer, mediator, and associate at BMA. John Gromala, is a lawyer, mediator and former bank chairman in California. He is an associate of BMA.
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