Session 02

The institutional and governance structure

B. Cannatelli & M. Pedrini

Agenda

 Institutional and governance structures

 The benefits of corporations

1
Let’s talk about…

…POWER

What is it?

2
3
Power

Rights Duties Power

4
Within a company…
Rights and duties of what?!

Rights Duties
 To make decisions  To assume responsibility
 To benefit from residual income  To bear possible negative results
(profit)

So, who holds power in a company? And how?

5
Who holds power within a company?

Core stakeholders!

Main rights/duties:
a) Set down objectives, strategies and policies
b) Select the people who will contribute to the economic activity of the organization
c) Monitor the economic viability of the organization

6
How can we identify core stakeholders?

People…
 … whose well-being depends largely on the existence of the organization
 … who invested in the organization (and will suffer if the companies does bad)
 … willing to take a share of the risks
 … who think that his/her expectations are protected by directly governing the
organization
 … whose contributions are most critical

For firms: Usually, shareholders and employees

7
What are stakeholders expectations?

Employees Shareholders

Suppliers FIRM State

Local
Customers
community

Institutional Structure:
“The configuration of the stakeholders of the organization, the contributions that they provide, and the
rewards and benefits that they receive, in addition to the core stakeholders, the institutional goals, and the
governance structures that determine the correlation between stakeholders, contributions and rewards.
8
The institutional structure: elements

The institutional structure of a firm can be described as:

 a set of stakeholders,
 the contributions they bring,
 the rewards they receive, and
 the core stakeholders,
 their fundamental/institutional goals, and
 the governance structures and mechanisms that allocate wealth and power
among them

9
The integration of contributions

The smooth integration of core stakeholders’ contributions and rewards is

complicated by:

 Different views and expectations

 Different interests
 Competition for limited resources
 Residual income to distribute
 Incomplete information
 Opportunistic behavior (free-riding)
 Joint results – hard to measure contributions

10
Effective integration of contributions

 Effective integration depends on structures and mechanisms that assign rights

do decide (power) and the rights to receive the residual income (wealth).

 Organisations survive and prosper to the extent that they successfully manage to
address these fundamental issues.

11
How do key stakeholders hold power?

 By means of a Governance Structure,

which is part of a broader structure called Institutional Structure.

12
How do Institutional and Governance
structures relate each other?

Stakeholders

Core stakeholders

Institutional goals

Governance structure

Contributions Rewards and benefits

13
Governance structure

Shareholders’ assembly Employees’ assembly

Representative bodies of shareholders

Other and employees
stakeholders
and other
external organs
for direction Decision making body for Board of auditors
and control economic governance
(Board of directors)

Structure of administrative and executive bodies

14
Example 1: Individual company

 3 employees
 small laboratory
 annual revenues around 500.000 €
 Entrepreneur holds 100% of the shares

Entrepreneur
Possible governance structure

Staff

15
Example 2: Small Limited liability company

 15 employees
 small production facility
 annual revenues around 1.200.000 €
 10 founders hold 5%; 1 founder holds 50% of the shares

Founders

Possible governance structure

Board of directors

Structure of admin
and executives 16
Example 3: Public listed company

 > 2.000 employees Shareholders breakdown

Shareholder %
 multiple production facilities shares

 annual revenues > 500.000.000 € Founder 5%

Invest fund #1 8%
 Public listed on Borsa Italiana Invest fund #2 5%
Private company #1 3%
Possible governance structure
Private company #2 3,5%
Shareholders’ assembly Others 75,5%

Decision making body for

Board of
Labor Union economic governance
auditors
(Board of directors)

Structure of administrative and executive bodies

17
AN EXAMPLE… CAMPARI
Shareholders

18
AN EXAMPLE… CAMPARI
Board of directors

19
AN EXAMPLE… CAMPARI
Board of auditors

20
AN EXAMPLE… CAMPARI
Chief Executive Officer (CEO)

21
AN EXAMPLE… CAMPARI
Structure of administrative and executive bodies

22
Why is there a need for delegating power?

 The more the turnover and the activities of the company …

 … the more the stakes around the organization and complexity …

 … the more the need for a reliable governance system!

This requires delegation!

23
To sum up

 Institutional structure
defines who is part of the organization, what are they expected to do and to
receive back, as well as the goals of the institution.

 Governance structure
defines who makes decisions within the organization and how.

24
Agenda

 Institutional and governance structures

 The benefits of corporations

25
Governance structures in firms:
benefits of corporations
 Limited liability of shareholders
– Low risk

 Easy transferability of shares

– Low costs of exit (flexibility)

 Legal personality
– Flexibility and independence

 Centralized management (separation of ownership and management)

– Efficiency

26
Why do corporations dominate the business landscape?

 Facilitate pooling of financial resources

 Facilitate increase in the size of operations (economies of scale and scope)

 Expand the sphere of activity of entrepreneurs across space and time

27
Why do corporations dominate the business landscape?
(2)

Stocks give their holders several property rights:

 The right to participate in decisions (via shareholders’ assembly)

 The right to certain residual income
 The right to claim a share of the capital
 The right to sell their shares

28
Why do corporations dominate the business landscape?
(3)
The conditions of existence of corporations:

 Economic viability
production of wealth (i.e. production of goods and services
that people are willing to purchase at a price that covers the costs)

 Legitimacy
pursuit of goals and reliance on practices that society considers desirable and
appropriate:
– No negative externalities (pollution, social disruption)
– Respect for laws and regulations
– Conformity to societal values and expectations
– No abuse of market power
29
Related questions for the group work

 Who are the main shareholders of the company?

 How is structured the corporate governance system? Who are the members of
board of directors?

 Does the company have any committee?

 Does the company have a code of ethics?

30