This chapter briefly outlines the history of the corporation, the powers it has, those involved in decision making within the corporate body, the functions carried out at the corporate level and the risks deemed to affect the corporate body, SBUs and projects.

The Dictionary of Management (French and Saward 1983) states:

The authors agree with the above statements, but for the purpose of this book the authors suggest that corporations are profitpursuing enterprises, whose goals include growth, efficiency and profit maximisation.

Chambers and Wallace (1993) define management as:

Transactions must only take place in securities listed by the council and government stocks. Each company trading as a jobber must provide a list of securities it will deal in. Brokers must normally deal only with jobbers and may not deal directly with each other unless no jobber deals in the particular security required.

The FTSE index simply lists the companies that deal on the London Stock Exchange for the use of traders. The authors suggest that the main function of the stock market is to raise funds, through the sale of shares.

The shareholders need to be aware of the risks taken by the corporate body on their behalf.

The FTSE illustrates the performance of corporations in 39 business sectors listed on the London Stock Exchange. The stock market reports information regarding a corporation’s share price, increase in value from the previous day, 52-week high and low share value, volume of shares sold, yield from each share and the profits/earning (P/E) ratio. Share values are given, in most cases, in pence or pounds sterling although some share prices are denominated in euros, US dollars or yen.

Stock market investors assess current share price against predicted changes in a corporation’s profit performance and share value when making decisions on buying and selling shares. The FTSE listings give investors a quick appraisal of how a sector or a specific corporation is performing.

Another function of the FTSE is to rate organisations in terms of their respective social and environmental record. Cole (2002) explains:

Taylor and Hawkins (1972) believe:

As time moved on the monarch began to award ‘charters of incorporation’ to trade associations. The associations were granted royal monopoly in certain economic sectors, but did not buy and sell in their own right. Businesses had to join an association in order to trade. However, over time the system began to break down and transformed itself into a profit-making company of shareholders, jointly owning the stock which previously belonged to its member businesses. Other trade associations swiftly followed suit, and soon the Crown and Parliament began to license them as commercial corporations. Gradually they acquired many of the legal rights hitherto granted only to humans. Governments lost the ability to destroy them if they exceeded their powers.

Throughout the twentieth century companies learnt new ways of discarding their obligations: establishing subsidiaries, often based offshore and in possession of no significant assets, for example to handle contentious operations. In 1998, a leaked letter from the Lord Chancellor’s office revealed that the government was planning to protect UK-based business from legal claims made against it by workers in the Third World. In 1999, the court of appeal forbade 3000 South Africans suffering asbestos poisoning from suing Cape plc, the corporation alleged to be responsible, in the UK courts, even though Cape is a UK company. While they seem to be able to exempt themselves from national law, multinational companies also remain immune from international human rights law, which applies only to states. At the same time, however, corporations in the UK are able to sue for libel, to call the police if their property is threatened, and to take out an injunction against protestors and workers. They may use the law as if they are human beings, in other words, but in key respects they are no longer subject to it (Monbiot 2000).

It is also true that many corporations are efficient and well managed. But they are, by definition, managed in interests at variance with those of the public. Their directors have a ‘fiduciary duty’ towards the shareholders: they must place their concerns above all others. The state, by contrast, has a duty towards all member states, and must strive to achieve a balance between their competing interests. Surprisingly, Peter Mandelson, the minister regarded by many as the most amenable to corporate power, appears to recognise this conflict. ‘It is not practical or desirable’, he wrote in 1996, ‘for company boards to represent different stakeholder interests. Boards should be accountable to their shareholders’ (Mandelson and Liddle 1996). ‘The government of an exclusive company of merchants’, Adam Smith observed, ‘is, perhaps, the worst of all governments for any country whatever.’

The directors of UK companies are individually responsible for keeping the price of their shares as high as possible. If they neglect this ‘fiduciary duty’, they can be prosecuted and imprisoned. If, on the other hand, they neglect to protect their workforce, with the result that an employee is killed, they remain, in practice, immune from prosecution. The company, if it is unlucky, will suffer an inconsequential fine, which will not touch the directors.

Around 360 people are killed at work every year in Great Britain. Research suggests that around 80 of those deaths should result in prosecution for corporate manslaughter, but only two companies, both of which are relatively small, have ever been prosecuted (Slapper 1999). The problem is that while corporations have acquired many of the rights of human beings, they have managed to shed many of the corresponding responsibilities. A company can be convicted of manslaughter only if a director or senior manager can be singled out as directly responsible for the death. If the responsibility is shared by the board as a whole, the firm is innocent of reckless or intentional killing.

The authors believe that the problem is compounded by the reluctance of the government’s Health and Safety Executive (HSE) to prosecute anyone or anything. The Centre for Corporate Accountability calculates that of the 47 000 major injuries in the workplace reported between 1996 and 1998, only 11% were investigated by the HSE (Select Committee on Environment, Transport and Regional Affairs 1999).

In 1996, the Law Commission reported that the corporate killing laws were in urgent need of reform. In 1997, two weeks after the Southall rail crash, in which seven people died, the Home Secretary told the Labour Party that he would introduce ‘laws which provide for conviction of directors of companies where it is claimed that due to a result of dreadful negligence by the company as a whole, people have lost their lives’. It took two and a half years for the Home Secretary to launch a consultation document on corporate killing. Even so, while the government proposes that companies could be convicted of corporate manslaughter whether or not an executive has been singled out for the blame, it suggests that the directors of grossly negligent companies should no longer be subject to no greater penalty than disqualification.

There are many types of stock, but there are two of primary importance. These are common stock (ownership without special guarantees of return on an investment) and preferred stock (certain privileges and restrictions which are not available with common stock) (Sullivan et al. 2003).

However, for the purpose of this book the present authors have adapted Figure 7.1 as illustrated in Figure 7.2.

At the top of the hierarchy in Figure 7.2 lies the corporate entity. This is the level under which the rest of the company trades. Here all the financial and acquisition decisions will be made. Second in the hierarchy is the SBU level. These SBUs are divided into separate strategic business operations, such as production companies, holding companies and service companies. At the bottom of the hierarchy lies the project level. Here projects are carried out under an SBU and with the necessary functions being carried out, usually by undertaking projects to generate revenues.

A senior corporate manager owns the process and has the staff to resource the analysis and administrative activities. A board member champions the process ensuring access to information and resources.

A core group of corporate board members and strategic business unit executives can draw additional input from stakeholders such as:

The authors believe that the information used often comes from a range of sources, sometimes more than one, which may include:

However, with the ever-increasing diversification within corporations senior managers are faced with new problems:

This accountability is to the company, not to the shareholders. If a majority of the shareholders disagree with the decisions of the board of directors, those shareholders are not normally free to change that decision directly. Therefore, when the annual general meeting (AGM) of a company is held and the directors are proposing the payment of a dividend, the shareholders have no powers there and then to raise the dividend. Similarly, the shareholders have no powers to order any specific action by the employees of the company. Shareholders’ real power resides in their ability to remove the directors and replace them with others.

Parker (1978) suggests that a company’s chance of success depends heavily on the quality of the board, senior management and the company’s competitive position. The authors agree with the above, but also cite the general state of the economy, such as the rate of interest, inflation and exchange rate, and external environmental factors, such as those concerned with politics, economics, society and technology, as critical factors in determining the success of a corporation.

Unlike traditional shareholders, who often have a long-term vision for the business and prefer to take a back seat approach to its management, a new breed of shareholder activists are spurning the gentleman’s agreement that complaints should be aired over coffee and biscuits. Hedge funds and speculators have found that a public campaign can often yield quicker results. Barclays is the latest firm to have the activists breathing down its neck.

At the time of writing Atticus Capital, which owns around 1% of the bank, valued at £47 billion is trying to halt the acquisition of ABN Amro. Atticus has stated that Barclays are not the best owner for ABN Amro’s sprawling collection of assets and if Barclays proceed with the acquisition Atticus will vote against the deal and encourage other shareholders to do likewise. Atticus stated that continuing to pursue such a risky acquisition would harm management credibility and anger shareholders, ultimately making Barclays vulnerable to a bid.

A major risk to corporations comes more and more from private equity firms. Often these firms buy out established corporations and cash in on the best revenue generators and saleable assets, such as land. Corporations also need to consider the risks associated with take-overs from government backed organisations.

Of course corporations and private companies can also mitigate the risks associated with one or a number of strategic business units by selling them off. Ford has recently sold Aston Martin and now seeks to sell off Jaguar as this is seen as a loss maker.

Other reasons directing the corporation include where the corporation wishes to focus its efforts, and the competitive ambitions or intentions as an important part of the mission (Abell 1980, Pearce 1982, Bartlett and Ghoshal 1994).

The corporate mission can be articulated by means of a mission statement, but in practice not everything that is called a mission statement meets the above criteria. However, the present authors believe that companies can have a mission, even if it has not been recorded on paper, although this will increase the risk of divergent interpretations throughout the corporate level (Pearce 1982, Collins and Porras 1996).

In general the corporate-level mission provides three important roles for an organisation. These roles are:

Corporate governance is concerned with building in checks and balances to ensure that top management pursue strategies that are in accordance with the corporate mission. Corporate governance encompasses all tasks and activities that are intended to supervise and steer the behaviour of top management. This is known as the corporate governance framework. It determines whom the organisation is there to serve and how the purposes and priorities of the organisation should be decided. It is concerned with both the functioning of the organisation and the distribution of power among different stakeholders. This is strongly culturally bound, resulting in different traditions and frameworks in different countries (Yoshimori 1995).

The Turnbull Report (1999) cites several principles of good corporate governance. Firstly, there are the directors. Factors controlled by directors include the board, the chairman and the CEO, board balance, supply of information, appointments to the board and re-election.

Every company listed on the London Stock Exchange should be headed by an effective board which should lead and control the company. There are two key aspects at the top of every public company, namely the running of the board, and the executive responsibility for running the company’s business. There should be a clear division of responsibilities at the head of the company which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision.

The board should include a balance of executive and non-executive directors (including independent non-executives) such that no individual or small group of individuals can dominate the board’s decision taking. It should also be noted that there should be a formal and transparent procedure for the appointment of new directors to the board.

The purpose of the Turnbull Report (1999) is to guide UK businesses and help them focus on risk management. Key aspects of the report include the importance of internal control and risk management, maintenance of a sound system of internal control with the effectiveness being reviewed constantly, the board’s view and statement on internal control, due diligence and the internal audit.

Tricked (1994) cites the common definition of corporate governance as ‘addressing the issues facing board of directors’. Attention must, therefore, be paid to the roles and responsibilities of the stakeholders involved at the corporate level.

The authors believe there are three important functions to be addressed at the corporate level:

The authors cite a number of practical goals to be carried out as a governing meter at the corporate level:

Ellis and Williams (1995) cite corporate strategy as a means of adding value in respect of two equally important key areas of decision making:

At the corporate level organisational activities and scope can be defined in terms of the business the organisation wants to be in. In making additions to and deletions from the range of industries and markets in which a firm competes, sources of additional corporate value added will accrue to the extent that corporate managers judge whether individual businesses are able to achieve acceptable rates of return. If they do not businesses should be divested from the company’s portfolio.

The second task is that of corporate parenting. This is concerned with how corporate management should manage the various businesses within the organisation. Goold and Campbell (1989) have discerned a number of principles that exist with regard to corporate parenting, as described below:

Conklin and Tapp (2000) cite a movement away from the traditional hierarchical structure of a corporation. More common is the fact that organisations have decentralised decision-making units operating with some independence within the overall corporate structure. For such organisations, strengthening the creative web is an internal challenge. With the shift of responsibility from a hierarchical corporate structure to separate but related work groups, a central issue is the set of systems that can best foster ‘intrapreneurship’.

Equity and credit analysts are increasingly focusing on risk and the quality of risk management within the companies they analyse, which is further sharpening focus in the board room. Analysts want to be able to tell current and potential investors that the corporate managers know what they are doing and that they are using the company’s capital in the most effective manner possible, and that they are in control of the SBUs and consequently future profits.

Senior management are increasingly using company reports and press departments to boast about their latest risk management initiatives and policies, but learning the vocabulary associated with risk management and simply slipping the words into glossy brochures does not constitute risk management. Corporations that want to report the stable, secure, socially responsible and ever-increasing earnings that investors and other stakeholders demand must take risk management seriously and put such words into practice (Parkinson 1993).

In the corporate sector, more enlightened senior management have hired overall risk managers, more often than not promoted from the insurance management function. Here these individuals’ core responsibility has normally been the identification, measurement and mitigation of risk, as well as arranging its funding when feasible and desirable. In many cases these individuals have attempted to co-ordinate the risk management activities of other departments and to promote a risk management culture throughout the organisation.

A recent survey of CEOs and risk managers in the UK, Europe and the USA has shown constantly that the main perceived issues today are: corporate governance; extortion, product tampering and terrorism; environmental liability; political risk; regulatory and legal risk; fraud; and a whole host of risks ushered in by modern technologies (Monbiot 2000). The causes of this shift in emphasis are of course many, varied and inextricably interrelated. But, essentially, corporate and financial risk has grown in scale and complexity in tandem with the globalisation of the world economy. The globalisation of trade and the removal of barriers at national and international levels have led to a massive process of consolidation in all sectors as essentially uneconomic organisations, which previously relied on a combination of customer ignorance, lack of external competition and government assistance, have been forced to adapt or die.

In this global, relatively and increasingly service-dominated economic environment, corporate success increasingly comes to rely on two key drivers — perception and knowledge. Risk management is an integral part of these and a thorough understanding of the concept will drive an organisation one step further to success. Companies must have the ability to source raw materials at a good price and turn them into a marketable product at a price that delivers a healthy margin. However, contingencies must be put in place, through the use of a complete, structured and up-to-date risk management system.

One major risk to corporations is from hostile bids. Corporations often increase their financial gearing to employ more debt than equity and thus make themselves less attractive to opportunistic take-overs. Shareholders, however, do not necessarily want too much debt, as debt service is senior to dividend payment and may result in poor or no dividends to shareholders.

The authors cite that companies in the UK are not legally classified as monopolies until they own 26% of the market in which they trade. If one assesses all the major sectors in which superstores trade, then Tesco, the largest, emerges with 17% (twice as high as two years ago), and Sainsbury’s has 13%. If on the other hand you assess the sales of groceries, then Tesco emerges with 26% and Sainsbury with 20%.

Hopes that Internet shopping would provide opportunities for new companies to challenge the dominance of the big stores have also been banished. Tesco, the market leader in the grocery business, has already emerged as the biggest online grocer in the world. At the beginning of 2000 it boasted annual Internet sales of £126 million and claimed it would treble that number by the end of the year. In this example Tesco took the risk of developing a new market long before its competitors identified the benefits of Internet shopping.

Some analysts have argued that the UK’s biggest chains collectively meet the legal definition of a monopoly. The five biggest supermarket chains sell 74.6% of all groceries sold in the UK. This could be the most concentrated market on earth and is seen by many as a cartel which sets the prices of groceries and thus reduces the risks of competition from smaller organisations in the grocery market. Their profits have long been higher than those of similar chains anywhere in continental Europe (Monbiot 2000).

The four large UK banks, Barclays, HSBC, Lloyds TSB and Royal Bank of Scotland, control approximately 86% of small-business banking. These banks are currently being investigated by the Competition Commission and face the risk of being fined for fixing charges to customers, thus reducing competition.

The authors believe that outsourcing is a major tool in which corporations and SBUs relieve risks. Many businesses transfer risk by outsourcing specific activities to other parties. A major supermarket chain, for example, often outsources the storage, quality checks, security and transport of its grocery items to the supplier as a method of transferring risks that are outside its control.

The message is clear: there is now a momentum, fuelled by strong public opinion in the wake of recent disasters, for companies and their directors to be held accountable when death and serious injury occur owing to their perceived failures. In the wake of these events, corporations are subject to new risks and must therefore incorporate sufficient guidelines into their health and safety legislation.

In seeking to reduce risk, opportunities for privatisation are now more limited than in the mid 1980s because the more accessible possessions of the state have already been procured, and public resistance is greater for more ambitious schemes. Now many of the larger corporations have chosen a new route to growth — consolidation. By engineering a single harmonised global market, in which they can sell the same product under the same conditions anywhere in the world, corporations are looking to extract formidable economies of scale. They are seizing, in other words, those parts of the world that are still controlled by small and medium-sized businesses. The authors suggest that decisions associated with investments on a global basis must take into consideration the country risks described in Chapter 4.

Consolidation in the print and the broadcast media industries has also enabled a few well-placed conglomerates to exert a prodigious influence over public opinion. They have used it to campaign for increased freedom for business. Globalisation, moreover, has enabled companies to hold a gun to the governments’ head. Governments refusing to meet corporate demands will be threatened with dis-investment, or shifting the whole operation to different countries, such as Thailand, resulting in widescale unemployment. The result is unprecedented widespread power for corporate bodies (Monbiot 2000).

Oil companies often suffer from cash flow risk when crude oil prices fall because the companies’ cash flows are based on higher crude oil prices. The risk associated with crude oil prices is normally outside the control of the oil companies and can often result in projects being delayed or decreasing output (Energy Information Administration 2001).

There are, of course, those who argue that none of the so-called new risks identified are new at all and it is simply a last-ditch attempt for risk managers to be recognised. There are also those who believe that most business risks are simply those that come with any commercial enterprise and that if you attempt to take them away, you are removing a large portion of the value in any company.

The authors suggest that risks affecting the corporate level may be mitigated through GAP analysis. GAP analysis involves identifying ways of closing the gap between the actual and the projected levels of performance. Methods include:

Safety is defined as the freedom from danger of risks. This applies to:

Accident is defined as:

The UK Health and Safety Executive (1993) define an accident as:

Events that lead to an accident are shown in Figure 7.4.

Hazard is a condition that can cause injury, or death, damage or loss of equipment or property, environmental harm.

A hazard as also been defined by Merna (2007) as:

Hazards in the construction industry include the following:

The most common safety human errors and their causes are as follows:

The standard was revised in 2004 to become ISO 14001:2004.

There are other environmental standards and guidelines that have been developed, most relevant being:

Certification to the internationally recognised EMS standard, ISO 14001 from an accredited and reputable provider is becoming a preferred choice for organisations looking to demonstrate their environmental credentials worldwide.

An effective EMS certified to ISO 14001 can help an organisation operate in a more efficient and environmentally responsible manner by managing its impacts, including those which can control and influence, while also complying with relevant environmental legislation and its own environmental policy.

The numerous benefits associated with a certified ISO 14001 management system include:

The worrying fact for senior managers of all types of companies is that the potential for corporate disaster on a large scale is growing at an alarming rate, and, worse still, the spectre of corporate Armageddon is growing at a faster rate than the ability of most organisations to cope. History shows that corporate vulnerability is mainly due to human error. Avoidance of these risks can be achieved by comparing old, painful risks with some new, excruciating ones. Only 16 years ago, the majority of risks faced by firms in the UK were related to day-to-day operations. The most obvious ones were physical, including standard property risks such as fire and theft of plant and machinery, and human, including standard liability, risks such as injury to the workforce or customers. These risks still exist today and have not diminished in significance, but many forward-thinking firms are now willing and able to retain a much higher level of mainly ‘attritional’ risks, which helps them focus attention on a whole host of new risks of an altogether more complex and unpleasant nature (Jacob 1997).

In the 1980s, the rise of the auditor meant that businesses were more aware of the risks they faced, but in reality this simply meant higher levels of insurance. By the 1990s, attitudes had shifted again. Increasing evidence showed that disaster could happen to any business and a spate of terrorist activity compounded with emerging corporate governance caused an overnight change. Now, in the twenty-first century, organisations declare that it won’t happen to them, because failure is no longer an option.

With this new emerging environment comes new risks and a new understanding of risk. The use of more technology will increase the threat of hacking, virus attack and cyberterrorism. It should also be noted that the manner in which business will view and subsequently protect itself from risk will also change. Where risk may once have been defined by its point of failure, the emphasis is moving towards the impact it has, usually financially, within the organisation (Jacob 1997).

Most importantly, when a corporation has proved to be a menace to society, the state must be empowered to destroy it. The authors believe that we should reintroduce the ancient safeguard against corporate governance: namely, the restrictive corporate charter. In 1720, after corporations had exceeded their powers in Great Britain, the government introduced an Act which provided all commercial undertakings ‘tending to the common grievance, prejudice and inconvenience of His Majesty’s subjects would be rendered void’ (The Bubble Act, S 18, 1720, cited by March and Shapira (1992), the Creation and Development of English Commercial Corporations and the Abolition of Democratic Control over their Behaviour, Programme on Corporations, Law and Democracy). Corporations which broke the rules of their charters could be wound up. Big business, once again, must be forced to apply for a licence to trade, which would be revoked as soon as its terms were breached.

The Department of Trade and Industry’s booklet Protecting Business Information (1996) advises executives to ‘reduce the risk of damage to your companies’ reputation’ by protecting sensitive information. Staff should be gagged (‘ensure a confidentiality agreement is signed’) and all sensitive documents should be destroyed ‘by approved cross-cut shredding, pulverising, burning or pulping’. Amongst those from whom material should be hidden are ‘investigative journalists’ seeking ‘to obtain newsworthy information’ (Department of Trade and Industry 1996).

However, the present authors believe that some government policies have been approved which displease corporations: the introduction of the minimum wage, for example, or energy taxes, limiting working hours and the recognition of trade unions.

This chapter defined the corporation and its history, the functions of the FTSE, corporate structure, the board of directors — their functions, obligations and membership — corporate functions, corporate risk strategy and the future of corporate risk.

It also highlighted the power and control of the corporation, what it considers as risks, and the relationship with the rest of the company, namely the SBUs and the projects they carry out.