Essential Unit Vocabulary
Agent – Any manager or executive within a firm with the control and authority to make business decisions for the good of the company as if he or she were the owner. Agents prefer higher levels of corporate diversification that maximize firm size and their compensation while reducing employment risk.
Agency Cost – Those costs incurred by the Principals of a firm related to maintaining an agency relationship with its managers. Typically comprised of incentives, monitoring and enforcement costs, these expenses are incurred to prevent conflicts between shareholders and managers by aligning the interests of both parties and increase shareholder value.
Agency Relationship – A fiduciary relationship consisting of a risk bearing owner (principal) and a decision making manger (agent) wherein the agent (person or business) is appointed by the principal (person or business) to make sound business decisions for the company.
Balanced Scorecard – A planning and management system that is used to carry out a company’s strategy and vision. It was created as a way to measure financial metrics against non-financial measurements in order to get a more balanced view of an organization’s performance and it is an excellent complement to a SWOT analysis when looking at an organization from the inside. The four key areas of a balanced scorecard include: finance, customers, internal processes, and knowledge & growth. This YouTube video is a good explanation of the balanced scorecard.
Board of Directors – A group of individuals elected as representatives of its owners (stockholders) to establish corporate management oversight related to decision making in major company issues such as strategy, hiring and firing of executives, dividend policies, and executive compensation. The Board of Directors makes sure the business is being run in a way that benefits the shareholders and looks out for the long term financial well being of the company.
Centralization – Describes the concentration or restriction of decision making power to the upper management of an organization. The opposite of centralized is decentralized; together these terms describe a continuum of decision making authority within a firm’s organization structure.
Culture – The shared value of beliefs, customs, practices and purpose of a company’s employees in a business setting. Culture of a company could be described by the interactions of employees with each other and with their customers.
Executive Compensation – Refers to the financial compensation package awarded to a firm’s executives by the Board of Directors within the restraints of Federal Law. Executive compensation is explicitly designed to create an incentive for the executive team to perform in the best interests of the owners and to increase stockholder profits. Typical packages include: salary, annual bonuses, future incentives or stock options, benefits and severance agreements (golden parachutes) with the majority of the compensation coming in the form of company stock contingent on the company achieving specific strategic or financial goals.
Formalization – The extent to which work roles are structured in an organization, and the activities of the employees are governed by rules and procedures. When designing an organizational structure, formalization is considered against its opposite, informalization.
Market for Corporate Control – When a company is undervalued due to the underwhelming performance of its governance or board of directors, which creates a competition for its control rights. The lower the stock price, the more attractive the company could be if it were under better management. So, investors will buy the controlling interest in the targeted company’s equity and effectively purchase the company from the original owners without their permission, and replace the board of directors and top management. The ultimate plan being to revitalize the company and allow it to reach its full revenue potential. This possibility of hostile takeover or leveraged buyout can force current management and board of directors to be held accountable for their choices and enforce greater corporate governance rules.
Mission Statement – A short statement outlining a company’s core values and business philosophy; used to communicate the purpose of the company.
Objective Setting – The process of identifying a goal or set of goals that will help the organization achieve competitive advantage and earn above average returns. Objective setting happens at all levels of an organization from the overall strategic plan to individual functions and their employees. In general, objectives should be “SMART”; this includes Specific, Measurable, Achievable, Related and Time-bound.
Organization Structure – The way an organization distributes its power and who makes decisions (Centralized/Decentralized), the type and number of jobs (Specialized/Generalized) and degree of rules to govern work practices (Formalized/Informal). Adam Chandler discovered a predictable pattern of evolution of organizations from simple (where the staff act as an extension of the owner) to functional (where a limited corporate staff controls unique operations of the firm) to multidivisional (where autonomous divisions act as profit centers).
Risk Profile – A risk profile is a measure across all points of the company to determine what and how risks may affect the company. It helps to locate and thus address the area of operations that is associated with the largest risk.
Specialization – The practice within the design of an organization of limiting the scope of duties each job performs in order to gain greater degrees of expertise, productivity or efficiency within the entire system of businesses or areas. This practice contrasts with that of expanding the scope of job duties, called generalization, where employees are expected to perform a broad range of duties.
Three P’s (profit, people and planet) – Also called “the triple bottom line” and consisting of three separate areas, a company should have (profit, people, planet). With focusing on all three of these aspects, it allows the company to “measure the financial, social and environmental performance of the company over a period of time.” The first P stands for Profit, which focuses on the profit and loss accounts. The main aspect of the “people account” is to ensure the firm measures its social responsibility the people in the firm, the people in the community in which the firm operates and the people impacted by its products or service. Last is the “planet account” which measures a firm’s environmental responsibility to the earth and the condition in which the earth is left for following generations.
Vision – The concrete companion to a firm’s mission statement, the vision statement defines where the firm is headed and is used as a compass to guide the business towards its goals. It is future focused and is typically so lofty as to be unachievable. Nevertheless, it is graphic, directional, focused, flexible, feasible, desirable and easy to communicate.