Management - Appunti Primo Parziale

IN SUMMARY

 Business is part of society and engages in ongoing exchanges with its external environment

 According to the stakeholder theory of the firm, the purpose of the modern corporation is to create value for all its stakeholders

 Stakeholders are all those, who affect, or are affected by, the actions of the firm

 Stakeholders often have multiple interests and can exercise their economic, political, and other powers in ways that benefit or challenge the organization

 Most companies have many departments specifically charged with interacting with stakeholders

PATAGONIA CASE

Chouinard started his business because he desired to make better climbing equipment, and thus his first company was born: Chouinard Equipment. Then Chouinard Equipment added an apparel line named Patagonia.

Dirtbag's business philosophy: businesses have the potential to alleviate problems such as the environmental and social ones: a new style of responsible business.

 E.g., Patagonia removed

anti-odor chemicals which were harmful, and only started using anti-odor chemicals in 2004, when they found an environmentally benign one

Patagonia's environmental initiatives fit into a five-prolonged philosophy: 1) lead an examined life; 2) clean up our own act; 3) do our own penance; 4) support civil democracy; 5) influence other companies

Patagonia always endeavored to improve the environmental impact of its processes

Mission: build the best products, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis (Obviously economic performance is aimed).

Business strategy:

• All the business decisions were driven by the final objective, even though many environmental goals were expensive, difficult and time-consuming
• There are 4 main product categories: sportswear, technical outwear, technical knits, and hard goods
• In developing its products, Patagonia focused on three criteria: quality, environmental impact and innovation

High Quality, innovation (constant improvements) and focus on environmental impact. Patagonia's core users are the people who lead a dirtbag lifestyle. They aim to produce simple garments, so that the customer can consume less but consume better. Patagonia chose his business partners not by commercial efficiency but by values: it expects people that do business with them to join One Percent Planet. Premium prices, brand loyalty and high gross-profit margins. Four sales channels, less dealers/retailers than competitors. The stores are a representation of the brand were the community could gather and feel like it's their shop. Low budget marketing but educative and coherent with their ideas. However, the environmental position of the company attracted a lot of press, therefore Patagonia received free publicity. In their catalogs, about 40% of the space was dedicated to essays and environmental advocacy. Its environmental commitment gave the company its competitive advantage.

• Shareholders: Chouinard and his family
• BoD: Yvon, Malinda, their two children and the previous CEO
• Managers: Mr. Sheahan (Yvon's friend) and then Mr. Gellert

• R&D: reducing environmental impact, increasing quality, and implementing innovation (e.g., organic cotton)
• Manufacturing is outsourced but suppliers are chosen based on the values and not the efficiency. In Nevada distribution and service center
• Sales: wholesale, retail, catalog/internet (direct stores are designed to integrate with communities)
• Marketing: only 1% of the revenues, but they always managed to have press and media attention (e.g., ambassadors)
• Human Resources: search and employment of the so called

“dirtbags” because they wanted employees that shared the same values: low employee turnover, paid sabbatical, maternity and paternity, incentives to buy for example hybrid cars – everything was coherent with the mission of the company

Product-life cycle : was it in line with the firm’s strategy?

• The initiative would expand existing practices such as repairing and recycling old garments while also establishing a swap market for used products to incentivize customers to think twice before buying and to limit their consumption to only essential products
• Pros: nice for social media and improves brand reputation
• Cons: less sales and increasing costs to manage
• They were afraid that this new initiative would threaten the balance between committing to sustainability while achieving revenue growth – it was still important for them to be profitable if they wanted to inspire other companies: “it’s okay to be eccentric, as long as you’re rich;

otherwise, you're just crazy"

"At the end it led to more sales, so yes, it was absolutely in line!

Summary: Activities driven by the mission and with high credibility are really well managed even if not every decision follows an economic logic. Governance is really important to preserve the mission of the firm.

QUESTIONS

1. How would you define the mission of Patagonia? In other words, why does Patagonia exist? What does it want to accomplish? What is the business?

They want to be a company with a focus on outdoor activities, by achieving quality and keeping the brand consistent so that customers do not get confused. Patagonia's mission is "Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis." They do this by also achieving economic growth (10% revenue growth – grow slowly in a way that allows them to be loyal to their mission). Chouinard also wants to be rich, wants something

revolutionary that makes society better, but thatalso works. He wants to be a source of inspiration – if it does well financially everybody wants tobe like PatagoniaThe new mission statement is: “we’re in business to save the planet”

2. How does Patagonia apply its mission in its functional activities and in the key aspects of theorganization?e.g., its governance, its products, its strategy (how it aims to beat its competitors), its businessmodel (how it organizes the key activities related to satisfying more needs)

The stakeholders are the community (investing on helping the environment); workers/employees (theyhave a paid sabbatical); competitors, suppliers, customers (climbers and lovers of outdoor activities);media; owners (Chouinard and his family)

https://www.youtube.com/watch?v=O3TwULu-Wjw

CORPORATE GOVERNANCE AND BOARD OF DIRECTORS

Corporate governance can be defined as a process by which a company is controlled and governedthrough systems of internal

governance that determine overall strategic direction and balance sometimesdivergent interests.

• Shareholders: decide about the constitution or termination of the firm, approval or rejection offinancial statements, removal and compensation of board of directors
• Board of directors: represents the shareholders and controls managers.
• Top management: manage everyday activities and operations.

Role of board directors

It is the group of people in charge of pursuing the interest of the company and of shareholders.

1. Establish corporate objectives;
2. Develop strategy and board policies.
3. Select top-level personnel;
4. Protect stakeholder interests;
5. Monitor managers;
6. Report on financial performance and take care of investor relations

Board activities

There are regular board meetings and committees with their own separate meetings. Important committees include:

• Compensation committee: which approves salaries and other benefits of top managers.
• Nominating committee: which recommends

candidates for officers and directors.

• Audit committee: which reviews financial reports and appoints auditors.
• Specialized committees: regarding sustainability, governance, etc...

There are two types of systems:

1. One tier system
   • Common in the US and most countries.
   • There's only one board: the executive board.
   • Executive directors and supervisors are combined in one management body.
2. Two-tier system
   • Common in some EU countries (Germany)
   • There are two boards of directors
   • Supervisory board (made of outsiders and independent chairperson);
     • Executive board (made of CEOs and other managers)
   • The supervisory board appoints the executive boards.

Effective boards are central to well-functioning companies but do not always work, for examples in the Enron scandal, the four director "have washed their hands of any blame in the collapse of the energy giant". Key features of effective boards:

• Select outside directors to fill most positions.
• Hold open elections for candidates for officers and directors.

members of the board.

• Hold elections for all directors regularly.
• Make sure outside directors are independent.
• Split roles between CEO and board chairperson.
• Diversify board membership (i.e., skills, gender, experience, age...)

The AGENCY PROBLEM

An agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests.

In corporate finance, an agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. In fact, there remains a separation between people who own the company and who controls it: sometimes managers have too much freedom and they don't always act in favor of stakeholders.

Modern corporations gave separated ownership and control: many owners or stakeholders do not manage day to day company operations which are left to managers or hired professionals. Sometimes managers (agents) act in their own interest and not in favor of stakeholders.

shareholders: for example, they may want to do things for themselves with corporations' money. Agency relationship

An agency relationship is a contract according to which the principal delegates an agent to fulfill a task which implies a power to take decisions in the name of the principal. So, the primary function of boards is to keep an eye on managers (lawyers are agents of their customers, also doctors for the patients, they decide the best strategy and cure).

Conflict of interests: If both principal and agent are utility-maximizers, the agent will probably act in her interest rather than in the interest of the principal. Therefore, the primary function of boards is to keep an eye on managers through safeguard mechanisms. Safeguard mechanisms: The principal must introduce safeguard mechanisms (contracts, controls, incentives, guarantees...) which are often costly. They give managers financial incentives to