You are on page 1of 949

A Subsidiary of FPA Policy and Procedures Manual - 1

Md Faridujjaman

B.A Homer’s .M.A. (Bangla). LLB (NU)

MBA (Finance & Banking). NTRECA


01737150401, 01913051012

mdfaridujjaman.education@gmail.com

mdfaridujjamanbd@gmail.com 01737150401,01913051012

Industrial Plan

Organogram

Chairman

Vice-Chairman

Adviser

Managing Director

Executive Director

Director

Deputy Director

Assistant Director

Page 1 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

General Manager (Subject)


Deputy General Manager

Assistant General Manager

The Managing Director

The Managing Director is responsible for the overall arrangements and for ensuring that the
company’s operations are executed at all times in such a manner as to ensure, so far as is reasonably
practicable, the health, safety and welfare of all employees and others who may be affected by its
operations.

In particular the Managing Director will:

1 . Ensure there is an effective company policy for health and safety and that all employees,
contractors and temporary workers are made aware of their individual responsibility.

2 To understand and ensure, through the appointment of competent persons, that the company’s
responsibilities as employers under the Health and Safety at Work etc. Act 1974 and any relevant
Acts of Parliament and Statutory Instruments are met.

3 To appoint a Director responsible for safety.

4 To ensure that all Directors and Managers understand and fulfill their responsibilities with
regard to health and safety.

5 Arrange for funds and facilities to meet the requirements of company policy and legislation.

6 Make provision for adequate and appropriate training to be given to all employees

7 To ensure that notification and reporting procedures to the relevant statutory authorities are
carried out

8 Set a personal example on all matters of health and safety.

Managing Director

Managing Director Responsibilities

 Developing and executing the company’s business strategies

 Providing strategic advice to the board and chairperson

 Preparing and implementing comprehensive business plans to facilitate achievement

Page 2 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Job brief

We are looking for an experienced Managing Director to control and oversee all business operations,

people and ventures. You will be the highest ranking manager in the organization and will be responsible
for the overall success of the business.

The ideal candidate will be a strategist and a leader able to steer the company to the most profitable
direction while also implementing its vision, mission and long term goals. Very strong crisis management
skills will also be essential since the managing director is the one expected to “save” the company in times
of need.

The goal is to ensure the company is constantly moving towards fulfilling its short-term and long-term
objectives and does not diverge from its strategic guidelines.

Responsibilities

 Develop and execute the company’s business strategies in order to attain the goals of the board and
shareholders

 Provide strategic advice to the board and Chairperson so that they will have accurate view of the market
and the company’s future

 Prepare and implement comprehensive business plans to facilitate achievement by planning cost-effective
operations and market development activities

 Ensure company policies and legal guidelines are communicated all the way from the top down in the
company and that they are followed at all times

 Communicate and maintain trust relationships with shareholders, business partners and authorities

 Oversee the company’s financial performance, investments and other business ventures

 Delegate responsibilities and supervise the work of executives providing guidance and motivation to drive
maximum performance

 Read all submitted reports by lower rank managers to reward performance, prevent issues and resolve
problems

 Act as the public speaker and public relations representative of the company in ways that strengthen its
profile

 Analyze problematic situations and occurrences and provide solutions to ensure company survival and
growth

Requirements

 Proven experience as Managing Director or other managerial position

 Demonstrable experience in developing strategic and business plans

 Thorough knowledge of market changes and forces that influence the company

 Strong understanding of corporate finance and measures of performance

Page 3 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

 Familiarity with corporate law and management best practices

 Excellent organizational and leadership skills

 Excellent communication, interpersonal and presentation skills

 Outstanding analytical and problem-solving abilities

 BSc/BA in business administration or relevant field; MSc/MA will be preferred

MANAGING DIRECTOR - CREATIVE & MARKETING


Aquent Studios provides Better Brand Execution to the world’s marquee brands, providing
customized tactical execution solutions that support strategic goals and reduce overall creative and
marketing spend. By segmenting strategic initiatives from tactical execution, Aquent Studios clients
get agency quality deliverables at non-agency prices.

The Managing Director is a leader for the Studios teams and a subject matter expert for our clients.
The main objectives for this role are Service Delivery and Solution & Implementation Development.

Service Delivery responsibilities include managing the Studios creative teams (people, process,
technology) to build client satisfaction, increase efficiency, meet established quarterly metrics, and
grow the business by looking for new opportunities to build and scale new solutions for existing
customers.

Solution & Implementation Development responsibilities align with sales efforts to advance new
prospects by providing marketing operations and decoupling expertise to advance new prospects to
clients. This involves assessing the client’s current situation, determining how our service offerings
match the client's needs, defining the specific delivery model and leading the implementation of
solutions with the new client.

To be successful in this position you must have the following skills and abilities:

 Experience in a business development or account management role in an agency, corporate or


consulting environment.
 Expertise in marketing operations, agency management, or decoupling marketing solutions.
 BS/BA degree in marketing, communications, business or related field with an in-depth
knowledge and a minimum of five years of combined marketing communications,
professional services, or agency business development experience.
 Demonstrate strategic understanding of emerging channels like social media, mobile, and
digital.
 Proven ability to make a professional and positive impression with senior management within
potential client organizations
 Successful track record at building and presenting concepts/programs for clients and new
business opportunities
 Direct management experience of team comprised of 10 or more
 Proven track record of showing improvement in cost, quality and cycle time metrics in a
creative environment

Page 4 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

 Understands components, cycle times and production and distribution requirements of print,
web and video/multimedia deliverables.

The Managing Director will work from an Aquent office or from home, but must live within two
hours of Philadelphia and travel there frequently for meetings.

Executive Director Responsibilities and Functions In the conduct of the ongoing business of JULIE,
Inc., the Executive Director is responsible for all business operations, including management of the
assets of JULIE, Inc.; hiring, training, promotion, discipline and termination of employees; and for
establishing and maintaining the business organization and structure to efficiently conduct the
management functions of JULIE, Inc.

The Executive Director plans for and administers a program providing service in accordance with
JULIE, Inc.'s stated purpose and in such a manner that optimum results are achieved in relation to the
resources of the agency, and operates under the general direction of the JULIE, Inc. Board of Directors.

Executive communication/counsel to the Board The Executive Director will provide information and
counsel to the Board. Accordingly, he/she will:

• Make the Board aware of special events, relevant trends, material external and internal changes and
the assumptions upon which any Board policy has previously been established;

• Submit required monitoring data in a timely, accurate and understandable fashion, directly addressing
provisions of the Board policies being monitored;

• Marshal as many staff and external points of view, issues and options as needed for fully informed
Board choices; and

• Present information in a form that is understandable and of reasonable length. Delegation to the
Executive Director

The Board’s job is generally confined to establishing topmost policies, leaving implementation of
Board policy to the Executive Director.

All Board authority delegated to staff is delegated through the Executive Director.

The Executive Director is authorized to establish all further policies, make all decisions, take all actions
and develop all activities which are true to the Board's policies.

The Board will respect the Executive Director's choices so long as the delegation continues.

This does not prevent the Board from obtaining information about activities in the delegated areas.
Executive Director Responsibilities and Functions - 2 No individual Board member, officer or
committee has any authority over the Executive Director. Information may be requested by such parties,
but if such request, in the Executive Director's judgment, requires a material amount of staff time, it
may be refused. Areas of responsibility delegated to the Executive Director In the area of human

Page 5 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

resources, the Executive Director relates both to the Board and to the staff of JULIE, Inc., but has
ultimate responsibility to the Board. For the Board of Directors, the Executive Director:

• develops and recommends to the Board of Directors, specific, written, long and short-range plans for
the achieving of JULIE, Inc. strategic plan;

• maintains appropriate relations with the Board and various Board committees, and keeps them
informed;

• interprets trends in the fields of service in which JULIE, Inc. is engaged maintaining involvement in
the professional field as a whole; and

• assists with orientation and training programs for the Board. For the JULIE, Inc. staff, the Executive
Director:

• supervises and directs key staff in the performance of their duties;

• evaluates the performance of key staff members; and

• provides overall control of and direction for the personnel of JULIE, Inc., including active
participation in or approval of personnel actions. In the area of planning, the Executive Director:

• evaluates the services being provided by JULIE, Inc. in relation to specified goals and standards, and
recommends modifications, where appropriate; and

• recommends new programs to the Board. In the area of finance, the Executive Director:

• oversees the JULIE, Inc. budget process and is accountable for control of these resources once
approved and

• directs all financial operations of JULIE, Inc. Executive Director Responsibilities and Functions - 3
in the area of constituent relations, the Executive Director:

 Manages all activities including coordinating Board activities in this area. In the area of interagency
relations, the Executive Director:

• maintains appropriate relations with other professional and service groups in the community; •
maintains appropriate relations with federal, state, and local government units; and

• maintains appropriate relations with other agencies in similar fields of service. In the area of JULIE,
Inc. organizational operations, the Executive Director:

• recommends policies to the Board and/or assists the Board in the formulation of policies for the
effective and economical operation of JULIE, Inc. and its programs;

• ensures implementation of the policies adopted by the Board;

Page 6 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

• has chief administrative responsibility for maintenance of agency facilities, and regular reporting to
various bodies; and

Monitoring Executive Director’s performance Monitoring Executive performance is somewhat


synonymous with monitoring organizational performance.

The Board delegates management to the Executive Director and must have a process for ongoing
monitoring of the Executive Director's performance of the delegated duties. The purpose of monitoring
is to determine the degree to which Board policies are being fulfilled.

The Board will monitor the Executive Director’s performance by awareness of the Executive Director's
job description, careful attention to all reports delivered to the Board and through an annual written
evaluation of the Executive Director's job performance.

Executive Director Responsibilities and Functions - 4 Executive Director’s performance evaluation It


is the policy of JULIE, Inc. to regularly evaluate the work performance of the Executive Director. The
evaluation should occur immediately following the Board Strategic planning Summit in November, but
at least by early December to allow the Board to collectively review the results and provide sufficient
time for the H.R. Committee to communicate the evaluation results to the Executive Director.
Compensation of the Executive Director will be determined after completion of the evaluation. Any
increase in compensation will be effective beginning with the first pay period of the new calendar year
following the evaluation. Although the evaluation will be facilitated by the Human Resources
Committee and the Board president, all Board Directors and the president will participate in the
evaluation process. The process begins with a review of the current job description to determine
accuracy and appropriateness.

The team next utilizes the organization’s current evaluation form based upon the job description and
current year’s organization objectives. Respondents will be asked to rate the Executive Director's
performance against each line item on the checklist as follows: 4 - Exceeds Performance consistently
exceeds expectations of the job. 3 - Meets expectations Performance consistently meets expectation of
the job. 2 - Improvement needed Performance does not meet expectation of the job. 1 - Unacceptable
Performance is consistently below expectations. Level of job performance is unacceptable and must
improve. N/A -not applicable Performance is not evaluated as it is not applicable to the job. Space
should be allowed on the checklist at each line item for comments.

Executive Director Responsibilities and Functions –

5 Prior to the October Strategic Planning Summit, the H.R. Committee mails the checklist to all Board
members with a self-addressed stamped envelope so that all evaluations are returned in person to the
home or business address of the Board president or H.R. committee chairperson. A request is sent with
the evaluation form to complete within ten working days of the retreat. Respondents have the option of
signing or not signing their evaluation forms. Constructive criticism from Board members should be
specific so that appropriate corrective action may be taken by the Executive Director. When the Board
members have returned the evaluation forms, the Board president or H.R. chairperson makes up a
composite checklist which, by line item, indicates the number of responses for each rating. All
comments are randomly listed without identifying the source of each comment. Next, the full Board
meets, without the Executive Director present, to review the composite evaluation. The Board must
reach consensus on each item in the checklist. Then the H.R. committee meets with the Executive
Director to present the full Board's conclusions about the evaluation. Should the Executive Director be
in serious disagreement with part or all of the evaluation, the right to respond to the full Board must be
available. Such a response should lead to a dialogue in which the problem area can be resolved in a

Page 7 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

candid and professional way. The final agreed-upon evaluation should be signed by both the Executive
Director and the Board president. A copy of the evaluation is given to the Executive Director, and the
original evaluation is kept on file by the Board chairperson to be passed on to the next Board
chairperson. A copy of the evaluation is not kept in the personnel office. Board members will not solicit
information regarding the Executive Director's performance from subordinate staff. Staff plays no role
in the evaluation. The board recognizes that including staff can seriously erode the relationship which
must exist between the Executive Director and staff. Board/Executive Director relationship The Board
of Directors recognizes and maintains the following guidelines in the Board's relationship with the
Executive Director:

• Good management is recognized as one of the key factors in the success of the organization. The
Board reserves the authority to establish policies, Executive Director Responsibilities and Functions -
6 approve plans, and programs and delegate authority to the Executive Director;

• The Board will approve policies and long-range plans and programs for JULIE, Inc., and delegate
authority to the Executive Director to execute and carry out the policies, plans and programs. The
Executive Director will be responsible for hiring capable personnel within the limitations of Board
policy and budget constraints, determining the appropriate compensation, training supervising,
disciplining and terminating if necessary;

• Board members will refrain from individually discussing management and personnel issues with
JULIE, Inc. personnel other than the Executive Director. The Board, in consultation with the Executive
Director, may confer with key personnel at regular or special meetings of the Board;

• authority for management of JULIE, Inc. will be through the Board of Directors to the Executive
Director, then to other personnel. The Board will require full and timely information from the Executive
Director concerning pertinent matters that relate to the management of JULIE, Inc.;

• The Board recognizes that efficient management of JULIE, Inc. can exist only through mutual
understanding and cooperation between the Board and the Executive Director. The Board also
recognizes that the Executive Director is accountable to the Board to show results, but the Executive
Director cannot perform well and show good results if not given latitude to exercise independent
judgment in executing Board policy. Therefore, the Board grants that latitude of judgment and
discretion and expects full accounting of performance from the Executive Director; and

• The Board recognizes its position as the employer of the Executive Director and will be responsible
for a systematic annual evaluation of the Executive Director’s performance. The evaluation will be for
the purpose of improving the Executive Director's performance and to provide a basis for consideration
of the Executive Director's salary for the next year. Executive Director’s job description SUMMARY:
Manage the overall planning, establishment and implementation of the organization’s goal, policies and
strategies. DUTIES/QUALIFICATION REQUIREMENTS: To perform this job successfully, an
Executive Director Responsibilities and Functions - 7 employee must be able to perform each of the
essential duties satisfactorily. The requirements listed below are representative of the knowledge, skill
and/or ability required. Reasonable accommodations may be made to enable team members with
disabilities to perform the essential functions.

1. Act as main contact with the Board of Directors, implementing the Board’s directions, plans and
strategies.

2. Establish and implement JULIE’s goals, plan and policies.

Page 8 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

3. Review and evaluate the performance of JULIE’s operation, identifying problem areas and directing
the development of corrective measures.

4. Oversee the development of the operating budgets and present proposed operating and capital
expenditure budgets for review and approval by the Board of Directors.

5. Review management reports to ensure the effective operation of JULIE to meet member needs and
requirements.

6. Represent the organization in the business community, with contractors, member companies,
potential members, governmental agencies, professional societies, and civic organizations.

7. Negotiate and contract for building, facility and capital equipment needs.

8. Participate in labor relations, representing the organization in labor negotiations and ensuring the
organization’s compliance with the collective bargaining agreement.

9. Work with the Board President to create quarterly Board meeting agendas.

10. Staff liaison to the Facility, Governmental Affairs, Human Resources, Operations and Vision
committees.

11. Coordinate annual review of employer handbook, management code of ethics and board manual.

12. Organize and facilitate annual board strategic planning Summit.

13. Perform other related duties as assigned.

Executive Director Responsibilities and Functions –

8 EDUCATION and /or EXPERIENCE: Masters Degree or equivalent experience. Minimum 12 years’
experience in management or business administration, not-for – profit or union experience preferred.
Budgetary and supervisory experience required. LANGUAGE SKILLS: The ability to read, write and
understand written documents. Must be able to compose various types of legal and business documents.

The ability to speak and to hear clearly. REASONING ABILITY: Ability to apply commonsense
understanding to give written or oral instructions. Ability to deal with problems involving multiple
variables. Must exercise considerable ingenuity and exceptional judgment to establish and ensure
operation procedures of entire organization. A high degree of diplomacy is required. Must be able to
set priorities and multitask. MATHEMATICAL ABILITY: Ability to add, subtract, multiply, and
divide. Ability to use whole numbers, fractions, and percentages. CONTACTS: Internal: All JULIE
directors and managers, and JULIE union employees External: Board of Directors, JULIE members,
Illinois Commerce Commission, Local and State government officials, Union representatives.
PHYSICAL DEMANDS: The physical demands described here are representative of those that must
be met by an employee to successfully perform the essential functions of this job. Reasonable
accommodations may be made to enable individuals with disabilities to perform the essential functions.
While performing this job, an employee is regularly required to stand, sit, and walk.

Page 9 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

The employee must regularly lift and/or move up to 5 pounds, occasionally lift and or move up to 20
pounds. Employee is required to use hands in repetitive motions using a keyboard, be able to reach with
hands and arms. Specific vision abilities required by this job include close vision, distance vision, color
vision, peripheral vision, depth perception and ability to adjust focus. ENVIRONMENTAL
CONDITIONS: Possess the ability to work in a typical office setting. May require occasional travel.

Director Responsible for Health and Safety


The Director Responsible for Health and Safety is accountable to the Managing Director for all
matters relating to health, safety and welfare of employees and those affected by the company’s
operations.

In particular the Director Responsible for Health and Safety will:

1 Understand and ensure that the implications and duties imposed by new Acts of Parliament,
Statutory Instruments, H.S.E. Guidance Notes and Codes of Practice are brought to the attention of
the Board of Directors.

2 To bring company related health and safety matters to the attention of the Board of Directors
at regular intervals.

3 To ensure that good communications exist between employer and employees and are
maintained.

4 Liaise with the person appointed in the role of Safety Manager over the full range of their
duties and responsibilities, with respect to inspections, audits, report recommendations,
changes in legislation and advice obtained from other sources.

5 Ensure adequate means of distributing and communicating health, safety and welfare
information obtained for the H.S.E., Safety organizations and Trade associations regarding
new techniques of accident prevention, new legislation requirements and codes of practice
etc.

6 Ensure that an adequate programmer of training for health and safety is established and that
the safety culture is encouraged amongst employees.

7 Set a personal example at all times by using the correct personal protective
clothing/equipment and following all safety requirements and procedures.

Safety Manager

The primary role of the Safety Manager is to advise the Directors and Managers on all safety, health
and welfare matters to ensure the Company complies with its statutory obligations.

Page 10 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

The Safety Manager is designated responsibility by the Director responsible for health and safety to
control and update this Safety Manual and to ensure that all Departments operate to the procedures
and instructions contained there:

In particular the Safety Manager will:

1 Understand the application of the Health and Safety at Work, etc. Act 1974 and other
legislation relevant to the Companies business.

2 Keep up to date with changes in current legislation and to bring to the attention of the
Director responsible for Health and Safety any relevant new legislation.

3 Attend such courses/seminars run by external sources to enable accurate interpretation of


legislation to enable implementation within the organization.

4 Ensure that all “assessments” as required by legislation are conducted and reviewed at
relevant intervals and to maintain records of the same.

5 To recommend control measures and advise on the standard of P.P.E. issued to employees.

6 Conduct health and safety inspections and prepare reports of all the company’s operations.

7 Immediately contact the Director responsible for health and safety if situations are found,
that in the opinion of the Safety Manager, require immediate rectification or the stopping of any
operation.

8 To notify the Director responsible for health and safety if the corrective action agreed after
any workplace inspection is not implemented by the arranged date.

9 To carry out investigations into all accidents and near-miss incidents and to record the
findings on the relevant forms.

10 Advise the Company Secretary of all incidents reportable under R.I.D.D.O.R.

11 To arrange Health surveillance as instructed.

12 To highlight areas where training/certification is required to meet the standards imposed by


Legislation, Approved Codes of Practice, or H.S.E. guidance.

13 To bring new techniques for improving health, safety and welfare to the attention of the
Director responsible for health and safety.

14 To set a personal example by wearing appropriate personal protective clothing/equipment


and observing all safety requirements/procedures.

Page 11 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Heads of Department
Each Manager/Department Head is responsible for his personal safety and that of all personnel
under his or her authority, including others who may be affected by the company’s activities.

In particular they will:

1 Understand and implement the company safety policy.

2 Appreciate the responsibilities of personnel under their authority and ensure that each
employee knows his/her responsibility and are equipped to play their part.

3 Conduct Risk Assessments on activities within their department ensuring that the methods
and systems of work are safe. Also that the necessary procedures, rules and regulations
designed to achieve this are formulated, published and applied.

4 Provide written instructions of work methods outlining potential hazards and precautions,
and ensure they are complied with.

5 Ensure accident and near-miss reporting procedures are understood and complied with, and
assist with accident investigations where appropriate.

6 Ensure all employees and sub-contractors are suitably trained/competent to carry out the
prescribed task and that the necessary licenses/certificates of competence are in force and
appropriate.

7 Ensure the Statutory Notices, the Safety Policy, Insurance Certificate and the names of
Appointed First Aiders are displayed and maintained in prominent locations.

8 Ensure that all new employees in the company are provided with a copy of the policy
statement, receive such induction training as may be laid down in procedures, are issued
with personal protective equipment as required and their personal responsibilities as set out in this
manual.

9 Reprimand any employee for failing to discharge their health and safety responsibilities.

10 Set a personal example with regard to health and safety matters

MANAGEMENT ROLES AND RESPONSIBILITIES OF THE GENERAL MANAGER

The General Manager is the Legal Representative of the Company and shall be entrusted with the
direction and management of the company businesses. The General Manager shall not be a regular

Page 12 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

member of the Board of Directors, but the Board can provisionally entrust the Management to any
of its members. The General Manager shall be appointed by the Board of Directors, except for the
first one who is appointed in the Deed of Incorporation. To be a Manager is not necessary to be a
shareholder. The General Manager is responsible, in a complementary manner, to the Board of
Directors duties and reports to the later about the company performance. The General Manager is
legally liable for the company, and in this regard, must oversee the compliance of all legal
requirements that affect the company businesses and operations. The term of office is undefined
and subject to removal at any moment by the Board of Directors or the GSM. If case of absence, the
General Manager can be replaced by the person appointed by the Board of Directors.

1. Roles The General Manager is in charge of executing the provisions of the Board of Directors
and the GSM. The main roles of this officer are the following:

Perform regular administration and management activities of the corporation.

> Organize the internal regime of the corporation, use the corporation seal, issue correspondence,
and oversee that the accounting is up to date.

> Represent the corporation and act on their behalf before judicial, administrative, labor, municipal,
political and police authorities, whether throughout the country or abroad.

> Attend, with the right to speak but with no voting rights, the Board of Directors sessions, unless
the Board agrees to hold private sessions.

> Attend, with the right to speak but with no voting rights, the GSM sessions unless agreed
otherwise.

> Issue certificates regarding the content of the GSM or Board sessions minutes, books of accounts
or corporation records.

> Submit the projects for annual reports and financial statements, annual budgets, work programs
and other activities to the Board of Directors for approval.

> Delegate, totally or partially, the powers granted upon the Manager in the company By-Laws.

> Execute the Business Plan approved by the Board and propose amendments to such Plan.

> Prepare and execute the budget approved by the Board of Directors and propose amendments to
such budget.

> Enter and sign the corporation agreements and obligations, within the criteria authorized by the
By-Laws and the Board of the corporation. Delegate the execution, decentralize bids or tenders, and
engage staff for managerial positions, according to the rules established by the Board of Directors
on hiring procedures.

> Design and execute development plans, annual action plans and investment, maintenance and
expenses plans.

> Conduct work relationships, with powers to delegate functions and appoint within the Company,
taking into account the number of people approved by the Board of Directors to compose the
company’s headcount.

> Assign the investment of available funds which are not necessary for the immediate company
operations.

Page 13 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

> Direct accounting processes, overseeing the compliance of applicable legal regulations.

> Appoint attorneys-in-fact for representing the Company in judicial, extrajudicial and
administrative acts; and establish their fees and assign powers with the prior consent of the Board of
Directors.

> Account for his or her management in those cases ordered by Law.

> Report to the Board of Directors about operations executed with shareholders, affiliate or
affiliated companies.

> Perform all necessary arrangements and formalities for the execution and registration of the GSM
and Board agreements in the Public Records.

> Sell, lease, grant use, pledge, and mortgage, grant bonds and other guarantees, and in general,
execute all operations that imply affect or dispose the real and personal property, assets, and rights
of the company, including those concessions owned by the company and flows up to the limits
established by the Board of Directors or the GSM.

> Draw, undersign, accept, re-accept, endorse, guarantee, extend, discount, negotiate, protest,
cancel and pay bills of exchange, consumption receipts, promissory notes and other securities, order
letters or letters of credits, mortgage bonds, insurance policies and other money orders and trade
instruments; and in general, perform any operation with securities up to the limits established by the
Board of Directors or the GSM.

> Open, close and administer bank accounts, whether checking, savings, credit accounts or any
other, with or without collaterals. Draw checks on credit, debit balance or authorized overdrafts of
the bank accounts of the company in financial institutions on Peru or another country.

> Authorize the assignment, withdrawals, transferences, disposal and sale of funds, incomes, and
stocks; regulate the issuance of bonds, obligations, short-term instruments, debt and other securities
owned by the Corporation. Grant, request, revoke loans, loans for consumption; and negotiate and
renegotiate their term and conditions.

> Undersign all trust agreements, including the transfer of present and future assets on trust. In
general, perform all kind of banking and financial operations.

> Enter into international sales agreements and others related to foreign trade, such as documentary
credits and letters of credit for imports.

> Enter into leasing and lease-back agreements.

> Enter into agreements with General Deposit Warehouses, accept, reaccept, draw, endorse, obtain,
receive and renew certificates of deposit, bills of lading, warrants and other security, trade or civil
document, and endorse the corresponding documents.

> Order payments.

> Negotiate, enter into, amend, terminate or settle contracts, agreements and commitments of all
kind, including those intended to acquire or dispose rights, real and personal property of the
company, for valuable or free consideration up to the limits established by the Board of Directors or
the GSM.

> Submit matters to arbitration as deemed necessary, enter into arbitration agreements or execute
judicial or extrajudicial transactions according to current legal regulations.

Page 14 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

> Transfer, acquire, assign, grant licenses, pledge, register, renew, cancel and perform any act
involving the modification of trademarks, service marks, trade names, any distinctive symbol,
technologies and other copyright whether national or foreign; as well as enter into agreement for
technical assistance or support with national or foreign suppliers.

> Represent the Company in public or private tenders, price bids or merit contests. > Grant all kind
of powers, including those granted herein and requesting guarantees if deemed necessary, as well as
revoke granted powers.

> Perform other legal and chartered functions and those assigned or delegated by the General
Shareholders Meeting or the Board of Directors.

Responsibilities of the General Manager

> The compliance of the Board of Directors and GSM agreements, unless indicated otherwise for
particular cases.

> The damages originated from non-compliance of his or her duties, fraud, abuse of authority and
severe negligence.

> The General Manager shall be held responsible with their predecessors with regard to any
violation made by them, if being of their knowledge, they fail to report them in writing to the GSM
at the moment of taking the position or immediately after knowing them.

> The existence, regularity and authenticity of accounting systems, books required to be kept by
Law and other books and records that an organized trade person must keep.

> The authenticity of the information provided to the General Shareholders Meeting or to the Board
of Directors.

> The concealment of deficiencies observed in the corporation activities.

> The preservation of the social funds under the name of the corporation.

> The allocation of the company resources in businesses different than those of the company.

> The authenticity of certificates issued on the content of the company books and records.

> The compliance of the Law, By-Laws and agreements of the General Shareholders Meeting and
the Board of Directors. 3. Compensation

> The Board of Directors establishes the compensation for the General Manager, according to the
compensation parameters agreed for the Corporation staff.

Mechanical and Electrical Engineering Manager


The Mechanical and Electrical Engineering Manager is responsible for his personal safety and that
of all personnel under his authority, including others who may be affected by the company’s
activities. In particular he will:

1 Understand and implement the Company Safety Policy.

Page 15 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

2 Appreciate the responsibilities of personnel under their authority and ensure that each
employee knows his/her responsibility and are equipped to play their part.

3 Ensure that all written schemes and procedures identified in Part 3 of this document are
prepared, contain sufficient detail for each task to be critically analyzed, and fully
comprehensible to all required to use them.

4 Prepare and maintain a scheme which identifies work equipment requiring inspection by
competent persons and ensuring that the equipment is easily identifiable and available for
inspection on the date required.

5 Prepare and maintain suitable records of all inspections. These records to identify precisely
what was inspected, how, who by, when, any defects found, remedial action taken and the
date/time of the next inspection.

6 As the appointed “responsible person” under the Supply of Machinery Regulations ensure
that all items of work equipment manufactured in house comply with the essential health and
safety requirements of schedule three of the regulations and that all necessary documentation
i.e. user and maintenance guides etc. are produced.

7 Conduct Risk Assessments on activities within their department ensuring that the methods
and systems of work are safe. Also that the necessary procedures, rules and regulations
designed to achieve this are formulated, published and applied.

8 Ensure that all engineering construction work under his control complies with all relevant
construction statutory instruments.

9 Ensure accident and near-miss reporting procedures are understood and implemented. Assist
with accident investigations where appropriate.

10 Ensure all employees and sub-contractors are suitably trained/competent to carry out the
prescribed task and that the necessary licenses/certificates of competence are in force and
appropriate.

11 Ensure the Statutory Notices, the Safety Policy, Insurance Certificate and the names of
Appointed First-Aiders are displayed and maintained in prominent locations.

12 Ensure that the impending start of any new employee is advised to the Company Secretary in
good time.

13 Reprimand any employee for failing to discharge their health and safety responsibilities.

Page 16 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

14 Set a personal example with regard to health and safety matters.

ROLE OF MANAGEMENT INFORMATION SYSTEM

The role of the MIS in an organization can be compared to the role of heart in the body. The
information is the blood and MIS is the heart. In the body the heart plays the role of supplying pure
blood to all the elements of the body including the brain. The heart work faster and supplies more
blood when needed. It regulates and controls the incoming impure blood, processed it and sends it to
the destination in the quantity needed. It fulfills the needs of blood supply to human body in normal
course and also in crisis.

The MIS plays exactly the same role in the organization. The system ensures that an appropriate data
is collected from the various sources, processed and send further to all the needy destinations. The
system is expected to fulfill the information needs of an individual, a group of individuals, the
management functionaries: the managers and top management.

Here are some of the important roles of the MIS:

i. The MIS satisfies the diverse needs through variety of systems such as query system, analysis
system, modeling system and decision support system.

ii. The MIS helps in strategic planning, management control, operational control and transaction
processing. The MIS helps in the clerical personal in the transaction processing and answers the
queries on the data pertaining to the transaction, the status of a particular record and reference on a
variety of documents.

iii. The MIS helps the junior management personnel by providing the operational data for planning,
scheduling and control , and helps them further in decision-making at the operation level to correct an
out of control situation.

iv. The MIS helps the middle management in short term planning, target setting and controlling the
business functions. It is supported by the use of the management tools of planning and control.

v. The MIS helps the top level management in goal setting, strategic planning and evolving the
business plans and their implementation.

vi. The MIS plays the role of information generation, communication, problem identification and
helps in the process of decision-making. The MIS, therefore, plays a vital role in the management,
administration and operation of an organization.

IMPACT OF THE MANAGEMENT INFORMATION SYSTEM

MIS plays a very important role in the organization; it creates an impact on the organization’s
functions, performance and productivity.

The impact of MIS on the functions is in its management with a good MIS supports the management
of marketing, finance, production and personnel becomes more efficient. The tracking and monitoring
of the functional targets becomes easy. The functional managers are informed about the progress,
achievements and shortfalls in the activity and the targets. The manager is kept alert by providing
certain information indicating and probable trends in the various aspects of business. This helps in
forecasting and long-term perspective planning. The manager’s attention is bought to a situation

Page 17 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

which is expected in nature, inducing him to take an action or a decision in the matter. Disciplined
information reporting system creates structure database and a knowledge base for all the people in the
organization. The information is available in such a form that it can be used straight away by blending
and analysis, saving the manager’s valuable time.

The MIS creates another impact in the organization which relates to the understanding of the business
itself. The MIS begins with the definition of data, entity and its attributes. It uses a dictionary of data,
entity and attributes, respectively, designed for information generation in the organization. Since all
the information systems use the dictionary, there is common understanding of terms and terminology
in the organization bringing clarity in the communication and a similar understanding of an event in
the organization.

The MIS calls for a systematization of the business operations for an effective system design. This
leads to streaming of the operations which complicates the system design. It improves the
administration of the business by bringing a discipline in its operations as everybody is required to
follow and use systems and procedures. This process brings a high degree of professionalism in the
business operations.

The goals and objectives of the MIS are the products of business goals and objectives. It helps
indirectly to pull the entire organization in one direction towards the corporate goals and objectives by
providing the relevant information to the organization.

A well designed system with a focus on the manager makes an impact on the managerial efficiency.
The fund of information motivates an enlightened manager to use a variety of tools of the
management. It helps him to resort to such exercises as experimentation and modeling. The use of
computers enables him to use the tools and techniques which are impossible to use manually. The
ready-made packages make this task simple. The impact is on the managerial ability to perform. It
improves decision-making ability considerably high.

Since, the MIS work on the basic system such as transaction processing and database, the drudgery of
the clerical work is transferred to the computerized system, relieving the human mind for better work.
It will be observed that lot of manpower is engaged in this activity in the organization. Seventy (70)
percent of the time is spent in recording, searching, processing and communicating. This MIS has a
direct impact on this overhead. It creates information –based working culture in the organization.

IMPORTANCE OF MIS

It goes without saying that all managerial functions are performed through decision-making; for
taking rational decision, timely and reliable information is essential and is procured through a logical
and well-structured method of information collecting, processing and disseminating to decision
makers. Such a method in the field of management is widely known as MIS. In today’s world of ever
increasing complexities of business as well as business organization, in order to service and grow ,
must have a properly planned, analyzed, designed and maintained MIS so that it provides timely,
reliable and useful information to enable the management to take speedy and rational decisions.

MIS has assumed all the more important role in today’s environment because a manager has to take
decisions under two main challenges:

First, because of the liberalization and globalization, in which organizations are required to compete
not locally but globally, a manager has to take quick decisions, otherwise his business will be taken
away by his competitors. This has further enhanced the necessity for such a system.

Page 18 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Second, in this information age wherein information is doubling up every two or three years, a
manager has to process a large voluminous data; failing which he may end up taking a strong decision
that may prove to be very costly to the company.

In such a situation managers must be equipped with some tools or a system, which can assist them in
their challenging role of decision-making. It is because of the above cited reasons, that today MIS is
considered to be of permanent importance, sometimes regarded as the name center of an organization.
Such system assist decision makers in organizations by providing information at various stages of
decision making and thus greatly help the organizations to achieve their predetermined goals and
objectives. On the other hand, the MIS which is not adequately planned for analyzed, designed,
implemented or is poorly maintained may provide developed inaccurate, irrelevant or obsolete
information which may prove fatal for the organization. In other words, organizations today just
cannot survive and grow without properly planned, designed, implemented and maintained MIS. It
has been well understood that MIS enables even small organizations to more than offset the
economies of scale enjoyed by their bigger competitors and thus helps in providing a competitive
edge over other organizations.

Sustainability Management Systems (SMS)


Environmental Management Systems (EMS)
Realize best management practices with a Sustainability Management System (SMS) Environmental
Management System (EMS).

Management System benefits include improved compliance, integrated systems, and operational
efficiency. Management Systems build on what you are already doing, allowing you to improve
stakeholder relationships by demonstrating your commitment. It is commonly considered a tool for
evolutionary change and is based on the internationally accepted ISO 14001 standard.

As a continual improvement management tool, Management Systems use a Plan-Do-Check-Act


cycle. Management Systems can be applied to any business as every organization can benefit from
going through this cycle.

Contact Project Azul Verde to begin, improve, or expand your Sustainability Management
System (SMS) or Environmental Management System (EMS):

 Identify risks and opportunities, engage stakeholders, and implement action plans, while
tracking and reporting progress to maintain momentum

 Enable evolutionary change

 Update to the ISO 14001:2015 standard for EMS

 Begin with this as a simple way to learn the basic Plan-Do-Check-Act principles: Download
the EMS Starting Template

About Management Systems:

Page 19 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Plan—Design the Approach to Achieve the Goal

In the “Planning” step, risks and opportunities are identified, and goals are developed to control the
risks and maximize the opportunities. Actions and process are drafted to describe how the
organization’s goals will be achieved (defining the plan to achieve the goal). Resources and top
management commitment are secured to ensure success.

Do—Implement the Plan

The “Do” step is focused on advancing from commitment to action. Defining roles and
responsibilities guides implementation activities. Communication and training engages stakeholders.
Documentation and training ensure staff with environmental responsibilities know how to fulfill those
responsibilities as formalized procedures reduce risk.

Check—Measure Effectiveness and Determine Improvements

In the “Check” step, the changes that result from implementation are monitored and tracked. Progress
is compared with the goals and objectives using performance metrics. Lessons learned and areas of
improvement are explored.

Act—React and Report

“Act” is the final step in the Plan-Do-Check-Act cycle. Reviewing progress allows decision-makers to
correct and refresh the path towards sustainability. Reporting is an important activity, as it keeps
stakeholders informed on the status of issues. Information is synthesized to continually improve for
the next cycle.

Office of Executive Resources Office of the Chief Human Capital Officer U.S. Department of Energy
FY 2016 Senior Professional (SP) Performance Appraisal System Opening

Sub-Contractors

1 All Sub-Contractors must comply with the aims of this policy as a condition of their sub
contract and will be required to forward a copy of their Safety Policy and Safety plan for the
work to E & J.W. Glendenning Ltd. for scrutiny.

2 Sub-Contractors will at pre-contract meetings or other time as may be stipulated, submit


Assessments, Test Certificates and Method Statements to comply with statutory
requirements.

3 All Sub-Contractors and their employees must respond to, and promptly comply with, any
instruction issued by the Glendenning Group employees where it effects health and safety.

Page 20 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

4 Operators certificates of competence and test certificates for the various types of plant and
equipment to be used will be presented to site management before the operation commences.

5 Every Sub-Contractor will be responsible for providing his employees with all necessary
personal protective clothing and equipment.

6 All portable tooling and other plant and equipment will be maintained and in good working
order and in the case of lighting appliances and electrical equipment evidence must be
produced as to the correct testing and certification.

7 Any hired ride on plant will only be operated by persons appointed as being competent and
where applicable certificated to C.I.T.B. or Q.P.T.C. standards for the plant in question.

8 All electrical plant will be rated at 110 volts or lower and be operated through a center
tapped earth transformer. Any other electrical equipment must be notified to the site
manager who will require evidence of the additional circuit and equipment protection
measures to ensure the safety of the operatives.

9 Any materials or substances brought onto the site must be correctly labelled and in approved
containers or packages. Such materials or substances must be advised to the site manager
together with an appropriate C.O.S.H.H. assessment to ensure that the substance poses no
risk to health or safety of those affected by its use and that the correct storage and fire
precautions are adequately catered for.

10 Sub-Contractors will be responsible for ensuring that the personnel placed on site are fully
trained and competent in the work to be undertaken. Evidence of training will be required at

the tendering stage and may be requested during site safety inspections/audits.

11 Sub-Contractors will ensure that they maintain their workplaces in a safe condition and that
their storage areas are kept clean, tidy and free from hazards.

12 Further conditions on any other health and safety matters will be contained in the conditions
of order/contract and will form part of this policy’s requirements.

13 Please study the PR13 (Personal Responsibilities for ALL EMPLOYEES).

Page 21 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Assistant General Manager - Quality & Technical


Job Description

 Accomplishes quality assurance human resource objectives by recruiting, selecting, orienting, training,
assigning, scheduling, coaching, counseling, and disciplining employees; communicating job
expectations; planning, monitoring, appraising, and reviewing job contributions; planning and
reviewing compensation actions; enforcing policies and procedures.
 Achieves quality assurance operational objectives by contributing information and analysis to strategic
plans and reviews; preparing and completing action plans; implementing production, productivity,
quality, and customer-service standards; identifying and resolving problems; completing audits;
determining system improvements; implementing change.
 Meets quality assurance financial objectives by estimating requirements; preparing an annual budget;
scheduling expenditures; analyzing variances; initiating corrective actions.
 Develops quality assurance plans by conducting hazard analyses; identifying critical control points and
preventive measures; establishing critical limits, monitoring procedures, corrective actions, and
verification procedures; monitoring inventories.
 Validates quality processes by establishing product specifications and quality attributes; measuring
production; documenting evidence; determining operational and performance qualification; writing and
updating quality assurance procedures.
 Maintains and improves product quality by completing product, company, system, compliance, and
surveillance audits; investigating customer complaints; collaborating with other members of
management to develop new product and engineering designs, and manufacturing and training
methods.
 Prepares quality documentation and reports by collecting, analyzing and summarizing information and
trends including failed processes, stability studies, recalls, corrective actions, and re-validations.
 Updates job knowledge by studying trends in and developments in quality management; participating
in educational opportunities; reading professional publications; maintaining personal networks;
participating in professional organizations.
 Enhances department and organization reputation by accepting ownership for accomplishing new and
different requests; exploring opportunities to add value to job accomplishments.
 Develop internal teams on quality management system.
 Maintain up to date information on the database and systems.
 Learn Everything (Quality Control, Production, Business, Company Policy etc.)
 Setup, train and monitor the QC, QI, and ensure the quality garments to reflect the customers�
requirements.
 Follow up the audit and take action if required as well as carry out final inspection considering the
shipment date and documenting the outcomes.
 Coordinate with production, IE, Merchandising, Finishing & other related departments.
 Handling Buyers complain/ Advice regarding Quality Assurance Issue

Job Requirements

 Quality assurance & audit procedure, Production & garments technology.


 Applicants must have experience in reputed garments manufacturing facility
 Should have good computer literacy in MS office.
 Must have good communication and interpersonal skills with pleasant personality.
 Strong negotiation skills.
 Industrial engineering knowledge would be an advantage.
 Technical aptitude with strong logical, problem solving, and decision making skills required
 Must have excellent analytical management skills.
 Maintains a focused, flexible, organized and proactive manner.

Page 22 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

All Employees

The Management of Health and Safety at Work Regulations 1992 (M.H.S.W.R.) re-enacts the
Health and Safety at Work etc. Act 1974, which places responsibilities on the employer and
employees alike. In this connection, the Company reminds employees of their duties under Section
7 of the act: to take care for their own health and safety and that of others who may be affected by
their acts or omissions. Additionally, employees must also co-operate with the company to enable
it to discharge its own responsibilities successfully.

Furthermore, all employees are expected to:-

1 Carry out assigned tasks and duties in a safe manner, in accordance with instructions, and to
comply with safety rules/procedures, regulations and codes of practice.

2 If aware of any unsafe practice or condition, or if in any doubt about the safety of any
situation, consult their supervisor.

3 Obtain and use the correct tools/equipment for the work and not to use any that are unsafe or
damaged. All tools, equipment and personal protective equipment must be stored in the
approved place after use.

4 Ensure that all guards are securely fixed and that all safety equipment and personal
protective clothing/equipment provided are used.

5 Not to operate any plant or equipment unless authorized.

6 To report any accident, near-miss, dangerous occurrence or dangerous condition to their line
management.

7 To switch off and secure unattended plant or equipment.

8 To avoid improvised arrangements and suggest safe ways of eliminating hazards.

9 Not to participate in horseplay or place fellow employees in danger by their actions.

Page 23 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Duties of Directors

The question of corporate governance as it pertains to directors is a very wide-ranging topic. This booklet
is intended to provide general guidance in this regard only, and does not purport to cover all possible issues
relating to the topic. For specific guidance, we suggest you contact Deloitte & Touche. Deloitte & Touche
cannot accept responsibility for loss occasioned to any person acting or refraining from action as a result of
any material in this publication. References Audit committees combined code guidance, Sir Robert Smith,
2003 Banks Act of 1990 Companies Act 71 of 2008 Insurance Act 53 of 1998 JSE Securities Exchange,
South Africa Listings Requirements JSE Securities Exchange, South Africa Insider Trading booklet, 2001
King Report on Corporate Governance for South Africa 2009 Law of South Africa, WA Joubert & JA
Faris, Butterworths, 2002 Long-Term Insurance Act 52 of 1998 Review of the role and effectiveness of
non-executive directors, Derek Higgs 2003 Financial Markets Act 19 of 2012 Companies and other
business structures in South Africa, Davis et al, 2009 Duties of Directors 3 Contents Preface

15 2. Appointment of a director 16 2.1

Who qualifies as a director?

17 2.2 the legal mechanics of appointment

17 2.3 what a new director should be told 20 3.

Director conduct

22 3.1 the standard of directors’ conduct

23 3.2 Conflicts of interest

27 3.3 Liability of directors 2

9 3.4 Apportionment of damages

30 3.5 Insider trading

30 4. The workings of the board of directors

35 4.1 Composition of the full board

35 4.2 the implicit duties of the board

36 4.3 Meetings of directors

40 4.4 Important roles of the board

41 4.6 Relationships within the company

52 4.7 Communication with stakeholders

57 5. The powers of the board of directors

59 5.1 How can a director bind the company?

59 5.2 Reservation of powers

Page 24 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

60 5.3 which powers are restricted?

60 5.4 Effectiveness of company actions and the role of the CIPC 61 6. Remunerating directors 65 6.1 The
director’s right to remuneration 65 6.2 Remuneration policy 66 6.3 What type of remuneration is
appropriate? 66 6.4 Employment contracts, severance and retirement benefits 69 6.5 Disclosure of
directors’ remuneration 69 7. Assessment, removal and resignation 72 7.1 Assessment of performance 72
7.2 Why a director may be removed 73 7.3 Rotation of directors 73 7.4 Vacancies on the board 74 7.5 The
legal mechanics of removal 74 7.6 Formalities when a director resigns 75 8. Financial institutions 76 8.1
Directors of banks 76 8.2 Directors of insurance companies 80 9. Contact information 81 4 Recent
international and local jurisprudence also underline the demanding standard of conduct that is expected of
company directors, all of which South African company directors would do well to take very thorough
notice of.

The Act reduces the company’s reliance on the regulator,

the Companies and Intellectual Property Commission (CIPC).

Although companies still have to comply with various administrative processes to inform the CIPC of its
decisions (for example the appointment of directors, changing of auditors, change of year end, amendment
of the Memorandum of Incorporation, etc.), the validity of these decisions are generally not dependent on
the approval of the CIPC. In most instances, the company’s decision is effective immediately and it merely
needs to inform the CIPC of decisions or actions. However, in a few instances the effect of the decision is
delayed until the necessary Notices have been ‘filed’ with the CIPC. ‘Filing’ in terms of the new Act
simply means that the Notice had been received by the CIPC (recorded in the CIPC’s computer system, or
the date on which registered or other mail is received by the CIPC).

The CIPC is not required to approve or vet any decisions or actions of the company. The counter balance to
the diminished role of the regulator is greater emphasis on the role of the directors of the company. The
construction is that by accepting their appointment to the position, directors tacitly indicate that they will
perform their duties to a certain standard, and it is a reasonable assumption of the shareholders that every
individual director will apply his or her particular skills, experience and intelligence appropriately and to
the best advantage of the company. In this regard, the Act subscribes to the “enlightened shareholder value
approach” – which requires that directors are obliged to promote the success of the company in the
collective best interest of shareholders.

This includes, as appropriate, the company’s need to take account of the legitimate interests of other
stakeholders including among others, the community, employees, customers and suppliers. Also, the social
responsibility of the company (and the directors) was noted in Minister of Water Affairs and Forestry v
Stilfontein Gold Mining Company Limited and others 2006 (5) SA 333 (W), emphasising the broader
responsibility of the directors and the company. In this case the court made direct reference to the King
Code, which is interpreted by some as evidence that the King Code has de facto become part of the duties
of directors.

The Act codifies the standard of directors’ conduct in section 76. The standard sets the bar very high for
directors, with personal liability where the company suffers loss or damage as a result of the director’s
conduct not meeting the prescribed standard. The intention of the legislature seems to be to confirm the
common law duties and to encourage directors to act honestly and to bear responsibility for their actions -
directors should be accountable to shareholders and other stakeholders for their decisions and their actions
on behalf of the inanimate company. With the standard set so high, the unintended consequence may be
that directors would not be prepared to take Preface A key feature of the Companies Act, 2008 (the Act) is
that it clearly emphasises the responsibility and accountability of directors. Duties of Directors 5 difficult
decisions or expose the company to risk. Since calculated risk taking and risk exposure form an integral
part of any business, the Act includes a number of provisions to ensure that directors are allowed to act
reasonably without constant fear of personal exposure to liability claims. In this regard, the Act has

Page 25 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

codified the business judgement rule, and provides for the indemnification of directors under certain
circumstances, as well as the possibility to insure the company and its directors against liability claims in
certain circumstances. The Act makes no specific distinction between the responsibilities of executive,
non-executive or independent non-executive directors (in order to understand the distinction between
different types of directors we turn to the King Report of Governance for South Africa, 2009 (King III) for
guidance). The codified standard applies to all directors. In CyberScene Ltd and others v iKiosk Internet
and Information (Pty) Ltd 2000 (3) SA 806 (C) the court confirmed that a director stands in a fiduciary
relationship to the company of which he or she is a director, even if he or she is a non-executive director. In
terms of this standard a director (or other person to whom section 76 applies), must exercise his or her
powers and perform his or her functions: • in good faith and for a proper purpose; • in the best interest of
the company; and • with the degree of care, skill and diligence that may reasonably be expected of a person
carrying out the same functions and having the general knowledge, skill and experience of that particular
director. In essence, the Act combines the common law fiduciary duty and the duty of care and skill. This
codified standard applies in addition to, and not in substitution of the common law duties of a director. In
fact, the body of case law dealing with the director’s fiduciary duty and the duty of care and skill remains
applicable. All directors are bound by their fiduciary duty and the duty of care and skill.

The codified standard of conduct applies equally to all the directors of the company. Of course, it is trite
that not all directors have the same skill and experience, and not all directors have a similar understanding
of the functioning of the company. This raises the question as to what is expected of different types of
directors when it comes to their duties. In this regard, the court, in Fisheries Development Corporation of
SA Ltd v AWJ Investments (Pty) Ltd 1980 (4) SA 156 (W) made it clear that the test is applied differently
to different types of directors. The court concluded that the extent of a director’s duty of care and skill
depends on the nature of the company’s business, that our law does not require a director to have special
business acumen, and that directors may assume that officials will perform their duties honestly.

The test for the duty of care and skill as contained in the Act provides for a customised application of the
test with respect to each individual director – in each instance both the objective part of the test (measured
against a person carrying out the same functions as that director), as well as the subjective element of the
test (measured against a person having the same knowledge, skill and experience as that director) will be
applied. Thus, even though all directors have the same duties, the measurement against the standard of
conduct will account for the personal circumstances of each director. As stated above, the Act also codifies
the business judgment rule. In terms of this rule a director will not be held liable if he or she took
reasonable diligent steps to become informed about the subject matter, did not have a personal financial
interest (or declared such a conflicting interest) and the director had a rational basis to believe that the
decision was in the best interest of the company at the time. 6 In discharging any board or board committee
duty, a director is entitled to rely on one or more employees of the company, legal counsel, accountants or
other professional persons, or a committee of the board of which the director is not a member.

The director, however, does not transfer the liability of the director imposed by this act onto such
employee, nor can a director blindly rely on the advice of employees or advisors. In a recent Australian
judgment, Australian Securities and Investments Commission v Healey [2011] FCA 717, commonly
referred to as the Centro case, the court re-emphasized the responsibility of every director (including non-
executive directors) to pay appropriate attention to the business of the company, and to give any advice due
consideration and exercise his or her own judgment in the light thereof. This case is relevant to directors of
South African companies, because the new Act indicates that a court, when interpreting or applying the
provisions of the Act, may consider foreign company law. In this case the non-executive Chairman, six
other non-executive directors and the Chief Financial Officer of the Centro Property Group (“Centro”)
faced allegations by the Australian Securities and Investments Commission that they had contravened
sections of the Corporations Act 2001 arising from their approval of the consolidated financial statements
of Centro, which incorrectly reflected substantial short-term borrowings as “non-current liabilities”.
Similar to our Companies Act, the Australian Corporations Act also requires the board to approve the
financial statements.

Page 26 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

The relevant detail facts are that the 2007 financial statements of Centro Properties Group failed to
disclose, or properly disclose, significant matters.

The statements failed to disclose some AUS$1.5 billion of short-term liabilities by classifying them as non-
current liabilities, and failed to disclose guarantees of short-term liabilities of an associated company of
about US$1.75 billion that had been given after the balance sheet date, but before approval of the
statements.

The central question in those proceeding were whether directors of substantial publicly listed entities are
required to apply their own minds to, and carry out a careful review of, the proposed financial statements
and the proposed directors’ report, to determine that the information they contain is consistent with the
director’s knowledge of the company’s affairs, and that they do not omit material matters known to them or
material matters that should be known to them. In short, the question was to what extent reliance may be
placed on the audit committee and the finance team.

Duties of Directors 7 In analysing the director’s duty of care and skill, the court commented that: “all
directors must carefully read and understand financial statements before they form the opinions which are
to be expressed ... Such a reading and understanding would require the director to consider whether the
financial statements were consistent with his or her own knowledge of the company’s financial position.
This accumulated knowledge arises from a number of responsibilities a director has in carrying out the role
and function of a director. These include the following:

• a director should acquire at least a rudimentary understanding of the business of the corporation and
become familiar with the fundamentals of the business in which the corporation is engaged;

• a director should keep informed about the activities of the corporation;

• Whilst not required to have a detailed awareness of day-to-day activities, a director should monitor the
corporate affairs and policies;

• a director should maintain familiarity with the financial status of the corporation by a regular review and
understanding of financial statements;

• a director, whilst not an auditor, should still have a questioning mind.” Several statements were made in
which it became apparent that every director is expected to apply his or her own mind to the issues at hand.
Even though directors may rely on the guidance and advice of other board committees, employees and
advisors, they nevertheless need to pay attention and apply an enquiring mind to the responsibilities placed
upon him or her. “…. a director is not relieved of the duty to pay attention to the company’s affairs which
might reasonably be expected to attract inquiry, even outside the area of the director’s expertise.” “…
Whether, for instance, a director went through the financial statements ‘line by line’, he is not thereby
taking all reasonable steps, if the director in doing so is not focussed for himself upon the task and
considering for himself the statutory requirements and applying the knowledge he has of the affairs of the
company”. A key statement made by the judge is as follows: “Nothing I decide in this case should indicate
that directors are required to have infinite knowledge or ability.

Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the
day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent
interest in the information available to him or her, to understand that information, and apply an enquiring
mind to the responsibilities placed upon him or her.” The court concluded that in the Centro case each
director failed to exercise the degree of care and diligence required by law in the course of their review of
the financial statements, and as such can be held liable for the losses suffered by that company as a result
of their failure to comply with their duties. 8 South African case law echoes the findings of the Centro
judgment. In Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty) Ltd 1980 (4) SA 156

Page 27 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

(W) the court stated that: “Nowhere are [the director’s] duties and qualifications listed as being equal to
those of an auditor or accountant. Nor is he required to have special business acumen or expertise, or
singular ability or intelligence, or even experience in the business of the company... He is nevertheless
expected to exercise the care which can reasonably be expected of a person with his knowledge and
experience... a director is not liable for mere errors of judgment. In respect of all duties that may properly
be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that
official to perform such duties honestly. He is entitled to accept and rely on the judgment, information and
advice of the management, unless there are proper reasons for querying such. Similarly, he is not expected
to examine entries in the company’s books... Obviously, a director exercising reasonable care would not
accept information and advice blindly. He would accept it, and he would be entitled to rely on it, but he
would give it due consideration and exercise his own judgment in the light thereof”. How do these
judgments affect the position of directors (especially non-executive directors) where the audit committee
considered complex financial reports? Are non-executive directors nevertheless expected to review such
reports and vote on applicable resolutions? The answer seems to be ‘yes’.

The obligation to approve the financial statements of the company rests equally on each director. As such,
every director has to study the relevant reports, and ensure for himself that the content of the report
confirms and coincides with his view of the business. No director is entitled to blindly rely on the
conclusions of the audit committee, the finance team or other experts. These judgments emphasize the fact
that the decision to accept appointment to the board of a company should not be taken lightly.

A director cannot uncritically rely on the officials of the company, or on the other members of the board
for the decisions of the company, but needs to be confident that he or she is able to pay adequate personal
attention to the business of the company. Even though directors are entitled to rely of the guidance and
advice from employees, advisors and other board committees, each director is obliged to apply their own
mind (i.e. bring their own skill and experience to bear) to the facts at hand.

They are not entitled to blindly rely on advice. What each director is expected to do is to ensure that they
make a concerted effort to understand the business of the company and the information placed in front of
them, and to apply an enquiring mind to such information. Duties of Directors 9 1. What is a Director? “At
common law, once a person accepts appointment as a director, he becomes a fiduciary in relation to the
company and is obliged to display the utmost good faith towards the company and in his dealings on its
behalf.” The term “director” has been defined in law.

The Companies Act, 2008 (the Act) defines a director as: “A member of the board of a company..., or an
alternate director of a company and includes any person occupying the position of director or alternate
director, by whatever name designated”. In terms of section 66 of the Act, the business and affairs of a
company must be managed by or under the direction of its board, which has the authority to exercise all of
the powers and perform any of the functions of the company. The powers of the board may be limited by
specific provisions of the Act or by the company’s Memorandum of Incorporation. It is interesting to note
that the definition of a director includes not only those individuals that are appointed to the board of the
company (as well as alternate directors), but also “any person occupying the position of director or
alternate director, by whatever name designated”. The effect of this wide definition is that the provisions
will apply not only to members of the board, but also to “de facto” directors. “A de facto director is a
person who assumes to act as a director. He is held out as a director by the company, and claims and
purports to be a director, although never actually or validly appointed as such. To establish that a person is
a de facto director of a company, it is necessary to plead and prove that he undertook the functions in
relation to the company which could properly be discharged only by a director.” Re Hydro dam (Corby)
Ltd [1994] 2 BCLC (Ch); [1994] BCC 161 at 183 The Act requires private companies and personal
liability companies to appoint at least one director, whereas public companies, state owned companies and
non-profit companies are required to appoint at least three directors. This number would be in addition to
the number of directors required where an audit committee and/or social and ethics committee is required
(see 2.2 below).

Page 28 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Howard v Her Rigel 1991 2 SA 660 (A) 678 10 It should be noted that this is the minimum requirement.
Given the complexities of running a corporate, it may be necessary to appoint more directors. Furthermore,
where companies apply the governance principles set out in the King Report on Governance for South
Africa (King III), it may be necessary to have more than the minimum number of directors. In general
terms, the directors of a company are those individuals empowered by the Memorandum of Incorporation
of that company to determine its strategic direction. As a consequence of the nature of a company, being a
lifeless corporate entity, human intervention is required to direct its actions and therefore determine its
identity. The directors are entrusted by the shareholders of the company with the ultimate responsibility for
the functioning of the company. While some of the day-to-day running of the company is generally
delegated to some level of management, the responsibility for the acts committed in the name of the
company rests with the directors. 1.2 Prescribed officers Prescribed officers include every person, by
whatever title the office is designated, that:

• exercises general executive control over and management of the whole, or a significant portion, of the
business and activities of the company; or

• regularly participates to a material degree in the exercise of general executive control over and
management of the whole, or a significant portion, of the business and activities of the company. Most of
the provisions in the Act pertaining to directors apply equally to prescribed officers. The Act determines
that prescribed officers are required to perform their functions and exercise their duties to the standard of
conduct as it applies to directors. Prescribed officers will be subject to the same liability provisions as it
applies to directors. As is the case with directors, the remuneration paid to prescribed officers must be
disclosed in the annual financial statements. The following provisions, inter alia applicable to directors,
will also apply to prescribed officers:

• Section 69 – Ineligibility and disqualification of persons to be directors or prescribed officers;

• Section 75 – Directors’ personal financial interest;

• Section 76 – Standards of directors’ conduct; • Section 77 – Liability of directors and prescribed officers;
• Section 78 – Indemnification and directors’ insurance; and

• Section 30(4) and 30(5) – Disclosure of remuneration. A person will be a prescribed officer regardless of
any title or office they are designated. Duties of Directors 11 Although it is not a legislative requirement, it
is recommended that the board records the names of all those individuals which are regarded as prescribed
officers. The list of names will be necessary, among other requirements, when the company has to disclose
the remuneration paid to or receivable by its prescribed officers in the annual financial statements. Note
that regardless of whether a company has officially identified a particular individual as a prescribed officer
or not, that person may nevertheless be classified as a prescribed officer to the extent that the person’s role
in the company meets the definition. In order to determine who the prescribed officers of the company are,
one will have to apply a certain degree of judgment. Management will have to consider all the relevant
provisions of the definition, such as “general executive management” and “control” and “significant
portion of the business and activities” in the context of their specific company in order to identify the
prescribed officers of the company. The meaning of general executive control and management needs to be
determined in view of the organizational and governance structure of the company. Executive control and
management should be distinguished from ordinary control and management carried out in the day to day
functioning of the company. Where a person is responsible for implementing specific decisions of the
board, he will in all likelihood not be regarded as a prescribed officer, as the exercise of those functions
will not be equated with executive management or control. Further, the company will have to determine, in
its particular circumstances and in view of the company’s structure, which parts of the company, if any, are
regarded as a significant portions of the company. Not every division or business unit will necessarily be
regarded as a significant portion of the business, and only persons that exercise general executive control
over or management of a significant portion of the company are regarded as prescribed officers. A person
does not have to be employed by a particular company to be classified as a prescribed officer of the

Page 29 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

company. 12 The intention of the legislature seems to be to classify as prescribed officers those individuals
that are not appointed to the board of the company (thus, they are not directors) but nevertheless act with
the same authority as that of a director (executive management and control). In an earlier draft of the
Regulations, a prescribed officer was defined as anyone that has a significant impact on the management
and administration of the company. This definition was much wider and included most of the (senior)
management of a company. However, the definition in the final Regulations limits the scope to only those
individuals that exercise “executive” management and control – this would limit the prescribed officers to
only those individuals that have executive authority in the company, and it would exclude ordinary
managers, even senior managers (depending of course on the organizational and governance structure of
the company). Persons may be classified as prescribed officers under the following circumstances:

• A member of a company’s executive committee

• The senior financial manager in a company that does not have a financial director

• A chief executive officer

• Regional manager (eg “Africa manager: Sales”)

A company secretary that performs the role contemplated in King III (i.e. advising the board but not taking
decisions on behalf of the board) would generally not be classified as a prescribed officer. Also, persons
that perform an important operational role, but not general executive management and control functions,
would not be prescribed officers. 1.3 The legal status of a director The Act assigns to directors the
authority to perform all the functions and exercise all the powers of the company. It sets out the minimum
standard of conduct, and provides for personal liability where a director does not perform to the said
standard. The Act does not specifically comment on the legal status of a director. Where no express
contract has been entered into between the company and its directors, the provisions contained in the Act
and the company’s Memorandum of Incorporation are generally viewed as guiding the terms of the
relationship that the director has with the company.

Directors have been alternately viewed as trustees, agents, managers and caretakers of the companies they
serve. Whatever the view taken, a director occupies a position of trust within the company. 1.4 The
different types of directors In law there is no real distinction between the different categories of directors.
Thus, for purposes of the Act, all directors are required to comply with the relevant provisions, and meet
the required standard of conduct when performing their functions and duties. It is an established practice,
however, to classify directors according to their different roles on the board. King III has provided
definitions for each type of director.

The classification of directors becomes particularly important when determining the appropriate
membership of specialist board committees, and when making disclosures of the directors’ remuneration in
the company’s annual report. Duties of Directors 13 Executive director Involvement in the day-to-day
management of the company or being in the full-time salaried employment of the company (or its
subsidiary) or both, defines the director as executive. An executive director, through his or her privileged
position, has an intimate knowledge of the workings of the company. There can, therefore, be an imbalance
in the amount and quality of information regarding the company’s affairs possessed by executive and non-
executive directors. Executive directors carry an added responsibility. They are entrusted with ensuring that
the information laid before the board by management is an accurate reflection of their understanding of the
affairs of the company. King III highlights the fact that executive directors need to strike a balance between
their management of the company, and their fiduciary duties and concomitant independent state of mind
required when serving on the board. The executive director needs to ask himself “Is this right for the
company?”, and not “Is this right for the management of the company?” Non-executive director the non-
executive director plays an important role in providing objective judgment independent of management on
issues facing the company. Not being involved in the management of the company defines the director as
non-executive. Non-executive directors are independent of management on all issues including strategy,

Page 30 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

performance, sustainability, resources, transformation, diversity, and employment equity, standards of


conduct and evaluation of performance.

The non-executive directors should meet from time to time without the executive directors to consider the
performance and actions of executive management. An individual in the full-time employment of the
holding company is also considered a non-executive director of a subsidiary company unless the
individual, by conduct or executive authority, is involved in the day-to-day management of the subsidiary.
King III Report Annex 2.3 14 Independent director An independent director is defined in detail in King III.
In essence, an independent director is a non-executive director who:

• is not a representative of a shareholder who has the ability to control or significantly influence
management or the board

• does not have a direct or indirect interest in the company (including any parent or subsidiary in a
consolidated group with the company) which exceeds 5% of the group’s total number of shares in issue

• does not have a direct or indirect interest in the company which is less than 5% of the group’s total
number of shares in issue, but is material to his or her personal wealth

• has not been employed by the company or the group of which it currently forms part in any executive
capacity, or appointed as the designated auditor or partner in the group’s external audit firm, or senior legal
adviser for the preceding three financial years

• is not a member of the immediate family of an individual who is, or has during the preceding three
financial years, been employed by the company or the group in an executive capacity

• is not a professional adviser to the company or the group, other than as a director

• is free from any business or other relationship (contractual or statutory) which could be seen by an
objective outsider to interfere materially with the individual’s capacity to act in an independent manner,
such as being a director of a material customer of or supplier to the company, or

• does not receive remuneration contingent upon the performance of the company. King III suggests that it
may be useful to appoint a lead independent director who, as a result of his or her senior status, has the
authority to facilitate any issues that may arise between executive and non-executive directors of the board.
Such a function is noted as being especially relevant where the chairperson is an executive director. Duties
of Directors 15 1.5 Personal characteristics of an effective director some such characteristics may include:

• Strong interpersonal and communications skills increasingly, directors are being expected to represent the
company at shareholders’ meetings and in discussions with third parties such as analysts and the media. An
obvious advantage is therefore the ability to clearly and definitively present the company’s position.

• Energy Directors typically have a number of competing commitments and priorities. Where critical
decisions are being made on a daily basis, directors are constantly challenged to maintain their energy
levels and enthusiasm.

• Of independent mind A director is expected to apply his or her independent judgment to all issues
presented to the board. Directors are increasingly required to take a stand when, in his or her mind, the
company’s long term future is not being prioritized, no matter what the consequences.

• A strategic thinker the primary duty of the director is to guide the company to long-term prosperity. This
often requires the individual to be able to assess the long-term consequences of decisions taken.

• Analytical Directors are often presented with problems that have a number of potential solutions, and the
ability to sift through data to find an answer is a valuable personality trait. In addition to personal

Page 31 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

characteristics, a number of experiential factors may contribute to the effectiveness of a director. Such
factors are not mandatory for all directors, but can often be persuasive in evaluating an individual for
appointment.

• International exposure South African firms are increasingly competing on the world stage. This
competition brings with it a number of unique challenges. A director that brings to the board an
international focus and an exposure to global benchmarks and processes is becoming more and more
valuable.

• Industry expertise The board is enriched by any individual that can contribute knowledge of the
particular industry when evaluating issues and decisions made at the company. • Financial knowledge All
businesses are becoming increasingly driven by financial and accounting considerations. Having the ability
to evaluate the financial implications of an action or decision is definitely an advantage as a director. The
role of a director, whether executive or nonexecutive, is a particularly challenging one. While all
appointments have their own unique demands, there are a number of characteristics that can contribute to
the effectiveness of a director. 16 2. Appointment of a director Shareholders are ultimately responsible for
the composition of the board and it is in their own interests to ensure that the board is properly constituted
from the viewpoint of skill and representivity. King III Principle 2.19 par 80 certainly one of the most
important responsibilities of shareholders is the appointment of directors. While the Act and the company’s
Memorandum of Incorporation may prescribe the required qualifications and disqualifications for
appointment as a director, it is vitally important that the existing directors assess the qualitative
characteristics necessary in an individual to effectively perform their functions and integrate with the
culture and style of the organization. From a legal perspective, it is important to ensure that the required
procedures of the appointment as set out in the Act and the company’s Memorandum of Incorporation are
carried out correctly.

This Amy avoid any unwanted ramifications in the future. In practice, companies may encounter
difficulties in identifying suitable individuals to approach as potential directors. The directors of small
companies are often hampered by the fact that they do not possess the extensive network of contacts that
the directors of larger companies have. In such instances it is often best to enquire of the company’s
auditors or other professional advisors, or to contact a professional organization such as the Institute of
Directors to identify suitable individuals. Further, companies could make use of executive search agencies
to identify suitable individuals for consideration. Duties of Directors 17 2.1 Who qualifies as a director?
With a few specific exceptions, anyone can be appointed as a director of a company. Legal qualities
required to be a director The Act is the primary determinant of who may or may not be appointed to be a
director. A company’s Memorandum of Incorporation may provide additional grounds for ineligibility or
disqualification, or minimum qualifications to be met by directors. Section 69 of the Act in essence
provides that any person is ineligible for appointment as director, if that person is a juristic person, an
emancipated minor (or is under a similar legal disability), or does not satisfy the qualifications as per the
company’s Memorandum of Incorporation. Also, a person is disqualified from being a director, if the
person: • has been prohibited to be a director by the court

• has been declared by the court to be delinquent in terms of this Act or the Close Corporations Act • is an
rehabilitated insolvent

• is prohibited in terms of any public regulation to be a director of the company • has been removed from
an office of trust, on the grounds of misconduct involving dishonesty, or • has been convicted and
imprisoned without the option of a fine, or fined more than the prescribed amount, for theft, fraud, forgery,
perjury or an offence under the Companies Act, the Insolvency Act, the Close Corporations Act, the
Competition Act, the Financial Intelligence Centre Act, the Securities Services Act, or the Prevention and
Combating of Corruption Activities Act. It is interesting to note that the Act provides the courts with wide
discretion to either extend any disqualification for no longer than a period of five years at a time, or to
exempt any person from the disqualifications as set out above.

Page 32 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

The Act determines that the appointment of an ineligible or disqualified person as director is null and void.
Register of Directors The Act requires the Commission to maintain a public register of persons who are
disqualified from serving as a director, or who are subject to an order of probation as a director, in terms of
an order of a court. 2.2 The legal mechanics of appointment Directors are either appointed or elected. The
Act provides that the company’s Memorandum of Incorporation may provide for:

• the direct appointment and removal of directors by any person who is named in, or determined in terms
of, the Memorandum of Incorporation (e.g. shareholder representative)

• ex officio directors (e.g. the CEO), and

• the appointment of alternate directors. The Act makes it clear that, in the case of a profit company other
than a state-owned company, the Memorandum of Incorporation must provide for the election by
shareholders of at least 50% of the directors, and 50% of any alternate directors. The first directors of the
company The Act determines that each incorporator of a company will also be a first director of that
company. This directorship will be temporary and will continue until a sufficient number of directors have
been first appointed or first elected in terms of the requirements of the Act.

The first appointment of directors should be done in terms of the provisions of the company’s
Memorandum of Incorporation (e.g. the Memorandum of Incorporation may permit the majority
shareholder to appoint a certain number of directors). The first election of directors should be done in
accordance with the provisions of section 68 (see below). 18 The required number of directors may be
determined either in terms of the Act (private companies and personal liability companies to appoint at
least one director, whereas public companies, state owned companies and non-profit companies are
required to appoint at least three directors) or the company’s Memorandum of Incorporation. It should be
noted that the number of directors as prescribed by the Act is in addition to the directors that must be
appointed to serve on the audit committee or social and ethics committee. If not enough directors are either
first appointed or first elected to meet the required number of directors as required in terms of the Act or
the company’s Memorandum of Incorporation, the board must call a shareholders’ meeting within 40 days
of incorporation to elect a sufficient number of directors. Election of directors by the shareholders While it
is usually the directors themselves who identify and nominate a new director to be elected to their number,
it is the responsibility of the shareholders to evaluate and legally appoint each new director. In terms of
section 68 of the Act each director must be voted on by a separate resolution at a general meeting of the
company. Once elected, the person will become a director only once written consent to serve as a director
was delivered to the company.

The company’s Memorandum of Incorporation may prescribe a different process for the election of
directors by the shareholders. However, it should be noted that this must still amount to an ‘election’. If a
vacancy arises on the board, other than as a result of an ex officio director ceasing to hold that office, it
must be filled:

• by a new appointment, if the director was appointed by a person identified in the Memorandum of
Incorporation, or • by a new election conducted at the next annual general meeting of the company (in the
case of a public company and a state owned company), or • in any other case, within six months after the
vacancy arose at a shareholders meeting called for the purpose of electing the director. In the latter
instance, the election may be conducted by means of a written poll of the persons entitled to exercise
voting rights in an election of the director. King III proposes that a formal and transparent board
appointment process be implemented. The JSE Listings Requirements require listed companies to have a
policy detailing the procedures for appointments to the board of directors. The board, assisted by a
nominations committee, should identify potential candidates and ensure that all such candidates will be in a
position to contribute to the combined skill and experience of the board. The nominations committee (or
the board) has to perform a background check on candidates. When considering candidates, cognizance
should be taken of the following: • the knowledge and experience required to fill the gap on the board • the
apparent integrity of the individual, and

Page 33 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

• the skills and capacity of the individual to discharge these duties to the board. Duties of Directors 19
Notwithstanding the consideration and evaluation of candidates, the onus is on the individual candidate to
determine whether or not they have the time, skill, experience, and capacity to make a meaningful
contribution to the company. They should consent to serve as a director only if they are of the opinion that
they meet the requisite requirements and would be in a position to commit the time necessary to discharge
their duties. This is especially true for non-executive directors. Prior to accepting an appointment as
director, they should consider the time and dedication required, and they should not accept an appointment
if they would not be able to exercise the necessary care, skill and diligence. King III does not prescribe a
maximum number of directorships for non-executive directors. The appointment of a non-executive
director should be formalized in an agreement between the director and the company. Even though
executive directors may accept non-executive directorships, they should consider their responsibilities and
only accept such appointment in consultation with the CEO and chairman. It is important when identifying
new directors to consider the balance of power and authority at board of directors’ level, to ensure that no
one director has unfettered powers of decision-making. The JSE Listings Requirements require that the
company inform the JSE of any new appointments of directors (including the change of important
functions on the board, or change of executive responsibilities of a director) by the end of the business day
following the decision, or receipt of notice of the change. This information must also be disclosed on the
JSE’s news service SENS. Where a director retires by rotation and is re-appointed, no notice needs to be
given to the JSE.

The minimum number of directors The Act requires private companies and personal liability companies to
appoint at least one director, whereas public companies, state owned companies and non-profit companies
are required to appoint at least three directors. This prescribed number of directors is in addition to the
number of directors appointed to the audit committee and/or the social and ethics committee. All public
companies and state-owned companies need to appoint an audit committee comprising at least three
directors that meet the prescribed criteria. All listed public companies and state-owned companies (as well
as those other companies that would have scored at least 500 public interest points in any two of the last
five financial years) must appoint a social and ethics committee comprising at least three directors or
prescribed officers, of which one director must be an independent non-executive director. It is, however,
permitted for committee members to serve on more than one committee. Thus, the members of the audit
committee may also serve on the social and ethics committee. As such, the minimum prescribed number of
directors for a public company is six (i.e. three directors as required by the Act, plus three committee
members). Note: the obligation to appoint an audit committee and/or a social and ethics committee does
not apply where the company in question uses the said committee of its holding company. In such an
instance, the minimum number will be one director for private companies and personal liability companies,
whereas public companies, state owned companies and non-profit companies are required to have at least
three directors. 20 Any failure by a company at any time to have the minimum number of directors
required by the Act or the company’s Memorandum of Incorporation, does not limit or negate the authority
of the board, or invalidate anything done by the board or the company. Where the company is listed,
Schedule 10 to the JSE Listings Requirements states that the company should have at least four directors.
The Register of Directors The Act requires every company to keep a record of its directors. This record
should be in written form, or other form as long as the information can be converted into written form
within a reasonable time.

The register of directors of a company must be open to inspection by any person who holds a beneficial
interest in any securities issued by a profit company, or who is a member of a non-profit company, as well
as any member of the public. A record of its directors should comprise details of any person who has
served as a director of the company, and include:

• full name

• identity number or date of birth

• Nationality and passport number

Page 34 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

• Occupation

• date of their most recent election or appointment as director of the company

• name and registration number of every other company or foreign company of which the person is a
director, and in the case of a foreign company, the nationality of that company, and

• any other information as required by Regulations. These records should be kept for a period of seven
years after the person ceases to serve as a director. One of the details required by the Act to be entered is
that of the other companies for which the individual also serves as a director. In practice, these details are
often insufficient as the company secretary may struggle to obtain the information from the director, and to
keep it current.

The information does, however, serve as an important record in distinguishing between independent and
non-executive directors. 2.3 What a new director should be told King III recommends that when a new
director is appointed to the board, he or she should receive the necessary induction to familiarize
themselves with the duties and responsibilities of a director generally (where the individual has not
performed the role previously), and with the issues specific to the company such as operations, business
environment and general sustainability matters. A formal programmer should be designed to increase the
awareness and effectiveness of each director appointed (both new and existing director). While the
responsibility for this process lies with the chairperson, it is suggested that the company secretary is the
best person to actually perform the induction and development programmer. Orientation of inexperienced
directors The functions and responsibilities of a director are unlike any other management position.
Therefore, even when an individual has served for a considerable period of time as a member of senior
management, the responsibilities assumed on the appointment as a director are unique to that position.
Duties of Directors 21 There are certain critical issues that should be communicated to a new,
inexperienced director:

• The time horizon of any decisions made Most individuals, certainly when acting in a managerial capacity,
become accustomed to dealing with a short time horizon. This arises due to the numerous deadlines
imposed, and the importance ascribed to accounting results. The director’s role is not to maximize short-
term returns, but should rather attempt to safeguard the sustainable development of the company in the
long-run. Decisions should therefore be taken that are in the long-term interests of the company, and not to
boost the next earnings statement.

• The independent frame of mind required Managers in the business world are often accused of not being
“team-players” when they criticize a decision made by their peers or superiors. It should be stressed that
the director’s role is to take a step back and critically assess the motivation and consequences of a decision,
and where necessary, to put forward a reasoned view.

• Personal liability of directors are often surprised by the high level of personal risk that they bear through
their position. The legal framework in South Africa (which extends far beyond the Companies Act) is
increasingly looking to make directors liable in their personal capacity for actions of the company. It is
only fair that an individual be given the opportunity to weigh up any risks against the rewards from serving
as a director. Each company and industry has its own unique issues. It is therefore vital for all directors to
understand what these issues are and what their impact on the company is. It may be beneficial for an
experienced member of the board to introduce the new director to these issues, which may include:

• Specific risks and the management thereof The pertinent risks present in the industry, and those specific
to the company, as well as the ways in which the board manages these risks.

• Key members of senior management New directors should be introduced to the various members of
management on whom the directors depend for information.

Page 35 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

• Pertinent accounting issues With accounting decisions driving a company’s share price to a greater extent
than ever before, it is important that all directors are aware of the material choices that have been made,
and the extent to which these choices influence the company’s results.

• Quality of information and internal controls Directors should satisfy themselves of the veracity of the
information received from management, and the state of the internal control environment at the company.

• The board’s relationship with internal and external audit The directors make certain assertions in the
annual report, including: ◦ the accounting results are free from misstatement, and that the internal controls
at the company are operating effectively ◦ the company will be a going concern in the foreseeable future,
and ◦ the risk management framework and processes within the company are adequate to manage the risks
inherent in the business. In order to make such statements, the directors rely to an extent on assurances
provided to them by the internal and external audit functions. It is therefore important for a director to
understand the sources and reliability of this assurance. 22 3. Director conduct “It is unhelpful and even
misleading to classify company directors as “executive” and “non-executive” for purposes of ascertaining
their duties to the company or when any or specific or affirmative action is required of them. No such
distinction is to be found in any statute. At common law, once a person accepts appointment as a director,
he becomes a fiduciary in relation to the company and is obliged to display the utmost good faith towards
the company and in his dealings on its behalf. That is the general rule and its application to any particular
incumbent of the office of director must necessarily depend on the facts and circumstances if each.”
Howard v Herrigel 1991 (2) SA 660 (A) Duties of Directors 23 3.1 The standard of directors’ conduct By
accepting their appointment to the position, directors imply that they will perform their duties to a certain
standard, and it is a reasonable assumption of the shareholders that every individual director will apply his
or her particular skills, experience and intelligence to the advantage of the company. The Act codifies the
standard of directors’ conduct in section 76. The standard sets the bar very high for directors. The intention
of the legislature seems to be to encourage directors to act honestly and to bear responsibility for their
actions - directors should be accountable to shareholders and other stakeholders for their decisions and
their actions. However, with the standard set so high, the unintended consequence may be that directors
would not be prepared to take difficult decisions or expose the company to risk. Since calculated risk
taking and risk exposure form an integral part of any business, the Act includes a number of provisions to
ensure that directors are allowed to act without constant fear of personal exposure to liability claims. In this
regard, the Act has codified the business judgment rule, and provides for the indemnification of directors
under certain circumstances, as well as the possibility to insure the company and its directors against
liability claims in certain circumstances. It should be noted that the duties imposed under section 76 are in
addition to, and not in substitution for, any duties of the director of company under the common law. This
means that the courts may still have regard to the common law, and past case law when interpreting the
provisions of the Act. The codified standard applies to all directors, prescribed officers or any other person
who is a member of a board committee irrespective of whether or not that the person is also a member of
the company’s board. Also, it should be noted that no distinction is made between executive, non-executive
or independent non-executive directors. The standard, and consequent liability where the standard is not
met, applies equally to all directors. In terms of this standard a director (or other person to whom section 76
applies), must exercise his or her powers and perform his or her functions:

• in good faith and for a proper purpose

• in the best interest of the company, and

• with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the
same functions and having the general knowledge, skill and experience of that director. The Act prohibits a
director from using the position of director, or any information obtained while acting in the capacity of a
director to gain an advantage for himself or herself, or for any other person (other than the company or a
wholly-owned subsidiary of the company), or to knowingly cause harm to the company or a subsidiary of
the company. Directors have a fiduciary duty to act in the best interest of the company as a whole.
Directors owe this duty to the company as a legal entity, and not to any individual, or group of shareholders
– not even if the majority shareholder appointed the director. Directors are obliged to act in good faith in

Page 36 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

the best interest of the company. They should act within the bounds of their powers, and always use these
powers for the benefit of the company. Where a director transgresses his or her powers, the company might
be bound by his or her action, although he or she can be held personally liable for any loss suffered as a
result. 24 The fiduciary duty of directors includes (but not limited to): • the duty to individually and
collectively exercise their powers bona fide in the best interest of the company

• the duty not to exceed their powers

• the duty not to act illegally dishonestly, or ultra vires

• the duty to act with unfettered discretion

• the duty not to allow their personal interests to interfere with their duties

• a director is accountable to the company for secret profits made by virtue of the fiduciary position or
from the appropriation of a corporate opportunity

• the duty not to compete with the company

• the duty not no misuse confidential information When determining whether a director complied with his
or her fiduciary duty, the court may consider whether, in the circumstances, a reasonable person could have
believed that the particular act was in the best interest of the company. This is typically known as an
objective test. “… and the directors as occupying a fiduciary position towards the company must exercise
those powers bona fide in the best interest of the company as a whole, and not for an ulterior motive …”
Treasure Trove Diamonds Ltd v Hyman 1928 AD 464 at 479 The codified standard for director conduct
combines “care, skill and diligence” in one single test. The test to measure a director’s duty to exercise a
degree of care, skill and diligence provides for an objective assessment to determine what a reasonable
director would have done in the circumstances.

However, the objective assessment contains subjective elements in that it takes into consideration the, skill
and experience of that particular director. In applying the test, a distinction is made between different types
of directors. “the extent of a director’s duty of care and skill depends to a considerable degree on the nature
of the company’s business and on any particular obligations assumed by him or assigned to him.... In that
regard there is a difference between the so-called full-time or executive director, who participates in the
day to day management of the company’s affairs or of a portion thereof, and the non-executive director
who has not taken on any special obligation. The latter is not bound to give continuous attention to the
affairs of the company. His duties are of an intermittent nature to be performed at periodical board
meetings, and at any other meetings that may require his attention.” Fisheries Development Corporation of
SA Ltd v AWJ Investments (Pty) Ltd 1980 (4) SA 156 (W) In a recent Australian case (Centro case) the
duty of care and skill was considered with respect to the duty of directors to approve the financial
statements of the company. In this case that court found that all non-executive directors were in breach of
their duty of care and skill. The failure to notice certain omissions may well be explicable – but here the
directors clearly looked solely to management and external advisors. However, if they had acted as the
final filter, taking care to read and understand the financial accounts, the errors may have been discovered.
Duties of Directors 25 “All directors must carefully read and understand financial statements before they
form the opinions which are to be expressed … Such a reading and understanding would require the
director to consider whether the financial statements were consistent with his or her own knowledge of the
company’s financial position. This accumulated knowledge arises from a number of responsibilities a
director has in carrying out the role and function of a director. These include the following:

• a director should acquire at least a rudimentary understanding of the business of the corporation and
become familiar with the fundamentals of the business in which the corporation is engaged;

• a director should keep informed about the activities of the corporation;

Page 37 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

• whilst not required to have a detailed awareness of day-to-day activities, a director should monitor the
corporate affairs and policies;

• a director should maintain familiarity with the financial status of the corporation by a regular review and
understanding of financial statements;

• a director, whilst not an auditor, should still have a questioning mind.” “…. a director is not relieved of
the duty to pay attention to the company’s affairs which might reasonably be expected to attract inquiry,
even outside the area of the director’s expertise.” Australian Securities and Investments Commission v
Healey [2011] FCA 717 at 17 and 18 As stated above, the Act also codifies the business judgment rule. In
terms of this rule a director will not be held liable if he or she took reasonable diligent steps to become
informed about the subject matter, does not have a personal financial interest (or declared such a
conflicting interest) and the director had a rational basis to believe that the decision was in the best interest
of the company. 26 In discharging any board or committee duty, a director is entitled to rely on one or
more employees of the company, legal counsel, accountants or other professional persons, or a committee
of the board of which the director is not a member. The director, however, does not transfer the liability of
the director imposed by this act onto such employee. “In respect of all duties that may properly be left to
some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to
perform such duties honestly. He is entitled to accept and rely on the judgment, information and advice of
the management, unless there are proper reasons for querying such. Similarly, he is not expected to
examine entries in the company’s books... Obviously, a director exercising reasonable care would not
accept information and advice blindly. He would accept it, and he would be entitled to rely on it, but he
would give it due consideration and exercise his own judgment in the light thereof”. Fisheries
Development Corporation of SA Ltd v AWJ Investments (Pty)Ltd 1980 (4) SA 156 (W) “Nothing I decide
in this case should indicate that directors are required to have infinite knowledge or ability. Directors are
entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day
affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in
the information available to him or her to understand that information, and apply an enquiring mind to the
responsibilities placed upon him or her.” Australian Securities and Investments Commission v Healey
[2011] FCA 717 at 20 Directors of a company may be held jointly and severally liable for any loss, damage
or costs sustained by the company as a result of a breach of the director’s fiduciary duty or the duty to act
with care, skill and diligence. The Act sets out a range of actions for which directors may be held liable for
any loss, damage or costs sustained by the company. These actions include:

• acting in the name of the company without the necessary authority

• being part of an act or omission while knowing that the intention was to defraud shareholders, employees
or creditors

• signing financial statements that was false or misleading in a material respect, or

• issuing a prospectus that contained an untrue statement. In certain instances companies are allowed to
indemnify directors in respect of any liability, or companies may purchase insurance to protect a director
against liability (but only for those instances for which the company may indemnify the director), or to
protect the company against expenses or liability for which the company may indemnify a director. A
company may indemnify a director in respect of any liability, except for: • any liability arising from
situations where the director: ◦ acted in the name of the company, signed anything on behalf of the
company, or purported to bind the company or authorise the taking of any action by or on behalf of the
company, despite knowing that the director lacked the authority to do so ◦ acquiesced in the carrying on of
the company’s business despite knowing that it was being conducted in a reckless manner ◦ been a party to
an act or omission by the company despite knowing that the intention was calculated to defraud a creditor,
employee or shareholder of the company, or had another fraudulent purpose

• any liability arising from wilful misconduct or wilful breach of trust, or

Page 38 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

• incurred a fine as a result of a conviction on an offence in terms of national legislation. Duties of


Directors 27 Unless the company’s Memorandum of Incorporation provides otherwise, a company may
purchase insurance to protect a director against any liability or expenses for which the company is
permitted to indemnify a director or to protect the company against any expenses or liability for which the
company is permitted to indemnify a director. The company may, however, not directly or indirectly pay a
fine imposed on the director of the company or of a related company as a consequence of that director
having been convicted of an offence unless the conviction was based on strict liability. 3.2 Conflicts of
interest One of the fundamental duties of a director is to avoid any possible conflict of interests with the
company. It is an accepted principle in South African law that, as a result of the trust placed in the director,
he or she is bound to put the interests of the company before their own personal interests. Section 75 of the
Act makes clear provision for dealing with a director’s use of company information and conflict of interest.
Where a director has a conflicting personal financial interest (where his or her own interests are at odds
with the interests of the company), he or she is prohibited from making, participating in the making,
influencing, or attempting to influence any decision in relation to that particular matter. This provision
seems to impose a strict duty on directors not to allow their personal financial interest to impact, in any
way, on their dealings with the company. In addition, where a director has a conflicting personal interest in
respect of a matter on the board agenda, he or she has to declare that personal interest and immediately
leave the meeting. A director is also prohibited from any action that may influence or attempt to influence
the discussion or vote by the board, and is prohibited from executing any document on behalf of the
company in relation to the matter, unless specifically requested to do so by the board. It should be noted
that section 75 of the Act extends the application of the conflict of interest provisions to prescribed officers
and members of board committees (even if those persons are not directors). The conflict of interest
provisions apply equally to persons related to the director. Thus, where a director knows that a related
person has a personal financial interest in a matter to be considered at a meeting of the board, or knows that
a related person has acquired a personal financial interest in a matter, after the board has approved that
agreement or matter, the director should disclose that fact to the board. In this regard, it should be noted
that for purposes of section 75 the definition of a ‘‘related person’’, when used in reference to a director,
not only has the ordinary meaning as set out in the Act, but also includes a second company of which the
director or a related person is also a director, or a close corporation of which the director or a related person
is a member.

The conflict of interest provisions do not apply to a company or its director, if the company has only one
director, and that director holds all the beneficial interest in all the issued securities of the company.
However, where that one director does not hold all the beneficial interest in the issued securities, he or she
may not approve or enter into an agreement, or determine any other matter, in terms of which a person
related to him may have a personal financial interest. In these instances, the director has to obtain
shareholder approval by ordinary resolution. The provision makes it clear that conflict of interest is taken
seriously by the legislature, and one may assume that the Commission and the Takeover Regulation Panel
will enforce these provisions strictly. 28 The provisions will potentially have an impact on the way in
which members of boards are selected and appointed, as membership of a number of different boards might
lead to possible conflicts, which in turn means that those directors will not be able to participate in or
contribute to discussions and decisions related to such matters. “It is an elementary principle of company
law, that (apart from explicit power in the articles of association) a director cannot vote for the adoption of
a contract or on a matter in which he is an interested party”. Gundelfinger v African Textile Manufacturers
Ltd 1939 AD 314 Where a director somehow acts in competition with the company, a fundamental conflict
of interest is inevitable. There are a number of ways in which such a situation could occur. One is where a
director takes an opportunity that could have been taken by the company, in his or her personal capacity.
Another is where the director holds directorships on rival companies. Where an opportunity arises that
could have been acted upon by the company, the director is precluded from acting upon it in his or her
individual capacity. The director has a fiduciary duty to pass this opportunity on to the company. The
courts have held that even where the company did not have the resources to pursue the opportunity, the
director who came across it was not at liberty to pursue it personally. It is debatable whether the holding of
directorships on the boards of rival companies in itself constitutes a breach of the director’s fiduciary
duties. However, it would be almost impossible for the director not to prejudice one of the two or more

Page 39 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

companies that he or she serves. “It would be a most unusual situation which allowed directors... of one
company to act in the same or similar capacity for a rival without actual or potential conflict situations
arising with frequent regularity”. Ibex Construction (SA) (Pty) Ltd v Inject seal CC 1988 2 SA 54 (T ) Of
course, the provisions of the Act relating to conflicts of interest (as discussed above) will prevent a director
from such a position. Duties of Directors 29 3.3 Liability of directors The Act makes it clear that a person
is not, solely by reason of being an incorporator, shareholder or director of a company, liable for any
liabilities or obligations of the company, unless where the Act or the company’s Memorandum of
Incorporation provides otherwise. The directors of a company may only incur liability in specific instances.
In terms of the Act, a director of a company may be held liable for any loss, damages or costs sustained by
the company as a consequence of any breach by the director of a duty contemplated in the standard of
directors conduct, failure to disclose a personal financial interest in a particular matter, or any breach by the
director of a provision of the Act or the company’s Memorandum of Incorporation. In addition, the Act
determines that a director of a company is liable for any loss, damages or costs sustained by the company
as a direct or indirect consequence of the director having –

• acted in the name of the company, signed anything on behalf of the company, or purported to bind the
company or authorize the taking of any action by or on behalf of the company, despite knowing that the he
or she had no authority to do so

• persisted and went along with any action or decision despite knowing that it amounts to reckless trading

• been a party to any action or failure to act despite knowing that the act or omission was calculated to
defraud a creditor, employee or shareholder of the company

• signed, consented to, or authorized the publication of any financial statements that were false or
misleading, or a prospectus that contained false or misleading information

• been present at a meeting, or participated in the making of a decision, and failed to vote against a decision
to issue any unauthorized shares or securities, to issue options for unauthorized shares or securities, to
provide financial assistance to a director or any person without complying with the requirements of the Act
and the Memorandum of Incorporation, to approve a distribution that was contrary to the requirements of
the Act, or for the company to acquire any of its own shares, or the shares of its holding company, or make
an allotment despite knowing that the acquisition or allotment was contrary to the requirements of the Act.

The Act makes it clear that a director is jointly and severally liable with any other person who is or may be
held liable for the same act. Also, any claim for loss, damages or costs for which a person is or may be held
liable in terms of the Act prescribes after three years after the act or omission that gave rise to that liability.
Delinquency and probation of directors The Act determines that directors may be declared delinquent or
placed on probation as a result of certain conduct. This can be achieved by an application to court by the
company, a director, a shareholder, the company secretary, a registered trade union or representatives of
employees of the company. The grounds for the application for delinquency and probation are set out in the
Act, but in general terms, directors could be:

• declared delinquent if they grossly abused their position or if they caused intentional harm to the
company, and

• placed on probation if they improperly supported a resolution in contravention of the solvency and
liquidity test or otherwise acted in a manner which is inconsistent with the duties of directors. Delinquency
usually lasts for 7 years from date of the order or a longer period as determined by the court order. A
person who has been declared delinquent may apply to court after 3 years, for suspension of the
delinquency order and substitution thereof with a probation order. A probation order will lapse
automatically after 5 years. 30 Personal liability company The Act allows for the inclusion in the
Memorandum of Incorporation of a private company the provision that all directors (both present and past)
are jointly and severally liable, together with the company, for the past and present debts and liabilities of
the company that were incurred during their term of office. Such a company is classified as a personal

Page 40 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

liability company, and the name of the company will end with the expression ‘Incorporated’ or the
abbreviation ‘Inc.’. While all private companies are able to include such a provision, it is usually those
within certain professions such as companies of attorneys or auditors where personal liability is a necessity
in terms of their professional standards. The advantage of such a corporate structure over a partnership
would be perpetual succession of the legal entity. 3.4 Apportionment of damages The Apportionment of
Damages Act makes it easier for an aggrieved party to sue more than one party at a time. In the case of
company failures, it has become common practice for the aggrieved creditors and shareholders to sue those
parties with the “deepest pockets” namely the auditors, and occasionally the directors (although most
directors of failed companies manage to alienate their assets prior to being sued). In such instances, it will
become more likely that the directors, together with any other relevant party, will be sued jointly under this
Act. 3.5 Insider trading Insider Trading and Closed Periods The Financial Markets Act 19 of 2012 replaces
the Securities Services Act which has governed the regulation of securities services in South Africa since
2005. With the purpose of maintaining the integrity of South African financial markets, aligning the
regulatory framework with relevant local and international developments and standards and mitigating the
potential impacts of any possible future financial crisis, the Financial Markets Act refines its predecessor’s
provisions regulating insider trading. The revisions further extend the liability of directors and their
proxies, mainly through the amendment of allowable defenses, in dealing with unpublished price-sensitive
information within their companies. Given the Financial Services Board and Legislature’s continued focus
on market abusive transactions as well as the criminal and civil sanctions envisaged by the Financial
Markets Act, this piece of legislation is very relevant to directors who receive and trade in their company’s
securities. Inside information Inside information is defined by the Financial Markets Act as specific or
precise information which has not been made public and which is obtained or learned as an insider and, if it
were made public, would be likely to have a material effect on the price or value of any security listed on a
regulated market. Duties of Directors 31 Insider An insider, as defined by the Financial Markets Act, is an
individual who “has inside information: (a) through (i) being a director, employee or shareholder of an
issuer of securities listed on a regulated market to which the inside information relates; or (ii) having access
to such information by virtue of employment, office or possession; or her employment, office or
possession; or (b) where such person knows that the direct or indirect source of the information was a
person contemplated in paragraph (a)” The definition, borrowed from the Security Services Act (Act 36 of
2004), stretches a far-reaching net to include not only directors as insiders, but also those that have direct
or indirect exposure to inside information. The offences Similar to its predecessor, the Financial Markets
Act makes it an offence for an insider to deal directly, indirectly or through an agent for his or her own
account or for any other person, in the securities listed on a regulated market to which the inside
information relates or which are likely to be affected by it. The disclosure of inside information to another
person, encouragement of another person in dealing in securities of the company or discouragement of
another person from dealing in the securities of the company by an insider who knows that he or she has
inside information, similarly remains an offence in terms of the Financial Markets Act.

The Financial Markets Act, however, for the first time extends liability to any person dealing for an insider
who knew that such person is an insider. Insider’s proxies are hereby included within the realm of liability
and are treated as insiders themselves if acting for another insider of the company. The defenses An
insider, dealing for his or her own account, may no longer utilise the defense that insider trading was
performed in pursuit of an affected transaction as defined in section 440A of the Companies Act 1973. The
only defense available to such an insider is where he or she only became an insider after having given the
instruction to deal to an authorized user (i.e. licensed security services provider) and the instruction was not
changed in any manner after he or she became an insider. A similar defense is given to the authorized user
acting on the insider’s behalf. Where an insider deals for another person’s account, the Financial Markets
Act has amended the defense available to the authorized user acting on the instruction of the insider and
now places the onus on that authorized user to prove that he or she did not know the client was an insider at
the time that the instruction was given. The defense previously available to public sector bodies in pursuit
of monetary policy was completely removed in the Financial Markets Act. A new defense has been added,
known as the “safe harbour defense”, for bona fide commercial transactions amongst insiders that are not
designed to benefit from the price sensitive information. This defense requires that all parties to the
transaction have possession of the same inside information and that trading is limited to these parties. An

Page 41 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

authorised user acting on the instruction of the insider(s) may also utilize this defence. Lastly, disclosure of
insider information by an insider to another person is defensible where the insider can prove that such
disclosure was made pursuant to the proper performance of his or her employment, office or profession in
circumstances unrelated to dealing and that he or she at the same time disclosed that the information was
inside information. 32 The table below summarises the available defences: The Defence Available to I only
became an insider after having given the instruction to deal to an authorised user (i.e. licensed security
services provider) and the instruction was not changed in any manner after I became an insider.

• An insider dealing for own account.

• The authorised user dealing on instruction of the insider I am an authorised user acting on the instruction
of the insider. The onus is on me to prove that I did not know the client was an insider at the time that the
instruction was given.

• The authorised user dealing on instruction of the insider. I entered into a bona fide commercial
transaction amongst fellow insiders. The transaction was not designed to benefit from the price sensitive
information. All parties to the transaction had possession of the same inside information and the trading
was limited to these parties.

• An insider dealing for another person’s account.

• An authorised user dealing on instruction of the insider. I disclosed insider information to another person.
I can prove that such disclosure was made pursuant to the proper performance of my employment, office or
profession in circumstances unrelated to dealing and that I at the same time disclosed that the information
was inside information.

• An insider dealing for own account.

• An insider dealing for another person’s account.

• An authorised user dealing on instruction of the insider. The Penalty Any director responsible for
contravening the Financial Markets Act’s provisions regulating insider trading will be liable to pay an
administrative sanction not exceeding the profit on insider trading or loss avoided as a result thereof, an
amount of up to R1 million, interest on any amount payable as well as the costs of suit, including any
investigation costs incurred by the Enforcement Committeee. In addition, the Financial Services Board has
wide-ranging powers to investigate allegations of insider trading, including the search of premises and
examination of any documentation related to their investigation on authority of a warrant. Publication The
insider trading provisions do not apply to public information. The Financial Markets Act has amended the
definition of public information to ensure that such information be more widely available before insiders
may deal. This was done by removing information obtained by persons exercising diligence or observation,
information only communicated on the payment of a fee or information only published outside South
Africa, from the definition of public information in the Financial Markets Act. Duties of Directors 33
Closed periods Regulators commonly utilise “closed period” provisions to curb insider trading practices of
directors and management. The provisions prohibit trading in company securities by designated persons
during closed periods which commonly coincide with periods during which the persons might be privy to
price sensitive information. The JSE Listing Requirements (“the JSE”) defines a “closed period” as: (a) the
date from the financial year end up to the date of earliest publication of the preliminary report, abridged
report or provisional report; (b) the date from the expiration of the first six month period of a financial year
up to the date of publication of the interim results; (c) the date from the expiration of the second six month
period of a financial year up to the date of publication of the second interim results, in cases where the
financial period covers more than 12 months; (d) in the case of reporting on a quarterly basis, the date from
the end of the quarter up to the date of the publication of the quarterly results; and (e) any period when an
issuer is trading under a cautionary announcement. The director of a company and company secretary (of
the issuer company or a major subsidiary of the issuer) as well as associates of the director, which include
immediate family, are prohibited from trading in the securities of a listed company during a closed period

Page 42 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

or any period when there exists any matter which constitutes unpublished price sensitive information in
relation to the issuer’s securities (whether or not the party has knowledge of such matter). As it is quite
possible that unpublished price sensitive information might already exist prior to the end of a financial
period, the closed period could, applying the definition above, result in extended periods during which no
trading is allowed. Even during periods of allowed trading, the director or company secretary (excluding
his or her associates) require written authorization to trade in the securities from the issuing company’s
chairman or another director designated for the purpose. A director is expected to notify his or her
immediate family and other associates as well as his or her investment manager of periods during which no
trading is allowed and such communication should include the names of the issuer(s) of which he or she is
a director. The investment manager of a director should be instructed by the director that no trades should
be entered into on his or her behalf without prior written consent. Similarly, immediate family and
associates of the director have to inform the director of their trading activities in the securities of the issuer
to allow the director to comply with the disclosure requirements set by the JSE. 34 Disclosure Trading in
the securities of a listed company requires disclosure on Stock Exchange News Service (SENS) when
trading is entered into by or on behalf of: (i) a director and company secretary (held beneficially, whether
directly or indirectly) of the issuer; (ii) a director and company secretary (held beneficially whether directly
or indirectly) of a major subsidiary company of the issuer; or (iii) any associate of the company or a major
subsidiary of the company. The SENS disclosure shall include all details of the transaction, including off-
market transactions. In terms of the JSE Listing Requirements, a company must, without delay, unless the
information is kept confidential for a limited period of time as allowed by the JSE, release an
announcement providing details of any development(s) in such company’s sphere of activity that is/are not
public knowledge and which may, by virtue of its/their effect(s), lead to material movements of the
reference price of such company’s listed securities. Immediately after a listed company acquires
knowledge of any material price sensitive information and the necessary degree of confidentiality of such
information cannot be maintained or if the company suspects that confidentiality has or may have been
breached, the company must publish a cautionary announcement on SENS in terms of the JSE Listing
Requirements. The company is required to update the cautionary statement at least every 30 business days
after issuing the initial cautionary statement. Duties of Directors 35 4. The workings of the board of
directors Directors should be individuals of integrity and courage, and have the relevant knowledge, skills
and experience to bring judgement to bear on the business of the company. In situations where directors
may lack experience, detailed induction and formal mentoring and support programmes should be
implemented. King III Principle 2.18 par 72 4.1 Composition of the full board The three different types of
directors each bring a different area of focus to the board of directors. Executive directors have an intimate
knowledge of the workings of the company. Non-executive directors may have a better understanding of
the issues facing the group as a whole. Independent directors bring a totally unclouded, objective viewpoint
to the board, as well as experience gained at other enterprises. The challenge lies in establishing the
appropriate balance. Each company faces different issues, and will require a unique combination of skills
to meet those challenges. King III suggests that every board should consider whether its size, diversity and
demographics make it effective. In this regard, a number of factors may be taken into account, including
academic qualifications, technical expertise, relevant industry knowledge, experience, nationality, age, race
and gender. When determining the number of directors to serve on the board, the collective knowledge,
skills, experience and resources required for conducting the business of the board should be considered.
Factors determining the number of directors to be appointed are

: • evolving circumstances, the needs of the company and the nature of its business

• the need to achieve an appropriate mix of executive and independent non-executive directors

• the need to have sufficient directors to structure board committees appropriately

• potential difficulties of raising a quorum with a small board

• regulatory requirements, and

Page 43 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

• the skills and knowledge needed to make business judgement calls on behalf of the company. King III
Report Principle 2.18 Par 70 36 King III has re-affirmed the view that the South African business
environment lends itself to having a single (unitary) board of directors that takes ultimate responsibility for
the direction of the company. Having a single board makes it essential to achieve the appropriate balance
of power between the different categories of directors. In South Africa, best practice dictates that the
majority of directors should be non-executive, of which the majority should be independent. At least two
executive directors (the CEO and the director responsible for the finance function) should be appointed to
the board. King III proposes staggered rotation for non-executive directors, while ensuring continuity of
skills and experience. Rotation also allows for the introduction of new directors with different skills and
experience from which the board may derive benefit. It is proposed that at least one third of non-executive
directors be rotated every year. Rotating directors may be re-appointed, if eligible. The chairman and the
board should re-assess the independence of independent directors on an annual basis. King III suggests that
the re-appointment of an independent director after a term of nine years should be seriously considered. A
statement on the outcome of such assessment should be included in the Integrated Report. It is suggested
that the director’s independence may be impaired after nine years. 4.2 The implicit duties of the board The
Practice Note on the Board Charter issued with King III advocates that the board has a number of duties,
with the following being the most fundamental:

• The board has to act as the focal point for, and custodian of, corporate governance and as such the board
should manage its relationship with management, the shareholders and other stakeholders of the company
along sound corporate governance principles. As the focal point for, and custodian of, corporate
governance the board should exercise leadership, integrity, enterprise and judgment when it directs,
governs and controls the company. The most important function of the board is to ensure value creation,
and in doing so, it should account for the interest of all stakeholders.

• The board has to appreciate that strategy, risk, performance and sustainability are inseparable and to give
effect to this by: ◦ informing and approving the strategy ◦ satisfying itself that the strategy and business
plans are not encumbered by risks that have not been thoroughly assessed by management ◦ identifying key
performance and risk areas ◦ ensuring that the strategy will result in sustainable outcomes, and ◦
considering sustainability as a business opportunity that guides strategy formulation.

• The board has to provide effective leadership that stands on an ethical foundation. Effective leadership is
built on four pillars, namely responsibility, accountability, fairness and transparency. This entails doing
business ethically and sustainably by having regard to the company’s economic, social and environmental
impact on the community. Duties of Directors 37 • The board must ensure that the company is a
responsible corporate citizen. Responsible corporate citizenship is closely related to ethical leadership. As a
responsible corporate, the board has to ensure that the company should have regard to not only the
financial aspects of the business of the company but also the impact that business operations have on the
environment and the society within which it operates.

• The board should ensure that the company’s ethics is managed effectively. The board should set the tone
for ethical behaviour within a company, and is responsible for creating and sustaining an ethical corporate
culture, both formal and informal. The ethical culture should be reflected in the company’s vision, mission,
strategies, operations, decisions, conduct and its stakeholder relationships. Ethical risks and opportunities
should be identified and managed. It is advisable to articulate ethical standards in a code of conduct, which
provides guidance and rules to avoid unethical behaviour. The board should further ensure that ethics are
integrated into all the company’s strategies and policies, and that its ethics performance is assessed,
monitored, reported and disclosed.

• The board must ensure that the company has an effective and independent audit committee. Although the
Act prescribes the composition and functions of the audit committee for state owned and public companies,
King III proposes that all companies should appoint an audit committee. The audit committee should
comprise at least three members and all members should be independent non-executive directors. The
committee as a whole should have sufficient qualifications and experience to fulfil its duties, and should be

Page 44 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

permitted to consult with specialists or consultants after following an agreed process. The terms of
reference of the audit committee should be approved by the board. The functions of the audit committee in
relation to the external auditor include:

• the nomination of the external auditor for appointment and to verify the independence of the auditor •
determining the audit fee and the scope of the appointment

• ensuring that the appointment complies with the requirements of the Act

• determining the nature and extent of non-audit services, and

• pre-approving any contract for non-audit services. The board may delegate certain aspects of risk
management and sustainability to the audit committee. King III introduces the concept of integrated
reporting (which combines financial and sustainability reporting) and allows for the board to delegate the
review of integrated reporting to the audit committee. In this regard, the audit committee should
recommend to the board the need to engage external assurance providers to provide assurance on the
accuracy and completeness of material elements of integrated reporting. 38 King III adopts a wide
approach to the audit committee’s responsibility for financial risk and reporting to include:

• financial risks and reporting

• review of internal financial controls, and

• fraud risks and IT risks as it relates to financial reporting. King III further introduces the combined
assurance model. In terms of this model, assurance should be done on three levels, i.e. management,
internal assurance providers and external assurance providers. The audit committee should ensure that a
combined assurance model is applied to provide a coordinated approach to all assurance activities.

• The board is responsible for the governance of risk. King III emphasises the fact that risk management
should be seen as an integral part of the company’s strategic and business processes. The board’s
responsibility for governance of risk should be set out in a risk management policy and plan. The board
should consider the risk policy and plan, and should monitor the whole risk management process. While
the board remains responsible for the risk management policy and the determination of the company’s risk
appetite and risk tolerance, management is responsible for the design, implementation and effectiveness of
risk management. The board should receive combined assurance regarding the effectiveness of the risk
management process. The board may assign its responsibility for risk management to the risk committee.
Membership of this committee should include executive and non-executive directors. Where the company
decides to assign this function to the audit committee, careful consideration should be given to the
resources available to the audit committee to adequately deal with governance of risk in addition to its
audit responsibilities. A director is “bound to take such precautions and show such diligence in their office
as a prudent man of business would exercise in the management of his own affairs”. Trustees of the Orange
River Land & Asbestos Company v King (1892) 6 HCG 260 285

• The board is responsible for information technology (IT) governance. As information and technology
systems have become such an integral part of doing business, King III provides specific guidelines to
ensure effective IT governance. It is necessary for directors to ensure proper IT governance, the proper
alignment of IT with the performance and sustainability objectives of the company, and the proper
management of operational IT risk, including security. The risk committee may be assigned responsibility
to oversee the management of IT risk. In addition, the audit committee should consider IT as it relates to
financial risk and reporting. Duties of Directors 39 • The board should ensure that the company complies
with applicable laws and consider adherence to non-binding rules and standards. The board is responsible
for overseeing the management of the company’s compliance risk. The board should ensure awareness of
and compliance with laws, rules, codes and standards throughout the business. In turn, management is
responsible for the implementation of an effective compliance framework and processes, and for the
effective management of the company’s compliance risk. The board may mandate management to establish

Page 45 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

a compliance function to implement measures and procedures to ensure that the board’s policy on
compliance is implemented.

• The board has to ensure that there is an effective risk-based internal audit function. King III advocates a
risk based approach to internal audit. In order for internal audit to contribute to the attainment of strategic
goals, the internal audit function should be positioned at a level within the company to understand the
strategic direction and goals of the company. It should develop a programme to test the internal controls
vis-a-vis specific risks. The internal audit function should provide assurance with reference to the adequacy
of controls to identify risks that may impair the realization of specific goals as well as opportunities that
will promote the achievement of the company’s strategic goals. As an internal assurance provider internal
audit should form an integral part of the combined assurance model. It should provide a written assessment
of internal controls and risk management to the board, and specifically on internal financial controls to the
audit committee.

• The board should appreciate that stakeholder’s perceptions affect the company’s reputation. King III
proposes that companies institute measures to ensure that they are able to proactively manage the
relationships with all their stakeholders, including shareholders. The board should encourage constructive
stakeholder engagement, and strive to achieve the correct balance between the interests of all its various
stakeholder groupings and promote mutual respect between the company and its stakeholders.

• The board should ensure the integrity of the company’s integrated report. King III proposes integrated
reporting to ensure that all stakeholders are able to assess the economic value of the company. This entails
the integration of the company’s financial reporting with sustainability reporting and disclosure. The board
should ensure that the positive and negative impacts of the company’s operations, as well as plans to
improve the positives and eradicate the negatives, are conveyed in the integrated report. The board should
review the integrated reporting and disclosure to ensure that it does not contradict financial reporting.

• The board must act in the best interests of the company and in fulfilling this responsibility individual
directors: ◦ must adhere to legal standards of conduct ◦ should be permitted to take independent advice in
connection with their duties following an agreed procedure ◦ must disclose real or perceived conflicts to the
board and deal with them accordingly, and ◦ deal in securities only in accordance with the policy adopted
by the board. 40

• The board must commence business rescue proceedings as soon as the company is financially distressed.
The Act sets out the processes and procedures to be followed when a company is financially distressed.
The board has the responsibility to ensure that all stakeholders are consulted in the preparation of the
business rescue plan.

• The board must elect a chairman of the board that is an independent non-executive director. King III
emphasises the fact that the chairman should be independent and free of conflicts. The chair has to set the
ethical tone for the board and the company, provide leadership to the board and the company, and act as
link between the board and company.

• The board must appoint and evaluate the performance of the chief executive officer. Arguably the most
important function of the board is to identify and appoint a suitable chief executive officer. The collective
responsibility of management vests in the chief executive officer, and as such the chief executive officer
bears ultimate responsibility for the decisions and actions of management. 4.3 Meetings of directors The
directors may meet as often as required. Generally, boards meet quarterly, but more meetings may be
scheduled, depending on circumstances. A director authorised to call a board meeting is obliged to do so if
2 or more directors (or 25% of directors where the board comprises more than 12 members) ask him or her
to call a meeting. In terms of the Act, board meetings may be conducted by electronic communication so
long as the electronic communication facility employed ordinarily enables all persons participating in that
meeting to communicate concurrently with each other without an intermediary, and to participate
effectively in the meeting. Directors that participate in the meeting via electronic communication are

Page 46 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

regarded as being present at the meeting – both for quorum and voting purposes. The majority of directors
must be present at a board meeting before a vote may be called, in other words, the quorum for the meeting
to commence is 50% plus one. Decisions taken at the meetings are generally on a majority vote. In this
regard, it should be kept in mind that a resolution will be passed by a majority of the directors that
participate in the meeting. Where there is a tie, the Act allows the chairperson to have the deciding vote
(but only if the chair did not participate in the initial vote). The Act allows a decision that could be voted
on at a meeting of the board to be adopted by written consent of a majority of the directors, given in
person, or by electronic communication, provided that each director has received notice of the matter to be
decided (round-robin). This allows for a handy alternative to a physical meeting. Duties of Directors 41
The information relating to the business to be conducted at the meeting is generally distributed ahead of
time within a board “pack” to enable each director to digest the information prior to the meeting. This is
usually the responsibility of the company secretary. Given the strict standard of director conduct, and the
requirement for directors to take reasonably diligent steps to become informed on any matter on the
agenda, it is important that the company secretary ensures that directors are provided with relevant and
accurate information. Section 73 of the Act requires that the minutes of the directors’ meetings be kept,
including any declaration of a conflict of personal financial interest, as well as every board resolution
adopted by the board. Again, given the strict standard of director conduct, it is important for all directors to
carefully read the minutes, and ensure that it provides a clear reflection of the proceedings and decisions
taken at that particular meeting. Directors may have to rely on the minutes, should their decisions or
actions ever be challenged. The chairperson of the meeting (usually also the chairperson of the board)
should sign the minutes as evidence that they are correct. Any minutes of a meeting, or a resolution, signed
by the chair of the meeting, or by the chair of the next meeting of the board, is evidence of the proceedings
of that meeting, or adoption of that resolution, as the case may be. If the chairperson of the meeting does
not sign the minutes, the chairperson of the following meeting should sign them. 4.4 Important roles of the
board The board comprises a number of important individuals, each with a different role to play. The
functions of these significant individuals are discussed below. The Chairperson The Memorandum of
Incorporation of a company generally allow for the directors to elect a chairperson to chair the meetings of
the board. Unless specified in the Memorandum of Incorporation, the chairperson remains in that position
for as long as he or she is a director, or until the board elects otherwise. The chairperson of the board is the
individual charged with providing the board with leadership, and to harness the talents and energy
contributed by each of the individual directors. King III recommends that the chairperson should be an
independent non-executive director. The chairperson should not also be the CEO. While the chairperson is
required to retain an objective viewpoint of the affairs of the company, the CEO is often required to
become intimately involved in developing and executing management plans for the company. King III
emphasises the importance of an independent chairperson. The chairperson of the board should be
independent and free of conflicts of interest at appointment, failing which, the board should appoint a lead
independent non-executive director (LID) (another independent director, usually the deputy chairperson).
In situations where the independence of the chairperson is questionable or impaired, a LID should be
appointed for as long as the situation exists. The role of the LID would be to act as the ‘independent
conscience’ of the chairperson, i.e. to ensure that all decisions of the chairperson are justifiable from an
independent point of view. 42 The most obvious role played by the chairperson is to govern the workings
of the board, including directing the meetings of the board and acting as a conciliatory element when
elements of the board differ. In case of a tied vote, the chairperson may cast the deciding vote (but only if
he did not cast a vote in the initial round of voting). The chairperson is obliged to use this power
appropriately and not to influence the outcome of the meetings towards a specific agenda. “The
Chairperson of a general meeting is empowered “to preserve order, and to take care that the proceedings
are conducted in a proper manner, and that the sense of the meeting is properly ascertained with regard to
any question which is properly before the meeting.” National Dwellings Society v Sykes [1894] 3
According to King III the core functions of thechairperson include:

• setting the ethical tone for the board and the company • providing overall leadership to the board •
formulating (with the CEO and company secretary) the yearly work plan for the board against agreed
objectives, and playing an active part in setting the agenda for board meetings • presiding over board
meetings and ensuring that time in meetings is used productively • managing conflicts of interest • acting

Page 47 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

as the link between the board and management and particularly between the board and the CEO • ensuring
that complete, timely, relevant, accurate, honest and accessible information is placed before the board to
enable directors to reach an informed decision • monitoring how the board works together and how
individual directors perform and interact at meetings • ensuring that good relations are maintained with the
company’s major shareholders and its strategic stakeholders, and presiding over shareholders’ meetings •
upholding rigorous standards of preparation for meetings, and • ensuring that decisions by the board are
executed. Further responsibilities of the chairperson would be to identify and participate in selecting board
members (via a nomination committee), and overseeing a formal succession plan for the board, CEO and
certain senior management appointments such as the chief financial officer (CFO). Duties of Directors 43
The chairperson should ensure that all directors are appropriately made aware of their responsibilities
through a tailored induction programme, and ensuring that a formal programme of continuing professional
education is adopted at board level. Also, he or she should ensure that directors play a full and constructive
role in the affairs of the company and taking a lead role in the process for removing non-performing or
unsuitable directors from the board. The Chief Executive Officer The chief executive officer (sometimes
referred to as the managing director) has the responsibility for determining and maintaining the strategic
direction of the company. The collective responsibility of management rests with the CEO, and as such the
CEO bears responsibility for all management functions and decisions. The CEO is usually seen as the
figurehead for the company in the public eye, and as such should be an individual with the ability to
present a positive image of the company. Certainly one of the most important functions of the board is to
appoint a CEO.

The CEO does not necessarily have to be an employee of the company in addition to holding a post as
director. Where the CEO is an employee of the company, however, best practice internationally and in
South Africa is that he or she should enter into at most a three year employment contract with the
company. Where the Memorandum of Incorporation so provides, the directors may delegate all of their
powers to this one individual, thus conferring onto him or her an enormous amount of responsibility.
However, it should be made clear that the board remains accountable to shareholders and stakeholders. The
board should have regard to the directors’ fiduciary and statutory responsibilities when delegating authority
to management. Also, the board should have clear performance indicators to hold management
accountable. The board should define its own levels of materiality, reserving specific powers to it and
delegating other matters to management. Such delegation by the board should have regard to directors’
statutory and fiduciary responsibilities to the company, while considering strategic and operational
effectiveness and efficiencies. King III principle 2.17 par 50 Some of the more important functions that
King III suggests that the CEO perform include: • recommending or appointing the executive team and
ensuring proper succession planning and performance appraisals • developing the company’s strategy for
consideration and approval by the board • developing and recommending to the board annual business
plans and budgets that support the company’s long-term strategy • monitoring and reporting to the board
the performance of the company and its conformance with compliance imperatives • establishing an
organisational structure for the company which is necessary to enable execution of its strategic planning •
setting the tone in providing ethical leadership and creating an ethical environment • ensuring that the
company complies with all relevant laws and corporate governance principles, and • ensuring that the
company applies all recommended best practices and, if not, that the failure to do so is justifiably
explained. 44 4.5 Board committees The Act provides the board with the power to appoint board
committees, and to delegate to such committees any of the authority of the board.

The authority of the board to appoint board committees is subject to the company’s Memorandum of
Incorporation. If the company’s Memorandum of Incorporation, or a board resolution establishing a
committee, does not provide otherwise, the committee may include persons who are not directors of the
company. However, it should be noted that where non-directors are appointed to a board committee, such
persons are not allowed to vote on a matter to be decided by the committee). Board committees constitute
an important element of the governance process and should be established with clearly agreed reporting
procedures and a written scope of authority. The Act recognises the right of a board to establish board
committees but by doing so, the board is not exonerated of complying with its legal responsibilities. King
III principle 2.23 par 125 King III recommends that the delegation of powers to a committee be made

Page 48 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

official, in order for the members to have formal terms of reference to determine the scope of their powers,
and the responsibilities they bear. The terms of reference should include detail pertaining to: • the
composition of the committee • the objectives, purpose and activities • the powers that have been delegated
• any mandate to make recommendations to the board • the lifespan of the committee, and • how the
committee reports to the board. The Act requires public companies and state owned companies to appoint
an audit committee comprising three independent non-executive directors. King III proposes that all other
companies provide for the appointment of an audit committee (the composition, purpose and duties to be
set out in the company’s Memorandum of Incorporation). In addition, King III proposes that the board
should appoint the audit, risk, remuneration and nomination committees as standing committees. The board
may also consider establishing governance, IT steering and sustainability committees. Smaller companies
need not establish formal committees to perform these functions, but should ensure that these functions are
appropriately addressed by the board. The Act requires listed public companies and state owned
companies, as well as any other company that scored more than 500 Public Interest Score points in any two
of the last five years, to establish a social and ethics committee. This committee should comprise at least
three members. The members may be directors or prescribed officers, but at least one must be a director
that is not involved in the day-to-day management of the company, i.e a non-executive director. Board
committees are allowed to consult with or receive advice from any person, including employees, advisors,
or other board committees. King III suggests that all board committees, other than the risk committee,
should only comprise members of the board and should have a majority of non-executive directors. The
majority of the non-executive directors serving on these committees should be independent. Committees
should be chaired by independent non-executive directors, other than the executive committee which is
ordinarily chaired by the CEO. Duties of Directors 45 Advisors, experts and other external parties may
attend committee meetings by invitation. Non-directors serving as members on committees of the board are
not entitled to vote, and will be subject to the same standards of conduct and liability as if they were
directors. Executive directors and senior management may be invited to attend committee meetings if the
chair of the committee considers their input and contribution to be of value to the decision-making process.
The composition and functions of each of these sub committees are discussed below. The Nomination
Committee The role of the nomination committee is to review, on a regular basis, the composition of the
full board, and where it appears that the board is lacking in skills or experience in a certain area, to identify
how best to rectify the situation. This may involve identifying skills that are required, and those individuals
best suited to bring these to the board. King III suggests that the committee should only comprise members
of the board. The majority of the members should be non-executive, of which the majority should be
independent. The ideal situation is for the chairperson of the board to also chair the nomination committee,
failing which an independent non-executive director should be the chairperson.

The committee is empowered to consider the size and balance of the full board, and to make
recommendations where, in the opinion of its members, improvements could be made. It remains the
responsibility of the full board of directors to consider the recommendations made and to vote on any
nominated appointments or, as the case may be, suggested removals. One of the important considerations
for the committee is whether there are adequate succession plans in place to mitigate the effects of losing
key members of the board, specifically non-executives as these individuals may be more difficult to replace
than executive directors who have followed a defined career path through the management of the company.
The role of the nominations committee may be extended to also consider the skill, experience and
succession planning with respect to the executive management team. The Remuneration Committee The
remuneration of a company’s directors is one of the most sensitive and topical issues facing the board of
directors today. It is therefore considered a crucial element of good corporate governance to establish a
committee whose sole focus it is to consider and recommend the level and form of the directors’ (and
senior management’s) remuneration. King III suggests that the committee should only comprise members
of the board. The majority of the members should be non-executive, of which the majority should be
independent. The chairman of the committee should be an independent, non-executive director. The chair
of the board should not chair the remuneration committee, but may be a member. One of the most
important responsibilities of the members of the committee is to remain up to date on appropriate levels,
structuring methods and types of remuneration in the environment in which the company operates. The
members of the committee are required to maintain a fine balance between recommending over-generous

Page 49 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

remuneration which is not in the interests of the shareholders, and a level of remuneration which fails to
attract the desired quality of individual to the board. 46 While it is usually within the committee’s mandate
to deliberate on the remuneration of the non-executive directors, it is up to the shareholders to make the
final decision on the appropriate level.

The Risk Committee Risk management is an often misunderstood discipline within a company. Too often
the responsibility for ensuring that the significant risks are adequately managed is not acknowledged, or is
inappropriately delegated to the audit committee. There are two reasons why the risk management function
should not report to the audit committee, but should be monitored by a separate risk committee. The first is
that, as a consequence of the composition of the committee, the function will often have financial focus
when risk management should correctly extend far beyond the finances of a company. Secondly, the audit
committee should act as an independent oversight body. Having to directly oversee the risk management
function would generally involve a large amount of detailed review of the processes and workings of the
company. This would necessarily have a detrimental effect on the objectivity of the audit committee’s
members when considering reports of the risk management function. The formation of a separate
committee recognizes the fact that the identification and management of risks impacting the business, and
the disclosure of these to the shareholders is vital to good governance. King III recommends that the
committee should have at least three members, and may comprise executive and non-executive directors,
and even non-directors. The chairperson of the committee should be a non-executive director. The
chairperson of the board should not chair this committee, but may be a member. The role of the committee
is to perform an oversight function. In doing so, it should consider the risk policy and plan, determine the
company’s risk appetite and risk tolerance, ensure that risk assessments are performed regularly, monitor
the whole risk management process, and receive assurance from internal and external assurance providers
regarding the effectiveness of the risk management process. In turn, management is responsible for the
design, implementation and effectiveness of risk management, as well as continual risk monitoring. It is of
vital importance that members of the risk committee have experience within the industry. This would allow
them to identify areas of risk and be aware of the appropriate methods of managing the company’s
exposure via internal (the control environment) or external (such as thorough insurance cover) means. To
operate effectively, it is recommended that the committee produces reports that are reviewed and signed by
the full board as acknowledgment that their responsibilities in this regard have been adequately discharged.
Duties of Directors 47 The Audit Committee King III emphasizes the vital role of an audit committee in
ensuring the integrity of financial controls and integrated reporting (both financial and sustainability
reporting), and identifying and managing financial risk. This sentiment is confirmed in the Act.

The appointment of an audit committee is regulated as part of the enhanced accountability and
transparency requirements set out in Chapter 3 of the Act. The Act requires all public companies and all
state owned companies to appoint an audit committee. Any other type of company may elect to appoint an
audit committee (although the provisions of the Act pertaining to the audit committee will only apply to
these companies to the extent provided for in their respective Memorandums of Incorporation.
Notwithstanding the requirements of the Act, King III proposes that all companies should have an audit
committee. The Act determines that where the appointment of an audit committee is required, the audit
committee must be appointed by the shareholders at every annual general meeting. This requirement
highlights the importance of the board’s nomination committee. As all audit committee members must be
directors (members of the board), it is important that the nominations committee identifies suitably skilled
and qualified individuals to nominate for appointment to the audit committee. The shareholders may
appoint anyone they deem fit and proper. Section 94 of the Act determines that the audit committee must
consist of at least three members. Each member of the committee must be a director of the company and
not: • be involved in the day to day management of the company for the past financial year; • be a
prescribed officer or full-time employee of the company for the past 3 financial years; • be a material
supplier or customer of the company such that a reasonable and informed third party would conclude in the
circumstances that the integrity, impartiality or objectivity of that director is compromised by that
relationship; and • be related to anybody who falls within the above criteria. The requirements of section 94
are prescriptive. It appears that if the company appoints an audit committee with persons other than those
prescribed, it would not be an audit committee as required by the Act. As a result, any functions undertaken

Page 50 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

by a non-compliant (that is an “incorrectly constituted”) audit committee will not have been performed by
the audit committee as required by the Act. 48 The audit committee can consist of as many members as the
company wishes to appoint, but each of them must meet the criteria and each of them must be a director of
the company. The audit committee would, of course, be entitled to utilise advisors and obtain assistance
from other persons inside and outside of the company. The audit committee may also invite knowledgeable
persons to attend its meetings. However, the formally appointed members of the audit committee entitled to
vote and fulfil the functions of the audit committee will have to meet the criteria (non-executive
independent directors) in accordance with the prescribed requirements. In this regard, cognisance should be
taken of the position of shareholders as potential members of the audit committee. The Act makes no
reference to shareholders, and the value judgement pertaining to independence relates only to suppliers and
customers. The mere fact that a person holds shares in the company (or meets any of the other factual tests
such as being related to a supplier) would not, on its own, preclude such a person from serving on the audit
committee.

It is proposed that, in line with the best practice principles set out in King III, the appointment of
shareholders to the audit committee be carefully considered. A judgment on the effect of the shareholding
or other relationship is required in order to establish the likely factual impact on the independence of a
particular person. The statutory duties of the audit committee include: • making submissions to the board
regarding the company’s accounting policies, financial controls, records and reporting • nominating an
auditor that the audit committee regards as independent

• determining the audit fee • ensuring that the appointment of the auditor complies with the Companies Act
and other relevant legislation • determining the nature and extent of non-audit services • pre-approving any
proposed agreement with the auditor for the provision of non-audit services • preparing a report to be
included in the annual financial statements describing how the committee carried out its functions, stating
whether the auditor was independent, and commenting on the financial statements, accounting practices
and internal financial control measures of the company • receiving and dealing with relevant complaints,
and • any other function designated by the board. Since the Act prescribes the appointment process,
composition and functions of the audit committee, it can now be described as a statutory committee. The
audit committee will bear sole responsibility for its decisions pertaining to the appointment, fees and terms
of engagement of the auditor. On all other matters it remains accountable to the board and, as such, it will
function as a board committee. An interesting development is the fact that the audit committee is now
obliged to also report to shareholders. The audit committee will report to shareholders by including in the
annual financial statements the audit committee’s report describing how the committee carried out its
functions, stating whether the auditor was independent, and commenting on the financial statements,
accounting practices and internal financial control measures of the company. Duties of Directors 49 In
addition to the legislative duties set out in the Act, King III proposes a number of additional functions,
including: • overseeing ◦ financial risks and reporting ◦ internal financial controls ◦ fraud and IT risks as
they relate to financial reporting • ensuring that a combined assurance model is applied to provide a
coordinated approach to all assurance activities (in terms of this model, assurance should be done on three
levels, i.e. management, internal assurance providers and external assurance providers) • overseeing
integrated reporting (both financial and sustainability reporting) • satisfying itself with regard to the
expertise, resources and experience of the finance function • overseeing the internal audit function •
playing a key role in the risk management process, and • overseeing the external audit process. In terms of
King III, the audit committee is responsible to ensure integrated reporting (integrating financial and
sustainability reporting). As a minimum, the audit committee should provide the following information in
the integrated report: • a summary of the role of the audit committee • a statement on whether or not the
audit committee has adopted a formal terms of reference that has been approved by the board and if so,
whether the committee satisfied its responsibilities for the year in compliance with its terms of reference •
the names and qualifications of all members of the audit committee during the period under review, and the
period for which they served on the committee

• the number of audit committee meetings held during the period under review and members’ attendance at
these meetings • a statement on whether or not the audit committee considered and recommended the

Page 51 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

internal audit charter for approval by the board • a description of the working relationship with the chief
audit executive • information about any other responsibilities assigned to the audit committee by the board
• a statement on whether the audit committee complied with its legal, regulatory or other responsibilities,
and • a statement on whether or not the audit committee recommended the integrated report to the board for
approval. Ethical leadership and social responsibility is highlighted in King III. These same sentiments are
echoed in the Act. Although it may be argued that the provisions of the Act are onerous and prescriptive, it
should be acknowledged that the intention is for the audit committee to play a key role in ensuring
accountability and transparency. As an independent, objective body, it should function as the company’s
independent watchdog to ensure the integrity of financial controls, combined assurance, effective financial
risk management, and meaningful integrated reporting to shareholders and stakeholders alike. 50 Social
and Ethics Committee During the public hearings on the Companies Bill conducted by the Portfolio
Committee on Trade and Industry in 2007, a proposal was made to include a requirement in the new Act to
oblige certain companies to appoint a member of a trade union as a board member (director). The Portfolio
Committee rejected this proposal, but presented a compromise. It was argued that there is a definite need in
the South African context to encourage large companies (especially those companies that have a significant
impact on the public interest) to not only act responsibly, but also to be seen doing so and to account from
the public interest perspective for their decision making processes and the results thereof. In essence, it was
argued that these companies should be obliged to develop a social conscience, and behave like responsible
corporate citizens. As such, the Companies Act now provides the Minister of Trade and Industry with the
authority to require certain companies to have a social and ethics committee, having regard to the impact
such companies have on the public interest. However, regardless of the requirement to appoint a social and
ethics committee, the directors and prescribed officers of all companies are bound to act in accordance with
an acceptable standard of conduct. In terms of this standard, directors and prescribed officers are obliged to
act in the best interest of the company. In this regard, the Act subscribes to the “enlightened shareholder
value approach” – which requires that directors are obliged to promote the success of the company in the
collective best interest of shareholders, which includes, as appropriate, the company’s need to take account
of the legitimate interests of other stakeholders including among others, the community, employees,
customers and suppliers. In terms of section 72 of the Companies Act (read with Companies Regulation
43), the following companies should have appointed a social and ethics committee within one year after the
Act became effective (i.e. by 30 April 2012): • every state owned company • every listed public company
and • any other company that has, in any two of the previous five years, had a public interest score of at
least 500 points. The social and ethics committee must comprise not less than three members. These
members may be directors or prescribed officers of the company, however, at least one must be a director
who is not involved in the day-to-day management of the company’s business, i.e. a non-executive
director, and must not have been so involved during the previous three financial years. In terms of
Companies Regulation 43 a social and ethics committee has to monitor the company’s activities with
regard to matters relating to: • social and economic development, including the company’s standing in
terms of the goals and purposes of: ◦ the 10 principles set out in the United Nations Global Company
Principles;

◦ the Organisation for Economic Co-operation and Development (OECD) recommendations regarding
corruption (refer to the OECD website for further details (www.oecd.org)); ◦ the Employment Equity Act,
No 55 of 1998; ◦ the Broad-Based Black Economic Empowerment Act, No 53 of 2003;

• good corporate citizenship, including the company’s: ◦ promotion of equality, prevention of unfair
discrimination, and measures to address corruption; ◦ contribution to development of the communities in
which its activities are predominantly conducted or within which its products or services are predominantly
marketed; and ◦ record of sponsorship, donations and charitable giving; Duties of Directors 51 • the
environment, health and public safety, including the impact of the company’s activities and of its products
or services;

• consumer relationships, including the company’s policies and record relating to advertising, public
relations and compliance with consumer protection laws; and

Page 52 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

• labour and employment matters. If one considers the requirements of King III with respect to ethical
leadership and ethical behaviour, it appears advisable to assign to the social and ethics committee some of
the responsibilities in this regard. The additional functions may include: • reviewing the adequacy and
effectiveness of the company’s engagement and interaction with its stakeholders, • considering substantive
national and international regulatory developments, overseeing their operationalisation as well as practice
in the fields of social and ethics management, • reviewing and approving the policy and strategy pertaining
to the company’s programme of corporate social investment, • determining clearly articulated ethical
standards (code of ethics), and ensuring that the company takes measures to achieve adherence to these in
all aspects of the business, thus facilitating a sustainable ethical corporate culture within the company, •
monitoring that management develop and implement programmes, guidelines and practices congruent with
the company’s social and ethics policies, • reviewing the material risks and liabilities relating to the
provisions of the code of ethics, and ensuring that such risks are managed as part of the company’s risk
management programmer, • reviewing the company’s performance in implementing the provisions of the
code of ethics and the assertions made in this regard, • obtaining independent external assurance of the
company’s ethics performance on an annual basis, and include in the Integrated Report an assurance
statement related to the ethics performance of the company, and • ensuring that management has allocated
adequate resources to comply with social and ethics policies, codes of best practice and regulatory
requirements. The social and ethics committee must report to shareholders at the Annual General Meeting.
At least one member of the committee must attend the Annual General Meeting of the company to report
back to shareholders on the activities of the company. Although there is no legislative requirement for the
committee to issue a written report, it is recommended that a written report be included in the company’s
Integrated Report, Director’s Report or its Governance report, whichever is the most appropriate in the
circumstances. 52 4.6 Relationships within the company The board’s relationship with the shareholders
The board of directors is ultimately accountable to the owners of the company. The shareholders therefore
need to evaluate the performance of the board to the extent that they are able to. By exercising their rights
to appoint and remove the directors of the company, the shareholders effectively control the board. In most
instances, however, the shareholders would not have access to the detailed decisions taken by the board,
and consequently are not in a position to evaluate the success or failure of each decision made by the
directors. The board should encourage shareholders to attend AGMs and other company meetings, at which
all the directors should be present. The chairmen of each of the board committees should be present at the
AGM. King III Report principle 8.2 par 18 Directors are not required by law to attend general meetings of
the shareholders. It is, however, general practice for the directors to attend the meetings to maintain a
channel of communication between the shareholders and the board. Where a company is required to have a
social and ethics committee, one member must attend the AGM to report to shareholders on the activities
of the committee. Usually the chairperson of the board also acts as the chairperson at a general meeting.
However, depending on the company’s Memorandum of Incorporation, the members may be able to
appoint their own chairperson. The board’s relationship with the company secretary The individual
directors, and the board collectively, should look to the company secretary for guidance on their
responsibilities and duties and how such responsibilities and duties should be properly discharged in the
best interests of the company. King III Report principle 2.21 par 101 The Act requires every public
company and state owned company to appoint a company secretary. The company secretary may be
appointed either by the board or by an ordinary resolution of the holders of the company’s securities. This
individual is required to have (in the opinion of the directors) sufficient relevant experience and knowledge
to perform this function adequately. In addition, the secretary should be permanently resident in South
Africa. The company secretary is accountable to the board. The company secretary should provide a central
source of guidance and advice to the board, and within the company, on matters of good governance and of
changes in legislation. King III Report principle 2.21 par 102 The Act allows that the role of the company
secretary be performed by a juristic person or partnership. Duties of Directors 53 The directors have the
power to remove the company secretary. The removed individual has the right to place a statement setting
out his or her objections to the removal in the annual financial statements of the company. Where there is a
casual vacancy of the company secretarial position, the directors have 60 business days to find a
replacement. The same restrictions on persons being appointed as directors apply to the appointment of the
company secretary, apart from the fact that the company secretary does not have to be a natural person.
The Act, in section 88 sets out the duties of the company secretary. The company secretary is responsible

Page 53 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

for: • providing the directors of the company collectively and individually with guidance as to their duties,
responsibilities and powers • making the directors aware of any law relevant to or affecting the company •
reporting to the company’s board any failure on the part of the company or a director to comply with the
Memorandum of Incorporation or rules of the company or the provisions of the Act; • ensuring that
minutes of all shareholders meetings, board meetings and the meetings of any committees of the directors,
or of the company’s audit committee, are properly recorded • certifying in the company’s annual financial
statements whether the company has filed required returns and notices in terms of the Act, and whether all
such returns and notices appear to be true, correct and up to date • ensuring that a copy of the company’s
annual financial statements is sent to every person who is entitled to it, and • ensuring that the company’s
annual return is filed in terms of section 33 of the Act. As can be seen from the above duties, the company
secretary plays a pivotal role in assisting and supporting the directors of the company. In the past, the role
of company secretary was often delegated to individuals who were meticulous in record keeping, but not
much more was usually required from the individual. The secretary, however, plays an important part in
educating and inducting new directors to the board. In recent years the company secretary has become an
important and powerful individual within the company. This role is enforced by the Act and King III. King
III suggests that a further important function of the secretary is to ensure that the directors receive all
relevant information in their board papers. Such information should be complete to allow for an informed
decision to be made, concise to ensure that the directors do not suffer from information overload and
timely to be of any use to the directors. The company secretary should have a direct channel of
communication to the chairman and should be available to provide comprehensive practical support and
guidance to directors, with particular emphasis on supporting the non-executive directors, the chairman of
the board and the chairman of committees and the audit committee. King III Report principle 2.21 par 103
54 The board’s relationship with management The directors have the power to appoint and remove the
management of the company, unless the manager is also a director of the company, in which case the
shareholders are responsible for his or her appointment or removal. In practice however, it is often the
board that takes decisions on executive director appointments, with shareholder approval being a “rubber-
stamping” exercise. It is management’s responsibility to provide the directors with all relevant information
that they require to make an informed decision as to the financial and operational affairs of the company. In
exceptional circumstances, managers who are not directors may attend directors’ meetings. This may be
the case where, for some reason, the directors require that a key member of management is required to
explain or clarify an issue for the benefit of the board. It should be noted that the Act determines that
prescribed officers are required to perform their functions and exercise their duties to the standard of
conduct as it applies to directors. Prescribed officers will be subject to the same liability provisions as it
applies to directors. Prescribed officers include every person, by whatever title the office is designated,
that: • exercises general executive control over and management of the whole, or a significant portion, of
the business and activities of the company; or • regularly participates to a material degree in the exercise of
general executive control over and management of the whole, or a significant portion, of the business and
activities of the company. A person will be a prescribed officer regardless of any title or office they are
designated. Where executive directors play a dual role, the individual should ensure that he or she is able to
detach him or herself from their role as a manager of the company when representing the interests of the
shareholders on the board of directors. Duties of Directors 55 The board’s relationship with the external
auditors The shareholders are responsible for the appointment of the auditor at the annual general meeting.
The audit committee has to nominate an independent auditor for appointment. However, nothing precludes
the appointment by the company at its annual general meeting of an auditor other than one nominated by
the audit committee. However, if such an auditor is appointed, the appointment is valid only if the audit
committee is satisfied that the proposed auditor is independent of the company. The board may remove the
auditor. A vacancy created in the appointment of the auditor, either through the removal of the auditor by
the board or by the resignation of the auditor, must be filled by the board within 40 business days. In such
an instance, the company’s audit committee must be satisfied that the auditor is independent of the
company. The audit committee is responsible, to the exclusion of the rest of the board, for the terms of
engagement, the fees and the appointment of the external auditor. The audit committee should be informed
when there is a disagreement on auditing or accounting matters between the management and the external
auditors. Where an accounting opinion has been requested from a person other than the external auditor of
the company, the reasoning for the accounting treatment adopted should be obtained and should be

Page 54 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

approved by the audit committee before the committee’s recommendation is made to the board. The audit
committee should also be satisfied with the credentials of the person providing such an opinion. King III
Report principle 3.4 par 32

The board’s relationship with internal audit The internal audit function offers the board an objective review
of the internal control systems within the company. The function should be staffed with appropriate
individuals who are well respected within the organisation. The internal audit function is accountable to the
board, and operates under the direct oversight of the audit committee. Internal audit should provide a
written assessment of the effectiveness of the system of internal controls and risk management to the board.
The assessment regarding internal financial controls should be reported specifically to the audit committee.
King III Report principle 7.3 par 16 56 The charter of the internal audit function should comply with the
guidance published by the Institute of Internal Auditors. King III indicates that the key responsibility of
internal audit is to the board, its committees, or both, in discharging its governance responsibilities and as a
minimum to perform the following functions: • evaluate the company’s governance processes including
ethics, especially the ‘tone at the top’ • perform an objective assessment of the effectiveness of risk
management and the internal control framework • systematically analyse and evaluate business processes
and associated controls, including IT, and • provide a source of information, as appropriate, regarding
instances of fraud, corruption, unethical behaviour and irregularities. Internal audit should pursue a risk
based approach to planning as opposed to a compliance approach that is limited to evaluation of adherence
to procedures. A risk-based internal audit approach has the benefit of assessing whether the process
intended to serve as a control is an appropriate risk measure. An internal audit function should be
independent from management who instituted the controls and should be an objective provider of
assurance with respect to the risks that may threaten the achievement of the company’s strategic goals, as
well as the opportunities that may contribute to the achievement of such goals. King III proposes that the
internal audit function should be positioned strategically within the company to ensure that its objectives
are achieved. The Chief Audit Executive should have a standing invitation to attend as an invitee any of the
executive committee or other committee meetings. The Chief Audit Executive should be apprised formally
of the company’s strategy and performance through meetings with the chairman, the CEO, or both. The
directors are required to take responsibility for the state of the internal controls at the company. In order to
discharge this responsibility, the directors have to take a certain amount of reliance from the work
performed by the internal audit department. It is vital that each member of the board understands the
significant risks impacting the company, and is therefore able to make an informed decision on the
appropriateness of the focus of the internal audit function, as well as the work performed to draw an
opinion on the functioning of the controls in place to mitigate the business, operational and financial risks.
Where the directors feel that there are significant risks that are not being sufficiently managed, they should
be able to look to the internal audit function to work with management in creating and maintaining a
comprehensive risk management plan to manage these risks. Duties of Directors 57 4.7 Communication
with stakeholders The Directors’ Report All communication to stakeholders should use clear and simple
language and should set out all relevant facts, both positive and negative. It should be structured to enable
its target market to understand the implications of the communication. Companies should use
communication channels that are accessible to its stakeholder. King III Report principle 8.5 par 33 The Act
requires that the annual financial statements of a company must include a directors’ report. As this report is
considered part of the financial statements of the company, it is subject to review by the auditor. The Act
requires the directors to discuss in the directors’ report any matter with respect to the state of affairs, the
business and profit or loss of the company, or of the group of companies, if the company is part of a group,
including any matter material for the shareholders to appreciate the company’s state of affairs. Ownership
of Integrated Reporting and the Integrated Report The actual effective ownership by the board of the
Integrated Reporting process, and the Integrated Report itself, is of significant practical importance as it is
one of the key determinants for a good Integrated Report. There is indeed an important difference between
the board actually setting and owning the agenda in this regard, or effectively acquiescing to an agenda
actually set, and populated by, executive management or those that report to them and which is submitted
to the board for approval, very often at a late stage of the process. Due to the relatively immature stage of
development of Integrated Reporting and Integrated Reports, and a consequentially still developing
framework, a greater degree of pro-activeness than is the case with the more traditional areas of
responsibility where more mature and generally accepted frameworks are in place, is indicated. This

Page 55 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

requires boards to equip themselves properly in this area, and/or to seek the appropriate assistance to
properly discharge their responsibilities. According to King III, the board should ensure the integrity of the
Integrated Report, and the audit committee should oversee the Integrated Report. Detailed requirements for
audit committees in King III, that directly and indirectly impact on the effective ownership of the
Integrated Report include: • The responsibility to consider whether an unbiased picture of the company’s
position, performance or sustainability is being presented;

• The responsibility for evaluating the significant judgements and reporting decisions affecting the
Integrated Report;

• The responsibility to understand how materiality for the Integrated Report has been determined; and • The
responsibility to ensure that forwardlooking information provides a proper appreciation of the key drivers
that will enable the achievement of such goals. 58 To properly discharge these responsibilities, as well as
those set out in the Companies Act and contained in Company Law, the board should pro-actively set and
own the Integrated Reporting agenda. In this regard, the view from executive management is obviously
important to take into account in setting the agenda and framework, but once these are finalised by the
board, the primary role of executive management and those that report to them is to operationalise and
report back to the board within the framework thus established. If, as is generally accepted, the Integrated
Report indeed reflects the collective mind of the board and the integrated thinking that is essential for
business in the modern world, a more reactive approach by the board would not effectively enable
capturing the essential qualities and pre-requisites for Integrated Reports. The purpose of an Integrated
Report is tell the unique story of the company and the manner in which it sustains and adds value in the
short, medium and long term. The board is clearly intended to be ultimately overall accountable for the
company and its journey, and has been placed in a unique position to practically discharge this
responsibility by a variety of formal and informal arrangements. In order to effectively discharge this
accountability responsibility, the board should therefore also embrace the proactive and effective
ownership of the Integrated Reporting process and the Integrated Report. The purpose of an Integrated
Report is tell the unique story of the company and the manner in which it sustains and adds value in the
short, medium and long term. Duties of Directors 59 5. The powers of the board of directors 5.1 How can a
director bind the company? A company is a juristic person, and unless the company’s Memorandum of
Incorporation provides otherwise it has all of the legal powers and capacity of an individual, except if a
juristic person is incapable of exercising any such power, or having any such capacity. A company may
limit, restrict or qualify the purposes, powers or activities of that company in its Memorandum of
Incorporation. In addition, the Memorandum of Incorporation may limit the authority of the directors to
perform an act on behalf of the company. It should be noted that the Act determines that where a company
or its directors acts in contravention of such a limitation, qualification or restriction the action is not
regarded as void for this reason only. Therefore, the Act provides that any person dealing with a company
in good faith may presume that the company has complied with all of the formal and procedural
requirements in terms of the Act, its Memorandum of Incorporation and any rules of the company, unless
the person knew or reasonably ought to have known of any failure by the company to comply with such
requirement. Where an action by the company or the directors is inconsistent with any limit, restriction or
qualification as set out in the company’s Memorandum of Incorporation, the shareholders, by special
resolution, may ratify such action. The business and affairs of a company are managed by or under the
direction of its board. The board of directors has the authority to exercise all of the powers and perform any
of the functions of the company, except to the extent that the Act or the company’s Memorandum of
Incorporation provides otherwise. It is important for directors to ensure that they are familiar with the
provisions of the Memorandum of Incorporation, especially those provisions that limit or restrict the
authority of the board and the directors. It is the board of directors generally that has the power to contract
on behalf of the company. Individual directors or members of management do not have such authority,
unless the authority is expressly delegated to them by the board. Often such delegation occurs through the
terms of reference of a position within the company, for example the position of managing director. The
board often reserves certain powers for itself, either because they are strategically important, or in
monetary terms they are significant. This concept is discussed below. 60 5.2 Reservation of powers As the
board of directors bears the ultimate responsibility for the actions and performance of the company, it is

Page 56 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

usually considered appropriate that certain decisions may only be taken by the board itself. In many
instances, monetary limits are set for each level of responsibility within the company. For example, when
authorising capital expenditure, limits for authorisation may be set for the divisional manager, the group
financial director and the managing director. Any projects exceeding the managing director’s limit would
then need to be authorised by the board itself. Further examples of when different levels of responsibility
may be designated for the various tiers of management (or may be reserved only for the board to decide
upon, depending on the materiality or strategic nature of the decision) are: • Decisions regarding the use of
auditors, consultants and other outside agencies

• Strategic marketing decisions affecting the company’s brands and stakeholder communications • Major
tenders to be awarded • Employee benefits awarded to senior and middle management

• Significant litigation issues It is therefore appropriate for the board to prescribe the types of decisions that
may be delegated, and those that need to be brought before the board. In some cases, it is appropriate for
the board to require that certain decisions should be “pre-approved” or alternatively subsequently ratified.
The board should set some level of quantitative materiality for itself to ensure that issues discussed are
significant in terms of the company as a whole. These limits may be more complex than a single threshold,
and may take into account additional factors such as whether the decision is for an unbudgeted expense. 5.3
Which powers are restricted? The Act reserves certain decisions for the shareholders and consequently the
directors require the approval of the shareholders prior to any such decisions being finalised. In some
instances the shareholders provide the directors with a general approval for such decisions, which is
usually valid until the next AGM, but some decisions need to be voted on individually. The Act requires
approval of the shareholders by special resolution in the following instances:

• amendment of the company’s Memorandum of Incorporation

• approval for the voluntary winding-up of the company

• approval of any proposed fundamental transaction (including the disposal of all or greater part of assets or
undertaking, amalgamation, merger or scheme of arrangement)

• ratification of any action by the company or the directors that is inconsistent with a limit, restriction or
qualification in the Memorandum of Incorporation

• approval of an issue of shares or securities to a director, future director, prescribed officer, or any person
related or inter-related to the company, or to a director or prescribed officer of the company

• approval of financial assistance for subscription of securities (special resolution of the shareholders
should be adopted within the preceding two years)

• approval of loans or other financial assistance to directors as well as related and interrelated companies
(special resolution of the shareholders should be adopted within the preceding two years), and

• approval of the policy or parameters for director remuneration(special resolution of the shareholders
should be adopted within the preceding two years). Duties of Directors 61 5.4 Effectiveness of company
actions and the role of the CIPC The Act specifically reduces the company’s reliance on the regulator, the
CIPC. Although companies still have to comply with an administrative process to inform the CIPC of its
decisions (for example the appointment of directors, changing of auditors, change of year end, amendment
of the Memorandum of Incorporation), none of these decisions are dependent on the approval of the CIPC.
In most instances, the company’s decision is effective immediately and it merely needs to inform the CIPC
of decisions or actions. However, in a few instances the effect of the decision is delayed until the necessary
notices have been ‘filed’ with the CIPC. Companies are often required to “file” a notice with the CIPC.
Section 1 provides that “file”, when used as a verb, means to deliver a document to the Commission in the
manner and form, if any, prescribed for that document. If one looks at the Regulations, (Regulation 7 and
Annexure 3), it clearly indicates that when a document is “delivered” to the CIPC, the date and time of

Page 57 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

delivery is determined as follows: Method of delivery Time of deemed delivery By entering the required
information in an electronic representation of that form on the internet website, if any, maintained by the
Commission, if the document is a prescribed form; or On the date and at the time recorded by the
Commission’s computer system, as verified by fax reply to the sender of the information. By transmitting
the document as a separate file attached to an electronic mail message addressed to the Commission; or On
the date and at the time recorded by the Commission’s computer system, unless, within 1 business day after
that date, the Commission advises the sender that the file is unreadable. By sending a computer disk
containing the document in electronic form, by registered post addressed to the Commission; or On the
date and at the time of delivery of the registered post to the Commission, as recorded by the post office,
unless, within 1 business day after that date, the Commission advises the sender that the disk is unreadable.
By handing the document, or a computer disk containing the document in electronic form, to the
Commission, or a responsible employee who is apparently in charge of the Commission’s office. On the
date and at the time noted in a receipt issued by the Commission unless, the document is on a computer
disk, and, within 1 business day after that date, the Commission advises the sender that the disk is
unreadable. 62 It should be clear from the table above that “file” and “deliver” is defined so as to simply
mean that a document must be submitted to the CIPC. There is no subsequent requirement for the CIPC to
check or approve the particular action. Of course, the company needs to ensure that the particular filing
complies with the provisions of the Act (relevant form completed correctly, required supporting documents
attached, and the prescribed fee paid). Where the company fails to comply with the provisions of the Act,
the company and its directors may be liable. In order to illustrate the above conclusion, the provisions of
the Act with respect to a few company actions will be investigated. To date, the CIPC still adheres to the
approach followed by its predecessor CIPRO, in that they regard it as a core function to check and approve
all documents filed with them, and then inform the company as to whether or not the particular company
action is approved or rejected. This approach is outdated, and not provided for in the new Act. On the
contrary, section 6(8) and (9) clearly provides for a ‘substance over form’ approach, and indicates that even
if there is a deviation from the design or content of a prescribed form, or in the manner of delivery, it does
not invalidate the action taken. Appointment of directors In terms of section 66(7): “A person becomes
entitled to serve as a director of a company when that person (a) has been appointed or elected in
accordance with this Part, or holds an office, title, designation or similar status entitling that person to be an
ex officio director of the company; and (b) has delivered to the company a written consent to serve as its
director.” In turn, section 70(6) requires every company to file a notice (CoR39) within 10 business days
after a person becomes or ceases to be a director of the company. Thus, in terms of the Act the appointment
of a director is effective as soon as he/she is appointed or elected, and has confirmed in writing that they
are prepared to accept the appointment to the board. The CIPC has no role to play in the appointment of
directors. The filing of the relevant notice does not affect the validity or the time of the appointment. The
question arises as to what would be the consequence if the CIPC fails to update its register of directors,
delays the updating of the register, or includes incorrect information in the register? Despite the
requirement to file a notice of the appointment or removal of a director to the CIPC, the company is
obliged to keep a record of its directors (section 24(3)(b) and 24(5)). This record may be accessed by any
person who holds or has a beneficial interest in any securities issued by a profit company, or who is a
member of a non-profit company. Any other person has a right to inspect or copy the register of directors
of a company, upon payment of a prescribed amount. As such one may conclude that the register held by
the company should be regarded as the ‘official’ register of its directors, and it is this register that should
be consulted where there is a discrepancy between the company’s register and CIPC’s register, or where
there is confusion or uncertainty as to the identity of the company’s directors. Duties of Directors 63
Change of the financial year end In order to determine the exact date and time on which the financial
yearend is changed, one needs to look at the provisions of the Act. Section 27(4) of the Companies Act
determines that: “The board of a company may change its financial year end at any time, by filing a notice
of that change, but— (a) it may not do so more than once during any financial year; (b) the newly
established financial year end must be later than the date on which the notice is filed; and (c) the date as
changed may not result in a financial year ending more than 15 months after the end of the preceding
financial year.” As pointed out above, ‘filing’ in terms of the new Act simply means that the notice had
been received by the CIPC (recorded in the CIPC’s computer system, or the date on which registered or
other mail is received by the CIPC). The CIPC is not required to approve or vet any decisions or actions of

Page 58 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

the company. The changing of the company’s financial year end will be complete once the relevant notice
(CoR25)is received by the CIPC. Change of auditor The Act requires certain companies to appoint an
auditor (public companies, state owned companies, and any other category of company that meets the
requirements set out in the Regulations). The Act provides for the appointment of the auditor by
shareholders at the annual general meeting, and where a vacancy exists, for the directors to fill the vacancy
within 40 business days. Section 85(3) requires the company to file a notice (CoR44) within 10 business
days after making the appointment. In addition, the company has to maintain a record of its auditors
(section 85(1)). Again, the Act does not link the filing of the relevant notice to the effectiveness of the
appointment. However, where an auditor resigns, the Act expressly states that the resignation of the auditor
is effective when the notice is filed (section 91(1)). This implies that a resignation letter submitted to the
company by the auditor is not sufficient to terminate the appointment of the auditor. In order to complete
the action, the company has to file the CoR44. The resignation will only be effective on the date and time
when the notice was received (and recorded) by the CIPC. 64 Amendment of the Memorandum of
Incorporation Where a company amends its Memorandum of Incorporation, it has to file a Notice of
Amendment (CoR15.2) within 10 days after such amendment (section 16(7) read with Regulation 15(3)).
Where a company amends its Memorandum of Incorporation by means of a special resolution of
shareholders (as provided for in section 16(1)(c)), the amendment will not be effective immediately. This
constitutes the one instance where the Act delays the effectiveness of a special resolution of shareholders.
Under other circumstances, a special resolution will take effect as soon as the required number of votes is
obtained. However, where a special resolution is obtained to amend the Memorandum of Incorporation, the
amendment to a company’s Memorandum of Incorporation takes effect on the later of the date on, and time
at, which the Notice of Amendment is filed, or the date, if any, set out in the Notice of Amendment
(section 16(9)).

The new approach to enforcement of the Act, as illustrated by the examples above is in line with the
Government’s objectives for reform of our corporate law. The high-level objectives of the new Companies
Act (as per a DTI presentation to Cabinet, dated 31 January 2007) were to: • Reduce regulatory burden for
small and medium-sized firms (mostly owner-managed, privately owned) • Enhance protection of investors
through enhanced governance and accountability (especially public interest companies), minority
protection and shareholder recourse • Create a more flexible environment, without comprising regulatory
standards and objectives, to enhance investment. The effect of the corporate law reform is clearly that the
regulator now regulates with a much lighter touch, and that companies and directors need to bear
responsibility for their actions. As a consequence, this new regulatory regime allows companies to take and
implement its own decisions much easier and quicker, without having to wait for approval or a go-ahead by
the CIPC. In most instances, mere ‘filing’ and ‘delivery’ will suffice to ensure compliance with the Act.
Where documents are rejected by the CIPC, it does not invalidate the particular company action – it merely
implies that the company needs to improve its administrative processes. Of course the new approach also
points to the need for directors to carefully consider their decisions and actions, and to take into account the
wider context and impact of such decisions. The Act clearly made it easier for companies to conduct
business and has upped the ante for directors. Duties of Directors 65 Remuneration of directors is one of
the most debated topics in the corporate governance arena, due to the tension between shareholders
demanding to understand their directors’ remuneration levels and methods and the directors’ desire for the
privacy of their financial affairs. 6.1 The director’s right to remuneration Both executive and non-executive
directors provide services to the company for which they deserve to be remunerated. Executive directors
generally enter into an employment contract in which their remuneration (which may take a variety of
forms as discussed below) is agreed upon. In many cases, non-executive directors have no formal contract
with the company but are paid a standard level of fees for attending board and committee meetings. “The
shareholders at a meeting duly convened for the purpose, can, if they think proper, remunerate directors for
their trouble or make presents to them for the services out of assets properly divisible amongst the
shareholders themselves.” Re George Newman & Co 1895 1 Ch 674 (CA) 686 The Memorandum of
Incorporation of a company generally provides for the remuneration of the directors, both for the services
they provide and any expenses that they incur on behalf of the company. Where the Memorandum of
Incorporation do not provide for this remuneration, the Act determines that the directors are entitled to
payments only if such remuneration is authorised by a special resolution approved by the shareholders

Page 59 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

within the preceding two years. 6. Remunerating directors 66 6.2 Remuneration policy King III suggests
that the remuneration committee be tasked with setting and administering remuneration policies in the
company’s long-term interests. The committee should consider and recommend remuneration policies for
all levels in the company, but should be especially concerned with the remuneration of senior executives,
including executive directors, and should also advise on the remuneration of non-executive directors. In
proposing the remuneration policy, the remuneration committee should ensure that the mix of fixed and
variable pay, in cash, shares and other elements, meets the company’s needs and strategic objectives.
Incentives should be based on targets that are stretching, verifiable and relevant.

The remuneration committee should satisfy itself as to the accuracy of recorded performance measures that
govern vesting of incentives. Risk-based monitoring of bonus pools and long-term incentives should be
exercised to ensure that remuneration policies do not encourage behaviour contrary to the company’s risk
management strategy. King III Report principle 2.25 par 151 King III proposes that the remuneration
policy of the company be approved by shareholders, and that the board should be responsible for
determining the remuneration of executive directors in accordance with the approved remuneration policy.
It is recommended that the remuneration committee set well defined criteria against which individual
directors should be assessed. Directors often have a number of directorships within the same group, some
executive and some non-executive. It is therefore not unusual for an individual to receive emoluments in
various forms and from various sources. 6.3 What type of remuneration is appropriate? Remunerating
directors can take a number of forms, and there is ongoing debate as to the most appropriate way of both
compensating the director for his or her time, and aligning their interests with the long term interests of the
company they serve. The various types of remuneration are discussed below. It is unusual for a
remuneration policy to employ only one type and often a variety of different remuneration methods are
negotiated. In setting remuneration policies, the remuneration committee should ensure that remuneration
levels reflect the contribution of senior executives and executive directors and should be rigorous in
selecting an appropriate comparative group when comparing remuneration levels. There should be a
balance between the fixed components and the bonus component of total remuneration of executives so as
to allow for a fully flexible bonus scheme. King III Report principle 2.25 par 157 Duties of Directors 67
Cash While being the most traditional and easyto-measure form of remuneration, cash can sometimes be
the most controversial. When remunerating a director with cash the only corporate governance issue is
generally the size of the cash payment to the director. King III recognises the fact that the quantum of a
director’s remuneration package should be appropriate in terms of the value that the director adds to the
company, bearing in mind the levels of remuneration that the market pays individuals of similar calibre in
similar industries.

Where the company employs bonuses as part of the remuneration package, the bonuses should be related to
specific performance indicators. Such performance indicators should be consistent with the long-term
objectives of the company and long term value for shareholders. Although long- and short-term goals may
be utilised in this regard, the company should guard against manipulation of results. The company’s own
equities Where a company is listed, and its shares are easily tradable, it is often appropriate to remunerate
the directors by issuing them with the company’s shares. The purpose of issuing a director with the
company’s own shares is that the shareholders’ and directors’ interests become more closely aligned. King
III proposes that the participation in share incentive schemes should be restricted to employees and
executive directors. Such schemes should have appropriate limits for individual participation, and such
limits should be disclosed. The chairperson and other non-executive directors should not receive share
options or other incentives aligned to the share price or the company’s performance, as this may impair
their objectivity and align their interest too closely with those of the executive directors. Often a “share
incentive trust” or other such vehicle is used to house the shares to be issued to directors and employees.
The purpose of such a scheme is to hold these shares in trust on behalf of the beneficiary. The share
incentive trust is not a trading entity. One of the problems with this remuneration strategy is that the
directors become overly interested in maintaining the short-term share price, sometimes at the expense of
the long-term interests of the company itself. In many cases the options issued have relatively short terms
to their maturity dates, thereby exacerbating the directors’ incentive to look for short term gains at the
expense of the long-term financial health of the company. It is therefore in the interests of the shareholders

Page 60 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

to ensure that the options have appropriate vesting periods. A possible solution to this issue is to lock the
directors into holding the shares for a reasonable period of time before they can dispose of them. King III
suggests that options or other conditional share awards should be granted for the year in question and in
expectation of service over a performance measurement period of not less than three years. This means that
vesting of rights should be dependent on performance. Accordingly, shares and options should not vest or
be exercisable within three years from the date of grant. In addition, options should not be exercisable more
than 10 years from the date of grant. For new schemes it is best practice to restrict the exercise period to
less than seven years. 68 To align shareholders’ and executives’ interests, vesting of share incentive awards
should be conditional on achieving performance conditions. Such performance measures and the reasons
for selecting them should be fully disclosed. They should be linked to factors enhancing shareholder value,
and require strong levels of overall corporate performance, measured against an appropriately defined peer
group or other relevant benchmark where yearly awards are made. If performance conditions for
sharebased incentive schemes are not met, they should not be re-tested in subsequent periods. Where
performance measures are based on a comparative group of companies, there should be disclosure of the
names of the companies chosen. King III Report principle 2.25 par 174 This may, however, prejudice the
individual director from a cash flow perspective, and therefore it is usually preferable to employ a
composite remuneration policy in which performance-related elements of remuneration constitute a
substantial portion of the total remuneration package of executives. Such an approach will ensure the
alignment of the directors’ interests with those of the shareholders.

The price at which shares are issued under a scheme should not be less than the mid-market price or
volume-weighted average price (or similar formula) immediately preceding the grant of the shares under
the scheme. A perceived benefit of issuing both equities and options is that the shares issued are seen as
“free” to the company, with no impact on the earnings of the company. Such a perception, however, is not
entirely accurate as any shares issued at less than market value dilute the existing shareholders’ interests in
the assets and earnings of the company. In addition, accounting standards require companies to reflect
share-based compensation as an expense in the income statement. The issue of shares or securities
convertible into shares, or a grant of options for the subscription of securities, or a grant of any other rights
exercisable for securities is regulated by section 41 of the Companies Act. In these instances, the Act
requires authorisation by a special resolution of the company.

However, no shareholder approval is required if the issue of shares, securities or rights is • under an
agreement underwriting the shares, securities or rights • in the exercise of a pre-emptive right to be offered
and to subscribe shares • in proportion to existing holdings, and on the same terms and conditions as have
been offered to all the shareholders of the company or to all the shareholders of the class or classes of
shares being issued

• pursuant to an employee share scheme, or

• pursuant to an offer to the public. Duties of Directors 69 Loans to directors The Act regulates financial
assistance to directors (and others) in terms of section 45. In terms of this section, unless the company’s
Memorandum of Incorporation provides otherwise, the board may authorise direct or indirect financial
assistance to the following parties:

• a director or prescribed officer of: ◦ the company ◦ a related or inter-related company, or

• a related or inter-related company or corporation

• a member of a related or inter-related company or corporation, or

• a person related to any of the above parties. The requirements for the provision of financial assistance in
terms of this section are:

• the provision of financial assistance must be pursuant to an employee share scheme, or • the shareholders
must have approved such financial assistance by special resolution (within the past 2 years), and

Page 61 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

• the company’s board of directors must be satisfied that after the transaction, the company will remain
solvent and liquid. An important development is that fact that the Act requires the board to inform all
shareholders and trade unions representing employees whenever it decides to provide financial assistance
in terms of this section. 6.4 Employment contracts, severance and retirement benefits King III recommends
that employment contracts (also for executive directors) should not commit companies to pay on
termination arising from the executive’s failure. Also, with respect to bonuses, there should be no
automatic entitlement to bonuses or share-based payments in the event of early termination. Companies
should not provide for balloon payments on termination. Contracts should not compensate executives for
severance because of change of control. Where a company pays compensation to a director for loss of
office, the Act requires the particulars of such compensation to be disclosed in the annual financial
statements. 6.5 Disclosure of directors’ remuneration Section 30 of the Act regulates the disclosure in the
company’s annual financial statements of the directors’ emoluments. Companies should provide full
disclosure of each individual executive and non-executive director’s remuneration, giving details as
required in the Act of base pay, bonuses, share-based payments, granting of options or rights, restraint
payments and all other benefits (including present values of existing future awards). Similar information
should be provided for the three most highly-paid employees who are not directors in the company. King
III Report principle 2.26 par 180 70

The Act requires the annual financial statements of a company to include particulars of the remuneration
and benefits received by each director. This should include: • the amount of any pensions paid by the
company to directors • any amount paid by the company to a pension scheme • the amount of any
compensation paid in respect of loss of office • the number and class of any securities issued to a director
and the consideration received by the company for those securities, and • details of service contracts of
current directors. For the purpose of disclosure, the Act defines remuneration’ so as to include: • fees paid
to directors for services rendered by them to or on behalf of the company • salary, bonuses and
performance-related payments • expense allowances • contributions paid under any pension scheme • the
value of any option or right given directly or indirectly to a director • financial assistance to a director for
the subscription of shares, and • with respect to any loan or other financial assistance by the company to a
director, or any loan made by a third party to a director (if the company is a guarantor of that loan), the
value of any interest deferred, waived or forgiven. It is encouraging that more and more listed companies
are compiling comprehensive remuneration reports which go far beyond the legislative and regulatory
disclosure requirements. These reports are increasingly reflecting not only the actual remuneration, but the
justification for the levels of remuneration for each individual director in relation to the performance of the
company for the period. This is in line with principles as set out in King III. Where consolidated financial
statements are provided, the information disclosed in terms of the Act relates only to the holding
company’s directors. In terms of best practice however, it would be recommended that the company should
also reflect the remuneration of directors of subsidiary companies.

This would remove any instances where directors structure their employment contracts through
subsidiaries to avoid making public disclosure of their remuneration. Section 30(5) of the Act requires that
the disclosure must show the amount of any remuneration or benefits paid to or receivable by persons in
respect of: a. services rendered as directors or prescribed officers of the company, or b. services rendered
while being directors or prescribed officers of the company i. as directors or prescribed officers of any
other company within the same group of companies, or ii. otherwise in connection with the carrying on of
the affairs of the company or any other company within the same group of companies. The effect of these
requirements is that all remuneration paid to or receivable by a director or prescribed officer must be
disclosed - thus, not only the remuneration paid to or received by the director or prescribed officer for
services to the company, but also all other remuneration received by the director or prescribed officer for
services rendered as a director or prescribed officer to any other company with the group. One person’s
remuneration may have to be disclosed by more than one company in the same group of companies. Duties
of Directors 71 Disclosure is required of all remuneration paid to or receivable by the directors and
prescribed officers of the company for services as a director or prescribed officer of any other company
within the same group of companies. In this regard the definition of a group should be considered. This
means disclosure will have to account for all other companies in the group, and not only the subsidiaries of

Page 62 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

the company in question, therefore the company will have to take into account all companies in the group –
thus upward, downward and sideways. It should be noted that the requirement applies only with respect to
all “companies” within the group. In terms of the Companies Act a “company” is a juristic person
incorporated in terms of the previous or current Companies Act, i.e. only South African companies.
Therefore, any amounts paid to directors and prescribed officers for services rendered to a trust or a foreign
subsidiary within the group would not be included in the disclosure, since a trust or a foreign subsidiary
(company) is not a “company” for purposes of the Companies Act. The Act requires all remuneration paid
to or receivable by directors and prescribed officers to be disclosed – it does not only account for
remuneration paid by the company, or another company in the group. Rather, it focuses on the amounts a
director or prescribed officer earns for services as a director or prescribed officer (to the company or any
other company within the group), or for carrying on the affairs of the company (or any other company
within the group). 72 7. Assessment, removal and resignation Effective and meaningful evaluation is only
possible once the board has determined its own role, functions, duties and performance criteria as well as
those for directors on the board and on board committees. King III Report principle 2.22 par 110 7.1
Assessment of performance The assessment of the board of directors (collectively and individually) is
becoming a critical success factor in any effective system of corporate governance. In capital markets such
as the United States, where the level of shareholder activism is far greater than in South Africa, it has
become common practice for directors, and in particular the CEO to be evaluated against the company’s
results. Where the results have not been consistent with the shareholders’ expectations, it is almost
inevitable that the individuals concerned are removed from his or her post. King III recommends that the
company carefully considers whether performance appraisals should be done in-house or by an
independent service provider.

Although an in-house process may yield proper results, an independent process may provide a more honest
assessment. The assessment is usually led by the chairperson (through the nominations committee) with the
assistance of the company secretary, or by an independent service provider. King III proposes that an
assessment of the board, the various board committees, and each individual director be done on an annual
basis. This would assist the nominations committee to evaluate the levels of skill and experience on the
board and committees with a view to identify training and skills development needs, as well as to evaluate
the composition of the board and the respective committees. These evaluations should be reviewed by the
nomination committee to be used in assessing whether the board requires additional skills, or that certain
members of the board are not performing according to expectations. Due to the costs and time of initiating
a new director, where possible it would be preferable for the existing directors to acquire any skills that the
board lacks, rather than to have to seek to expand the board. The outcome of the evaluation should be used
as the basis for an action plan to ensure that the board as a whole has the required skill and experience. The
annual evaluation of director performance should be used to determine whether or not a particular director
should be nominated for re-appointment. Re-appointment should not be an automatic process, but rather be
based on the director’s contribution to the board and relevant committees. The chairperson should ensure
that all directors are aware of the annual evaluation, and that they understand the criteria used for
evaluation. A director’s role and contribution should be measured against his or her specific duties. The
chairperson should also be evaluated, and he or she should not be present when his or her performance is
discussed by the board.

Where an independent service provider is not used, the Lead Independent Director should lead the
evaluation of the chairperson. Duties of Directors 73 7.2 Why a director may be removed Directors may be
removed for a number of reasons. In some cases, the results of the evaluations discussed above may reveal
the fact that an individual does not have the appropriate personality traits or other skills to continue to serve
the board. In other cases the director may become legally disqualified from his or her post as director, in
terms of the Companies Act or other legislation. In some cases a director is removed not due to his or her
performance (or lack thereof). When the nomination committee assesses the skills and balance of the
board, the conclusion may be that the board is overloaded with certain skill sets, and unfortunately
individual directors with redundant skills or experience may have to make way for others who possess the
attributes that the board requires. The Memorandum of Incorporation of a company may provide that
where a director becomes interested in a contract with the company, and he or she fails to declare that

Page 63 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

interest to the board, that the director’s office must be vacated. 7.3 Rotation of directors The Memorandum
of Incorporation of a company generally provides that a certain number or percentage of directors resign
every year and offer themselves for re-appointment.

The intention of such a provision is so that the shareholders will actively consider whether the director is
performing according to their expectations, and where he or she is not performing, they will not be re-
appointed. Generally, the Memorandum of Incorporation will require that all directors retire at the first
annual general meeting of the company, and that one third of the directors retire annually thereafter. It is
usually the directors that have served the longest that retire, but where the directors have served an equal
period of time, their retirement is selected by lot. The JSE Listings Requirements requires such provisions
to appear in the Memorandum of Incorporation. King III provides for similar rotation requirements for
non-executive directors. The Listings Requirements provide for the exception where a managing director
or other executive director has a contract with the company, he or she does not have to retire so long as
they are employed by the company. They would not be taken into account when determining the number of
directors that need to retire annually. Any appointment (even re-appointment) is only valid once the
director has provided written consent to serve as a director. 74 7.4 Vacancies on the board In terms of the
Act, a person ceases to be a director, and a vacancy arises on the board of a company when the person’s
term of office as director expires (in the case of a company whose Memorandum of Incorporation provides
for fixed terms). A vacancy may also arise where a director: • resigns or dies

• in the case of an ex offıcio director, ceases to hold the office, title, designation or similar status that
entitled the person to be an ex offıcio director • becomes incapacitated to the extent that the person is
unable to perform the functions of a director • is declared delinquent by a court, or placed on probation •
becomes ineligible or disqualified in terms of the provisions of the Act, or • is removed by resolution of the
shareholders or the board, or by an order of court. In the case of a vacancy, the directors may have the
power to appoint a director to the board. Such appointment will be temporary, until the director is elected
and appointed by the shareholders in terms of the provisions of the Act. Schedule 10 of the JSE Listings
Requirements requires that any appointment of a director needs to be confirmed at the next AGM of the
company. In general, the shareholders are not under any obligation to fill the vacancy left by a retiring
director, unless the number of directors has fallen below the minimum required by the Companies Act, the
company’s Memorandum of Incorporation or the JSE Listings Requirements where the company is listed.
The Listings Requirements require that the company’s Memorandum of Incorporation provide for, where
the minimum number of directors in terms of the Memorandum of Incorporation has been reached, a
retiring director to be deemed to have been re-appointed where the shareholders do not fill the vacancy at
the meeting even if they decided not to re-appoint that particular director. 7.5 The legal mechanics of
removal Section 71 of the Act determines that a director may be removed by an ordinary resolution
adopted at a shareholders meeting. In any such case, the director should be given a reasonable opportunity
to state his or her case. Also, where a company has a board comprising two or more directors, the board
may remove a director where it is resolved that he or she: • has become ineligible or disqualified in terms
of the Act • has become incapacitated to the extent that the director is unable to perform the functions of a
director, or • has neglected, or been derelict in the performance of his or her functions. The Act provides
the director concerned with the facility to air his or her grievances regarding the impending removal. The
director is allowed the opportunity to make representations to those attending the meeting. Any person who
feels that the representations may prejudice them may apply to the Court to stop the representations being
communicated to the members. Where the director does have a valid contract with the company,
compensation may have to be paid to the director, as removal would in most instances constitute a breach
of the contract (unless of course the removal is due to the fact that the director breached the contract in the
first place). Any such payments should be reflected in the schedule of directors’ remuneration in the annual
financial statements of the company. Duties of Directors 75 7.6 Formalities when a director resigns A
director generally resigns his or her office by providing the company with a notice of this intention (usually
in writing in terms of the Memorandum of Incorporation of the company). From a practical point of view it
would be preferable to have written record of the resignation. “(A) director, once having given in the
proper quarter notice of his resignation of his office, is not entitled to withdraw that notice, but, if it is
withdrawn, it must be by the consent of the company properly exercised by their managers, who are the

Page 64 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

directors of the company. But, of course, that is always dependent upon any contract between the parties,
and that has to be ascertained from the articles of association.”

Glossop v Glossop 1907 2 Ch 374 & 375 In addition, the relevant form needs to be sent to the CIPC. In
terms of the JSE Listings Requirements, listed companies must report to the JSE when a director resigns or
is removed from the board. The ease with which the director is able to resign will be a function of the
existence of any contract between the director and the company, and whether in addition the director acts
as an employee of the company. 76 8. Financial institutions Financial institutions are often viewed as
companies with a higher public profile than their counterparts in other industries. These companies
therefore often find themselves the focus of more regulation than companies operating in other sectors.
This fact results in the directors of these financial institutions being entrusted with added disclosure and
performance responsibilities. All financial institutions that are companies are regulated by the Companies
Act and the case law that interprets it. Consequently the discussions elsewhere in this guide are equally of
application to directors of these institutions. Most financial industries, however, have specific legislation
that increases the regulatory environment in that sector. The impact of this legislation on certain financial
sectors is discussed in this chapter. 8.1 Directors of banks The Companies Act determines that if there is an
inconsistency between any provision of the Companies Act and a provision of any other national
legislation, the provisions of both Acts apply concurrently. If, in case of a bank, it is impossible to apply or
comply with one of the inconsistent provisions without contravening the Banks Act, the provisions of the
Banks Act will prevail. Directors applying for registration of a bank The Registrar of Banks is not obliged
to approve the registration of a new bank unless certain criteria are met. The Banks Act requires that the
Registrar must be satisfied that the proposed composition of the board of directors is “appropriate having
regard to the nature and scale of the business it is intended to conduct.” In addition, in terms of section
25(4) of the Banks Act, the Registrar has the power to apply to the court to cancel or suspend the
registration of a bank where the directors or executive officers have committed any offence in terms of the
Banks Act. Fiduciary duties of a bank’s directors In addition to the codified standard of director conduct in
the Companies Act, the Banks Act has codified the specific fiduciary responsibilities of directors of a bank
in section 60. This section states that each director, chief executive officer and executive officer of a bank
owes a duty towards the bank to: • act bona fide for the benefit of the bank • avoid any conflict between the
bank’s interests and the interests of such a director, chief executive officer or executive officer, as the case
may be • possess and maintain the knowledge and skill that may reasonably be expected of a person
holding a similar appointment and carrying out similar functions as are carried out by the director, chief
executive officer or executive officer of that bank, and • exercise such care in the carrying out of his or her
functions in relation to that bank as may reasonably be expected of a diligent person who holds the same
appointment under similar circumstances, and who possesses both the knowledge and skill mentioned
above and any such additional knowledge and skill as the director, chief executive officer or executive
officer in question may have. “Each director, chief executive officer and executive officer of a bank owes a
fiduciary duty and a duty of care and skill to the bank of which such a person is a director, chief executive
officer or executive officer.” Banks Act 94 of 1990 Section 60 (1) Duties of Directors 77 The Regulations
to the Banks Act further expand on the responsibilities of the directors of a bank. Regulation 39 requires
that each director of a bank acquire at least a basic knowledge of the bank’s business, and those laws and
regulations that govern it.

The Regulation further states that while not every director on a bank’s board necessarily has to have an
intimate knowledge of the workings of a bank, each director’s knowledge thereof must be evaluated, based
on the size and complexity of the bank. In the case of a director of a controlling company of a bank, his or
her required level of knowledge becomes a function of the diverse nature of the banks controlled by that
company. Appointment of directors When appointing any new director, the Banks Act requires that the
particulars of the potential new director be forwarded to the Registrar of Banks at least 30 days before the
appointment is made. The Banks Act in section 60 (3) mandates the appointment of non-executive
directors by requiring that at most 49% (rounded down to the next lowest whole number) of the directors of
the bank may be employees of the bank or its subsidiaries. Where the bank is controlled by a controlling
company, only 49% of that company’s directors can be employees of that company or the bank. In
addition, at each directors meeting, the votes of the executive directors may only count at most 49% of the

Page 65 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

total votes on each resolution voted on by the board. Audit Committee It should be noted that section 94 of
the Companies Act (dealing with the audit committee) applies concurrently with section 64 of the Banks
Act. However, the provisions of the Companies Act pertaining to the appointment and requirements for
membership of the audit committee, do not apply to the audit committees of banks. The Banks Act in
section 64 requires that the board of directors establish an audit committee. Regulation 64 to the Banks Act
further requires that at least three directors be appointed to the committee. The majority of directors
appointed to the committee must, in terms of section 64 (3) be independent non-executive directors. The
chairperson of the board may not serve on the audit committee. Also, the chairperson of the committee may
not be an executive director. The Banks Act in section 64 (4) allows an exemption from creating an audit
committee in the circumstances where the bank is part of a group of companies and the holding company
has appointed an audit committee that has assumed responsibility for all the banks within the group.
Section 64 (2) of the Act provides guidance for the functioning of the committee. The section states that the
primary responsibilities assumed by the members of the committee are to: “assist the board of directors in
its evaluation of the adequacy and efficiency of the internal control systems, accounting practices,
information systems and auditing processes applied within that bank in the day-to-day management of its
business.” 78 The members of the committee are therefore required to have a reasonably detailed
understanding of the workings of the bank, including the design and operation of the internal controls, the
pertinent accounting issues, the information technology applied and the scope and function of the internal
audit department. “facilitate and promote communication, regarding the matters referred to in paragraph (a)
or any other related matter, between the board of directors and the executive officers of, the auditor
appointed under section 61 or 62 for, and the employee charged with the internal auditing of the
transactions of, the bank.” As in other companies, the audit committee is intended to bridge the gaps
between management and the external and internal audit functions at the bank.

Any unresolved differences that occur within the three parties must be brought before the committee for
resolution. “Introduce such measures as in the committee’s opinion may serve to enhance the credibility
and objectivity of financial statements and reports prepared with reference to the affairs of the bank.” It is
clear that the audit committee is entrusted with the responsibility for optimizing the disclosures made by
the bank, whether in the annual report or in the statutory returns made to the Registrar of Banks. In addition
to the functions set out in the Banks Act, the audit committee appointed in terms of section 64 of the Banks
Act will also be responsible for the functions of the audit committee as set out in section 94 of the
Companies Act. The legislative duties of the audit committee as provided for in section 94 of the
Companies Act include: • nominating an auditor that the audit committee regards as independent •
determining the audit fee • ensuring that the appointment of the auditor complies with the Companies Act
and other relevant legislation • determining the nature and extent of non-audit services • pre-approving any
proposed agreement with the auditor for the provision of non-audit services • preparing a report to be
included in the annual financial statements describing how the committee carried out its functions, stating
whether the auditor was independent, and commenting on the financial statements, accounting practices
and internal financial control measures of the company • receiving and dealing with relevant complaints •
making submissions to the board regarding the company’s accounting policies, financial controls, records
and reporting, and • any other function designated by the board. Responsibilities of a director The
Regulations to the Banks Act provide guidance for directors in carrying out their responsibilities.
Regulation 38 states that the board of directors is responsible for establishing an effective corporate
governance process within the bank. The scope of this process is intended to be consistent with the risks,
complexity and nature of the bank’s operations. Sub-committees may be established to assist the board in
carrying out these corporate governance processes. Duties of Directors 79 The regulation stresses that a
bank’s business revolves around the effective management of the different risks impacting the bank. These
risks are listed in the regulations as: • Solvency • Liquidity • Credit • Currency • Market or position risk •
Interest-rate • Counterparty • Technology • Operational • Compliance “In view of the fact that the primary
source of funds administered and utilised by a bank in the conduct of its business is deposits loaned to it by
the general public, it shall be the duty of every director and executive officer of a bank to ensure that risks
that are of necessity taken by such a bank in the conduct of its business are managed in a prudent manner.”
Regulation 39 (3) to the Banks Act 94 of 1990 The board has the responsibility for evaluating the
effectiveness of the corporate governance processes at the bank (or controlling company) on an ongoing

Page 66 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

basis. While this task may be operationally delegated to a sub-committee of the board, the responsibility
for corporate governance at the bank remains with the board. At least once a year the corporate governance
assessment is required to be formally documented. Directors’ duty to establish a compliance function As a
result of the numerous pieces of legislation impacting a bank, there is a considerable risk that the bank does
not comply with all laws and regulations impacting it. In order to manage this risk, Regulation 47 to the
Banks Act requires that the directors establish an internal compliance function. The function should be
headed by a compliance officer who has the necessary senior status within the organisation to effectively
address the bank’s regulatory risk. To be effective, the Regulation suggests that the compliance function
should: • be independent of internal audit; • have direct access to, and be supported by the CEO of the
bank; • report to the board and the audit committee on compliance with laws and regulations and submit a
copy of this to the Registrar; and • avoid any conflict of interest with other internal functions. The
compliance function performs an important monitoring role within the bank. The Regulation reinforces this
by requiring the following activities to be performed: • a culture of risk management and compliance
should be established • create a channel of communication to line management to monitor compliance with
laws and regulations • instil a compliance focus into line management • incorporate regulatory
requirements into operational manuals, and • recommend improvements to ensure greater compliance with
laws and regulations. 80 In terms of reporting, recommendations and findings reported by the compliance
officer should be documented together with the action plan for rectifying problems. In order that issues are
resolved promptly, the channel for the compliance officer to report problems should always be available
and open. The compliance function should be staffed by capable individuals that receive regular training to
enable them to remain technically up to date with regulatory issues at the bank. A comprehensive
compliance manual should be developed and kept up to date.

Reporting by directors The board of directors of a bank is required by Regulation 39 (4) to the Banks Act
to report to the Registrar of Banks on certain matters within 120 days of the end of the financial year of the
bank, including whether: • the bank’s internal controls provide reasonable assurance as to the integrity and
reliability of the financial statements and safeguard, verify and maintain accountability of the bank’s assets
• the internal controls are based on established policies and procedures and are implemented by trained,
skilled personnel , whose duties have been segregated appropriately • adherence to the implemented
internal controls is continuously monitored by the bank • all bank employees are required to maintain high
ethical standards, thereby ensuring that the [bank’s] business practices are conducted in a manner that is
above reproach, and • anything has come to the directors’ attention to indicate that any material
malfunction , as defined and documented by the board of directors, which definition has to be submitted to
the Registrar of Banks, in the functioning of the aforementioned controls, procedures and systems has
occurred during the period under review. In addition, the directors are required annually to report to the
Registrar of Banks on the going concern assumption at the bank. Where there is a potential going concern
problem, the details thereof should be disclosed. When making supervisory returns to the Registrar of
Banks, both the CEO and Chief Accounting Officer are required to certify that the returns are correct. 8.2
Directors of insurance companies Audit committee Both the Long Term Insurance Act (in section 23) and
the Short-Term Insurance Act (in section 22) require that the board of directors establish an audit
committee unless exempted by the relevant Registrar on the grounds of impracticality or inappropriateness.
The committee must have at least three members, and at least two of those must be directors of that
insurance company. The chairperson, as well as the majority of the members must be non-executive. The
Acts state that the objectives of the committee are to: • assist the board of directors in its evaluation of the
adequacy and efficiency of the internal control systems, accounting practices, information systems and
auditing and actuarial valuation processes applied by the insurer in the day-to-day management of its
business • facilitate and promote communication and liaison concerning the matters referred to above or a
related matter, between the board of directors and the managing executive, auditor, statutory actuary and
internal audit staff of the insurer • recommend the introduction of measures which the committee believes
may enhance the credibility and objectivity of financial statements and reports concerning the business of
the insurer, and • advise on a matter referred to the committee by the board of directors. The audit
committee of an insurance company therefore has a similar brief to that of a financial institution. Duties of
Directors 81 9. Contact information Dr Johan Erasmus Tel: 082 573 2536 jerasmus@deloitte.co.za Nina le
Riche Tel: 082 331 4840 nleriche@deloitte.co.za 82 Duties of Directors 83 Deloitte refers to one or more

Page 67 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

of Deloitte Touché Tohmatsu Limited (DTTL), a UK private company limited by guarantee, and its
network of member firms, each of which is a

Executive Director
The Executive Director is responsible for the successful leadership and management of the
organization according to the strategic direction set by the Board of Directors.

Primary Duties and Responsibilities*


 Solve Problems: Assess problem situations to identify causes, gather and process relevant
information, generate possible solutions, and make recommendations and/or resolve the problem.
 Think Strategically: Assesses options and actions based on trends and conditions in the
environment, and the vision and values of the organization.

 Develop and implement strategies aiming to promote the organization’s mission and “voice”

 Create complete business plans for the attainment of goals and objectives set by the board of directors

 Build an effective team of leaders by providing guidance and coaching to subordinate managers

 Ensure adherence of the organization’s daily activities and long-term plans to established policies and legal
guidelines

 Direct and oversee investments and fundraising efforts

 Forge and maintain relations of trust with shareholders, partners and external authorities

 Act as the public speaker and public relations representative of the company in ways that strengthen its
profile

 Review reports by subordinate managers to acquire understanding of the organization’s financial and non-
financial position

 Devise remedial actions for any identified issues and conduct crisis management when necessary

Requirements

 Proven experience as executive director or in other managerial position

 Experience in developing strategies and plans

 Ability to apply successful fundraising and networking techniques

 Strong understanding of corporate finance and measures of performance

 In depth knowledge of corporate governance principles and managerial best practices

 An analytical mind capable for “out-of-the-box” thinking to solve problems

 Outstanding organization and leadership abilities

 Excellent communication (oral and written) and public speaking skills

Page 68 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

 MSc/MA in business administration or relevant field

Experience
 5 or more years of progressive management experience in a voluntary sector organization

Working Conditions

 Executive Directors usually work in an office environment, but the mission of the organization may
sometimes take them to nonstandard workplaces.
 Executive Directors work a standard work week, but additionally will often work evening,
weekends, and overtime hours to accommodate activities such as Board meetings and representing
the organization at public events.

 Developing and implementing strategies aiming to promote the organization’s mission and “voice”

 Creating complete business plans for the attainment of goals and objectives set by the board of directors

 Building an effective team of leaders by providing guidance and coaching to subordinate managers

We are looking for an experienced Executive Director to oversee all operations, functions and activities.
You will be the face of the organization, responsible for giving the proper strategic direction and
implementing a high quality vision.

An excellent executive director is an influential manager with ability to lead and motivate. They have great
communication skills and take a holistic approach in managing the organization’s operations.

The goal is to manage and lead the organization towards the realization of its mission.

The Executive Director performs some or all of the following:

Leadership
 Participate with the Board of Directors in developing a vision and strategic plan to guide the
organization
 Identify, assess, and inform the Board of Directors of internal and external issues that affect the
organization
 Act as a professional advisor to the Board of Director on all aspects of the organization's activities
 Foster effective team work between the Board and the Executive Director and between the
Executive Director and staff
 In addition to the Chair of the Board, act as a spokesperson for the organization
 Conduct official correspondence on behalf of the Board as appropriate and jointly with the Board
when appropriate
 Represent the organization at community activities to enhance the organization's community profile

Operational planning and management
 Develop an operational plan which incorporates goals and objectives that work towards the
strategic direction of the organization
 Ensure that the operation of the organization meets the expectations of its clients, Board and
Funders
 Oversee the efficient and effective day-to-day operation of the organization

Page 69 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

 Draft policies for the approval of the Board and prepare procedures to implement the organizational
policies; review existing policies on an annual basis and recommend changes to the Board as
appropriate
 Ensure that personnel, client, donor and volunteer files are securely stored and
privacy/confidentiality is maintained
 Provide support to the Board by preparing meeting agenda and supporting materials

Program planning and management
 Oversee the planning, implementation and evaluation of the organization's programs and services
 Ensure that the programs and services offered by the organization contribute to the organization's
mission and reflect the priorities of the Board
 Monitor the day-to-day delivery of the programs and services of the organization to maintain or
improve quality
 Oversee the planning, implementation, execution and evaluation of special projects

Human resources planning and management
 Determine staffing requirements for organizational management and program delivery
 Oversee the implementation of the human resources policies, procedures and practices including the
development of job description for all staff
 Establish a positive, healthy and safe work environment in accordance with all appropriate
legislation and regulations
 Recruit, interview and select staff that have the right technical and personal abilities to help further
the organization's mission
 Ensure that all staff receives an orientation to the organization and that appropriate training is
provided
 Implement a performance management process for all staff which includes monitoring the
performance of staff on an on-going basis and conducting an annual performance review
 Coach and mentor staff as appropriate to improve performance
 Discipline staff when necessary using appropriate techniques; release staff when necessary using
appropriate and legally defensible procedures

Financial planning and management
 Work with staff and the Board (Finance Committee) to prepare a comprehensive budget
 Work with the Board to secure adequate funding for the operation of the organization
 Research funding sources, oversee the development of fund raising plans and write funding
proposals to increase the funds of the organization
 Participate in fundraising activities as appropriate
 Approve expenditures within the authority delegated by the Board
 Ensure that sound bookkeeping and accounting procedures are followed
 Administer the funds of the organization according to the approved budget and monitor the monthly
cash flow of the organization
 Provide the Board with comprehensive, regular reports on the revenues and expenditure of the
organization
 Ensure that the organization complies with all legislation covering taxation and withholding
payments

Community relations/advocacy
 Communicate with stakeholders to keep them informed of the work of the organization and to
identify changes in the community served by the organization
 Establish good working relationships and collaborative arrangements with community groups,
funders, politicians, and other organizations to help achieve the goals of the organization

Risk management

Page 70 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

 Identify and evaluate the risks to the organization's people (clients, staff, management, volunteers),
property, finances, goodwill, and image and implement measures to control risks
 Ensure that the Board of Directors and the organization carries appropriate and adequate insurance
coverage
 Ensure that the Board and staff understand the terms, conditions and limitations of the insurance
coverage

Qualifications
Education
 University degree in a related field
Professional designation

Knowledge, skills and abilities


 Knowledge of leadership and management principles as they relate to non-profit/ voluntary
organizations
 Knowledge of all federal and provincial legislation applicable to voluntary sector organizations
including: employment standards, human rights, occupational health and safety, charities, taxation,
CPP, EI, health coverage etc…
 Knowledge of current community challenges and opportunities relating to the mission of the
organization
 Knowledge of human resources management
 Knowledge of financial management
 Knowledge of project management

Proficiency in the use of computers for:
 Word processing
 Financial management
 E-mail
 Internet

Personal characteristics
The Executive Director should demonstrate competence in some or all of the following:

 Adaptability: Demonstrate a willingness to be flexible, versatile and/or tolerant in a changing work


environment while maintaining effectiveness and efficiency.
 Behave Ethically: Understand ethical behavior and business practices, and ensure that own behavior
and the behavior of others is consistent with these standards and aligns with the values of the
organization.
 Build Relationships: Establish and maintain positive working relationships with others, both
internally and externally, to achieve the goals of the organization.
 Communicate Effectively: Speak, listen and write in a clear, thorough and timely manner using
appropriate and effective communication tools and techniques.
 Creativity/Innovation: Develop new and unique ways to improve operations of the organization and
to create new opportunities.
 Focus on Client Needs: Anticipate, understand, and respond to the needs of internal and external
clients to meet or exceed their expectations within the organizational parameters.
 Foster Teamwork: Work cooperatively and effectively with others to set goals, resolve problems,
and make decisions that enhance organizational effectiveness.
 Lead: Positively influence others to achieve results that are in the best interest of the organization.
 Make Decisions: Assess situations to determine the importance, urgency and risks, and make clear
decisions which are timely and in the best interests of the organization.
 Organize: Set priorities, develop a work schedule, monitor progress towards goals, and track
details, data, information and activities

Page 71 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

 Plan: Determine strategies to move the organization forward, set goals, create and implement
actions plans, and evaluate the process and results.

The Duties & Responsibilities of a General Manager of Administration


Related Articles
 1What Are the Duties of a Manager in the Workplace?
 2Job Descripion & Responsibilities of a Business Manager
 3The Role of an Operations Manager
 4The Top Three Responsibilities of a Manager
As a small business owner, growth can come with increased responsibilities. If you reach a point
where your staff becomes too large to delegate, it helps to hire a general manager. A general manager
of administration, however, is even more advantageous. If your business focuses heavily on
administrative activities, hiring such an expert will ensure that your business runs well, along with a
reduced workload for you. Understanding the duties and responsibilities of a general manager of
administration will help you decide if such an employee is useful to you.
Manager Specializing in Administration
The term "general manager" is used throughout business. A general manager of administration is
simply a title indicating that she specializes in the administrative field or oversees administrative
tasks. Many of these people have a background working for larger companies, giving them skills
beyond that of a generic manager.
Communication and Coaching
The duties for a general manager of administration may vary slightly from one business to another,
but they can be grouped into general categories. For example, he must communicate the wishes of his
superiors -- specifically you -- to administrative employees, so that your business functions according
to your wishes. Decision-making is another important duty, because the manager has to analyze
situations and determine the best course of action. Anyone who has worked under a general manager -
- administrative or otherwise -- also understands that discipline and coaching are also essential duties.
This is to ensure that your business keeps competent employees, helps employees improve, or
eliminates those who do not meet the organization's standards. The manager also will understand
recruitment and selection, giving him the skills to judge potential candidates for hiring.
Directing and Delegating
If hired, a general manager of administration is responsible for overseeing all administrative functions
in your business. A major part involves leading and directing employees. She delegates administrative
tasks, such as accounting, paperwork and payroll, while giving you the freedom to deal with other
issues. In doing so, she ensures administrative efficiency, proper procedure, implementation of
policies and employee morale.
Degrees and Merits
In some cases, a general manager of administration can earn his position through seniority or merit,
should you notice an employee who stands out. Ideally, qualified candidates possess a bachelor's or
master's degree in business administration. Through his education, he will have taken courses in
finance, accounting, management or industrial relations. This knowledge and experience makes him a
valuable asset to any small business.

Job Responsibility

Job responsibility of HR department is very essential to fulfill buyer requirements in apparel industry. All
Assistant manager, deputy manager, manager and deputy general manager of HR department should be in
written format.

Page 72 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Job Responsibilities of HR deportment

Duties of Assist. Manager

1. Factory opening & Closing monitoring


2. Before closing the factory, all door, window, electric matter checking.
3. Monitoring security and answer.
4. Factory cleaning & housekeeping of the zone.
5. Transport movement, parking arrangement & fuel for transport.
6. Looking wastage goods.
7. Workers collection for recruitment and maintaining recruitment procedure.
8. Maintaining leave record.
9. Salary sheet checking before payment and sign.
10. Tiffin distribution monitoring
11. Maintaining workers discipline.
12. Uniform, ID card, uniform distribution & record keeping.
13. Preparing disciplinary action related paper.
14. Communication with BGMEA if needed.
15. Checking license date, fire extinguisher refilling date and ensuring all necessary documents are
available.
16. Arrangement of transport for sick worker if needed.
17. Arrangement of workers service book.

Duties of Deputy Manager

1. Daily recruitment
2. Maintaining workers personnel file.
3. Conducting workers orientation for newly joined worker.
4. Giving awareness training to workers.
5. Ensuring all workers are given uniform, ID card, shoe keeping box & these are maintaining properly.
6. Keeping leave form in the personal file & leave register maintaining.
7. Properly maintaining compliance related documents
8. Maintaining workers discipline during in & out in the factory
9. Monitoring housekeeping and cleaning in the production floor.
10. Arrangement of meeting if needed.
11. Salary sheet checking before payment and signed in the sheet.
12. Workers grievance handling
13. Workers increment.
14. Preparing several kinds of document i.e. appointment letter, promotion letter, increment sheet etc.

Responsibilities of Manager

1. Monitoring all the works of subordinate.


2. Overall safety & security matter of the zone
3. Canteen
4. All furniture and fixtures.
5. Overall discipline of the factory.
6. Monitoring recruitment, Salary fixation, issuing appointment letter, confirmation letter etc.
7. Preparing compliance document
8. Maintaining all necessary document, license, file etc.
9. Communication with BGMEA if needed.
10. Monitoring purchase, transport, tiffin, cleaning.
11. Grievance handling
12. Monitoring wastage goods.

Page 73 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

13. Arrangement of meeting if needed.


14. Preparing notice, office order, transfer order, promotion letter etc.
15. Preparing several kinds of bill including maternity benefit bill.

16. Monitoring salary / wages payment.

Duties and Responsibilities of DGM

1. Designing HR. Dept.


2. Developing several kinds of policy i.e. rules & regulation working hour, child labor, forced labor, non-
discrimination, harassment & abuse, security, environment etc.
3. Developing training modal for the workers and staff development.
4. Establish MIS system linking with HR / Personnel dept.
5. Manpower planning
6. Management restructuring
7. Preparing yearly budget
8. Dealing with disciplinary matters.
9. Dealing with labor / IR issues
10. Developing admin manual and implementation.
11. Developing internal control tools & procedures.
12. Recruiting national experts, head hunting, negotiating, accomplishing contracts.
13. Overall looking the safety & security matters of the company.
14. Training for workers and staff development.
15. Overall HR, Admin & compliance related matter handling.

Duties of Assist. Manager

1. Factory opening & Closing monitoring


2. before closing the factory , all door, window, electric matter checking.
3. Monitoring security and answer.
4. Factory cleaning & house keeping of the zone.
5. Transport movement, parking arrangement & fuel for transport.
6. Looking wastage goods.
7. Workers collection for recruitment and maintaining recruitment procedure.
8. Maintaining leave record.
9. Salary sheet checking before payment and sign.
10. Tiffin distribution monitoring
11. Maintaining workers discipline.
12. Uniform, ID card, uniform distribution & record keeping.
13. Preparing disciplinary action related paper.
14. Communication with BGMEA if needed.
15. Checking license date, fire extinguisher refilling date and ensuring all necessary documents are
available.
16. Arrangement of transport for sick worker if needed.
17. Arrangement of workers service book.

Duties of Deputy Manager

1. Daily recruitment
2. Maintaining workers personnel file.
3. Conducting workers orientation for newly joined worker.
4. Giving awareness training to workers.
5. Ensuring all workers are given uniform, ID card, shoe keeping box & these are maintaining properly.
6. Keeping leave form in the personal file & leave register maintaining.
7. Properly maintaining compliance related documents
8. Maintaining workers discipline during in & out in the factory
9. Monitoring house keeping and cleaning in the production floor.

Page 74 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

10. Arrangement of meeting if needed.


11. Salary sheet checking before payment and signed in the sheet.
12. Workers grievance handling

13. Workers increment.


14. Preparing several kinds of document i.e. appointment letter, promotion letter, increment sheet etc.

Responsibilities of Manager

1. Monitoring all the works of subordinate.


2. Overall safety & security matter of the zone
3. Canteen
4. All furniture and fixtures.
5. Overall discipline of the factory.
6. Monitoring recruitment, Salary fixation, issuing appointment letter, confirmation letter etc.
7. Preparing compliance document
8. Maintaining all necessary document, license, file etc.
9. Communication with BGMEA if needed.
10. Monitoring purchase, transport, tiffin, cleaning .
11. Grievance handling
12. Monitoring wastage goods.
13. Arrangement of meeting if needed.
14. Preparing notice, office order, transfer order, promotion letter etc.
15. Preparing several kinds of bill including maternity benefit bill.
16. Monitoring salary / wages payment.

Duties and Responsibilities of DGM

1. Designing HR. Dept.


2. Developing several kinds of policy i.e. rules & regulation working hour, child labor, forced labor, non
discrimination, harassment & abuse, security, environment etc.
3. Developing training modual for the workers and staff development.
4. Establish MIS system linking with HR / Personnel dept.
5. Manpower planning
6. Management restructuring
7. Preparing yearly budget
8. Dealing with disciplinary matters.
9. Dealing with labor / IR issues
10. Developing admin manual and implementation.
11. Developing internal control tools & procedures.
12. Recruiting national experts, head hunting, negotiating, accomplishing contracts.
13. Overall looking the safety & security matters of the company.
14. Training for workers and staff development.
15. Overall HR, Admin & compliance related matter handling.

General Management:
Skills and Talents Required

Most managers have both a specialized background and a set of managerial skills. You need expertise
in a specialized activity, such as marketing, operations, or manufacturing to get started. As you work
your way up from an entry-level position and demonstrate potential for learning and achievement, and
gain managerial skills, you can earn promotions into managerial ranks.

To become a manager you must demonstrate competence in three areas: technical, human relations,
and conceptual skills.

Page 75 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

 Technical -- knowledge and understanding of the mechanics of a specific job


 Human relations -- understanding of people and being able to effectively work with people
 Conceptual -- ability to think and see the relationships between various parts and the whole

Human relations skills are necessary for all levels of managers. As a manager, you spend the majority
of your time with people and getting work done through people. Thus it is not too surprising that a
core set of skills necessary to be successful center around interpersonal skills: oral and written
communication, constructive listening, honest and direct dialogue, and sensitive to what motivates
others.

As you move up the career ladder you will rely less on technical skills and more on conceptual skills.

Core Required Skills:

Comments on Skills and Traits Associated with Success

Are You a Leader or a Manager?.


While a person may be successful in a first-line supervision job, that success may not translate
to middle and top management. Top managers need excellent conceptual skills and the ability
to see the big picture. Leaders are visionaries and have the ability to inspire and infect the
entire organization with that vision. Look for passionate employees in firms with leaders.
Coach, Facilitator, Cheerleader.
Thought you wanted to be a manager so you could control, give orders, issue commands, and
basically boss people around. Well you are out of luck. Today's successful managers
empower employees, coach, facilitate, and are cheerleaders.
Cooperation and Negotiation.
As firms move from hierarchies to virtual organizations, strategic alliances, networks, joint
ventures, modular forms, coalitions, and outsourced relationships managers increasingly a
negotiations portfolio of skills to effectively manage these new forms. They need to be able to
manage webs of networks, relationships, and contacts to successfully maneuver this new
business terrain.
Can You Handle Complexity and Pressure?
Managers have increased pressures to produce high quality products and services in an
efficient manner within a fast product cycle (The big three: QUALITY, COST, AND
SPEED). After thousands of mergers, acquisitions, and divestitures managers find that their
plates are full.
Teams, Teams, and Teams.
Managers today may find themselves in a team or managing a team. Managers need to be able
to form and motivate teams. As firms strive to capture the entrepreneurial spirit the use of
autonomous teams is increasing. Teams are now responsible for moving a product from the
drawing board to the marketplace. Managers face new challenges finding ways to motivate,
measure performance, evaluate, and reward teams. Managers that learn this art will be able
harness remarkable creativity and spirit.

General Management:
Skills and Talents Required

Most managers have both a specialized background and a set of managerial skills. You need expertise
in a specialized activity, such as marketing, operations, or manufacturing to get started. As you work
your way up from an entry-level position and demonstrate potential for learning and achievement, and
gain managerial skills, you can earn promotions into managerial ranks.

Page 76 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

To become a manager you must demonstrate competence in three areas: technical, human relations,
and conceptual skills.

 Technical -- knowledge and understanding of the mechanics of a specific job


 Human relations -- understanding of people and being able to effectively work with people
 Conceptual -- ability to think and see the relationships between various parts and the whole

Human relations skills are necessary for all levels of managers. As a manager, you spend the majority
of your time with people and getting work done through people. Thus it is not too surprising that a
core set of skills necessary to be successful center around interpersonal skills: oral and written
communication, constructive listening, honest and direct dialogue, and sensitive to what motivates
others.

As you move up the career ladder you will rely less on technical skills and more on conceptual skills.

Core Required Skills:

Comments on Skills and Traits Associated with Success

Are You a Leader or a Manager?.


While a person may be successful in a first-line supervision job, that success may not translate
to middle and top management. Top managers need excellent conceptual skills and the ability
to see the big picture. Leaders are visionaries and have the ability to inspire and infect the
entire organization with that vision. Look for passionate employees in firms with leaders.
Coach, Facilitator, Cheerleader.
Thought you wanted to be a manager so you could control, give orders, issue commands, and
basically boss people around. Well you are out of luck. Today's successful managers
empower employees, coach, facilitate, and are cheerleaders.
Cooperation and Negotiation.
As firms move from hierarchies to virtual organizations, strategic alliances, networks, joint
ventures, modular forms, coalitions, and outsourced relationships managers increasingly a
negotiations portfolio of skills to effectively manage these new forms. They need to be able to
manage webs of networks, relationships, and contacts to successfully maneuver this new
business terrain.
Can You Handle Complexity and Pressure?
Managers have increased pressures to produce high quality products and services in an
efficient manner within a fast product cycle (The big three: QUALITY, COST, AND
SPEED). After thousands of mergers, acquisitions, and divestitures managers find that their
plates are full.
Teams, Teams, and Teams.
Managers today may find themselves in a team or managing a team. Managers need to be able
to form and motivate teams. As firms strive to capture the entrepreneurial spirit the use of
autonomous teams is increasing. Teams are now responsible for moving a product from the
drawing board to the marketplace. Managers face new challenges finding ways to motivate,
measure performance, evaluate, and reward teams. Managers that learn this art will be able
harness remarkable creativity and spirit.

Page 77 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Careers in Management Consulting

The essence of management consulting is to help a client obtain information and advice which leads
to real and lasting solution of a problem.

Managing consulting is a growing area with good jobs available in the 2009-2010 time period.

Consultants think, analyze, brainstorm, cajole and challenge good organizations to become even better
by adopting new ideas.

Great consultants are able to step into ambiguous, sometimes hostile situations and sense what
changes need to be made. Great consultants are driven by ideas and a strong desire to have a positive
impact on clients.

This web site is designed to help you become a great consultant by presenting key information needed
to enter consulting jobs including an overview of the industry, descriptions of firms and common
practice areas, comparisons to other jobs, interviewing practice and advice and a discussion of some
of the powerful ideas consultants are using to reshape organizations.

(GM) Job Description Sample Template

This free general manager job description sample template can help you attract an innovative and
experienced general manager to your company. We make the hiring process one step easier by giving
you a template to simply post to our site. Make sure to add requirements, benefits, and perks specific
to the role and your company.

General Manager Job Summary


The general manager supervises lower-level managers and may oversee a department or a local office
within the company. You will be responsible for interviewing, hiring, training, and disciplining lower-
level managers and employees, as well as coaching and mentoring lower-level managers. As general
manager, you will create incentives for employees and evaluate your department’s efficiency and
productivity. Additionally, as the general manager, you will collaborate with company executives to
develop strategic plans for business growth based on short-term and long-term goals. Then you will
communicate those goals to your team and guide them to success.

General Manager Duties and Responsibilities


 Communication: increase management’s effectiveness through active listening with both
superiors and subordinates as well as strong written communication skills
 Leadership: provide and seek out continuing education opportunities to foster a growth mindset
 Delegation: identify the best person (or people) for a particular task and act as a facilitator to
motivate and direct the work
 Time management: prioritize tasks to ensure that projects are completed by deadlines,
streamline processes to maximize productivity
 Negotiation and mediation: find opportunities to resolve conflicts efficiently and favorably
 Decision-making: weigh the costs and benefits of various options to determine the best course
of action to achieve company goals
 Problem-solving: analyze past and current performance and recommend objectives to improve
productivity and profitability

Page 78 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

General Manager Requirements and Qualifications


 Oversee day-to-day business operations

 Provide leadership at all levels of the organization


 Communicate and embody the company vision and values
 Build up the company by recruiting, interviewing, hiring, and mentoring new talent
 Define and implement policies and performance standards
 Evaluate employee performance and provide additional coaching and support as needed
 Assess departmental and company performance and devise plans for improvement
 Manage profit and loss statements and account for costs and revenues
 Allocate budget resources for supplies, equipment, marketing, and personnel
 Past managerial experience preferred
Similar Job Titles
 General Managers
 Management

Project Administrator
Use this Project Administrator job description template as part of your hiring process to attract qualified
candidates for your open positions.

Project Administrator responsibilities include:

 Scheduling regular meetings and recording decisions (e.g. assigned tasks and next steps)

 Breaking projects into doable tasks and setting timeframes

 Creating and updating workflows

We are looking for a Project Administrator to coordinate project activities, including simple tasks and
larger plans. You will manage schedules, arrange assignments and communicate progress to all team
members.

Project Administrator responsibilities include preparing action plans, analyzing risks and opportunities and
gathering necessary resources. For this role, you will work with a team of Project Managers so good
communication and collaboration skills are essential.

Ultimately, you will ensure our projects meet quality standards and are completed on time and within
budget.

Responsibilities

 Schedule regular meetings and record decisions (e.g. assigned tasks and next steps)

 Break projects into doable tasks and set timeframes and goals

Page 79 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

 Create and update workflows

 Conduct risk analyses

 Prepare and provide documentation to internal teams and key stakeholders

 Order resources, like equipment and software

 Retrieve necessary information (e.g. user/client requirements and relevant case studies)

 Track expenses and predict future costs

 Monitor project progress and address potential issues

 Coordinate quality controls to ensure deliverables meet requirements

 Measure and report on project performance

 Act as the point of contact for all participants

Requirements

 Work experience as a Project Administrator, Project Coordinator or similar role

 Hands-on experience with flowcharts, technical documentation and schedules

 Knowledge of project management software (e.g. Trello or Microsoft Project)

 Solid organization and time-management skills

 Team spirit

 BSc in Business Administration or related field

 PMP / PRINCE2 certification is a plus

Document Controller job description

Post this Document Controller job description template to online job boards and careers pages to hire
qualified candidates. Modify this template to meet your specific job duties and requirements.

Document Controller responsibilities include:

 Copying, scanning and storing documents

 Checking for accuracy and editing files, like contracts

 Reviewing and updating technical documents (e.g. manuals and workflows)

Job brief

Page 80 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

We are looking for a Document Controller to prepare, manage and file documents for our projects.

Document Controller responsibilities include typing contracts, archiving files and ensuring all team
members have access to necessary documentation. To be successful in this role, you should have previous
experience reviewing technical documents along with the ability to spot errors.

Ultimately, you’ll support our procedures maintaining transparent, up-to-date and easily traceable
documents.

Responsibilities

 Copy, scan and store documents

 Check for accuracy and edit files, like contracts

 Review and update technical documents (e.g. manuals and workflows)

 Distribute project-related copies to internal teams

 File documents in physical and digital records

 Create templates for future use

 Retrieve files as requested by employees and clients

 Manage the flow of documentation within the organization

 Maintain confidentiality around sensitive information and terms of agreement

 Prepare ad-hoc reports on projects as needed

Requirements

 Proven work experience as a Document Controller or similar role

 Familiarity with project management

 Basic knowledge of labor and corporate law

 Hands-on experience with MS Office and MS Excel

 Knowledge of Electronic Document Management Systems (EDMS)

 Proficient typing and editing skills

 Data organization skills

 Attention to detail

 BSc degree in Project Management or relevant field

Strategic Planner Responsibilities


Include:

Page 81 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

 Shaping the company’s overall business strategy


 Developing strategic plans and assessing company performance
 Conducting research and data analysis to inform business decisions

Job brief
We are looking for a Strategic Planner to define our company’s direction and develop plans to realize
our business objectives. You will help us maintain our competitive advantage and allocate resources
appropriately.

Strategic thinking is the most important skill in this role. You should also be analytical with strong
organizational abilities. If you also have experience in market research and business operations, we’d
like to meet you.

Ultimately, you will help our company adapt to changes and grow.

Responsibilities

 Understand and shape the company’s strategy and mission


 Develop plans to materialize strategy and analyze business proposals
 Research competition to identify threats and opportunities
 Assess the company’s operational and strategic performance
 Align processes, resources-planning and department goals with overall strategy
 Provide support and insight into significant organizational changes (e.g. shift in strategic focus,
mergers and acquisitions)
 Educate senior executives in making effective decisions
 Construct forecasts and analytical models
 Monitor and analyze industry trends and market changes

Requirements

 Proven experience as a Strategic Planner or Business Consultant


 Understanding of market research and data analysis
 Knowledge of business operations and procedures
 Demonstrable strategic thinking abilities
 Analytical mind with problem-solving aptitude
 Organizational and leadership skills
 Excellent communication skills
 BSc/BA in Business Administration, Marketing, Finance or a related field; MSc/MA/MBA is a
plus

Management
Strategic Management - Meaning and Important
Concepts

Page 82 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Strategic Management - An Introduction

Strategic Management is all about identification and description of the strategies that managers can carry so as
to achieve better performance and a competitive advantage for their organization. An organization is said to
have competitive advantage if its profitability is higher than the average profitability for all companies in its
industry.

Strategic management can also be defined as a bundle of decisions and acts which a manager undertakes and
which decides the result of the firm’s performance. The manager must have a thorough knowledge and analysis
of the general and competitive organizational environment so as to take right decisions. They should conduct a
SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats), i.e., they should make best possible
utilization of strengths, minimize the organizational weaknesses, make use of arising opportunities from the
business environment and shouldn’t ignore the threats.

Strategic management is nothing but planning for both predictable as well as unfeasible contingencies. It is
applicable to both small as well as large organizations as even the smallest organization face competition and,
by formulating and implementing appropriate strategies, they can attain sustainable competitive advantage.

It is a way in which strategists set the objectives and proceed about attaining them. It deals with making and
implementing decisions about future direction of an organization. It helps us to identify the direction in which
an organization is moving.

Strategic management is a continuous process that evaluates and controls the business and the industries in
which an organization is involved; evaluates its competitors and sets goals and strategies to meet all existing and
potential competitors; and then reevaluates strategies on a regular basis to determine how it has been
implemented and whether it was successful or does it needs replacement.

Strategic Management gives a broader perspective to the employees of an organization and they can
better understand how their job fits into the entire organizational plan and how it is co-related to other
organizational members. It is nothing but the art of managing employees in a manner which maximizes the
ability of achieving business objectives. The employees become more trustworthy, more committed and more
satisfied as they can co-relate themselves very well with each organizational task. They can understand the
reaction of environmental changes on the organization and the probable response of the organization with the
help of strategic management. Thus the employees can judge the impact of such changes on their own job and
can effectively face the changes. The managers and employees must do appropriate things in appropriate
manner. They need to be both effective as well as efficient.

One of the major role of strategic management is to incorporate various functional areas of the organization
completely, as well as, to ensure these functional areas harmonize and get together well. Another role of
strategic management is to keep a continuous eye on the goals and objectives of the organization.

Following are the important concepts of Strategic Management:

Strategy - Definition and Features


The word “strategy” is derived from the Greek word “strategies”; stratus (meaning army) and “ago” (meaning
leading/moving).

Strategy is an action that managers take to attain one or more of the organization’s goals. Strategy can also be
defined as “A general direction set for the company and its various components to achieve a desired state in the
future. Strategy results from the detailed strategic planning process”.

A strategy is all about integrating organizational activities and utilizing and allocating the scarce resources
within the organizational environment so as to meet the present objectives. While planning a strategy it is
essential to consider that decisions are not taken in a vaccum and that any act taken by a firm is likely to be met
by a reaction from those affected, competitors, customers, employees or suppliers.

Page 83 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Strategy can also be defined as knowledge of the goals, the uncertainty of events and the need to take into
consideration the likely or actual behavior of others. Strategy is the blueprint of decisions in an organization that
shows its objectives and goals, reduces the key policies, and plans for achieving these goals, and defines the

business the company is to carry on, the type of economic and human organization it wants to be, and the
contribution it plans to make to its shareholders, customers and society at large.

Features of Strategy

1. Strategy is Significant because it is not possible to foresee the future. Without a perfect foresight, the
firms must be ready to deal with the uncertain events which constitute the business environment.
2. Strategy deals with long term developments rather than routine operations, i.e. it deals with probability
of innovations or new products, new methods of productions, or new markets to be developed in future.
3. Strategy is created to take into account the probable behavior of customers and competitors. Strategies
dealing with employees will predict the employee behavior.

Strategy is a well defined roadmap of an organization. It defines the overall mission, vision and direction of
an organization. The objective of a strategy is to maximize an organization’s strengths and to minimize the
strengths of the competitors.

Components of a Strategy Statement


The strategy statement of a firm sets the firm’s long-term strategic direction and broad policy directions. It gives
the firm a clear sense of direction and a blueprint for the firm’s activities for the upcoming years. The main
constituents of a strategic statement are as follows:

1. Strategic Intent

An organization’s strategic intent is the purpose that it exists and why it will continue to exist,
providing it maintains a competitive advantage. Strategic intent gives a picture about what an
organization must get into immediately in order to achieve the company’s vision. It motivates the
people. It clarifies the vision of the vision of the company.

Strategic intent helps management to emphasize and concentrate on the priorities. Strategic intent is,
nothing but, the influencing of an organization’s resource potential and core competencies to achieve
what at first may seem to be unachievable goals in the competitive environment. A well expressed
strategic intent should guide/steer the development of strategic intent or the setting of goals and
objectives that require that all of organization’s competencies be controlled to maximum value.

Strategic intent includes directing organization’s attention on the need of winning; inspiring people by
telling them that the targets are valuable; encouraging individual and team participation as well as
contribution; and utilizing intent to direct allocation of resources.

Strategic intent differs from strategic fit in a way that while strategic fit deals with harmonizing
available resources and potentials to the external environment, strategic intent emphasizes on building
new resources and potentials so as to create and exploit future opportunities.

2. Mission Statement

Mission statement is the statement of the role by which an organization intends to serve it’s
stakeholders. It describes why an organization is operating and thus provides a framework within
which strategies are formulated. It describes what the organization does (i.e., present capabilities), who
all it serves (i.e., stakeholders) and what makes an organization unique (i.e., reason for existence).

A mission statement differentiates an organization from others by explaining its broad scope of
activities, its products, and technologies it uses to achieve its goals and objectives. It talks about an

Page 84 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

organization’s present (i.e., “about where we are”). For instance, Microsoft’s mission is to help people
and businesses throughout the world to realize their full potential. Wal-Mart’s mission is “To give
ordinary folk the chance to buy the same thing as rich people.” Mission statements always exist at top

level of an organization, but may also be made for various organizational levels. Chief executive plays
a significant role in formulation of mission statement. Once the mission statement is formulated, it
serves the organization in long run, but it may become ambiguous with organizational growth and
innovations.

In today’s dynamic and competitive environment, mission may need to be redefined. However, care
must be taken that the redefined mission statement should have original fundamentals/components.
Mission statement has three main components-a statement of mission or vision of the company, a
statement of the core values that shape the acts and behaviour of the employees, and a statement of the
goals and objectives.

Features of a Mission

a. Mission must be feasible and attainable. It should be possible to achieve it.


b. Mission should be clear enough so that any action can be taken.
c. It should be inspiring for the management, staff and society at large.
d. It should be precise enough, i.e., it should be neither too broad nor too narrow.
e. It should be unique and distinctive to leave an impact in everyone’s mind.
f. It should be analytical,i.e., it should analyze the key components of the strategy.
g. It should be credible, i.e., all stakeholders should be able to believe it.
3. Vision

A vision statement identifies where the organization wants or intends to be in future or where it should
be to best meet the needs of the stakeholders. It describes dreams and aspirations for future. For
instance, Microsoft’s vision is “to empower people through great software, any time, any place, or any
device.” Wal-Mart’s vision is to become worldwide leader in retailing.

A vision is the potential to view things ahead of themselves. It answers the question “where we want to
be”. It gives us a reminder about what we attempt to develop. A vision statement is for the organization
and it’s members, unlike the mission statement which is for the customers/clients. It contributes in
effective decision making as well as effective business planning. It incorporates a shared understanding
about the nature and aim of the organization and utilizes this understanding to direct and guide the
organization towards a better purpose. It describes that on achieving the mission, how the
organizational future would appear to be.

An effective vision statement must have following features-

a. It must be unambiguous.
b. It must be clear.
c. It must harmonize with organization’s culture and values.
d. The dreams and aspirations must be rational/realistic.
e. Vision statements should be shorter so that they are easier to memorize.

In order to realize the vision, it must be deeply instilled in the organization, being owned and shared by
everyone involved in the organization.

4. Goals and Objectives

A goal is a desired future state or objective that an organization tries to achieve. Goals specify in
particular what must be done if an organization is to attain mission or vision. Goals make mission more
prominent and concrete. They co-ordinate and integrate various functional and departmental areas in an
organization. Well made goals have following features-

Page 85 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

a. These are precise and measurable.


b. These look after critical and significant issues.
c. These are realistic and challenging.

d. These must be achieved within a specific time frame.


e. These include both financial as well as non-financial components.

Objectives are defined as goals that organization wants to achieve over a period of time. These are the
foundation of planning. Policies are developed in an organization so as to achieve these objectives.
Formulation of objectives is the task of top level management. Effective objectives have following
features-

f. These are not single for an organization, but multiple.


g. Objectives should be both short-term as well as long-term.
h. Objectives must respond and react to changes in environment, i.e., they must be flexible.
i. These must be feasible, realistic and operational.

Strategic Management Process - Meaning, Steps and Components

The strategic management process means defining the organization’s strategy. It is also defined as the process
by which managers make a choice of a set of strategies for the organization that will enable it to achieve better
performance.

Strategic management is a continuous process that appraises the business and industries in which the
organization is involved; appraises it’s competitors; and fixes goals to meet all the present and future
competitor’s and then reassesses each strategy.

Strategic management process has following four steps:

1. Environmental Scanning- Environmental scanning refers to a process of collecting, scrutinizing and


providing information for strategic purposes. It helps in analyzing the internal and external factors
influencing an organization. After executing the environmental analysis process, management should
evaluate it on a continuous basis and strive to improve it.
2. Strategy Formulation- Strategy formulation is the process of deciding best course of action for
accomplishing organizational objectives and hence achieving organizational purpose. After conducting
environment scanning, managers formulate corporate, business and functional strategies.
3. Strategy Implementation- Strategy implementation implies making the strategy work as intended or
putting the organization’s chosen strategy into action. Strategy implementation includes designing the
organization’s structure, distributing resources, developing decision making process, and managing
human resources.
4. Strategy Evaluation- Strategy evaluation is the final step of strategy management process. The key
strategy evaluation activities are: appraising internal and external factors that are the root of present
strategies, measuring performance, and taking remedial / corrective actions. Evaluation makes sure that
the organizational strategy as well as it’s implementation meets the organizational objectives.

These components are steps that are carried, in chronological order, when creating a new strategic management
plan. Present businesses that have already created a strategic management plan will revert to these steps as per
the situation’s requirement, so as to make essential changes.

Page 86 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Benefits of Strategic Management


There are many benefits of strategic management and they include identification, prioritization, and
exploration of opportunities. For instance, newer products, newer markets, and newer forays into business
lines are only possible if firms indulge in strategic planning. Next, strategic management allows firms to take an
objective view of the activities being done by it and do a cost benefit analysis as to whether the firm is
profitable.

Just to differentiate, by this, we do not mean the financial benefits alone (which would be discussed below) but
also the assessment of profitability that has to do with evaluating whether the business is strategically aligned to
its goals and priorities.

The key point to be noted here is that strategic management allows a firm to orient itself to its market and
consumers and ensure that it is actualizing the right strategy.

Financial Benefits

It has been shown in many studies that firms that engage in strategic management are more profitable and
successful than those that do not have the benefit of strategic planning and strategic management.

When firms engage in forward looking planning and careful evaluation of their priorities, they have control over
the future, which is necessary in the fast changing business landscape of the 21st century.

It has been estimated that more than 100,000 businesses fail in the US every year and most of these failures are
to do with a lack of strategic focus and strategic direction. Further, high performing firms tend to make more
informed decisions because they have considered both the short term and long-term consequences and hence,
have oriented their strategies accordingly. In contrast, firms that do not engage themselves in meaningful
strategic planning are often bogged down by internal problems and lack of focus that leads to failure.

Non-Financial Benefits

The section above discussed some of the tangible benefits of strategic management. Apart from these benefits,
firms that engage in strategic management are more aware of the external threats, an improved understanding of
competitor strengths and weaknesses and increased employee productivity. They also have lesser resistance to
change and a clear understanding of the link between performance and rewards.

The key aspect of strategic management is that the problem solving and problem preventing capabilities of the
firms are enhanced through strategic management. Strategic management is essential as it helps firms to
rationalize change and actualize change and communicate the need to change better to its employees. Finally,
strategic management helps in bringing order and discipline to the activities of the firm in its both internal
processes and external activities.

Closing Thoughts

In recent years, virtually all firms have realized the importance of strategic management. However, the key
difference between those who succeed and those who fail is that the way in which strategic management is done
and strategic planning is carried out makes the difference between success and failure. Of course, there are still
firms that do not engage in strategic planning or where the planners do not receive the support from
management. These firms ought to realize the benefits of strategic management and ensure their longer-term
viability and success in the marketplace.

Business Policy - Definition and Features


Definition of Business Policy

Page 87 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Business Policy defines the scope or spheres within which decisions can be taken by the subordinates in an
organization. It permits the lower level management to deal with the problems and issues without consulting top
level management every time for decisions.

Business policies are the guidelines developed by an organization to govern its actions. They define the limits
within which decisions must be made. Business policy also deals with acquisition of resources with which
organizational goals can be achieved. Business policy is the study of the roles and responsibilities of top level
management, the significant issues affecting organizational success and the decisions affecting organization in
long-run.

Features of Business Policy

An effective business policy must have following features-

1. Specific- Policy should be specific/definite. If it is uncertain, then the implementation will become
difficult.
2. Clear- Policy must be unambiguous. It should avoid use of jargons and connotations. There should be
no misunderstandings in following the policy.
3. Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed by the
subordinates.
4. Appropriate- Policy should be appropriate to the present organizational goal.
5. Simple- A policy should be simple and easily understood by all in the organization.
6. Inclusive/Comprehensive- In order to have a wide scope, a policy must be comprehensive.
7. Flexible- Policy should be flexible in operation/application. This does not imply that a policy should be
altered always, but it should be wide in scope so as to ensure that the line managers use them in
repetitive/routine scenarios.
8. Stable- Policy should be stable else it will lead to indecisiveness and uncertainty in minds of those who
look into it for guidance.

Difference between Policy and Strategy

The term “policy” should not be considered as synonymous to the term “strategy”. The difference between
policy and strategy can be summarized as follows-

1. Policy is a blueprint of the organizational activities which are repetitive/routine in nature. While
strategy is concerned with those organizational decisions which have not been dealt/faced before in
same form.
2. Policy formulation is responsibility of top level management. While strategy formulation is basically
done by middle level management.
3. Policy deals with routine/daily activities essential for effective and efficient running of an organization.
While strategy deals with strategic decisions.
4. Policy is concerned with both thought and actions. While strategy is concerned mostly with action.
5. A policy is what is, or what is not done. While a strategy is the methodology used to achieve a target as
prescribed by a policy.

Corporate Governance - Definition, Scope and Benefits


What is Corporate Governance?

Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are
directed and managed. It means carrying the business as per the stakeholders’ desires. It is actually conducted by
the board of Directors and the concerned committees for the company’s stakeholder’s benefit. It is all about
balancing individual and societal goals, as well as, economic and social goals.

Corporate Governance is the interaction between various participants (shareholders, board of directors, and
company’s management) in shaping corporation’s performance and the way it is proceeding towards. The
relationship between the owners and the managers in an organization must be healthy and there should be no

Page 88 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

conflict between the two. The owners must see that individual’s actual performance is according to the standard
performance. These dimensions of corporate governance should not be overlooked.

Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a fair
return on their investment. Corporate Governance clearly distinguishes between the owners and the managers.
The managers are the deciding authority. In modern corporations, the functions/ tasks of owners and managers
should be clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate
authority and complete responsibility to the Board of Directors. In today’s market- oriented economy, the need
for corporate governance arises. Also, efficiency as well as globalization are significant factors urging corporate
governance. Corporate Governance is essential to develop added value to the stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced economic development. This
also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It
ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment.

Benefits of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth.


2. Strong corporate governance maintains investors’ confidence, as a result of which, company
can raise capital efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to achieve objectives that
are in interests of the shareholders and the organization.
6. Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of all.

What is Motivation ?
Motivation is the word derived from the word ’motive’ which means needs, desires, wants or drives within the
individuals. It is the process of stimulating people to actions to accomplish the goals. In the work goal context
the psychological factors stimulating the people’s behaviour can be -

 desire for money


 success
 recognition
 job-satisfaction
 team work, etc

One of the most important functions of management is to create willingness amongst the employees to perform
in the best of their abilities. Therefore the role of a leader is to arouse interest in performance of employees in
their jobs. The process of motivation consists of three stages:-

1. A felt need or drive


2. A stimulus in which needs have to be aroused
3. When needs are satisfied, the satisfaction or accomplishment of goals.

Page 89 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Therefore, we can say that motivation is a psychological phenomenon which means needs and wants of the
individuals have to be tackled by framing an incentive plan.

Importance of Motivation
Motivation is a very important for an organization because of the following benefits it provides:

1. Puts human resources into action

Every concern requires physical, financial and human resources to accomplish the goals. It is through
motivation that the human resources can be utilized by making full use of it. This can be done by
building willingness in employees to work. This will help the enterprise in securing best possible
utilization of resources.

2. Improves level of efficiency of employees

The level of a subordinate or a employee does not only depend upon his qualifications and abilities. For
getting best of his work performance, the gap between ability and willingness has to be filled which
helps in improving the level of performance of subordinates. This will result into-

a. Increase in productivity,
b. Reducing cost of operations, and
c. Improving overall efficiency.
3. Leads to achievement of organizational goals

The goals of an enterprise can be achieved only when the following factors take place :-

a. There is best possible utilization of resources,


b. There is a co-operative work environment,
c. The employees are goal-directed and they act in a purposive manner,
d. Goals can be achieved if co-ordination and co-operation takes place simultaneously which can
be effectively done through motivation.
4. Builds friendly relationship

Motivation is an important factor which brings employees satisfaction. This can be done by keeping
into mind and framing an incentive plan for the benefit of the employees. This could initiate the
following things:

a. Monetary and non-monetary incentives,


b. Promotion opportunities for employees,
c. Disincentives for inefficient employees.

In order to build a cordial, friendly atmosphere in a concern, the above steps should be taken by a
manager. This would help in:

iv.Effective co-operation which brings stability,


v.Industrial dispute and unrest in employees will reduce,
vi.The employees will be adaptable to the changes and there will be no resistance to the change,
vii.This will help in providing a smooth and sound concern in which individual interests will coincide with the
organizational interests,
viii.This will result in profit maximization through increased productivity.
5. Leads to stability of work force

Stability of workforce is very important from the point of view of reputation and goodwill of a concern.
The employees can remain loyal to the enterprise only when they have a feeling of participation in the

Page 90 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

management. The skills and efficiency of employees will always be of advantage to employees as well
as employees. This will lead to a good public image in the market which will attract competent and
qualified people into a concern. As it is said, “Old is gold” which suffices with the role of motivation

here, the older the people, more the experience and their adjustment into a concern which can be of
benefit to the enterprise.

From the above discussion, we can say that motivation is an internal feeling which can be understood only by
manager since he is in close contact with the employees. Needs, wants and desires are inter-related and they are
the driving force to act. These needs can be understood by the manager and he can frame motivation plans
accordingly. We can say that motivation therefore is a continuous process since motivation process is based on
needs which are unlimited. The process has to be continued throughout.

We can summarize by saying that motivation is important both to an individual and a business. Motivation is
important to an individual as:

1. Motivation will help him achieve his personal goals.


2. If an individual is motivated, he will have job satisfaction.
3. Motivation will help in self-development of individual.
4. An individual would always gain by working with a dynamic team.

Similarly, motivation is important to a business as:

1. The more motivated the employees are, the more empowered the team is.
2. The more is the team work and individual employee contribution, more profitable and successful is the
business.
3. During period of amendments, there will be more adaptability and creativity.
4. Motivation will lead to an optimistic and challenging attitude at work place.

5. Self Motivation at Work


6. Self-motivation is a power that drives us to keep moving ahead. It encourages continuous learning and
success, whatever be the scenario. Self-motivation is a primary means of realizing our goals and
progressing. It is basically related to our inventiveness in setting dynamic goals for ourselves, and our
faith that we possess the required skills and competencies for achieving those challenging goals. We
often feel the need for self-motivation.
7. Following are the ways/techniques for self-motivation:

8. Team Motivation - Tips for Motivating Team


9. A group heading towards a common objective will perform best when it is motivated as a team. Team
motivation is determined by how well the team members’ needs and requirements are met by the team.
10. Some tips for effective team motivation are as follows:

Motivational Challenges

Motivation seems to be a simple function of management in books, but in practice it is more challenging. The
reasons for motivation being challenging job are as follows:

 One of the main reasons of motivation being a challenging job is due to the changing workforce. The
employees become a part of their organization with various needs and expectations. Different
employees have different beliefs, attitudes, values, backgrounds and thinking. But all the organizations
are not aware of the diversity in their workforce and thus are not aware and clear about different ways
of motivating their diverse workforce.
 Employees motives cannot be seen, they can only be presumed. Suppose, there are two employees in a
team showing varying performance despite being of same age group, having same educational

Page 91 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

qualifications and same work experience. The reason being what motivates one employee may not
seem motivating to other.
 Motivation of employees becomes challenging especially when the organizations have considerably

changed the job role of the employees, or have lessened the hierarchy levels of hierarchy, or have
chucked out a significant number of employees in the name of down-sizing or right-sizing. Certain
firms have chosen to hire and fire and paying for performance strategies nearly giving up motivational
efforts. These strategies are unsuccessful in making an individual overreach himself.
 The vigorous nature of needs also pose challenge to a manager in motivating his subordinates. This is
because an employee at a certain point of time has diverse needs and expectations. Also, these needs
and expectations keep on changing and might also clash with each other. For instance-the employees
who spend extra time at work for meeting their needs for accomplishment might discover that the extra
time spent by them clash with their social neds and with the need for affiliation.

Essentials / Features of a Good Motivation System

Motivation is a state of mind. High motivation leads to high morale and greater production. A motivated
employee gives his best to the organization. He stays loyal and committed to the organization. A sound
motivation system in an organization should have the following features:

 Superior performance should be reasonably rewarded and should be duely acknowledged.


 If the performance is not consistently up to the mark, then the system must make provisions for
penalties.
 The employees must be dealt in a fair and just manner. The grievances and obstacles faced by them
must be dealt instantly and fairly.
 Carrot and stick approach should be implemented to motivate both efficient and inefficient employees.
The employees should treat negative consequences (such as fear of punishment) as stick, an outside
push and move away from it. They should take positive consequences (such as reward) as carrot, an
inner pull and move towards it.
 Performance appraisal system should be very effective.
 Ensure flexibility in working arrangements.
 A sound motivation system must be correlated to organizational goals. Thus, the individual/employee
goals must be harmonized with the organizational goals.
 The motivational system must be modified to the situation and to the organization.
 A sound motivation system requires modifying the nature of individual’s jobs. The jobs should be
redesigned or restructured according to the requirement of situation. Any of the alternatives to job
specialization - job rotation, job enlargement, job enrichment, etc. could be used.
 The management approach should be participative. All the subordinates and employees should be
involved in decision- making process.
 The motivation system should involve monetary as well as non- monetary rewards. The monetary
rewards should be correlated to performance. Performance should be based on the employees’ action
towards the goals, and not on the fame of employees.
 “Motivate yourself to motivate your employees” should be the managerial approach.
 The managers must understand and identify the motivators for each employee.
 Sound motivation system should encourage supportive supervision whereby the supervisors share their
views and experiences with their subordinates, listen to the subordinates views, and assist the
subordinates in performing the designated job

 Defining Marketing for the 21st Century


 The 21st century has seen the advent of the new economy, thanks to the technology innovation and
development. To understand the new economy, it is important to understand in brief characteristics and
features of the old economy.
 Industrial revolution was the start point of the old economy with focus on producing massive quantities
of standardized products. This mass product was important for cost reduction and satisfying large
consumer base, as production increased companies expanded into new markets across geographical
areas. The old economy had the organizational hierarchy where in top management gave out
instructions which were executed by the middle manager over the workers.

Page 92 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

 In contrast, the new economy has seen the buying power at all time thanks to the digital revolution.
Consumers have access to all types’ information for product and services. Furthermore, standardization
has been replaced by more customization with a dramatic increase in terms of product offering.

Purchase experience has also changed as well with the introduction of online purchase, which can be
done 24 × 7 with products getting delivered at office or home.
 Companies have also taken advantage of information available and are designing more efficient
marketing programs across consumers as well as the distribution channel. Digital revolution has
increased speed of communication mobile, e-mail SMS, etc. This helps companies take faster decisions
and implement strategies more swiftly.
 Marketing is art of developing, advertising and distributing goods and services to consumer as
well as business. However, marketing is not just limited to goods and services it is extended to
everything from places to ideas and in between. This brings forth many challenges within which
marketing people have to take strategy decisions. And answer to these challenges depends on the
market the company is catering to, for consumer market decision are with respect to product, packaging
and distribution channel.
 For business market, knowledge and awareness of product is very essential for marketing people
as businesses are on the lookout to maintain or establish a credential in their respective market.
For global market, marketing people have to consider not only culture diversity but also be careful with
respect to international trade laws, trade agreement, and regulatory requirements of individual market.
For non for profit organization with limited budgets, importance is related to pricing of products, so
companies have to design and sell products accordingly.
 Marketing philosophy employed by any given company has to be mix of organization interest,
consumer interest and societal interest. In production philosophy, companies focus is on numbers,
high production count, which reduces cost per unit and along with mass distribution. This kind of
concept is usually making sense in a developing market where there is the need of product in large
numbers.
 The product philosophy talks about consumers who are willing to pay an extra premium for high
quality and reliable performance, so companies focus on producing well made products.
 The selling concept believes in pushing consumers into buying of products, which under normal
circumstance, they would be resistant. The marketing concept believes consumer satisfaction, thereby
developing and selling products keeping focus solely on customer needs and wants.
 The customer philosophy believes in the creation of customized products, where in products is design
looking at historical transaction of consumers.
 The last philosophy is the societal concept which believes in developing products, which not only
generate consumer satisfaction but also take into account well being of society or environment.
 Digital revolution and 21st century have made companies fine tune the way they conduct their
business. One major trend observed is the need of stream lining processes and systems with the
focus on cost reduction through outsourcing. Another trend observed in companies is,
encouragement to entrepreneur style of work environment with glocal (global-local) approach. At the
same time, marketers of companies are looking forward to building long term relationship with
consumers. This relationship establishes platform understanding consumer needs and preference.
Marketers are looking at distribution channels as partners in business and not as the customer.
Companies and marketers are making decisions using various computers simulated models.
 To summarize 21st century marketing is challenge, which is to keep up pace with changing time.

Scanning the Market Environment

Fad is short lived mushrooming of opportunity which is difficult to predict and forecast. Business profit from
fad is pure matter of luck and chance. Trend is something which takes time to build up compared to fad and has
a predictable future. Trend is sometimes co-related with changes in social culture and economical situation.
Megatrend is much slower in development and is associated with political, socio-economical, technology and
regulatory changes. Megatrends are estimated to last around half decade or more. For companies trend and
megatrend are of great importance because they present business opportunities to them. Currently portable
music player and hand held devices are real craze in the market with consumer willing to pay premium for them.
However the direction in which market is going to develop is only possible by continuous following of market.

This trend-spotting activity can be undertaken by company itself or through market research. This activity can
also be outsourced to companies, which specialize in analyzing current social and economical changes. Fitness

Page 93 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

and diet are another trend, which witness growth across the globe. Trends developing in markets are under the
influence of a number of factors to which company's stakeholders are participants. Some of the factors are as
follows; globalization is affecting the way companies are conducting their business. Communication and

connectivity are reaching at a new level every day. New economic powers like India, China, Brazil and Russia
are exerting their influence. There are many other factors beyond the above mention which affect business
working making it essential for companies to scan market condition.

Factors influencing the market can be categorized under 6 different titles, demographic, economic, ecology,
technology, regulatory-political and society-culture.

1. Demographic factors: are associated with changing nature and volume of population. It follows how
people are conducting themselves in the new world, increasing per capita income, urban migration,
ethnically diverse cities and mega cities. These are some demographic factors companies are
monitoring. For example, a country like India and China are showing highest concentration of youth
population where as Japan is showing high number of retired workers. Therefore, demand and
consumption of product will also be different.
2. Economic factors: deals with function like purchasing power parity, income level, savings level and
interest rates among many other. For example, countries with a high income level are more likely to
afford luxury items compare to a low income level country. Savings level and interest rate determine
the borrowing power as well as spending power of consumer.
3. Ecological factors: consist of natural resource composition in a given county. For example, demand
for fossil fuel has sky rocketed in recent years there by increasing general price level in the market.
Companies, therefore, are looking forward to designing products which eco-friendly design that is
they are less fuel dependent and give out less pollution.
4. Technology factors: like internet and connectivity are changing the face of business. More and more
people are doing business online. Science and medicine are also part of technology factors. Challenge
for the company is to keep up with innovation and offer products, which are not obsolete.
5. Political environment: is also changing with more and more market based system rather than the
socialist system. Furthermore, regulatory requirements like competition policy, investment policy, tax
policy, etc. companies should investigate before taking their business to a particular country.
6. Culture environment: deals with factors like opinion people have towards themselves, others,
organization and society in general. People have become more eco conscious, contributing one or
many causes they can relate to, want organization to be responsible for their action and are looking
to open society with meaningful co-existence.

All this 6 factors define any market environment and companies must understand them before developing their
business plan.

Analyzing Consumer’s Buying Behavior


The core function of the marketing department is to understand and satisfy consumer need, wants and desire.
Consumer behavior captures all the aspect of purchase, utility and disposal of products and services. In
groups and organization are considered within the framework of consumer. Failing to understand consumer
behavior is the recipe for disaster as some companies have found it the hard way. For example, Wal-Mart
launched operations in Latin-America with store design replicating that of US markets. However, Latin America
consumer differs to US consumer in every aspect. Wal-Mart suffered consequences and failed to create impact.

Social, cultural, individual and emotional forces play a big part in defining consumer buying behavior. Cultural,
sub-culture and social class play an important is finalizing consumer behavior. For example, consumer growing
up in US is exposed to individualism, freedom, achievement, choice, etc. On sub-culture level influence of
religion, race, geographic location and ethnicity define consumer behavior. Social class consists of consumer
with the same level of income, education, taste, feeling of superiority and inferiority. Over time consumer can
move from one social level to another.

Page 94 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

Culture alone cannot define consumer behavior; social forces also play an important role. Social forces consist
of family, friends, peer groups, status and role in society. Groups which have direct or indirect influence on
consumer are referred to as reference groups. Primary groups consist of friends, family and peers with whom

consumer has direct contact for considerable time. Secondary groups are association where interaction is at
formal level and time devoted is less.

Consumer buying behavior is influenced by individual’s own personality traits. These personality traits
do not remain the same but change with the life cycle. The choice of occupation and corresponding income
level also play part in determining consumer behavior. A doctor and software engineer both would have
different buying pattern in apparel, food automobile etc. Consumers from similar background, occupation and
income levels may show a different lifestyle pattern.

An individual buying behavior is influenced by motivation, perception, learning, beliefs and attitude. These
factors affect consumer at a psychological level and determine her overall buying behavior. Maslow’s hierarchy,
Herzberg Theory and Freud Theory try and explain people different motivational level in undertaking a buying
decision. Perception is what consumer understands about a product through their senses. Marketers have to pay
attention to consumer’s perception about a brand rather than true offering of the product. Learning comes from
experience; consumer may respond to stimuli and purchase a product. A favorable purchase will generate
positive experience resulting in pleasant learning. Belief is the pre-conceived notion a consumer has towards a
brand. It is kind of influence a brand exerts on consumer. For example, there is a strong belief product coming
through German engineering are quality products. Companies may take advantage of this belief and route their
production through Germany.

Companies need to think beyond buying behaviour and analyze the actual buying process. Complex buying
behaviour requires high involvement of buyers, as it is infrequent in nature, expensive, and they are significant
differences among the available choice e.g. automobile. Grocery buying is referred to as habitual buying, which
requires less involvement as few differences among brands, frequent and inexpensive. Buying process involves
purchase need, decision makers, information search, alternatives evaluation, purchase decision and post
purchase behaviour. Companies try hard to understand consumer experience and expectation at every stage of
buying process. Marketers need to figure the right combinations which will initiate purchase need e.g. marketing
programs. Companies should ensure consumer have readily available information to take the decision e.g.
internet, friends. Consumers evaluate alternatives based on their brand perception and belief. Companies need to
work hard to develop products, which match this perception and belief every time. Final purchase decision is
taken looking other’s perception of the brand. Post purchase if expectations meet actual performance consumer
is satisfied and more likely to repurchase or recommend the brand to others.

Consumer markets are defined by various geographical, social and cultural factors. Furthermore, consumer
behaviour is influenced by psychological, personality, reference groups and demographic reasons. Finally actual
buying process involves complex process and cycle. Companies have to keep a tab on all three factors in
formulating strategy.

Managing Integrated Marketing Communications


Companies need to develop strategies to improve brand image and brand awareness. The important aspect of
spreading brand awareness and brand image is through communication. Companies need to establish a
communication channel to win the new customers and retain existing customer. This communication is not
restricted just to customer but also stakeholders in the value network. Communication is achieved through
advertisement, sales promotion, public relation exercise, direct marketing and interactive marketing.

Elements of Communication Process

Communication process should not be one way traffic. Companies should look forward to developing
communication network in which companies can reach customer but customer also can effectively communicate
with companies. Technology has opened up many avenues to carry out effective communication. Companies
have traditional tools like newspaper, television, radio, telephone, billboards and modern tools like the internet,

Page 95 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

emails and wireless devices. Technology has made the communication process not only faster but also reduced
over all communication cost.

There are nine elements, which make the communication process. The two parties are sender-company and
receiver-customer. The communication tools are message and media used to communicate the process. The four
major communication functions are encoding, decoding, response and feedback. The last element is the noise
which is anytime of interference disrupting clarity of the message.

Senders must encode the message as per the target audience and use the right media. The receiver decodes the
message, responds to the message and sends feedback to the company. Experience senders are able to garner a
more effective response from the right message.

However the message may not have required effect if:-

 Target Audience may choose to ignore the message as it is not attention grabbing
 Target Audience cannot make association with message
 Target Audience will response positive if the earlier communication had made any impact

Developing Effective Communication Program

Companies have to put effort in developing an effective communication program. The development of the
communication program can be charted into eight steps.

1. The first step is identifying the target audience. The target audiences are the existing customer or the
potential new customers. Target audience identification is essential for further development and overall
success of the communication program. Once the audience is identified the next part is assessing the
present company or brand perception within the target audience. Based on the results from the audience
analysis the message should address the requirements.
2. The second step is to set specific objectives for the given communication message. This objective could
be to enhance existing image, convey attribute, or encourage a consumer to act. The objective can have
a cognitive, affective or behavioral response.
3. The third step is the design of the message. The designing of the message follows the objective of the
message. The design of the message has to address the following four points, content of message,
message structure, message format and message source.
4. The fourth step is the selection of the communication channel. The channel must be appropriate to
carry the message to the target audience. For pharmaceutical companies, their sales people are the most
effective channel in reaching the target doctor audience, instead of placing billboards.
5. The fifth step is related with the financial estimates of the whole expenditure. Companies need to
decide budget of sales promotional and other activities. The common methods followed are an
affordable method, percentage of sales method, competitive parity method, and objective-task methods.
6. The sixth step is the decision relate to the communication mix. Companies have limited budget, so they
need balance expenditure among advertising, sales promotion, public relation, sales force and direct
marketing. The relevant choice of the communication mix is highly dependable on the industry the
company is operating.
7. The seventh step measuring results of the communication process. It is very important for companies to
keenly follow the outcomes of the communication process. The results could be increased in sales,
change in attitude or image of the brand.
8. The eight step is managing the integrated marketing process. Companies cannot afford to continue one
medium approach to achieve desired communication effect. Companies must integrate all the available
tools as to reach a wider audience and effectively communicate about brand and products.

Page 96 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

The Art of Strategic Marketing: Market Learning, Sensing,


and Intuiting
9. Market Learning
10. The first step in strategic marketing is to learn from the market about the changing consumer
preferences and attitudes. Firms typically employ market research agencies to conduct surveys and
research reports about how consumers and their preferences goods and services over others are
changing with the times. In other words, firms attempt to understand the market by direct observation
by surveying the consumers and finding out what they would buy. Apart from this, market learning
also involves direct interaction with the consumers to try and understand why they prefer a certain
brand to others. The strategies that the firm adopts after the market learning process are based on the
feedback that they have received from the ground. This kind of strategizing is quite popular with
marketers and practitioners of strategic marketing as it helps them fine tune their strategies based on
market preferences.
11. Market Sensing
12. This approach deals with going a step ahead of market learning and combining data and experience to
understand how the market moves. In other words, after the data collection is done, marketers who are
experienced or talented put the data and the strategic models of marketing together and try and sense
how the market moves. For those who follow the stock markets, the term “mood of the market” and
“market sentiment” is terms that can be known as sensing how the market moves based on both data
and the wisdom of accumulated experience.
13. Market Intuiting
14. We have discussed how firms try and understand consumer preferences by direct observation and by an
indirect analytical method of “sensing” how the market would move. The third aspect in this sub-topic
of strategic marketing takes the whole concept ever further by adopting what can be called as “Market
Intuiting”. In other words, this approach involves to know the “mind and soul of the market” and to
predict the future based on both data and an intuitive understanding of how the market would move.
Lest one thinks that this approach is like Astrology or other such forms of prediction, there have been
the cases of marketers like the late legendary Steve Jobs who could “feel it in his gut” about how
consumers would either flock to the brands or abandon it altogether. The idea in this approach is to
“preempt” the future by preparing for it and as the saying goes, chance favors the prepared mind.
Hence, after studying the market through direct observation, sensing the mood of the market, this third
approach is to get into the very essence of the consumer, which is to do with how he or she would
behave in the future.
15. Closing Thoughts
16. The key aspect here is that in the fast changing business landscape of the 21st century, it is not merely
enough to measure data and proceed accordingly. On the other hand, the consumer behavior, which is
in a flux, cannot be sensed by experience alone. Hence, the combination of the strategies outlined here
can be followed to beat the expectations of the consumers and by gaining insights into the mind of the
consumer and getting inside their heads, marketers can hope to outclass the competition.

Planning Function of Management


Planning means looking ahead and chalking out future courses of action to be followed. It is a preparatory step.
It is a systematic activity which determines when, how and who is going to perform a specific job. Planning is a
detailed programmer regarding future courses of action.

It is rightly said “Well plan is half done”. Therefore planning takes into consideration available & prospective
human and physical resources of the organization so as to get effective co-ordination, contribution & perfect
adjustment. It is the basic management function which includes formulation of one or more detailed plans to
achieve optimum balance of needs or demands with the available resources.

According to Urwick, “Planning is a mental predisposition to do things in orderly way, to think before acting
and to act in the light of facts rather than guesses”. Planning is deciding best alternative among others to
perform different managerial functions in order to achieve predetermined goals.

Page 97 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

According to Koontz & O’Donell, “Planning is deciding in advance what to do, how to do and who is to do it.
Planning bridges the gap between where we are to, where we want to go. It makes possible things to occur
which would not otherwise occur”.

Steps in Planning Function


Planning function of management involves following steps:-

1. Establishment of objectives
a. Planning requires a systematic approach.
b. Planning starts with the setting of goals and objectives to be achieved.
c. Objectives provide a rationale for undertaking various activities as well as indicate direction
of efforts.
d. Moreover objectives focus the attention of managers on the end results to be achieved.
e. As a matter of fact, objectives provide nucleus to the planning process. Therefore, objectives
should be stated in a clear, precise and unambiguous language. Otherwise the activities
undertaken are bound to be ineffective.
f. As far as possible, objectives should be stated in quantitative terms. For example, Number of
men working, wages given, units produced, etc. But such an objective cannot be stated in
quantitative terms like performance of quality control manager, effectiveness of personnel
manager.
g. Such goals should be specified in qualitative terms.
h. Hence objectives should be practical, acceptable, workable and achievable.
2. Establishment of Planning Premises
a. Planning premises are the assumptions about the lively shape of events in future.
b. They serve as a basis of planning.
c. Establishment of planning premises is concerned with determining where one tends to deviate
from the actual plans and causes of such deviations.
d. It is to find out what obstacles are there in the way of business during the course of operations.
e. Establishment of planning premises is concerned to take such steps that avoids these obstacles
to a great extent.
f. Planning premises may be internal or external. Internal includes capital investment policy,
management labour relations, philosophy of management, etc. Whereas external includes
socio- economic, political and economical changes.
g. Internal premises are controllable whereas external are non- controllable.
3. Choice of alternative course of action
a. When forecast are available and premises are established, a number of alternative course of
actions have to be considered.
b. For this purpose, each and every alternative will be evaluated by weighing its pros and cons in
the light of resources available and requirements of the organization.
c. The merits, demerits as well as the consequences of each alternative must be examined before
the choice is being made.
d. After objective and scientific evaluation, the best alternative is chosen.
e. The planners should take help of various quantitative techniques to judge the stability of an
alternative.
4. Formulation of derivative plans
a. Derivative plans are the sub plans or secondary plans which help in the achievement of main
plan.
b. Secondary plans will flow from the basic plan. These are meant to support and expediate the
achievement of basic plans.
c. These detail plans include policies, procedures, rules, programmes, budgets, schedules, etc.
For example, if profit maximization is the main aim of the enterprise, derivative plans will
include sales maximization, production maximization, and cost minimization.
d. Derivative plans indicate time schedule and sequence of accomplishing various tasks.
5. Securing Co-operation
a. After the plans have been determined, it is necessary rather advisable to take subordinates or
those who have to implement these plans into confidence.
b. The purposes behind taking them into confidence are :-
i. Subordinates may feel motivated since they are involved in decision making process.

Page 98 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

ii. The organization may be able to get valuable suggestions and improvement in
formulation as well as implementation of plans.
iii. Also the employees will be more interested in the execution of these plans.

6. Follow up/Appraisal of plans


a. After choosing a particular course of action, it is put into action.
b. After the selected plan is implemented, it is important to appraise its effectiveness.
c. This is done on the basis of feedback or information received from departments or persons
concerned.
d. This enables the management to correct deviations or modify the plan.
e. This step establishes a link between planning and controlling function.
f. The follow up must go side by side the implementation of plans so that in the light of
observations made, future plans can be made more realistic.

Characteristics of Planning

1. Planning is goal-oriented.
a. Planning is made to achieve desired objective of business.
b. The goals established should general acceptance otherwise individual efforts & energies will
go misguided and misdirected.
c. Planning identifies the action that would lead to desired goals quickly & economically.
d. It provides sense of direction to various activities. E.g. Maruti Udhyog is trying to capture
once again Indian Car Market by launching diesel models.
2. Planning is looking ahead.
a. Planning is done for future.
b. It requires peeping in future, analyzing it and predicting it.
c. Thus planning is based on forecasting.
d. A plan is a synthesis of forecast.
e. It is a mental predisposition for things to happen in future.
3. Planning is an intellectual process.
a. Planning is a mental exercise involving creative thinking, sound judgement and imagination.
b. It is not a mere guesswork but a rotational thinking.
c. A manager can prepare sound plans only if he has sound judgement, foresight and
imagination.
d. Planning is always based on goals, facts and considered estimates.
4. Planning involves choice & decision making.
a. Planning essentially involves choice among various alternatives.
b. Therefore, if there is only one possible course of action, there is no need planning because
there is no choice.
c. Thus, decision making is an integral part of planning.
d. A manager is surrounded by no. of alternatives. He has to pick the best depending upon
requirements & resources of the enterprises.
5. Planning is the primary function of management / Primacy of Planning.
a. Planning lays foundation for other functions of management.
b. It serves as a guide for organizing, staffing, directing and controlling.
c. All the functions of management are performed within the framework of plans laid out.
d. Therefore planning is the basic or fundamental function of management.
6. Planning is a Continuous Process.
a. Planning is a never ending function due to the dynamic business environment.
b. Plans are also prepared for specific period f time and at the end of that period, plans are
subjected to revaluation and review in the light of new requirements and changing conditions.
c. Planning never comes into end till the enterprise exists issues, problems may keep cropping up
and they have to be tackled by planning effectively.
7. Planning is all Pervasive.
a. It is required at all levels of management and in all departments of enterprise.
b. Of course, the scope of planning may differ from one level to another.
c. The top level may be more concerned about planning the organization as a whole whereas the
middle level may be more specific in departmental plans and the lower level plans
implementation of the same.

Page 99 of 596
A Subsidiary of FPA Policy and Procedures Manual - 1

8. Planning is designed for efficiency.


a. Planning leads to accompishment of objectives at the minimum possible cost.
b. It avoids wastage of resources and ensures adequate and optimum utilization of resources.

c. A plan is worthless or useless if it does not value the cost incurred on it.
d. Therefore planning must lead to saving of time, effort and money.
e. Planning leads to proper utilization of men, money, materials, methods and machines.
9. Planning is Flexible.
a. Planning is done for the future.
b. Since future is unpredictable, planning must provide enough room to cope with the changes in
customer’s demand, competition, govt. policies etc.
c. Under changed circumstances, the original plan of action must be revised and updated to male
it more practical.

Advantages of Planning

1. Planning facilitates management by objectives.


a. Planning begins with determination of objectives.
b. It highlights the purposes for which various activities are to be undertaken.
c. In fact, it makes objectives more clear and specific.
d. Planning helps in focusing the attention of employees on the objectives or goals of enterprise.
e. Without planning an organization has no guide.
f. Planning compels manager to prepare a Blue-print of the courses of action to be followed for
accomplishment of objectives.
g. Therefore, planning brings order and rationality into the organization.
2. Planning minimizes uncertainties.
a. Business is full of uncertainties.
b. There are risks of various types due to uncertainties.
c. Planning helps in reducing uncertainties of future as it involves anticipation of future events.
d. Although future cannot be predicted with cent percent accuracy but planning helps
management to anticipate future and prepare for risks by necessary provisions to meet
unexpected turn of events.
e. Therefore with the help of planning, uncertainties can be forecasted which helps in preparing
standbys as a result, uncertainties are minimized to a great extent.
3. Planning facilitates co-ordination.
a. Planning revolves around organizational goals.
b. All activities are directed towards common goals.
c. There is an integrated effort throughout the enterprise in various departments and groups.
d. It avoids duplication of efforts. In other words, it leads to better co-ordination.
e. It helps in finding out problems of work performance and aims at rectifying the same.
4. Planning improves employee’s moral.
a. Planning creates an atmosphere of order and discipline in organization.
b. Employees know in advance what is expected of them and therefore conformity can be
achieved easily.
c. This encourages employees to show their best and also earn reward for the same.
d. Planning creates a healthy attitude towards work environment which helps in boosting
employees moral and efficiency.
5. Planning helps in achieving economies.
a. Effective planning secures economy since it leads to orderly allocation ofresources to various
operations.
b. It also facilitates optimum utilization of resources which brings economy in operations.
c. It also avoids wastage of resources by selecting most appropriate use that will contribute to the
objective of enterprise. For example, raw materials can be purchased in bulk and
transportation cost can be minimized. At the same time it ensures regular supply for the
production department, that is, overall efficiency.
6. Planning facilitates controlling.
a. Planning facilitates existence of certain planned goals and standard of performance.
b. It provides basis of controlling.

Page 100 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

c. We cannot think of an effective system of controlling without existence of well thought out
plans.
d. Planning provides pre-determined goals against which actual performance is compared.

e. In fact, planning and controlling are the two sides of a same coin. If planning is root,
controlling is the fruit.
7. Planning provides competitive edge.
a. Planning provides competitive edge to the enterprise over the others which do not have
effective planning. This is because of the fact that planning may involve changing in work
methods, quality, quantity designs, extension of work, redefining of goals, etc.
b. With the help of forecasting not only the enterprise secures its future but at the same time it is
able to estimate the future motives of it’s competitor which helps in facing future challenges.
c. Therefore, planning leads to best utilization of possible resources, improves quality of
production and thus the competitive strength of the enterprise is improved.
8. Planning encourages innovations.
a. In the process of planning, managers have the opportunities of suggesting ways and means of
improving performance.
b. Planning is basically a decision making function which involves creative thinking and
imagination that ultimately leads to innovation of methods and operations for growth and
prosperity of the enterprise.

 ROLES AND RESPONSIBILITIES OF TOP LEVEL MANAGERS

 Top level management consists of the Chief Executive Officer (CEO), Chief Operating
Officer (COO),

 Chief Information Officer (CIO),

 the Managing Director and the Senior Executive as we already discuss in our previous . In a
typical commercial company top level managers rule the enterprise. They decide on the
direction of an organization and set major milestones, which departments and teams need to
achieve. Let’s take a closer look at the work of these professionals and some of their functions
in a modern company.

Role of a Financial Manager

Financial activities of a firm is one of the most important and complex activities of a firm. Therefore in order to
take care of these activities a financial manager performs all the requisite financial activities.

A financial manger is a person who takes care of all the important financial functions of an organization. The
person in charge should maintain a far sightedness in order to ensure that the funds are utilized in the most
efficient manner. His actions directly affect the Profitability, growth and goodwill of the firm.

Following are the main functions of a Financial Manager:

1. Raising of Funds

In order to meet the obligation of the business it is important to have enough cash and liquidity. A firm
can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide
the ratio between debt and equity. It is important to maintain a good balance between equity and debt.

2. Allocation of Funds

Page 101 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Once the funds are raised through different channels the next important function is to allocate the
funds. The funds should be allocated in such a manner that they are optimally used. In order to allocate
funds in the best possible manner the following point must be considered

 The size of the firm and its growth capability


 Status of assets whether they are long-term or short-term
 Mode by which the funds are raised

These financial decisions directly and indirectly influence other managerial activities. Hence formation
of a good asset mix and proper allocation of funds is one of the most important activity

3. Profit Planning

Profit earning is one of the prime functions of any business organization. Profit earning is important for
survival and sustenance of any organization. Profit planning refers to proper usage of the profit
generated by the firm.

Profit arises due to many factors such as pricing, industry competition, state of the economy,
mechanism of demand and supply, cost and output. A healthy mix of variable and fixed factors of
production can lead to an increase in the profitability of the firm.

Fixed costs are incurred by the use of fixed factors of production such as land and machinery. In order
to maintain a tandem it is important to continuously value the depreciation cost of fixed cost of
production. An opportunity cost must be calculated in order to replace those factors of production
which has gone thrown wear and tear. If this is not noted then these fixed cost can cause huge
fluctuations in profit.

4. Understanding Capital Markets

Shares of a company are traded on stock exchange and there is a continuous sale and purchase of
securities. Hence a clear understanding of capital market is an important function of a financial
manager. When securities are traded on stock market there involves a huge amount of risk involved.
Therefore a financial manger understands and calculates the risk involved in this trading of shares and
debentures.

Its on the discretion of a financial manager as to how to distribute the profits. Many investors do not
like the firm to distribute the profits amongst share holders as dividend instead invest in the business
itself to enhance growth. The practices of a financial manager directly impact the operation in capital
market.

Capital Structure - Meaning and Factors


Determining Capital Structure
Meaning of Capital Structure

Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as long-term finance.
The capital structure involves two decisions-

a. Type of securities to be issued are equity shares, preference shares and long term borrowings
(Debentures).
b. Relative ratio of securities can be determined by process of capital gearing. On this basis, the
companies are divided into two-
i. Highly geared companies - Those companies whose proportion of equity capitalization is
small.
ii. Low geared companies - Those companies whose equity capital dominates total capitalization.

Page 102 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

For instance - There are two companies A and B. Total capitalization amounts to be USD 200,000 in
each case. The ratio of equity capital to total capitalization in company A is USD 50,000, while in
company B, ratio of equity capital is USD 150,000 to total capitalization, i.e, in Company A,

proportion is 25% and in company B, proportion is 75%. In such cases, company A is considered to be
a highly geared company and company B is low geared company.

Factors Determining Capital Structure

1. Trading on Equity- The word “equity” denotes the ownership of the company. Trading on equity
means taking advantage of equity share capital to borrowed funds on reasonable basis. It refers to
additional profits that equity shareholders earn because of issuance of debentures and preference
shares. It is based on the thought that if the rate of dividend on preference capital and the rate of
interest on borrowed capital is lower than the general rate of company’s earnings, equity shareholders
are at advantage which means a company should go for a judicious blend of preference shares, equity
shares as well as debentures. Trading on equity becomes more important when expectations of
shareholders are high.
2. Degree of control- In a company, it is the directors who are so called elected representatives of equity
shareholders. These members have got maximum voting rights in a concern as compared to the
preference shareholders and debenture holders. Preference shareholders have reasonably less voting
rights while debenture holders have no voting rights. If the company’s management policies are such
that they want to retain their voting rights in their hands, the capital structure consists of debenture
holders and loans rather than equity shares.
3. Flexibility of financial plan- In an enterprise, the capital structure should be such that there is both
contractions as well as relaxation in plans. Debentures and loans can be refunded back as the time
requires. While equity capital cannot be refunded at any point which provides rigidity to plans.
Therefore, in order to make the capital structure possible, the company should go for issue of
debentures and other loans.
4. Choice of investors- The company’s policy generally is to have different categories of investors for
securities. Therefore, a capital structure should give enough choice to all kind of investors to invest.
Bold and adventurous investors generally go for equity shares and loans and debentures are generally
raised keeping into mind conscious investors.
5. Capital market condition- In the lifetime of the company, the market price of the shares has got an
important influence. During the depression period, the company’s capital structure generally consists of
debentures and loans. While in period of boons and inflation, the company’s capital should consist of
share capital generally equity shares.
6. Period of financing- When company wants to raise finance for short period, it goes for loans from
banks and other institutions; while for long period it goes for issue of shares and debentures.
7. Cost of financing- In a capital structure, the company has to look to the factor of cost when securities
are raised. It is seen that debentures at the time of profit earning of company prove to be a cheaper
source of finance as compared to equity shares where equity shareholders demand an extra share in
profits.
8. Stability of sales- An established business which has a growing market and high sales turnover, the
company is in position to meet fixed commitments. Interest on debentures has to be paid regardless of
profit. Therefore, when sales are high, thereby the profits are high and company is in better position to
meet such fixed commitments like interest on debentures and dividends on preference shares. If
company is having unstable sales, then the company is not in position to meet fixed obligations. So,
equity capital proves to be safe in such cases.
9. Sizes of a company- Small size business firms capital structure generally consists of loans from banks
and retained profits. While on the other hand, big companies having goodwill, stability and an
established profit can easily go for issuance of shares and debentures as well as loans and borrowings
from financial institutions. The bigger the size, the wider is total capitalization.

Capitalization in Finance
What is Capitalization

Page 103 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Capitalization comprises of share capital, debentures, loans, free reserves,etc. Capitalization represents
permanent investment in companies excluding long-term loans. Capitalization can be distinguished from capital
structure. Capital structure is a broad term and it deals with qualitative aspect of finance. While capitalization is

a narrow term and it deals with the quantitative aspect.

Capitalization is generally found to be of following types-

 Normal
 Over
 Under

Overcapitalization
Overcapitalization is a situation in which actual profits of a company are not sufficient enough to pay interest on
debentures, on loans and pay dividends on shares over a period of time. This situation arises when the company
raises more capital than required. A part of capital always remains idle. With a result, the rate of return shows a
declining trend. The causes can be-

1. High promotion cost- When a company goes for high promotional expenditure, i.e., making contracts,
canvassing, underwriting commission, drafting of documents, etc. and the actual returns are not
adequate in proportion to high expenses, the company is over-capitalized in such cases.
2. Purchase of assets at higher prices- When a company purchases assets at an inflated rate, the result is
that the book value of assets is more than the actual returns. This situation gives rise to over-
capitalization of company.
3. A company’s floatation n boom period- At times company has to secure it’s solvency and thereby
float in boom periods. That is the time when rate of returns are less as compared to capital employed.
This results in actual earnings lowering down and earnings per share declining.
4. Inadequate provision for depreciation- If the finance manager is unable to provide an adequate rate
of depreciation, the result is that inadequate funds are available when the assets have to be replaced or
when they become obsolete. New assets have to be purchased at high prices which prove to be
expensive.
5. Liberal dividend policy- When the directors of a company liberally divide the dividends into the
shareholders, the result is inadequate retained profits which are very essential for high earnings of the
company. The result is deficiency in company. To fill up the deficiency, fresh capital is raised which
proves to be a costlier affair and leaves the company to be over- capitalized.
6. Over-estimation of earnings- When the promoters of the company overestimate the earnings due to
inadequate financial planning, the result is that company goes for borrowings which cannot be easily
met and capital is not profitably invested. This results in consequent decrease in earnings per share.

Effects of Overcapitalization

1. On Shareholders- The over capitalized companies have following disadvantages to shareholders:


a. Since the profitability decreases, the rate of earning of shareholders also decreases.
b. The market price of shares goes down because of low profitability.
c. The profitability going down has an effect on the shareholders. Their earnings become
uncertain.
d. With the decline in goodwill of the company, share prices decline. As a result shares cannot be
marketed in capital market.
2. On Company-
a. Because of low profitability, reputation of company is lowered.
b. The company’s shares cannot be easily marketed.
c. With the decline of earnings of company, goodwill of the company declines and the result is
fresh borrowings are difficult to be made because of loss of credibility.
d. In order to retain the company’s image, the company indulges in malpractices like
manipulation of accounts to show high earnings.
e. The company cuts down it’s expenditure on maintainance, replacement of assets, adequate
depreciation, etc.

Page 104 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

3. On Public- An overcapitalized company has got many adverse effects on the public:
a. In order to cover up their earning capacity, the management indulges in tactics like increase in
prices or decrease in quality.

b. Return on capital employed is low. This gives an impression to the public that their financial
resources are not utilized properly.
c. Low earnings of the company affects the credibility of the company as the company is not
able to pay it’s creditors on time.
d. It also has an effect on working conditions and payment of wages and salaries also lessen.

Undercapitalization
An undercapitalized company is one which incurs exceptionally high profits as compared to industry. An
undercapitalized company situation arises when the estimated earnings are very low as compared to actual
profits. This gives rise to additional funds, additional profits, high goodwill, high earnings and thus the return on
capital shows an increasing trend. The causes can be-

1. Low promotion costs


2. Purchase of assets at deflated rates
3. Conservative dividend policy
4. Floatation of company in depression stage
5. High efficiency of directors
6. Adequate provision of depreciation
7. Large secret reserves are maintained.

Efffects of Under Capitalization

1. On Shareholders
a. Company’s profitability increases. As a result, rate of earnings go up.
b. Market value of share rises.
c. Financial reputation also increases.
d. Shareholders can expect a high dividend.
2. On company
a. With greater earnings, reputation becomes strong.
b. Higher rate of earnings attract competition in market.
c. Demand of workers may rise because of high profits.
d. The high profitability situation affects consumer interest as they think that the company is
overcharging on products.
3. On Society
a. With high earnings, high profitability, high market price of shares, there can be unhealthy
speculation in stock market.
b. ‘Restlessness in general public is developed as they link high profits with high prices of
product.
c. Secret reserves are maintained by the company which can result in paying lower taxes to
government.
d. The general public inculcates high expectations of these companies as these companies can
import innovations, high technology and thereby best quality of product.

Manager - Compliance
Responsibility

 Ensure 100% implementation of buyer's COC, Labor Law 2006 and Srom Bidhimala.
 Ensure the factories always prepared/ready for following audits like, Social compliance Audit,
Technical/Quality Assurance Audit & Security System Audit (CTPAT)
 Ensure Compliance on Health & Safety as per in house check list
 Ensure Non-Discrimination in course of employment, paying/providing wages/salary/benefits/
facilities/welfare.
 Ensure that no Force Employment occurred in the factories.

Page 105 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Ensure that Employment of No Child/Child Looking Workers are in practice


 Ensure Access/Right to Inspection during buyer's Audits.
 Ensure Compliance related MIS are properly maintain, update

 Follow up / take instant corrective action on auditors certain minor findings /discrepancies during audit.
 Follow up that all corrective action has been taken/follow up; regularly as per CAP submitted.
 Take proper and immediate steps to improve factory conditions those will get object of non-compliance
from buyers and take all possible steps to adhere with buyers compliance inspection
 Follow up all date, records, reports, formats, statement, rank & files, Books & Registers of all
departments are properly prepared, issued, update & maintained as per compliance
requirement/standards.
 Liaise with merchandising, Production and QA Department in order to coordinate with Buyers visits
and take all necessary steps for facing the buyers/ Govt. and compliance visit and audit.
 Review and develop compliance related printing materials and ensure distribution thereof in the
factories so that unwanted complaints are not received from the end of any buyers or Govt.
 To lead, direct, control, motivate, appraise & trained-up fellow staffs

Educational Requirements

 Bachelor/ Masters in any discipline


 Post Graduation Diploma on Compliance will be given preference

Experience Requirements

 9 to 12 year(s)
 The applicants should have experience in the following area(s):
 Legal Compliance/ Code of Conduct
 The applicants should have experience in the following business area(s):
 Garments

Additional Job Requirements

 Age 34 to 40 year(s)
 Strong knowledge on Labour law 2006 & Labour Rules 2015
 Have sound knowledge on different buyers Code of Conduct
 Should have sound knowledge on different certification.
 Good leadership ability to lead & motivate.
 Good command in both written and spoken English
 Good inter-personal & communication skills
 Good team player, well-organized, initiative and detail-oriented

 FUNCTIONS OF TOP LEVEL MANAGEMENT


 Top level managers are mainly involved in board meetings. They discuss matters such as long
range planning, policy formulation and organization strategies. These specialists primarily
deal with the stability, growth and survival of an organization. In other works, their main
responsibility is to protect the integrity of the company. Here’re some of the functions of top
level managers.

Page 106 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Determine organizational objectives – organizational objectives generally relate to profit,


survival, business growth, widening sales operations and maintaining good relations with
employees, customers and public
Set market policy – advertising and sales techniques, product pricing, commission, training,
promotions, appraisal of performance and channel of distribution
Set financial policy – this practice relates to the procurement of sources of finance, funds and
management of profits
Operations control – control over middle and lower level management, regarding operations,
through budget, quality control and accounting services

 ROLES OF TOP LEVEL MANAGERS


 Generally, the top level management in an organization is formed by three individuals – the
CEO, COO and CIO. Here’s more information about these roles.

 CHIEF EXECUTIVE OFFICER (CEO)


 This is the highest ranking person in an organization. The CEO reports only to the board of
directors. This manager is responsible for the company’s success. CEOs typically need to
provide broad leadership and vision rather than deal with the details of operations and
performance.

 CHIEF OPERATING OFFICER (COO)


 The COO is the second-in-command in a company. The duties of this manager include
reporting to the CEO, monitoring departments’ results as well as measuring performance and
efficiency. In many cases COOs ascend to the role of CEOs.

 CHIEF INFORMATION OFFICER (CIO)


 This professional manages the technical needs or an organization. CIOs determine how
hardware and software is implemented, analyses data security and computing needs of a
company.

 Top level management makes the key decisions in an organization. These managers shape the
goals, strategies, objectives and projects in a company. They take decisions which affect
every person working in the organization and are ultimately responsible for the failure or
success of the enterprise.

 LOOKING FOR A BUSINESS COACH IN LONDON? MAKE SURE TO CHECK


ONE OF THE MANY BUSINESS COURSES AVAILABLE ONLINE.

0 General Manager Responsibilities and Duties


Posted in Responsibilities
Plan, coordinate and manage all business operations to achieve corporate goals.

Develop and implement business plan for profitability.

Assist in budget preparation and expense management activities.

Evaluate the effectiveness of marketing program and recommend improvements.

Develop strategies to improve overall quality and productivity.

Generate business, cost and employee reports to management.

Page 107 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Schedule regular team meetings to discuss about business updates, issues and recommendations.

Respond to employee concerns in timely manner.

Provide direction and guidance to employees in their assigned job duties.

Determine staffing requirements and ensure that office positions are filled promptly.

Assist in employee recruitment, training, performance evaluation, promotion and termination


activities.

Manage orientations and exit interviews for employees.

Ensure that employees follow company policies and procedures.

Manage administrative, logistical, human resources, and accounting services to support company
operations.

Address customer inquiries promptly and professionally and ensure customer satisfaction.

Identify business opportunities with new and existing customers.

Characteristics of Good Managers

Leadership

Leadership is organizing a group of people to achieve a common goal.

Differentiate between a leader and a manager

Key Points

 While people can manage many things, including their time, money, fuel consumption, and
people, one can only lead people.
 Even though leadership is a subset of management, the term “leader” seems to have a halo
attached to it, while the term ” manager ” comes with a bit of a stigma.
 The search for the qualities that make a good leader has been going on for centuries and
continues today.

Key Terms

 lead: To provide direction and influence.


 manage: To handle or control a situation or job.

Page 108 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Management and Leadership

In today’s business world, there seems to be a halo affixed to the term “leader,” while the label of
“manager” has a more negative connotation. “Leader” brings to mind heroic figures rallying people
together to give their all for a cause, while “manager” brings to mind less-charismatic individuals
trying to make people into more efficient cogs in the corporate machine.

When one considers this definition of management, it becomes apparent that leadership is actually a
sub-category of management. Management (from Old French ménagement, “the art of conducting,
directing,” from Latin “manu agere” or “to lead by the hand”) characterizes the process of leading and
directing all or part of an organization, often a business, through the deployment and manipulation of
resources (human, financial, material, intellectual, or intangible).

People can manage their time, their budget, their fuel, and yes, their people, but one can only lead
people (or to be more inclusive, one can only lead intelligent living things, since shepherds and dog
trainers may object to a homo sapiens-centric definition).

Perhaps the perception of a cog-manipulating manager is rooted in this difference between animate
and inanimate objects. When people feel used, manipulated, or led against their will by a person in
authority, they feel as if they are being treated like inanimate objects. They say the person in authority
is a “lousy manager. ” But when the person in authority increases their autonomy, makes them feel at
liberty to accept or reject his or her vision, and fills them with a real personal desire to bring this
vision to life, they say he/she is a great leader.

Great leaders are often described as having charisma. Charisma is defined as a compelling
attractiveness or charm that can inspire devotion in others. Also, many great leaders have referent
power, which is the ability to inspire their followers with a high level of identification with,
admiration of, or respect for the powerholder/ leader.

Leadership in a Team Setting

When applying these concepts for “manager” and “leader” in a team setting, one finds interesting
results. If there is a team leader that is perceived to be unconcerned with the team members’ needs or
has a personal agenda more important than the team’s goals, then the leader is perceived to be more of
a “manager” and becomes estranged from the team members. Conversely, the team leaders who are
admired and followed loyally are those who show concern for the team members as individuals with
real needs, and who put “the cause” of the team above their own persona agenda.

Realistically, most organizations do need leaders who sometimes look at their teams with cold,
analytical eyes, evaluating inefficiencies and making unpopular choices. But it would be a mistake to
think that one has to be an “estranged, unliked manager” in order to execute these responsibilities. If a
team leader’s tasks, such as efficiency analysis, were done hand-in-hand with sincerely seeking to
know team members’ individual needs, then the team leader would be perceived to have a genuine
desire to make the team more successful. Additionally, ineffective leaders may hide an unwillingness
to make tough decisions by faking the “touchy-feely” attitudes associated with great leaders with high
emotional-intelligence.

Leadership Research

Leadership is ” organizing a group of people to achieve a common goal”. The leader may or may not
have any formal authority. Scholars of leadership have produced theories involving traits, situational
interaction, function, behavior, power, vision and values, charisma, and intelligence, among others.

Page 109 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

US Army leadership:

Commander of the International Security Assistance Force Gen. David H. Piraeus (center), U.S. Army,
talks with U.S. soldiers of the 2nd Battalion, 327th Infantry Regiment, 1st Brigade Combat Team, 101st
Airborne Division at Combat Outpost Monti in eastern Afghanistan on Aug. 5, 2010.

New methods and measurements were developed after these influential reviews that would ultimately
re-establish the trait theory as a viable approach to the study of leadership. For example,
improvements in researchers’ use of the round robin research design methodology allowed
researchers to see that individuals can and do emerge as leaders across a variety of situations and
tasks.

Additionally, during the 1980s, statistical advances allowed researchers to conduct meta-analyses, in
which they could quantitatively analyze and summarize the findings from a wide array of studies.
This advent allowed trait theorists to create a comprehensive picture of previous leadership research
rather than rely on the qualitative reviews of the past. Equipped with new methods, leadership
researchers revealed that individuals can and do emerge as leaders across a variety of situations and
tasks. They found significant relationships between leadership and individual traits such as the
following:

 Intelligence
 Adjustment
 Extraversion
 Conscientiousness
 Openness to experience
 General self-efficacy

While the trait theory of leadership has certainly regained popularity, its re-emergence has not been
accompanied by a corresponding increase in sophisticated conceptual frameworks.

Styles of Leadership

A leadership style is the manner and approach of providing direction, implementing plans, and
motivating people.

Recognize the differences between different leadership styles and attitudes

Key Points

 Leadership styles can be categorized as being authoritarian, democratic, laissez-faire,


transactional, or narcissistic.
 Authoritarian leaders keep strict control over their subordinates and keep a distinct professional
relationship with their followers.

Page 110 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Leaders who embrace a democratic style of leadership guide and control and make key
decisions when necessary, but otherwise share decision making with their followers, promote
the interests of the group, and practice social equality.
 Laissez-faire leadership is a “hands off” approach.
 Narcissistic leadership is a common form of leadership and can be either healthy or destructive.
 Transactional leaders motivate their subordinates by using rewards and punishments.

Key Terms

 narcissistic: Obsessed with one’s own self-image and ego.

A leadership style is the manner and approach of providing direction, implementing plans, and
motivating people. There are many different leadership styles that can be exhibited by leaders in
politics, business, or other fields.

Leadership: A leadership style is the manner and approach of providing direction, implementing plans,
and motivating people.

Authoritarian

An authoritarian or autocratic leader keeps strict, close control over followers by closely regulating
the policies and procedures given to followers. To maintain emphasis on the distinction between
authoritarian leaders and their followers, these types of leaders make sure to only create a distinct
professional relationship. They believe direct supervision to be key in maintaining a successful
environment and followership. Due to fear of followers being unproductive, authoritarian leaders keep
close supervision and feel this is necessary in order for anything to be done.

Democratic

The democratic leadership style consists of the leader sharing the decision-making abilities with group
members by promoting the interests of the group members and by practicing social equality. This
style of leadership encompasses discussion, debate and sharing of ideas, and encouragement of people
to feel good about their involvement. The boundaries of democratic participation tend to be
circumscribed by the organization or group needs and the instrumental value of people’s attributes
(skills, attitudes, etc.). The democratic style encompasses the notion that everyone, by virtue of their
human status, should play a part in the group’s decisions. However, the democratic style of leadership
still requires guidance and control by a specific leader. The democratic style demands the leader make
decisions on who should be called upon within the group and who is given the right to participate in,
make, and vote on decisions.

Laissez-Faire

The laissez-faire leadership style was first described by Lewin, Lippitt, and White in 1938, along with
the autocratic leadership and the democratic leadership styles. The laissez-faire style is sometimes
described as a “hands off” leadership style because the leader delegates the tasks to the followers
while providing little or no direction. If the leader withdraws too much, it can sometimes result in a
lack of productivity, cohesiveness, and satisfaction. Lassiez-faire leaders allow followers to have
complete freedom to make decisions concerning the completion of their work. It allows followers a
high degree of autonomy and self-rule, while at the same time offering guidance and support when
requested. The lassiez-faire leader using guided freedom provides the followers with all materials

Page 111 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

necessary to accomplish their goals, but does not directly participate in decision making unless the
followers requests the leader’s assistance. This is an effective style to use when:

 The followers are highly skilled, experienced, and educated;


 The followers have pride in their work and the drive to do it successfully on their own;
 Outside experts, such as staff specialists or consultants, are being used; and
 Followers are trustworthy and experienced.

This style should not be used when:

 Followers feel insecure at the unavailability of a leader.


 The leader cannot or will not provide regular feedback to their followers.

Transactional

The transactional style of leadership was first described by Max Weber in 1947, and then later
described by Bernard Bass in 1981. Mainly used by management, transactional leaders focus their
leadership on motivating followers through a system of rewards and punishments. There are two
factors which form the basis for this system: contingent reward and management by exception.
Contingent reward provides rewards (materialistic or psychological) for effort and recognizes good
performance. Management by exception allows the leader to maintain the status quo; the leader
intervenes when subordinates do not meet acceptable performance levels and initiates corrective
action to improve performance.

Narcissistic

Narcissistic leadership is a common form of leadership. The narcissism may be healthy or destructive,
although there is a continuum between the two. To critics, narcissistic leadership (especially
destructive) is driven by unyielding arrogance, self-absorption, and a personal egotistic need for
power and admiration. A study published in the journal, Personality and Social Psychology Bulletin,
suggests that when a group is without a leader, a narcissist often takes charge; researchers found that
people who score high in narcissism tend to take control of leaderless groups. Freud considered “the
narcissistic type… especially suited to act as a support for others, to take on the role of leaders and
to… impress others as being ‘personalities’. ”

Technical Skills

Technical skills involve the process or technique knowledge, as well as proficiency that may be
needed in order to be a successful manager.

Identify the managerial need for technical skills

Key Points

 The three managerial skills Robert Katz identified as being necessary to be a successful
manager are technical, human, and conceptual.
 Technical skills are easier to learn than human and conceptual skills.

Page 112 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Technical skills become less important at the top management levels of large firms as chief
executives can use the technical abilities of their employees. However, high-level managers
may still need these skills in smaller firms.

Key Terms

 technical skill: the learned capacity or ability to carry out pre-determined results through tools,
machines, techniques, crafts, systems, and methods of organization
 conceptual skill: the ability to formulate ideas
 conceptual: Of, or relating to concepts or mental conception; existing in the imagination.

To perform management functions and assume multiple roles, managers must be skilled. Robert Katz
identified three managerial skills essential to successful management: technical, human, and
conceptual. Technical skill involves process or technique knowledge and proficiency. Managers use
the processes, techniques, and tools of a specific area. These are the specific skills and knowledge
related to the individual’s profession or specialization. Examples include project management skills
for engineers building bridges, aircraft, and ships. Technical skills include the ability to properly
operate a computer, efficiently use the various software programs that are required in a particular
environment, and the utilization of other electronic devices that pertain to the job function. These
skills are especially important for lower level managers, as they are often responsible for training their
subordinates.

Training surgical technical skills with simulation at Valdecilla: Technical skills are especially
important for lower level managers, as they are often responsible for training their subordinates.

Katz pointed out that training programs tend to focus on skills in this area. These skills are easier to
learn than those in the other two groups. Managers use the processes, techniques, and tools of a
specific area. A manager’s level in the organization determines the relative importance of possessing
technical skills. For instance, supervisors need technical skills to manage their area of specialty. As
the pace of change accelerates and diverse technologies converge, new global industries are being
created (e.g., telecommunications). Technological change alters the fundamental structure of firms
and calls for new organizational leadership approaches and management skills.

At the top management level, conceptual and design abilities and human skills are especially valuable,
but there is relatively little need for technical abilities. The assumption, especially in large companies,
is that chief executives can utilize the technical abilities of their subordinates. In smaller firms,
however, technical experience may still be quite important.

Conceptual Thought

Conceptual thought involves seeing the important elements in any situation and, according to Robert
Katz, is the key management skills.

Explain the managerial need for conceptual skills

Key Points

Page 113 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 People who are able to see the key elements in any situation can see the enterprise as a whole,
see the relationship between the various parts, understand their dependence on each other, and
recognize that changes in one part will influence the others.
 Conceptual skills are likened to a “helicopter mind,” meaning that one is able to rise above a
problem and see it in context.
 These skills are not critical for lower-level mangers, gain importance for middle- management
and are essential for the success of higher-level managers.

Key Terms

 conceptual: Of, or relating to concepts or mental conception; existing in the imagination.


 design: To plan and carry out (a picture, work of art, construction etc. ).

A scheme of management skills was suggested by Robert L. Katz (1986) in the Harvard Business
Review. Katz, who was interested in the selection and training of managers, suggested that effective
administration rested on three groups of basic skills, each of which could be developed. Katz saw
conceptual skills as being the ability to see the significant elements in any situation.

Conceptual skills of a manager: Conceptual skills are probably some of the most important
management skills.

Conceptual skills are probably some of the most important management skills. There are some very
basic principles behind conceptual skills. The inputs by people who are hired especially for their
exceptional conceptual skills often influence the decision-making process in an organization, be it
about a simple thing like a change in the employees dress code, to something as big as a revamped
advertising campaign for a product.

Seeing the elements involves being able to:

 See the enterprise as a whole


 See the relationships between the various parts
 Understand their dependence on one another
 Recognize that changes in one part affect all the others

This ability also extends to recognizing the relationship of the individual organizations to the political,
social, and economic forces of the nation as a whole. This has since been called the “helicopter mind,”
that is, being able to rise above a problem and see it in context. These conceptual skills are likely to be
demonstrated by a manager or executive higher in the organization. Indeed, at these higher levels of
management, organizations require these skills.

Conceptual skills are not critical for lower-level supervisors but gain in importance at the middle-
management level. At the top management level, conceptual and design abilities are especially
valuable

Analytical Mindset

Deriving, interpreting, and communicating patterns within data allows managers to make informed
strategic and tactical decisions.

Page 114 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

LEARNING OBJECTIVES

Understand the value of analytical thinking as it pertains to management, and recall the various
perspectives of analysis

KEY TAKEAWAYS

Key Points

 A strong sense of analytical understanding is a highly useful skill set in both business and
science.
 Pursuing objective information to drive data-driven decisions requires a highly developed
analytical skill set, and is a critical component of managerial decision-making.
 Analytics can be used to assess and visualize decisions, describe the implications of historical
data, predict and model future expectations, and optimize internal processes.
 In the age of big data, the importance of analytics has never been higher. The ability to
navigate and derive value from big data is critical to successful organizational management.

Key Terms

 cherry-picking: To pick only a part of the whole truth, often in order to support an opinion or
personal agenda. In analysis, it is seeing what one wants to see in the data (as opposed to
what’s there).
 analytics: The derivation, interpretation, and expression of patterns within data sets.

Defining Analytics

The derivation, interpretation, and expression of patterns within data sets is referred to as analytics.
This broad definition can fit numerous contexts, and is highly relevant in virtually every modern field
of business and science. There are many instances in a business environment where analytical
thinking skills are applied to produce meaningful observations. In fields from marketing to operations
to finance to strategic decision-making, managers must both understand and employ analytical skills
to succeed in the modern business environment.

Analyzing the Operational Environment: This image shows how information from the operational
environment translates into meaningful data, information and ultimately intelligence for decision-
making.

How to be Analytical

Strong analytical skills are as much a developed competency as they are a perspective. Pursuing
objective, fact-based decision-making and data-driven conclusions requires a commitment to an
analytical mentality. Pushing gut feelings and intuition into the background in favor of framing issues
through analysis is a constant struggle in nearly every organization. It is a critical role of management
to ask the right questions and align employee behavior with analytical thinking.

Depending on the particular role, industry, organization and objectives, a manager may use one or
more of the following analytical models to frame tactical and strategic questions:

Page 115 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Decision analytics – Using data-driven models and visualizing outcomes of specific


organizational behaviors can enable managers to visualize the various outcomes of different
strategic approaches.
 Descriptive analytics – Collecting historical data from reporting, scorecards, clustering and
various other sources of information, managers can underline trends and identify opportunities
and/or risks.
 Predictive analytics – Leveraging statistical models and machine learning, managers can
predict future outcomes with varying degrees of statistical confidence.
 Prescriptive analytics – Using optimization and simulation, managers can produce
recommended decisions through analytical modeling.

Domains of Analytics

 Behavioral analytics
 Cohort Analysis
 Contextual data modeling
 Enterprise Optimization
 Financial services analytics
 Marketing analytics
 Pricing analytics
 Retail sales analytics
 Risk & Credit analytics
 Supply Chain analytics
 Talent analytics
 Transportation analytics
 Customer Analytics

More Important Now Than Ever

In the current technological environment of big data, analytics has never been more relevant and
central to the organization. With endless data available, it is easier than ever to derive advantage or
make substantial mistakes in digesting this data. Indeed, utilizing analytics incorrectly can be just as
disastrous as not using it at all! In a world with this much data, maintaining objectivity and refraining
from cherry-picking to prove one’s opinion is a very important skill.

Managers must be owners not only of the decisions they make, but the validity of the process in which
they make them. Analytics is the core skill set required for success in this domain, arguably the most
important facet of management.

Sensitivity to Human Relations

Good managers have an innate sensitivity to the needs of the people they manage, and a highly
developed emotional intelligence.

LEARNING OBJECTIVES

Page 116 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Integrate emotional intelligence and human resource needs into the broader field of management

KEY TAKEAWAYS

Key Points

 Management is primarily the task of aligning internal resources to create efficient production
processes. These resources are often human resources with complex emotional needs.
 Strong managers have an innate sensitivity to human resource needs, which is enabled by a
high level of emotional intelligence (EQ).
 EQ can be defined in a variety of ways. Central to EQ is communication, courtesy,
interpersonal skills, positive attitude, and a strong sense of teamwork.
 To create a comfortable working environment for employees, managers should focus on
motivating, setting goals, delegating and communicating effectively.

Key Terms

 Interpersonal skills: The competencies related to human interaction, such as social skills,
communication, and emotional intelligence.

Management is a functional discipline that requires a wide variety of skill sets, including
organizational skills, technical skills, and people skills (or ‘soft skills’). Effective management is
often centered around people skills, as the resource being managed is primary the effort of human
resources.

As a result, managers who are sensitive to human resources are much more likely to be successful in a
leadership role.

Soft Skills and Emotional Intelligence

The skills required to lead from a human sensitivity perspective are often referred to as soft skills or
EQ (emotional intelligence). According to a research done at Eastern Kentucky University, soft skills
can be summarized as the following ten attributes:

1. Communication – Speaking, writing, presenting, and listening


2. Courtesy – Showing appropriate respect and pleasantries when dealing with others
3. Flexibility – Both adaptable and teachable, good managers can fill the unique needs of each
employee they manage through changing their own habits
4. Integrity – Understanding the ethical implications of decisions is integral to success
5. Interpersonal skills – This is an extensive list of characteristics involving social ability,
friendliness, sense of humor, patience, etc.
6. Positive attitude – A confident and upbeat personality tends to trickle down through work
groups
7. Professionalism – Reliability and professionalism go hand and hand, and showing a strong
sense of professionalism can emotionally reassure employees
8. Responsibility – A willingess to take credit for the team ‘s mistakes and a willingness to give
the team credit for their successes is a key component of responsible management

Page 117 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

9. Teamwork – Mangers must be collaborators, capable of filling the many roles required in a
team

10. Work ethic – Finally, management is hard work, and strong work ethic sets a good example.

As you can see here, the vast majority of these skills involve integrating with human resources. High
performing managers are sensitive to the needs, emotions, perspectives,and well-being of the
individuals they are managing.

How to Manage Sensitively

With the above core skills in mind, managers with a strong sense of human resource sensitivity focus
on managing people via the following four phases:

1. Motivating – Understand what your employees are good at, and what they enjoy. Let them
know they are appreciated for their skills and attitude and ensure they have everything they
need to succeed in their role.
2. Setting Goals – Create agreement among the team regarding direction, and identify practical
objectives that won’t overburden or intimidate team members. Offer feedback, and receive
feedback in turn. Ensure that feedback maintains a positive note.
3. Delegating – Managers must take on the functional role of delegation. This simply means
dividing tasks among the work group, and letting each individual know what is expected of
them and how they will contribute. Give employees credit for their successes, and as a manager
it is on you to take responsibility for any failures.
4. Focus on Communication – Communicating well and avoiding misunderstandings will save
time and stress. Make sure tasks are clear and feedback channels are open. Listen carefully and
clarify what you’re hearing. Take an active interest in your employees.

Through focusing on these core human relations activities while managing, employees are likely to
have the clarity, confidence, and commitment required to succeed in the workplace.

The Three Levels of Leadership: Much of a leader’s responsibilities lie in managing and motivating
externally. This is to say that leaders are not only defined by their internal competencies, but more
importantly by their ability to translate these competencies externally.

The Role of the Manager in Performance Management

An organization’s success is not just dependent upon having the right strategy and resources. It is also
reliant upon the ability of its management to harness, direct and support teams and individuals to
engage in delivering the organization’s mission and objectives.

Managers play a critical role in delivering performance. Managers need to be able to consistently
deliver performance and results and get the best possible performance from the teams and individuals
they manage.

Effective performance management enables employees and teams to understand the goals of the
organization and to identify how individual and team outputs contribute to the achievement of

Page 118 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

organizational objectives in line with organizational values. The integration of people, planning and
performance with organisational objectives develops individual, team and organizational capability
leading to higher performance.

An effective performance management process helps to establish and support the link between
strategic business objectives and people's day-to-day actions and tasks. An effective goal setting
system, combined with a process for tracking progression can contribute significantly to individual,
team and organisational performance.

An effective performance management process enables managers to evaluate and measure individual
and team performance and to optimise performance and productivity.

This can be achieved by:

 Aligning individual employees' day-to-day actions with strategic business objectives

 Providing clarifying accountability related to performance expectations

 Documenting individual performance to support compensation and career planning decisions

 Establishing focus for skill development and learning activity choices

 Creating documentation for legal purposes, to support decisions and reduce disputes

Many of the practices that support performance also impact positively on job satisfaction, employee
retention and employee engagement levels.

Some of the recommended performance management practices include:

 Providing individuals and teams with clear, constructive feedback

 Defining and communicating clear performance objectives and standards

 Reviewing performance and delivering incentives in a fair and consistent manner

 Providing relevant learning and development opportunities

 Recognising and rewarding strong individual and team performance

 Linking performance to compensation and recognition

 Identifying clear career progress routes for employees

Performance Management: A Definition

Armstrong and Baron (2004) argue that performance management is about:

'[a] strategy which relates to every activity of the organisation set in the context of its human resource
policies, culture, style and communication systems'.

Armstrong and Baron

Page 119 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

They further argue that the precise nature of the strategy is dependent upon the organisational context
and that it will vary from organisation to organisation.

Performance management is therefore strategic (i.e. it is about broader issues and longer-term
business goals) and it should provide an integrated frameworkconnecting various aspects of the
business, people management and teams and individuals.

An effective performance management system should embrace:

 Performance improvement (i.e. supporting individual, team and organisational


effectiveness)
 Development (i.e. supporting the continuous development of individuals and teams resulting
in continuous performance improvement)
 Managing behaviour (i.e. ensuring that people are supported and encouraged to adopt
behaviours that promote better working relationships)

Armstrong and Baron further argue that performance management is a tool that helps managers to
manage effectively, ensuring that the teams and individuals they manage:

 Posses the knowledge and skills they need to perform to the required standards
 Know and understand what is required of them
 Receive the support from the organisation to perform
 Are given feedback on and the opportunity to discuss their performance
 Are encouraged to discuss and contribute to identifying and achieving individual and team
objectives

Effective performance management systems also enable managers to understand the impact of their
own behaviour and performance on the people they manage.

Performance management is about:

 Establishing and building a culture within which teams and individuals can take responsibility
for developing their own skills, performance and behaviour
 Enabling teams and individuals to contribute to continuous improvement of business
processes and performance
 Communicating and clarifying expectations both from management to employees and vice
versa
 The quality of relationships between managers and individuals, managers and teams, teams
and individuals
 Working collaboratively and collectively to achieve organisational aims and objectives now
and in the future
 Planning and defining organisational, team and individual objectives and how to measure
them
 A continuous process designed to develop the knowledge, skills and capabilities of
individuals, teams and organisations to develop and deliver organisational strategy, plans and
objectives

Performance management is a process that is supported by a framework of systems, structures and


procedures such as appraisal systems, learning and development plans, objective setting and
performance measurement systems, and reward and remuneration packages.

The starting point for effective performance management is the organisation's strategy, goals and
objectives as they provide the context for departmental, team and individual objectives and

Page 120 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

performance expectations. They provide the context for the preparation of departmental and team
plans which in turn inform managers about the knowledge, skills and competencies required by
individuals and teams; the number of people required to achieve the objectives and what measurement
and feedback systems need to be managed.

Theories of Motivation

Maslow’s Hierarchy of Needs

Maslow’s hierarchy of needs are a series of physiological and emotional requirements for human
contentment, arranged in order of necessity.

LEARNING OBJECTIVES

Explain Maslow’s hierarchy of needs

KEY TAKEAWAYS

Key Points

 Maslow’s hierarchy of needs is often portrayed in the shape of a pyramid, with the greatest and
most fundamental levels of needs at the bottom, and the need for self-actualization at the top.
 The order of needs as categorized by Maslow are physiological; safety; love and belonging;
esteem; and self-actualization.
 Maslow acknowledged that many different levels of motivation are likely to be present in a
human all at once. His focus in discussing the hierarchy was to identify the basic types of
motivation and the order that they generally progress as lower needs are reasonably well met.

Key Terms

 esteem: to regard someone with respect.


 security: The condition of not being threatened, especially physically, psychologically,
emotionally, or financially.
 potential: currently unrealized ability.

The most fundamental and basic needs are what Maslow called “deficiency needs” or “d-needs”:

 Esteem
 Friendship and love
 Security
 Physical needs

If these “deficiency needs” are not met, the body gives no physical indication but the individual feels
anxious and tense. Maslow’s theory suggests that the most basic level of needs must be met before the
individual will focus on higher level needs.

Page 121 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Maslow’s Hierarchy of Needs: Maslow’s hierarchy captures the varying degree of needs by which
humans are motivated. According to the psychological perspective, decision makers are motivated
by these needs and decisions are influenced accordingly.

The human mind is so complex that separate motivations from different levels of Maslow’s pyramid
usually occur at the same time. Maslow referred to these levels and their satisfaction in terms such as
“relative,” “general,” and “primarily.” His focus in establishing the hierarchy of needs was to identify
the basic types of motivations and the order in which that they generally progress as lower needs are
reasonably well met.

Physiological Needs

Physiological needs are generally obvious because they are requiremed for survival. If requirements
are not met, the body cannot continue to function. People lacking food, love, esteem, or safety would
consider food to be their greatest need. Air, water, food, clothing, and shelter are the basic
physiological needs.

Safety Needs

Once physical needs are satisfied, individual safety takes precedence. Safety and Security needs
include:

 Personal security
 Financial security
 Health and well-being
 Safety net against accidents/illness and their adverse impacts

Page 122 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Love and belonging

Interpersonal Needs

After physiological and safety needs are fulfilled, the third layer of human needs are interpersonal.
This involves feelings of belongingness. Deficiencies in interpersonal needs, due to neglect, shunning,
ostracism, etc., can impact an individual’s ability to form and maintain emotionally significant
relationships in general, such as:

 Friendship
 Intimacy
 Family

Humans need to feel a sense of belonging and acceptance, whether it comes from a large social group,
such as clubs, religious groups, professional organizations, gangs, family, or mentors. Humans need to
love and be loved (sexually and non-sexually) by others. Without these connections, many people
become susceptible to loneliness, social anxiety, and clinical depression. This need for belonging can
sometimes overcome physiological and security needs. For example, an anorexic may ignore the need
to eat and the security of health for a feeling of control and belonging.

Esteem

Esteem represents the normal human desire to be accepted and valued by others. People need to
engage themselves to gain recognition and have an activity or activities that give the person a sense of
contribution, to feel self-valued, be it in a profession or hobby. Imbalances at this level can result in
low self-esteem or an inferiority complex. Many people with low self-esteem will not be able to
improve their view of themselves simply by receiving fame, respect, and glory externally, but must
first accept themselves internally. Psychological imbalances, such as depression, can prevent one from
obtaining self-esteem on both levels.

Maslow noted two versions of esteem needs: a “lower” version and a “higher” version. The “lower”
version of esteem is the need for respect from others. This may include a need for status, recognition,
fame, prestige, and attention. The “higher” version manifests itself as the need for self-respect. For
example, the person may have a need for strength, competence, mastery, self-confidence,
independence, and freedom. This “higher” version takes precedence over the “lower” version because
it relies on an inner competence established through experience. Deprivation of these needs may lead
to an inferiority complex, weakness, and helplessness.

Maslow also states that even though these are examples of how the quest for knowledge is separate
from basic needs, he warns that these “two hierarchies are interrelated rather than sharply separated. ”
This means that this level of need, as well as the next and highest level, are not strict, separate levels
but closely related to others, and this is possibly the reason that these two levels of need are left out of
most textbooks.

Self-actualization

“What a man can be, he must be. ” This quotation forms the basis of the perceived need for self-
actualization. This level of need refers to what a person’s full potential is and the realization of that
potential. Maslow describes this level as the desire to accomplish everything that one can, to become
the most that one can be. Individuals may perceive or focus on this need very specifically. For

Page 123 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

example, one individual may have the strong desire to become an ideal parent. In another, the desire
may be expressed athletically. For others, it may be expressed in paintings, pictures, or inventions. As
previously mentioned, Maslow believed that to understand this level of need, the person must not only
achieve the previous needs, but master them.

Herzberg’s Two-Factor Theory

The Two-factor theory indicates that one set of factors at work cause job satisfaction, while another
set of factors cause dissatisfaction.

LEARNING OBJECTIVES

Explain Herzberg’s two factor theory

KEY TAKEAWAYS

Key Points

 Factor 1: Motivators such as challenging work and recognition give positive satisfaction
created by the job’s intrinsic conditions. Factor 2: Hygiene factors such as status, job security
and salary do not themselves create positive satisfaction, but their absence can cause
dissatisfaction.
 Individuals look for the gratification of higher-level psychological needs associated with
achievement, recognition, responsibility, and advancement, rather than the satisfaction of
lower-order needs such as minimum salary levels or safe and pleasant working conditions.
 If management wants to increase satisfaction on the job, it should be concerned with the nature
of the work itself. On the other hand, if management wishes to reduce dissatisfaction, then it
must focus on improving the job environment.

Key Terms

 productivity: Productivity is a measure of the efficiency of production and is defined as total


output per one unit of a total input.
 Need Hierarchy: Abraham Maslow’s theory created in 1943 that postulates that needs can be
categorized into the following 5 categories which are the basis for human motivations:
Physiological, Safety, Belongingness and Love, Esteem, and Self-Actualization
 motivate: To provide someone with an incentive to do something; to encourage.

The Two-factor theory (also known as Herzberg’s motivation -hygiene theory and Dual-Factor
Theory) states that certain factors in the workplace cause job satisfaction, while a separate set of
factors cause dissatisfaction. It was developed by Frederick Herzberg, a psychologist, who theorized
that job satisfaction and job dissatisfaction act independently of each other.

Fundamentals of the Theory

Attitudes and their connection with industrial mental health are related to Maslow’s theory of
motivation. According to Herzberg, individuals are not content with the satisfaction of lower-order
needs at work such as minimum salary levels or safe and pleasant working conditions. Rather,
individuals look for the gratification of higher-level psychological needs having to do with
achievement, recognition, responsibility, advancement, and the nature of the work itself. This appears
to parallel Maslow’s theory of a need hierarchy.

Page 124 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Maslow’s hierarchy: Maslow’s hierarchy captures the varying degree of needs by which humans
are motivated. According to the psychological perspective, decision makers are motivated by these
needs and decisions are influenced accordingly.

However, Herzberg added a new dimension to this theory by proposing a two-factor model of
motivation, based on the notion that the presence of one set of job characteristics or incentives leads
to worker satisfaction at work, while another and separate set of job characteristics leads to
dissatisfaction at work. Thus, satisfaction and dissatisfaction are not on a continuum with one
increasing as the other diminishes, but are independent phenomena.

This theory suggests that to improve job attitudes and productivity, administrators must recognize and
attend to both sets of characteristics and not assume that an increase in satisfaction leads to decrease
in unpleasurable dissatisfaction.

Herzberg found that the job characteristics related to what an individual does (the nature of the work
he performs) apparently have the capacity to gratify such needs as achievement, competency, status,
personal worth, and self-realization, thus making him happy and satisfied. However, the absence of
such gratifying job characteristics does not appear to lead to unhappiness and dissatisfaction. Instead,
dissatisfaction results from unfavorable assessments of such job-related factors as company policies,
supervision, technical problems, salary, interpersonal relations on the job, and working conditions.

Thus, if management wishes to increase satisfaction on the job, it should be concerned with the nature
of the work itself—the opportunities it presents for gaining status, assuming responsibility, and for
achieving self-realization. If, on the other hand, management wishes to reduce dissatisfaction, then it
must focus on the job environment—policies, procedures, supervision, and working conditions. If
management is equally concerned with both satisfaction and dissatisfaction, then managers must give
attention to both sets of job factors.

Theory Development

The two-factor theory was developed from data collected by Herzberg from interviews with 203
American accountants and engineers in Pittsburgh, chosen because of their professions’ growing
importance in the business world. The subjects were asked to relate times when they felt exceptionally

Page 125 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

good or bad about their present job or any previous job, and to provide reasons, and a description of
the sequence of events giving rise to that positive or negative feeling.

The two-factor theory distinguishes between:

 Motivators (e.g. challenging work, recognition, responsibility) that give positive satisfaction,
arising from intrinsic conditions of the job itself, such as recognition, achievement, or personal
growth.
 Hygiene factors (e.g. status, job security, salary, fringe benefits, work conditions) that do not
give positive satisfaction, though dissatisfaction results from their absence. These are extrinsic
to the work itself, and include aspects such as company policies, supervisory practices, or
wages/salary.

Essentially, motivation factors are needed to motivate an employee to higher performance. Hygiene
factors are needed to ensure an employee is not dissatisfied. Herzberg also further classified our
actions and how and why we do them. For example, if you perform a work related action because you
have to, then that is classed as movement, but if you perform a work related action because you want
to, then that is classed as motivation.

Implications of Herzberg’s Theory

Herzberg’s theory attempts to uncover psychological needs of employees and enhance employee
satisfaction. In order to apply this theory, employers are encouraged to design jobs that enhance and
motivate employees beyond simply meeting a daily or weekly quota. This theory highlights the
importance of rewards systems and monitoring when and how employees are rewarded. Herzberg’s
theory implies that simple recognition is often enough to motivate employees and increase job
satisfaction.

Herzberg argues that both motivation and hygiene are equally important, but that good hygiene will
only lead to average performance, preventing dissatisfaction, but not, by itself, create a positive
attitude or motivation to work. To motivate the employee, management must enrich the content of the
actual work they ask them to do.

MacGregor’s Theory X and Theory Y

Theory X and Theory Y describe two contrasting models of workforce motivation applied by
managers in human resource management, organizational behavior, organizational communication,
and organizational development.

LEARNING OBJECTIVES

Differentiate between the motivators in Theory X and the motivators in Theory Y

KEY TAKEAWAYS

Key Points

 Theory X and Theory Y, put forward by Douglas McGregor, describe two contrasting models
of workforce motivation and management.
 Theory X is a much more traditional management style, predicated on the assumption that
external rewards, punishments, and supervision are effective ways to manage employees.

Page 126 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Theory Y focuses on the internal mechanisms of motivation (relative to the employee),


assuming that employees have a natural drive to contribute, take ownership of their work, and
pursue organizational objectives on their own.
 While Theory Y may seem optimal, it does have some drawbacks. Through empowering
everyone towards autonomy, it can be easy to lose organizational alignment. Strong
organizational objectives and processes are necessary in order for it to work.
 There is some balance to be achieved between these two perspectives, though Theory Y
motivators tend to be the preferably approach to building strong collaborative cultures.

Among the many theories of motivation is Douglas McGregor’s concept of Theory X and Theory Y.
His initial work focused on demonstrating two contrasting motivators in the workplace: external
motivators such as supervision, rewards, penalties, and rules (X) versus internal motivators such as
passion, job satisfaction, accountability, and feelings of self-worth (Y).

The true value in creating this contrast is understanding the situations where X or Y may work better,
and recognizing that motivation is both internally and externally complex. To draw something of a
parallel here, Maslow’s hierarchy has some loose alignment with McGregor’s theories, wherein the
lower levels of the hierarchy are more along ‘X’ lines while the higher levels have more of a ‘Y’ feel
to them.

Theory X

The core assumption here is that, in a given workplace environment, employees won’t have the
intrinsic motivations required to accomplish objectives. Instead, a system should be in place where
external motivators create desired behavioral outcomes. This is considered more of a firm managerial
approach, where management will set objectives, supervise execution, and provide corresponding
returns.

This can be implemented in two ways. Employees can be externally motivated by the existence of
supervision or punishment or externally motivated by the absence of supervision or punishment.

In the first scenario, supervision is tight, and rewards are positive for strong performance and negative
for bad performance. In this method, authoritarian management pushes employees toward desired
outcomes. Workplaces like this focus on shaping their employees into what they want them to be. The
latter scenario represents a softer approach that reduces animosity and anxiety.

Theory Y

Theory Y is a bit more complex, as the manager is not entirely in control (and thus, feels less like a
management style). However, properly understanding Theory Y concepts can help managers manage
and hire better.

Theory Y assumes that employees enjoy a challenge, and strive to add value for the sake of self-worth
and a desire to contribute to a community. The focal point here is on building strong, friendly
relationships between management and employees, and removing most (if not all) authority from the
arrangement. In such a situation, there is no push and no push back, simply unclouded business
objectives.

This, in theory, sounds ideal. However, managers and employees who work in this framework do
eventually encounter some challenges. Through a hands off management approach, it can be easy to
lose alignment, as different individuals go in slightly different tactical directions. It can also result in
enabling less motivated employees to take advantage of a relaxed work environment. There are

Page 127 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

various ways to address these concerns, though, such as building organizational processes to create
alignment and through hiring carefully.

Theory X and Theory Y: This image demonstrates where the true source of motivation is derived in
each theory. Under Theory X, management uses control to direct behavior. Under Theory Y, behavior
is dictated by the employees themselves through communication with management and an
understanding of the agreed upon broader strategy and objectives.

Using Both

No model is perfect, and every circumstance requires some individual thought. Most often,
experienced managers will find the need to use both at some point, though Theory Y usually leads to
preferable outcomes and company culture. Some employees require different sources of motivations
depending on where they are in their own personal development, not to mention some tasks seems to
work out better when externally driven, while others work better when internally driven. Having
comfort with both concepts is the ideal tool set for a motivational manager.

Ouchi’s Theory Z

Ouchi’s theory focuses on increasing employee loyalty to the company by providing a job for life and
focusing on the employee’s well-being.

LEARNING OBJECTIVES

Explain how the Ouchi Theory promotes a strong work force

KEY TAKEAWAYS

Key Points

 Theory Z is a name applied to three distinctly different psychological theories, one of which
was was developed by Dr. William Ouchi.
 According to Ouchi, Theory Z management tends to promote stable employment, high
productivity, and high employee morale and satisfaction.
 William Ouchi takes Japanese business techniques and adapts them to the American corporate
environment.
 One of the most important pieces of this theory is that management must have a high degree of
confidence in its workers in order for this type of participative management to work.

Key Terms

 morale: The capacity of people to maintain belief in an institution or a goal, or even in oneself
and others.
 turnover: In a human resources context, turnover or staff turnover or labor turnover is the rate
at which an employer gains and loses employees.

Introduction

Theory Z is a name applied to three distinct psychological theories. One was developed by Abraham
H. Maslow in his paper Theory Zand the other is Dr. William Ouchi’s so-called “Japanese

Page 128 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Management” style popularized during the Asian economic boom of the 1980s. The third was
developed by W. J. Reddin in Managerial Effectiveness.

For Ouchi, Theory Z focused on increasing employee loyalty to the company by providing a job for
life with a strong focus on the well-being of the employee, both on and off the job. According to
Ouchi, Theory Z management tends to promote:

 Stable employment
 High productivity
 High employee morale and satisfaction

History of Ouchi’s Theory

Professor Ouchi spent years researching Japanese companies and examining American companies
using the Theory Z management styles.

Toyota: A Product of Japanese Productivity: Professor Ouchi spent years researching Japanese
companies using the Theory Z management styes.

By the 1980s, Japan was known for the highest productivity anywhere in the world, while America’s
productivity had fallen drastically. The word “Wa” in Japanese can be applied to Theory Z because
they both deal with promoting partnerships and group work.

The word “Wa” means a perfect circle or harmony, which influences Japanese society to always come
to a solution via teamwork. Promoting Theory Z and the Japanese word “Wa” is how the Japanese
economy became so powerful. Because the Japanese show a high level enthusiasm to work, some of
the researchers also claim that the “Z” in the Theory Z stands for “Zeal. ”

Ouchi’s Conclusions

Ouchi wrote a book called Theory Z: How American Business Can Meet the Japanese
Challenge (1981). In this book, Ouchi shows how American corporations can meet the Japanese
challenges with a highly effective management style that promises to transform business in the 1980s.

The secret to Japanese success, according to Ouchi, is not technology, but a special way of managing
people. “This is a managing style that focuses on a strong company philosophy, a distinct corporate
culture, long-range staff development, and consensus decision-making” (Ouchi, 1981). Ouchi claims
that the results show:

 Lower turnover
 Increased job commitment
 Dramatically higher productivity

William Ouchi doesn’t say that the Japanese culture for business is necessarily the best strategy for
the American companies. Instead, he takes Japanese business techniques and adapts them to the
American corporate environment.

Much like McGregor’s theories, Ouchi’s Theory Z makes certain assumptions about workers. Some
of the assumptions about workers under this theory include:

Page 129 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Workers tend to want to build happy and intimate working relationships with those that they
work for and with, as well as the people that work for them.

 Workers have a high need to be supported by the company, and highly value a working
environment in which such things as family, cultures and traditions, and social institutions are
regarded as equally important as the work itself. These types of workers have a very well
developed sense of order, discipline, a moral obligation to work hard, and a sense of cohesion
with their fellow workers.
 Workers can be trusted to do their jobs to their utmost ability, so long as management can be
trusted to support them and look out for their well-being (Massie & Douglas, 1992).

One of the most important pieces of this theory is that management must have a high degree of
confidence in its workers in order for this type of participative management to work. This theory
assumes that workers will be participating in the decisions of the company to a great degree.

Ouchi explains that the employees must be very knowledgeable about the various issues of the
company, as well as possess the competence to make those decisions. He also points out, however,
that management sometimes has a tendency to underestimate the ability of the workers to effectively
contribute to the decision-making process (Bittel, 1989). For this reason, Theory Z stresses the need
for the workers to become generalists, rather than specialists, and to increase their knowledge of the
company and its processes through job rotations and constant training.

Promotions tend to be slower in this type of setting, as workers are given a much longer opportunity
to receive training and more time to learn the ins and outs of the company’s operations.

The desire, under this theory, is to develop a work force, which has more loyalty toward staying with
the company for an entire career. It is expected that once employees do rise to a position of high level
management, they will know a great deal more about the company and how it operates, and will be
able to use Theory Z management theories effectively on the newer employees.

Modern Views on Motivation

Equity Theory

Equity theory states that perceptions of equality in the input/outcome ratio of employees determines
their relative job satisfaction.

Explain equity theory

Key Points

 Equity theory was developed in 1963 by John Stacey Adams, who stated that an employee will
consider himself to be fairly treated if the ratio of his inputs to outcomes is equivalent to those
around him (by his perception).
 Inputs include effort, time, loyalty, seniority, commitment, personal sacrifice, etc. Outcomes,
on the other hand, include salary, benefits, job security, reputation, sense of achievement,
gratitude, etc.
 According to equity theory, the person who gets “too much” and the person who gets “too
little” both feel distressed. The person who gets too much may feel guilt or shame. The person
who gets too little may feel angry or humiliated.

Page 130 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 (1) Individuals try to maximize outcomes


 (2) [a] Groups will evolve systems of equity, and induce members to adhere to these systems

 [b] Groups will reward those who treat others equitably, and punish those who don’t.
 (3) Individuals in an inequitable relationship feel ‘distressed’. Those who get too little feel
angry/humiliated, while those with too much feel guilt or shame.
 (4) Those in distress will attempt to eliminate the inequity, in order to eliminate the distress.
 3 Primary assumptions:
 (1) Employees except a fair return for their contribution
 (2) Employees can and do determine what an equitable return should be by comparing
themselves to coworkers
 (3) Distressed employees attempt to fix an inequitable situation by distorting inputs and
outcomes in their own minds, by actually changing inputs/outcomes, or by leaving the
organization.
 Implications of Equity Theory:
 – The value of inputs and outcomes will vary from person to person
 – Employees may adjust outcomes according to purchasing power and local market conditions
 – An overcompensated employee may adjust their efforts, or may inflate the value of their
inputs in their mind, adopting a sense of superiority and thus decrease their efforts.
 Criticisms:
 – Some say the model is too simple; there are other variables that affect people’s perceptions of
fairness which vary from person to person
 – Much theory related to Equity Theory has been conducted in laboratories and not real world
settings

Key Terms

 Inputs: Each participant’s contributions that are viewed as entitling him/her to rewards or
costs. Examples include time, effort, and loyalty.
 outcomes: The positive and negative consequences that an individual perceives to be a result
of his/her actions. Examples include praise, bonuses, and promotions.
 ratio: The relative magnitudes of two quantities (usually expressed as a quotient).
 equity theory: an attempt to explain relational satisfaction in terms of perceptions of fair or
unfair distributions of resources within interpersonal relationships

Equity theory was first developed in 1963 by John Stacey Adams, a workplace and behavioral
psychologist, who asserted that employees seek to maintain equity between the inputs that they bring
to a job and the outcomes that they receive from it, against the perceived inputs and outcomes of
others.

For example, if an employee was given a salary increase but a peer was given a larger salary increase
for the same amount of work, the first employee would evaluate this change, perceive an inequality,
and be distressed. However, if the first employee perceived the other employee being given more
responsibility and therefore relatively more work along with the salary increase, then the first
employee may evaluate the change, conclude that there was no loss in equality status, and not resist
the change.

Page 131 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

An individual will consider that he is treated fairly if he perceives the ratio of his inputs to his
outcomes to be equivalent to those around him.

Formula expressing equal equity theory: Ratio of one individual’s outputs to inputs is perceived
as equal to that of another individual in comparison.

Defining Inputs & Outcomes

Inputs are defined as each participant’s contributions to the relational exchange and are viewed as
entitling him/her to rewards or costs. The inputs that a participant contributes to a relationship can be
either assets (entitling him/her to rewards) or liabilities (entitling him/her to costs). Individual traits
such as boorishness and cruelty are seen as liabilities entitling the possessor to costs. Inputs typically
include:

 Time
 Effort
 Loyalty
 Commitment
 Adaptability
 Flexibility
 Tolerance
 Determination
 Enthusiasm
 Personal sacrifice
 Support from coworkers and colleagues
 Skill

Outcomes are defined as the positive and negative consequences that an individual perceives a
participant has incurred as a consequence of his/her relationship with another. When the ratio of
inputs to outcomes is close, then the employee should be very satisfied with their job. Outcomes can
be both tangible and intangible.

Typical outcomes include:

 Job security
 Salary
 Expenses
 Recognition
 Responsibility
 Sense of achievement
 Praise

Four Propositions of Equity Theory

Page 132 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

1. Individuals will try to maximize their outcomes.


2. A) Individuals can maximize collective rewards by evolving accepted systems for equitably

apportioning resources among members. Thus, groups will evolve such systems of equity, and
will attempt to induce members to accept and adhere to these systems. B) Groups will
generally reward members who treat others equitably and generally punish members who treat
each other inequitably.
3. When individuals find themselves participating in inequitable relationships, they will become
distressed. The more inequitable the relationship, the more distress they will feel. According to
equity theory, the person who gets “too much” and the person who gets “too little” both feel
distressed. The person who gets too much may feel guilt or shame. The person who gets too
little may feel angry or humiliated.
4. Individuals who discover they are in inequitable relationships will attempt to eliminate their
distress by restoring equity.

Three Primary Equity Theory Assumptions Applied to Most Businesses

1. Employees expect a fair return for what they contribute to their jobs, a concept referred to as
the “equity norm.”
2. Employees determine what their equitable return should be after comparing their inputs and
outcomes with those of their coworkers, a concept referred to as “social comparison.”
3. Employees who perceive themselves as being in an inequitable situation will seek to reduce the
inequity either by distorting inputs and/or outcomes in their own minds, by directly altering
inputs and/or outcomes, or by leaving the organization.

Implications for Managers

Equity theory has several implications for business managers:

 People measure the totals of their inputs and outcomes. This means a working mother may
accept lower monetary compensation in return for more flexible working hours.
 Different employees ascribe personal values to inputs and outcomes. Thus, two employees of
equal experience and qualification performing the same work for the same pay may have quite
different perceptions of the fairness of the deal.
 Employees are able to adjust for purchasing power and local market conditions. Thus a teacher
from Alberta may accept lower compensation than his colleague in Toronto if his cost of living
is different, while a teacher in a remote African village may accept a totally different pay
structure.
 Although it may be acceptable for more senior staff to receive higher compensation, there are
limits to the balance of the scales of equity and employees can find excessive executive pay
demotivating.
 Staff perceptions of inputs and outcomes of themselves and others may be incorrect, and
perceptions need to be managed effectively.

Expectancy Theory

Expectancy Theory postulates that an individual’s motivation can be derived through identifying an
appropriate expectation.

Page 133 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

LEARNING OBJECTIVES

Understand the three relationships and four variables that result in Expectancy Theory

KEY TAKEAWAYS

Key Points

 Victor Vroom at the Yale School of Management put forward a concept called Expectancy
Theory, which suggests behavior is motivated by an anticipated outcome.
 There are three interactions: expectancy (effort → performance ), instrumentality (performance
→ outcome), and valence (outcome → reward).
 Expectancy allows an individual to move from effort to performance, and is predicated upon
the belief that one can accomplish a given goal.
 Instrumentality is confidence that a given performance will result in the desired reward. This is
best enabled through an established relationship or contract that guarantees the reward.
 Valence is the degree to which this reward matters to the individual being motivated, which
could be pictured as a spectrum. The higher the valence, the higher the motivation.

Key Terms

 self-efficacy: One’s belief that he or she can accomplish a given objective.


 valence: A value assigned to an object, behavior, or other consequence that has relative scale.

Expectancy Theory, initially put forward by Victor Vroom at the Yale School of Management,
suggests that behavior is motivated by the anticipated result or consequences expected. The concept of
choice is central to this theory, as there are a variety of behaviors that an individual could potentially
choose. To anticipate what choice will be made, identify what consequences would be expected as an
outcome, and select the motivation which will result in the optimal outcome.

The Building Blocks

Expectancy Theory boils down to a few simple variables, which in conjunction produce the projected
outcome based upon the motivational inputs. This is described as three relationships using four inputs:

1. Expectancy: effort → performance (E→P)


2. Instrumentality: performance → outcome (P→O)
3. Valence: V(R) outcome → reward

What you’ll notice is a full equation, where each variable leads to the next:

Effort (E) → Performance (P) → Outcome (O) → Reward (R)

Expectancy Theory: This illustration visually expresses the three relationships that ultimately equate
to a given motivation.

Expectancy

Page 134 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Moving from effort to performance requires three things. First is self-efficacy, or the belief that one
can accomplish the goal. Second is the appropriate goal difficulty. Third is the perception of control,
the concept that accomplishing the objectives is within one’s influence.

Instrumentality

To move from performance to outcome, the individual must trust that the delivery of a given output
will result in the desired reward. An example of this could be a commission on a sale. Established
policies in place, preferably via a contract, will guarantee the reward will be delivered based upon an
agreed upon performance.

Valence

This is simply the valuation of a given reward from the individual being motivated. This can be
intrinsically positive or negative, which is to say the pursuit of OR avoidance of an outcome. This is
why it is called a valence. Based upon the values, desires, and objectives of an individual, the
individual will have a certain valued reaction to the reward. If one reward has a more extreme valence
than another, it will consequently result in a higher level of motivation.

Expectancy Theory combines these three concepts into the conclusion that these three interactions
will ultimately create a desired motivational response.

Goal-Setting Theory

If done correctly, having more specific and well-enumerated goals lead to higher performance and a
greater chance of achieving those goals.

Explain the procedures and outcomes of goal setting

Key Points

 According to the theory, goal setting affects outcomes in four ways: choice (focus on goal-
relevant activities); effort (an enumerated target can raise effort); persistence (goals focus
employees to work through setbacks); and cognition (change inefficient behaviors).
 Goal-setting helps managers: since managers cannot consistently drive motivation and monitor
employee activities, goal setting can work as a self-regulatory mechanism for employees to
work with less guidance and oversight.
 Do not encourage employees to “do their best. ” Instead, specific goals should be set, that are
both challenging as well as realistic. It is best if these goals are set after deliberation with the
employee in question.
 For employees to care about goals that are set, six interdependent factors need to be
considered: importance of the expected outcomes to the employee; self efficacy; commitment
to others; goal feedback; task complexity; and goal motivation.
 Feedback is particularly important, in order to sustain motivation and commitment, as well as
to ensure that efforts are correctly guided.
 It is important that the goals of a manager align with the goals of the organization as a whole.
Another limitation is that rigorous goal setting may hamper complex and creative tasks, as
individuals become preoccupied with meeting the goals rather than performing tasks.
 Locke and Latham (2002) urge managers not to encourage employees to “do their best”. They
state that this attitude is useless in eliciting specific behavior. Instead, specific goals should be

Page 135 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

set, which are both challenging as well as realistic. It is best if these goals are set after
deliberation with the employee in question.

 For employees to care about goals that are set, 6 interdependent factors need to be considered:
Importance of the expected outcomes to the employee, Self Efficacy, Commitment to others,
Goal feedback, Task complexity, Goal Motivation.
 Feedback is particularly important, in order to sustain motivation and commitment, as well as
to ensure that efforts are correctly guided.
 Goal setting has limitations. It is important that the goals of a manager – and of specific
individuals – align with the goals of the organization as a whole. If goals are not aligned,
performance may suffer. Another limitation is that rigorous goal setting may hamper complex
tasks, as individuals become preoccupied with meeting the goals rather than performing tasks.
This may also be true with particularly creative work, where setting rigorous goals may hamper
the creative process.

Key Terms

 goal: a result that one is attempting to achieve


 self-efficacy: the measure of the belief in one’s own ability to complete tasks and reach goals
 cognitive: the part of mental function that deals with logic, as opposed to affective which deals
with emotions

Goal Setting Theory

Setting goals affects outcomes in four ways:

1. Choice: Goals direct efforts towards goal-relevant activities and away from distractions.
2. Effort: Goals can lead to more effort; for example, if one typically produces four widgets an
hour, and has the goal of producing six, one may work more efficiently as a result.
3. Persistence: People become more likely to work through setbacks if pursuing a goal.
4. Cognition: Goals can lead individuals to develop and change their behavior.

Goals that are difficult to achieve and specific tend to increase performance more than goals that are
not. A goal can become more specific through quantification or enumeration (should be measurable),
such as by demanding “…increase productivity by 50%,” or by defining certain tasks that must be
completed.

Goal-Setting Theory: Goals lead to higher performance in an organization.

Psychologists have examined the behavioral effects of goal-setting, concluding in 90% of laboratory
and field studies that specific and challenging goals led to higher performance than when the goals
were easy or did not exists.

While some managers believe it is sufficient to urge employees to “do their best,” psychologists have
disagreed on this style’s effectiveness. Some psychologists have found that people who are told to “do
their best” don’t. To elicit some specific form of behavior from others, it is important that all
employees have a clear understanding what is expected. “Doing their best” does not provide that clear
measure. A goal is important because it establishes a specified direction and measure of performance.

Page 136 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

However, when goals are established at a management level and thereafter solely laid down,
employee motivation with regard to achieving these goals is rather suppressed. To increase
motivation, employees must be involved in the goal setting process and the goals must be challenging
as well.

People perform better when they are committed to achieve certain goals. Goal commitment is
dependent on:

 Importance of the expected outcomes of goal attainment


 Self-efficacy – one’s belief that he is able to achieve the goals
 Commitment to others – promises or engagements to others can strongly improve commitment
 Feedback – keep track of performance to allow employees to see how effective they have been
in attaining the goals to ensure that any deficiencies are quickly corrected.
 Task complexity – more difficult goals require more cognitive strategies and well-developed
skills. The more difficult the tasks, the smaller the group of people who possess the necessary
skills and strategies. From an organizational perspective it is thereby more difficult to
successfully attain more difficult goals since resources become more scarce.
 Employee motivation – the more employees are motivated, the more they are stimulated and
interested in accepting goals.

These success factors are interdependent. For example the expected outcomes of goals are positively
influenced when employees are involved in the goal setting process. Not only does participation
increase commitment in attaining the goals that are set, participation influences self-efficacy as well.

Goal-commitment, the most influential moderator, becomes especially important when dealing with
difficult or complex goals. If people lack commitment to goals, they lack motivation to reach them.
To commit to a goal, one must believe in its importance or significance.

The enhancement of performance through goals requires feedback. Goal setting and feedback go hand
in hand. Without feedback, goal setting is unlikely to work. Providing feedback on short-term
objectives helps to sustain motivation and commitment to a goal. Besides, feedback should be
provided on the strategies followed to achieve the goals and the final outcomes achieved as well.
Feedback on strategies to obtain goals is very important, especially for complex work, because
challenging goals put focus on outcomes rather than on performance strategies, so they impair
performance.

Proper feedback is also very essential, and the following hints may help for providing a good
feedback:

 Create a positive context for feedback.


 Use constructive and positive language.
 Focus on behaviors and strategies.
 Tailor feedback to the needs of the individual worker.
 Make feedback a two-way communication process.

Goal-setting may have little effect if individuals can’t see the state of their performance in relation to
the goal. By gauging their performance, individuals can determine whether they need to work harder
or changing their methods.

Page 137 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Goal-setting theory has limitations. In an organization, a goal of a manager may not align with the
goals of the organization as a whole. In such cases, the goals of an individual may come into direct
conflict with the employing organization. Without aligning goals between the organization and the
individual, performance may suffer. Moreover, for complex or creative tasks, goal-setting may actual
impair performance because the individual may become preoccupied with meeting goals and not
performing tasks.

Reinforcement Theory

Reinforcement theory, or operant conditioning, is a implementation of cause and effect thinking into
workplace motivation.

Recognize the role of cause and effect via reinforcement in motivating good performance

Key Points

 B.F. Skinner originally founded the basic premise behind Reinforcement Theory, which is best
described as cause and effect. When a behavior occurs, individuals associate the consequences
with the behavior.
 Reinforcement, be it positive or negative, increases a behavior. This is best done through
rewards or the removal of frustrations.
 Punishment, be it positive or negative, is designed to decrease a behavior. This is best done
through providing an adverse response.
 Various factors can influence the efficacy of reinforcement. Most notably, the size, immediacy,
and need for a given reward (or level of avoidance for a given punishment).

Key Terms

 Reinforcement: The process of repeating a behavior with desirable consequences.

The basic premise behind B.F. Skinner’s Theory of Reinforcement is both simple and intuitive: an
individual’s behavior is a function of its consequences. Think of it as a simple cause and effect graph.
Every behavior will be a cause that creates some sort of consequence as an effect. If I work hard
today, I’ll make more money. If I make more money, I’m more likely to want to work hard. This
creates behavioral reinforcement, where the desired behavior is enabled and promoted by the desired
outcome from a behavior.

The Primary Inputs

This theory relies on four primary inputs or aspects of operant conditioning, generated from the
external environment. These four inputs are positive reinforcement, negative reinforcement, positive
punishment, and negative punishment. A fifth input could be described as extinction, which is a lack
of reinforcement for a behavior that had previously been reinforced.

Page 138 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Operant Conditioning: This chart demonstrates the various facets of operant conditioning, which can
be framed via reinforcement and punishment (both positive and negative for each).

Reinforcement

Positive reinforcement: When a behavior (and subsequent response) is rewarding, the frequency of
that behavior will be increased. For example, if an employee identifies a new market opportunity that
creates profit, an organization may give her a bonus. This will positively reinforce the desired
behavior.

Negative reinforcement: When a desired behavior is responded to with the removal of something the
individual doesn’t like, the behavior is reinforced. For example, an employee demonstrates a strong
sense of work ethic and wraps up a few projects faster than expected. This employee happens to have
a long commute. The manager tells the employee to go ahead and work from home for a few days,
considering how much progress she has made. This is an example of removing a negative stimuli for
reinforcing a behavior.

Punishment

Page 139 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Positive punishment: Conditioning at it’s simplest, punishment is simply identifying a negative


behavior and providing an adverse stimuli to dissuade future instances. A simple example would be
suspending an employee for inappropriate behavior.

Negative punishment: Similar to negative reinforcement, negative punishment revolves around


removing something to condition a response. To use our previous example for negative reinforcement,
an employee prefers to work at home. However, his performance has been suffering lately. A negative
punishment would be to revoke the right to work at home until performance improves.

Factors Impacting Success

Reinforcement can be impacted by various factors:

Satiation – In short, the degree of need. If an employee is quite wealthy, for example, it may not be
particularly helpful to offer a bonus.

Immediacy – The time between the desired behavior and the potential reinforcement will have impact
on how significantly the reinforcement will be correlated with the behavior. To use the bonus
example, if an employee does something great, don’t wait around to provide a bonus. Make sure it’s
fresh in their minds; this helps associate the outcome cause with the effect.

Size – Of course, the scale of the reward or punishment has a big impact on the scale of the response.
A bigger bonus means a bigger impact (to a degree, see the satiation aspect above).

LICENSES AND ATTRIBUTIONS

Motivation Techniques in Practice

Behavior Modification

Modifying behavior through reinforcement and environmental stimuli can increase positive actions
and decrease negative actions in the workplace.

Differentiate between the various stimuli managers use to create or reinforce certain types of behavior

Key Points

 Behavior modification is a central concept in organizational behavior, pulling from a wide


variety of multidisciplinary perspectives such as psychology and sociology.
 An important concern for creating a business is the environment, which will actively modify
behavior in a variety of ways. Being able to proactively predict how a given environment may
impact behavior is a great opportunity.
 Reinforcement, both positive and negative, can be created via incentives or the removal and
avoidance of negative stimuli.
 Punishments, such as demotions, are also used to avoid repeating undesirable past behaviors.

Key Terms

 stimuli: An external force which generates a response or a reaction from something else

Page 140 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Reinforcement: The process which enables behavior with desirable consequences to be


repeated.

Identifying how to keep employees interested and motivated in their work is a substantial aspect of
organizational behavior. This area of business is uniquely combined with psychology and sociology to
create an understanding of how people behave at work, and why. As an overview, there are a few key
concepts which will help to frame motivational theory, and how it is commonly applied in the
workplace.

Environment Matters

How people behave is largely impacted by how they interact with the world around them. As an
organization, it’s useful to consider how the structure of an office, and the availability of certain
resources, may impact overall behavior of all employees. External forces that impact behavior are
referred to as stimuli, and understanding what type of stimuli may modify behavior is useful in
leading organizations.

Take an example of an open office environment, as compared to an environment of cubicles and


individual offices. With easy access to privacy and walls between employees, tendencies toward
individual work and decision-making via small groups and small meetings may be more likely
compared to an office with long tables, no offices, and no walls. This is just a simple example of a
cultural decision that will result in modified behavior.

Reinforcement (Positive and Negative)

Behavior modification in organizational management is often linked with B.F. Skinner’s contributions
to the study of behavior. Reinforcement, both positive and negative, can be created via incentives or
the removal and avoidance of negative stimuli. These influences on behavior are different than
environmental influences because they are deliberately reactive to employee behaviors (as opposed to
proactive or incidental). Hence the idea of reinforcing something deliberately, after it occurs.

Concepts like this tend to look much simpler in action than in theory. A simple example can be seen
in the restaurant industry. A server might be motivated to perform better after receiving higher tips for
exceptional service. This is positive reinforcement. On the other hand, a server might be motivated to
perform better after his or her boss received negative feedback from an unhappy customer. This is
negative reinforcement.

Punishment

Punishments, such as demotions, are also used to avoid repeating undesirable past behaviors. For
example, a restaurant manager might require the server who makes the most mistakes (such as mixing
up orders) to pick up the least desirable shifts.

Operant Conditioning: Behavior can be promoted or demoted through strategic use of positive and
negative reinforcements, as well as positive and negative punishments.

Job Design

Designing jobs and job characteristics strategically to empower employee satisfaction and motivation
is a central responsibility of management.

Page 141 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

List the various core dimensions of strategic job design, along with the psychological states which
accompany them

Key Points

 Job design is the process of specifying the contents, objectives, responsibilities, and
relationships the job will fulfill or interact with.
 Clever job design can be a highly motivating aspect of an employee’s day-to-day operations.
Effectively building motivation and satisfaction into the job design itself empowers positive
employee behaviors.
 Skill variety, task identity, task significance, autonomy, and feedback are core components of
effective job design.
 If effectively designed, a job should induce the psychological states of meaningfulness,
responsibility, and ownership of the results.
 Managers can also leverage intrinsic and extrinsic rewards, job rotation, job enrichment and job
enlargement to better motivate employees via job design.

Key Terms

 Autonomy: The ability to determine and enact one’s own objectives and processes in the
workplace.

Job Design

Job design is an important prerequisite to effective workplace motivation, as designing a job


effectively can empower positive behaviors and create a strong infrastructure for employee success.
Job design is specifying the contents, responsibilities, objectives, and relationships required to satisfy
the expectations of the role. Understanding how to effectively design a job is a key managerial skill,
with various models and theories to assist in pursuing this tactfully.

Job Characteristic Theory

Proposed by Hackman & Old man in 1976, this theory underlines five critical characteristics job
design should keep in mind, which satisfy three critical psychological states of the employee filling
the role. The objective of this model is to generate intrinsic motivation, satisfaction, and performance
while minimizing turnover.

Core Job Dimensions

1. Skill variety — Doing the same thing day in and day out gets tedious. The natural solution is
designing jobs with enough variety to stimulate ongoing interest, growth, and satisfaction.
2. Task identity — Being part of a team is motivating, but so too is having ownership of a facet of
the process. Having a clear understanding of what one is responsible for, and some degree of
control over said task, is motivating.
3. Task significance — Being relevant to organizational success provides key motivation to
completing the tasks at hand. Knowing one’s importance tends to lead to satisfaction.
4. Autonomy — No one likes being micro-managed, and having some freedom to be the expert is
critical to job satisfaction. Generally speaking, we hire individuals for their specialized
knowledge. Giving specialists autonomy to make the right decisions is a win win.

Page 142 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

5. Feedback — Finally, everyone needs objective feedback as to how they are doing and how
they can do better. Providing well-constructed feedback with tangible outcomes is a key
component of job design.

Psychological States

1. Experienced Meaningfulness – Through accomplishing the first three dimensions above,


employees feel what they do is meaningful. This is a positive psychological state.
2. Experienced Responsibility – Dimension four brings about a sense of accountability, which is
motivating.
3. Knowledge of Results – Dimension five provides a sense of progress, growth, and personal
assessment. Understanding one’s accomplishments is a healthy state of mind for motivation
and satisfaction.

Job Design Techniques

As a motivational force in the organization, managers must consider how they can design jobs
tactfully to create empowered, motivated, and satisfied employees. Here are a few established
methods to accomplish this objective:

 Job Rotation – As noted in the above model, it’s not particularly motivating to do the exact
same thing every day. As a result, rotating jobs and expanding the skill sets of employees
accomplishes two objectives: increased employee satisfaction will and broader employee skill
sets.
 Job Enlargement (horizontal) – Zooming out a little, and granting employees the autonomy to
assess the quality of their work, improve efficiency of their processes, and address mistakes
often empowers satisfaction in the workplace.
 Intrinsic and Extrinsic Rewards – Having autonomy is motivating, but particularly motivating
when rewards are granted on the performance level. Consider a salesman. Receiving a
commission on every sale motivates both performance and job satisfaction.
 Job Enrichment (vertical) – As a manager, it is your responsibility to dedicate some (if not all)
of your managerial planning to experienced employees as they grow into their roles. By giving
over control of the employee’s work task planning to the employees themselves, they feel a
strong sense of progress in their career and ownership of their outcomes.

Flextime

Under flextime, workers are allowed to determine their work schedule instead of working during the
standard hours of 9 a.m. to 5 p.m.

Evaluate flextime as an alternative work schedule

Key Points

 Even with flextime, employees are usually expected to work during a core period of time
during the working day depending on the needs of the business (from 11 a.m. to 3 p.m. for
example).
 Some companies have a flex place policy which allows employees to decide where they do
their work.

Page 143 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Flextime benefits for employees include: a better work-life balance, less commute, less fatigue,
more days off, and lower sickness.

 Flextime benefits for the company include: better motivated workers; more efficient and
effective operation; less fatigued workers, so less errors; people work overtime hours without
receiving overtime rates; fewer facilities required; and lower sickness.

Key Terms

 flextime: An arrangement that allows employees to set their own working hours within agreed
limits; normally must include certain periods (core time) when they must be at work.
 Telecommuting: Telecommuting or telework are terms often used interchangeably to refer to a
work arrangement in which employees enjoy flexibility in work location and hours. A person
who telecommutes is known as a “telecommuter” and a person who teleworks is known as a
“teleworker. ” Telecommute generally refers to the elimination of the daily commute to a
central place of work. Many telecommuters work from home, while others, occasionally also
referred to as “nomad workers” or “web commuters” utilize mobile telecommunications
technology to work from coffee shops or other locations.
 Work-life balance: The relative importance of work and personal life to a particular
individual.

Flextime

Flextime is a variable work schedule, in contrast to traditional work arrangements requiring


employees to work a standard 9 a.m. to 5 p.m. day. Its invention is usually credited to William
Henning. Under flextime, there is typically a core period (of approximately 50% of total working time
/ working day) of the day, when employees are expected to be at work (for example, between 11 a.m.
and 3 p.m.). The rest of the working day is “flextime”, in which employees can choose when they
work, subject to achieving total daily, weekly, or monthly hours in the region of what the employer
expects, and subject to the necessary work being done.

Telecommuting: This man is telecommuting from a restaurant. As a result of improvement in


technology and Internet connectivity, one can telecommute from almost anywhere now.

A flextime policy allows staff to determine when they will work, while a flexplace policy allows staff
to determine where they will work. Its practical realization can mainly be attributed to the
entrepreneur Wilhelm Haller who founded Hengstler Gleitzeit, and later “Interflex Datensysteme
GmbH” in Southern Germany, where today a number of companies offer Flexitime (Gleitzeit)
solutions which have grown out of his initiative.

Advantages of Flextime

The advantages of flexitime for the individual include: better work-life balance, less commute, less
fatigue, more days off, and lower sickness. The benefits for the company include: better motivated
workers; more efficient and effective operation; less fatigued workers, so less errors; people work
overtime hours without receiving overtime rates; fewer facilities required; and lower sickness.

For employers, flexitime can aid the recruitment and retention of staff. It has been a particularly
popular option in 2009 for employers trying to reduce staff costs without having to make
redundancies during the recession. It can also help provide staff cover outside normal working hours
and reduce the need for overtime. Flexitime can also improve the provision of equal opportunities to

Page 144 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

staff unable to work standard hours. Flexitime can give employees greater freedom to organize their
working lives to suit personal needs. In addition, travelling can be cheaper and easier if it is out of
peak time.

A recent review by the Cochrane Collaboration has found that flexible working arrangements, such as
flextime and telecommuting can have positive effects on health, but the effects are primarily seen
when employees have some control over their new schedules. Additionally, individuals who
telecommute to work most of the work week are more satisfied with their jobs than are traditional
employees who commute into a physical office location.

Cross-Training and Job Sharing

Cross training involves workers being trained in tangent job functions, while job sharing involves two
people working together on the same job.

Explain cross-training and job training

Key Points

 Cross training involves workers being trained in tangent job functions to increase oversight in
ways that are impossible through management interactions with workers alone; it also
empowers them to be more effective.
 Job sharing is an employment arrangement where typically two people are retained on a part
time or reduced time basis to perform a job normally fulfilled by one person working full time.
 There are challenges associated with making job sharing work, but studies show that net
productivity increases when two people share the same 40-hour job.

Key Terms

 job sharing: Job sharing is an employment arrangement where typically two people are
retained on a part-time or reduced-time basis to perform a job normally fulfilled by one person
working full-time.
 Cross-training: Cross-training in business operations involves training employees to engage in
quality control measures. Employees are trained in tangent job functions to increase oversight
in ways that are impossible through management interactions with workers alone.
 featherbedding: The employment of more workers than is necessary because of union rules,
especially upon the introduction of new technology
 job specification: the criteria required to be filled by an employee

Cross-Training and Job Sharing

What is Cross-training ?

Cross-training in business operations involves training employees to engage in quality control


measures. Employees are trained in tangent job functions to increase oversight in ways that are
impossible through management interactions with workers alone.

Workers working together on an assembly line: Workers on an assembly line, who normally do a
single task, benefit from cross-training to develop their skills and be able to work on a variety of
areas.

Page 145 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Advantages

The advantages of cross-training employees include the following:

 Helps customers and clients by empowering employees to answer questions about the entire
organization
 Illuminates inefficient methods, outdated techniques, and bureaucratic drift, which allows staff
to re-evaluate the work methods
 Raises awareness of how other departments operate
 Enhances routine scheduling and enables staff to move around the tasks of the operation
 Better coverage, increased flexibility, and the ability to cope with unexpected absences,
emergencies, and illnesses
 Increases the employability of staff who have the opportunity to train in areas outside of their
original responsibilities

There are other, more general advantages as well:

 Increased flexibility and versatility


 Appreciated intellectual capital
 Improved individual efficiency
 Increased standardization of jobs
 Heightened morale

Job Sharing

Job sharing is an employment arrangement where typically two people are retained on a part time or
reduced time basis to perform a job normally fulfilled by one person working full time. Compensation
is apportioned between the workers, thus leading to a net reduction in per employee income. Job
sharing should not be confused with the more pejorative term featherbedding, which describes the
deliberate retention of excess workers on a payroll. For employees seeking more free time, job sharing
may be a way to take back more control of their personal lives. Employees who job share frequently
attribute their decision to quality of life issues. Studies have shown that net productivity increases
when two people share the same 40-hour job.

However, there is an inherent challenge in making job sharing work for the rest of the company’s
stakeholders. The hand-off or handover communication between those sharing the job is essential, and
co workers must adapt to working with each other. For example, one person is responsible for a task
on Monday, but another performs it on Tuesday.

Working from Home

Innovations in technology have allowed for telecommuting, a practice in which employees work from
home or on the go.

Evaluate the advantages and disadvantages to telecommuting

Key Points

Page 146 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 The terms” telecommuting” and “telework” are both used to describe a work arrangement in
which employees have the flexibility to choose their work location and hours.

 Communities, employers, employees, and the environment receive benefits from


telecommuting.
 The disadvantages of telecommuting include a possible negative impact on career advancement
and workplace communication issues.
 Entrepreneurs can choose to run a business from home for a variety of reasons, such as lower
business expenses, personal health limitations, and a more flexible schedule due to the lack of a
commute.
 Work-at-home parents may have decided to start a home-based business due ot the
incompatibility of a 9-5 work day with school hours or sick days.

Key Terms

 virtual office: A virtual office is a combination of off-site live communication and address
services that allow users to reduce traditional office costs while maintaining business
professionalism. Frequently the term is confused with “office business centers” or “executive
suites” which demand a conventional lease whereas a true virtual office does not require that
expense.
 Telecommute: To work from home, sometimes for part of a working day or week, using a
computer connected to one’s employer’s network or via the Internet.

Advantages of Telecommuting

Telecommuting refers to a work arrangement in which employees enjoy flexibility in work location
and hours. With modern telecommunication technology, no longer is it necessary for employees to
undergo a daily commute to a central place of work. Many telecommuters work from home, while
others, who are occasionally referred to as “nomad workers” or “web commuters”, work from coffee
shops or other locations.

To be successful, telecommuting should incorporate training and development that includes


evaluation, simulation programs, team meetings, written materials, and forums. Information sharing
should be considered synchronous in a virtual office and building processes to handle conflicts should
be developed. Operational and administrative support should be redesigned to support the virtual
office environment. Facilities need to be coordinated properly in order to support the virtual office
and technical support should be coordinated properly.

Telecommuting offers benefits to communities, employers, and employees. For communities,


telecommuting can offer fuller employment by increasing the employability of circumstantially
marginalized groups, such as work at home parents and caregivers, the disabled, retirees, and people
living in remote areas. Furthermore, working from home reduces traffic congestion and traffic
accidents, relieves the strain on transportation infrastructures, reduces greenhouse gases, saves fuel,
and reduces energy use.

For companies, telecommuting and work-from-home arrangements may:

 Expand the talent pool


 Reduce the spread of illness
 Reduce costs

Page 147 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Increase productivity
 Reduce their carbon footprint and energy usage

 Reduce turnover and absenteeism


 Improve employee morale
 Offer a continuity of operations strategy
 And improve their ability to handle business across multiple time zones

For individuals, telecommuting improves work-life balance. Working from home can free up the
equivalent of 15 to 25 workdays a year from time that would have otherwise been spent commuting,
and save between $4,000 and $21,000 per year in travel and work-related costs.

Environmental Benefits and Government Regulation

Telecommuting gained more ground in the United States in 1996 after the Clean Air Act amendments
were adopted. The act required companies with over 100 employees to encourage car pools, public
transportation, shortened workweeks, and telecommuting. In 2004, an appropriations bill was enacted
by Congress to encourage telecommuting for certain Federal agencies. The bill threatened to withhold
money from agencies that failed to provide telecommuting options to all eligible employees. The
energy-saving potential of telecommuting from gas savings alone would total more than twice what
the U.S. currently produces from all renewable energy sources combined.

Employee Motivation and Satisfaction

Work-from-home flexibility is a desirable asset for employees. A meta-analysis of 46 studies on


telecommuting by Ravi Gajendran and David A. Harrison found that telecommuting has largely
positive benefits for employees and employers, mainly relating to job satisfaction, autonomy, stress,
manager -rated job performance, and work-family conflict. The meta-analysis found generally no
detrimental effects on the quality of workplace relationships and career outcomes. Only high-intensity
telecommuting (where employees work from home for more than 2.5 days a week) was found to harm
employee relationships with coworkers, but this was found to be offset by beneficial effects on work-
family conflict.

Potential Drawbacks and Concerns

Telecommuting has come to be viewed by some as more a complement rather than a substitute for
work in the workplace. Barriers to continued growth of telecommuting include distrust from
employers and personal disconnectedness for employees. Traditional line managers are accustomed to
managing by observation and not necessarily by results. This causes a serious obstacle in
organizations attempting to adopt telecommuting. The main concern about telecommuting is the fear
of loss of control. While 75% of managers say they trust their employees, a third say they’d like to be
able to see them, just to be sure.

Managers may view the teleworker as experiencing a drop in productivity during the first few months.
This drop occurs as the employee, his peers, and the manager adjust to the new work regimen. The
drop could also be accountable to an inadequate office setup. Managers should be patient and give the
teleworker time to adapt. Eventually, productivity of the teleworker should climb, as over two-thirds
of employers report increased productivity among telecommuters.

From an employee perspective, some believe that telecommuting can negatively affect one’s career. A
recent survey of 1,300 executives from 71 countries indicated a belief that people who work from

Page 148 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

home are less likely to get promoted. The reasoning is that companies rarely promote people into
leadership roles who haven’t been consistently seen and measured.

Home-Based Business

Another category of people who work from home are those who have a home-based business.
Entrepreneurs choose to run businesses from home for a variety of reasons, including lower business
expenses, personal health limitations, and a more flexible schedule due to the lack of a commute. This
flexibility can give an entrepreneur more options when planning tasks, especially parenting duties.

Common Organizational Structures


Functional Structure

An organization with a functional structure is divided based on functional areas, such as IT, finance,
or marketing.

Explain the functional structure within the larger context of organizational structures in general

Key Points

 A functional organization is a common type of organizational structure in which the


organization is divided into smaller groups based on specialized functional areas, such as IT,
finance, or marketing.
 Functional departmentalization arguably allows for greater operational efficiency because
employees with shared skills and knowledge are grouped together by function.
 A disadvantage of this type of structure is that the different functional groups may not
communicate with one another, potentially decreasing flexibility and innovation. A recent trend
aimed at combating this disadvantage is the use of teams that cross traditional departmental
lines.

Key Terms

 silo: In business, a unit or department within which communication and collaboration occurs
vertically, with limited cooperation outside the unit.
 Departmentalization: The organization of something into groups according to function,
geographic location, etc.

Overview of the Functional Structure

An organization can be arranged according to a variety of structures, which determine how the
organization will operate and perform. In a functional structure, a common configuration, an
organization is divided into smaller groups by areas of specialty (such as IT, finance, operations, and
marketing). Some refer to these functional areas as ” silos “—entities that are vertical and
disconnected from each other. Correspondingly, the company’s top management team typically
consists of several functional heads (such as the chief financial officer and the chief operating officer).

Page 149 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Communication generally occurs within each functional department and is transmitted across
departments through the department heads.

Functional structure at FedEx: This organizational chart shows a broad functional structure at FedEx.
Each different functions (e.g., HR, finance, and marketing) is managed from the top down via functional
heads (the CFO, the CIO, various VPs, etc.).

Advantages of a Functional Structure

Functional departments arguably permit greater operational efficiency because employees with shared
skills and knowledge are grouped together by functions performed. Each group of specialists can
therefore operate independently with management acting as the point of cross-communication
between functional areas. This arrangement allows for increased specialization.

Disadvantages of a Functional Structure

A disadvantage of this structure is that the different functional groups may not communicate with one
another, potentially decreasing flexibility and innovation. Functional structures may also be
susceptible to tunnel vision, with each function perceiving the organization only from within the
frame of its own operation. Recent trends that aim to combat these disadvantages include the use of
teams that cross traditional departmental lines and the promotion of cross-functional communication.

Functional structures appear in a variety of organizations across many industries. They may be most
effective within large corporations that produce relatively homogeneous goods. Smaller companies
that require more adaptability and creativity may feel confined by the communicative and creative
silos functional structures tend to produce.

Divisional Structure

Divisional structures group various organizational functions into product or regional divisions.

Describe the basic premise behind divisional structures within the general framework of
organizational structure

Key Points

 The divisional structure is a type of organizational structure that groups each organizational
function into a division. These divisions can correspond to either products or geographies.
 Each division contains all the necessary resources and functions within it to support that
product line or geography (for example, its own finance, IT, and marketing departments).
 A multidivisional form (or “M-form”) is a legal structure in which one parent company owns
subsidiary companies, each of which uses the parent company’s brand and name.
 The divisional structure is useful because failure of one division doesn’t directly threaten the
other divisions. In the multidivisional structure, the subsidiaries benefit from the use of the
brand and capital of the parent company.
 Disadvantages of divisional structure can include operational inefficiencies from separating
specialized function. For the multidivisional structure, disadvantages can include increased
accounting and taxes.

Page 150 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Key Terms

 parent company: An entity that owns or controls another entity.


 division: A section of a large company.
 subsidiary: A company owned by a parent company or holding company.

Divisional Structure Overview

Organizations can be structured in various ways, with each structure determining the manner in which
the organization operates and performs. A divisional organization groups each organizational function
into a division.

U.S. Department of Energy organization chart: The DOE organization chart shows a divisional
structure with different divisions under each of three under-secretaries for energy. Each of the three
division is in charge of a different set of tasks: environmental responsibilities, nuclear-energy
responsibilities, or research responsibilities.

Divisional Strategies

Each division within this structure can correspond to either products or geographies of the
organization. Each division contains all the necessary resources and functions within it to support that
particular product line or geography (for example, its own finance, IT, and marketing departments).
Product and geographic divisional structures may be characterized as follows:

 Product departmentalization : A divisional structure organized by product departmentalization


means that the various activities related to the product or service are under the authority of one
manager. If the division builds luxury sedans or SUVs, for example, the SUV division will
have its own sales, engineering, and marketing departments distinct from those departments
within the luxury sedan division.
 Geographic departmentalization: Geographic departmentalization involves grouping activities
based on geography, such as an Asia/Pacific or Latin American division. Geographic
departmentalization is particularly important if tastes and brand responses differ across regions,
as it allows for flexibility in product offerings and marketing strategies (an approach known as
localization).

A common legal structure known as the multidivisional form (or “M-form”) also uses the divisional
structure. In this form, one parent company owns subsidiary companies, each of which uses its brand
and name. The whole organization is ultimately controlled by central management; however, most
decisions are left to autonomous divisions. This business structure is typically found in companies that
operate worldwide—for example, Virgin Group is the parent company of Virgin Mobile and Virgin
Records.

Advantages of a Divisional Structure

As with all organizational structure types, the divisional structure offers distinct advantages and
disadvantages. Generally speaking, divisions work best for companies with wide variance in product
offerings or regions of geographic operation. The divisional structure can be useful because it affords
the company greater operational flexibility. In addition, the failure of one division does not directly
threaten the other divisions. In the multidivisional structure, subsidiaries benefit from the use of the
brand and capital of the parent company.

Page 151 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Disadvantages of a Divisional Structure

Some disadvantages of this structure include operational inefficiencies from separating specialized
functions—for example, finance personnel in one division do not communicate with those in another
division. Disadvantages of the multidivisional structure can include increased accounting and tax
implications.

Matrix Structure

The matrix structure is a type of organizational structure in which individuals are grouped via two
operational frames.

Illustrate the way two different operational perspectives can be crossed in a matrix structure to
organize a company

Key Points

 The matrix structure is a type of organizational structure in which individuals are grouped
simultaneously by two different operational perspectives.
 Matrix structures are inherently complex and versatile, making them more appropriate for large
companies operating across different industries or geographic regions.
 Proponents suggest that matrix management is more dynamic than functional management in
that it allows team members to share information more readily across task boundaries; it also
allows for specialization that can increase depth of knowledge.
 A disadvantage of the matrix structure is the increased complexity in the chain of command,
which can lead to a higher manager-to-worker ratio and contribute to conflicting loyalties
among employees.

Overview of the Matrix Structure

Organizations can be structured in various ways, and the structure of an organization determines how
it operates and performs. The matrix structure is a type of organizational structure in which
individuals are grouped by two different operational perspectives simultaneously; this structure has
both advantages and disadvantages but is generally best employed by companies large enough to
justify the increased complexity.

Page 152 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Matrix organizational structure: In a matrix structure, the organization is grouped by both product
and function. Product lines are managed horizontally and functions are managed vertically. This means
that each function—e.g., research, production, sales, and finance—has separate internal divisions for
each product.

In matrix management, the organization is grouped by any two perspectives the company deems most
appropriate. Common organizational perspectives include function and product, function and region,
or region and product. In an organization grouped by function and product, for example, each product
line will have management that corresponds to each function. If the organization has three functions
and three products, the matrix structure will have nine (3×33×3) potential managerial interactions.
This example illustrates how inherently complex matrix structures are in comparison to other, more
linear structures.

Advantages of a Matrix Structure

Proponents of matrix management suggest that this structure allows team members to share
information more readily across task boundaries, countering the “silo” critique of functional
management. Matrix structures also allow for specialization that can both increase depth of
knowledge and assign individuals according to project needs.

Disadvantages of a Matrix Structure

A disadvantage of the matrix structure is the increased complexity in the chain of command when
employees are assigned to both functional and project managers. This increase in complexity can
result in a higher manager-to-worker ratio, which can in turn increase costs or lead to conflicting
employee loyalties. It can also create a gridlock in decision making if a manager on one end of the
matrix disagrees with another manager. Blurred authority in a matrix structure can result in reduced
agility in decision making and conflict resolution.

Page 153 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Matrix structures should generally only be used when the operational complexity of the organization
demands it. A company that operates in various regions with various products may require interaction
between product development teams and geographic marketing specialists—suggesting a matrix may
be applicable. Generally speaking, larger companies with a need for a great deal of cross-departmental
communication benefit most from this model.

Team-Based Structure

The team structure is a newer, less hierarchical organizational structure in which individuals are
grouped into teams.

Classify team-based structures within the larger context of the most common organizational structures

Key Points

 The team structure in large organizations is a newer type of organizational structure. A team
should be a group of workers, with complementary skills and synergistic efforts, all working
toward a common goal.
 An organization may have several teams that can change over time. Teams that include
members from different functions are known as cross- functional teams.
 Although teams are characterized as less hierarchical, they typically still include a management
structure (or management team).
 Critics argue that the use of the word “team” to describe modern organizational structures is a
fad—that some teams are not really teams at all but merely groups of staff.
 One aspect of team-based structures likely to persist indefinitely is the integration of team
cultures within an broader structure (such as a functional structure with interspersed teams).

Key Terms

 synergistic: Cooperative, working together, interacting, mutually stimulating.


 hierarchical: Classified or arranged according to various criteria into successive ranks or
grades.

Overview of the Team-Based Structure

Organizations can be structured in various ways, and the structure of an organization determines how
it operates and performs. The team structure in large organizations is considered a newer type of
organization that is less hierarchical, less structured, and more fluid than traditional structures (such as
functional or divisional). A team is a group of employees—ideally with complementary skills and
synergistic efforts—working toward a common goal. Teams are created by grouping employees in a
way that generates a variety of expertise and addresses a specific operational component of an
organization. These teams can change and adapt to fulfill group and organizational objectives.

Some teams endure over time, while others—such as project teams—are disbanded at the project’s
end. Teams that include members from different functions are known as cross-functional teams.
Although teams are described as less hierarchical, they typically still include a management structure.

Critics argue that the use of the word “team” to describe modern organizational structures is a fad;
according to them, some teams are not really teams at all but rather groups of staff. That said, team-
building is now a frequent practice of many organizations and can include activities such as bonding

Page 154 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

exercises and even overnight retreats to foster team cohesion. To the extent that these exercises are
meaningful to employees, they can be effective in improving employee motivation and company
productivity.

Integration with Other Structures

One aspect of team-based structures that will likely persist indefinitely is the integration of team
cultures within an broader structure (e.g., a functional structure with teams interspersed). Such
integration allows for the authority and organization of a more concrete structure while at the same
time capturing the cross-functional and projected-oriented advantages of teams.

For example, imagine Proctor and Gamble brings together a group of employees from finance,
marketing, and research and development—all representing different geographic regions. This newly
created team is tasked with the project of creating a laundry detergent that is convenient, economic,
and aligned with the company’s manufacturing capabilities. The project team might be allocated a
certain number of hours a month to devote to team objectives; however, members of the team are still
expected to work within their respective functional departments.

Network Structure

In the network structure, managers coordinate and control relationships with the firm that are both
internal and external.

Identify the structural implications of a network-based organizational design

Key Points

 The network structure is a newer type of organizational structure viewed as less hierarchical
(i.e., more “flat”), more decentralized, and more flexible than other structures.
 In a network structure, managers coordinate and control relationships that are both internal and
external to the firm.
 The concept underlying the network structure is the social network—a social structure of
interactions. Open communication and reliable partners (both internally and externally) are key
components of social networks.
 Proponents argue that the network structure is more agile than other structures. Because it is
decentralized, a network organization has fewer tiers, a wider span of control, and a bottom-up
flow of decision making and ideas.
 A disadvantage of the network structure is that this more fluid structure can lead to more
complex relations in the organization.

Key Terms

 network: Any interconnected group or system.


 decentralized: Diffuse; having no center or several centers.
 agile: Apt or ready to move; nimble; active.

Overview of the Network Structure

An organization can be structured in various ways that determine how it operates and performs. The
network structure is a newer type of organizational structure often viewed as less hierarchical (i.e.,

Page 155 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

more flat), more decentralized, and more flexible than other structures. In this structure, managers
coordinate and control relations that are both internal and external to the firm.

The concept underlying the network structure is the social network—a social structure of interactions.
At the organizational level, social networks can include intra-organizational or inter-organizational
ties representing either formal or informal relationships. At the industry level, complex networks can
include technological and innovation networks that may span several geographic areas and
organizations. From a management perspective, the network structure is unique among other
organizational structures that focus on the internal dynamics within the firm.

A network organization sounds complex, but it is at its core a simple concept. Take, for example, a T-
shirt design company. Because the company leaders are mainly interested in design, they may not
want to get too heavily involved in either manufacturing or retail; however, both aspects of the
business are necessary to complete their operations. To maintain control of their product, they may
rent retail space through their network and purchase production capabilities from a variety of partner
organizations that have their own manufacturing facilities. While the core company focuses mainly on
designing products and tracking finances, this network of partnerships enables it to be much more
than just a design operation.

Like other organizational structures, the network structure has its advantages and its disadvantages.

Advantages of a Network Structure

Proponents argue that the network structure is more agile compared to other structures (such as
functional areas, divisions, or even some teams). Communication is less siloed and flows freely,
possibly opening up more opportunities for innovation. Because the network structure is
decentralized, it has fewer tiers in its organizational makeup, a wider span of control, and a bottom-up
flow of decision making and ideas.

Disadvantages of a Network Structure

On the other hand, this more fluid structure can lead to a more complex set of relationships in the
organization. For example, lines of accountability may be less clear, and reliance on external vendors
can be quite high. These potentially unpredictable variables essentially reduce the core company’s
control over its operational success.

Modular Structure

In the modular structure, an organization focuses on developing specialized and relatively


autonomous strategic business units.

Define the nature and value of a modular structure in an organizational framework

Key Points

 The modular structure divides the business into small, tightly knit strategic business units (
SBUs ),which focus on specific elements of the organizational process.
 Interdependencies between modules tends to be weak; however, flexibility is extremely high.
 An advantage of the modular structure is that loosely coupled structures enable organizations to
be more flexible and restructure more easily. For example, a firm can switch between different
providers and thus respond more quickly to different market needs.

Page 156 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Increased internalization and more tightly coupled structures can produce better
communication and intellectual property gains. As a result, some argue that the modularity of a
firm should be limited to the extent the flexibility it affords results in gains.
 Various degrees of modularity are possible; however, a business must be consistent in the
degree of modularity it employs.

Key Terms

 disaggregation: A division or breaking up into constituent parts, particularly categories which


have been lumped together.
 modular: Consisting of separate units, especially where each unit performs a specified
function and could be replaced by a similar unit for the same function, independently of other
units.

Overview of the Modular Structure

Organizations can be structured in various ways that determine how the organization operates and
performs. The modular structure focuses on dividing the business into small, tightly knit strategic
business units (SBUs), which focus on specific elements of the organizational process.
Interdependence among the units is limited because the focus of many SBUs is more inward than
outward and because loyalty within SBUs tends to be very strong.

The term modularity is widely used in studies of technological and organizational systems. Product
systems are deemed modular when they can be broken down into a number of components that can
then be mixed and matched to connect, interact, or exchange resources. Modularization within
organizations leads to the disaggregation of the traditional form of hierarchical governance into
relatively small, autonomous organizational units (modules). Although modules are not generally
interdependent, the modular organization is extremely flexible.

For example, a firm that employs contract manufacturing rather than in-house manufacturing is using
an organizational component that is more independent. The firm can switch between different contract
manufacturers that perform different functions; the contract manufacturer can similarly work for
different firms. Another (more internally focused) modular model involves the existence of various
consumer services which cater to dramatically different needs or demographics. At GNU Health, for
example, the surgery unit may interact with different departments at different times for different
reasons.

Modular organizations: A modular organization involves several largely independent bodies that can
rearrange and work with different other departments as needed. This image shows the GNU health
module interacting with many different departments, such as oncology, radiology, surgery and
pediatrics, across many contexts, such as location and socioeconomic status.

Advantages of a Modular Structure

One advantage of the modular structure is that loosely coupled structures can enable organizations to
be more flexible and restructure more easily. For example, a firm can switch between different
providers and thus respond more quickly to different market needs. An organization can also fill its
own corporate needs internally by creating a new modular department, which can operate
interdependently with the whole.

Disadvantages of a Modular Structure

Page 157 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

On the other hand, more internalization and more tightly coupled structures can produce better
communication and intellectual property gains. As a result, critics of the modular organization argue
that a firm’s modularity should be limited to the extent that its flexible nature affords gains. Various
degrees of modularity are possible but not necessarily useful if the pros do not outweigh the cons.
Managers must carefully consider whether or not a modular structure would be useful, either entirely
or partially, for a given organization.

Principles of management for better business


operations
Henri Fayol proposed 14 principles of management for effective decision making and for giving guidelines for
management actions. 14 principles of management are the essence of his research and it was published in 1916,
titled ‘General and Industrial Management’. Due to the globalization and with the growing business activities
and industries, managers are facing problems with decision making and implementation. Here the secret behind
successful organizations is understanding and practicing principles of management.

Henri Fayol is the father of modern management theory. The statements of Fayol’s 14 principles are based on
the fundamental truth which is helpful in management actions and decision making for the successful running of
the organizations. After years of study and research, he synthesized and proposed these 14 principles of
management.

Division of work

According to Henri Fayol division of work into small tasks facilitates managers to assign various tasks to
workforce those who are specialized in that particular task. Division of work simplifies the entire work and
motivates the workforce to perform the tasks with more perfection, accuracy, and speed.

Authority and Responsibility

Authority and responsibility must go hand in hand i.e. there should always be a balance between the authority
and responsibility. Authority without responsibility results in inefficient leadership and irresponsible behavior,
whereas in another case responsibility without authority results in the ineffective utilization of manpower.
Though a person may be responsible but without authority, he/she cannot bring change in the organization.

So while taking key managerial decisions and recruiting candidates for key managerial positions, organizations
must select the right candidates with both leadership skills and responsibility.

Discipline

Management should encourage the entire manpower to follow organization’s rules, regulations, policies, and
principles. Such a common effort of workers towards the interests of the organization can bring discipline in the
work environment. In order to encourage this common effort management should communicate with the
workforce to motivate them to follow discipline. Penalties should also be applied judiciously to eliminate the
indiscipline from the organizations.

So the managers should raise questions such as

 What measures to be taken in order to bring discipline?


 How to communicate with the workers or employees in order to make them understand about
organization’s discipline?

Page 158 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 What should disciplinary actions be taken to eliminate conflicts in the work environment?

Unity of command

Henri Fayol’s principle of unity of command means that a group of employees or an individual employee should
receive orders from a single manager. If more than one boss passes orders then the employees may get confused
to follow instructions of many bosses. All the leader’s approach may not be similar, different managers have
different leadership styles. More importantly, communication barriers and the work procedure may also differ
from one boss to another. All such factors highly bring dissatisfaction in the work group.

Applying the principle unity of command in the organizations promotes good relations in between superiors and
subordinates; it highly reduces conflicts while assigning tasks. By introducing single head, single plan concept
organizations can reach the desired objectives without difficulty. It reduces the confusions in the work group
that whose orders they should follow.

Unity of direction

The principle “unity of direction” can lead the individual goals towards the organization’s goals. Organizational
goals should be fulfilled by the common efforts of the employees. If the individual objectives are different from
the group objectives then such organizations may not reach the desired objectives. So operating the functions of
various subsidiaries towards the interests of the organization is possible through this principle. For example, if
an organization is a non-profit motive, and its employees are working for profit-making, then such efforts may
not fulfill the goals and existence of the firm. This one plan concept highly reduces the confusions in the
workforce and clarifies what they have to do for the effective contribution of their services to reach the common
objectives.

By introducing the concept unity of direction in the modern organizations it maximizes team spirit, discipline,
clarity in reaching goals, and in developing more powerful teams. It helps in reducing unnecessary duplication
of efforts, confusions, and wastage of resources. Various departments of the organization do not follow the
similar strategies to fulfill their tasks, but all their efforts should contribute towards the success of the
organization.

Subordination of individual interests to the general interests

Employees of an organization have different personal interests, but these should not dominate and ruin the
reason for the existence of the organization. According to Henri Fayol, individual interests should always be
subordinate to the interests of the firm. So a single person’s interests and thought process should not disturb the
work environment. In the case of conflict or dispute arises regarding individual interests and organizations
interests, then the individual interests must be sacrificed to fulfill the bigger interest.

Applying this concept and creating awareness can act as a guideline for the effective achievement of the group
goals. So the managers should build a rapport with the employees to make them understand this concept.
Subordination of individual interests should always support the reason for the existence of the firm and in turn,
it can fulfill the belongingness, self-esteem and self-actualization needs of the employees.

Hence transforming individual interests towards group interests can bring team spirit and helps in developing
more powerful teams.

Remuneration

Page 159 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

According to Henri Fayol’s 14 principles remuneration must be paid to the employees as per the cost of living,
general market conditions, experience, and skills. Fair remunerations can keep the employee motivation levels
high and it can make them more efficient, innovative, creative and loyal towards the organization.

Remunerations may be monetary or non-monetary, here monetary benefits include salary, bonus, incentives and
other financial benefits, whereas non-monetary benefits include non-financial benefits such as rewards, gifts,
recognition and promotion.

When the employee needs are fulfilled by giving proper compensation then they never think about applying for
other jobs. Fair remuneration practice reduces the employee turnover and efforts of recruiting. Organizations
should not take it as a simple matter because it may become a competitive advantage to the rival firms.

 So the organizations must pay remuneration according to the industry standards, market demand and
cost of living.
 Non-monetary benefits maximize the employee motivation levels and it can make them loyal towards
the organization.

The Degree of centralization

Decision-making authority must be balanced according to the volume and size of the firm including hierarchy. If
the decision-making authority is concentrated at the top level management then it is known as centralized
decision making, whereas authority is delegated to the middle level and lower level management, then it is
known as decentralization. Depending on the size of the organization managers must take decisions regarding
centralization or decentralization in order to maintain the balance.

Multinational companies with many subsidiaries follow decentralization in order to take decisions fit for the
local business environment where the subsidiary is located. In such cases, centralized decisions may not be
effective and suitable. In the case of smaller organizations, centralization is seen. In some cases smaller
organizations also follow decentralization in decision-making in order to get the work done faster, however, it
depends on the size of the business and nature of its business operations.

 So the managers must check whether their approach is centralized or decentralized


 Which techniques will help their organization
 Need for the delegation of authority
 Must maintain balance between centralization and decentralization

Scalar chain

Scalar chain principle says that there should be an unbroken, straight chain of command exist between the lower
level and the ultimate level of the hierarchy each manager possess a certain amount of authority in all the levels
of the hierarchy. First line supervisor possess the least authority, whereas the managers of the top most position
possess highest authority to take decisions and to the control the business operations

According to scalar chain principle, there must be a clear path of authority in the firms so that the employees can
report to the higher level managers when they face calamities or emergencies. They should know whom to they
complain if their immediate superior does not resolve their problems and queries.

For example, if a customer’s problem is not resolved in three days then it goes to the next level i.e. to the local
managers, if the complaint is not resolved in Five days then it goes to the regional managers, then also it is not
resolved then the complaint goes to national heads.

Page 160 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

An unbroken and straight chain of command and authority passes and increases from the lower level to the top
most level in the organizations can create transparency and eliminates confusions from the minds of the
employees.

Order

According to Henri Fayol, all the materials and people must be placed in a right order. In order to work in an
efficient manner, workers/employees need the right procedure and right equipment all the time. To perform a
specific kind of work, specific materials and skilled people related to that particular task must be treated as
equally as possible.

Maintaining order in the workplace maximizes efficiency and coordination. If a firm does not work in an orderly
manner, then it may be the result of inefficiency and leads to chaos. In such a work environment it is not
possible to maintain coordination in between men and materials.

In addition to the arrangement of man and materials, it is very important to take actions to maintain the
workplace hygiene and maintenance of materials; it can highly reduce the wastage of efforts and time. A simple
example can make it clear, if the workers or employees have to work with wrong equipment, wrong materials,
wrong procedure and at wrong place then all the efforts may become useless.

Equity

The management principle of equity says that all the employees or workers of the organization must be treated
fairly, equally and impartially. Maintaining equity in the organizations come from the organization’s culture;
adopting and maintaining equity maximizes employee loyalty and trustworthiness.

The combination of kindliness and justice is very important to achieve equity and to adopt in the organization
culture. If an organization follows ethics and right organization culture then it is not necessary to put extra
efforts to maintain equity in the workplace. If all the employees not treated equally and giving preference over
few employees or a particular group then it leads to conflicts and revolutions.

Misunderstanding and misinterpretations from the minds of employees must be cleared with proper
communication and with regular interactions. If something is done favorable towards a particular employee then
the managers must give clarity to the other employees that what situations made them do it; and it must be
justified.

Stability of tenure

The increase in employee turnover increases the cost of training and development and it can act as a competitive
advantage to the rival firms. Usually, the high attrition rate is problematic in various aspects. Generally,
employees leave the organizations due to the lack of job satisfaction, insufficient salary, shift inconvenience,
superior’s domination, peer unacceptance etc. Henri Fayol stressed that the stability of tenure can maximize the
profits, it enables the firms to give better salaries and to provide better working conditions.

Employee satisfaction is the only solution to reduce the rate of attrition and cost of training the new employees,
sometimes attrition may result in expensive mistakes and rejection of projects due to hiring new employees. So
the managers should know the problems of the employees and reasons behind leaving the organization. Giving
priority to reduce the attrition rate and taking necessary actions in order to retain the employees maximizes the
profits and production. Retaining the skilled employees can act as a competitive advantage to the firms.

Initiative

Page 161 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Management must encourage the worker or employee initiative in order to bring additional energy to the
organization. Most of the successful organizations create such an environment to maximize employee initiatives,
creativity and innovations.

Identifying and encouraging skilled and talented employees can make them initiative in putting their efforts in a
unique way; it results in innovations and creations.

Some companies regularly introduce new products and services to the customers; it is only possible through the
skills, talent, and initiative of the manpower of that particular company. As long as freedom is given in the work
environment it automatically brings out hidden talents, skills, and commitment.

Managers should know the fact that the initiation comes from the positive motivation and encouragement.

Esprit de Corps

Management must encourage team spirit and unity so that it brings out mutual loyalty and feeling of pride.
Esprit de corps facilitate the union of the employees and management which creates a feeling of loyalty in the
minds of employees and management also.

Team spirit can act as a support to decision making and implementation, healthy team environment such as
superior, subordinate mutual understandings and peer relations maximizes spirit among the members of the
team.

Factors to Consider in Organizational Design

Considering the Environment

Considerations of the external environment—including uncertainty, competition, and resources—are


key in determining organizational design.

Identify the inherent complexities in the external environment that influence the design of an
organization’s structure

Key Points

 Organizational design is dictated by a variety of factors, including the size of the company, the
diversity of the organization‘s operations, and the environment in which it operates.
 According to several theories, considerations of the external environment are a key aspect of
organizational design. These considerations include how organizations cope with conditions of
uncertainty, procure external resources, and compete with other organizations.
 A company in a highly uncertain environment must prioritize adaptability over a more rigid
and functional strategy. In contrast, a company in a mature market with limited variability and
uncertainty should pursue more structure.
 A company with a low-cost strategy relative to its competition may benefit from a more
simplistic and fixed structural approach to operations, while a company pursuing
differentiation must prioritize flexibility and a more diversified structure.

Page 162 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Key Terms

 strategy: A plan of action intended to accomplish a specific goal.


 differentiation: A strategy focused on creating a unique product for a particular population.

Overview

Organizational design is dictated by a variety of factors, including the size of the company, the
diversity of the organization’s operations, and the environment in which it operates. Considerations of
the external environment are a key aspect of organizational design. The environment in which an
organization operates can be defined from a number of different angles, each of which generates
different structural and design strategies to remain competitive.

Complexity

Complexity theory postulates that organizations must adapt to uncertainty in their environments. The
complexity theory treats organizations and firms as collections of strategies and structures that interact
to achieve the highest efficiency within a given environment. Therefore, companies in a highly
uncertain environment must prioritize adaptability over a more rigid and functional strategy.
Alternatively, a fixed and specific approach to organizational design will capture more value in a
mature market, where variability and uncertainty are limited.

Resource Dependence

Another perspective on organizational design is resource dependence theory—the study of how


external resources affect the behavior of the organization. Procuring external resources is important in
both the strategic and tactical management of any company. Resource-dependence theory explores the
implications regarding the optimal divisional structure of organizations, recruitment of board
members and employees, production strategies, contract structure, external organizational links, and
many other aspects of organizational strategy.

Competition

Another environmental factor that shapes organization design is competition. Higher levels of
competition require different organizational structures to offset competitors’ advantages while
emphasizing the company’s own strengths. A company that demonstrates strength in differentiation
relative to the competition benefits from implementing a divisional or matrix strategy, which in turn
allows the company to manage a wide variety of demographic-specific products or services.
Alternatively, a company that demonstrates a low-cost strength (producing products cheaper than the
competition) benefits from employing a structural or bureaucratic strategy to streamline operations.

Identifying External Factors

In considering organizational design relative to the environment, managers may find it helpful to
employ two specific frameworks to identify external factors and internal strengths and weaknesses:

Porter’s five-forces model: Porter’s five-forces analysis identifies five environmental factors that can
influence a company’s strategic design: power of buyers, power of suppliers, competition, substitutes,
and barriers to entry.

Page 163 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Smaller, more agile companies tend to thrive better in uncertain or constantly changing markets, while
larger, more structured companies function best in consistent, predictable environments.
Understanding these tools and frameworks alongside the varying external forces that act upon a
business will allow companies to make strategic organizational decisions that optimize their
competitive strength.

Considering Company Size

The size and operational scale of a company is important to consider when identifying the ideal
organization structure.

Explain how the size of a company helps determine the organizational structure that optimizes
operational efficiency and managerial capacity

Key Points

 Company size plays a substantial role in determining the ideal structure of the company: the
larger the company, the greater need for increased complexity and divisions to achieve
synergy.
 Companies may adopt any of six organizational structures based on company size and diversity
in scope of operations: pre-bureaucratic, bureaucratic, post-bureaucratic, functional, divisional,
and matrix.
 Smaller companies function best with pre-bureaucratic or post-bureaucratic structures. Pre-
bureaucratic structures are inherently adaptable and flexible and therefore particularly effective
for small companies aspiring to expand.
 Larger companies usually achieve higher efficiency through functional, bureaucratic,
divisional, and matrix structures (depending on the scale, scope, and complexity of operations).
 Understanding the varying pros and cons of each structure will help companies to plan their
organization design and structure in a way that optimizes resources and allows for growth.

Key Terms

 economies of scale: Processes in which an increase in quantity will result in a decrease in


average cost of production (per unit).
 Homogeneous: Having a uniform makeup; having the same composition throughout.
 economies of scope: Strategies of incorporating a wider variety of products or services to
capture value through the ways in which they interact or overlap.

Company Size and Organizational Structure

Organizational design can be defined narrowly as the strategic process of shaping the organization’s
structure and roles to create or optimize competitive capabilities in a given market. This definition
underscores why it is important for companies to identify the factors of the organization that
determine its ideal structure—most specifically the size, scope, and operational initiatives of the
company.

Company size plays a particularly important role in determining an organization’s ideal structure: the
larger the company, the greater the need for increased complexity and divisions to achieve synergy.
The organizational structure should be designed in ways that specifically optimize the effort and input

Page 164 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

compared to output. Larger companies with a wider range of operational initiatives require careful
structural considerations to achieve this optimization.

Types of Organizational Structure

Companies may adopt one of six organizational structures based upon company size and diversity of
scope of operations.

Pre-bureaucratic

Ideal for smaller companies, the pre-bureaucratic structure deliberately lacks standardized tasks and
strategic division of responsibility. Instead, this is an agile framework aimed at leveraging employees
in any and all roles to optimize competitiveness.

Bureaucratic

A bureaucratic framework functions well in large corporations with relatively complex operational
initiatives. This structure is rigid and mechanical, with strict subordination to ensure consistency
across varying business units.

Post-bureaucratic

This structure is a combination of bureaucratic and pre-bureaucratic, where individual contribution


and control are coupled with authority and structure. In this structure, consensus is the driving force
behind decision making and authority. Post-bureaucratic structure is better suited to smaller or
medium-sized organizations (such as nonprofits or community organizations) where the importance of
the decisions made outweighs the importance of efficiency.

Functional

A functional structure focuses on developing highly efficient and specific divisions which perform
specialized tasks. This structure works well for large organizations pursuing economies of scale,
usually through production of a large quantity of homogeneous goods at the lowest possible cost and
highest possible speed. The downside of this structure is that each division is generally autonomous,
with limited communication across business functions.

Divisional

A divisional structure is also a framework best leveraged by larger companies; instead of economies
of scale, however, they are in pursuit of economies of scope. Economies of scope simply means a
high variance in product or service. As a result, different divisions will handle different products or
geographic locations/markets. For example, Disney may have a division for TV shows, a division for
movies, a division for theme parks, and a division for merchandise.

Matrix

A matrix structure is used by the largest companies with the highest level of complexity. This
structure combines functional and divisional concepts to create a product-specific and division-
specific organization. In the Disney example, the theme park division would also contain a functional
structure within it (i.e., theme park accounting, theme park sales, theme park customer service, etc.).

Page 165 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Strategic Organizational Design

Structure becomes more difficult to change as companies evolve; for this reason, understanding which
specific structure will function best within a given company environment is an important early step
for the management team. Smaller companies function best as pre-bureaucratic or post-bureaucratic;
the inherent adaptability and flexibility of the pre-bureaucratic structure is particularly effective for
small companies aspiring to expand. Larger companies, on the other hand, achieve higher efficiency
through functional, bureaucratic, divisional, and matrix structures (depending on the scale, scope, and
complexity of operations).

McDonald’s fast-food restaurants departmentalize varying elements of their operation to optimize


efficiency. This structure is divisional, meaning each specific company operation is segmented (for
example, operations, finance/accounting, marketing, etc.).

Considering Technology

Technology impacts organizational design and productivity by enhancing the efficiency of


communication and resource flow.

Recognize the intrinsic structural value of the ever-evolving technological environment

Key Points

 Organizations use technological tools to enhance productivity and to initiate new and more
efficient structural designs for the organization. These uses of technology become potential
sources of economic value and competitive advantage.
 An example of an organizational structure emerging from newer technological trends is what
some have called the “virtual organization,” which connects a network of organizations via the
internet.
 A network structure is another kind of organizational structure that is heavily reliant upon
technology for communication.
 More traditional organizational structures also benefit greatly from the advance of technology.
Managers can communicate and delegate much more effectively through using technologies
such as email, calendars, online presentations, and other virtual tools.

Key Terms

 supply chain: A system of organizations, people, technology, activities, information, and


resources involved in moving a product or service from the supplier to the customer.
 network: Any interconnected group or system.

Organizational design can be defined narrowly as the strategic process of shaping an organization’s
structure and roles to create or optimize capabilities for competition in a given market.

Technology is an important factor to consider in organizational design. Modern organizations can be


treated as complex and adaptive systems that include a mix of human and technological interactions.
Organizations can utilize technological tools to enhance productivity and to initiate new and more
efficient structural designs for the organization, thereby adding potential sources of economic value
and competitive advantage.

Page 166 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Technology: Technology has opened doors to incorporating new and advanced forms of
organizational design. This is most notably seen through rapid global communications and the ability
to constantly and economically be in contact.

Technological Organizational Structures

An example of an organizational structure that has emerged from newer technological trends is what
some have called the “virtual organization,” which connects a network of organizations via the
internet. Over the internet, an organization with a small core can still operate globally as a market
leader in its niche. This can dramatically reduce costs and overhead, remove the necessity for an
expensive office building, and enable small, dynamic teams to travel and conduct work wherever they
are needed.

A similar organizational design that is heavily reliant upon technological capabilities is the network
structure. While the network structure existed prior to recent technologies (i.e., affordable
communications via internet, cell phones, etc.), the existence of complex telecommunications
networks and logistics technologies has greatly increased the viability of this structure.

Technology and Traditional Structures

Technology can also affect other longstanding elements of an organization. For example, information
systems allow managers to take a much more analytic view of their businesses than before the advent
of such systems. Managers can communicate and delegate much more effectively through using
technologies such as email, calendars, online presentations, and other virtual tools.

Technology has also impacted supply chain management —the management of a network of
interconnected businesses involved in the provision of product and service packages required by the
end customers in a supply chain. Supply chain management now has the capacity to track, forecast,
predict, and refine the outbound logistics, contributing to a wide variety of logistical advantages (such
as minimizing costs from warehousing, fuel, negative environmental impacts, or packaging).

Technology simplifies the process of managing reports, collecting communications, and keeping in
touch, enabling management in more formal structures to take on more workers. Increases in
technology have essentially allowed organizations to scale up their companies through more effective
and efficient teams.

Considering the Organizational Life Cycle

The life cycle of an organization is important to consider when determining its overall design and
structure.

Describe the way in which life cycles influence an organization’s overall design and structure

Key Points

 From an organizational perspective, the ” life cycle ” can refer to various factors such as the
age of the organization, the maturation of a particular product or process, or the maturation of
the broader industry.
 In organizational ecology, the idea of age dependence is used to examine how an
organization’s risk of mortality relates to its age. Richard L. Daft outlines different patterns of
age dependence in his four stages model.

Page 167 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 The idea of the Enterprise Life Cycle in enterprise architecture argues for a life cycle concept
as an overarching design strategy —a dynamic, iterative process of changing the enterprise
over time by incorporating, maintaining, and disposing of new and existing elements of the
enterprise.
 Companies must understand clearly where they are in their life cycle and what influence this
will have on their optimal organizational structure.

Key Terms

 life cycle: The useful life of a product or system; the developmental history of an individual,
group or entity.
 assessment: An appraisal or evaluation.
 strategy: A plan of action intended to accomplish a specific goal.

Organization design can be defined narrowly as the strategic process of shaping organizational
structure and roles to create or optimize capabilities for competition in a given market. The life cycle
of an organization, industry, and/or product can be an important factor in organization design.

The life cycle of a business: Organizations must always be striving to sustain their position in a given
competitive environment. This often requires structural evolution and rapid iterations in the feedback
loop of disruption, growth, refinement, and renewal.

Overview of the Life Cycle

From an organizational perspective, “life cycle” can refer to various factors such as the age of the
organization itself, the maturation of a particular product or process, or the maturation of the broader
industry. In organizational ecology, the idea of age dependence is used to examine how an
organization’s risk of mortality relates to the age of that organization. Generally speaking,
organizations go through the following stages:

1. Birth
2. Growth
3. Maturity
4. Decline
5. Death

The Enterprise Life Cycle

The Enterprise Life Cycle is a model that underlines the way in which organizations remain relevant.
The Enterprise Life Cycle is the dynamic, iterative process of changing an enterprise over time by
incorporating new business processes, technologies, and capabilities, as well as maintaining, using,
and disposing of existing elements of the enterprise.

Richard L. Daft’s Four Stages

Richard L. Daft theorized four stages of the organizational life cycle, each with critical transitions:

1. Entrepreneurial stage → Crisis: Need for leadership

Page 168 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

2. Collectivity stage → Crisis: Need for delegation


3. Formalization stage → Crisis: Too much red tape

4. Elaboration stage → Crisis: Need for revitalization

Structural Implications of the Life Cycle

The life cycle of an organization is important to consider when making decisions about the
organization’s structure and design. Richard L. Daft’s model underlines critical problems within each
stage of an organization’s life cycle that can often be solved through intelligent structural design.

Daft first notes that the entrepreneurial (or startup) stage of an organization requires leadership. In this
situation, decision-making must be enabled and bureaucracy should be minimized. This lends itself
well to pre-bureaucratic stuctures in which everyone involved is empowered to take the reins and
employ their creativity and innovation.

In the collectivity stage, momentum has been created and expansion is required. This is where
functional or divisional strategies may begin to emerge, enabling managers to build teams and
delegate tasks.

Companies continue to expand in the formalization stage, requiring increased bureaucracy and more
levels of authority to approve a given decision. In this stage they grow large enough to accommodate
functional, divisional, or even matrix structures in order to produce at scale. Organizations in this
stage must be careful not to fall too strongly into rigid structures that inhibit or disrupt efficiency,
communication, or decision-making.

The Enterprise Life Cycle comes strongly into play in the elaboration stage. During this stage the
organization must retain its relevance in the industry through reinforcing competitive advantages
and/or creating new products to fill changing consumer needs. This requires a great deal of organized
creativity and exploration of new markets, which may justify team or divisional structures within the
broader organizational structure. Such structures allow small teams to experiment and react quickly as
they try new entrepreneurial strategies while the larger organization maintains operative efficiency in
established markets.

Productivity

Impacts of Productivity on Output

Productivity, or the efficiency of production, is important because it can drive increases in output and
improvements in living standards.

Develop a model to measure productivity

Key Points

 Productivity is generally measured as the ratio of the total output to total input.
 In an economy, higher productivity leads to higher real income, the ability to enjoy more
leisure time, and better social services, such as health and education–all leading to higher living
standards.
 Surplus value refers to the difference between returns and costs. The higher is surplus value;
the more productive is the process.

Page 169 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Small differences in productivity between countries can compound, leading to large differences
in prosperity in the long run.

Key Terms

 Surplus value: The part of the new value made by production that is taken by enterprises as
generic gross profit.
 productivity: The state of being productive, fertile, or efficient; the rate at which goods or
services are produced by a standard population of workers.

Defining Productivity

Productivity is a measure of the efficiency of production. Productivity is a ratio of production output


to what is required to produce it (inputs). The measure of productivity is defined as a total output per
one unit of a total input.

Productivity: Productivity is a measure of the efficiency of production.

In order to obtain a measurable form of productivity, operationalization of the concept is necessary. In


explaining and operationalizing, a set of production models are used. A production model is a
numerical expression of the production process that is based on production data (i.e., measured data in
the form of prices and quantities of inputs and outputs0.

Production Income Model

There are no criteria that might be universally applicable to success. Nevertheless, there is one
criterion by which we can generalize the rate of success in production. This criterion is the ability to
produce surplus value.

As a criterion of profitability, surplus value refers to the difference between returns and costs, taking
into consideration the costs of equity in addition to the costs included in the profit and loss statement
as usual. Surplus value indicates that the output has more value than the sacrifice made for it; in other
words, the output value is higher than the value (production costs) of the used inputs. If the surplus
value is positive, the owner’s profit expectation has been surpassed.

Impact on Output

When there is productivity growth, even the existing commitment of resources generates more output
and income. Income generated per unit of input increases. Additional resources are also attracted into
production and can be profitably employed.

At the national level, productivity growth raises living standards because more real income improves
people’s ability to purchase goods and services (whether they are necessities or luxuries), enjoy
leisure, improve housing and education and contribute to social and environmental programs.

Over long periods of time, small differences in rates of productivity growth compound, such as
interest in a bank account, and can make an enormous difference to a society’s prosperity. Nothing
contributes more to the reduction of poverty, increases in leisure, and to the country’s ability to
finance education, public health, environment, and the arts.

Page 170 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Productivity Gains from Software

New ways of developing and using software have led to higher efficiency and productivity through
greater interaction between users.

Explain how collaborative software increases productivity

Key Points

 Collaborative software, or groupware, puts computers in the center of communications between


groups of workers, managers, and technicians. This way of working has produced major gains
in productivity since it was first introduced.
 Examples of collaborative software include document sharing, shared calendars, instant
messaging, and web conferencing.
 In agile software development, solutions arise through collaboration between self-organizing,
cross-functional teams. It involves adaptive planning and flexbile responses: tasks are broken
into small increments with minimal longer-term planning, and responses evolve to problems as
they arise.
 The values espoused in the Agile Manifesto focus on people and functionality, rather than
rigidity, documentation, and planning. It is thought that better, more useful software can be
developed with these values.

Key Terms

 Collaborative software: Computer software designed to help people involved in a common


task achieve goals.
 Agile software development: A group of software development methods based on iterative
and incremental development, where requirements and solutions evolve through collaboration
between self-organizing, cross-functional teams. The basic idea behind the agile method is to
develop a system through repeated cycles (iterative) and in smaller portions at a time
(incremental), allowing software developers to take advantage of what was learned during
development of earlier parts or versions of the system.

Collaborative Software

Collaborative software was originally designated as groupware and this term can be traced as far back
as the late 1980s, when Richman and Slovak said, “Like an electronic sinew that binds teams together,
the new groupware aims to place the computer squarely in the middle of communications among
managers, technicians, and anyone else who interacts in groups, revolutionizing the way they work. ”

Collaborative software has produced major gains in productivity. The definition of an office has
dramatically changed as an individual is able to work efficiently as a member of a group wherever
there is a computer (or an iPad, or iPhone, or Blackberry).

Software: Collaborative software has produced major gains in productivity.

Examples of the major gains include:

 Document sharing (including group editing)

Page 171 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Group calendars
 Instant messaging

 Web conferencing

Agile Software Development

Agile software development is a group of software development methods based on iterative and
incremental development, where requirements and solutions evolve through collaboration between
self-organizing, cross-functional teams.

It promotes adaptive planning, evolutionary development and delivery, a time-boxed iterative


approach, and encourages rapid and flexible response to change. It is a conceptual framework that
promotes foreseen interactions throughout the development cycle.

Agile methods break tasks into small increments with minimal planning and do not directly involve
long-term planning.

Iterations are short time frames (timeboxes) that typically last from one to four weeks. Each iteration
involves a team working through a full software development cycle when a working product is
demonstrated to stakeholders. The development cycle includes:

 Planning
 Requirements analysis
 Design
 Coding
 Unit testing
 Acceptance testing

This approach minimizes overall risk and allows the project to adapt to changes quickly. Stakeholders
produce documentation as required.

An iteration might not add enough functionality to warrant a market release, but the goal is to have an
available release (with minimal bugs) at the end of each iteration. Multiple iterations might be
required to release a product or new features.

According to the Agile Manifesto:

Through this work we have come to value: individuals and interactions over
processes
and tools; working software over comprehensive documentation; customer collaboration over
contract negotiation; responding to change over following a plan. That is, while there is value in the
items on the
right
, we value the items on the left more.

Productivity Gains from Hardware

Productivity improving technologies lower traditional factors of production of land, labor capital,
materials, and energy.

Page 172 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

LEARNING OBJECTIVES

Outline the progression of productivity improving technologies in the 20th century

KEY TAKEAWAYS

Key Points

 Productivity gains were not just the result of inventions, but also of continuous improvements
to those inventions which greatly increased output in relation to both capital and labor
compared to the original inventions.
 The technology of building mills and mechanical clocks was important to the development of
the machines of the Industrial Revolution.
 Machine tools–which cut, grind, and shape metal parts–were another important mechanical
innovation of the Industrial Revolution.
 The evolution of hardware has allowed computing to become widespread due to its low cost
and effectiveness. Microchips are now used in everything from greeting cards to missile
defense systems.

Key Terms

 cloud: Regarded as an amorphous omnipresent space for processing and storage on the
Internet; the focus of cloud computing.
 Industrial Revolution: The major technological, socioeconomic, and cultural change in the
late 18th and early 19th century, resulting from the replacement of an economy based on
manual labor to one dominated by industry and machine manufacture.

Productivity Improving Technologies

Productivity improving technologies are technologies that lower the traditional factors of production
of land, labor capital, materials, and energy that go into production of economic output. Increases in
productivity are responsible for increases in per capita living standards. Since the beginning of the
Industrial Revolution, some major contributors to productivity have been:

1. The spinning jenny and spinning mule greatly increased the productivity of thread
manufacturing compared to the spinning wheel.
2. Replacing human and animal power with water power, wind power, steam, electricity, and
internal combustion greatly increased the use of energy.
3. Energy efficiency in the conversion of energy to useful work.
4. Infrastructures: canals, railroads, highways, and pipelines.
5. Mechanization of both production machinery and agricultural machines.
6. Work practices and processes: the American system of manufacturing, Taylorism or scientific
management, mass production, assembly line, modern business enterprise.
7. Materials handling: bulk materials, palletization, and containerization.
8. Scientific agriculture: fertilizers and the green revolution, livestock and poultry management.
9. New materials, new processes for production and dematerialization.
10. Communications: telegraph, telephone, radio, satellites, fiber optic network, and the Internet.

Page 173 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

11. Home economics: public water supply, household gas, appliances.


12. Automation and process control.

13. Computers and software, data processing.

Productivity gains were not just the result of inventions, but also of continuous improvements to those
inventions which greatly increased output in relation to both capital and labor compared to the
original inventions. Productivity also arises from developing economies of scale, despite that not
actually being a technology in its own right.

Industrial Machinery

The most important mechanical devices before the Industrial Revolution were water and windmills.
Just before the Industrial Revolution, water power was applied to bellows for iron smelting. Wind and
water power were also used in sawmills. The technology of building mills and mechanical clocks was
important to the development of the machines of the Industrial Revolution.

The spinning wheel was a medieval invention that increased thread making productivity by a factor
greater than ten. Later in the Industrial Revolution came the flying shuttle, a simple device that
doubled the productivity of weaving. Spinning thread had been a limiting factor in cloth making,
requiring 10 spinners using the spinning wheel to supply one weaver. With the spinning jenny, a
spinner could spin eight threads at once. The spinning mule allowed a large number of threads to be
spun by a single machine using water power. A change in consumer preference for cotton at the time
of increased cloth production resulted in the invention of the cotton gin. Steam power eventually was
used as a supplement to water during the Industrial Revolution, and both were used until
electrification.

Machine Tools

Machine tools, which cut, grind, and shape metal parts, were another important mechanical innovation
of the Industrial Revolution. Before machine tools, it was prohibitively expensive to make precision
parts, an essential requirement for many machines and interchangeable parts. Perhaps the best early
example of a productivity increase by machine tools and special purpose machines is the Portsmouth
Block Mills. With these machines, 10 men could produce as many blocks as 110 skilled craftsmen.

Historically important machine tools are the screw-cutting lathe, milling machine, and metal planer
(metalworking), which all came into use between 1800 and 1840. However, around 1900, it was the
combination of small electric motors, specialty steels, and new cutting and grinding materials that
allowed machine tools to mass produce steel parts.

Productivity Gains From Computer Hardware

Computer hardware is the collection of physical elements that comprise a computer system. Computer
hardware refers to the physical parts or components of computer (objects you can touch), such as a:

 Monitor;
 Keyboard;
 Printer;
 Chip;
 Hard disk; and

Page 174 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Mouse.

The history of computing hardware is the record of the ongoing effort to make hardware faster,
cheaper, and capable of storing more data.

The Rapid Increase in Productivity

Early electric data processing was done by running punched cards through tabulating machines, the
holes in the cards allowing electrical contact to incremental electronic counters. Tabulating machines
were in a category called “unit record equipment,” through which the flow of punched cards was
arranged in a program-like sequence to allow sophisticated data processing. They were widely used
before the introduction of computers.

The first digital computers were more productive than tabulating machines, but not by a great amount.
Early computers used thousands of vacuum tubes (thermionic valves), which used a lot of electricity
and constantly needed replacing. By the 1950s, the vacuum tubes were replaced by transistors which
were much more reliable and used relatively little electricity. By the 1960s, thousands of transistors
and other electronic components were being manufactured on silicon semiconductor wafers as
integrated circuits, which are universally used in today’s computers.

In 1973, IBM introduced point of sale (POS) terminals in which electronic cash registers were
networked to the store’s mainframe computer. By the 1980s, bar code readers were added. These
technologies automated inventory management. The Bureau of Labor Statistics estimated that bar
code scanners at checkout increased ringing speed by 30% and reduced the labor requirements of
cashiers and baggers by 10-15%.

Computers did not revolutionize manufacturing because automation, in the form of control systems,
had already been in existence for decades. Although they did allow more sophisticated control, which
led to improved product quality and process optimization. Today’s servers and mainframes are
capable of processing enormous amounts of data. Moreover, this type of processing power has
become much easier to obtain through cloud computing services.

Intel CPU: Hardware advancements, such as the CPU, greatly increased productivity for many areas
of society.

Productivity Technology: The introduction of the spinning mule into cotton production processes
helped to drastically increase industry consumption of cotton. This example is the only one in existence
made by the inventor Samuel Crompton. It can be found in the collection of Bolton Museum and
Archive Service.

Controlling the Supply Chain

Purchasing

Purchasing is the formal process of buying goods and services.

Inventory Management

Inventory management is primarily concerned with specifying the shape and percentage of stocked
goods to reduce costs and improve sales.

Page 175 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

LEARNING OBJECTIVES

Recognize the applications and benefits of inventory management

KEY TAKEAWAYS

Key Points

 Inventory refers to a list compiled for some formal purpose, such as the details of an estate or
the contents of a rented house.
 Inventory management is required at different locations within a facility or within many
locations of a supply network in order to plan for the production and stock of materials.
 Inventory management addresses issues including: replenishment lead time; carrying costs of
inventory; asset management; inventory forecasting; inventory valuation; inventory visibility;
and future inventory price forecasting.
 Supply chain activities can be grouped into strategic, tactical, and operational categories.
 Supply chain activities can be grouped into strategic, tactical, and operational levels.

Key Terms

 supply chain: A supply chain is a system of organizations, people, technology, activities,


information and resources involved in moving a product or service from supplier to customer.
 tactical planning: an organization’s process of determining how to optimize current resources
and operations

In the United Kingdom, inventory typically refers to a list compiled for some formal purpose, such as
one that itemizes an estate going to probate or the contents of a furnished house to be rented. In the
U.S. and Canada, inventory has become the equivalent of the British term stock; that is, it refers to
material that is available from and stocked by a business. In the context of accounting, inventory or
stock is considered an asset.

Inventory Management

Inventory management tracks the shape and percentage of stocked goods. At different locations
within a facility, or within many locations of a supply network, inventory management must precede
the regular and planned course of production and stocking of materials.

Inventory Management: Inventory management is primarily concerned with specifying the shape and
percentage of stocked goods.

Inventory management addresses a number of concerns, including: replenishment lead time; carrying
costs of inventory; asset management; inventory forecasting; inventory valuation; inventory visibility;
future inventory price forecasting; physical inventory; available physical space for inventory; quality
management; replenishment; returns and defective goods; and demand forecasting. By effectively
managing these issues, a business can achieve optimal inventory levels. However, the management
process is on-going as a business and its needs shift and respond to the wider environment.

Inventory management often involves a retailer seeking to acquire and maintain a proper merchandise
assortment while ordering, shipping, handling, and related costs are kept in check. It requires systems
and processes that identify inventory requirements, set targets, provide replenishment techniques,

Page 176 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

report actual and projected inventory status, and handle all functions related to the tracking and
management of material. These include the monitoring of material moved into and out of stockroom
locations, as well as the reconciling of inventory balances. Processes may also include ABC analysis,
lot tracking, and cycle counting support.

Management of inventories, aimed primarily at determining and controlling stock levels within the
physical distribution system, serves to balance the need for product availability against the need for
minimizing stock holding and handling costs. Reasons for keeping an inventory include:

 Time: The time lag in the supply chain from supplier to user requires the availability of a
certain amount of inventory for use during this lead time. In practice, inventory is maintained
for consumption during variations in lead time, and lead time itself can be addressed by
ordering a specified number of days in advance.
 Uncertainty: Inventories are maintained as buffers to meet uncertainties in demand, supply, and
movement of goods.
 Economies of scale: To deliver one unit of product at a time, and in response to the specific
need and location of a given user, would be costly and logistically difficult. In contrast, bulk
buying, movement, and storage translate into economies of scale and inventory.

Inventory and the Supply Chain

Supply chain activities can be grouped into strategic, tactical, and operational levels. Inventory
considerations present at each level include:

Strategic: Network optimization, including the number, location, and size of warehousing, distribution
centers, and facilities.

Tactical: Inventory decisions, including quantity, location, and quality of inventory.

Operational: Sourcing planning, including current inventory and forecast demand, done in
collaboration with all suppliers; inbound operations, including transportation from suppliers and
receiving inventory; outbound operations, including all fulfillment activities, warehousing, and
transportation to customers; management of non-moving, short-dated inventory and avoidance of
short-dated products.

Scheduling

The purpose of scheduling is to minimize production time and costs.

LEARNING OBJECTIVES

Explain the benefits of using modern scheduling tools

KEY TAKEAWAYS

Key Points

 Production scheduling aims to maximize the efficiency of operations and reduce costs.

Page 177 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Benefits of production scheduling include process change-over reduction; inventory reduction;


leveling; reduced scheduling effort; increased production efficiency; labor load leveling;
accurate delivery date quotes; and real time information.
 Minute-by-minute production scheduling for each manufacturing facility in the supply chain
occurs at the operational level of supply chain activities.
 Benefits of production scheduling include process change-over reduction, inventory reduction,
leveling, reduced scheduling effort, increased production efficiency, labor load leveling,
accurate delivery date quotes and real time information.
 Production scheduling for each manufacturing facility in the supply chain (minute by minute)
takes place at the operational level of supply chain activities.

Key Terms

 Backward scheduling: Backward scheduling is planning the tasks from the due date or
required-by date to determine the start date and/or any changes in capacity required.
 Forward scheduling: Forward scheduling is planning the tasks from the date resources
become available to determine the shipping date or the due date.
 maturity date: the time of the final payment of a loan or other financial instrument, at which
point the principal (and all remaining interest) is due to be paid

Scheduling is an important tool in the manufacturing and engineering industries, where it can
significantly impact the productivity of a particular process. In manufacturing, the purpose of
scheduling is to minimize production time and cost by telling a production facility when to make a
product and with which staff and equipment.

Production scheduling aims to maximize the efficiency of an operation and reduce its costs. Modern
scheduling tools greatly outperform older, manual scheduling methods. Today’s tools provide the
production scheduler with powerful graphical interfaces, which can be used to visually optimize real
time work loads in various stages of production. Further, pattern recognition software reveals
scheduling opportunities that might not be apparent without this view into the data.

Scheduling Visualization: This Gantt chart aids in scheduling by visualizing and relating phases of
production.

For example, in order to reduce costs, an airline may want to minimize the number of airport gates
required for its aircraft. Scheduling software allows planners to see how this might be done, enabling
them to analyze time tables, aircraft usage, or the flow of passengers.

Companies use backward and forward scheduling to allocate plant and machinery resources,
determine human resources and production processes, and purchase materials. Forward scheduling
involves planning tasks from the date that resources become available in order to determine the
shipping date or the due date. Backward scheduling involves planning tasks from the due date or
required-by date in order to determine the start date and/or necessary changes in capacity.

Production scheduling has a number of benefits:

 Process change-over reduction


 Inventory reduction and leveling
 Reduced scheduling effort
 Increased production efficiency

Page 178 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Labor load leveling


 Accurate delivery date quotes

 Real time information

Finally, minute-by-minute production scheduling occurs for each manufacturing facility in the supply
chain at the operational level of supply chain activities.

Routing

Routing is the process of selecting paths in a network along which to send network traffic.

LEARNING OBJECTIVES

Explain the process of routing

KEY TAKEAWAYS

Key Points

 Routing is performed for many kinds of networks, including the telephone network (circuit
switching), electronic data networks (such as the Internet), and transportation networks.
 A transport network, (or transportation network in American English), is typically a network of
roads, streets, pipes, aqueducts, power lines, or nearly any structure which permits either
vehicular movement or flow of some commodity.
 Transport engineers use mathematical graph theory to analyze a transport network to determine
the flow of vehicles (or people) through it.
 At the tactical level of supply chain activities, the transportation strategy of goods must be
considered. This includes frequency, routes, and contracting.

Key Terms

 routing: a method of finding paths from origins to destinations in a network such as the
Internet, along which information can be passed
 transport network: A transport network, or transportation network in American English, is
typically a network of roads, streets, pipes, aqueducts, power lines, or nearly any structure
which permits either vehicular movement or flow of somecommodity.

Routing is the process of selecting paths in a network along which to send network traffic. Routing is
performed for many kinds of networks, including the telephone network (circuit switching), electronic
data networks (such as the internet), and transportation networks. This chapter focuses on the role of
routing in transportation networks.

Transport Networks

A transport network, (or transportation network in American English), is typically a network of roads,
streets, pipes, aqueducts, power lines, or nearly any structure which permits either vehicular
movement or flow of some commodity. Transport engineers use mathematical graph theory to analyze
a transport network to determine the flow of vehicles (or people) through it. A transport network may
combine different modes of transport.

Page 179 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

At the tactical level of supply chain activities, the transportation strategy of goods must be considered.
This includes frequency, routes, and contracting of goods. A goal of a company when transporting
goods is to ensure efficiency. Wear and tear of vehicles and the cost of gas can make some routes
more expensive than others. In order to reduce costs, companies often look for ways to streamline
routes and supply chain activities. GPS, or global positioning system, is a technological advancement
that has helped companies determine which routes are the most expensive to maintain. These routes
can be analyzed to determine if they can be eliminated, divided, and/or merged with other routes, or if
finding a new route can help make the route more efficient. Sometimes transport is subcontracted to
specialists or logistics partners.

Outsourcing

Outsourcing is the contracting of an existing business process to an external, independent


organization.

LEARNING OBJECTIVES

Analyze the effects of outsourcing on the supply chain

KEY TAKEAWAYS

Key Points

 The specialization model creates manufacturing and distribution networks composed of


multiple, individual supply chains specific to products, suppliers, and customers who work
together to design, manufacture, distribute, market, sell, and service a product.
 Outsourcing involves not only the procurement of materials and components, but also the
outsourcing of services that traditionally have been provided in-house.
 Managing and controlling a network of partners and suppliers requires a blend of both central
and local involvement.
 Managing and controlling a network of partners and suppliers requires a blend of both central
and local involvement. Hence, strategic decisions need to be taken centrally, with the
monitoring and control of supplier performance and day-to-day liaison with logistics partners
being best managed at a local level.

Key Terms

 supply chain: A supply chain is a system of organizations, people, technology, activities,


information and resources involved in moving a product or service from supplier to customer.

Outsourcing is the process of contracting an existing business process which an organization


previously performed internally to an independent organization, where the process is purchased as a
service.

Outsourcing: Outsourcing is the process of contracting an existing business process which an


organization previously performed internally to an independent organization, where the process is
purchased as a service.

Page 180 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

The Rise of Outsourcing

In the 1990s, industries began to focus on “core competencies,” and adopted a specialization model.
Companies abandoned vertical integration, sold off non-core operations, and outsourced those
functions to other companies. This changed management requirements by extending the supply chain
well beyond company walls and distributing management across specialized supply chain
partnerships.

This transition also re-focused the fundamental perspectives of each respective organization. OEMs
became brand owners that needed deep visibility into their supply base. They had to control the entire
supply chain from above instead of from within. Contract manufacturers had to manage bills of
material with different part numbering schemes from multiple OEMs and support customer requests
for work -in-process visibility and vendor-managed inventory (VMI).

Outsourcing and the Supply Chain

The specialization model creates manufacturing and distribution networks composed of multiple,
individual supply chains specific to products, suppliers, and customers who work together to design,
manufacture, distribute, market, sell, and service a product. The set of partners may change according
to a given market, region, or channel, resulting in a proliferation of trading partner environments, each
with its own unique characteristics and demands.

Outsourcing involves not only the procurement of materials and components, but also the outsourcing
of services that traditionally have been provided in-house. The logic of this trend is that the company
will increasingly focus on those activities in the value chain where it has a distinctive advantage, and
outsource everything else. This movement has been particularly evident in logistics, where the
provision of transport, warehousing, and inventory control is increasingly subcontracted to specialists
or logistics partners. Also, managing and controlling this network of partners and suppliers requires a
blend of both central and local involvement. Hence, strategic decisions need to be taken centrally,
with the monitoring and control of supplier performance and day-to-day liaison with logistics partners
being best managed at a local level.

Logistics

Logistics plans, implements, and controls the forward and reverse flow and storage of goods between
the point of origin and consumption.

LEARNING OBJECTIVES

Differentiate between supply chain and logistics

KEY TAKEAWAYS

Key Points

 Logistics involves the integration of information, transportation, inventory, warehousing,


material handling, and packaging, and often security. Today, the complexity of production
logistics can be modeled, analyzed, visualized, and optimized by plant simulation software but
is constantly changing.
 Logistics applies to activities within one company involving distribution of the product,
whereas the term ” supply chain ” also encompasses manufacturing and procurement and,
therefore, has a much broader focus.

Page 181 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Logistics as a business concept evolved in the 1950s due to the increasing complexity of
supplying businesses with materials and shipping out products in an increasingly globalized
supply chain, leading to a call for experts called “supply chain logisticians”.
 In business, logistics may have either internal focus (inbound logistics) or external focus
(outbound logistics), covering the flow and storage of materials from point of origin to point of
consumption (see supply chain management ).
 There are two fundamentally different forms of logistics. One optimizes a steady flow of
material through a network of transport links and storage nodes, and the other coordinates a
sequence of resources to carry out some project.
 There are two fundamentally different forms of logistics: one optimizes a steady flow of
material through a network of transport links and storage nodes; the other coordinates a
sequence of resources to carry out some project.

Key Terms

 logistics: The process of planning, implementing, and controlling the efficient, effective flow
and storage of goods, services, and related information from their point of origin to point of
consumption for the purpose of satisfying customer requirements.
 supply chain: A system of organizations, people, technology, activities, information. and
resources involved in moving a product or service from supplier to customer.
 inventory: The stock of an item on hand at a particular location or business.

Logistics

The term Logistics Management or Supply Chain Management is the part of Supply Chain
Management that plans, implements, and controls the efficient, effective, forward, and reverse flow
and storage of goods, services, and related information between the point of origin and the point of
consumption in order to meet customer’s requirements.

Distribution chain: Example of how companies may be supplied by the same distributor.

Logistics involves the integration of information, transportation, inventory, warehousing, material


handling, and packaging, and often security. Today, the complexity of production logistics can be
modeled, analyzed, visualized, and optimized by plant simulation software but is constantly changing.

Page 182 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

This can involve anything from consumer goods, such as food to IT materials, and aerospace and
defense equipment.

There is often confusion over the terms “supply chain” and “logistics. ” It is now generally accepted
that the logistics applies to activities within one company/organization involving distribution of
product, whereas supply chain also encompasses manufacturing and procurement and, therefore, has a
much broader focus as it involves multiple enterprises, including suppliers, manufacturers, and
retailers, working together to meet a customer’s need for a product or service.

The Evolution of Logistics

Logistics as a business concept evolved in the 1950s due to the increasing complexity of supplying
businesses with materials and shipping out products in an increasingly globalized supply chain,
leading to a call for experts or supply chain logisticians. Business logistics can be defined as “having
the right item in the right quantity at the right time at the right place for the right price in the right
condition to the right customer,” and is the science of process and incorporates all industry sectors.
The goal of logistics work is to manage the fruition of project life cycles, supply chains, and resultant
efficiencies.

Starting in the 1990s, several companies chose to outsource the logistics aspect of supply chain
management by partnering with a 3PL, third-party logistics provider. Companies also outsource
production to contract manufacturers. Technology companies have risen to meet the demand to help
manage these complex systems.

Logistic Focus

In business, logistics may have either an internal focus (inbound logistics) or external focus (outbound
logistics).

Inbound logistics is one of the primary processes of logistics, concentrating on purchasing and
arranging the inbound movement of materials, parts, and/or finished inventory from suppliers to
manufacturing or assembly plants, warehouses, or retail stores.

Outbound logistics is the process related to the storage and movement of the final product and the
related information flows from the end of the production line to the end user.

Quality Control

Quality control is a process that evaluates output against a standard and takes corrective action when
output doesn’t meet that standard.

LEARNING OBJECTIVES

Discuss the role of quality control in business

KEY TAKEAWAYS

Key Points

 The purpose of quality control is to make sure that certain processes perform to a company’s
set standards.

Page 183 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Quality control in relation to customers involves the continuous act of making sure products,
designed and manufactured, are produced to meet and exceed customer needs.

 Quality should be measured differently for products and services and judged by their own set
of dimensions.
 Controls include product inspection, where every product is visually examined, often with a
stereo microscope to perceive fine detail before the product is sold into the external market.
 Responsibility for overall quality lies with top management. Top management must establish
strategies, institute programs for quality, and motivate managers and workers.

Key Terms

 total quality management: A strategic approach to management aimed at embedding


awareness of quality in all organizational processes.
 organizational culture: Organizational culture is the collective behavior of humans who are
part of an organization and the meanings that the people attach to their actions.
 quality control: A control, such as inspection or testing, introduced into an industrial or
business process to ensure quality.

Quality can be thought of as the degree to which performance of a product or service meets or exceeds
expectations. Quality control is a process that evaluates output against a standard and takes corrective
action when output doesn’t meet these predetermined standards. Therefore, quality control in relation
to customers would be the continuous act of making sure products, designed and manufactured, are
produced to meet and exceed the needs of customers. For contract work, particularly work awarded by
government agencies, quality control issues are among the top reasons for not renewing a contract.

quality control: The purpose of quality control is to make sure that certain processes are performing
up to a company’s set standards.

This approach places an emphasis on three aspects:

 Elements such as controls, job management, defined and well-managed processes, performance
and integrity criteria, and identification of records
 Competence, such as knowledge, skills, experience, and qualifications
 Soft elements, such as personnel integrity, confidence, organizational culture, motivation, team
spirit, and quality relationships

Controls include product inspection, where every product is examined visually, often using a stereo
microscope for fine detail before the product is sold on the external market. Inspectors will be
provided with lists and descriptions of unacceptable product defects such as cracks or surface
blemishes.

An emphasis on quality control heightened during World War II. At that time quality control evolved
to quality assurance and is now better known as a Strategic Approach, a tool for improving not only
products but also processes and services. Quality should be measured differently for products and
services, and judged by their own set of dimensions. Responsibility for overall quality lies with top
management. Top management must establish strategies, institute programs for quality, and motivate
managers and workers. Most of the time, managers aim to improve or maintain the quality of an
organization as a whole; this is referred to as Total Quality Management (TQM). TQM involves a

Page 184 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

continual effort for quality improvement by everyone in an organization. The entire supply chain must
be involved for an organization to meet and exceed goals of quality control.

Investment in Operations

Investment in information technology has made supply chains faster, cheaper, and more reliable.

LEARNING OBJECTIVES

Examine the effect of technological advances on supply chain optimization

KEY TAKEAWAYS

Key Points

 Supply chain optimization applies processes and tools that ensure the optimal operation of a
manufacturing and distribution supply chain.
 Supply chain managers try to maximize the profitable operation of their manufacturing and
distribution supply chain.
 Supply chain optimization may include refinements at various stages of the product lifecycle,
and new, ongoing, and obsolete items are optimized in different ways.
 Optimization solutions are typically part of, or linked to, the company’s replenishment systems
distribution requirements planning, so that orders can be automatically generated to maintain
the model stock profile. The algorithms used are similar to those used in making financial
investment decisions; the analogy is quite precise, as inventory can be considered to be an
investment in prospective return on sales.
 Supply chain optimization may include refinements at various stages of the product lifecycle,
so that new, ongoing and obsolete items are optimized in different ways: and adaptations for
different classes of products, for example seasonal merchandise.

Key Terms

 supply chains: A supply chain is a system of organizations, people, technology, activities,


information and resources involved in moving a product or service from supplier to customer.

Supply chains have become faster, cheaper, and more reliable through investment in information
technology, cost-analysis, and process-analysis.

Supply chain optimization applies processes and tools that ensure optimal operation of a
manufacturing and distribution supply chain. These include the optimal placement of inventory within
the supply chain and the minimizing of operating costs associated with manufacturing, transportation,
and distribution. Optimization may also incorporate computer-based mathematical modelling
techniques.

Supply Chain: Supply chain optimization applies processes and tools that ensure the optimal operation
of a manufacturing and distribution supply chain.

Ongoing investment in a company’s operations is necessary in order for supply chain optimization to
be achieved. Supply chain managers may employ optimization such as maximizing gross margin

Page 185 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

return on inventory invested (GMROII); balancing the cost of inventory at all points in the supply
chain with availability to the customer; minimizing total operating expenses (e.g., transportation,
inventory, and manufacturing); and maximizing gross profit of products distributed through the
supply chain.

Supply chain optimization addresses the general supply chain problem of delivering products to
customers at low cost and high profit. This involves balancing the costs of inventory, transportation,
distribution, and manufacturing, and supply chain optimization has applications in all industries that
manufacture and/or distribute goods (retail, industrial, and/or consumer packaged goods [CPG]).

The classic supply chain approach has been to forecast future inventory demand using statistical
trending and “best fit” techniques, which are based on historic demand and predicted future events.
The advantage of this approach is that it can be applied to data aggregated at a fairly high level (e.g.,
category of merchandise; weekly, by customer category), thus requiring modest database sizes and
small amounts of manipulation. Unpredictability in demand is subsequently managed by setting safety
stock levels; for example, a distributor might hold two weeks of supply for a steadily in-demand
article but twice that supply for an article whose demand is more erratic.

Using this forecast demand, a supply chain manufacturing and distribution plan is created to
manufacture and distribute products to meet the demand at low cost and/or high profit. This plan
typically addresses several questions:

 How much of each product should be manufactured each day?


 How much of each product should be made at each manufacturing plant?
 Which manufacturing plants should re-stock which warehouses with which products?
 What transportation modes should be used for warehouse replenishment and customer
deliveries?

The technical ability to record and quickly manipulate large databases has allowed for the emergence
of a new breed of supply chain optimization solutions, which are capable of forecasting at a granular
level (for example, per article per customer per day). Some vendors are applying “best fit” models to
this data, to which safety stock rules are applied, while other vendors have started to apply stochastic
techniques to the optimization problem.

Supply chain optimization may include additional refinements at various stages of the product
lifecycle, and new, ongoing, and obsolete items are optimized in different ways. Finally, while most
software vendors are offering supply chain optimization as a packaged solution and integrated in ERP
software, some vendors are running the software on behalf of clients as application service providers.

LICENSES AND ATTRIBUTIONS

Planning for Operations

New Product Development

Organizations put a lot of time and money into new products and thus deploy various methods in an
attempt to mitigate the risks.

LEARNING OBJECTIVES

Page 186 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Distinguish between minimum viable product, continuous deployment, split testing, vanity metrics,
laboratory tests, expert evaluations and customer evaluations

KEY TAKEAWAYS

Key Points

 Organizations use formal systems to evaluate new products.


 Product testing and sales forecasts are used to help diminish the risk of introducing a new
product.
 It’s possible to eliminate some of the risks associated with introducing a new product by
launching the smallest amount of the product possible to test demand.
 Several methods can be used to evaluate new products before they are launched.

Key Terms

 minimum viable product: The minimum viable product is a product stripped down to it’s
most basic, necessary features in order to get that product into the consumer’s hands in the
quickest, most affordable way.
 product placement: a form of advertising where a brand, good, or service is placed in the
media, for money
 product: Any tangible or intangible good or service that is a result of a process and that is
intended for delivery to a customer or end user.
 product differentiation: perceived differences between the product of one firm and that of its
rivals so that some customers value it more

Introduction

Organizations invest a lot of money to create new products that perform effectively. Nonetheless,
firms often struggle to convince people to incorporate these new products into their routines (Arts
2008). For example, it took 18 years for microwave ovens to gain acceptance in Greece (Tellis,
Stremersch, and Yin 2003). The ultimate success of new products depends on consumers accepting
them (Arts 2008)..

New product: Organizations invest a lot of money to create new products that perform effectively.

Product Evaluation

The term “product” refers to both goods and services. A product is anything that can be offered to a
market to satisfy a want or need. When an organization adds a new product, there is both potential

Page 187 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

benefit and risk. As a result, organizations implement formal systems for evaluating new products. In
particular, there is a concerted effort to forecast projected sales and thus reduce some of the financial
risk.

While evaluating new products, there is also the possibility of generating innovative ideas that can
later go through the testing process. Idea generation is an essential part of marketing strategy and is
critical to the success of a company. When such product ideas move further along, a key step is to
create a prototype or working version of the new offering. Again, market testing is crucial at every
stage in the development process.

Minimum Viable Product

A minimum viable product (MVP) is the “version of a new product which allows a team to collect the
maximum amount of validated learning about customers with the least effort. ” The goal of an MVP is
to test fundamental business hypotheses (or leap-of-faith assumptions) and to help entrepreneurs
begin the learning process as quickly as possible.

For example, Ries notes that Zappos founder Nick Swinmurn wanted to test the hypothesis that
customers were ready and willing to buy shoes online. Instead of building a website and a large
database of footwear, Swinmurn approached local shoe stores, took pictures of their inventory, posted
the pictures online, bought the shoes from the stores at full price, and sold them directly to customers
if they purchased the shoe through his website. Swinmurn deduced that customer demand was
present, and Zappos would eventually grow into a billion-dollar business based on the model of
selling shoes online.

Continuous Deployment

Continuous deployment is a process “whereby all code that is written for an application is
immediately deployed into production,” resulting in a reduction of cycle times. Ries states that some
of the companies he’s worked with deploy new code into production as often as 50 times a day. The
phrase was coined by Timothy Fitz, one of Ries’s colleagues and an early engineer at IMVU.

Split Testing

A split test or A/B test is an experiment in which “different versions of a product are offered to
customers at the same time. ” The goal of a split test is to observe changes in behavior between the
two groups and to measure the impact of each version on an actionable metric. A/B testing can also be
performed in serial fashion where a group of users one week may see one version of the product while
the next week users see another.

Vanity Metrics

Vanity metrics are measurements which give “the rosiest picture possible” but do not accurately
reflect the key drivers of a business. This is in contrast to actionable metrics, the measurement of
which can lead to a business decision and subsequent action.

Laboratory Tests

Laboratory tests provide information regarding the performance of new products in extreme settings.
For example, a new copy machine can be tested at various work loads, like numbers of copies and
speed per minute to test the relationship between workload and paper jam.

Page 188 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Expert Evaluations

Expert evaluators can be used at all phases of the new product development process. For instance,
experts can be used to estimate whether or not a new product idea will be accepted in the marketplace
before a prototype even exists.

Customer Evaluations

In later stages of development, customers can be recruited to evaluate prototypes. There is an attempt
to test new products under conditions that are relatively close to actual use.

Designing the Operation

Designing effective operations is critical, and can have both short-term and long-term impacts on an
organization’s longevity.

LEARNING OBJECTIVES

Explain the importance of operations management on the success of a business

KEY TAKEAWAYS

Key Points

 Operations management is a strategic function within an organization.


 Operations decisions include elements needed to produce goods and services, and make them
available to customers.
 Operations management touches upon multiple areas of a business, from engineering and
research & development, to human resources and accounting.

Key Terms

 operation: The method or practice by which actions are done.


 Operations management: An area of management concerned with overseeing, designing,
controlling the process of production, and redesigning business operations in the production of
goods and/or services.

Designing the Operation

Operations management is a strategic function in organizations that adds value to customers and
allows businesses to successfully produce goods and deliver services. Operational decisions determine
how well these goods and services meet the needs of the organization’s target market, and
consequently, whether the organization will be able to survive over the long-term.

Page 189 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Smooth Landing: Operations management plays a key role in the success in airline companies.

If the organization has made mostly good operational decisions in designing and executing its
transformation system to meet the needs of customers, its prospects for long-term survival are greatly
enhanced.

Operations management and planning are common in industries such as the airlines, manufacturing
companies, service provider organizations, the military, and government. Some examples of
management and planning include:

 Scheduling airlines, including both planes and crew


 Deciding the appropriate place to site new facilities such as a warehouse, factory, or fire station
 Managing the flow of water from reservoirs; identifying possible future development paths for
parts of the telecommunications industry
 Establishing the information needs and appropriate systems to supply them within the health
service
 Identifying and understanding the strategies adopted by companies for their information
systems

Operational Decisions

As mentioned, operations decisions have both long-term and short-term impacts on the organization’s
ability to produce goods and services, and can provide added value to customers and employees.
Operations management touches upon multiple areas of a business, from engineering and research &
development, to human resources and accounting. Likewise, the decisions management makes when
parceling technological, monetary, and people resources across the organization typically falls under
the following areas:

 Inventory decisions
 Capacity decisions
 Quality decisions

Page 190 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Scheduling decisions
 Process decisions

 Technology decisions
 Location decisions

Most often when a company sets operational goals and objectives, they are considered relatively short
term.

Capacity Planning

Capacity planning revolves around answering the question “How much? ” in both long-term and
short-term situations.

LEARNING OBJECTIVES

Compare and contrast long-term and short-term capacity decisions

KEY TAKEAWAYS

Key Points

 Capacity planning takes place on a daily basis in some industries.


 Organizations must closely examine the services and the cost of services offered to their
customers when making capacity decisions.
 In a grocery store or supermarket, managers must ensure that sufficient cash registers and
employees are on-hand to meet check-out demand and provide good customer service.

Key Terms

 capacity: The maximum that can be produced on a machine or in a facility or group.

Introduction

When making capacity decisions, managers must answer the simple question, “How much?”
Determining the organization’s capacity to produce goods and services involves both long-term and
short-term decisions. Long-term capacity decisions involve facilities and major equipment
investments.

capacity: The question managers must answer for capacity decisions is simply “How much?”

Page 191 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Long-term decisions

In 2007, Airbus introduced its Super Jumbo Jet that carries up to 850 passengers and costs USD 3
billion. The Super Jumbo Jet provides huge amounts of passenger carrying capacity, but before an
airline purchases this jet, it needs to decide if it has enough passengers to generate the revenue to pay
for the plane and earn profits for the airline. Buying a large single airplane like the Super Jumbo Jet
may not be the right capacity decision for an airline that serves numerous medium-sized cities. On the
other hand, an airline that serves passengers traveling between large cities like New York City, USA,
and Shanghai, China might find the Super Jumbo Jet to be a perfect choice for meeting consumer
demand.

Short-term decisions

Capacity decisions are also required in short-term situations. In a grocery store, the number of
customers that need to pay for their groceries at any one point during the day will vary significantly.
To provide good customer service, managers must make sure that sufficient cash registers and
employees are on-hand to meet check-out demand at any given time.

Similarly, hotels must make sure that they have enough employees to register arriving guests, clean
hotel rooms, and provide food and beverages to customers. These decisions must be made carefully to
avoid excessive labor costs that result from having an excess of employees available for the number
of customers being served.

Facilities Layout

Facility layout decisions are based on criteria aimed at creating an effective and efficient workflow
and high standard production.

LEARNING OBJECTIVES

Outline the key considerations in facility design

KEY TAKEAWAYS

Key Points

 There are three types of workflow layouts that managers can choose from.
 Office and factory facilities are approached differently.
 A facility manager’s industry can also influence the facilities layout design.

Key Terms

 facilities layout: Facility layout is simply the way a facility is arranged in order to maximize
processes that are not only efficient but effective towards the overall organizational goal.

Introduction

Facilities is defined as the workspace and equipment needed to carry out the operations of the
organization. This includes offices, factories, computers, and trucks.

Page 192 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

The location, design, and layout of an organizations’ facilities are central to maximising the efficiency
of the overall operations system.

In this unit, we’re going to focus on facility design and layout.

Facilities Design and Layout

After choosing the facility’s location, the next stage in operations planning is to design the best
physical layout for the facility. The avaliable space needs to be assessed with workstations,
equipment, storage, and other amenities need to be arranged. The aim is to allow for the most efficient
workflow without disruption. A workplace that has carefully arranged its layout will allow for a more
effictive and efficient workflow and produce its good or services to a high standard.

There are three types of workflow layouts that managers can choose from:

 Process layout: arranged in departments (e.g., hospitals).


 Product layout: production line (e.g., a car assembly plant).
 Fixed-position layout: building a large item (e.g., jumbo jet).

Facility Layout Considerations

Facility managers should consider several factors when designing the layout of a facility to achieve
maximum effectiveness.

 Does the design and layout allow for growth or change? Is there a chance that your company
will experience significant growth? Could some other change come about that could influence
the layout of your facility? In business, anything is possible. Make sure that same is true of
your facilities layout. While making changes is a costly and undertaking them shouldn’t be
taken lightly, your layout should be flexible enough to allow a redesign if the situation calls for
it.
 Is the process flow smooth? If you are running a factory, for example, the flow should be such
that the raw materials enter at one end and the finished product exits at the other. The flow
doesn’t have to form a straight line, but there should be no backtracking. Backtracking creates
confusion. Employees get confused (“Has that been done yet? “), parts get lost, and
coordination is very difficult. You need to have a smooth process to be efficient.
 Are materials being handled efficiently? Here simplicity is best.
 Does the facility layout aid the business in meeting its production needs? Is there enough space
and is it used efficiently? Have you allowed enough space for shipping and receiving? Can
different areas of the business communicate effectively? Does the layout lend itself to
promotional activities? (e.g., showing the facilites to potential customers)
 Does the layout contribute to employee satisfaction and moral? Numerous studies have linked
employee moral to productivity. So managers should take this point into consideration when
designing the layout of their facilities. How can this be done? Paint the walls light colors, allow
for windows and space, include a cafeteria and a gym. Some of the options may cost lots of
money, but if it increases productivity in the long run, it is probably worth making the
investment.

Are the Facilities for an Office or a Factory?

Page 193 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Office Space: An office will have different layout requirements than a factory.

Office and factory facilities are approached differently.

Factories move materials from point A to point B to produce a final products. The process uses
equipment and utilities. Minimizing transportation costs may be one of the criteria of planning the
layout of a factory. Another important consideration for factories in the necessity for maintenance of
machinery. As such, careful consideration of enabling access to technicians is critical to ensuring
minimal workflow disruptions in a scenario of updating, repairing or replacing machinery.

Offices, on the other hand, produces information. The form may be physical, electronic, or oral, but
the the final result is still information. Office facility layout is harder to quantify than factory facilities
layout, but the goal should be to minimize communication costs and maximize productivity.

Your industry can also influence the facilities layout design. The facility layout for service industries
will differ from that of retailers and manufacturers. It all depends on organization’s needs.

Location Choice and Site Planning

An organization’s location choice impacts its efficiency and effectiveness, so it is important for it to
properly weigh the various factors.

LEARNING OBJECTIVES

Outline the key considerations for deciding the location of facilities

KEY TAKEAWAYS

Key Points

 There are many factors that can determine where an organization will locate its facilities. For
any given situation, some factors become more important than others in how facility location
affects an organization’s efficiency and effectiveness.

Page 194 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 The factors determining where a company chooses to locate its facilites include supply,
customer, community, and labor considerations.

 An essential part of choosing a location is doing proper research to verity that the location
matches an organization’s strategic requirements.

Key Terms

 facility: The physical means or contrivances to make something (especially a service) possible;
the required equipment, infrastructure, location etc.

Introduction

There are many factors that can determine where an organization will locate its facilities. For any
given situation, some factors become more important than others in how facility location affects an
organization’s efficiency and effectiveness.

Key Factors

 Proximity to sources of supply: Firms that process bulk raw materials usually locate close to
the source of supply to reduce transportation costs. Paper mills locate close to forests, canneries
are built close to farming areas, and fish processing plants are located close to the harbors
where the fishing vessels dock.
 Proximity to customers: There are several reasons why an organization would locate close to
end customers. Service firms need to be close to customers to be convenient, as is the case for
grocery stores, gas stations, fast food restaurants, and hospitals. Transportation costs can also
require proximity to customers, as in the case of concrete manufacturing. Perishable products
often require that they be produced close to the final market, as is the case for bakeries and
fresh flowers.
 Community factors: Communities may offer a number of incentives to entice companies,
including waiving or reducing taxes, and providing access roads, water and sewer connections,
and utilities. Community attitudes can also play a role in an organization’s location decision.
Some communities may actively discourage companies that might bring more pollution, noise,
and traffic to the area. Some communities may not want a prison to be located in their
community. Other communities may welcome such firms because of the jobs, tax revenues,
and economic diversity they promise.
 Labor factors: Research shows that the majority of location decisions are largely based on labor
factors, since labor is a critical variable for many firms. Labor factors include the prevailing
wage rate in a community for similar jobs, the supply of qualified workers, and the average
education level of the local population (percentage of high school graduates, etc.). Other labor
factors can include the degree of union organizing and the general work ethic of a community,
as well as other measures of absenteeism, and worker longevity in a job can play a strong role
when a firm makes a location decision.
 Other factors: Many other factors can play a role in the location decision, including quality of
life (crime rates, good schools, climate, and recreation options), access to major transportation
arteries, construction costs, proximity of the competition, and opportunities for future
expansion.

As mentioned earlier, the importance of any location factor can vary greatly, depending on the
circumstances of the decision.

Page 195 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Colorado river: Colorado is beautiful, but it might not be the best location for all organizations.

In the 1990s, MCI, a major US telecommunications company, decided to relocate its engineering
services division from MCI’s headquarters in Washington DC to Colorado Springs, Colorado to
reduce labor and facility costs. The decision was largely unsuccessful due to the high costs of
employee relocation and the fact that much of the ethnically diverse engineering workforce did not
want to live in Colorado Springs.

Unlike Washington DC, Colorado Springs did not have cultural diversity to match with its diverse and
highly educated workforce, it lacked employment options for spouses, and the work ethic was more
relaxed due to the beautiful natural setting that provided unlimited options for outdoor recreation.

In short, if MCI had put more effort into researching how well the Colorado Springs location matched
its strategic requirements, it probably could have saved itself millions of dollars and a great deal of
internal disruption to the organization.

Sustainability Initiatives

Sustainability initiatives consider every dimension of how a business operates in the social, cultural,
and economic environment.

LEARNING OBJECTIVES

Explain the principles of corporate sustainability

KEY TAKEAWAYS

Key Points

 Transparency deals with the idea that having an engaging and open environment within the
company, as well as the community, will improve performance and increase profits.
 Employee development involves the idea that people are the most important renewable
resource and, therefore, are the strongest asset to any organization.
 Resource efficiency refers to that fact that companies must adapt to a rapidly changing
environment by being prepared to change and implement new creative ideas related to
sustainability.
 Essential principles of a sustainability initiative include triple top-line value production, nature-
based knowledge and technology, products of service and products of consumption, renewable
energy, local economies, and continuous improvement.

Key Terms

 stewardship: The act of caring for or improving with time.


 geothermal: Pertaining to heat energy extracted from reservoirs in the earth’s interior.
 sustainability: The capacity to support, maintain, or endure.

Sustainability, in a general sense, is the capacity to support, maintain, or endure. Since the 1980s,
human sustainability has been related to the integration of environmental, economic, and social
dimensions towards global stewardship and responsible management of resources.

Page 196 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Sustainability: Sustainability is related to the integration of environmental, economic, and social


dimensions towards global stewardship and responsible management of resources.

Corporate sustainability is a business approach that creates long-term consumer and employee value
by not only creating a “green” strategy aimed towards the natural environment, but taking into
consideration every dimension of how a business operates in the social, cultural, and economic
environment. It also involves formulating strategies to build a company that fosters longevity through
transparency and proper employee development. Three key principles that should form the foundation
of a corporate sustainability initiative are: transparency, employee development, and resource
efficiency.

Transparency deals with the idea that having an engaging and open environment within the company,
as well as the community, will improve performance and increase profits. An open culture promotes
employee involvement in regards to the innovation and creative processes. Reaching out to the
community creates a much bigger team and provides evaluation from all angles. Companies are
looking inward and realizing changes must be made to fulfill environment needs such as energy
efficiency, limiting product waste and toxicity, and designing innovative products.

Employee development involves the idea that people are the most important renewable resource and,
therefore, are the strongest asset to any organization. A strong development program could be the
underlying factor for a company’s success or failure. Employees are the concrete foundation for the
company and must be thoroughly analyzed and evaluated to tap into their true motivations and
desires. For a company that wants to reach its greatest potential, employees must work towards
improvement rather than perfection. Programs should be implemented that reward star performers,
foster the creative learning process, and provide comprehensive training and evaluating.

Page 197 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Resource efficiency refers to that fact that companies must adapt to a rapidly changing environment
by being prepared to change and implement new creative ideas related to sustainability. Companies
should not throw away old products and materials, but rather be prepared with upgraded technology
that can transform the product. New solutions that improve recycling and waste redirecting can
ultimately reduce costs and increase profits. For example, Wal-Mart Stores Inc. has redirected more
than 64% of the waste generated by stores and Sam’s Club facilities. In 2009 alone, they recycled
more than 1.3 million pounds of aluminum, 120 million pounds of plastics, 11.6 million pounds of
mixed paper, and 4.6 billion pounds of cardboard. On an annual basis, they expect to save around $20
million and prevent 38 million pounds of waste being sent to landfills.

Essential Principles of a Sustainability Initiative

1. Triple top-line value production: This establishes three simultaneous requirements of


sustainable business activities: 1) financial benefits for the company, 2) natural world
betterment, and 3) social advantages for employees and members of the local community—
with each of these three components recognized as equal in status.
2. Nature-based knowledge and technology: This biomimicry-based principal involves the
conscious emulation of natural-world genius in terms of growing our food, harnessing our
energy, construction, conducting business, healing ourselves, processing information, and
designing our communities.
3. Products of service and products of consumption: Products of service are durable goods
routinely leased by the customer that are made of technical materials and are returned to the
manufacturer and re-processed into a new generation of products when they are worn out.
Products of consumption are shorter lived items made only of biodegradable materials. This
principal requires that we manufacture only these two types of products and necessitates the
gradual but continual reductions of products of service and their replacement with products of
consumption as technological advancements allow.
4. Solar, wind, geothermal, and ocean energy: This principal advocates employing only
sustainable energy technology—solar, wind, ocean, and geothermal—that can meet our energy
needs indefinitely without negative effects for life on Earth.
5. Local-based organizations and economies: This principle calls for durable, beautiful, and
healthy communities with locally-owned and operated businesses and locally-managed non-
profit organizations, along with regional corporations and shareholders working together in a
dense web of partnerships and collaborations.
6. Continuous improvement process: This principle suggests that operational processes inside
successful organizations include provisions for constant advancements and upgrade as the
company does its business.
LICENSES AND ATTRIBUTIONS

Management and Motivation

Introduction to Motivation

Motivation is a term that refers to the process that elicits, controls, and sustains certain behaviors.

LEARNING OBJECTIVES

Discuss the relevance of motivation to the workplace

KEY TAKEAWAYS

Page 198 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Key Points

 Conceptually, motivation should not be confused with either volition or optimism. Motivation
is related to, but distinct from, emotion.
 Studies have found that employees are not motivated solely by money but motivation is linked
to employee behavior and their attitudes.
 At one time, employees were considered just another input into the production of goods and
services, but this changed after the Hawthorne studies.

Key Terms

 motivation: Willingness of action, especially in behavior.


 volition: The mental power or ability of choosing; the will.

Motivation is a term that refers to a process that elicits, controls, and sustains certain behaviors. It is a
group phenomenon which affects the nature of an individual’s behavior, the strength of the behavior,
and the persistence of the behavior. For instance: an individual has not eaten, so he or she feels
hungry, and as a response he or she eats and diminishes feelings of hunger.

There are many approaches to motivation: physiological, behavioral, cognitive, and social. It is the
crucial element in setting and attaining goals —and research shows you can influence your own levels
of motivation and self-control. According to various theories, motivation may be rooted in a basic
need to minimize physical pain and maximize pleasure; or it may include specific needs such as
eating and resting; or a desired object, goal, state of being, or ideal; or it may be attributed to less-
apparent reasons such as altruism, selfishness, morality, or avoiding mortality. Conceptually,
motivation should not be confused with either volition or optimism. Motivation is related to, but
distinct from, emotion.

At one time, employees were considered just another input into the production of goods and services.
But this changed after the Hawthorne studies. The Hawthorne studies were conducted by Elton Mayo
at Hawthorne Plant in the 1920s. The researchers were studying the effect of different working
environments on productivity. They used lighting as an experimental variable (the effect of bright
lighting and dull lighting). Initially they noticed that employees were working harder but it was not
because of the lighting. They concluded that productivity increased due to attention that the workers
got from the research team and not because of changes to the experimental variable. The Hawthorne
studies found that employees are not motivated solely by money but motivation is linked to employee
behavior and their attitudes. The Hawthorne Studies began the human relations approach to
management, so the needs and motivation of employees became the primary focus of managers.

Page 199 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Carrot and Stick: Motivation theories often use the metaphor of a carrot dangling from a stick to
describe how people are motivated to achieve goals.

Classical Theory of Motivation

The classical theory of motivation includes the hierarchy of needs from Abraham Maslow and the
two-factor theory from Frederick Herzberg.

LEARNING OBJECTIVES

Compare Maslow’s and Herzberg’s theories of the hierarchy of needs

KEY TAKEAWAYS

Key Points

 A good manager will try to figure out which levels of needs are important for a certain
individual or employee.
 Maslow’s Hierarchy of Needs consist of the following: Physiology (hunger, thirst, sleep, etc. );
Safety/ Security /Shelter/Health; Belongingness/Love/Friendship; Self-
esteem/Recognition/Achievement; Self actualization.

Page 200 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Frederick Herzberg’s two-factor theory, a.k.a. intrinsic/extrinsic motivation, concludes that


certain factors in the workplace result in job satisfaction but, if absent, they don’t lead to
dissatisfaction but rather to no satisfaction at all.

Key Terms

 demotivation: Feeling or state of being unmotivated or demotivated.

Needs Hierarchy Theory

The content of this theory includes the hierarchy of needs from Abraham H. Maslow and the two-
factor theory from Frederick Irving Herzberg. Maslow’s theory is one of the most widely discussed
theories of motivation.

History of Motivation: Maslow’s theory is one of the most widely discussed theories of motivation.

The American motivation psychologist Abraham H. Maslow developed the Hierarchy of Needs
consistent of five hierarchical classes. It shows the complexity of human requirements. According to
him, people are motivated by unsatisfied needs. The lower level needs such as physiological and
safety needs will have to be satisfied before higher level needs are to be addressed. We can relate
Maslow’s Hierarchy of Needs theory with employee motivation. For example, if a manager is trying
to motivate his employees by satisfying their needs, according to Maslow, he should try to satisfy the
lower-level needs before he tries to satisfy the upper-level needs or the employees will not be
motivated. Also the manager has to remember that not everyone will be satisfied by the same needs.

A good manager will try to figure out which levels of needs are active for a certain individual or
employee. The basic requirements build the first step in his pyramid. If there is any deficit on this
level, the whole behavior of an individual will be oriented to satisfy this deficit. Subsequently we do
have the second level, which awakens a need for security. Basically it is oriented on a future need for
security. After securing those two levels, the motives shift in the social sphere, which form the third
stage. Psychological requirements comprise the fourth level, while the top of the hierarchy is self-
realization. So the theory can be summarized as follows: Human beings have wants and desires which
influence their behavior.

Only unsatisfied needs influence behavior; satisfied needs do not. Since needs are many, they are
arranged in order of importance, from the basic to the complex. The person advances to the next level
of needs only after the lower-level need is at least minimally satisfied. The further the progress up the
hierarchy, the more individuality, humanness and psychological health a person will show. The needs,
listed from basic (lowest or earliest) to most complex (highest or latest) are as follows:

 Physiology (hunger, thirst, sleep, etc. )


 Safety/Security/Shelter/Health
 Belongingness/Love/Friendship
 Self-esteem/Recognition/Achievement
 Self actualization

Herzberg’s Two-factor Theory

Frederick Herzberg’s two-factor theory, a.k.a. intrinsic/extrinsic motivation, concludes that certain
factors in the workplace result in job satisfaction, but if absent, they don’t lead to dissatisfaction but

Page 201 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

rather to no satisfaction at all. The factors that motivate people can change over their lifetime, but
“respect for me as a person” is one of the top motivating factors at any stage of life. He distinguished
between: Motivators (e.g. challenging work, recognition, responsibility) which give positive
satisfaction, and Hygiene factors (e.g. status, job security, salary and fringe benefits) that do not
motivate when present but, if absent, result in demotivation. The name Hygiene factors is used
because, like hygiene, the presence will not make you healthier, but absence can cause health
deterioration. The theory is sometimes called the “Motivator-Hygiene Theory” or “The Dual Structure
Theory. ” Herzberg’s theory has found application in such occupational fields as information systems
and in studies of user satisfaction.

Frederick Taylor

Scientific management, also called Taylorism, concerns the analysis and synthesis of workflows to
improve productivity.

LEARNING OBJECTIVES

Explain Taylorism: the theory of scientific management

KEY TAKEAWAYS

Key Points

 It can be said that the quality of life at work extends to life outside of work. This can be
evaluated by comparing the wages of the “expert leaders” to those of “general laborers”.
 Taylor proposed a “neat, understandable world in the factory, an organization of men whose
acts would be planned, coordinated, and controlled under continuous expert direction”.
 Factory production was to become a matter of efficient and scientific management —the
planning and administration of workers and machines alike as components of one big machine.

Key Terms

 workflow: A process and/or procedure in which tasks are completed. It may be defined with a
flowchart to define actors, actions, results, decisions, and action paths.

Scientific management, also called Taylorism, is a theory of management that analyzed and
synthesized workflows. Its main objective was improving economic efficiency, especially labor
productivity. It was one of the earliest attempts to apply science to the engineering of processes and to
management. Its development began with Frederick Winslow Taylor in the 1880s and 1890s within
the manufacturing industries. Its peak of influence came in the 1910s, but by the 1920s, its influence
started to dwindle. The 1920s saw the beginning of an era of competition and syncretism with
opposing or complementary ideas.

Frederick Taylor: Scientific management, also called Taylorism, is a theory of management that
analyzed and synthesized workflows.

Although scientific management as a distinct theory or school of thought was obsolete by the 1930s,
most of its themes are still important parts of industrial engineering and management today. These
include analysis; synthesis; logic; rationality; empiricism; work ethic; efficiency and elimination of
waste; standardization of best practices; disdain for tradition preserved merely for its own sake or

Page 202 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

merely to protect the social status of particular workers with particular skill sets; the transformation of
craft production into mass production; and knowledge transfer between workers and from workers
into tools, processes, and documentation.

Features of Scientific Management

 Social philosophy, a promise of reform through growth and expansion


 Application of engineering principles to the industrial system of the production
 Time and motion studies to ensure efficiency
 Standarization
 Factory work to be planned, coordinated, and controlled under expert direction
 Information centralized/controlled in planning department, which increases potential for
survillance and controlling the production process
 Expert directions by engineers, factory planning, time and motion studies, standardization, and
the intensive division of labors

Taylor proposed a “neat, understandable world in the factory, an organization of men whose acts
would be planned, coordinated, and controlled under continuous expert direction. ” Factory
production was to become a matter of efficient and scientific management—the planning and
administration of workers and machines alike as components of one big machine.

Elton Mayo

George Elton Mayo concluded that people’s work performance is dependent on both social issues and
job content.

LEARNING OBJECTIVES

Analyze Elton Mayo’s theories on motivation and management

KEY TAKEAWAYS

Key Points

 The human relations movement refers to the researchers of organizational development who
study the behavior of people in groups, particularly workplaces.
 The movement viewed workers in terms of their psychology and fit with companies rather than
as interchangeable parts, and it resulted in the creation of the discipline of human resource
management.
 Norms of cooperation and higher output were established because of a feeling of importance,
physical conditions or financial incentives had little motivational value.

Key Terms

 human resource management: The process of hiring and developing employees so that they
become more valuable to the organization.

The human relations movement refers to the researchers of organizational development who study the
behavior of people in groups, in particular workplace groups. It originated in the 1930s’ Hawthorne

Page 203 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Studies, which examined the effects of social relations, motivation, and employee satisfaction on
factory productivity. The movement viewed workers in terms of their psychology and fit with
companies rather than as interchangeable parts, and it resulted in the creation of the discipline of
human resource management.

George Elton Mayo is known as the founder of the Human Relations Movement and was known for
his research, including the Hawthorne Studies and his book, The Human Problems of an
Industrialized Civilization (1933). The research he conducted under the Hawthorne Studies of the
1930s showed the importance of groups in affecting the behavior of individuals at work. Mayo’s
employees, Roethlisberger and Dickson, conducted the practical experiments. This enabled Mayo to
make certain deductions about how managers should behave. He carried out a number of
investigations to look at ways of improving productivity—for example, by changing lighting
conditions in the workplace. What he found, however, was that work satisfaction depended to a large
extent on the informal social pattern of the work group. Where norms of cooperation and higher
output were established because of a feeling of importance, physical conditions or financial incentives
had little motivational value. People will form work groups, and this can be used by management to
benefit the organization. In short, he concluded that people’s work performance is dependent on both
social issues and job content. He suggested a tension between workers’ “logic of sentiment” and
managers’ “logic of cost and efficiency ” which could lead to conflict within organizations.

Motivation: Motivation makes for courageous decisions.

George Elton Mayo stressed the importance of natural groups, in which social aspects take precedence
over functional organizational structures. He also encouraged upwards communication, by which
communication is two-way, from worker to chief executive, as well as vice versa. Companies need
their employees to be able to successfully communicate and convey information, to be able to
interpret others’ emotions, to be open to others’ feelings, and to be able to solve conflicts and arrive at
resolutions. By acquiring these skills, the employees, those in management positions, and the
customer can maintain more compatible relationships. Cohesive and good leadership is needed to
communicate goals and to ensure effective and coherent decision making. It has become a concern of
many companies to improve the job-oriented interpersonal skills of employees. The teaching of these
skills to employees is referred to as “soft skills” training.

Criticisms

Elton Mayo’s work is considered the counterpoint of Taylorism and scientific management by various
academics. Taylorism, founded by F. W. Taylor, sought to apply science to the management of
employees in the workplace in order to gain economic efficiency through labor productivity. On the
other hand, Elton Mayo’s work has been widely attributed to the discovery of the “social person,”
thereby allowing for workers to be seen as individuals rather than merely robots designed to work for
unethical and unrealistic productivity expectations. However, this theory has been contested, as
Mayo’s purported role in the human relations movement has been questioned. Nonetheless, although
Taylorism attempted to justify scientific management as a holistic philosophy rather than a set of
principles, the human relations movement worked parallel to the notion of scientific management
aiming to address the social welfare needs of workers and therefore elicit their co-operation as a
workforce.

The Hawthorne Effect

The Hawthorne effect refers to a series of studies starting in 1924 at the Hawthorne Works concerning
productivity.

Page 204 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

LEARNING OBJECTIVES

Apply the Hawthorne effect to business organizations

KEY TAKEAWAYS

Key Points

 Changing a variable usually increased productivity, even if the variable was just a change back
to the original condition.
 The central idea behind the Hawthorne effect is that changes in the behavior of participants
during the course of a study may be related only to the special social situation and social
treatment that they received.
 Output was measured mechanically by counting how many finished relays each worker
dropped down a chute.

Key Terms

 illumination: The act of illuminating, or supplying with light; the state of being illuminated.

The Hawthorne Effect

The central idea behind the Hawthorne effect, a term used as early as 1950 by John R. P. French, is
that changes in the behavior of participants during the course of a study may be “related only to the
special social situation and social treatment they received. ” The term gets its name from a factory
called the Hawthorne Works, where a series of experiments on factory workers was carried out
between 1924 and 1932. This effect was observed for minute increases in illumination.

The Last Vestige of the Hawthorne Works Plant in Cicero, Illinois: The term Hawthorne effect
was applied in reference to a set of studies begun in 1924 at the former Hawthorne Works plant.

Evaluation of the Hawthorne effect continues in the present day. Most industrial and occupational
psychology and organizational behavior textbooks refer to the illumination studies. Only occasionally
are the rest of the studies mentioned. In the lighting studies, light intensity was altered to examine its
effect on worker productivity. In one of the studies, experimenters chose two women as test subjects
and asked them to choose four other workers to join the test group. Together the women worked in a
separate room over the course of five years (1927–1932) assembling telephone relays. Output was
measured mechanically by counting how many finished relays each worker dropped down a chute.
This measuring began in secret two weeks before moving the women to an experiment room and
continued throughout the study.

Relay Assembly Experiments

In the experiment room, they had a supervisor who discussed changes with them and at times used
their suggestions. Then the researchers spent five years measuring how different variables impacted
individual and group productivity. Some of the variables were: giving two five-minute breaks (after a
discussion with them on the best length of time), and then changing to two ten-minute breaks (not
their preference). Productivity increased, but when they received six five-minute rests, they disliked it
and reduced output.

Page 205 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Providing food during the breaks shortened the day by 30 minutes (output went up), while shortening
it more increased the output per hour, but decreased overall output. Changing a variable usually
increased productivity, even if the variable was just a change back to the original condition. However,
it is said that this is the natural process of the human being to adapt to the environment without
knowing the objective of the experiment occurring. Researchers concluded that the workers worked
harder because they thought that they were being monitored individually. Researchers hypothesized
that choosing one’s own coworkers, working as a group, being treated as special (as evidenced by
working in a separate room), and having a sympathetic supervisor were the real reasons for the
productivity increase.

One interpretation, mainly due to Elton Mayo, was that “the six individuals became a team and the
team gave itself wholeheartedly and spontaneously to cooperation in the experiment. ” (There was a
second relay assembly test room study whose results were not as significant as the first experiment. )

Bank Wiring Room Experiments

The purpose of the next study was to find out how payment incentives would affect productivity. The
surprising result was that productivity actually decreased. Workers apparently had become suspicious
that their productivity may have been boosted to justify firing some of the workers later on. The study
was conducted by Elton Mayo and W. Lloyd Warner between 1931 and 1932 on a group of fourteen
men who put together telephone switching equipment. The researchers found that although the
workers were paid according to individual productivity, productivity decreased because the men were
afraid that the company would lower the base rate. Detailed observation between the men revealed the
existence of informal groups or “cliques” within the formal groups. These cliques developed informal
rules of behavior as well as mechanisms to enforce them. The cliques served to control group
members and to manage bosses; when bosses asked questions, clique members gave the same
responses, even if they were untrue. These results show that workers were more responsive to the
social force of their peer groups than to the control and incentives of management.

Trends in Organization

Flattening Hierarchies

Flattening hierarchies can benefit smaller organizations by increasing employee empowerment,


participation, and efficiency.

LEARNING OBJECTIVES

Define a flattened hierarchy, specifically in which situations where the utilization of this model is
appropriate and beneficial for an organization

KEY TAKEAWAYS

Key Points

 A hierarchy can link entities either directly or indirectly; it can also link entities either
vertically or horizontally. The only direct links in a hierarchy are to a person’s immediate
superior or subordinates.

Page 206 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 The flat organization model essentially “flattens” the hierarchy and promotes employee
involvement through a decentralized decision -making process.

 According to the logic behind this model, well-trained workers will be more productive when
they are directly involved in the decision-making process rather than closely supervised by
many layers of management.
 Flat organizations are most relevant in specific scenarios—most notably small organizations
that are dependent upon creativity, freedom of action, and high-powered employees.

Key Terms

 hierarchy: An arrangement of items in which each item is represented as being above, below,
or at the same level as other items.

Links within Hierarchies

Hierarchies can be linked in several different ways. A hierarchy can link entities either directly or
indirectly; it can also link entities either vertically or horizontally. The only direct links in a hierarchy
are to a person’s immediate superior or subordinates. Parts of the hierarchy that are not linked
vertically to one another can be horizontally linked through a path by traveling up the hierarchy; this
path eventually reaches a common direct or indirect superior and then travels down the hierarchy
again. An example of this would be two colleagues who each report to a common superior but have
the same relative amount of authority in the organization.

Flat Hierarchies

Flat (or horizontal) organizational structures have few or no levels of intervening management
between staff and managers. This “flattened” hierarchy promotes employee involvement through a
decentralized decision-making process. The idea is that well-trained workers will be more productive
when they are directly involved in the decision-making process rather than closely supervised by
many layers of management.

Flat organization chart: This diagram illustrates the structure of a flat organization: there is no low-
or mid-level management—just one manager and the rest of the staff.

Advantages of Flattened Hierarchies

Page 207 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Flat structures empower each individual within the company to be involved in decision-making
processes. This allows for a great deal of creative discussion and operational diversity and tends to
create great variance in new ideas. By elevating the level of responsibility of baseline employees and
eliminating layers of middle management, comments and feedback can quickly reach all personnel
involved in decisions. Response to customer feedback can be carried out more rapidly.

This type of structure generally works best in smaller organizations or individual units within larger
organizations. Start-up companies, “mom and pop shops,” and other small independent businesses are
the most common examples of a flat structure.

Disadvantages of Flattened Hierarchies

Flat organizations are difficult to maintain as companies grow larger and more complex. When
organizations reach a critical size, they can retain a streamlined structure; however, they cannot keep a
completely flat manager-to-staff hierarchy without impacting productivity. Certain financial
responsibilities may also require a traditional hierarchical structure. While the flat structure can foster
employee empowerment, involvement, and creativity, it can also create inefficiency in decision-
making processes. Some theorize that flat organizations become more traditionally hierarchical when
they gear themselves more toward productivity.

Because the interaction between workers is more frequent, this organizational structure generally
depends on a more personal relationship between workers and managers. As a result, the structure can
be more time-consuming to build than a traditional hierarchical model.

Decentralizing Responsibility

In decentralized structures, responsibility for decision making is broadly dispersed down to the lower
levels of an organization.

LEARNING OBJECTIVES

Compare and contrast centralization and decentralization of responsibility within the organizational
hierarchy

KEY TAKEAWAYS

Key Points

 Decentralization is the process of dispersing decision making authority among the people,
citizens, employees, or other elements of an organization or sector.
 A decentralized organization shows fewer tiers in the organizational structure, a wider span of
control, and a bottom-to-top flow of ideas and decision making.
 The bottom-to-top flow of information allows lower-level employees to better inform the
officials of the organization during any decision making processes.
 When companies decentralize authority, however, there can be confusion as to how final
decisions are made.

Key Terms

 mechanistic organization: A bureaucratic structure.

Page 208 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 governance: Accountability for consistent and cohesive policies, processes, and decision
rights.
 authority: The power to enforce rules or give orders.

Decentralization is the process of dispersing decision making authority among the people, citizens,
employees, or other elements of an organization or sector. In decentralized structures, responsibility
for decision making and accountability are broadly dispersed down to the lower levels of an
organization. This dispersion can be intentional or unintentional. A decentralized organization tends
to show fewer tiers in its organizational structure (less hierarchy ), a wider span of control, and a
bottom-to-top or horizontal flow of decision making and ideas.

Decentralization: The management structure in a decentralized organization changes from a top-down


approach to more of a peer-to-peer approach.

Contrasting Centralized and Decentralized Structures

In a centralized organization, decisions are made by top executives on the basis of current policies.
These decisions or policies are then enforced through several tiers of hierarchy within the
organization, gradually broadening the span of control until they reach the bottom tier.

In a decentralized organization, the top executives delegate much of their decision making authority to
lower tiers of the organizational structure. This type of structure tends to be seen in organizations that
run on less rigid policies and wider spans of control among each officer of the organization. The
wider spans of control also reduce the number of tiers within the organization, giving its structure a
flat appearance.

Page 209 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Decentralized organizational chart: This image illustrates a decentralized (often referred to as a


“flat”) organizational chart. Note that there are not multiple layers of management; there is one manager
and then the rest of the staff. This means that each staff-person necessarily has more responsibility and
therefore more autonomy.

Advantages of Decentralization

One advantage of this structure—if the correct controls are in place—is the bottom-up flow of
information. This flow allows lower-level employees to better inform the officials of the organization
during any decision making processes. For example, if an experienced technician at the lowest tier of
an organization knows how to increase the efficiency of the production, the bottom-to-top flow of
information can allow this knowledge to pass up to the executive officers.

Disadvantages of Decentralization

On the other side of the argument, when companies decentralize authority there can be confusion as to
how final decisions are made. It can be difficult to empower multiple people without certain decisions
negatively interacting with other decisions. Decentralized organizations must be mindful of the
possibility of running in too many different directions at once. Because of this, decentralization is
most effective in organizations that have transparent strategies, a strong mission, and a clear vision.

Increasing Empowerment

Modern organizations are more aware of the value of empowered employees and actively strive to
structurally increase empowerment.

LEARNING OBJECTIVES

Discuss the advantages of empowerment in an organization, and how organizational structure can
improve upon the promotion of empowered employees

KEY TAKEAWAYS

Key Points

 Empowerment is a process that enables individuals and groups to fully access their personal
and collective power, authority, and influence, and to employ this power when engaging with
other people, other institutions, or society.
 Leaders within an organization can play a strong role in encouraging employees to put
empowerment into practice.
 To enable empowerment, managers can share information, provide employees with autonomy,
and migrate to self-managed teams when possible.
 Though the idea of empowerment can produce successful results, it is important to understand
the risks. More decision -makers means more discussion about how a process should be
accomplished and more moving parts within the organization, increasing complexity.

Key Terms

 Empowerment:

Page 210 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

The accessing and employing of political, social, or economic power by an individual or group.

Defining Empowerment

Empowerment is a process that enables individuals and groups to fully access personal and collective
power and employ this power when engaging with other people, other institutions, or society.
Empowerment does not give people power; rather, it helps to release and express the power that
people already have.

Empowerment encourages people to gain the skills and knowledge that allows them to overcome
obstacles in life and work. This will ultimately enable personal development and a deeper sense of
professional fulfillment. Empowering people in organizations can encourage more confident, capable,
and motivated employees. Organizations are increasingly aware that empowerment often leads to
better performance and higher operational efficiency, and there is a general trend toward structuring
organizations for empowerment.

Empowerment within the Organization

Empowering employees in the workplace means providing them with opportunities to make their own
decisions related to their tasks. This can be a powerful and positive aspect within an organization that
promotes shared power and enables checks and balances in decision-making processes.

Empowerment in organizations includes:

 Making decisions about personal and collective circumstances;


 Accessing information and resources for decision-making;
 Considering a range of options from which to choose (and understanding the options rather
than just deciding yes or no);
 Exercising assertiveness in collective decision-making;
 Employing positive thoughts toward the ability to make change;
 Learning and accessing skills for improving personal and collective circumstances; and
 Informing others’ perceptions though exchange, education, and engagement.

Though the idea of empowerment can produce very successful results, there are certain risks are
involved. When turning responsibility over to others, it is important to keep in mind that diversifying
power creates more voices and therefore potentially more conflict and discussion. All of these
elements can slow down the decision-making process. As organizations move toward higher levels of
empowerment, protocols should be put in place to mitigate failure and improve decision-making
efficiency across the board.

Decentralization: One key technique of empowering employees and providing autonomy is


decentralizing the organizational structure. Notice how the diagram of the centralized organization
looks like one large asterisk with many spokes, whereas the diagram of the decentralized organization
looks like many small interconnected asterisks.

Increasing Empowerment

Page 211 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Leaders within an organization can encourage employees to put empowerment into practice in several
ways. If leaders want to tap into the possibilities of an empowerment-based company, they need to
have confidence in employees. Employees should also be given opportunities to make their own
decisions and succeed. For an empowerment-based organization, rules and policies that interfere with
self-management should be made more lenient. Leaders should also set goals that can inspire people.

The following are three key concepts that leaders can use to empower employees throughout an
organization:

 Share information with everyone. By sharing information with everyone, leaders gain a clear
picture of the company and its current situation. Allowing all employees to view company
information helps to build trust between employers and employees. This also provides
decision-makers with important perspectives to assess prior to deciding.
 Create autonomy through boundaries. By opening communication through information
sharing, space can be created for feedback and dialogue about what holds people back from
being empowered. It is critical that leaders minimize micro-management so that employees,
who are specialists at the function they are assigned, can set the tone for how a particular task
is accomplished.
 Replace the old hierarchy with self-managed teams. By replacing the old hierarchy with self-
managed teams, more responsibility is placed upon unique and self-managed teams; this can
lead to better communication, diversity of strategies, and higher performance.

The success of the modern organization relies heavily on understanding the complexity of a diverse
global market. Leveraging employee knowledge and enabling autonomy is increasingly important in
capturing value and attaining competitive advantages in this complex business environment.

Increasing Adaptation

In order to succeed, modern organizations must constantly adapt to evolving technologies and
expanding global markets.

LEARNING OBJECTIVES

Identify the importance and inherent value of increasing adaptation within company structures and
performance

KEY TAKEAWAYS

Key Points

 Technological advances, global market expansions, and the potential for constant (sometimes
disruptive) innovation all point to the need for organizations to be adaptive.
 Blockbuster and Netflix provide a classic example: in this case, Blockbuster was simply too
slow to adapt to the demand for live-streaming videos.
 If an organization takes on the identity of a growing, adapting, and learning organization, these
qualities become part of the fabric of how it operates.
 Implementing an adaptable strategy may have effects that ripple across an organization.
Minimizing disruption can reduce costs and save time.
 Resistance to change is considered a major obstacle to creating effective adaptability in an
organization. Integrating changes step by step while utilizing focus groups and training
sessions can improve the efficacy of adaptation.

Page 212 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Key Terms

 adaptation: Adjustment to extant conditions; modification of a thing or its parts in a way that
makes it more fit for existence under the conditions of its current environment.

The Importance of Adaptation

Organizational adaption is becoming increasingly relevant to both strategy and structure as the
business environment changes more quickly each year. Technological innovations, global market
expansions, and the potential for constant (sometimes disruptive) innovation all point to the need for
organizations to be adaptive.

There are a number of examples in which some organizations have adapted to new technologies or
global competition, while others have failed to adapt and subsequently gone under. Blockbuster and
Netflix provide a classic example: in this case, Blockbuster was simply too slow to adapt to the
demand for live-streaming videos. Netflix, on the other hand, embraced this technological evolution
and pioneered a user-friendly interface, gaining the company enormous value.

Increasing Adaptation

Strategic management largely pertains to adapting an organization to its business environment. The
greatest agent for organizational change is the socialization aspect of culture, which can be
empowered structurally. If an organization takes on the identity of a growing, adapting, and learning
organization, these qualities become part of the fabric of how it operates. Knowing how and being
able to increase this adaptability is important to organizational success.

Implementing a strategy of adaptation may have effects that ripple across an organization. Increasing
an organization’s ability to adapt to change and minimize disruption can reduce costs and save time.
One approach for increasing adaptation is to appoint an individual to champion the changes, address
and eventually enlist opponents, and proactively identify and mitigate problems.

Challenges in Adaptation

Resistance to change is considered a major obstacle to creating effective adaptability in an


organization. Organizational change can lead to loss of stability and—if this instability becomes great
enough—loss of organizational effectiveness.

Organizational loss of effectiveness (LOE): Organizational change can cause a loss of stability and
results in the development of a predictable and measurable set of symptoms within an organization.
When a significant number of these symptoms are present simultaneously, an organizational loss of
effectiveness (LOE) will occur (Grady, 2005).

Page 213 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

The following are methods that can be employed to help an organization and its staff to cope with
change:

 Form focus groups. Staff from different departments can be selected to form focus groups,
where quality data can be collected. In focus group discussions, staff should be given the
chance to freely express their opinions and share their experiences.
 Provide training. Providing training courses to staff on new processes or structures can help to
increase staff competence and reduce their resistance to change.
 Implement changes step by step. This involves first implementing the system in small groups—
such as several departments or sections—and then widening the scope of implementation. This
step-by-step approach can help by exposing problems raised simultaneously across the small
groups and providing management with sufficient time to solve these problems before
implementing the system across the organization.

Moving to Flexible Work Schedules

Employers can offer flexible working arrangements in the form of flextime and telecommuting work.

LEARNING OBJECTIVES

Identify critical factors of success in creating a “telework” organization

KEY TAKEAWAYS

Key Points

 Companies have begun to recognize how important a healthy work-life balance is to the
productivity and creativity of their employees. Integrating new technologies for flexible
schedules is a great opportunity to capture this value.
 Flextime and telecommuting (telework) are popular strategies that enable employees to set
their own schedules and work from wherever is most convenient for them.
 In addition to supporting the required incremental technologies, a well-functioning telework
organization needs a management system that is at least as effective as that of a traditional
organization.
 Management teams face additional issues such as how to supervise employees who are often
out of the office, how to monitor staff productivity with less personal interaction, how to build
a strong virtual team, and how to maintain relationships between remote employees.

Key Terms

 telecommute: To work from home, sometimes for part of a working day or week, using a
computer connected to the employer’s network or via the internet.

Companies have begun to recognize how important a healthy work-life balance is to the productivity
and creativity of their employees. Research by Kenexa Research Institute in 2007 showed that
employees who were more favorable toward their organization’s efforts to support work-life balance
also indicated a lower intent to leave the organization, greater pride in their organization, a
willingness to recommend the organization as a place to work, and higher overall job satisfaction.

Employers can offer a range of different programs and initiatives that support such a work-life
balance. Flexible working arrangements such as flextime and telecommuting work are becoming

Page 214 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

increasingly popular. More proactive employers can also provide compulsory leave, implement strict
maximum hours, or foster an environment that encourages employees not to continue working after
hours.

Telecommuting

Telecommuting (or telework) is a work arrangement in which employees do not commute to a central
place of work. A person who telecommutes is known as a “telecommuter,” “teleworker,” or “home-
sourced employee.” Many telecommuters work from home while others—sometimes called “nomad
workers”—use mobile telecommunications technology to work from coffee shops or other locations.
This allows employees the flexibility of adapting their work schedule to their living situation.

This arrangement is also quite popular in circumstances of sick leave, pregnancy, parenting, and other
important life events. In the past these events could have resulted in temporary loss of employment.
Being able to work from anywhere with an internet connection is a modern luxury that adaptable
companies should be well aware of.

Home office: This small office is designed for telecommuting.

Flextime

Flextime (also called flexitime or flexi-time) is a variable work schedule, unlike traditional work
arrangements in which employees work a standard 9 a.m. to 5 p.m. shift. In this arrangement, there is
typically a core period of approximately 50% of the total working day when employees are expected
to be at work (for example, between 11 a.m. and 3 p.m.). The rest of the working day is “flextime” in
which employees can choose when they work. Employees are still required to complete the necessary
work and achieve total daily, weekly, or monthly hours in the region of what the employer expects.

A flextime policy allows staff to determine when they will work, and a flexplace policy allows staff to
determine where they will work. These strategies allow employees to adapt their work hours based on
public transport schedules, child-care responsibilities, rush-hour traffic, and other elements.

Establishing a Telework Organization

In addition to supporting the required incremental technologies, a well-functioning telework


organization needs a management system that is at least as effective as that of a traditional
organization. Management teams face additional issues such as how to supervise employees who are
often out of the office, how to monitor staff productivity with less personal interaction, how to build a
strong virtual team, and how to maintain relationships between remote employees.

Some suggested best practices for maintaining a successful telework organization include:

 Develop a daily schedule. Setting a standardized daily schedule can help remote teleworkers
feel as though they are really at work. It can also make it easier for supervisors to monitor staff
activities and can lead to increased productivity.
 Establish milestone dates. Milestone dates help keep projects on track and make it easier to
spot problems while there is still time to effectively deal with them.
 Encourage social networking. Employee surveys show that being able to keep in touch and
communicate with colleagues despite physical distance can boost employee satisfaction and
encourage top talent to stick around.
 Address problems right away. Respond to problems immediately even if they are reported by
email or text message. This will prevent teleworkers from feeling isolated.

Page 215 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Design key performance indicators ( KPIs ) for remote workers. These KPIs can also be used
to measure the effectiveness of in-office staff and maintain an equivalence among the distinct
employee categories.
 Start workdays by holding a five-minute team video-conference. This helps supervisors to
maintain a regular check-in routine; it also enables employees to catch up on team work
progress and feel connected to the whole organization.
 Manage by observation. A successful telework or telecommuting program requires a
management style that is results-oriented (as opposed to task-oriented). This is referred to as
management by objectives as opposed to management by observation.

Increasing Coordination

Increasing coordination helps organizations to maintain efficient operations through communication


and control.

LEARNING OBJECTIVES

Identify the way in which effective coordination across an organization can be increased through
effective structure and good management

KEY TAKEAWAYS

Key Points

 Coordination is a managerial function in which different activities of the business are properly
adjusted and interlinked.
 The management team must pay special attention to issues related to coordination and
governance and be able to improve upon coordination through effective management.
 Managers should strengthen communication across all facets of the organization to increase the
level of integration between each moving part.
 If there is a lack of coordination, there is a risk that responsibility will become dispersed and
tasks will be left unclaimed. Organizing accountability for every task helps to ensure that
efforts are tangibly coordinated.

Key Terms

 division: A section of a large company.


 margin: A permissible difference; allowing some freedom to move within limits.
 centralization: The act or process of combining or reducing several parts into a whole.

Defining Coordination

Coordination is the act of organizing and enabling different people to work together to achieve an
organization’s goals. It is a managerial function in which different activities of the business are
properly adjusted and interlinked.

Employees within the functional divisions of an organization tend to perform a specialized set of
tasks, such as engineering. This leads to operational efficiency within that group. However, it can also
lead to a lack of communication between various functional groups within an organization, rendering
the organization slow and inflexible.

Page 216 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Organizational structure: This is an example of an organizational structure. At a high level are


multiple functional groups, or “modules”—technical, marketing, and intellectual property. The linked
working groups (e.g., data coding workgroup, security workgroup, and audio and video compression
workgroup) within the technical functional group likely have coordinated functions.

Increasing Coordination

Coordination is simply the managerial ability to maintain operations and ensure they are properly
integrated with one another; therefore, increasing coordination is closely related to improving
managerial skills. The management team must pay special attention to issues related to coordination
and governance and be able to improve upon coordination through effective management.

Increasing coordination internally can be accomplished by keeping all moving parts of the
organization on the same page. There are a number of ways to improve upon the coordination of
different departments, work groups, teams, or functional specialists. These include creating a well-
communicated and accurate mission statement; clearly defining strategic objectives; monitoring and
evaluating each functional group; providing company-wide updates and communications from each
department; and, wherever possible, promoting cross-departmental meetings and projects. While this
list is long and complex, the underlying concept is relatively simple: managers should strengthen
communication across all facets of the organization to increase the level of integration between each
moving part.

Structural Implications

In practice, coordination involves a delicate balance between centralization and decentralization.


However, maintaining coordination does not necessarily imply that decision-making processes are
centralized or that actions are carried out without the support of employees. Put simply, it is important
to ensure that there is a person or team in place that takes responsibility for general tasks.

If there is a lack of coordination, there is a risk that responsibility will become dispersed and tasks
will be left unclaimed. Organizing accountability for every task helps to ensure that efforts are
tangibly coordinated and provides structure to operational expectations. Structure is a central
determinant of effective coordination across an organization as it enables communications, underlines
responsibilities, and provides concrete authority in decision-making.

LICENSES AND ATTRIBUTIONS

Quality Management

Philosophies

Quality management adopts a number of management principles that can be used to guide
organizations towards improved performance.

LEARNING OBJECTIVES

Recognize how top management can improve quality performance

KEY TAKEAWAYS

Page 217 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Key Points

 There are eight primary quality management principles.


 The principles are the basis of the ISO 9001:2008 quality management system standard.
 One of the permanent quality objectives of an organization should be the continual
improvement of its overall performance.

Key Terms

 value: The degree of importance you give to something.


 ISO 9001:2008: The ISO 9000 family of standards are related to quality management systems
and designed to help organizations ensure that they meet the needs of customers and other
stakeholders while meeting statutory and regulatory requirements related to the product.
 Quality Management: Process of ensuring that an organization or product is consistent. It can
be considered to have four main components: quality planning, quality control, quality
assurance, and quality improvement. Quality management is focused not only on
product/service quality, but also the means to achieve it.

The Principles of Quality Management

Quality management adopts a number of management principles that can be used by top management
to guide their organizations towards improved performance. The principles include:

 Customer focus: Since the organizations depend on their customers, they should understand
current and future customer needs, should meet customer requirements, and try to exceed the
expectations of customers. An organization attains customer focus when all people in the
organization know both the internal and external customers and also what customer
requirements must be met to ensure that both the internal and external customers are satisfied.
 Leadership: Leaders of an organization establish unity of purpose and direction of it. They
should go for creation and maintenance of such an internal environment, in which people can
become fully involved in achieving the organization’s quality objective.
 Involvement of people: People at all levels of an organization are the essence of it. Their
complete involvement enables their abilities to be used for the benefit of the organization.
 Process approach: The desired result can be achieved when activities and related resources are
managed in an organization as process.
 System approach to management: An organization’s effectiveness and efficiency in achieving
its quality objectives are contributed by identifying, understanding, and managing all
interrelated processes as a system.
 Continual improvement: One of the permanent quality objectives of an organization should be
the continual improvement of its overall performance.
 Factual approach to decision making: Effective decisions are always based on the data analysis
and information.
 Mutually beneficial supplier relationships: Since an organization and its suppliers are
interdependent, therefore, a mutually beneficial relationship between them increases the ability
of both to add value.

These eight principles form the basis for the quality management system standard ISO 9001:2008.

TQM

Page 218 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Total quality management (TQM) is an integrative philosophy of management for continuously


improving the quality of products and processes.

LEARNING OBJECTIVES

Explain the principles of Total Quality Management (TQM)

KEY TAKEAWAYS

Key Points

 TQM functions on the premise that the quality of products and processes is the responsibility of
everyone who is involved with the creation or consumption of the goods or services offered by
an organization.
 Satisfying the customer involves making sure both internal and external customers are happy.
 The internal suppliers are the subordinates who answer to a particular supervisor. Satisfying
them involves giving them the tools and motivation they need to do their jobs.
 It is important to go beyond satisfaction, making the customer – and supplier – feel important
and valued, and part of the process.
 “Lean” focuses on eliminating the wasteful use of time, energy or resources, and instead
focusing activities completely on the creation of value.
 The focus of the Six Sigma management strategy is to reduce defect by minimizing variation in
processes.

Key Terms

 Total Quality Management (TQM): A strategic approach to management aimed at


embedding awareness of quality in all organizational processes.
 poka-yoke: A methodology of using low-cost techniques to error-proof production processes.

Total Quality Management (TQM) is an integrative philosophy of management for continuously


improving the quality of products and processes.

TQM Practices Are Used in Many Industries: Here, two aviation structural mechanics are
collaborating on the wing of a F/A-18C Hornet, performing routine maintenance in the hangar bay.
TQM practices ensure each person involved with a product is responsible for its quality.

Overview

TQM functions on the premise that the quality of products and processes is the responsibility of
everyone involved in the creation or consumption of the goods or services the organization offers.
TQM capitalizes on the involvement of management, the workforce, suppliers, and even customers in
order to meet or exceed customer expectations.

Considering the practices of TQM as discussed in six empirical studies, Cua, McKone, and Schroeder
(2001) identified nine common TQM practices:

1. Cross-functional product design;

Page 219 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

2. Process management;
3. Supplier quality management;

4. Customer involvement;
5. Information and feedback;
6. Committed leadership;
7. Strategic planning;
8. Cross-functional training; and
9. Employee involvement.

Basic Principles of Total Quality Management

The basic principles for the Total Quality Management philosophy of doing business are to satisfy the
customer, satisfy the supplier, and continuously improve the business processes.

Satisfy the Customer

The first, and major, TQM principle is to satisfy the customer–the person who pays for the product or
service. Customers want to get their money’s worth from a product or service they purchase.

Satisfy the Users: If the user of the product is different than the purchaser, then both the user and
customer must be satisfied, although the person who pays gets priority.

Company Philosophy: A company that seeks to satisfy the customer by providing them value for what
they buy and the quality they expect will get more repeat business, referral business, and reduced
complaints and service expenses. Some top companies not only provide quality products but also give
extra service to make their customers feel important and valued.

Internal Customers: Within a company, a worker provides a product or service to his or her
supervisors. If the person has any influence on the wages the worker receives, that person can be
thought of as an internal customer. A worker should have the mindset of satisfying internal customers
in order to keep his or her job and to get a raise or promotion.

Chain of Customers:Often in a company, there is a chain of customers–each improving a product and


passing it along until it is finally sold to the external customer. Each worker must not only seek to
satisfy the immediate internal customer, but must also look up the chain to try to satisfy the ultimate
customer.

Satisfy the Supplier

A second TQM principle is to satisfy the supplier, which is the person or organization from whom
you are purchasing goods or services.

External Suppliers: A company must look to satisfy their external suppliers by providing them with
clear instructions and requirements and then paying them fairly and on time. It is in the company’s
best interest that its suppliers provide quality goods or services if the company hopes to provide
quality goods or services to its external customers.

Page 220 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Internal Suppliers: A supervisor must try to keep workers happy and productive by providing good
task instructions, the tools they need to do their job, and good working conditions. The supervisor
must also reward the workers with praise and good pay.

Get Better Work: The reason to do this is to get more productivity out of the workers, as well as to
keep the good workers. An effective supervisor with a good team of workers will certainly satisfy his
or her internal customers.

Empower Workers: One area of satisfying the internal suppler is by empowering the workers. This
means allowing them to make decisions on things that they can control. This not only takes the burden
off the supervisor, but it also motivates these internal suppliers to do better work.

Continuous Improvement

The third principle of TQM is continuous improvement. You can never be satisfied with the method
used, because there always can be improvements. The competition is always improving, so it is
necessary to strive to keep ahead of the game.

Work Smarter, Not Harder: Some companies have tried to improve by making employees work
harder. This may be counterproductive, especially if the process itself is flawed. For example, trying
to increase worker output on a defective machine may result in more defective parts. Examining the
source of problems and delays and then solving those problems is what works best. Often, the process
has bottlenecks that are the real cause of the problem. Those are what should be removed.

Worker Suggestions: Workers are often a source of continuous improvements. They can provide
suggestions on how to improve a process and eliminate waste or unnecessary work.

Quality Methods: There are also many quality methods, such as just-in-time production, variability
reduction, and poka-yoke, that can improve processes and reduce waste.

Quality Inspections and Standards

Companies ensure the quality of products and services by adhering to ISO standards and performing
quality audits to ensure compliance.

LEARNING OBJECTIVES

Recognize the ISO’s role in ensuring quality standards

KEY TAKEAWAYS

Key Points

 The Quality Management System (QMS) standards were created by the International
Organization for Standardization (ISO) in 1987, and are reviewed and updated every few years.
These standards are used to certify the processes and systems of an organization, but not the
product or service itself.
 In 1994 three major standards were released as part of the ISO 9000:1994 series. Major
revisions were made in 2008.
 A quality audit is the systematic examination of a quality system, and is carried out by internal
or external auditors. It is a key element in ISO 9001 standards.

Page 221 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Since 2008, the focus of quality audits has shifted from simply procedural adherence to
measuring the effectiveness of actual QMS’s.

Key Terms

 ISO 14000: a set of standards related to environmental management designed to help


organizations reduce the negative environmental effect of their operations, meet legal
requirements, and continually improve
 International Organization for Standardization (ISO): An international standard-setting
body composed of representatives from various national standards organizations. Founded on
February 23, 1947, the organization promulgates worldwide proprietary, industrial, and
commercial standards.
 Quality Audit: The process of systematic examination of a quality system carried out by an
internal or external quality auditor or audit team. It is an important part of an organization’s
quality management system and is a key element in the ISO quality system standard, ISO 9001.
 Quality Management System (QMS): The organizational structure, procedures, processes,
and resources needed to implement quality management.
 ISO 9000: a set of standards related to quality management systems and designed to help
organizations ensure that they meet the needs of customers and other stakeholders while
meeting statutory and regulatory requirements related to the product

Quality Standards

The International Organization for Standardization (ISO) created the Quality Management System
(QMS) standards in 1987. They were the ISO 9000:1987 series of standards, comprising ISO
9001:1987, ISO 9002:1987, and ISO 9003:1987; which were applicable in different types of
industries, based on the type of activity or process (designing, production, or service delivery).

The standards are reviewed every few years by the ISO. The version in 1994 was called the ISO
9000:1994 series; consisting of the ISO 9001:1994, 9002:1994 and 9003:1994 versions.

A major revision occurred in 2008, and the series was called ISO 9000:2000 series. The ISO 9002 and
9003 standards were integrated into one single certifiable standard: ISO 9001:2008. After December
2003, organizations holding ISO 9002 or 9003 standards had to complete a transition to the new
standard.

The ISO 9004:2009 document gives guidelines for performance improvement over and above the
basic standard (ISO 9001:2000). This standard provides a measurement framework for improved
quality management, similar to and based upon the measurement framework for process assessment.

The Quality Management System standards created by ISO are meant to certify the processes and the
system of an organization, not the product or service itself. ISO 9000 standards do not certify the
quality of the product or service.

In 2005 the International Organization for Standardization released a standard, ISO 22000, meant for
the food industry. This standard covers the values and principles of ISO 9000 and the HACCP
standards. It gives one single integrated standard for the food industry and is expected to become
more popular in the coming years in the industry.

ISO has also released standards for other industries. For example, Technical Standard TS 16949
defines requirements in addition to those in ISO 9001:2008 specifically for the automotive industry.

Page 222 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

ISO has a number of standards that support quality management. One group describes processes
(including ISO/IEC 12207 & ISO/IEC 15288), and another describes process assessment and
improvement (ISO 15504).

Quality Audits

A quality audit is the process of systematic examination of a quality system carried out by an internal
or external quality auditor or audit team. It is an important part of organization’s quality management
system and is a key element in the ISO quality system standard, ISO 9001.

Quality audits are typically performed at predefined time intervals and ensure that the institution has
clearly defined internal system monitoring procedures linked to effective action. This can help
determine if the organization complies with the defined quality system processes and can involve
procedural or results-based assessment criteria.

Quality Check: Quality assurance inspectors regularly perform audits.

With the upgrade of the ISO 9000 series of standards from the 1994 to 2008 series, the focus of the
audits has shifted from purely procedural adherence towards measurement of the actual effectiveness
of the Quality Management System (QMS) and the results that have been achieved through the
implementation of a QMS.

Audits are an essential management tool to be used for verifying objective evidence of processes, to
assess how successfully processes have been implemented, for judging the effectiveness of achieving
any defined target levels, to provide evidence concerning reduction and elimination of problem areas.

For the benefit of the organisation, quality auditing should not only report non-conformance and
corrective actions, but also highlight areas of good practice. In this way, other departments may share
information and amend their working practices, which contributes to continual improvement.

Quality audits can be an integral part of compliance or regulatory requirements. One example is the
US Food and Drug Administration, which requires quality auditing to be performed as part of its
Quality System Regulation (QSR) for medical devices (Title 21 of the US Code of Federal
Regulations part 820).

Several countries have adopted quality audits in their higher education system (including New
Zealand, Australia, Sweden, Finland, Norway, and the USA). Initiated in the UK, the process is
focused primarily on procedural issues rather than on the results or the efficiency of a quality system
implementation.

Audits can also be used for safety purposes. Evans and Parker (2008) describe auditing as one of the
most powerful safety monitoring techniques and “an effective way to avoid complacency and
highlight slowly deteriorating conditions,” especially when the auditing focuses not just on
compliance but effectiveness.

The processes and tasks that a quality audit involves can be managed using a wide variety of software
and self-assessment tools. Some of these relate specifically to quality in terms of fitness for purpose
and conformance to standards, while others relate to quality costs or (more accurately) to the cost of
poor quality. In analyzing quality costs, a cost of quality audit can be applied across any organization
rather than just to conventional production or assembly processes.

Page 223 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Reducing Waste and Environmental Impacts

Reducing waste by more efficient manufacturing is a key goal of management, with supply chain
sustainability seen as a key component.

LEARNING OBJECTIVES

Explain the benefits of reducing waste

KEY TAKEAWAYS

Key Points

 Waste minimization is often achieved through more efficient manufacturing processes and the
usage of better materials, but often requires some initial investment.
 Governments often provide incentives to companies for waste minimization, including
subsidies and reduced taxes for companies that take steps to reduce waste.
 A more sustainable supply chain is increasingly seen as leading to a more profitable supply
chain, and, thus, managers are increasingly looking for ways to make their supply chains more
sustainable.
 Collaboration is seen as a way of achieving the goal of supply chain sustainability.
 Many companies avoid collaboration due to a fear of a loss of commercial control.

Key Terms

 Supply Chain Sustainability: An essential component to delivering long-term profitability. It


has replaced monetary cost, value, and speed as the dominant topic of discussion among
purchasing and supply professionals.
 Collaboration: Working together to achieve a common goal.

Reducing Waste: The Incentives

In industrial production, using more efficient manufacturing processes and better materials will
generally reduce the production of waste. The application of waste minimization techniques has led to
the development of innovative and commercially successful replacement products. Waste
minimization has proven benefits to industry and the wider environment.

Waste minimization often requires investment, which is, at least in theory, usually compensated by
the savings. However, waste reduction in one part of the production process may create waste
production in another part.

There are government incentives for waste minimization, which focus on the environmental benefits
of adopting waste minimization strategies.

In the United Kingdom, several pilot schemes, such as The Catalyst Project and the Dee Waste
Minimisation Project, have shown the efficacy of such policies. Fourteen companies in Merseyside
took part in the Catalyst Project; the project generated overall savings of £9 million and landfill waste
was reduced by 12,000 tonnes per year. ).

Page 224 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Colorful recycling containers: By producing using materials that are recyclable, landfill waste can be
minimized.

Supply Chain Sustainability

Supply chain sustainability is a business issue affecting an organization’s supply chain or logistics
network in terms of environmental, risk, and waste costs.

Sustainability in the supply chain is increasingly seen among high-level executives as essential to
delivering long-term profitability and has replaced monetary cost, value, and speed as the dominant
topic of discussion among purchasing and supply professionals.

One of the key requirements of successful sustainable supply chains is collaboration. The practice of
collaboration, such as sharing distribution to reduce waste by ensuring that half-empty vehicles do not
get sent out and that deliveries to the same address are on the same truck, is not widespread because
many companies fear a loss of commercial control by working with others.

Investment in alternative modes of transportation, such as use of canals and airships, can play an
important role in helping companies reduce the cost and environmental impact of their deliveries.

Sustainability has been found to be a major component of supplier relationship management as an


efficient way to cut costs among retailer giants such as Wal-Mart. In fact, under Wal-Mart’s Supplier
Energy Efficiency Project (SEEP), which is aimed at eliminating emissions from the company’s
supply chain, suppliers reduced GHG emissions by 3,300 metric tons and saved $200,000 in energy
costs.

Realizing the efficiency that effective supplier relationship management creates, Wal-Mart has asked
suppliers to be more efficient in managing their environmental footprint.

Looking to the supply chain to maximize efficiency and cut costs is a key cost-cutting measure; using
the same suppliers in a tight-knit relationship saves time and energy. As industry leaders continue to
add in cost-cutting measures, we are likely to see this trend continue in supply chain sustainability for
sustained improvement in relationship building and cost reduction.

LICENSES AND ATTRIBUTIONS

Introduction to Operations Management

Operations Management

Operations management is the management of processes that transform inputs into goods and services
that add value for the customer.

LEARNING OBJECTIVES

Explain the role of operations management

KEY TAKEAWAYS

Key Points

Page 225 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 The goal of operations management is to maximize efficiency while producing goods and
services that effectively fulfill customer needs.

 Operations is one of the three strategic functions of any organization.


 Operations decisions include decisions that are strategic in nature, meaning that they have
long-term consequences and often involve a great deal of expense and resource commitments.

Key Terms

 strategy: A plan of action intended to accomplish a specific goal.


 tactic: A maneuver or action calculated to achieve some end.
 Operations management: Management of processes that transform inputs into goods and
services that add value for the customer.

What is Operations Management?

Operations management is the management of processes that transform inputs into goods and services
that add value for the customer.

The Goal of Operations Management

The goal of operations management is to maximize efficiency while producing goods and services
that effectively fulfill customer needs.

Countless operating decisions must be made that have both long- and short-term impacts on the
organization’s ability to produce goods and services that provide added value to customers. If the
organization has made mostly good operating decisions in designing and executing its transformation
system to meet the needs of customers, its prospects for long-term survival are greatly enhanced.

For example, if an organization makes furniture, some of the operations management decisions
involve the following:

 purchasing wood and fabric,


 hiring and training workers,
 location and layout of the furniture factory,
 purchase cutting tools and other fabrication equipment.

If the organization makes good operations decisions, it will be able to produce affordable, functional,
and attractive furniture that customers will purchase at a price that will earn profits for the company.

The Role of Operations Management in the Organization

Operations is one of the three strategic functions of any organization. This means that it is a vital part
of accomplishing the organization’s strategy and ensuring its long-term survival. The other two areas
of strategic importance to the organization are marketing and finance. The operations strategy should
support the overall organization strategy. Many companies prepare a 5-year pro-forma to assist in
their operation planning. The pro forma uses information from past and current financial statements in
an effort to predict future events such as sales, and capital investments.

Page 226 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Strategic Versus Tactical Operations Decisions

Operations decisions include decisions that are strategic in nature, meaning that they have long-term
consequences and often involve a great deal of expense and resource commitments.

Strategic operations decisions include the following:

 facility location decisions,


 the type of technologies that the organization will use,
 determining how labor and equipment are organized,
 how much long-term capacity the organization will provide to meet customer demand.

Tactical operations decisions have short to medium term impact on the organization, often involve
less commitment of resources, and can be changed more easily than strategic decisions. The following
are some tactical decisions:

 workforce scheduling,
 establishing quality assurance procedures,
 contracting with vendors,
 managing inventory.

Strategic and tactical operations decisions determine how well the organization can accomplish its
goals. They also provide opportunities for the organization to achieve unique competitive advantages
that attract and keep customers.

For example, United Parcel Service (UPS), an international package delivery service, formed a
partnership with its customer, Toshiba computers. Toshiba needs to provide a repair service to its
laptop computer customers. The old approach of providing this service was cumbersome and time-
consuming:

1. UPS picked up the customer computers.


2. UPS delivered the computers to Toshiba.
3. Toshiba repaired the computers.
4. UPS picked up the repaired computers and delivered them back to the customers.

Under this traditional approach, the total time to get a laptop computer repaired was two weeks—a
long time for people to be without their laptop! Then they came up with an innovative idea for
Toshiba to provide better service to its customers.

UPS hired, trained, and certified its own employees to repair Toshiba laptop computers. The new
repair process is much more efficient:

1. UPS picks up computers from Toshiba owners.


2. UPS repairs the computers.
3. UPS delivers the computers back to their owners.

The total time to get a computer repaired is now about two days.

Page 227 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Most Toshiba customers think that Toshiba is doing a great job of repairing their computers, when in
fact Toshiba never touches the computers! The result of this operations innovation is better service to
Toshiba customers and a strong and profitable strategic partnership between UPS and its customer,
Toshiba.

Operations Management: Blueprint for a commercial operations management solution.

A Study of Process

Operations management transforms inputs (labor, capital) into outputs (goods and services) that
provide added value to customers.

LEARNING OBJECTIVES

Analyze the importance of operations management in protecting an organization’s competitive


advantage

KEY TAKEAWAYS

Key Points

 Operations management transforms inputs (labor, capital, equipment, land, buildings,


materials, and information) into outputs ( goods and services ) that provide added value to
customers.
 All organizations must strive to maximize the quality of their transformation processes to meet
customer needs.
 Controlling the transformation process makes it difficult for competitors to manufacture
products of the same quality as the original producer.

Key Terms

 output: Production; quantity produced, created, or completed.


 input: Something fed into a process with the intention of it shaping or affecting the outputs of
that process.
 process: A series of events to produce a result, especially as contrasted to product.

Page 228 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Operations Management and the Transformation Process

Operations management transforms inputs (labor, capital, equipment, land, buildings, materials and
information) into outputs (goods and services) that provide added value to customers.

Figure 1 summarizes the transformation process. The arrow labeled “Transformation System” is the
critical element in the model that will determine how well the organization produces goods and
services that meet customer needs. It does not matter whether the organization is a for-profit
company, a non-profit organization (religious organizations, hospitals, etc.), or a government agency;
all organizations must strive to maximize the quality of their transformation processes to meet
customer needs.

Example: Strategic Importance of Operations Management

The 3M Company is a good example of the strategic importance of transforming inputs into outputs
that provide competitive advantage in the marketplace.

3M manufactures a top-quality adhesive tape called “Magic Tape”. Magic Tape is used for everyday
taping applications, but it offers attractive features that most other tapes do not, including:

 Smooth removal from the tape roll


 An adhesive that is sticky enough to hold items in place (but not too sticky that it can not be
removed and readjusted if necessary! )
 A non-reflective surface

For several decades, 3M has enjoyed a substantial profit margin on its Magic Tape product because
3M engineers make the manufacturing equipment and design the manufacturing processes that
produce Magic Tape. In other words, 3M enjoys a commanding competitive advantage by controlling
the transformation processes that turn raw material inputs into the high value-added Magic Tape
product.

Controlling the transformation process makes it extremely difficult for competitors to produce tape of
the same quality as Magic Tape, allowing 3M to reap significant profits from this superior product.

An opposite example of the strategic implications of the input/output transformation process is 3M’s
decision in the 1980s to stop manufacturing VHS tape for video players and recorders.

In the VHS tape market 3M had no proprietary manufacturing advantage, as there were many Asian
competitors that could produce high-quality VHS tape at lower cost. Since 3M had no proprietary
control over the transformation process for VHS tape that would allow the company to protect its
profit margins for this product, it dropped VHS tape from its offerings.

The two 3M examples of Magic Tape and VHS tape show how important the transformation process
and operations management can be to providing and protecting an organization’s competitive
advantage.

Page 229 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Example of a typical transformation process

Service Operations

Services operations often encounter different opportunities and challenges than tangible goods, and
thus require unique operational considerations.

LEARNING OBJECTIVES

Identify the key differences between services and other types of goods, and recognize the operational
implications of these differences

KEY TAKEAWAYS

Key Points

 Service operations are the operational strategies and tactics which go into delivering an
intangible good to prospective consumers.
 Understanding this field of work requires an understanding of what a service constitutes. One
useful perspective in differentiating services from other goods is the ‘5 I’s of services’
perspective.
 As services behave somewhat differently than tangible products, operations managers must
take into account different considerations when optimizing their operational strategy.

Page 230 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Improving overall quality through measuring consumer satisfaction, planning facilities for
optimal use of space, and effective scheduling are a few examples of considerations service
operators consider.

Key Terms

 Intangibility: The state of not being touchable. For example, an idea is real, but not tangible.
 opportunity costs: The overall cost of something missed; through deciding to do ‘A’, an
individual or organization incurs the opportunity cost of doing ‘B’.
 NPS surveys: Management tools that can be used to gauge the loyalty of a firm’s customer
relationships. It serves as an alternative to traditional customer satisfaction research and claims
to be correlated with revenue growth.

Service operations are simply the application of operations management to an intangible good (i.e. a
service). To understand how service operations function, let’s first take a look at what is considered a
service.

Service-Goods Continuum: This simple line graph shows industries that are nearly 100% service-
related at the top and industries that are nearly 100% product-related at the bottom. It is an illustration
of how the service-product continuum is more of a spectrum than a black and white rule.

Services Defined

An easy way to remember what a service is (compared to a product) is through using the ‘5 I’s of
Services’:

1. Intangibility – Services cannot be touched, shipped, handled, or looked at. They are an
occurrence, not a tangible good.
2. Inventory – Services cannot be stored for later use. They occur, or they do not occur.
3. Inseparability – Services cannot be pulled into different parts or separated (as many tangible
goods can be—which makes operations management quite different for products).
4. Inconsistency – Services tend to be unique. A teacher may teach you a topic, and another
teacher may teach you the same topic in another course. Each teacher will deliver this topic
somewhat differently. This is a good example of service inconsistency.
5. Involvement – Consumers are often directly involved in the service delivery. A therapist is a
good example of this. The consumer is the center of the service, and thus each instance of the
service is unique based on the individual involved.

Managing Service Operations

This definition offers a great deal of insight when applied to the concept of operational management.
Without a tangible good to ship, handle and produce, operational managers are instead focused on the
execution of an activity to fill a consumer need. This management of an instance is rather different
than the management of a product.

Managing operations is just as critical on the service side as it is on the product side. While there are
countless considerations to be made, many of which are unique to specific organizations or industries,
these core operational decisions are strong indications of the mentality service management specialists
consider:

Page 231 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Location

Choosing where to open a facility, how to lay out the facility, what size is appropriate, and overall
how efficiently a given space can be used relative to the cost are key considerations. Consider a car
mechanic opening a garage. Depending upon how many jobs she anticipates having within a given
period of time, and how many employees she expects to be able to manage simultaneously, she may
want to open a facility with three garages or five garages. It really depends on how much output she
expects she can accomplish, and how much input demand will provide.

Scheduling

Just as a product manufacturing facility will know when a product will be where, so too do service
operators need to know when a given service should start and what duration of time is required to
complete it. Maximizing output through planning properly can minimize opportunity costs and
maximize revenue, and plays an integral role in operational management of services. Take a doctor’s
office. If they simply had everyone come in whenever they wanted, there would be times when the
staff would have nothing to do (but be obligated to be there, and be paid), and other times when there
would be too much to do and capital and customers would be lost.

Quality

As the ‘5 I’s of Services’ indicate, most services tend to be completely unique. A hair dresser rarely
gives the same haircut twice and, even if they do, it would be cut to fit a different individual. As a
result, managing for high quality output is rather complex. Each execution is measured relative to the
specific instance and that specific consumer, making tools like NPS surveys and other measures of
individual satisfaction highly useful in optimizing. Following these ratings, operational specialists
must consider the comments received and work to find a way to integrate this feedback into future
services.

LICENSES AND ATTRIBUTIONS

Types of Management

Management Levels: A Hierarchical View

An organization can have many different managers, across many different titles, authority levels, and
levels of the management hierarchy.

LEARNING OBJECTIVES

Recognize the difference between low-level, middle-level and top-level management

KEY TAKEAWAYS

Key Points

 The three levels of management typically found in an organization are low-level management,
middle-level management, and top-level management.

Page 232 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Top-level managers are responsible for controlling and overseeing the entire organization.
 Middle-level managers are responsible for executing organizational plans which comply with

the company’s policies. These managers act at an intermediary between top-level management
and low-level management.
 Low-level managers focus on controlling and directing. They serve as role models for the
employees they supervise.

Key Terms

 hierarchy: Any group of objects ranked so that every one but the topmost is subordinate to a
specified one above it.
 manager: A person whose job is to manage something, such as a business, a restaurant, or a
sports team.
 board of directors: A group of people, elected by stockholders, to establish corporate policies,
and make management decisions.
 top management: company employees responsible for controlling and overseeing the entire
organization
 middle management: company employees that are accountable for controlling and overseeing
a department

Management Levels: An Overview

Most organizations have three management levels:

 Low-level managers;
 Middle-level managers; and
 Top-level managers.

These managers are classified in a hierarchy of authority, and perform different tasks. In many
organizations, the number of managers in every level resembles a pyramid.

Below, you’ll find the specifications of each level’s different responsibilities and their likely job titles.

Top-level managers

The board of directors, president, vice-president, and CEO are all examples of top-level managers.

These managers are responsible for controlling and overseeing the entire organization. They develop
goals, strategic plans, company policies, and make decisions on the direction of the business.

In addition, top-level managers play a significant role in the mobilization of outside resources.

Top-level managers are accountable to the shareholders and general public.

Middle-level managers

General managers, branch managers, and department managers are all examples of middle-level
managers. They are accountable to the top management for their department’s function.

Page 233 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Middle-level managers devote more time to organizational and directional functions than top-level
managers. Their roles can be emphasized as:

 Executing organizational plans in conformance with the company’s policies and the objectives
of the top management;
 Defining and discussing information and policies from top management to lower management;
and most importantly
 Inspiring and providing guidance to low-level managers towards better performance.

Some of their functions are as follows:

 Designing and implementing effective group and intergroup work and information systems;
 Defining and monitoring group-level performance indicators;
 Diagnosing and resolving problems within and among work groups;
 Designing and implementing reward systems supporting cooperative behavior.

Low-level managers

Supervisors, section leads, and foremen are examples of low-level management titles. These managers
focus on controlling and directing.

Low-level managers usually have the responsibility of:

 Assigning employees tasks;


 Guiding and supervising employees on day-to-day activities;
 Ensuring the quality and quantity of production;
 Making recommendations and suggestions; and
 Upchanneling employee problems.

Also referred to as first-level managers, low-level managers are role models for employees. These
managers provide:

 Basic supervision;
 Motivation;
 Career planning;
 Performance feedback; and
 Staff supervision.

Page 234 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Management Levels: Hierarchical view of management in organizations

Management Areas: A Functional View

Organizational management is often approached by identifying business functions and assigning


leadership to those functions.

LEARNING OBJECTIVES

Understand management areas and why they are often viewed from a functional perspective

KEY TAKEAWAYS

Key Points

 Organizations are essentially a group of different functions, aligned to create a specific product
or service. Assigning managers to different functional areas is a popular approach to business
management.
 Viewing organizational management from this perspective is useful in ensuring each function
has a specialist in place with the knowledge and expertise to make sound decisions.
 Some common management areas include marketing, finance, IT, sales, human resources, and
legal.
 Taking a look at an organizational chart is useful in understanding how management areas are
commonly identified from a functional view.

Key Terms

 best practices: The specific professional activities that produce near optimal results.

Page 235 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 organizational chart: A chart outlining the structure of an organization and the way in which
the different roles, functions, and departments interact with one another.

Understanding Functional Management Areas

Businesses are comprised of a variety of different tasks which, when coordinated properly, create
value through producing products and/or services. Each of these different tasks, or functions, require
management and alignment. One approach to management is assigning leadership roles with authority
and accountability over these different tasks, or management areas.

This view creates management positions with authority over a given functional department. These
management areas can span a wide variety of skills and functions, but the most recognizable and
common include marketing, finance, human resources, operations, software development, and IT.

This functional view emphasizes managers who are specialists in their fields who are also capable of
leading teams, balancing budgets, and thinking tactically (and sometimes strategically, at the upper
levels).

The Role of a Functional Management

Functional management is focused on the execution of a specific organizational task within functional
areas, through organizing and leading an organization’s talent in a given field. Functional managers
have a high level of technical knowledge and skills relative to the area they manage and focus their
efforts on achieving best practices.

Let’s quickly explore an example of a functional manager to clarify the role and responsibilities. A
human resources manager in an organization would be expected to oversee all operations within the
scope of human resources. At a medium or larger sized organization, this could include managing
specialists in payroll, recruitment, talent development, legal, and a variety of other specializations
within the scope of a human resources team.

The manager shouldn’t execute each specific task, but instead understand what is required to complete
these tasks. The manager must have the broad technical knowledge required to ensure each individual
within that functional team has the skills, resources, and alignment necessary to effectively carry out
these functions.

Illustrating Functional Management

A simple way to understand how this all plays out in an organization is a simple organizational chart
(org chart, as they are commonly referred to). By taking a look at how the departments are divided, it
becomes fairly easy to assume what types of management areas exist from a functional view. As a
result, it’s fairly common to receive an org chart when you start a job (particularly at larger
companies), to understand who reports to whom, and regarding what tasks.

Page 236 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Organizational Chart: This is a simple example of an organizational chart, in this case at an advertising
agency. By looking at each functional area, and considering how it relates to broader functional areas,
it becomes clear how management areas are divided from a functional perspective.

WHAT’S THE POINT?

To some, the point of ISO 9000 (ISO 9001:2015) registration is a certificate. While important to
convince customers that certain procedures are in place, a certificate can be a very expensive piece of
paper if that is the only benefit realized by the organization. To others, the point of IS0 9000 is
measured performance improvement for the organization, and the certificate is merely a confirmation
of an effective quality management system (QMS). This results-focused view of ISO 9000 is
confirmed by the growing number of companies pursuing “compliance through self-certification”
instead of a formal registrar-certification of their QMS.

The framers of the new standard saw performance improvement as the central point of the standard
along with RISK BASED THINKING as a core practice. The expanded top management
responsibilities make clear who must lead the charge toward measurable results.
Top management shall demonstrate leadership and commitment with respect to the quality
management system. (ref 5.1.1) by (among others):
• insuring the quality policy and quality objectives are established…..
• ensuring the integration of the quality management system into the organization’s business processes
• promoting the use of the process approach and risk-based thinking
• promoting improvement

Page 237 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

The new standard standardizes knowledge gained from experience, recognizes not only risk but
opportunities, delves deeper into the measurement of an organization’s success, and places more
emphasis on management involvement.
Many ISO 9001 professionals believe the establishment of meaningful, measurable quality objectives
toward which the entire QMS is directed is a very important part of the ISO 9001:2015 standard. For
it is in the setting and achieving of business-essential objectives that a real return-on-investment
(ROI) can be found. So, as top management sits down to discuss quality objectives, they must define
quality for their organization and its customers. Surely the quality of products and services should be
included. Certainly measures of customer satisfaction would be on the list of key objectives. These
measures are termed, “Key Process Indicators” or KPIs and CORE can help the organization establish
those to assess the effectiveness of the system. Some of those KPIs or drivers of a quality organization
might be:
• delivery performance
• percent of total market share
• sales generated from new products
• through-put time from sale to delivery
• time to order fulfillment
• cost of rework and scrap
There are many other measures that can be incorporated into the organization’s QMS and they may be
related to the establishment of “business performance targets” as well. While a (surprisingly) few
measures are mandated in the ISO standard, it is left to the organization’s management to set
objectives most useful to the organization and its customers.
BREAKING DOWN THE STANDARD

The section entitled “Leadership and commitment” (ref. 5.1) starts with a mandate for top
management:
Top management shall demonstrate leadership and commitment to the quality management system
(QMS) by:

This leads to other parts of the mandate that top management is obligated: “Ensuring that the QMS
achieves its intended results” (5.1.1g). While also including basic best practices of management such
as: “PROMOTING the use of the process approach and risk-based thinking” (5.1.1d),
“COMMUNICATING the importance of effective quality management….”(5.1.1f), “PROMOTING
improvement” (5.1.1i) and DEMONSTRATE leadership and COMMITMENT to ensure that “the
focus on enhancing customer satisfaction is maintained” (5.1.2).
The primary responsibility for the establishment of quality objectives cannot be delegated, though
involving the rest of the organization can help ensure the objectives are realistic with a high degree of
buy-in. Top management must determine performance targets for the organization as a whole, and
then break them down into smaller sub-objectives that can be assigned to divisions, departments,
teams or individuals, as appropriate.

Page 238 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

In Section 6, Planning, the new standard starts by asking the organization to consider addressing risks
and opportunities that might have an impact on the QMS and quality of the product. The standard
mentions risk several more times indicating it is an important new aspect to consider.
In the section, “Quality objectives and planning to achieve them” (ref 6.2), the standard indicates that
the quality objectives shall:
The additional objectives set are left to the judgment of management based on the organization’s size,
market, product mix, complexity, etc. It is typical that the organization limit the number of objectives
to those most vital to the organization’s success.
DEFINING MEASURABLE OBJECTIVES

The objectives must also be measured:

The quality objectives shall be measurable and consistent with the quality policy. (ref. 6.2.1a)
This would eliminate “motherhood-and-apple-pie” statements that are mere slogans espousing a
general desire for quality. By stating that objectives must be “measurable”, an objective set of data
gathered, reported and analyzed should be able to clearly indicate whether or not specific objectives
have been reached.
In establishing measurable objectives, many companies define the following for each:
• In establishing measurable objectives, many companies define the following for each:
• Measurement – Data to be collected to monitor actual performance.
• Baseline – Historical level of performance; establishes the starting point.
• Target – Specific performance goal for the objective.
• Target Date – Date by which the target is to be achieved.
• Owner – Person/group responsible to gather, report and analyze the measurement data.
• Reporting Frequency – Schedule for reporting, analyzing and responding to the measurement
• Review Frequency – Schedule for reviewing the objective and corresponding target for possible
modification to ensure ongoing relevancy for the organization.
While this format is not specified by the ISO 9001:2015 requirements, an organization might want to
consider including many of these elements in their quality objectives planning. It is also required that
all quality objectives are “consistent with the quality policy” (see 6.2.1). That means there must be
logical relationship between the performance targets of the organization and top management’s
statement of intention that it intends to achieve quality as a result of the company’s operation. The
consistency between the quality policy and quality objectives must be clear to third-party auditors as
well as those more familiar with the company.
GENERAL QMS PLANNING

In addition to setting quality objectives, the organization (management) is responsible for planning the
overall QMS.
First, the QMS must be planned (and implemented) to be sure the requirements listed in the “General
Requirements” for the QMS (ref. 4.1) are met. These requirements are summarized below:
1. The QMS must be established and continually improved.
2. QMS processes must be identified (including processes outsourced by the company) and their
sequence and interactions determined.
3. Criteria and methods of control must be established to be sure the QMS processes are effective
(NOTE: The company’s quality objectives can meet this requirement).
4. Needed resources and information must be available to operate and monitor the QMS processes.
5. QMS processes must be monitored, measured and analyzed.
6. Actions must be taken to meet planned results (quality objectives) and continually improve QMS
processes.
7. The QMS processes must meet the requirements of the ISO 9001:2015 standard.
The planning of the QMS now includes addressing risks and opportunities. This will serve to (ref
6.1.1):

Page 239 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

a) give assurances that the QMS can achieve its intended results;
b) enhance desirable effects;
c) prevent or reduce, undesired effects;
d) achieve improvement.
These items are enhanced (ref. 6.1.2), where in the organization “shall plan”
a) how to: 1) integrate and implement the actions into its QMS processes (see 4.4); and 2) evaluate the
effectiveness of these actions.
Second, the QMS must deliver results. It is expected that top management monitor the company’s
performance against its stated quality objectives and take necessary actions to be sure these objectives
are met. Third-party auditors will certainly be looking to see a strong pattern of meeting stated
objectives.
The results of the QMS are measurable against the quality objectives and how much improvement is
gained. Among new considerations in this iteration of ISO is planning for the accumulation and
documentation of “Organizational Knowledge” (ref. 7.1.6). Organizational knowledge can be gained
in numbers of ways, and the standard notes: “Organizational knowledge is knowledge specific to the
organization, it is generally gained by experience; and this knowledge can be based on internal or
external sources. Among the sources that might be used are:
• Lessons Learned meetings after projects or tasks are completed.
• Internal and external audit findings and recommendations.
• Experience of new employees.
• Industry knowledge from meetings, conferences, and other sources.
Third, the QMS planning process must respond to significant organizational changes by making
necessary adjustments to policies, procedures, quality objectives, etc. Changes that could require
QMS modifications might include new product lines, customers with new requirements, marked
organizational growth or downsizing, acquisition or divestiture of company facilities, management
reorganizations, etc.
THE POINT OF IT ALL

This brief set of management “planning” requirements has huge implications for any organization
seeking ISO 9001:2015 compliance or registration. Senior management must “direct the ship” by
steering the organization away from high risks and toward clearly stated, consistently measured and
carefully analyzed quality objectives. It is through the use of quality objectives that top management
can keep the organization focused on what is most important to the company and its customers,
ensuring improving results that deliver real, demonstrable quality throughout the company.
Original article written by Scott Dawson, May 7th, 2014:

SETTING A DIRECTION

WHAT’S THE POINT?

Page 240 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

To some, the point of ISO9000 registration is a certificate.


While important to convince customers that certain procedures are in place, a certificate can be a very
expensive piece of paper if that is the only benefit realized by the organization. To others, the point of
IS09000 is measured performance improvement for the organization, and the certificate is merely a
confirmation of an effective quality management system (QMS). This results-focused view of
ISO9000 is confirmed by the growing number of companies pursuing “compliance through self-
certification” instead of a formal registrar-certification of their QMS.
The framers of new standard also saw performance improvement as the central point of the standard.
The expanded top management responsibilities make clear who must lead the charge toward
measurable results.
Top management shall ensure that quality objectives … are established … within the organization.
(ref.5.4.1)

The quality system must be planned and implemented by top management:


In order to meet … the quality objectives. (ref. 5.4.2)
“The point of IS09000 is measured performance improvement for the organization.”
Many ISO9000 professionals believe the establishment of meaningful, measurable quality objectives
toward which the entire QMS is directed is a very important part of the ISO9000 standard. For it is in
the setting and achieving of business-essential objectives that a real return-on-investment (ROI) can
be found. So, as top management sits down to discuss quality objectives, they must define quality for
their organization and its customers. Surely the quality of products and services should be included.
Certainly measures of customer satisfaction would be on the list of key objectives. But what about
other drivers of a quality organization such as:

Delivery performance
Percent of total market share
Sales generated from new products
Through-put time from sale to delivery
Time to order fulfillment
Cost of rework and scrap

We could name a dozen additional measures of a quality company, but the determination of “quality
objectives” may not be much different from setting “business performance targets” as part of strategic
planning. While a (surprisingly) few measures are mandated in the ISO standard, it is left to the
organization’s management to set objectives most useful to the organization and its customers.
BREAKING DOWN THE STANDARD

Page 241 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

The section entitled “Planning” (5.4) starts with a mandate for senior management:
Top management shall ensure that quality objectives, including those needed to meet requirements for
product [see 7.1 a)], are established at relevant functions and levels within the organization. (ref.
5.4.1)
The primary responsibility for the establishment of quality objectives cannot be delegated, though
involving the rest of the organization can help ensure the objectives are realistic with a high degree of
buy-in. Top management must determine performance targets for the organization as a whole, and
then break them down into smaller sub-objectives that can be assigned to divisions, departments,
teams or individuals, as appropriate.
As is stated, the objectives must include required product quality goals as specified in section 7.1,
Planning of Product Realization:
In planning product realization, the organization shall determine the following, as appropriate:
a) quality objectives and requirements for the product (ref. 7.1)
The additional objectives set are left to the judgment of management based on the organization’s size,
market, product mix, complexity, etc. It is typical that the organization limit the number of objectives
to those most vital to the organization’s success.
DEFINING MEASURABLE OBJECTIVES

The objectives must also be measured:


The quality objectives shall be measurable and consistent with the quality policy. (ref. 5.4.1)
This would eliminate “motherhood-and-apple-pie” statements that are mere slogans espousing a
general desire for quality. By stating that objectives must be “measurable”, an objective set of data
gathered, reported and analyzed should be able to clearly indicate whether or not specific objectives
have been reached.

In establishing measurable objectives, many companies define the following for each:
Objective – Statement of the performance area to be achieved.
Measurement – Data to be collected to monitor actual performance.
Baseline – Historical level of performance; establishes the starting point.
Target – Specific performance goal for the objective.
Target Date – Date by which the target is to be achieved.
Owner – Person/group responsible to gather, report and analyze the measurement data.
Reporting Frequency – Schedule for reporting, analyzing and responding to the measurement
Review Frequency – Schedule for reviewing the objective and corresponding target for possible
modification to ensure ongoing relevancy for the organization.

While this format is not specified by the ISO9000 requirements, an organization might want to
consider including many of these elements in their quality objectives planning. It is also required that
all quality objectives are “consistent with the quality policy” (see 5.3). That means there must be
logical relationship between the performance targets of the organization and top management’s
statement of intention that it intends to achieve quality as a result of the company’s operation. The
consistency between the quality policy and quality objectives must be clear to third-party auditors as
well as those more familiar with the company.
GENERAL QMS PLANNING

In addition to setting quality objectives, management is responsible for planning the overall QMS.
Top management shall ensure that
a) the planning of the quality management system is carried out in order to meet the requirements
given in 4.1, as well as the quality objectives, and
b) the integrity of the quality management system is maintained when changes to the quality
management system are planned and implemented. (ref. 5.4.2)
First, the QMS must be planned (and implemented) to be sure the requirements listed in the “General
Requirements” for the QMS (ref. 4.1) are met. These requirements are summarized below:

Page 242 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

1. The QMS must be established and continually improved.


2. QMS processes must be identified (including processes outsourced by the company) and their
sequence and interactions determined.
3. Criteria and methods of control must be established to be sure the QMS processes are
effective (NOTE: The company’s quality objectives can meet this requirement).
4. Needed resources and information must be available to operate and monitor the QMS
processes.
5. QMS processes must be monitored, measured and analyzed.
6. Actions must be taken to meet planned results (quality objectives) and continually improve
QMS processes.
7. The QMS processes must meet the requirements of the ISO9000 standard.

So, the QMS planning must incorporate all of the requirements found in
section 4.1, and compliance with these requirements must be maintained.
Second, the QMS must deliver results. It is expected that top management monitor the company’s
performance against its stated quality objectives and take necessary actions to be sure these objectives
are met. Third-party auditors will certainly be looking to see a strong pattern of meeting stated
objectives.
Third, the QMS planning process must respond to significant organizational changes by making
necessary adjustments to policies, procedures, quality objectives, etc. Changes that could require
QMS modifications might include new product lines, customers with new requirements, marked
organizational growth or downsizing, acquisition or divestiture of company facilities, management
reorganizations, etc.
THE POINT OF IT ALL

This brief set of management “planning” requirements has huge implications for any organization
seeking ISO9000 compliance or registration. Senior management must “direct the ship” by steering
the organization toward clearly stated, consistently measured and carefully analyzed quality
objectives. It is through the use of quality objectives that top management can keep the organization
focused on what is most important to the company and its customers, ensuring improving results that
deliver real, demonstrable quality throughout the company.

Decision Making

Observation: Framing the Problem

A frame in social theory consists of a schema of interpretation that individuals rely on to understand
and respond to events.

LEARNING OBJECTIVES

Apply the framing problem to decision making

KEY TAKEAWAYS

Page 243 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Key Points

 People do not look at an event and then “apply” a frame to it; people constantly project into the
world around them the interpretive frames that allow them to make sense of it.
 The basis of framing is the selective influence of information on a person’s decision- making
process based on internal heuristics.
 Framing can affect the outcome (i.e., the choices one makes) of choice problems, to the extent
that several of the classic axioms of rational choice do not hold. This led to the development of
the prospect theory as an alternative to rational choice theory.
 Depending on how the information is presented, framing can lead to entirely rational
individuals making completely different decisions based on the way information is presented.
Numerous experiments have shown this to be the case.
 Generally, people prefer absolute certainty in situations where information is positively framed,
while they prefer risk -seeking behavior when decisions are framed in negative terms.

Key Terms

 Rational choice theory: Rational choice theory, also known as choice theory or rational action
theory, is a framework for understanding and often formally modelling social and economic
behavior. Rationality, interpreted as “wanting more rather than less of a good,” is widely used
as an assumption of the behavior of individuals in microeconomic models and analysis and
appears in almost all economics textbook treatments of human decision making.
 heuristics: A mental shortcut that may not always yield desired results.
 schema: An outline or image universally applicable to a general conception, under which it is
likely to be presented to the mind.

A frame in social theory consists of a schema of interpretation that individuals rely on to understand
and respond to events. In other words, people build a series of mental filters through biological and
cultural influences and use those filters to understand the world. Their choices are influenced by their
frames.

Explanation

When one seeks to explain an event, the understanding often depends on the individual’s frame. If a
friend rapidly closes and opens an eye, we will respond very differently depending on whether we
attribute this to a purely “physical” frame (s/he blinked) or to a social frame (s/he winked).

Though the former might result from a speck of dust (resulting in an involuntary and not particularly
meaningful reaction), the latter would imply a voluntary and meaningful action (e.g., to convey humor
to an accomplice).

People do not look at an event and then “apply” a frame to it; people constantly project into the world
around them the interpretive frames that allow them to make sense of it. People only shift frames
when incongruity calls for a frame shift. In other words, people only become aware of the frames that
they already use when something forces them to replace one frame with another.

Framing is so effective because it is a heuristic, or a mental shortcut that may not always yield desired
results and is seen as a “rule of thumb.” According to Susan T. Fiske and Shelley E. Taylor, human
beings are by nature ” cognitive misers,” meaning they prefer to do as little thinking as possible.
Frames provide people a quick and easy way to process information. Hence, people will use the
previously mentioned mental filters (a series of which is called a “schema”) to make sense of

Page 244 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

incoming messages. This gives the sender and framer of the information enormous power to use these
schemas to influence how the receivers will interpret the message.

The Brain’s Heuristics for Emotions: Emotions appear to aid the decision-making process.

The Framing of Problems

Amos Tversky and Daniel Kahneman have shown that framing can affect the outcome (i.e., the
choices one makes) of choice problems, to the extent that several of the classic axioms of rational
choice do not hold. This led to the development of the prospect theory as an alternative to rational
choice theory.

The context or framing of problems adopted by decision makers results in part from extrinsic
manipulation of the decision options offered, as well as from forces intrinsic to decision makers (e.g.,
their norms, habits, and unique temperament).

Experimental Demonstration

Tversky and Kahneman (1981) demonstrated systematic reversals of preference when the same
problem is presented in different ways, for example, in the Asian disease problem. Participants were
asked to “imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is
expected to kill 600 people. Two alternative programs to combat the disease have been proposed.
Assume the exact scientific estimate of the consequences of the programs are as follows. ”

The first group of participants was presented with a choice between programs: In a group of 600
people, Program A: “200 people will be saved;” Program B: “there is a one-thirds probability that 600
people will be saved, and a two-thirds probability that no people will be saved. ” Of participants, 72%
preferred program A (the remainder, 28%, opted for program B).

The second group of participants was presented with the choice between the following: In a group of
600 people, Program C: “400 people will die” Program D: “there is a one-third probability that
nobody will die, and a two-thirds probability that 600 people will die”

In this decision frame, 78% preferred program D, with the remaining 22% opting for program C.

Programs A and C are identical, as are programs B and D. The change in the decision frame between
the two groups of participants produced a preference reversal: When the programs were presented in
terms of lives saved, the participants preferred the secure program, A (= C). When the programs were
presented in terms of expected deaths, participants chose the gamble D (= B).

Absolute and Relative Influences

Framing effects arise because one can frequently frame a decision using multiple scenarios, wherein
one may express benefits either as a relative risk reduction (RRR), or as absolute risk reduction
(ARR). Extrinsic control over the cognitive distinctions (between risk tolerance and reward
anticipation), adopted by decision makers, can occur through altering the presentation of relative risks
and absolute benefits.

People generally prefer the absolute certainty inherent in a positive framing-effect, which offers an
assurance of gains. When decision options appear framed as a likely gain, risk-averse choices
predominate.

Page 245 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

A shift toward risk-seeking behavior occurs when a decision maker frames decisions in negative
terms or adopts a negative framing effect.

Developing Alternate Plans of Action

It is important to develop and consider alternatives for dealing with any given situation.

LEARNING OBJECTIVES

Explain the benefits of decision planning

KEY TAKEAWAYS

Key Points

 After defining a problem, decision makers must take steps to identify alternative actions to
respond to it.
 Developing alternatives requires decision makers to gather data, interpret that data, and
brainstorm to come up with multiple solutions that can be compared and ranked.
 Creative thinking, and thinking out of the box, are key to coming up with a full range of
alternatives.

Key Terms

 brainstorming: A method of problem solving in which members of a group contribute ideas


spontaneously.

Decision Planning

Making a decision without planning is fairly common, but does not often end well. Planning allows
for decisions to be made comfortably and in a smart way. Planning also makes decision making much
simpler. Any decision will get four benefits out of planning:

Page 246 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Flowchart Diagram: Simplistic decision diagram of when to create Wikipedia articles


1. Planning establishes independent goals. It is a conscious and directed series of choices.
2. Planning provides a standard of measurement. It is a measurement of whether you are going
toward or further away from your goal.
3. Planning converts values to action. You think twice about the plan and decide what will help
advance your plan best.
4. Planning allows for limited resources to be committed in an orderly way. Always govern the
use of what is limited to you (e.g., money, time, and so on).

Developing Alternatives

The need to make a decision arises because there are many available alternatives. Hence, the next step
after defining the main problem would be to identify the alternatives available for that particular
situation.

Gathering data helps decision makers have actual evidence that will aid them in coming up with a
solution. Brainstorming helps them develop alternatives. Coming up with more than one solution
enables decision makers to see which one can actually work.

While brainstorming, individuals do not have to restrict themselves to thinking about the very obvious
options. Instead, they can use their creative skills and come up with alternatives that may look a little
irrelevant. This is important because sometimes solutions can come from these out-of-the-box ideas.

Analyzing the Options

Page 247 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Evaluating alternatives is an important and difficult step of the decision-making process.

LEARNING OBJECTIVES

Analyze the misleading effects of evaluating alternatives

KEY TAKEAWAYS

Key Points

 The normative approach to analyzing decision-making assumes rational decision-makers with


well-defined preferences. On the other hand, the descriptive approach is based on empirical
observations and experiments. Finally, the prescriptive enterprise develops methods to improve
decision making.
 Whichever approach is taken, there is always the problem that misleading effects can lead to a
bad decision. These effects can take the form of heuristics, which help in some situations and
not in others.
 Decision making often includes the need to assign a reason to justify the decision.
 – Subjective models – people create misleading and incorrect decision making models
 – Focusing illusion – people neglect important outcomes because they are focused on other,
more obvious aspects
 – Selective search for evidence – focusing on facts that support certain conclusions
 – Premature termination of search for evidence
 – Selective perception – screening out of information not thought to be important
 – Wishful thinking – our desire to see things in a positive light may distort our perception
 – Recency – placing more emphasis on more recent events
 Repetition bias – believing that which we hear most often
 – Group think – pressure to conform to the opinions of a group
 – Source credibility bias
 – Anchoring – accepting initial information as factual and basing subsequent opinions around
that
 – Over confidence
 – Recallability trap – a distorted ability to recall life events objectively
 – Outguessing randomness trap – imagination of patterns where none exist

Key Terms

 Prescriptive: Prescriptive analytics automatically synthesizes big data, mathematical sciences,


business rules, and machine learning to make predictions and then suggest decision options to
take advantage of the predictions.

Evaluating the alternatives can be said to be one of the most important stages of the decision-making
process. This is the stage where you have to analyze each alternative that you have come up with. You
have to find out the advantages and disadvantages of each option. This can be done with the research
you have done on that particular alternative. At this stage, you can also filter out the options that you

Page 248 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

think are impossible or do not serve your purpose. Rating each option with a numerical digit would
also help in the filtration process.

Money and Decision Making: Relation between (monetary) gains and losses and their subjective
value.

Misleading Effects

But even respecting the considerations above, there still might be problems in making the “right”
decision because of different misleading effects, which mainly arise because of the constraints of
inductive reasoning. This generally means that our model of a situation or problem might not be ideal
to solve it in an optimal way. Biases can creep into our decision-making processes. Many different
people have made a decision about the same question (e.g., “Should I have a doctor look at this
troubling breast cancer symptom I’ve discovered? ” “Why did I ignore the evidence that the project
was going over budget? “) and then craft potential cognitive interventions aimed at improving
decision-making outcomes.

At every step of decision making, misperceptions based on incorrect input, biases, lack of
information, and other traps can corrupt the choices we make. We are particularly vulnerable to traps
involving uncertainty because most of us are not good at judging chances. Complex and important
decisions are the most prone to distortion because they tend to have many assumptions and estimates,
as well as influence by misaligned parties.

Page 249 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Research has shown that over time we develop unconscious routines to cope with the inherent
intricacy in most decision making. These thinking patterns, known as heuristics, can help us in many
situations. We are nimble at judging distance, time, weight, and volume. For example, in judging
distance our minds rely on a heuristic that associate clearness with closeness. The better the visibility
of an object, the closer it must be.

But some heuristics can muddle our thinking with biases and irrational preferences. The danger with
these traps is that they are invisible to most of us.

Justification in Decision Making

Decision making often includes the need to assign a reason to justify the decision. This factor is
illustrated by an experiment by A. Tversky and E. Shafir in 1992. For this experiment, a very
attractive vacation package was offered to a group of students who had just passed an exam. It was
also offered to another group of students who had just failed the exam and had the chance to rewrite it
over their vacation. All students had the option to buy the ticket straight away, to stay at home, or to
pay and keep the option open until they would get their results. Even though the actual exam result
did not influence the decision, it was required in order to provide a rationale.

Putting the Plan to Work

After analyzing the options, the next step is the implementation of a solution.

LEARNING OBJECTIVES

Outline the key steps in the decision making process

KEY TAKEAWAYS

Key Points

 Implementation is a difficult and important step, as decisions made need to be carried out.
 It is important that all the people involved in implementation know about the implications.
 The decisive actions are taken, and additional actions are taken to prevent any adverse
consequences from becoming problems and starting both systems (problem analysis and
decision making) all over again.

Key Terms

 contingency planning: the process of forming an alternative set of actions in case the original
set of intended actions fails
 planning: The act of formulating a course of action, or of drawing up plans.

Decision Making

Steps in the decision making process include:

 Objectives must first be established.


 Objectives must be classified and placed in order of importance.

Page 250 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

 Alternative actions must be developed.


 The alternatives must be evaluated against all the objectives.

 The alternative that is able to achieve all the objectives is the tentative decision.
 The tentative decision is evaluated for more possible consequences.

The decisive actions are taken, and additional actions are taken to prevent any adverse consequences
from becoming problems and starting both systems (problem analysis and decision making) all over
again. There are steps that are generally followed that result in a decision model that can be used to
determine an optimal production plan. In a situation featuring conflict, role-playing is helpful for
predicting decisions to be made by the parties involved.

SYSTEM: The SYSTEM pyramid explains the key leadership attributes for strategic thinking.

Decision Planning

Making a decision without planning is fairly common, but does not often end well. Planning allows
for decisions to be made comfortably and in an intelligent way. Planning also simplifies the decision-
making process. Any decision will get four benefits out of planning:

1. Planning establishes independent goals. It is a conscious and directed series of choices.


2. Planning provides a standard of measurement. It is a measurement of whether you are going
toward or further away from your goal.
3. Planning converts values to action. You think twice about the plan and decide what will help
advance your plan best.
4. Planning allows for limited resources to be committed in an orderly way. Always govern the
use of what is limited to you (e.g., money, time, and so on).

Page 251 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Closing the Feedback Loop

Feedback is the process where past information influences the a similar phenomenon in the present or
future.

LEARNING OBJECTIVES

Explain the role of the feedback loop in decision making and the different types of feedback
associated with it

KEY TAKEAWAYS

Key Points

 It is important to note that information by itself is not feedback unless it is translated into
action.
 Feedback is also a synonym for feedback signals, feedback mechanisms, and feedback loops.
 The making and implementation of a decision is not the end of the decision-making process.
Regular monitoring, and measuring the results of implementation against expected standards
from an early stage will help close the feedback loop by altering decisions, if necessary.

Key Terms

 Feedback mechanism: the action or means used to subsequently modify the gap in a feedback
loop
 Feedback signal: the measurement of the actual level of the parameter of interest in a feedback
loop
 Feedback loop: Feedback is a process in which information about the past or the present
influences the same phenomenon in the present or future. As part of a chain of cause-and-effect
that forms a circuit or loop, the event is said to “feed back” into itself. The feedback loop is the
complete causal path that leads from the initial detection of the gap to the subsequent
modification of the gap.

Feedback is a process in which information about the past or the present influences the same
phenomenon in the present or future. As part of a chain of cause-and-effect that forms a circuit or
loop, the event is said to “feed back” into itself.

Ramaprasad (1983) defines feedback generally as “information about the gap between the actual level
and the reference level of a system parameter which is used to alter the gap in some way,”
emphasising that the information by itself is not feedback unless translated into action. “…’feedback’
exists between two parts when each affects the other…”

Feedback is also a synonym for:

 Feedback signal: The measurement of the actual level of the parameter of interest.
 Feedback mechanism: The action or means used to subsequently modify the gap.
 Feedback loop: The complete causal path that leads from the initial detection of the gap to the
subsequent modification of the gap.

The Feedback Loop in Decision Making

Page 252 of 596


A Subsidiary of FPA Policy and Procedures Manual - 1

Just making a decision, and implementing it is not the end of the decision-making process. It is crucial
to monitor your decision regularly once it is implemented. At this stage, you have to keep a close eye
on the progress made by implementing the solution. You may need to measure the results of
implementation against your expected standards. Monitoring of solutions early on will help you close
the feedback loop by altering your decisions, if you notice a deviation of results from your
expectations.

In the end, you will be able to see what you did right and wrong when coming up and putting the
decision to use and you may choose to revisit the past decision or take a different tact when faced with
similar problems in the future.

In the management plan of the business, there are three levels of management, these are the
top-level management, mid-level management, and the low-level management.

Each quality management has its own jobs and responsibilities and each level reports to the
levels above them. Except for the top-level management because they are on the top of the
organization’s hierarchical structure.

The top-level management is on the top and they are the ones who manage the whole
organization. The mid-level management reports to the top-level management and they are the
one manages the low-level management. The low-level management is the management that
works for both top-level management and the mid-level management.

Defining an Organization

The Role of Management in an Organization

Management is tasked with generating an organizational system and integrating operations for high
efficiency.

LEARNING OBJECTIVES

Categorize the three primary managerial levels in an organization

KEY TAKEAWAYS

Key Points