Corporate Governance and The Sustainability Imperative

NAME: Rd.Indra Adika P.

NIM : 29114810
CLASS: YP51B

MASTER OF BUSINESS ADMINISTRATION

INSTITUT TEKNOLOGI BANDUNG
2015

Governance mechanisms designed to ensure effective leadership of firms to develop and

implement strategies that create value for stakeholders is challenging. However, corporate
governance is critical to firms success and thus has become an increasingly important part
of the strategic management process. Corporate governance is the set of mechanisms used
to manage the relationship among stakeholders and to determine and control the strategic
direction and performance of organizations. At its core, corporate governance is concerned
with identifying ways to ensure that strategic decisions are made effectively. Corporate
governance reflects company standards, it also collectively reflects country societal
standards.
Three internal governance mechanisms and a single external one are used in the modern
corporation. The three internal governance mechanisms :
1. Ownership concentration.
Defined by the number of large-block shareholders and the total percentage of the
firms shares they own. Large-block shareholders typically own at least 5% of a
companys issued shares.
2. The board of directors.
A group of elected individuals whose primary responsibility is to act in the owners
best interests by formally monitoring and controlling the firms top-level managers.
Classification of BODs members are :
A. Insiders : the firms CEO and other top-level managers
B. Related outsiders : individuals not involved with the firms day-to-day
operations, but who have a relationship with the company
C. Outsiders : individuals who are independent of the firm in terms of day-to-day
operations and other relationships
3. Executive compensation.
A highly visible and often criticized governance mechanism. Salary, bonuses, and
long-term incentives are used for the purpose of aligning managers and
shareholders interests. A firms BOD is responsible for determining the
effectiveness of the firms executive compensation system.
The separation between owners and managers creates an agency relationship. An agency
relationship exists when one or more persons (the principal or principals) hire another
person or persons (the agent or agents) as decision-making specialists to perform a service.
The separation between ownership and managerial control can be problematic. Problems

can surface because the principal and the agent have different interests and goals, or
because shareholders lack direct control of large publicly traded corporations. Problems
also arise when an agent makes decisions that result in the pursuit of goals that conflict with
those of the principals.
The market for corporate control is an external governance mechanism that becomes active
when a firms internal controls fail. The market for corporate control is composed of
individuals and firms that buy ownership positions in or take over potentially undervalued
corporations so they can form new divisions in established diversified companies or merge
two previously separate firms. Because the undervalued firms top-level managers are
assumed to be responsible for formulating and implementing the strategy that led to poor
performance, they are usually replaced. Thus, when the market for corporate control
operates effectively, it ensures that managers who are ineffective or act opportunistically
are disciplined.

Corporate governance structures used in Germany, Japan, and China differ from each other
and from the structure used in the United States.
A. The U.S. governance structure focused on maximizing shareholder value.

B. In Germany, employees, as stakeholder group, take a more prominent role in

governance.
C. Japanese shareholders played virtually no role in monitoring and controlling
top-level managers. However, Japanese firms are now being challenged by
activist shareholders.
D. In china, the central government still plays a major role in corporate
governance practices.
E. Internationally, all these systems are becoming increasingly similar, as are
many governance systems both in developed countries, such as France and
Spain, and in transitional economies, such as Russia and India.
The Sustainability Imperative
The

information

technology

revolution

was

about

tangible

technology

breakthroughs that fundamentally altered business capabilities and redefined how

companies do much of what they do. In both the IT and quality business megatrends, the
market leaders evolved through four principal stages of value creation:
They focused on reducing cost, risks, and waste delivering proof-of-value
They redesigned selected products, processes, or business functions to optimize
their performance
They drove revenue growth by integrating innovative approaches into their core
strategies
They differentiated their value propositions through new business models that
used these innovations to enhance corporate culture, brand leadership, and other
intangibles to secure durable competitive advantage.
To respond the global challenge of sustainability we need to make road map. The firm
seeking competitive advantages from sustainability must match innovative green product
offerings and business models with strategic execution. To create value creation M. R.
Rangaswami explain on four stages :
1. Do old things in new ways

Firms focus on outperforming competitors on regulatory compliance and

environment related cost and risk management. In doing so, they develop proof
cases for the value of eco-efficiency.
2. Do new things in new ways
Firm engage in widespread redesign of products, processes, and whole systems to
optimize natural resource efficiencies and risk management across their value
chains.
3. Transform core business
As the vision expands further, sustainability innovation become the source of new
revenues and growth.
4. New business model creation and differentiation
At the highest level, firms exploit the megatrend as a source of differentiation in
business model, model, brand, employee engagement, and other intangibles,
fundamentally repositioning the
competitive advantage.
Making Sustainability Winner

company and redefining its strategy for