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CHAPTER

1

Understanding Understanding Business

ACCA F1 Accountant Accountant in

Study Notes By: Shaista Aziz

Business

UPDATED FOR

2014 EXAMS

CHAPTER

1

Understanding Business

ACCA F1 Accountant in Business

By: Shaista Aziz

Study Notes

1

CHAPTER TABLE OF CONTENTS


Chapter #

Title of Chapter

Page #

1

Understanding business

05

2

Organizational Structure

15

3

Organizational Culture

21

4

Performance Measurement

27

5

Corporate Governance

31

6

Ethics

41

7

Information Technology and Systems

45

8

Management Theories

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Shaista Aziz, an ACCA affiliate herself teaches Law and business related subjects at ACCA LIVE.

Although this publication has been written keeping the students studying paper F1 of ACCA course, however, the students of other professional qualifications like CA, CIMA and ACCA etc. who want to test their their business basics can also consult these study notes. This book can book can be used in addition to official study texts by ACCA. Author has given every effort that topics discussed discussed in these notes provide sufficient material to help students not only pass the exam but also to to understand the topics. Book is written w ritten in plain English for clear understanding. Even though though that author has taken great care and has reviewed these notes, still if you find any mistakes and mistakes and areas that need correction you can let us know. Also if you have any suggestion in making this this book and other resources even this better then it will be much appreciated. Students are Students are advised to visit http://pakaccountants.com for more resources related to ACCA F8 and other professional professional qualifications. Students also have different facilities at their disposal absolutely free like discussion forums, forums, LIVE! Sessions with tutors, tutors, study material, video lectures, exam tips, subject related related articles, ask tutor and many others.

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So, So, it’s that simple. More you share by sharing it with your friends and everyone you know. Help others to get a help for yourself! © PakAccountants.com 2013 This book is provided FREE of cost online. This book is for students and for students only for their individual use.

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Understanding Business Business Business is any legal activity that is performed by individuals or group of people t o generate profit.

Organization Is simply a group group of people ,intentionally organized to work together having common goals and objectives and which has a boundary separating it from its environment . Business combinations combinations /Organizations any legal activity that is performed by group of people with a view to earn profit. e.g organizations involved in a trade of goods.

Purpose of organizati organizations ons 1. An organization encourage collective effort ,so different peo ple work together to achieve objective more effectively which individual person cannot achieve himself.

2. Synergy development. 3. Time saving. 4. Accumulation of knowledge. 5. High level of skills and expertise.

How organizations differs Organizations differs on the basis of following aspects.

1. Ownership Private sector organizations Public sector organizations

2. Control Government sponsored organizations Non government organizations

3. Activity

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Understanding Business Manufacturing organizations Service organizations

4. Objective For profit organizations Nonprofit organizations

5. Size Sole proprietorship Partnership Corporation

Some other elements are technology ,legal status and sources of finance.

Types of busines businesss organizati o rganizations ons Organizations can be divided into different types, as some types are given below.

For Profit organizations Nonprofit organizations Private sector organizations Public sector organizations Non government organizations

1. For profit organizati organizations ons Every organization having primary objective is to generate profit are called as profit making organizations. These organizations are also called as commercial organizations. organizations. e.g Trade of goods and services These are mostly private organizations

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Understanding Business 2. Non profit organizati organizations ons These are the organizations having primary objective is to facilitate public and social welfare are called nonprofit organizations. e.g. Charities These organizations mostly work under public sector.

3. Private organization organizationss These are the organizations usually owned, controlled and managed by private individuals and mostly work for the purpose purpose of profit. These organizations mostly work at three levels. 1. Sole Trader ship 2. Partnership 3. Company

Sole trader ship In this the whole business is owned by a single person .Although other persons can be employed but the ultimate responsibility and authority depends on one person that is called proprietorship or owner. The owner is stand to loose and gain eve rything from that business. Many sole traders are small businesses that sell services e .g. taxi drivers, plumbers, decorators and electricians. Sole traders cease to exist when owner retires or dies.

Advantages 1. It is simplest form of business. 2. It is easy and cheap to set up.

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Understanding Business 3. Income of the business attributed to one person. Disadvantages 1. Owner may have to work for long hours. 2. Less expertise due to one person. 3. Owner may have unlimited liability, that means owner must have to pay all liabilities.

2. Partnership When two or more persons work together and pool their resources and expertise with a view to earn profit that formed partnership. In this each partner is liable fo r all the debts of firm. An ordinary partnership can have between two and twenty partners. Partnership is usually established by writing out a deed of partnership witnessed by a solicitor on which important details are sets out .e.g how profit and loss shared. Examples of partnership Accountants Accountants and solicitors. Advantages 1. Different partners have unique and different ideas so pool of expertise generate. 2. Work load managed easily. 3. Loss is shared between partners Disadvantages 1. Conflicts can arise between partners related with work and profit sharing. 2. Difficult to establish and then management.

3. Companies A company is owned by large number of people known as members and shareholders. hay appoint directors for direction and management of companies. So company is a legal personality separate from its owners.

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Understanding Business A company is a most popular form of business association. A company is more formal than sole trader and partnership.

Structure a) Shareholders / Owners. They provide finance to start business in return of dividend. They have limited rights over day to day running of business.

b) Directors. They are appointed by shareholders for day to day running of operations more effectively. They are accountable to shareholders also regarding their responsibilities.

Types of companies i)

Private limited company. These are the companies which have small number of shareholders and its shares cannot offer to ge neral public. Mostly the shareholding is limited to family members, relatives and friends. E.g. Law and small accountancy firms.

ii)

Public limited company. These are the companies having greater number of shareholders and its shares are offered to general public also. These companies can raise funds easily through general public. e.g. city bank But the liability of members in both companies is limited to t heir investments.

Advantages of limited companies 1. More money can be raised. 2. Reduced risk due to limited liability. 3. Separate legal entity from its owners. 4. No limitation on the size of companies. Disadvantages 1. Ownership is divided between large number of people so pract ically less power of each member.

2. Compliance cost of companies is greater.

4 Public sector organization organizationss

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Understanding Business These are the organizations owned and controlled by government and local government. Their primary objective is to provide facilities to whole society so they do not operate for profit but they can earn profit also from some activities but the generated profit also used on society .e.g. Government schools, universities, hospitals, post office and electricity.

Advantages 1. Every person has access to the services provided by public public sector organizations e.g. Health services. 2. Cost is lower than private organizations. 3. These sectors are more efficient than private sectors.

Disadvantages 1. They have limited resources and public demand is greater than government resources. 2. There can be conflict between ec onomy of operation and adequacy of services.

5 Non government organizations These are the organizations that are not owned and controlled by government and these are privately owned but do no operate to e arn profit like private organizations. e.g. Amnesty international international ,Green peace and Red cross. cross.

Advantages 1. These organizations are more efficient than public sector organizations. 2. These organizations promote social, political and environmental change. 3. These organizations possess efficient level of Organization structure.

Disadvantages 1. More complex and difficult to manage as they provide diverse range of activities. 2. Difficult to raise funds and donations.

STAKEHOLDERS

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Understanding Business A person, group, organization or system that affects or can be affected by organization’s

decisions and actions. E.g Investors, Employees, Customers, Suppliers, Managers, Government and pressure groups. They are directly or indirectly involved with the o rganization.

Types of stakeholders There are three broad types of stakeholders. 1. Internal stakeholders 2. External stakeholders 3. Connected stakeholders

Internal stakeholders These are the stakeholders that are within the organization and are directly involved with the operations of organizations. Internal stakeholders are strongly influenced by the organization. E.g. Directors, workers and managers appointed by shareholders. They Directors. They may be executive or non executive directors, appointed have interest to secure their the ir position and take decisions that are within the best intere st of directors.

mem bers that are involved in managing the organization. They Managers. The managers are key members are concerned with economical condition of the organization, because of their interest of jobs, promotions and other benefits. Workers. These are lower level employees em ployees and supporting staff .They also has an interest of jobs, retirement benefits and other allowances. So they are interested in the stability and profitability of their employees.

External stakeholders These are the stakeholders that have no direct link and also not involved in running operations but at some point they are affected affec ted by the actions of organizations and can in turn affect the organization. e.g. government ,trade union ,professional bodies and pressure groups.

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Understanding Business Connected stakeholders These are the stakeholders that are a re not directly involved in operations but they have wide contractual relationships with the or ganization. e.g. shareholders ,customers ,suppliers and bankers.

Stakeholder conflicts different stakeholders may have different objectives and priorities so conflicts can arise between them .But the major conflict that is vividly characterized is between managers and shareholders .Mostly manager manager ‘S decisions focus on short term benefits that give higher returns

instantly but shareholders want to see organization in long r un so focus on decisions more carefully to get long run benefits. In the same way customers want high quality goods with low prices while managers focus on reducing their cost and increasing the prices charged to customers.

Measuring stakeholder satisfaction satisfaction through mapping power and interest In order to resolve t he conflicts between stakeholders and to get them satisfied, Medlow suggested to measure their power and interest .These factors will determine the relationship between stakeholders and organization. Organization may try to satisfy all stakeholders according to their nature of relationships.

Factors I) POWER II) INTEREST A=Low interest, low power minimum effort B=high interest, low power keep informed C=low interest, high power keep satisfied D=high interest, high power key players

Examples

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Understanding Business A)Small customers ,small shareholders, lower level workers. B) Employees, environmental groups ,local community and average investors. C) Institutional investors, central government and media. D) local planning authority and major customer.

a) Key players. According to Medlow’s matrix key players fall under section D .

Organization must have to adopt their strategy that is acceptable to them. organization depends on them for profits and success. E.g. major customers.

b) Keep informed These are the stakeholders fall under section B. They have low power that may not influence the strategy of organization but their views are important so they should be keep informed . e.g. employees and community representatives

c) keep satisfied These are the stakeholders fall under section C . They must b treated carefully because they have high power so they should be keep satisfied not informed to avoid them to move into sect ion A. e.g. Central government and media.

d)minimum effort These are the stakeholders fall under section D . They have low interest and low power also it needs minimum effort to deal with them. e.g. Small customers and workers.

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Organizational Organization al structures An organization can be structured in many different ways depending on their objectives. Organizational structure allows the expressed allocation of responsibilities for different functions and processes to different entities.

1. General structures i)

Entrepreneurial structure

ii)

Functional structure

iii)

Divisional structure

iv)

Geographical structure

v)

Matrix structure

1. Entrepreneurial structure This type of structure is suitable for small organizations because in this, there is one owner and he/she is the per son who is responsible for all decisions. Owner is also called as entrepreneur, who c an employ other persons to share workload.

Advantages 1. One owner, so there will be no conflicts. 2. Good control over decision making. 3. Simple structure 4. Less risk

Disadvantages 1. No diversification 2. Autocracy 3. Only suitable for small companies companies 4. Dependent on one person

Functional structure This type of structure is suitable for the organizations having small number of products and same functions for all products dealt with coordination within one department. Example. Production department manufactures product A, B and C.

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Organizational Structure Advantages 1. Coordination 2. Economies of scale because no repetition of functions for different products.

Disadvantages 1. More complex as compared to simple structures. 2. Slow decision making 3. Conflicts can arise 4. Less diversification.

Divisional structure In this type of structure, separate divisions work for different products at different locations. These divisions are independent to their all functions. It is more specific to products than location.

Advantages 1. Divisions are independent and they have authority to their decisions so top management free to focus on strategic matters. 2. More diversification. 3. Fast growth. 4. Healthy competition.

Disadvantages 1. Lack of goal congruence. 2. Isolation of expertise. 3. Loss of control of strategic management. 4. Duplication of functions so more cost. 5. Empire building, so complex structure. 6. More conflicts between managers of different divisions.

Geographical structures Same as like divisional structure but it is more specific to location than products.

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Organizational Structure Advantages 1. It enables growth over a wide geographic area. 2. Clear authority and then responsibility to each area.

Disadvantages Same as above for divisional structures.

Matrix structure This type of structure groups employees by both functional and product structure. This structure can combine the best of both separate structures. In this structure mostly each employee has dual authority and responsibility also. Example A company that produces two products A and B. By matrix structure the company would organize the functions as follows. Sales department, production department and accounting department for product A and sales department, production department and accounting department for product B. This type of structure is most difficult and complex.

Advantages 1. Temporary structure. 2. Sharing of knowledge between experts. 3. Improved communication and coordination. 4. Enhance team work. 5. Solve complex issues.

Disadvantages 1. Dual authority and responsibility so conflicts can arise between them. 2. Slow decision making. 3. More complex and difficult. 4. High cost.

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Controls structures Another method of differentiating structures is through controls and decision making at different levels. It can be divided into two types. i)

Centralized structures.

ii)

Decentralized structures.

Centralization The structures in which authority for decision making and controls is at one point or one place, called centralized structures. Centralization offers greater control and coordination.

Advantages 1. Fast decision making. 2. High expertise. 3. Standardization. 4. Economical.

Disadvantages 1. Low quality due to work load. 2. Demonization at lower level due to central system.

Decentralization The structure in which authority for decision making and controls passed or delegated to different managers at lower level, called decentralized structures.

Advantages 1. Responsibility and accountability.

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Organizational Structure 2. High quality at different levels. 3. More focus on decisions at each level. 4. Motivation due to delegation of authority.

Disadvantages

1. More expensive than centralization. 2. Slow decision making. 3. No standardization.

Formality structures Organizations can be divided into different types on the basis of formation of structures. Formal structures. Informal structures

Formal organizati organization on Every organization has social re lationships, communication systems, control systems and behavioural norms. “the organization which has appropriate systems of social relationships ,communication systems

,control systems and it is structured in we ll organized manner ,called formal structure. Example. Company and partnership.

Informal organizat organization ion The organization that is loosely structured and is not specifically designed by owner but by the group of friends, c alled informal organizations.

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Culture Culture is the way of life of a particular society or group of people, including patterns of thought, beliefs, behavior, customs, traditions, rituals, dress, and language, as well as art, music, and literature. We can also say that culture is shared values and beliefs in a given group.

Components of culture 1. Set of norms of behavior 2. Shared values and beliefs 3. Symbols and symbolic actions

Factors affecting on the culture of the organizations The basic factor which can affect the organization culture is the "Change". So any change in following factors may give influences on the culture. 1. Size 2. Technology 3. Management 4. Ownership 5. Employees 6. Strategies 7. Age (how old is business) 8. Geographical location

Elements of culture

1.

Language.

2.

Norms.

3.

Values.

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Organizational Culture 4.

Beliefs and ideologies.

5.

Statuses and Roles.

6.

Social Collectives.

7.

Cultural Integration.

Culture at different levels There are three writers Schein, Handy and Hofstede , they work for culture and describe culture at different levels.

1. Schein According to schein organizational leader develops organizational culture. So there is strong re lationship between leadership and culture. Levels 1. Artefacts 2. Espoused values 3. Basic assumptions and values

Artefacts Artifacts are the physical things that are found that have particular symbolism for a culture. These are the influences on culture that can be seen.

Examples Dress code

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Monogram Building structure Office layout And the ways in which people behave.

Espoused values These are the strategies, goals and objectives of the organizations.

Examples Mission statement Slogans

Basic assumptions and values These are the taken-for granted beliefs. It is difficult to identify as they are unseen. Examples Foundational ideas (unspoken rules)

2. Handy Handy gives four cultural stereotypes. i)

Power culture

ii)

Role culture

iii)

Task culture

iv)

Person culture

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Power culture Power culture is shaped by one individual “The boss”

All the decisions are made by one person, so we can say that there is an autocratic style in this culture. This culture is often found in small, family businesses, particularly where the name of the business is the same as the name of the boss.

Role culture This is characterised by a traditional organisational structure in which jobs are arranged by function and seniority, and each employee has a distinct ro le and job specification. This would be seen in a bureaucratic or ganisation. It is suitable for stable businesses because there is less change. People work according to their r oles and functions assigned.

Task culture In task culture the emphasis is on ge tting the job done. People work as a team to complete their tasks so nothing is allowed to get in the way of task accomplishment. Flexibility is encouraged and it is more important to serve customers and clients well than to defend one’s role. This culture is much more responsive to environmental and competitive

developments.

Person culture In this culture the individual is the central point and culture exists to satisfy the requirements o f the particular individual involved in the organization.

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The organisation is seen as serving the individuals within it. Barristers’ chambers, chambers, architects’ partnerships and small consultancy firms often have this person orientation.

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Performance measurement Performance measurement is the process of collecting, analyzing and/or reporting information regarding the performance of an individual, group, organization, system or component.

It can be measured through different ways which gives output results obtained from processes. All good organizations improving their performance measurement s ystems to ensure whether organization is performing well or not Purpose of performance measurement

Performance measurement criteria exist in every organization to get the answer of “Are we

getting required output or results from our input or resources” OR Whether a business is achieving its Objects, Goals, Mission and Vision.

Vision Vision is the future state of organization that where the organization wants to be in future. It gives specific direction to whole or ganization.

Mission Mission is the overall purpose of the organization or business.e.g what is the business for? Purpose can be described in terms of its products and services it offers to its c lients. A mission is a very big long term end result or achievement. It provides basis for planning and final implementation. Elements of mission 1. Purpose 2. Strategy 3. Norms of behavior 4. Values and beliefs Mission is achieved through goals and objectives

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Mission statement Mission statement is the written declaration of the overall purpose or mission of the organization. Elements of mission statement 1. Purpose 2. Strategy 3. Norms of behavior 4. Values and beliefs

Characteristics of mission statement It should be 1. Brief 2. Flexible 3. Easy to understand 4. Written in simple language 5. Open ended 6. Distinctive

Benefits 1. It is helpful for the senior management to develop their strategies. 2. It provides guidance to managers to set their goals and objectives that ultimately achieve corporate vision and mission. 3. It gives clear purpose and nature o f the business to employees, customers and all othe r stakeholders. 4. Mission statement can be used as a screening device for rejecting strategies that are inconsistent with the mission of the organization. 5. Mission statement can be used to establish a cor porate culture.

Drawbacks 1. Mission statement can have a little practical value if it is worded in vague language. 2. It may also have little worth if developing strategies are inconsistent with the mission described. 3. If is changed or amended frequently the n it may have negative impact on the whole business.

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Strategic goals and objectives Goals and objectives are defined for the accomplishment of mission. Usually there are number of goals and objectives for one mission.

Goals 

Goals are qualitative and subjective aims or interpretation of mission.



Goals are broad statements and difficult to measure them.

Example 

Increase profit



Controlling cost

Goals could be of three types. 1. Ideological goals 2. Formal goals 3. System goals

Objectives Objectives are quantitative targets to ac complish goals over a specified period of time. Example 

Increase profit by 5 %



Reduce cost by 10%

Objectives are easily measured in quantitative terms. Objectives may be of two types. 1. Primary objectives (corporate objectives) 2. Secondary objective (strategic objectives)

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Corporate governance Corporate governance is a set of rules, principles and processes to manage the organization by the senior management in an effective w ay. Corporate governance can also be defined as the ‘’the system through which organizations are

directed and controlled by the senior officers. A good system of corporate governance must be present in all types of organizations or ganizations whether commercial or not for profit.

Elements of corporate governance There are number of elements in corporate governance ,some of them are discussed as follows. 

Integrity



Independence



Accountability



Responsibility



Transparency



Reliable systems and procedures

Integrity Integrity means honesty and fair dealing in all matters in other words we can say that ‘’doing the right things”

In relation with corporate governance, senior management should be very honest and clear with employees, customers, suppliers ,business contracts and all other stakeholders.

Accountability Accountabil ity Accountability means answerable towards their responsibilities. In relation with corporate governance, senior management must be willing to be held accountable (answerable) to their actions and functions to which they are assigned.

Responsibility Responsibility Responsibility means ‘’ a duty to perform a task”

Or we can say that taking care of your duties or o bligations.

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In relation with corporate governance, all t he Directors and senior management should be able to accept their responsibilities to shareholders and all other stakeholders. They must perform their actions in the best interest of shareholders and all other stakeholders otherwise they will be held responsible.

Independence Independence means Free State of mind without any external influence Or we can say that any person is said to be independent that is able to take decisions without any influence or bias from others. There must be independent senior management to t ake all decisions unbiased. Directors should take decisions that are in the best interest of company and do not influence from their personal interests and feelings.

Transparency Transparency means fairness. Directors should provide correct and fair information to shareholders and do not attempt to bias opinion. Transparency in all business matters is essential to achieve the ultimate aim of the organization.

Reliable system and procedures. Senior management must use reliable systems and procedures to manage the organization more effectively.

Poor features of corporate governance governance There are following factors that may ar ise and create problems in governing the organizations. 

If the board is managed and dominated by single individual then independence may be biased.



If there is lack of coordination between the executive and non executive directors then poor decisions, oversight due to lack of information.



Lack of internal audit department clearly shows poor control of all functions and processes in the organization.



Lack of segregation of duties between executive and non executive directors that will give rise to poor supervision.

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Corporate Governance 

Lack of independence.



Communication gaps between shareholders and directors.



Emphasis on short decisions of profitability.

Corporate governance theories There are following theories that describe the nature of relationship and their interest between shareholders and Board of Directors.

Stewardship Theory: Good Corporate Governance undertakes the higher management (directors) as the person; sole responsible for looking after the organizations property covering the scope of their employment and deployment maintain the consistency with the overall strategy. Apparently power is the cake of executive managers under this theory. Managers are thought to work in favor of the organizations and neglect their own self interest. Therefore shareholders posses the right to dismiss the steward following the dissatisfaction by his stewardship.

Agency Theory: Theory: Agency theory emphasizes on the relationship of a principal and an agent. Those who owns the company (shareholders) appoints the one to run the company (managers) in their best interest. Unlike stewardship theory, here managers assumed to ac t in their own interest. Aim of agency theory is to create the goal congruence (balance) between the managers selfinterests in line with the organization interests. Managers probably overlook the benefits of shareholder and prioritize their own profits.

Stakeholder Theory: Stakeholder theory depicts the natural view of an organization with the belief that external bodies are also of importance as that of the shareholders. Aim of this theory is to manifest that each body having any kind of interest associated with the organization should be of equal importance to managers instead only working in best of shareholders. In order to prosper the organizational growth, executives must align the needs of customers, employers, suppliers, communities and shareholders in the same direction.

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Board of Directors Board of Directors consist of following members 

Chairman



CEO



Non-executive Directors



Executive Directors



Other Committee members

They are responsible to manage the or ganization and to safeguard the assets of the or ganization on the behalf of shareholders. The board as a whole needs to contain a mix of expertise and show a balance between executive management and independent non executive directors.

Non-Executive Directors Non-executive directors are engaged part time by the organization to take part in dec ision making at board meetings. They are not involved in day to day operations of t he company. They have more expertise, knowledge and skills to support the business.

Roles of non Executive Directors Non executive directors have following roles. 

As part of the Board, they are involved in making strategies in line with company objectives.



They play important role to monitor the act ivities of executive directors.



They monitor controls and performance of the company.



They are involved in setting remuneration for all Directors through remuneration committee.



They are involved in appointment and dismissal of executive directors and other managers through nomination committee.



They supervise internal audit and involved in appointment of external independent auditor through audit committee.



They play important role in risk committee to review arrangements for risk management and controls.

Advantages of non executive directors 

They bring lot of expertise and unique knowledge into the business which executive directors do not pocess.

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They have wide perspective of experience so they are able to manage business affairs more effectively.



Communication gaps between shareholders and auditors are filled by them.



Due to their wide knowledge and e xperience they take right investment decisions into new products and new businesses.

Problems with non executive directors 

They may lack independence if they are providing services to the organizations which are competitors of each another.



They may face problems to impose their views upon the board because they are easily dismissed by the shareholders if they consider their views as irrelevant to the company’s

objectives. 

They have limited time to devote, becau se their commitments are at more than one place.



They are not involved in day to day operations of company so they do not know exactly what is happening in the company.

Executive Directors Executive directors are the full time employees of the organization and involved in day to day operation of the business. They are accountable to chief exec utive director of the company about their work and duties.

Roles of executive directors 

They develop and plan strategies to achieve goals of the company.



They are involved in daily operations of the business.



They have fiduciary duty to act in good faith of the organization.



They are involved in monitoring the work of other managers.



They act as a leading individual of the organization.



They develop organizational plan and culture of the organization.

Chairman and chief executive officer o fficer Chairman is the most senior member of t he organization having highest position and status. Chairman controls and manage all executive and non executive direc tors and CEO of the organization. Some other roles of the chairman are as follows

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Roles and responsibilities of Chairman 

Organized meetings and leads them.



Takes decisions in the favor of organization and shareholder.



Monitor the performance of other board members.



Evaluates performance of whole company.



Develop and monitors organizational strategies and policies.

Chief executive officer (CEO) CEO Is the second most senior member of the organization. Chief executive officer leads executive Directors of the company.

Roles and responsibilities of CEO 

Implement the strategies and polices made by the chairman.



Responsible to the operational work of the organization.



Provide information to all other board members about any special agenda discussed in board meetings.



Monitor the performance of executive directo rs.

The duties and responsibilities of the chairman and CEO should be segregated to make the Board independent and more effective. Committees made by independent non executive directors 

Remuneration committee



Nomination committee



Audit committee



Risk committee

Remuneration committee It consists of independent non executive directors , no executive directors are involved in it. The objective of remuneration committee is to set remuneration of executive directors and chairman of the board also. Remuneration is set according to the performance of directors and the policies made by the organizations. Other benefits, bonuses and additional rewards are also included in their remuneration packages. Pension benefits and plans are also made by the remuneration committee.

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The members of remuneration committee also invite chairman and CEO in setting their remuneration packages and other executive directors.

Nomination committee Nomination committee mostly consists of independent non executive Directors but chief executive officer is also at there to manage the committee. It established for the election and appointment of directors and other senior managers.

Audit committee Audit committee is also consist of independent non executive directors. This committee is basically established for the work of exter nal and internal audit. There are following roles of audit committee. 

Monitor the work of internal auditors.



Established policies and procedures for effective audit.



Provide information to external auditors as they re quire in completing their annual audit.



Review financial statements made by the management.



Audit committee also work for risk management in the organization.

Risk committee In some of the organizations, risk committee is separately formed for identification and management of risks faced by the or ganization. This committee is responsible to manage the risk e ffectively through applying controls and risk minimizing policies.

Reporting requirements under Corporate Governance There are following reporting requirements under the corporate governance. 

Statement that shows assumptions made by the management for going concern status of the organization.



Statement of compliance for all legal r equirements, ethics and corporate social responsibility.



Statement that shows brief memorandum about the wo rk of audit committee, remuneration committee and nomination committee.



Statement that shows organization is effectively applying controls for r isk management.

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Statement that shows composition of board of directors and independence of executive and non executive directors.



Statement that shows operating and financial review made by the Directors.

Corporate Social Responsibility In large organizations and companies in addition to meeting all statutory re quirements, it is most important and beneficial to satisfy and facilitate the whole society in which organizations are working. Organizations thought to be responsible for all their actions and impacts on the society and environment in which organizations are working. Some of the organizations consider following duties under corporate social responsibility 

To provide safe and healthy environment



To provide jobs and earning resources to the society.



Try to avoid and minimize all negative impacts on the society e.g. pollution



To satisfy all the stakeholders including external, connected and, internal stakeholders.

It is important to understand the difference between social responsibility and ethical behavior because they are not same things. Some of the organizations meet social re sponsibility just to obtain good will and reputation in the society that may impact on the profitability of the organizations. By integrating corporate social responsibility with the core business processes, o rganizations can achieve more effectively effectively organization’s organization’s mission. Strategies developed for social responsibility 

Proactive strategy



Reactive strategy



Defense strategy



Accommodation strategy

In proactive strategy organizations attempt to take steps in identifying possible mistakes or faults that may occur before the actual situation then they try to remove the faults in the products before reaching in the hands of c ustomers. Minimum cost is incurred at this stage. In case of reactive strategy organizations take necessary steps to remove mistakes at the request the customers when they identify problems after receiving products. Some extra cost is incurred to rectify the products. This involves minimizing or attempting to avoid additional obligations arising from a specific problem in defense strategy

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The accommodation strategy involves taking responsibility for actions, probably when one of the following happens. 

Encouragement from special interest groups



Strongly presumed that failure to act will result in government intervention

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Ethics

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Ethics

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Ethics

Ethics It derives from the Greek word which means character Ethics is the highest level of behavior which gives set of moral principals about right or wrong behavior. Unlike rules and regulations, ethics are more flex ible and can be changed according to circumstances.

Types of ethics Personal ethics: these are the e thics made by the individuals themselves and derived from their culture, personality, legal and political views and religion. They can be seen and expected expecte d to be seen by ever y individual in the society. Professional ethics: these are ACCA’s code of ethics made by IFAC committee. They are

specifically required by professional accountants working in the organizations. They are given below. 

Integrity



Objectivity



Confidentiality



Professional competence and due care



Professional behavior

Integrity All the members must be honest and st raight forward in their dealings.

Objectivity Members should not allow bias and conflicts of interest and any other influence that may affect professional judgments.

Confidentiality Member should respect the confidentiality of information and should not disclose any information to third party without authority.

Professional competence and due care Members should have continuing duty to maintain and update their professional knowledge and skills according to the circumstances and competitive environment. Professional behavior

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Ethics

Members should act in the way that may not discredit his profession. They must provide services to clients according to their professional standard. Ethical environment in the organizations Not only employees have duty to comply with all ethical requirements but organizations are also meeting these requirements expected by all their stakeholders

Employees 

job security



reasonable salary and correct wage rate



healthy work environment



promotions and job satisfaction

Customers Customers may be entitled to good quality products at reasonable price

Suppliers They may be offered regular orders with time payments.

Society 

control of pollution and other undesirable toxic material



provide job resources and other sources of income



funds to charities and for social care of w hole society



financial assistance to poor people

Other qualities expected from an accountant In addition to professional code of ethics there ar e some other qualities expected from an accountant 

personal qualities



professional qualities

Personal qualities 

Reliability



Courtesy



Responsibility



Respect

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Ethics 

Timeliness

Professional qualities 

Independence



Accountability



Skepticism



Social responsibility

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CHA HAPTER PTER

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7

Information Technology and Systems Data Is raw form of data that is in random form and meaningless until it is organized.

Information When data is processed, organized and structure d into a meaningful way that is called information

Purpose to get information In the organizations, information is necessary at each level to manage operations effectively. Some major purposes are as follows 

Planning



Decision making



Controlling



Monitoring and measuring performance

Importance of information Information is needed at three levels to support decision making. These are as follows 

Strategic level of management



Tactical level of management



Operational level of management

Strategic level of managem management ent At this level of management information is needed from both ext ernal and internal sources to plan out strategies of the organizations. This type of information is needed on ad-hoc basis because long te rm decisions and strategies are not made on routine basis. More qualitative and less quantitative information is required but in a summarized form. Usage of information At this level the information collected from exter nal or internal sources helpful to analyze following perspectives. 

Government policy



Competitive analysis



Potential market growths

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7 

Total cash needs



Capital requirements



Resource management



Overall profitability

Tactical level of manageme management nt At this level of management more detailed information is re quired as compared to strategic level information. Both external and internal information is required but more from internal and more quantitative information is required as compared to qualitative information

Usage of information The information gathered here used in following areas 

Productivity measurements



Budgetary control



Stock turnover



Variance analysis



Labor turnover



Short term decision making

Operational level management The type of information required here, which is useful in day to day operations of the business. The information is more detailed as compared to tactical information and quantitative. Most of the information is required from within the organization. Usage of information 

Labor hours worked



Raw material used per unit



Total hours spent on each job



Stock level



Wage rate per hour



Rejection rate

Qualities of good information The information needed in the organization will be considered as good enough having following characteristics It is represented by the means of mnemonic ACCURATE

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7 

ACCURATE: The information collected should be correct by its words and digits.



COMPLETE:

The information should contain all the contents necessary to meet its purpose. 

COST BENEFICIAL: The information should not cost more than benefit derived from it.



USER TARGETED: The collected information should meet the user requirements or meet the purpose for which it is gather ed.



RELATIVE : The information provided should be relevant to the decision taking or with its purpose otherwise it will have no benefit



AUTHORITATIVE: The information provided should be gathered from reliable source or from authorized person



TIMELY : The information needed should be provided within the specified period in which it is required



EASY TO USE : The information provided should be clear and simple in its words and meaning so that it is easily understandable by the user.

Sources of informatio information n Information can be collected from both e xternal and internal sources; these are given below as follows 

Internal sources



External sources

Internal sources Any source of information that is available within the organization and provides all relevant information known as internal source. There are following sources within the organization 

Customer records



Employees records



Payroll department



Production department



Human resource management department



Sales department



Reference books e.g. dictionary, telephone directo ries, maps and street guides.

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In addition to these formal sources information can also be co llected from informal sources of employees’ gossips, meeting and telephone conversation. Much of the information that is

collected from within the organization is in t he form of quantitative information.

External sources The sources of information that are available outside the organization are known as external sources. Much o the information that is collected from outside the organization is qualitative information. There are following external sources 

Competitive analysis



Political and legal factors



Economic conditions



Government policies



Advertisements in newspapers, T.V and internet.

Information systems in the organizatio organizations ns Information systems aims to support following three 

Operations of the organizations



Management



Decision making

Organizations need a wide range of information systems to c ollect, process, analyze and retain information in the organizations. There are several types of information systems used in the organizations. These systems are useful to provide information to management at different levels in the organization. These systems are given as follows 

Executive information system



Management information system



Decision support system



Expert system



Transaction processing system

Executive information system Executive information system provides information from both internal and external sources to strategic management.

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The information provided here is critical and limited access to only strate gic management. The information provided here mostly includes about strategies, budgets and long term decision making and also includes from external sources about competitors, legislation, government policies and environment.

Management information system Management information system used to provide necessary information to managers at all levels. The information provided mostly relates with production, sales, customers and suppliers. Management information system consists of four types to provide information in more detail 

Data base systems



Direct control systems



Enquiry systems



Support systems

Decision support system Decision support system is an integrated computer based system t hat provides information to tactical and operational management to support operations and functions in the or ganizations. It forms the backbone of organization’s decision processes.

Expert system Expert system is developed by the improvement in t echnology. Expert systems eliminate the limitations about human capabilities and knowledge. The first expert system was created in 1970s. This system provides all type of information through computer programs.

Transaction processing system Transaction processing system mostly relates with recording, processing and holding transactions to support operational functions. Examples Sales ledger, purchase ledgers and payroll systems.

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Leading Leading and and Managing Managing People People

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Leading and Managing People

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Leading and managing people Leadership Leadership is the process of social influence in which one person guides or directs other people to achieve a common goal and that person is called leader.

Characteristics of a leader There are some qualities that must be present in a leading person. 

Having good Knowledge



Courage



Patience



Honesty



Humility



Competent



Skillful



Sharp

Management Management is the continuous process of organizing, controlling and running all operations and functions to meet organizational objectives and aims.

Difference between leader and manager Leader is the person who has natural skills and knowledge to develop things but manager is the person who learns from others and then maintains things in an effective manner. There are some other differences also 

Manager focuses on systems and operations in the organization while leader focuses on people



Manager focuses on controls to get the work done but leader try to win the heart of people



Manager has short range view but leader has long range perspective



Manager takes short term decisions while leader t akes long run decisions



Manager has learned knowledge while leader has natural skills



Managers are risk averse while leaders are risk takers

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Authority, accountability accountability and responsibility responsibility Authority, accountability and responsibility are interrelated but they all have different meaning and concepts. To manage the organizations effectively by management it is necessary to understand following concepts.

Authority Authority is defined as the right or power that may or may not influence others to get things done. We can also say that authority is t he right to do something. Authorized person have right to give or ders and instructions to their subordinated for the accomplishment of work. Without authority organizations cannot achieve their objectives

Delegation of authority Authority can be delegated from one person to other in which one person who has authority transfers his rights to other person t o make him authorized to achieve the task.

Accountability Accountability can be defined as the process of being answerable or reportable to the superiors for the work assigned by them.

Responsibility It can be defined as “o bligation of a person to perform his or her duties assigned by the superiors”

It originates from superior subordinate relationship. Unlike authority responsibility cannot be delegated

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Authority and power Authority and power go hand in hand but authority is somehow different from power. Authority is right of any person to pe rform any task but power is personal ability of any person to perform the task. Here we can also say that authority is legitimate power of any person. So the person who is authorized to perm any task must have power to complete it but it is not essential always that person who has ability to do something have authority also.

Types of power The person having power may influence the decisions of others. There are following types of power in the organizations 

Physical power Power of any person due to its superior force or position



Resource power The person having more resources e.g. money, m aterial, machinery



Coercive power Power that is based on fear of o f punishment



Reward power Person having more authority and resources to give reward to his subordinates



Legitimate power Power that is given to any person by reliable source or under legal framework



Expert power Power of any person due to his personal skills and expertise



Referent power Power based on the personal qualities of a person that are not processed by every person



Negative power Power of any person that may have adverse impact on others

Manager’s role in the organization

To run the organization more effectively managers have number of functions but following are key rol of managers in the organizations or ganizations 

Planning



Resource allocation



Project management

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Managementt theories Managemen On the basis of role and functions there ar e following theories that give rules and ideas to manage the organizations 

Classical management theory



Human relations theory



Neo-humans relations theory

Classical management theory Classical management theory focused on the work of two well known scientists 

Henri Fayol



F W Taylor

Henri Fayol Henri Fayol was the first who worked on management and gave theory in which he described 14 principals and five functions of management. On the basis of functions management can be divided into five broad areas 

Planning and forecasting



Organizing



Commanding



Coordinating



Controlling

1. Planning and forecastin forecasting g Planning is the key role of management t hat how objectives can be achieved and then planning for strategies policies and procedures for the accomplishment of objectives. Planning is required at all levels and for all decisions. Planning is necessary before starting any task.

2. Organizing After planning management get involved in assigning duties by delegating authority and allocating resources. At this level a structure of complete task is mapped and then resources are categorized according to the task. Teams are also developed here to achieve objective by coordination.

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3. Commanding After organizing people, management give and take instructions to perform the task. At this level management have authority and responsibility also.

4. Coordinatin Coordinating g Coordination is the main function of management in which all activities are gr ouped together to get collective output.

5. Controlling Management is also responsible for measuring the performance of all working people t o ensure that objectives are going through achieved.

Principals of managerial conduct There are following principals and rules for managerial conduct 

Division of work Work should be divided and assigned to specific job so people m ay aware about their duties



Authority All the managers must have rights to orders to their subordinates.



Discipline All the employees in the organization must have to obey the orders from seniors and respect their superiors.



Unity of command All the employees must receive orders or ders from one senior to avoid conflicts and dual responsibility



Unity of direction There must be a common goal and direction in the organization and employees should work together in a same direction.



Subordination to the general interest Employees should not prefer their personal interests to o verall organizational interests.



Remuneration All the managers and employees must be paid reasonably



Centralization Fayol focused on centralization in which all the subordinated are e qually participated in decision making.



Scalar chain

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Leading Leading and and Managing Managing People People There must be clear line of hierarchy in the organization in which authority is given to each level. 

Order All the people and resources should be treat ed equally in the organization



Equity All the employees should be treated equally.



Tenure of personnel Adequate time scale for the completion of task must be given and allowed.



Initiative Management should encourage their subordinated to take steps for new activity and functions



Esprit de corps Team work and single harmony should be developed in the organization

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Management Theories People Leading and Managing

CHA HAPTER PTER

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Management Theories

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1 F W Taylor theory Taylor was an engineer and he proposed a t heory on scientific management. He is considered as the father of scientific management. It was one of the first attempts to apply science on to the management and the objective is to increase economic efficiency and labor productivity. As we know the scientific management is the process of managing business, people, economy and industry according to the methods of efficiency and experie nced works derived through science like time and motion studies.

Principles of scientific management There may be following four principle on which the theory based. 1. First of all the old work methods may be reformed and replaced by new efficient working ways. The entire task may be investigated through science and knowledge must be spread within the organization so that all the employees and manager s follow it. 2. After it the new work should be given to employees and then they m ust be trained to for the work and the employees must be given job which is suitable to the mean s they must have skills to do the task. 3. After the selection of suitable worke rs, the techniques and methods may be implemented according to the plan. The whole process should be supervised and controlled so that objective achieved. 4. At last it is noted that the relation of workers and senior se nior managers should be fair and good and they must cooperate with each others.

2 Human relations theory Elton Mayo is the developer of this theory, was professor of industrial research at Harvard business school. In 1920s Elton Mayo with his colleagues starts research on the human behavior at work. According to this theory the managers must focus on the behavior of all the workers w ith each another and with the senior managers. They wer e taught to create and develop group relationships because it will enhance to achieve the level o f production. Mayo group concluded that to work efficiently and to get better results of work, it is necessary to keep satisfy the workers first.

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The management process Peter Drucker also worked in 1940s to work on the business management. He also worked for number of years as a business adviser and creates a specific profile on business management. He argued that business manager is different from any other manager and focused on economic performance. Before explaining management process Drucker defined the management tasks. 

Managing a business



Managing managers



Managing workers and work

Management process Drucker described the work of managers m anagers into five sections. 1. Setting objectives of the business 2. Organizing and defining work to the workers 3. Creating motivation 4. Measuring performance 5. Developing and training employees The managers in the organizations must follow the above steps so that they can better manage the business and its processes. First of all the managers must decide dec ide the objectives and targets in which it is clearly defined that why the organization is working. They must then communicate these targets in the organization to all employees so that they can c an achieve these objectives. After it the work is divided and delegated to the capable employees and also assign jo bs to them. Employees are integrated to perform specific task. Employees are motivated to do the jo bs by giving them incentives and other benefits. They should be satisfied on their jobs so that they can work properly. Management must establish criteria to measure the performance of employees. If it is determined that employees are achieving the objec tives set within the organization is means they are performing well. Besides all above a manger should also bring out the capabilities of employees and must strengthen them. They should also train the existing employees and search for the new ones if they require.

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So it is concluded that a manager should go through all above functions as it is his/her basic duty on job.

3 Work of Mintzberg Henry Mintzberg also studied the work and roles of management, for this purpose Henry started research on a small sample of corporation and dee ply observe that how senior managers spend their time. After it Henry concluded that following three t ypes of roles and functions must be present in a manager. He classified ten roles into three g roups which are given as follows. 

Interpersonal roles



Informational roles



Decisional roles

Interpersonal roles describe the functions of interaction and communication with whole staff and connected third parties. Managers are involved in meetings in which they take small decisions and resolve the issues of employees and work related m atters They also focus on work operations and group behavior which may enhance productivity. They made contracts with contracting parties and r epresent them if delegation came from overseas. They also involved in hiring new employees and training the existing employees. Employees may be motivated to work efficiently through fair relationship and job satisfaction Managers also spend their time with staff and other senior employees at official dinners, meetings and other get together. together . They also arrange some occasional functions and trips to make all the employees fresh and satisfied, it will enhance the company’s reputation. Managers play Informational roles through receiving information from their subordinates and other departments and provide it to all the concerned but authorized parties. Managers also provide confidential information when it is in public interest. Managers also provide necessary information to the staff and outside the or ganization about the company position, performance and about its mission. Sometimes management provides relevant information to interested parties like customers, suppliers and auditors.

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Decisional roles is the most important and major role of management as it is described previously that mangers are involved in taking short decisions during meetings. They are also responsible to take major decisions about the investment, production, and risk manageme nt. They also take decisions in allocation of resources and power to implement the strategies and plans. Managers are responsible to handle and control unexpected events like machinery shut down and deviation from actual results. Managers take decisions regarding negotiation with outside parties or w ithin the organization. So it I concluded that managers are responsible overall to take decisions in management of all operations. Mintzberg mangers roles help to improve the skill of managers and other senior employees.

3.1 Management and supervision Supervision is also one of roles of management at the most lower level so it represents the interface between the senior managers and the non managerial staff. They are known as supervisors and the roles of supervisors are given as follows. Provide information to the managers about the operational core. Monitors the performance and work of lower staff They act as a front line manager and deal with the policies, health and safety issues and day to day work operation. Maintain upward and downward communication system

4 Leadership theories We have defined leadership previously, the process of social influence in which one person guides or directs other people to achieve a common goal. It is also one of the major roles of management. Those are known as leaders and they have following features and skills. 

Entrepreneurship



Interpersonal skills



Decisional skills



Problem resolving skills



Personal organizing skills



Time management skills



Personal development

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Like management theories there are also theories on leadership which are grouped into three sections. 

Trait theories



Style theories



Contingency theories

4.1 Trait theory This theory is developed to describe the qualities and characteristics of a leader. According to the developer of this theory leaders (gr eat people) are differentiated from others (non leaders) by focusing on their personal attributes and qualities. The developer of this theory believes that these qualities are heritable so they are unique to the leading persons. The scholars also believe that leaders are by borne and cannot be developed. Trait theory found following characteristics in a person to become a leader. 

Honesty and Integrity



Fair in all dealings



Power and energy to handle the situation



High power of judgment



Cooperative nature



Ambitious mind



Dedication power



Self confidence



Human relation skills



Foresight



Objectivity



Knowledge

So it is concluded that above characteristics must be present in a leader and he/she also have desire to be a leader and it is remembered that these qualities must be equally effective for both male and female.

4.1.1 Drawbacks of trait theory Although scholars have worked on it and investigate full characteristics of a leader but this theory remains one of the most criticized theory of leadership. The scholars argued that leadership should focus on the actual effectiveness of leader perce ived by followers rather than the leader’s effectiveness. So leader’s behavior is more predictive and important than personal

traits.

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4.2 Style theories of leadership Style theories focus on the behavior of le aders that are used in different ways in different situations. The scholars believe that leaders must be able to lead in all types of situations so it is essential that a leader must have a flexible behavior which can be changed easily to cover t he situation. Two models are given which focus primarily on the behavior. 

Ashridge Model



Blake and Mouton’s managerial Grid

4.2.1 Ashridge Model The researches distinguish following four styles of leadership on the basis of behavior. 

Autocratic style



Persuasive style



Consultant style



Democratic style

Tells (autocratic) In this style a leader must be in a state of strict be havior because a leader issues instructions and orders which must be followed by the management without asking nay question. They have power and authority to take all dec isions without involvement from other management and then they only tell to the followers about their final decisions. This behavior is usually effective where a quick decision needed or where the other team members and not competent and leaders are sure that they cannot participate to give an effective outcome. However this behavior leads to demonization and staff turnover.

Sells (persuasive) This behavior is slightly different from the above one so it develops a new style of leadership. In this a leader could take all of the decisions but they also believe that the subordinates should be motivated by convincing them or describing the benefits and outcomes of the decision. So they are not forced to acc ept decision but to convince them.

Consults In this style a leader may coordinate with their subordinates and involve them before take a final decision. The subordinates put their views and ideas also but the final decision is taken by

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the leader. Knowledge is contributed from t he whole staff so a good decision c an be taken after a long time. It will enhance the motivation level of subordinates. This behavior is usually effective where the whole staff is much more competent.

Joins (democratic) This behavior is different from all of the above in which a leader may give a right to their subordinates to participate and take the decisions. The subordinates give their opinions as they better know the operations of business. It will enhance the motivation level of all the subordinates and increases their commitment.

5 Blake and Mouton’s Managerial Grid This grid helps to understand and analyze the leadership style which is oriented by Robert Blake and Jane Mouton’s in early 1960s. 1960s. In all conditions it is not possible to maintain maintain one leadership

style and it depends on the person (leader) also. Some people are task oriented and wanted to get things done but some are people o riented and wanted to satisfy them in all conditions while others are the combination of both. Both scholars focused on two dimensions of leadership which give rise to four basic leadership styles when they both overlap. The two dimensions are; em ployees and all People oriented: in this behavior the leaders are more concerned for the employees other managerial staff. They prefer to meet the needs and interests of people.

Work/production oriented: in this way the leaders are more concerned to get work done primarily in every condition. When the leaders show low and high co ncern for above dimensions then following four leadership styles developed. 

Improvised leadership



Country club leadership



Middle of the road leadership



Task leadership



Team leadership

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5.1 Improvised leadership This is the most worse and ineffective leadership style in which le ader is so lazy and incompetent both with work and people. He/she show little interest to develop systems and plans to get the work done. I n result the whole staff also become incompetent and does not work efficiently. In addition to this leaders are also unable to create satisfied and motivated work environment for people. So when the staff is not satisfied and their interests and needs never meet by the leaders, they try to escape from their responsibilities. This leadership style is not suitable in any of the organization or condition which gives rise to dissatisfaction and disorganization.

5.2 Country club leadership In this style the leader is always ready to satisfy the needs of work member s and create good relationship with whole staff. Leaders paid more attention in creating and establishing happy and relaxed work environment. This type of work environment is good for workers but not for work because there is less direction, direc tion, supervision and control over the work/production. This environment leads to low work and usually actual outcome is deviated from the plan.

5.3 Task/production leadership In this type of leadership style the leaders pay focus and attention to the work/production primarily and give secondary importance to the employees. They show more concern to achieve their objectives and targets by ignoring employees’ nee ds and interests.

These types of leaders are stricter stricte r and issue orders (autocratic style) to their subordinates and punish them if they failed to do their duties.

5.4 Middle of the road leadership In this type of leadership style, the leaders show average concern to both work and employees. The needs of employees are not fully meet by the leaders so an average outcome of work is resulted.

5.5 Team leadership This type of leadership is seen under the perfect conditions. In this leader pay full attention to both work and people. This is the best and most suitable leadership style because people are satisfied fully at their needs and demands. A better work environment is c reated for work also.

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5.6 Limitations There are some limitations of Blake and Mouton’s Managerial Grid. Although this grid helps to choose best leadership style but it may neglect other leadership style and only focus on the limited one. These leadership styles also neglect the changing situation, circum stances and external constraints.

6 Contingency theory of leadership According to contingency leadership approach a leadership style did not depe nd only the behavior of leader but it depends on so many contingent or variable factors like the atmosphere, task structure and power position of the leader. On the basis of contingency approach a leader c hooses his/her leadership style according to the needs of people and the situation. To understand and built the co ntingency approach two of the leaders given below have worked and developed the new leadership styles.

6.1 Fred Edward Fiedler F E Fiedler is the leading advocate of contingency theory. He carried out research and found that people become leaders due to two reasons; 

Their personal attributes which makes them unique from others



Current situation which give them power and ability to meet the needs of the situation

By the combination of both above he identified two types of leaders. 

Psychologically distant leaders



Psychologically close leaders

Psychologically distant leaders: They maintain distance from their subordinates and focus on the role assignment, planning and controlling them. They are re served in their interpersonal relationships at work and usually they are much busier completing their task.

Psychologically close leaders : they are opposite from the above so they are more concerned to make and create good human relationships at work. They prefer meetings and consultation before achieving any task. In addition to this Fiedler identified three variables on which the leadership style depends.

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The relation of leader with subordinates: There must be a good relationship between them like a reasonable level of trust and confidence so that they can perform their duties efficiently without any stress. If the above situation is highly favorable or unfavorable then the psychologically distant leadership style is suitable.

Task structure: A clear and structured task must be assigned to the subordinates and avoid from the ambiguity and misunderstanding. If the above situation is moderately favorable then a psychologically close leadership style will be preferred.

Power of the leader: Power and authority is essential before performing any task. The more power of leaders make them able to do big tasks.

7 John Adair’s Adair’s Circle Circle Model John Adair gives a three circle m odel of leadership in 1970s. This model is too simple which is its great strength. According to this model john Adair recognized that leadership style depends on the re sponsibilities the leaders have and not on the personal traits. These responsibilities are given as follows which are considered as the elements of leaders. 

Achieving the Goal or task



A competent group of people performing task



Individual member of the group involved in performing task

Goals are set by the leaders and then whole team is responsible to achieve that go al. But the goal is achieved if a correct leadership method is applied. Leaders are responsible to convey the clear and distinguished goals to all the team members. After sharing the goals to all t eam members it is necessary that all the members work together in a form a form of group to achieve the task. Leaders are required to meet the group needs like encouraging and motivating them. While the group is performing well in it’s all but the individual members of the group should not

lose their identity. Their needs must be fulfilled by the leaders to make them more competent and determined.

CHAPTER

8


Adair’s three circle model

achievement of task

individual member

group as a whole

The above diagram shows that the three elements of leadership which are discussed above show a related relationship with each another as in the figure the three elements overlapped. It is concluded from the figure that a task is achieved by the group as a whole and not by the individual members and second to make group efficient each member of the group must be competent. Thirdly a task is needed to motivate the group as a whole and its group member s.

7.1 Functions of leaders In addition to this John Adair identified following eight functions of the leader . 1. Identifying a task 2. Developing contingency plans to achieve tasks 3. Briefing team about the plan 4. Allocation of resources and responsibilities 5. Organizing people 6. Motivating individuals 7. Time management 8. Review plans and make changes 9. Controlling team 10. Evaluation of results 11. Setting a practical example

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