According to the Oxford Dictionary, 'Consolidate' means: Combine (a number of things) into a single more effective or coherent whole, so combine (a number of financial accounts or funds) into a single overall account or set of accounts.
A challenging question for you: in your view, why most Italian controlling companies have the interest to show that the direction is in the hand of their subsidiaries rather than in their own hands? What could be the advantages?
I think that because most of them are family businesses, in this way they could seems to not be the strategic part and external shareholders will trust more in the firm because if they direct subsidiaries there are some transaction issues such as tunneling.
In my point of view, we should think about the answerability. I don't want to be misunderstood. Most italian companies have the interest to show that the direction are in the hands of their subsidiaries because in case of failure they could let off some of the negligence to other internal actors.
I agree with Cristina and I think also that in some situations there could be coflict of interests if the direction is not in the hand of the subsidiaries.
Interesting question Alberto. Nice answer Cristina. Moreover, as underlined by Saverio coflict of interests could be an issue if the direction is not in the hand of the subsidiaries.
Thuy Le, very nice quesion, but I've really no idea of which type of answer would suit better to these systems. According to Alberto's question..well, there coud be several reasons... not just one. And in my opinion, all of them are mainly directed to mislead the market or the investors judgment.
These are two examples of multivisional structure where we can find five legal entities and financial statement and one consolitated financial statement. While in the first case managers are not in the holding company in the second case yes so we are sure that direction activity is exerced according to the holding willingness.
These are two possible multidivisional structures of a business group. In both cases we have five legal entities, five separate financial statements and a single consolidated financial statement. In the first case the divisional managers are in the subsidiaries therefore we cannot say for sure if each subsidiary is directed or not by the holding company ( in Italy it's mandatory to disclose this kind of information). In the second case we cannot have any doubts. In fact, the divisional managers are employee of the holding company and all the subsidiaries are directed by the holding company for sure.
As far as I am concerned, it depends on the dimensions and the strategy of the firm. The leftside structure is the one which fits best with a company that is big and operates in multiple markets (concerning products or geographical areas). In addition, it provides shared responisiblities for the holding company and its subsidiaries at a price of more costs related to the control function. To make things better, it is a flexible structure in which subsidiaries that operate in different areas can be totally involved on field. That will permit to know better the market and consumer needs. On the other side, the rightside structure is a structure in which the divisional managers are incorporated inside the holding company. In this case, the separation between subsidiaries and their holding is low and is wide only for functional areas. Furthermore, it is a vertically integrated structure where divisional managers are controlled (directed and appointed) by the holding company. Therefore, costs related to the control function are lower than the leftside structure, even though responsibilities charged by the holding will be a lot.
I totally agree with Lorenzo. There is not a "best structure". The optimal solution depends on many factors, such as environmental factors or the strategy and the dimensions that the firm want to achieve. If we want more autonomy and responsabilities for subsidiaries probably the leftside structure would be better. If we want more centralized control porbably the rightside structure would be better
I agree with both of you guys; of course it depends on many factors which structure to choose, so we cannot say that one is better than the other one; we can just say that if we are looking for more autonomy, we can choose the one in the left, but we can also say that the left side structure has too many responsibilities since it is not directly controlled by the holding; the right side structure, as you guys mentioned, has more centralized power since the subsidiaries are controlled and directed by the holding company, so lower cost of control and less responsibilities from the managers of the subsidiary, since they are driven directly by the holding.
I definitively agree with you. There is not a right structure. Each company has to adapt it to its needs. Companies can identify the more appropriate structure based on, for instance, their dimension, internal and external factors, the degree of authonomy they want to leave to the subsidiaries and their objective.
actually , as my colleagues said that there is no right structure to apply it , i tend to the right figure which has a specific features such as centralized power and low cost of control and low responsibility
As our professor said: "It depends". It depends on many factors such as the entity and the type of the business. On the right side we can see a centralized structure and the control is in the hand of the holding company, but we can imagine that the business does not concern about the external environment as much as the left structure because every change will need time to be arranged.
I agree with Giovanni. The optimal solution depends on many factors. If more autonomy is desired and responsabilities for subsidiaries probably the leftside structure would be better.A more centralized control can be described by structure on the right.
Obviously the decision to centralize or decentralize can depend on the business strategy, the the core business processes and the stage developement of the market.
Guys, as many of you said, it depends.. but I'm not sure that both structures are on the same level of efficiency. I'm still pretty sure that the second one (right) sounds way less efficient to me, whatever production process or service you are about to produce and manage. Could you provide me examples for the left and the right ones?
It cannot singularly be stated that there is one best multidivisional structure for a firm. It depends on the market, the size and various other factors of the company. The business strategy is another of the determining factors that can lead to an informed decision of which structure to adapt for a company.
In my opinion the unique structure does not exist. Companies have to identify the most appropriate structure in the base of environment (internal and external), authonomy that they have, and other factors.
Yes there is a difference. Its that in the 2nd figure, the divisional managers are employed in the holding companies. So the other 4 companies are directed by the holding company.
We can see differences among the figures, only from a legal point of view ( there are no differences from a strategic point of view). In the first figure divisional managers are responsible of subsidiaries and they could also declared that they are not directed by the holding. In the second case all the subsidiaries are controlled and directed by the holding company.
From a legal and financial point of view , there are no differences , as in both cases we find 5 separate legal entities(holding plus 4 subholdings) and the consolidated financial statement is used rather than separate individual fin.statements. The difference is that while in the first case (the one on the left) the subholidings can declare not to be directed by the holding, in the second case, on the grounds that divisional managers are employed by the holding itself ,the divisions are for sure not only controlled but also directed by the holding.
In my opinion, there are legal differences between two situations. There is no difference between consolidated financial statements of the holding company in two case. However, the Consolidated Financial statements of subsidiaries and the Separated Financial statements of all companies are different in two cases. This results from the internal transactions between companies in group. For the case of Division managers belong to the holding company, the subsidiaries are directed by holding company for sure. In the other case, the subsidiaries can say that they r not directed by holding company.
In my opinion From the legal point of view, We can see some differences among the figures, we can't see any differences on the strategic point of view . In the first part the divisional managers are responsible to the subsidiaries and they are not directed by the holding company on the other hand all the subsidiaries are controlled and directed by the holding company.
In both cases we have five legal entities and one consolidated financial statement. However, in one case divisional managers are the CEO of the subsidiaries and in this case the 4 businesses can state that they are CONTROLLED by the holding but not DIRECTED by it. In the other case divisional managers are part of the holding so the 4 business have to state that they are CONTROLLED AND DIRECTED by the holding itself.
Yes, the difference stands on the fact that in the second figure, the divisional managers are in the holding and it means that subsidiaries will be both controlled and directed by the holding. Is not possible to say the opposite. In the figure 1 instead since divisional managers are included in the subsidiaries, it could be possibile that the holding controls subsidiaries without directing them.
As my collegues said, here we have five legal entities that are defined by the legal boundaries. On the left side we see the delegation of power: the four subsidiaries are controlled by the holding, but not directed by it. On the right side we see the four subsidiaries that are directed by the holding, because the divisional managers are employees of the holding.
Well, my collegues correctly underlined the features of the two business unity structures. From the legal point of view the five legal entities are well-defined. On the left, the divisional managers are part of the subsidiary, while on the right side they are included on the parent firm bounderies. It is interesting how the italian law leaves room for declaring autonomy in control and direction taking into consideration the left map. I would like ask my collegues. Do you think we can associate the case on the left to a pure holding company and the case on the right to an operating holding company? What are the differences betwee them?
Answering to Nardi,In order to differentiate between pure and operating holding company, I think that we should look at the holding investments in subsidiaries in the financial statement. In fact,the main difference between these two types of structures is that the former has just interest in owing shares of the subsidiaries and does not produce any good/service, while the latter is engaged in business activities. I think that we cannot say anything about these difference,even if I think that the second figure,since we have both direction and control of the holding it could be more reasonably the case of a pure holding. And what to you think about?
I totally agree with Federica. The right side of the picture simply indicates that the divisional managers are within the boundaries of the holding company. Therefore, they cannot be considered as entities that are separated by the "mother firm". For what concerns the difference between pure holding and operating one, this picture does not show us anything . We should see if the holding merely is a "Financial" entity with just Investments in aubsidiaries in its balance sheet or not.
From the legal point of view these two structures are basically the same. They have five legal entities, five separate financial statement (one for the holding and one for each subsidiaries) and one consolidated financial statement. The main difference can be found in tha fact that in the second picture the managers are employed within the Holding Company, so we can say that the four subsidiaries are controlled and directed by HC. In the first picture we can only say that the subsidiaries are controlled and maybe they could be directed y the HC.
From the picture we can analyze two multidivisional structures of a business group. In both the structures, there are for sure 5 legal entities and one consolidated financial statement. The main difference is represented by the fact that in the first one, divisional managers are in the subsidiaries, and basically they are controlled but not directed from the Holding Company. In the second one, instead, divisional managers are employees of the Holding Company and as a consequence, the subsidiaries are both controlled and directed.
In my opinion, the internal transactions between companies in group leads to the main diffirence are in the Consolidated Financial statements of subsidiaries and the Separated Financial statements of all companies are different in two cases. For the case of Division managers do not belong to the holding company the subsidiaries can say that they are not directed by holding company. In the other case, Division managers belong to the holding company, the subsidiaries are surely directed by holding company.
I agree with Federica Sabato, I think that the second structure( where we have both direction and control of the holding ) it fits best in the case of a pure holding, an holding company that doesn't produce goods/servicies but its only objective is to control the subsidiaries.
I agree with you, the business group structure with its legal bundaries does not help us in understanding whether a holding is pure or operating: this is a matter of business and financial data. We have to look whether any products or goods are produced by the holding, and we have to take a glipse at the fin. statement, to see if it only owns investments in subsidiaries, or has also other fin. elements like credits, receivables and so on.
in this case , we observe that the five legal entities have defined by the legal boundaries. On the left side the four subsidiaries are controlled by the holding, but not directed by it. On the right side the four subsidiaries that are directed by the holding, because the divisional managers are employees of the holding.
I think that this figure shows the difference about the competences and the bounderies between functional and divisional managers. On the left side the figure shows the collaboration and integration between each division and support function. In this case maybe the two kind of managers share competences and interact within each division. The figure on the right side shows the clear bounderies between the divisions and support functions. In this case the department and managers work indipendently to each other.
The difference is that while in the left structure the subsidiares can declare that are not directed by the holding, in the right case the divisional managers are employed by the holding itself so the divisions are for sure not only controlled but also directed by the holding.
Yes we do.In the leftside structure the subholidings can say that they are not directed by the holding. The other is a structure in which the divisional managers are incorporated inside the holding company, so the divisions are clearly directed by the holding.
The structure is the same. The difference behind the left and the right one is the governance. But my colleagues already told everything that can be said about! :)
In the first case divisional managers are responsible of subsidiaries. In the second case all the subsidiaries are controlled and directed by the holding company.
Why are functional managers legally separeted into four different legal entities? What could be the reason? Isn't it more expensive rather than having just one legal entity? There are some advantages as we saw in the Caltagirone example.
From my point of view, when the functions are separated into 4 different legal entities (according to the fact that these companies usually are listed companies) the group can easilly mobilize more capital/equity from the minority shareholder. This strategy can leverage the group and also remain the control power of the current controlling party
probably the different organization is led by the difference in the business of the two firms. in my opinion the organization on the left fits well with corporations whit many business and each division (strategic business unit "SBU") has it's own management and reference market (telecommunication services for example). on the other hand, the structure on the right fits with a single business- corporation, where over specification is not required, and divisions are settled to share the unique reference market, according for example with geographical boundaries (food retailer)
Putting functional managers out of the holding company's boundaries could be a measure taken to lighten the holding of some legal responsibilities concerning each function's production. Even if it may lead to additional costs, the trade-off between them and some legal troubles will be probably positive.
Agree with federica, having different legal entities allows the parent firm to access to a much higher value of possible investment, that is by listing each single branch and collecting investments. In this case would probably mantain control, keeping the majority of shares, but would menage a much higher capital
In my point of view, the functional managers legally seperated into four different legal entities to reduce risk in management and it express the specialization in management
I agree with Francesca, setting different legal entities allow the holding to collect more investment founds by listing the subsidiaries and has also the advantage of limiting the company financial liability by dividing and sharing risks with the other firms of the group
One of the most important advantage will be the better reactivity that the management will have in taking decision. we have to balance this advantage with the cost of this type of organization.
Because we have different advantages. For instance to limit the responsibilities of the holding or attract more investors for the subsidiaries or also to have transactions with other firms (suppliers) related to the holding.
Well, in my opinion setting different legal entities enables firms to be financed in much more different ways, listing each subsidiary and at the same time reducing the financial liability of the firm through the sharing of risks.
I agree with Michele, but I would like to add also the fact that the advantage to have separate legal entities becomes necessity, even desirable, when the businesses are dislocated on a global-scale and the juridical framework is very different form subs/division to another.
potential investors (institutional ones like pensions founds but even for private and sophisticated savers), banks, credit institutions, stakeholders (not only shareholders) and obviously Public authorities (Consob in Italy, SEC for the Usa stock market), if those companies are listed ;)
The consolidated financial statements are the financial statments of a Group presented as those of a signle activity we said. Thus corporations may use this tool to level the results of the economic activity. That is, if one of the subsidiaries produces destroys value during the year, profits from other subsidiaries may be used to compensate these losses.
The consolidated financial statement is the financial statement of a parent company and its subsidiaries. It does not take into consideration internal transactions ( transanctions among the group members) and it is very useful to have an overall picture, for example, of the financial situation of the group as a whole. It is done by the parent company and it is very important first of all for investors and creditors. In fact it would be difficult for them to collect all the information they need looking at all the separate financial statements of the group members even if this is fundamental to understand how secure the entire economic entity is since every member gives its contribute.
I agree with you. I would like to add that the consolidated financial statement eliminates all the Intra-group transactions which may provoke some misliading informations about the group as a whole. That is why consolidated financial statement is so important for investors, creditors and other categories of stakeholders.
The consolidated financial statement is the financial statement made by the parent company and regarding the financial statement of the group as a whole ( both parent company and subsidiaries). As Giulia said, I believe that is extremely important for the external stakeholders, such as creditors, since it provides information only related to the group as an economic entity. This is the reason why it does not consider the transactions among the single economic entity: they can misrepresent information.
I totally agree with you guys. Basically, the consolidated financial statement is so important because it represents an aggregated look at the financial position of the group as a whole, and so of the parent company and the subsidiaries. It's so important above all for external stakeholders like creditors and investors because they can understand the overall HEALTH of an entire group of companies.
Consolidated financial statement is the statement of a group and is made by the holding or parent company.It is important because it highlights only the transactions between the group and the market considering the group a single economic entity despite of the fact it is composed of different legal entities.
worth of notice a consolidated financial statement given that, as you all said, eliminates related-party transactions, avoids that a group can fraudly inflate the amount of assets by imposing fictious prices over the market value among its branches. Inflation of assets would result as fraud as big as Parmalat
In my view, consolidated financial statements are so important because through its the parent company can regard the finacial actions not only subsidiaries but also itself, then they can give suitable decision making for specific business situations/strategies of company
As you all have said, the consolidated fin. statement is useful to have a clear idea of how the group works as a whole, eliminating potential misleading, in fact it happens very often that while in separated statements substantial revenues can be found, coming from internal transactions within the group, at the consolidated level these revenues turn out to be losses . the consolidated statement is useful for everyone potentially interested in the firm performance: potential investors, customers, autorities, researchers.
As you all said above, The consolidated financial statement is the financial statement of a parent company and its subsidiaries transactions between the group and the market considering a single economic entity, and to add It's so important for external stakeholders like creditors and investors because they can understand how the company is going on the right track.
The consolidated financial statement is used by the holding company to eliminate the related party transaction that can hide illegal purposes. Is also important because investors can look at the financial position of the group as a whole
Consolidated financial statement is the Financial statement of a group in which the assets, liabilities, equity, income, expenses and cash flows of the company and its subsidiaries are presented as those of a single economic entity.
Consolidated financial statements show the company's financials together with those of all its subsidiaries. Consolidation of financials is also necessary when there are joint ventures or if there are investments in associate companies, in which the company can influence, but not control, policy decisions. Given that a company may have subsidiaries, doesn't matter if or not in the same line of business, where these are profitable, they add to shareholder's wealth. So, consolidated financial statement is pivotal for all the external actors that are interested in investing in a firm.
As my colleagues explained clearly, the consolidated financial statement plays a fundamental role in providing investors and creditors with truthful information on a group, in that this kind of financial statement isn't biased by internal transactions between the parent firm and its subsiadiaries, which could be misleading in the evaluation of the economic entity.
The consolidated financial statement is useful for who is interested and wants to have a a clear idea on all the group performance. Anyway one of the most important characteristic of that is that the consolidated financial statement does not include internal transactions among the parties of the group.
The consolidated Financial Statement in my opinion is important to assess the Group as a whole, so it is fundamental for all types of investors and also for institutions.
We know that the consolidated financial statement is the financial statement made by the holding and regards the financial statement of the entire group. In my opinion it is so important for the interests of the external stakeholders, due to the fact it provides information that refers only to the group as an economic entity.
Investors, public authorities, such as the government as well as shareholders have a vital interest in knowing about the financial situation of a company, about the losses and revenues as well as the investments.
Consolidated financial statements are really important because then they can give finacial actions and suitable decision making for specific business strategies of company
How can manage the group on the leftside a fraud scandal in which functional managers and divisional managers are responsible for? What happen on the rightside? Can we consider the two cases as similar or do they touch the holding company in different ways?
Hi guys, I would like to ask you something, even though it is not related to this topic. Could you tell me how is it possible that a Chief Legal Officer of a company is a non-executive director? Shouldn't he be considered as an executive director?
In my opinion, A publicly traded company's most powerful legal executive. The Chief Legal Officer (CLO) is an expert and leader who helps the company minimize its legal risks by advising the company's other officers and board members on any major legal and regulatory issues the company confronts, such as litigation risks. The CLO may also be a member of the company's operating committee and is overseen by the CEO. The CLO oversees the company's in-house attorneys.
When a large, publicly traded company hires a new CLO, it will make the news, just as the hiring of a new COO or CFO would. A CLO typically has more than a decade of legal experience; positions a CLO might hold prior to becoming an executive include Head of Legal, First General Counsel and firm partner.
The CFO is an expert who helps the company to minimize its legal risks for instance legal and regulatory issues. It is overseen by CEO. From this definition I think that the CFO shouldn't be considered an executive director because it has consulting function and it doesn't have the possibility to elaborate and plan strategies and decisions.
I agree with my colleagues, the CLO can be considered as an executive director, since executive members are engaged in the daily management of the firm.
It depends on if the CLO is actively involved in the daily running of the firm. But on my view the CLO helps the company in a daily minimize of the legal risk so he should be considered an executive member of the board of directors.
I agree especially with Alessandro..."it depends" on the involvement of the member within the management of the firm...but in most cases CLO is also an Executive Member of BoD because he is involved in management every day.
Do you guys think it depends also on the object of the company? In a company operating in the service industry the clo sustains the company in core business activities helping to minimize the legal risks. In this case he should be considered an executive member of the board of directors.
...Even if not all the big copanies have one! Look a the CTO (chief technical officer), for example, it is unnecessary in most of the biggest service oriented companies, let's say insurances for example, while he becomes crucial in hi-tech or ICT firms. This is the same for the CLO, because sometimes times Legal Department in a firm is a mere support function.
Hi guys, I have some questions for you; 1) Can you please explain me the difference between "Indipendent" and "Dependent" director? 2) And the difference between "executive" and "non executive" director??? Thank you
Hi Pier Paolo, as we said during the lectures the difference is basically on the fact that the independent director is an outside director and it is part of the board of directors. This director has to respect some criteria in order to be considered 'independent', for example, it does not have a material or financial relationship with the company and with its employees and management. For what concern, instead, the Executive Director is generally represented by the CEO or the Managing Director of the company. Moreover, it is an inside director. The Non-Executive Director, finally, is a director who is not an executive inside the organization.
Thank you Francesco; so is it possible that an independent director owns some shares of the company?? in the company that I'm analyzing, I found in the minutes of the 2014 annual meeting of shareholders, that the independent directors are paid with shares also :/
Yes Pierpaolo it is possible. An indipendent director can own shares ONLY if he is a non executive one! so only if he is not part of the executive management team.
I totally agree with Federica and Francesco. I would like to add that it is quite common to see such a case since it is a way to make independent directors careful about company's performance. As a matter of fact, being paid with stock options may lead to high salary increases as well as very low ones in case of negative firm performance.
It's easier to keep in mind this distinction if you think of EXECUTIVE as something associated with MANAGERIAL issues,while NON EXECUTIVE cannot be associated with this item,as Federica,Francesco e Lorenzo correctly said.
Yes Pier Paolo, an indipendent directors can hold some shares of the company, but these have to be not too many, in order to not prejudice the independence of the director himself
Independent directors respect some criteria of independence towards the company, such as having no financial, material or familiar relationship with the firm or its members. Executive directors do managerial tasks inside the company, while non executive directors don't
Hi Pier, I'm writing in response of your 2nd question. The chief executive officer has the overall, primary management and leadership role in the organization. Therefore, the CEO must have extensive knowledge and skills in a wide variety of areas. While a non-executive's role is less hands-on. A non-executive director may have less experience and less knowledge than an executive. However, the benefit here is that a non-executive can bring objectivity and an external awareness to the board. Non-executive directors are not usually involved with day-to-day management, however, the smaller the company, the more likely it is that there will be some hands-on work. The non-executive's role is an over-viewer and whistle blower, ensuring adherence to good practice, respect for the interests of other stakeholders and adherence to the process of boardroom discipline. Non-executives are often thought of as "advisers" although this is not the case. The role is larger than this - the non-exec is a director and shares the legal duties and responsibilities of the executive directors. As far as corporate governance is concerned, non-executives are usually associated with Independence and may be self employed.
Just to underline the main points widely treated by Morgan: The CEO must have extensive knowledge and skills in a wide variety of areas. While non executives may be less experienced, the most important thing is to try to be super-partes within the board and try to bring in the board the external interests.
An indipendent director can hold shares only in the case he is a non executive director.. so he has to be out of the executive management team. Insted, for what concerns executive directors, they are active in doing managerial tasks and in deciding the competitive strategy of the company!!
1. Independent Director: somebody not financially entangled in the corporation who does not have a personal interest in the well-being of the firm. The dependent director might own shares of the firm or might have been appointed by a major shareholder, thus he has a vital interest in the high performance of the firm, as he also personally profits from this.
2) An executive director is somebody who steers the company and is 'executing' the task. A non-executive director on the other hand is rather somebody, who is monitoring the ongoings and does not have to power to actually influence by actions. His primary task is that of an advisor and guide.
I agree with Hannah Merz, - Independent Director: somebody not financially entangled in the corporation who does not have a personal interest in the well-being of the firm. - The dependent director might own shares of the firm or might have been appointed by a major shareholder, thus he has a vital interest in the high performance of the firm, as he also personally profits from this.
- An executive director is somebody who steers the company and is 'executing' the task. - A non-executive director on the other hand is rather somebody, who is monitoring the ongoings and does not have to power to actually influence by actions. His primary task is that of an advisor and guide.
1. Independent Directors who are not fiancially entangled in the firm and doesnt have interest in the well-being of firm. But the dependent direcotrs might own shares of the firm. 2. Non-Excutive directors who are member of BOD but they are not managers.And Executive directors who are member of BOD but they steers the company with : executing" task
1) Independent directors are those directors who do not have economic relationship with the company they serve and whose primary goal is to effectively monitor the behavior of a) the management in case of Public Company, b) the owners in case of concentrated company where direction and control are together. However a fully independent director is such whenever he/she has been elected by minority shareholders. Non independent directors are simply elected by the shareholder (particularly by the major shareholder if any) and can be divided in a) Inside directors and b) Outside directors.
2)As far it concerns the difference between executive and none, the former do represent the management of the firm whereas the latter are embodied by independent directors and affiliated outside directors.
Hey guys, I know it's Saturday night but please understand me :) How can I understand which kind of legal boundaries are there in a company? If I don't have informations about it?!
One recognizes the legal boundaries inside a company (which would then become a group), because the company would then be divided into separate legal entities (Eg Geox Spa created Geox Deutschland Gmbh, Geox UK Ltd and so on). The main company would then become a parent company and control its subsidiaries.
I add that i many cases company are obliged to disclose and adopt legal boundaries by national legislations and international agreements. Some times you can find hints in the financial statement as sole, or you may directly find an aggregated one which include all the info you need. Other sources are the shareholders meeting documents and other official docs.
I believe that we can consider CEO duality as a positive element following the Stewardship theory. In that case, the CEO, as a trustworthy individual appointed by the board of directors, will work closely to the board to create value. On the other hand, the agency theory does not see it in a good way as it may represent a situation of potential power abuse of the CEO within the board. Moreover, it will be more difficult for shareholders to monitor the management activity.
I agree with Lorenzo, the CEO duality is not always a negative element, as it can become positive when the CEO behaves as a steward to the firm, considering the firm's interest more relevant than his own.
Actually, I believe that CEO duality could be not so good because it does not enhance the effectiveness of the board and it does not lead toward an independent monitoring role. Indeed, the control and balance function for shareholders is improved if the CEO and Chairman positions are separated.
CEO duality as well said by the others is good just in case of managers behaving in stewardship way, in fact their interest is no more related only in remuneration, but they have also extrinsic incentives to act in a good way. They believe that pursuing organizational and collective ends they will be able to reach also self-satisfaction, that is why CEO duality it is no more seen as a negative attribute, because shareholders can be sure that their interests will coincide with the ones of the firm.
I agree with Cristina. Based on agency theory, the CEO duality hinders board ability to monitor management and therefore increase the agency problem. As a result, CEO duality reduces board independence. Conversely, Stewardship theory argues that CEO duality creates strong leadership and a clear sense of strategic decision. Splited roles may create high communication costs and decision making processes can be less effective and less efficient when there are two leaders
Yes, there are both of CEO duality. a disadvantage case of CEO duality as it does not enhance the effectiveness of the board and it does not lead toward an independent monitoring role. and an advantage case of CEO duality as it creates strong leadership and a clear sense of strategic decision
In my opinion the CEO duality could be a bad things for the companies because should compromise the monitoring and control of the CEOs. On the other hand could be positive in the improvement of profitability and maximization of stakeholders' wealth.
In our cases that we analyzed for the project work, the both firms have a CEO duality "problem", but the performance are brillant. So, I don't think is a bad element for the corporate governance.
I agree especially with Lorenzo, the CEO duality has to be assessed according to different theories. For instance, according to the stewardship theory this could be a positive element.
Well, the CEO duality can be considered as a positive element following the Stewardship theory. While the agency theory does not see it in a good way as it may represent a situation of abuse of power abuse of the CEO.This may increase shareholders' difficulties to have a right picture of the management operating.
CEO duality might be positively perceived in light of Stewardship Theory (ST) according to which the management is entrusted of the mission of achieving the organizational goal. However, to be a good steward and positively contribute to the mission of the firm, it is highly recommended that the manager is enrooted in the culture of the organization. Thus the expected benefit associated with CEO duality consists in a more demanding, motivating and stimulating position for the CEO.
my answer would be: it depends. If we consider the agency theory, the CEO duality limits board ability to monitor managers behaviours and so it increases the agency problem because it reduces the independece of the board. Instead, if we cosndier the stewardship theory, CEO duality can give to the firm positive effects
The duality issues depends on the view. On the one hand side, the Stewardship Theory might say that it is positive as the CEO has the firms performance well at heart on the other side one might think that the duality leads to a limited view of the CEO, as his ability to monitor and view the performance critically is obstructed due to his involvement.
According the Agency theoryThe CEO duality hinders board ability to monitor management. Therefore it is increase the agency problem. So CEO duality reduces board independence. Following Stewardship theory, CEO duality creates strong leadership and a clear sense of strategic decision. They can give possitive effects for the firm
It depends, according to the different theories. From the Stewardship theory -its good. As the CEO would have deeper understanding of the company and its operations, and as a result make better decisions during the BoD meetings. But from the Agency theory perspective its not a good thing, because, as Damiano said, it could lead to the agency problems
Of course, as I stated in the previous comment,it depends on many factors which structure to choose, so we cannot say that one is better than the other one; we can just say that if we are looking for more autonomy, we can choose the one in the left, but we can also say that the left side structure has too many responsibilities since it is not directly controlled by the holding; the right side structure, as you guys mentioned, has more centralized power since the subsidiaries are controlled and directed by the holding company, so lower cost of control and less responsibilities from the managers of the subsidiary, since they are driven directly by the holding.
Please, ask questions to your colleagues using the Figure above and the theory discussed during the lesson
ReplyDeleteThis comment has been removed by the author.
DeleteWhat type of companies (Ltd, LLC, PLC, ....) are best suitable with figure 1 and/or figure 2?
DeleteCould you please post here a proper definition of the verb "consolidate"?
DeleteAccording to the Oxford Dictionary, 'Consolidate' means: Combine (a number of things) into a single more effective or coherent whole, so combine (a number of financial accounts or funds) into a single overall account or set of accounts.
DeleteA challenging question for you: in your view, why most Italian controlling companies have the interest to show that the direction is in the hand of their subsidiaries rather than in their own hands? What could be the advantages?
DeleteI think that because most of them are family businesses, in this way they could seems to not be the strategic part and external shareholders will trust more in the firm because if they direct subsidiaries there are some transaction issues such as tunneling.
DeleteCristina you got it!
DeleteIn my point of view, we should think about the answerability. I don't want to be misunderstood. Most italian companies have the interest to show that the direction are in the hands of their subsidiaries because in case of failure they could let off some of the negligence to other internal actors.
DeleteI agree with Cristina and I think also that in some situations there could be coflict of interests if the direction is not in the hand of the subsidiaries.
DeleteInteresting question Alberto. Nice answer Cristina. Moreover, as underlined by Saverio coflict of interests could be an issue if the direction is not in the hand of the subsidiaries.
DeleteThuy Le, very nice quesion, but I've really no idea of which type of answer would suit better to these systems. According to Alberto's question..well, there coud be several reasons... not just one. And in my opinion, all of them are mainly directed to mislead the market or the investors judgment.
DeleteThese are two examples of multivisional structure where we can find five legal entities and financial statement and one consolitated financial statement. While in the first case managers are not in the holding company in the second case yes so we are sure that direction activity is exerced according to the holding willingness.
DeleteThese are two possible multidivisional structures of a business group.
ReplyDeleteIn both cases we have five legal entities, five separate financial statements and a single consolidated financial statement. In the first case the divisional managers are in the subsidiaries therefore we cannot say for sure if each subsidiary is directed or not by the holding company ( in Italy it's mandatory to disclose this kind of information). In the second case we cannot have any doubts. In fact, the divisional managers are employee of the holding company and all the subsidiaries are directed by the holding company for sure.
which is in you opinion the most efficient multidivisional structure ?
DeleteAs far as I am concerned, it depends on the dimensions and the strategy of the firm. The leftside structure is the one which fits best with a company that is big and operates in multiple markets (concerning products or geographical areas). In addition, it provides shared responisiblities for the holding company and its subsidiaries at a price of more costs related to the control function. To make things better, it is a flexible structure in which subsidiaries that operate in different areas can be totally involved on field. That will permit to know better the market and consumer needs.
DeleteOn the other side, the rightside structure is a structure in which the divisional managers are incorporated inside the holding company. In this case, the separation between subsidiaries and their holding is low and is wide only for functional areas. Furthermore, it is a vertically integrated structure where divisional managers are controlled (directed and appointed) by the holding company. Therefore, costs related to the control function are lower than the leftside structure, even though responsibilities charged by the holding will be a lot.
I totally agree with Lorenzo. There is not a "best structure". The optimal solution depends on many factors, such as environmental factors or the strategy and the dimensions that the firm want to achieve. If we want more autonomy and responsabilities for subsidiaries probably the leftside structure would be better. If we want more centralized control porbably the rightside structure would be better
DeleteI agree with both of you guys; of course it depends on many factors which structure to choose, so we cannot say that one is better than the other one; we can just say that if we are looking for more autonomy, we can choose the one in the left, but we can also say that the left side structure has too many responsibilities since it is not directly controlled by the holding; the right side structure, as you guys mentioned, has more centralized power since the subsidiaries are controlled and directed by the holding company, so lower cost of control and less responsibilities from the managers of the subsidiary, since they are driven directly by the holding.
DeleteI definitively agree with you. There is not a right structure. Each company has to adapt it to its needs. Companies can identify the more appropriate structure based on, for instance, their dimension, internal and external factors, the degree of authonomy they want to leave to the subsidiaries and their objective.
Deleteactually , as my colleagues said that there is no right structure to apply it , i tend to the right figure which has a specific features such as centralized power and low cost of control and low responsibility
DeleteAs our professor said: "It depends".
DeleteIt depends on many factors such as the entity and the type of the business. On the right side we can see a centralized structure and the control is in the hand of the holding company, but we can imagine that the business does not concern about the external environment as much as the left structure because every change will need time to be arranged.
I agree with Giovanni. The optimal solution depends on many factors. If more autonomy is desired and responsabilities for subsidiaries probably the leftside structure would be better.A more centralized control can be described by structure on the right.
DeleteObviously the decision to centralize or decentralize can depend on the business strategy, the the core business processes and the stage developement of the market.
DeleteGuys, as many of you said, it depends.. but I'm not sure that both structures are on the same level of efficiency. I'm still pretty sure that the second one (right) sounds way less efficient to me, whatever production process or service you are about to produce and manage. Could you provide me examples for the left and the right ones?
DeleteIt cannot singularly be stated that there is one best multidivisional structure for a firm. It depends on the market, the size and various other factors of the company. The business strategy is another of the determining factors that can lead to an informed decision of which structure to adapt for a company.
DeleteI totally agree with Lorenzo. It depends on the size and many other factors ( environmental, political, economic).
DeleteIn my opinion the unique structure does not exist. Companies have to identify the most appropriate structure in the base of environment (internal and external), authonomy that they have, and other factors.
DeleteDo we have a difference between these two figures? And if yes what is it? Why the legal boundaries are different?
ReplyDeleteYes there is a difference. Its that in the 2nd figure, the divisional managers are employed in the holding companies. So the other 4 companies are directed by the holding company.
DeleteWe can see differences among the figures, only from a legal point of view ( there are no differences from a strategic point of view). In the first figure divisional managers are responsible of subsidiaries and they could also declared that they are not directed by the holding. In the second case all the subsidiaries are controlled and directed by the holding company.
DeleteFrom a legal and financial point of view , there are no differences , as in both cases we find 5 separate legal entities(holding plus 4 subholdings) and the consolidated financial statement is used rather than separate individual fin.statements. The difference is that while in the first case (the one on the left) the subholidings can declare not to be directed by the holding, in the second case, on the grounds that divisional managers are employed by the holding itself ,the divisions are for sure not only controlled but also directed by the holding.
DeleteIn my opinion, there are legal differences between two situations.
DeleteThere is no difference between consolidated financial statements of the holding company in two case.
However, the Consolidated Financial statements of subsidiaries and the Separated Financial statements of all companies are different in two cases. This results from the internal transactions between companies in group.
For the case of Division managers belong to the holding company, the subsidiaries are directed by holding company for sure. In the other case, the subsidiaries can say that they r not directed by holding company.
In my opinion
DeleteFrom the legal point of view, We can see some differences among the figures, we can't see any differences on the strategic point of view . In the first part the divisional managers are responsible to the subsidiaries and they are not directed by the holding company on the other hand all the subsidiaries are controlled and directed by the holding company.
In both cases we have five legal entities and one consolidated financial statement. However, in one case divisional managers are the CEO of the subsidiaries and in this case the 4 businesses can state that they are CONTROLLED by the holding but not DIRECTED by it. In the other case divisional managers are part of the holding so the 4 business have to state that they are CONTROLLED AND DIRECTED by the holding itself.
DeleteYes, the difference stands on the fact that in the second figure, the divisional managers are in the holding and it means that subsidiaries will be both controlled and directed by the holding. Is not possible to say the opposite. In the figure 1 instead since divisional managers are included in the subsidiaries, it could be possibile that the holding controls subsidiaries without directing them.
DeleteAs my collegues said, here we have five legal entities that are defined by the legal boundaries. On the left side we see the delegation of power: the four subsidiaries are controlled by the holding, but not directed by it.
DeleteOn the right side we see the four subsidiaries that are directed by the holding, because the divisional managers are employees of the holding.
Well, my collegues correctly underlined the features of the two business unity structures. From the legal point of view the five legal entities are well-defined. On the left, the divisional managers are part of the subsidiary, while on the right side they are included on the parent firm bounderies. It is interesting how the italian law leaves room for declaring autonomy in control and direction taking into consideration the left map. I would like ask my collegues. Do you think we can associate the case on the left to a pure holding company and the case on the right to an operating holding company? What are the differences betwee them?
DeleteAnswering to Nardi,In order to differentiate between pure and operating holding company, I think that we should look at the holding investments in subsidiaries in the financial statement. In fact,the main difference between these two types of structures is that the former has just interest in owing shares of the subsidiaries and does not produce any good/service, while the latter is engaged in business activities. I think that we cannot say anything about these difference,even if I think that the second figure,since we have both direction and control of the holding it could be more reasonably the case of a pure holding. And what to you think about?
DeleteI totally agree with Federica. The right side of the picture simply indicates that the divisional managers are within the boundaries of the holding company. Therefore, they cannot be considered as entities that are separated by the "mother firm". For what concerns the difference between pure holding and operating one, this picture does not show us anything . We should see if the holding merely is a "Financial" entity with just Investments in aubsidiaries in its balance sheet or not.
DeleteFrom the legal point of view these two structures are basically the same. They have five legal entities, five separate financial statement (one for the holding and one for each subsidiaries) and one consolidated financial statement. The main difference can be found in tha fact that in the second picture the managers are employed within the Holding Company, so we can say that the four subsidiaries are controlled and directed by HC. In the first picture we can only say that the subsidiaries are controlled and maybe they could be directed y the HC.
DeleteFrom the picture we can analyze two multidivisional structures of a business group. In both the structures, there are for sure 5 legal entities and one consolidated financial statement. The main difference is represented by the fact that in the first one, divisional managers are in the subsidiaries, and basically they are controlled but not directed from the Holding Company. In the second one, instead, divisional managers are employees of the Holding Company and as a consequence, the subsidiaries are both controlled and directed.
DeleteIn my opinion, the internal transactions between companies in group leads to the main diffirence are in the Consolidated Financial statements of subsidiaries and the Separated Financial statements of all companies are different in two cases. For the case of Division managers do not belong to the holding company the subsidiaries can say that they are not directed by holding company. In the other case, Division managers belong to the holding company, the subsidiaries are surely directed by holding company.
DeleteI agree with Federica Sabato, I think that the second structure( where we have both direction and control of the holding ) it fits best in the case of a pure holding, an holding company that doesn't produce goods/servicies but its only objective is to control the subsidiaries.
DeleteI agree with you, the business group structure with its legal bundaries does not help us in understanding whether a holding is pure or operating: this is a matter of business and financial data. We have to look whether any products or goods are produced by the holding, and we have to take a glipse at the fin. statement, to see if it only owns investments in subsidiaries, or has also other fin. elements like credits, receivables and so on.
Deletein this case , we observe that the five legal entities have defined by the legal boundaries.
DeleteOn the left side the four subsidiaries are controlled by the holding, but not directed by it.
On the right side the four subsidiaries that are directed by the holding, because the divisional managers are employees of the holding.
I think that this figure shows the difference about the competences and the bounderies between functional and divisional managers. On the left side the figure shows the collaboration and integration between each division and support function. In this case maybe the two kind of managers share competences and interact within each division. The figure on the right side shows the clear bounderies between the divisions and support functions. In this case the department and managers work indipendently to each other.
DeleteThe difference is that while in the left structure the subsidiares can declare that are not directed by the holding, in the right case the divisional managers are employed by the holding itself so the divisions are for sure not only controlled but also directed by the holding.
DeleteYes we do.In the leftside structure the subholidings can say that they are not directed by the holding. The other is a structure in which the divisional managers are incorporated inside the holding company, so the divisions are clearly directed by the holding.
DeleteThe structure is the same. The difference behind the left and the right one is the governance. But my colleagues already told everything that can be said about! :)
DeleteIn the first case divisional managers are responsible of subsidiaries. In the second case all the subsidiaries are controlled and directed by the holding company.
Deletethe main difference is the distance between funcional managers and divisional managers
DeleteWhy are functional managers legally separeted into four different legal entities? What could be the reason? Isn't it more expensive rather than having just one legal entity? There are some advantages as we saw in the Caltagirone example.
ReplyDeleteFrom my point of view, when the functions are separated into 4 different legal entities (according to the fact that these companies usually are listed companies) the group can easilly mobilize more capital/equity from the minority shareholder. This strategy can leverage the group and also remain the control power of the current controlling party
Deleteprobably the different organization is led by the difference in the business of the two firms. in my opinion the organization on the left fits well with corporations whit many business and each division (strategic business unit "SBU") has it's own management and reference market (telecommunication services for example).
Deleteon the other hand, the structure on the right fits with a single business- corporation, where over specification is not required, and divisions are settled to share the unique reference market, according for example with geographical boundaries (food retailer)
Putting functional managers out of the holding company's boundaries could be a measure taken to lighten the holding of some legal responsibilities concerning each function's production. Even if it may lead to additional costs, the trade-off between them and some legal troubles will be probably positive.
DeleteThis is also a strategy in order to have listed company, I think.
DeleteAgree with federica, having different legal entities allows the parent firm to access to a much higher value of possible investment, that is by listing each single branch and collecting investments. In this case would probably mantain control, keeping the majority of shares, but would menage a much higher capital
DeleteIn my point of view, the functional managers legally seperated into four different legal entities to reduce risk in management and it express the specialization in management
DeleteI agree with Francesca, setting different legal entities allow the holding to collect more investment founds by listing the subsidiaries and has also the advantage of limiting the company financial liability by dividing and sharing risks with the other firms of the group
Deletedifferent legal entities allows the firm to attract much more investment, by listing each single branch and collecting investments.
DeleteOne of the most important advantage will be the better reactivity that the management will have in taking decision. we have to balance this advantage with the cost of this type of organization.
DeleteBecause we have different advantages. For instance to limit the responsibilities of the holding or attract more investors for the subsidiaries or also to have transactions with other firms (suppliers) related to the holding.
DeleteWell, in my opinion setting different legal entities enables firms to be financed in much more different ways, listing each subsidiary and at the same time reducing the financial liability of the firm through the sharing of risks.
DeleteI agree with Michele, but I would like to add also the fact that the advantage to have separate legal entities becomes necessity, even desirable, when the businesses are dislocated on a global-scale and the juridical framework is very different form subs/division to another.
DeleteIn my opinion is usefull in order to differenciate risks and avoid legal problems. Often it doesn't have a serious economic reason behind
DeleteGuys, WHY and FOR WHICH CATEGORY OF ACTORS consolidated financial statements are so important?
ReplyDeletepotential investors (institutional ones like pensions founds but even for private and sophisticated savers), banks, credit institutions, stakeholders (not only shareholders) and obviously Public authorities (Consob in Italy, SEC for the Usa stock market), if those companies are listed ;)
DeleteThe consolidated financial statements are the financial statments of a Group presented as those of a signle activity we said. Thus corporations may use this tool to level the results of the economic activity. That is, if one of the subsidiaries produces destroys value during the year, profits from other subsidiaries may be used to compensate these losses.
DeleteThe consolidated financial statement is the financial statement of a parent company and its subsidiaries. It does not take into consideration internal transactions ( transanctions among the group members) and it is very useful to have an overall picture, for example, of the financial situation of the group as a whole. It is done by the parent company and it is very important first of all for investors and creditors. In fact it would be difficult for them to collect all the information they need looking at all the separate financial statements of the group members even if this is fundamental to understand how secure the entire economic entity is since every member gives its contribute.
DeleteI agree with you. I would like to add that the consolidated financial statement eliminates all the Intra-group transactions which may provoke some misliading informations about the group as a whole. That is why consolidated financial statement is so important for investors, creditors and other categories of stakeholders.
DeleteThe consolidated financial statement is the financial statement made by the parent company and regarding the financial statement of the group as a whole ( both parent company and subsidiaries). As Giulia said, I believe that is extremely important for the external stakeholders, such as creditors, since it provides information only related to the group as an economic entity. This is the reason why it does not consider the transactions among the single economic entity: they can misrepresent information.
DeleteI totally agree with you guys. Basically, the consolidated financial statement is so important because it represents an aggregated look at the financial position of the group as a whole, and so of the parent company and the subsidiaries. It's so important above all for external stakeholders like creditors and investors because they can understand the overall HEALTH of an entire group of companies.
DeleteConsolidated financial statement is the statement of a group and is made by the holding or parent company.It is important because it highlights only the transactions between the group and the market considering the group a single economic entity despite of the fact it is composed of different legal entities.
Deleteworth of notice a consolidated financial statement given that, as you all said, eliminates related-party transactions, avoids that a group can fraudly inflate the amount of assets by imposing fictious prices over the market value among its branches. Inflation of assets would result as fraud as big as Parmalat
DeleteIn my view, consolidated financial statements are so important because through its the parent company can regard the finacial actions not only subsidiaries but also itself, then they can give suitable decision making for specific business situations/strategies of company
DeleteAs you all have said, the consolidated fin. statement is useful to have a clear idea of how the group works as a whole, eliminating potential misleading, in fact it happens very often that while in separated statements substantial revenues can be found, coming from internal transactions within the group, at the consolidated level these revenues turn out to be losses . the consolidated statement is useful for everyone potentially interested in the firm performance: potential investors, customers, autorities, researchers.
DeleteAs you all said above, The consolidated financial statement is the financial statement of a parent company and its subsidiaries transactions between the group and the market considering a single economic entity, and to add It's so important for external stakeholders like creditors and investors because they can understand how the company is going on the right track.
DeleteThe consolidated financial statement is used by the holding company to eliminate the related party transaction that can hide illegal purposes. Is also important because investors can look at the financial position of the group as a whole
DeleteConsolidated financial statement is the Financial statement of a group in which the assets, liabilities, equity, income, expenses and cash flows of the company and its subsidiaries are presented as those of a single economic entity.
DeleteGuys, what about the separate financial statement?
DeleteConsolidated financial statements show the company's financials together with those of all its subsidiaries. Consolidation of financials is also necessary when there are joint ventures or if there are investments in associate companies, in which the company can influence, but not control, policy decisions. Given that a company may have subsidiaries, doesn't matter if or not in the same line of business, where these are profitable, they add to shareholder's wealth. So, consolidated financial statement is pivotal for all the external actors that are interested in investing in a firm.
DeleteAs my colleagues explained clearly, the consolidated financial statement plays a fundamental role in providing investors and creditors with truthful information on a group, in that this kind of financial statement isn't biased by internal transactions between the parent firm and its subsiadiaries, which could be misleading in the evaluation of the economic entity.
DeleteThe consolidated financial statement is useful for who is interested and wants to have a a clear idea on all the group performance. Anyway one of the most important characteristic of that is that the consolidated financial statement does not include internal transactions among the parties of the group.
DeleteThe consolidated Financial Statement in my opinion is important to assess the Group as a whole, so it is fundamental for all types of investors and also for institutions.
DeleteWe know that the consolidated financial statement is the financial statement made by the holding and regards the financial statement of the entire group.
DeleteIn my opinion it is so important for the interests of the external stakeholders, due to the fact it provides information that refers only to the group as an economic entity.
Control, control, control. Actors: shareholders, governments, Guardia di Finanza.
DeleteInvestors, public authorities, such as the government as well as shareholders have a vital interest in knowing about the financial situation of a company, about the losses and revenues as well as the investments.
DeleteConsolidated financial statements are really important because then they can give finacial actions and suitable decision making for specific business strategies of company
DeleteIt's important for external stakeholders and potential investors, but also for legal Autorities in order to sustain customers interests
DeleteThis comment has been removed by the author.
ReplyDeleteHow can manage the group on the leftside a fraud scandal in which functional managers and divisional managers are responsible for?
ReplyDeleteWhat happen on the rightside? Can we consider the two cases as similar or do they touch the holding company in different ways?
Hi guys, I would like to ask you something, even though it is not related to this topic. Could you tell me how is it possible that a Chief Legal Officer of a company is a non-executive director? Shouldn't he be considered as an executive director?
ReplyDeleteOf course he is an executive director, since executive members shall be those engaged in the daily management of the firm.
DeleteI agree, if he is a C.L.O.this imply his involvement in the daily management so He is an executive director.
DeleteThe C.L.O helps the firm in minimizing legal risks and so on,so he has to be involved in the daily management as my colleagues said.
DeleteIn my opinion, A publicly traded company's most powerful legal executive. The Chief Legal Officer (CLO) is an expert and leader who helps the company minimize its legal risks by advising the company's other officers and board members on any major legal and regulatory issues the company confronts, such as litigation risks. The CLO may also be a member of the company's operating committee and is overseen by the CEO. The CLO oversees the company's in-house attorneys.
DeleteWhen a large, publicly traded company hires a new CLO, it will make the news, just as the hiring of a new COO or CFO would. A CLO typically has more than a decade of legal experience; positions a CLO might hold prior to becoming an executive include Head of Legal, First General Counsel and firm partner.
chief legal officer is an executive director since he join the rest of directors in managing the firm day-to-day
DeleteThe CFO is an expert who helps the company to minimize its legal risks for instance legal and regulatory issues. It is overseen by CEO. From this definition I think that the CFO shouldn't be considered an executive director because it has consulting function and it doesn't have the possibility to elaborate and plan strategies and decisions.
DeleteI agree with my colleagues, the CLO can be considered as an executive director, since executive members are engaged in the daily management of the firm.
DeleteIt depends on if the CLO is actively involved in the daily running of the firm. But on my view the CLO helps the company in a daily minimize of the legal risk so he should be considered an executive member of the board of directors.
DeleteI agree especially with Alessandro..."it depends" on the involvement of the member within the management of the firm...but in most cases CLO is also an Executive Member of BoD because he is involved in management every day.
DeleteDo you guys think it depends also on the object of the company? In a company operating in the service industry the clo sustains the company in core business activities helping to minimize the legal risks. In this case he should be considered an executive member of the board of directors.
DeleteWhen we talk about CFO, CMO, CLO we always refer to executive directors!!
Delete...Even if not all the big copanies have one! Look a the CTO (chief technical officer), for example, it is unnecessary in most of the biggest service oriented companies, let's say insurances for example, while he becomes crucial in hi-tech or ICT firms. This is the same for the CLO, because sometimes times Legal Department in a firm is a mere support function.
DeleteIn my opinion yes, Legal area can exist also among the support line of the organigramm
DeleteHi guys, I have some questions for you;
ReplyDelete1) Can you please explain me the difference between "Indipendent" and "Dependent" director?
2) And the difference between "executive" and "non executive" director???
Thank you
Hi Pier Paolo, as we said during the lectures the difference is basically on the fact that the independent director is an outside director and it is part of the board of directors. This director has to respect some criteria in order to be considered 'independent', for example, it does not have a material or financial relationship with the company and with its employees and management.
DeleteFor what concern, instead, the Executive Director is generally represented by the CEO or the Managing Director of the company. Moreover, it is an inside director. The Non-Executive Director, finally, is a director who is not an executive inside the organization.
Thank you Francesco; so is it possible that an independent director owns some shares of the company?? in the company that I'm analyzing, I found in the minutes of the 2014 annual meeting of shareholders, that the independent directors are paid with shares also :/
DeleteYes Pierpaolo it is possible. An indipendent director can own shares ONLY if he is a non executive one! so only if he is not part of the executive management team.
DeleteI totally agree with Federica and Francesco. I would like to add that it is quite common to see such a case since it is a way to make independent directors careful about company's performance. As a matter of fact, being paid with stock options may lead to high salary increases as well as very low ones in case of negative firm performance.
DeleteIt's easier to keep in mind this distinction if you think of EXECUTIVE as something associated with MANAGERIAL issues,while NON EXECUTIVE cannot be associated with this item,as Federica,Francesco e Lorenzo correctly said.
DeleteYes Pier Paolo, an indipendent directors can hold some shares of the company, but these have to be not too many, in order to not prejudice the independence of the director himself
DeleteIndependent directors respect some criteria of independence towards the company, such as having no financial, material or familiar relationship with the firm or its members.
DeleteExecutive directors do managerial tasks inside the company, while non executive directors don't
Hi Pier, I'm writing in response of your 2nd question. The chief executive officer has the overall, primary management and leadership role in the organization. Therefore, the CEO must have extensive knowledge and skills in a wide variety of areas.
DeleteWhile a non-executive's role is less hands-on. A non-executive director may have less experience and less knowledge than an executive. However, the benefit here is that a non-executive can bring objectivity and an external awareness to the board. Non-executive directors are not usually involved with day-to-day management, however, the smaller the company, the more likely it is that there will be some hands-on work. The non-executive's role is an over-viewer and whistle blower, ensuring adherence to good practice, respect for the interests of other stakeholders and adherence to the process of boardroom discipline. Non-executives are often thought of as "advisers" although this is not the case. The role is larger than this - the non-exec is a director and shares the legal duties and responsibilities of the executive directors. As far as corporate governance is concerned, non-executives are usually associated with Independence and may be self employed.
Just to underline the main points widely treated by Morgan: The CEO must have extensive knowledge and skills in a wide variety of areas. While non executives may be less experienced, the most important thing is to try to be super-partes within the board and try to bring in the board the external interests.
DeleteAn indipendent director can hold shares only in the case he is a non executive director.. so he has to be out of the executive management team.
DeleteInsted, for what concerns executive directors, they are active in doing managerial tasks and in deciding the competitive strategy of the company!!
1. Independent Director: somebody not financially entangled in the corporation who does not have a personal interest in the well-being of the firm. The dependent director might own shares of the firm or might have been appointed by a major shareholder, thus he has a vital interest in the high performance of the firm, as he also personally profits from this.
Delete2) An executive director is somebody who steers the company and is 'executing' the task. A non-executive director on the other hand is rather somebody, who is monitoring the ongoings and does not have to power to actually influence by actions. His primary task is that of an advisor and guide.
I agree with Hannah Merz,
Delete- Independent Director: somebody not financially entangled in the corporation who does not have a personal interest in the well-being of the firm.
- The dependent director might own shares of the firm or might have been appointed by a major shareholder, thus he has a vital interest in the high performance of the firm, as he also personally profits from this.
- An executive director is somebody who steers the company and is 'executing' the task.
- A non-executive director on the other hand is rather somebody, who is monitoring the ongoings and does not have to power to actually influence by actions. His primary task is that of an advisor and guide.
1. Independent Directors who are not fiancially entangled in the firm and doesnt have interest in the well-being of firm. But the dependent direcotrs might own shares of the firm.
Delete2. Non-Excutive directors who are member of BOD but they are not managers.And Executive directors who are member of BOD but they steers the company with : executing" task
1) Independent directors are those directors who do not have economic relationship with the company they serve and whose primary goal is to effectively monitor the behavior of a) the management in case of Public Company, b) the owners in case of concentrated company where direction and control are together. However a fully independent director is such whenever he/she has been elected by minority shareholders. Non independent directors are simply elected by the shareholder (particularly by the major shareholder if any) and can be divided in a) Inside directors and b) Outside directors.
Delete2)As far it concerns the difference between executive and none, the former do represent the management of the firm whereas the latter are embodied by independent directors and affiliated outside directors.
1) If they have financial interest or not
Delete2) Spend enegies to push the strategies into practice or not
This comment has been removed by the author.
ReplyDeleteHey guys, I know it's Saturday night but please understand me :)
ReplyDeleteHow can I understand which kind of legal boundaries are there in a company? If I don't have informations about it?!
One recognizes the legal boundaries inside a company (which would then become a group), because the company would then be divided into separate legal entities (Eg Geox Spa created Geox Deutschland Gmbh, Geox UK Ltd and so on). The main company would then become a parent company and control its subsidiaries.
DeleteI add that i many cases company are obliged to disclose and adopt legal boundaries by national legislations and international agreements. Some times you can find hints in the financial statement as sole, or you may directly find an aggregated one which include all the info you need. Other sources are the shareholders meeting documents and other official docs.
Deletemy question is not related to that topic..But, to what exent we can consider the CEO duality as a good element for the corporate governance of a firm?
ReplyDeleteI believe that we can consider CEO duality as a positive element following the Stewardship theory. In that case, the CEO, as a trustworthy individual appointed by the board of directors, will work closely to the board to create value.
DeleteOn the other hand, the agency theory does not see it in a good way as it may represent a situation of potential power abuse of the CEO within the board. Moreover, it will be more difficult for shareholders to monitor the management activity.
I agree with Lorenzo, the CEO duality is not always a negative element, as it can become positive when the CEO behaves as a steward to the firm, considering the firm's interest more relevant than his own.
DeleteActually, I believe that CEO duality could be not so good because it does not enhance the effectiveness of the board and it does not lead toward an independent monitoring role. Indeed, the control and balance function for shareholders is improved if the CEO and Chairman positions are separated.
DeleteCEO duality as well said by the others is good just in case of managers behaving in stewardship way, in fact their interest is no more related only in remuneration, but they have also extrinsic incentives to act in a good way. They believe that pursuing organizational and collective ends they will be able to reach also self-satisfaction, that is why CEO duality it is no more seen as a negative attribute, because shareholders can be sure that their interests will coincide with the ones of the firm.
DeleteI agree with Cristina.
DeleteBased on agency theory, the CEO duality hinders board ability to monitor management and therefore increase the agency problem. As a result, CEO duality reduces board independence.
Conversely, Stewardship theory argues that CEO duality creates strong leadership and a clear sense of strategic decision. Splited roles may create high communication costs and decision making processes can be less effective and less efficient when there are two leaders
Yes, there are both of CEO duality. a disadvantage case of CEO duality as it does not enhance the effectiveness of the board and it does not lead toward an independent monitoring role. and an advantage case of CEO duality as it creates strong leadership and a clear sense of strategic decision
DeleteI agree with Lorenzo and Cristina
DeleteIn my opinion the CEO duality could be a bad things for the companies because should compromise the monitoring and control of the CEOs. On the other hand could be positive in the improvement of profitability and maximization of stakeholders' wealth.
DeleteIn our cases that we analyzed for the project work, the both firms have a CEO duality "problem", but the performance are brillant. So, I don't think is a bad element for the corporate governance.
DeleteI agree especially with Lorenzo, the CEO duality has to be assessed according to different theories. For instance, according to the stewardship theory this could be a positive element.
DeleteWell, the CEO duality can be considered as a positive element following the Stewardship theory.
DeleteWhile the agency theory does not see it in a good way as it may represent a situation of abuse of power abuse of the CEO.This may increase shareholders' difficulties to have a right picture of the management operating.
CEO duality might be positively perceived in light of Stewardship Theory (ST) according to which the management is entrusted of the mission of achieving the organizational goal.
DeleteHowever, to be a good steward and positively contribute to the mission of the firm, it is highly recommended that the manager is enrooted in the culture of the organization.
Thus the expected benefit associated with CEO duality consists in a more demanding, motivating and stimulating position for the CEO.
my answer would be: it depends.
DeleteIf we consider the agency theory, the CEO duality limits board ability to monitor managers behaviours and so it increases the agency problem because it reduces the independece of the board.
Instead, if we cosndier the stewardship theory, CEO duality can give to the firm positive effects
The duality issues depends on the view. On the one hand side, the Stewardship Theory might say that it is positive as the CEO has the firms performance well at heart on the other side one might think that the duality leads to a limited view of the CEO, as his ability to monitor and view the performance critically is obstructed due to his involvement.
DeleteAccording the Agency theoryThe CEO duality hinders board ability to monitor management. Therefore it is increase the agency problem. So CEO duality reduces board independence.
DeleteFollowing Stewardship theory, CEO duality creates strong leadership and a clear sense of strategic decision. They can give possitive effects for the firm
I think that, in general, it can't be considered so good for a company because can lead on an agency problem
DeleteIt depends, according to the different theories. From the Stewardship theory -its good. As the CEO would have deeper understanding of the company and its operations, and as a result make better decisions during the BoD meetings. But from the Agency theory perspective its not a good thing, because, as Damiano said, it could lead to the agency problems
DeleteThis comment has been removed by the author.
ReplyDeleteHiii guys, what are the positives and negatives if comapny organize by figure 1/figure 2?
ReplyDeleteOf course, as I stated in the previous comment,it depends on many factors which structure to choose, so we cannot say that one is better than the other one; we can just say that if we are looking for more autonomy, we can choose the one in the left, but we can also say that the left side structure has too many responsibilities since it is not directly controlled by the holding; the right side structure, as you guys mentioned, has more centralized power since the subsidiaries are controlled and directed by the holding company, so lower cost of control and less responsibilities from the managers of the subsidiary, since they are driven directly by the holding.
ReplyDeleteThis comment has been removed by the author.
ReplyDelete