1.

Composition of business environment

a. State of economy- an economy made up of a constant stock of physical wealth (capital) and a
constant population size, or one where these grow at constant rates. In effect, such
an economy does not grow in the course of time.
b. Resources availability- the access to the right resources for a given project, at a given time with
the necessary skill sets (in case of people) or the necessary technology (in case of non-human
resources)’
c. External governance group (media, government, creditor, suppliers)
- External control mechanisms are controlled by those outside an organization and serve the
objectives of entities such as regulators, governments, trade unions and financial institutions.
These objectives include adequate debt management and legal compliance. External mechanisms
are often imposed on organizations by external stakeholders in the forms of union contracts or
regulatory guidelines. External organizations, such as industry associations, may suggest
guidelines for best practices, and businesses can choose to follow these guidelines or ignore them.
Typically, companies report the status and compliance of external corporate governance
mechanisms to external stakeholders.
d. Internal governance (shareholders, BOD, managerial hierarchy)
- The result of showed that internal corporate governance mechanism represented by Ownership
Structure, Board of Directors, Management Remuneration, InternalControl & Audit and
Transparency & Disclosure have a great effect on corporateperformance

2. Operational structure of the business

a. The capital budgeting decisions
- Capital budgeting is important because it creates accountability and measurability. Any business
that seeks to invest its resources in a project, without understanding the risks and returns involved,
would be held as irresponsible by its owners or shareholders.
- Capital budgeting is a company’s formal process used for evaluating potential expenditures or
investments that are significant in amount. It involves the decision to invest the current funds for
addition, disposition, modification or replacement of fixed assets

- FEATURES OF CAPITAL BUDGETING

1) It involves high risk

2) Large profits are estimated
3) Long time period between the initial investments and estimated returns

b. Decisions on the size of the company

- The executive committee is often officially responsible for making acompany's big
decisions while another, unofficial group, led by the CEO, seems to hold the real decision-making
power. Although that informal “kitchen cabinet” lacks a proper name, everyone knows who's in it.
Your effectiveness in managing your business decision making will ultimately determine the
success of your company. While this is a problem for companies of all sizes, we have found that
this is particularly true for companies that are growing rapidly.

c. Decision regarding the production function (labor intensive or machine intensive)

- a production function gives the technological relation between quantities of physical inputs and
quantities of output of goods. The production function is one of the key concepts
of mainstreamneoclassical theories, used to define marginal product and to distinguish allocative
efficiency, a key focus of economics. One important purpose of the production function is to
address allocative efficiency in the use of factor inputs in production and the resulting distribution
of income to those factors, while abstracting away from the technological problems of achieving
technical efficiency, as an engineer or professional manager might understand it.
Capital intensive refers to the production that requires higher capital investment such as financial
resources, sophisticated machinery, more automated machines, the latest equipment, etc. Capital
intensive industries pose higher barriers to entry as they require more investment in equipment and
machinery to produce goods and services.
Labor intensive refers to the production that requires a higher labor input to carry out production
activities in comparison to the amount of capital required. Examples of labor intensive industries
include agriculture, restaurants, hotel industry, mining and other industries that require much
manpower to produce goods and services. Labor intensive industries depend mostly on the workers
and employees of their firms, and require higher investment and time to train and coach workers
to produce goods and services according to specified standards. Labor intensive production also
requires more time to complete one unit of production as production, generally, occurs on a small
scale.
Capital intensive and labor intensive refer to types of production methods used in the
production of goods and services. Whether an industry or firm is capital or labor intensive
depends on the ratio of capital vs. labor required in the production of goods and services.
While capital intensive is more expensive and requires a higher capital investment, labor
intensive production requires more labor input and requires higher investment in training
and education of employees.

d. Decision on the cost and quality audit

- We present a model and provide empirical evidence showing that auditor quality affects the
financing decisions of companies, and that higher audit quality reduces the impact of market
conditions on client financial decisions and capital structure. Consistent with our analytical
predictions, we find that companies audited by Big 6 firms are more likely to issue equity as
opposed to debt than are those audited by small audit firms. We also find that companies audited
by Big 6 auditors are able to make larger equity issues than are those audited by small auditors,
but the difference narrows when market conditions improve. Additional results show that the debt
ratios of companies decrease less in response to favorable market conditions when auditor quality
is high, at least over the medium term.
e. Decision regarding the financial structure of the company
- The choice of financial policy is the most important decisions of the company. The
financial policy refers to the decision regarding firm's capital structure. The capital structure of the
firm consists of the mix of debt and equity instruments, used to finance firm's assets.

3. Financial structure
a. Ownership structure
- Ownership structure concerns the internal organization of a business entity and the rights and
duties of the individuals holding a legal or equitable interest in that business
b. Financial leverage
- which is also known as leverage or trading on equity, refers to the use of debt to acquire additional
assets. The use of financial leverage to control a greater amount of assets (by borrowing money)
will cause the returns on the owner's cash investment to be amplified.
c. Dividend policies
- is the policy a company uses to structure its dividend payout to shareholders. Some researchers
suggest that dividend policy may be irrelevant, in theory, because investors can sell a portion of
their shares or portfolio if they need funds.
d. Stock repurchase policies
- Typically, when a company announces a stock buyback program, the prospect of
repurchases boosts the share price. That rewards even those shareholders who hold onto
their shares rather than selling them back to the company.
e. Executive compensation policies
- The standard wage paid to an executive that typically is the largest share of an
annual compensation package. Bonuses (Short-term incentives) Distributions for annual
milestones or reaching incentivized goals that are typically cash-based.
Executive compensation is a significant thing to consider when evaluating an investment
opportunity. Executives who are improperly compensated may not have the incentive to perform
in the best interest of shareholders, which can be costly for those shareholders.

4. Challenges on decision of executive compensation policies

1. Reluctance to use their discretion. One of the most controversial issues for boards is the decision
of whether to use the power of their discretion to overrule a compensation formula. Boards fear
that this will create an issue with proxy advisory firms and shareholders.

Response: Use situational judgment. “Discretion can be the linchpin that connects the
compensation program to the business and management team, leading to better alignment of pay
and performance,” says the report. But these situations require that directors “show commitment
and courage by standing behind tough, well-reasoned decisions until results are clear.”

2.Being handcuffed by data. The decision to set pay solely through the use of competitive market
data ignores important considerations such as individual performance (especially during unusual
company circumstances) and the variances in actual job duties from company to company even
for nominally the same title.

Response: Target the position, pay the person. “Data should serve as only one factor in making
decisions,” says the report. Other variables and individual circumstances must go into the mix.

3.Skepticism over the need for retention pay. Shareholders and other stakeholders tend to be
skeptical of pay for retention, especially when the economy isn’t doing well.

Response:Retention is worth paying for. “Unwanted turnover in the senior ranks has a cost to the
organization,” the report notes. This includes hard costs such as executive search fees and
replacement costs for “trickle-down turnover” in reporting positions, and soft costs such as the
organizational distraction that happens during a top-level change. Retention of a strong
management team is as legitimate an objective for compensation design as performance.
4.Short-termism. Companies often experience short-term investors clamoring for quarterly
returns, while investors claim the short tenure of executives leads to a focus on maximizing
immediate results. But incentive programs that have a particularly long time horizon (e.g., 10-year
stock options) may not truly incentivize, either.

Response: value creation is a marathon, not a sprint. Boards must tailor their incentive time frames
to make sure they are rewarding against their business plans. While a company in start-up mode
may want to weight executive compensation toward long-term equity to focus executives on a sale
or initial public offering, a company in turnaround mode may want to emphasize the achievement
of shorter-term goals that are necessary to corporate survival.

5.Opposing pressures on the issue of severance. Severance provisions have been greatly reduced
and are more shareholder-friendly than ever, but the expectations of executives are still high, and
market norms are hard to ignore. At the same time, high severance payments routinely generate
negative press and shareholder anger.

Response:Stop paying for failure. “It is naive to believe that severance contracts will disappear
completely,” says the report. However, it outlines possible strategies for reining in potential
payouts under the most extreme circumstances, such as providing an offset for signing bonuses in
the case of short-lived executives