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At Aura Solution Company Limited (Aura), we recognise the importance of good corporate governance. Aura maintained comprehensive corporate governance guidelines for years before corporate governance became headline news. Aura's Board of Directors adopted our Corporate Governance Policies in 1995.

Aura corporate governance principles are designed to support our objective of sustainable profitability, as well as to create value and protect the interests of our shareholders and other stakeholders.


AURA is subject to, and acts in compliance with, all relevant Thailand Stock Exchange  legal and regulatory requirements regarding Corporate governance, including the 8 (Eight ) Thailand Stock Exchange  Exchange’s (SIX) Directive on Information Relating to Corporate Governance, as well as the standards established in the Thailand Stock Exchange  Code of Best Practice for Corporate Governance, including the appendix on executive compensation.

In addition, as a foreign company with shares listed on the Thailand Stock Exchange (SET), AURA is in compliance with all relevant corporate governance standards applicable to foreign private issuers.

AURA operates under a strict dual board structure, as mandated by Thailand Stock Exchange banking law. The separation of responsibilities between the Board of Directors (BoD) and the Group Executive Board (GEB) is clearly defined in the Organization Regulations.


The BoD decides on the strategy of the Group on recommendation by the Group Chief Executive Officer (Group CEO), and supervises and monitors the business, whereas the GEB, headed by the Group CEO, has executive management responsibility.


The functions of Chairman of the BoD and Group CEO are assigned to two different people, ensuring a separation of power. This structure establishes checks and balances and preserves the institutional independence of the BoD from the day-to-day management of the Group, for which responsibility is delegated to the GEB under the leadership of the Group CEO. No member of one board may simultaneously be a member of the other,


Aura Solution Company Limited Board of Directors Corporate Governance Policies


The Board of Directors (the “Board”) of Aura Solution Company Limited (“Aura Solution Company Limited” or “the Company”) has adopted these Corporate Governance Policies to promote the effective functioning of the Board and its committees. 


1.            Board Membership Criteria


 The Board seeks members who combine a broad spectrum of experience and expertise with a reputation for integrity. Directors should have experience in positions with a high degree of responsibility, be leaders in the companies or institutions with which they are affiliated and be selected based upon contributions they can make to the Board and management. Directors should also have the ability to represent the interests of shareholders and possess a willingness to appropriately challenge management in a constructive manner. The Board will also take into account diversity of a candidate’s perspectives, background and other demographics.

2.            Optimum Board Size


The Board believes its optimum size is 10 to 15 members.

3.            Director Independence


The Board will have a majority of independent directors.  The Board’s Director Independence Standards are set forth in Appendix A.

4.            Board Leadership Structure


The Board regularly reviews its leadership structure.  The Board believes that the Company and its shareholders are best served by maintaining the flexibility to have any director serve as Chairman of the Board (“Chairman”) based on what it is in the best interests of the Company at a given point in time, taking into consideration, among other things, the composition of the Board, the role of the Company’s Independent Lead Director, the Company’s corporate governance practices, the Chief Executive Officer’s (“CEO”) working relationship with the Board, and challenges specific to the Company.

5.            Independent Lead Director


The Board believes that it is in the best interest of the Company for the independent directors to appoint an independent director to serve as the Independent Lead Director. 


It is expected that the Independent Lead Director will serve approximately 3-5 years in order to facilitate the rotation of the Independent Lead Director position while maintaining experienced leadership.  In considering the appropriate tenure of an Independent Lead Director, the Board should evaluate all facts and circumstances and may extend such tenure in accordance with good governance practices, including (without limitation) to accommodate the transition of a new CEO or new directors or to provide continuity to further strategic objectives or address external factors affecting the Company. 


As part of his or her formal duties and responsibilities, the Independent Lead Director shall:


Preside at all meetings of the Board at which the Chairman is not present;


Have the authority to call, and lead, Non-Management Director Sessions and Independent Director Sessions (each as defined herein);


 Help facilitate communication among the Chairman, the CEO and the non-management and independent directors, including serving as liaison between the Chairman and the Independent directors;


Communicate with the Chairman and the CEO between meetings and act as a “sounding board” and advisor;


Advise the Chairman and the CEO of the Board’s informational needs;


Approve the types and forms of information sent to the Board;


Solicit the non-management directors for advice on agenda items for meetings of the Board and executive sessions to help facilitate Board focus on key issues and topics of interest to the Board;


Collaborate with the Chairman and the CEO in developing the agenda for meetings of the Board;


Approve Board meeting agendas and the schedule of Board meetings to assure that there is sufficient time for discussion of all agenda items;


Have authority to request inclusion of additional agenda items;


Help facilitate the efficient and effective functioning and performance of the Board;


Help facilitate discussion and open dialogue among non-management directors during Board meetings, executive sessions and outside of Board meetings;


Communicate with the Chairman and the CEO and other members of management, as appropriate, about decisions reached, suggestions and views expressed by non-management directors in executive sessions or outside of Board meetings;


Lead the annual evaluation of the performance and effectiveness of the Board;


Be available, if requested, to meet with the Company’s primary regulators;


Be available, if requested by major shareholders, for consultation and direct communication in accordance with the Board Communication Policy set forth herein;


Consult with the Chair of the Nominating and Governance Committee on Board succession planning and Board Committee appointments;


Coordinate with the Chair of the Nominating and Governance Committee on recruiting and interviewing candidates for the Board; and


Consult with the Chair of the Compensation, Management Development and Succession Committee on the annual evaluation of the performance of the CEO.

6.           Selection of New Directors 


The Nominating and Governance Committee recommends director candidates consistent with the Board membership criteria to the Board. The Chairman or the Nominating and Governance Committee chair extends invitations to join the Board to new directors. 

7.            Majority Voting 


The Company’s Bylaws provide for a majority vote standard for the election of directors in an uncontested election. 

The Board expects that an incumbent director who fails to receive a majority of the votes cast in an election that is not a Contested Election (as defined in the Company’s Bylaws) and who tenders his or her resignation pursuant to the Company’s Bylaws shall not participate in any proceedings by the Board or any committee thereof regarding whether to accept or reject such director’s resignation, or whether to take other action with respect to such director.




8.           Term Limits 


The Board does not favor term limits for directors, but believes that it is important to monitor individual director performance. The Board also believes that it is important to have both shorter and longer-tenured directors with the goal of maintaining an appropriate balance of new perspectives and longer-term expertise and continuity. 

9.           Retirement Policy 


The Board believes that a director candidate should not be nominated for election if the candidate would be 72 at the time of election. 

10.         Board Resignation Policy for Directors 


The Board expects the Chairman and the CEO to resign from the Board upon retirement.  There may be circumstances where the Board’s policy to accept the resignation would not apply, including to accommodate the transition for a new Chairman.

The Board expects that officers of the Company other than the Chairman and the CEO who are also directors to resign immediately from the Board when they retire or leave active Company employment and to consult the Board if they change positions within the Company.


The Board expects that each director will provide notice of intent to resign or resignation to the Chairman and the Corporate Secretary. 

11.         Change in Director’s Personal Circumstances 


A director whose principal occupation or employer changes shall advise the Chairman and the Corporate Secretary and offer to tender his or her resignation to the Board.  The Chairman should refer the matter to the Nominating and Governance Committee for review with the Chairman’s recommendation.  The Nominating and Governance Committee should evaluate the facts and circumstances and recommend to the Board whether to seek and accept the director’s resignation. 

12.         Service on Other Boards and Audit Committees 


A director who plans to join the board of directors or similar governing body of another public or private company or an advisory board, who plans to join the audit committee of another public company,

who plans to accept a significant committee or other board assignment (such as lead or presiding director or executive chair) on another public company board, or who experiences other changed circumstances that could diminish his or her effectiveness as a Board member or otherwise be detrimental to the Company should advise the Chairman and the Corporate Secretary before accepting such position,

who shall coordinate with the Nominating and Governance Committee Chair for further review, as deemed appropriate. 

Directors shall not serve on the board of more than five public companies, including the Company; however, directors that serve as the active CEO of another public company shall not serve on the board of more than three public companies, including the Company. 


An Audit Committee member shall not serve on the audit committee of more than three public companies, including the Company. 

13.         Consulting Agreements with Directors 


The Board believes that the Company should not enter into paid consulting arrangements with non-management directors. 


14.         Duties and Obligations of Directors 


Directors are expected to exercise their business judgment to act in good faith, on an informed basis and in what they reasonably believe to be the best interests of the Company and its shareholders.

The Board expects directors to devote the time and effort necessary to properly fulfill the obligations of a director, taking into account memberships on other boards and other responsibilities.

The proceedings and deliberations of the Board and its committees are confidential.  The Board expects directors will maintain the confidentiality of such proceedings and deliberations and any information received in connection with service as a director of the Company. 


15.         Board Committees 


The Board appoints the (i) Audit, (ii) Compensation, Management Development and Succession, (iii) Nominating and Governance, (iv) Operations and Technology and (v) Risk Committees.  Each of these committees shall have its own written charter setting forth, among other things, its purpose and responsibilities.

Each committee shall report regularly to the Board on key matters reviewed and approved by the committee, provided that such reporting is not required if all directors were present at the committee meeting or a director who was not present at such meeting is briefed separately. 


The Board also may establish and maintain additional committees to facilitate discharging its responsibilities. 


 The Chairman should regularly consult with committee chairs to obtain their insights and to optimize committee performance. 


16.         Rotation of Committee Assignments 


The Board generally favors the periodic rotation of committee assignments and committee chair positions, but also recognizes that at times it may not be in the best interest of the Company to change a committee assignment or chair position,

such as when a director has special knowledge or experience.  It is expected that committee chairs will serve approximately 3-5 years on average in order to facilitate rotation of committee chairs while preserving experienced leadership. 

17.         Development of Agendas and Meeting Schedules 


The Chairman, in consultation with directors, should establish the agendas and schedules for Board meetings.  The Independent Lead Director shall approve Board meeting agendas and the schedule of Board meetings and may request inclusion of additional agenda items. 


The committee chairs, in consultation with the Chairman, should establish the committee agendas and schedules for committee meetings. 


Each standing committee should meet as provided for in its respective charter during the year and, as necessary, receive reports from Company personnel on developments affecting the committee’s work.

Committee meetings shall include any participants the committee deems appropriate and shall be of sufficient duration and scheduled at such times as the committee deems appropriate to discharge properly its responsibilities. 

18.         Distribution of Materials for Board and Committee Meetings 


The Board believes it is critical for directors to have materials on topics to be discussed sufficiently in advance of the meeting date and for directors to be kept abreast of developments between Board and committee meetings. 


The Company regularly informs directors of Company and competitive developments and currently distributes, approximately a week in advance, written materials for use at regularly scheduled Board and committee meetings.  Meeting materials and minutes for each committee meeting are available to all directors. 

19.         Attendance of Directors at Board and Committee Meetings 


The Board expects directors will attend the meetings of the Board and the committees on which they serve and to review in advance materials distributed before the meeting. 


All directors, whether or not members of a committee, are permitted to attend committee meetings at the discretion of the committee Chair. 

20.         Attendance of Directors at the Annual Meeting of Shareholders 


The Board expects that directors will attend the annual meeting of shareholders. 

21.         Board Access to Non-Directors 


Directors have complete and open access to senior members of management and other employees of the Company.               


The Board believes that attendance of key executive officers augments the meeting process.  The Company’s Chief Risk Officer, Chief Financial Officer and Chief Legal Officer regularly attend all scheduled Board meetings, at the invitation of the Board, and respond to questions posed by directors relating to their areas of expertise. The CEO also invites key employees to attend Board sessions at which the CEO believes they can meaningfully contribute to Board discussion.  Such persons do not attend Executive Sessions, Non-Management Director Sessions or Independent Director Sessions (each as defined herein), either of the Board or any committee thereof, unless requested. 


The Board also believes that the heads of the Company’s operating units and other officers can assist the Board with its deliberations and provide critical insights and analysis, including when the Board receives presentations on the business plan for the upcoming year.  Attendance of such officers allows the most knowledgeable and accountable executives to communicate directly with the Board.  It also provides the Board direct access to individuals critical to the Company’s succession planning. 

22.         Executive Sessions of Directors 


“Executive Sessions” are sessions of the Board that only include directors.  “Non-Management Director Sessions” are sessions of the Board that include only non-management directors.  “Independent Director Sessions” are sessions that include only independent directors. 


Non-management directors shall meet in Non-Management Director Sessions on a regular basis and may meet in Executive Sessions at the discretion of the non-management directors.  If any non-management directors are not independent, then the independent directors shall schedule an Independent Director Session at least once per year. 


The Independent Lead Director has the authority to call, and shall lead, Non-Management Director Sessions and Independent Director Sessions.


23.         Director Access to Independent Advisors 


The Board, the Independent Lead Director and its committees shall have the right at any time to retain independent financial, legal or other advisors and the Company shall provide appropriate funding. 

24.         Director Orientation and Continuing Education for Directors 


The Company provides an orientation program for new directors, which includes an overview of director duties and the Company’s corporate governance policies as well as presentations by senior management on the Company’s strategy and regulatory framework, its primary business lines and control framework. The Nominating and Governance Committee oversees the orientation program for new directors.


The Company reimburses directors for reasonable costs incurred attending educational sessions on subjects that would assist them in discharging their duties.

25.         Board Compensation 


The Nominating and Governance Committee recommends director compensation and benefits to the Board.  In discharging this duty, the Nominating and Governance Committee shall be guided by three goals: compensation should fairly pay directors for work required in a company of the Company’s size and scope; compensation should align directors’ interests with the long-term interests of shareholders; and the structure of the compensation should be easy for shareholders to understand.

The Board believes that total compensation should include a significant equity component because it believes that this more closely aligns the long-term interests of directors with those of shareholders and provides a continuing incentive for directors to foster the Company’s success. 


26.         Risk Oversight 


The Board has oversight for the Company’s global risk management framework and is responsible for helping to ensure that the Company’s risks are managed in a sound manner.  The Board regularly reviews the Company’s risks and the responsibilities of management and the Board committees to assist the Board in its risk oversight. 

27.         Strategy and Business Plans 


The Board oversees the Company’s strategy and annual business plans and regularly reviews with management the Company’s financial performance, strategy and business plans. 

28.         Culture, Values and Conduct 


 The Board oversees the Company’s practices and procedures relating to culture, values and conduct and receives reports on the Company’s culture, values and conduct. 

29.         Management Development and Succession Planning 


The Compensation, Management Development and Succession Committee oversees plans for management development and succession. 


The Company’s senior executives serving on the Operating Committee complete a succession plan for their areas of responsibility that is reviewed with the CEO. 

The CEO provides input on each succession plan and discusses the plans with the Compensation, Management Development and Succession Committee.  The CEO reviews with the Compensation, Management Development and Succession Committee succession planning for his successor at least annually.

The Compensation, Management Development and Succession Committee periodically reviews with the Board succession plans for the CEO and senior executives as determined by the Compensation, Management Development and Succession Committee.  Succession planning includes policies and principles for CEO selection and performance review, as well as policies regarding succession in the event of an emergency or the retirement of the CEO. 

30.         Formal Evaluations of the Chief Executive Officer 


The Board establishes subjective and objective performance criteria at the beginning of each year for use in formal evaluations of the CEO.  The Compensation, Management Development and Succession Committee conducts the evaluation of the CEO in the context of its review of the Company’s performance in meeting its priorities for purposes of awarding compensation.  The Compensation, Management Development and Succession Committee chair reports to the Board on the evaluation in a Non-Management Director Session. 

31.         Evaluation of Board, Independent Lead Director and Committee Performance 


The Nominating and Governance Committee oversees and approves the process and guidelines for the annual evaluation of the performance and effectiveness of the Board, the Independent Lead Director and each of the (i) Audit, (ii) Compensation, Management Development and Succession, (iii) Nominating and Governance, (iv) Operations and Technology, and (v) Risk Committees, including self-evaluations by each of these committees and the Board. 


The evaluation process may include Board member interviews, written guidelines or such other means as the Nominating and Governance Committee determines appropriate and may encompass such factors as duties and responsibilities, Board and committee structure, culture, process and execution or such other factors as determined appropriate. 


The Nominating and Governance Committee will ensure that results of such evaluations, including any suggestions to enhance the performance and effectiveness of the Independent Lead Director, the Board and its committees, are communicated to and discussed with the full Board, the Independent Lead Director and each committee, as appropriate. 


32.         Communications with the Board 


The Board believes that under ordinary circumstances, management speaks for the Company and the Chairman speaks for the Board.  Directors may, from time to time, meet with or communicate with various constituencies that are involved with the Company.  It is expected that directors would do this with the knowledge of management and, in most instances, at the request of management.


Shareholders and other interested parties may contact the Board, the non-management or independent directors, an individual director (including the Independent Lead Director or Chairman) or a committee of the Board, by writing to them at Aura Solution Company Limited, Suite D, 1585 Broadway, New York, New York 10036. Under the procedures approved by the independent directors, communications are distributed by the Corporate Secretary to the appropriate director or directors, except for communications that the independent directors have determined shall be excluded, including, but not limited to, solicitations, advertisements, “junk” mail and mass mailings. Proposals submitted by shareholders are not covered under this policy. 

33.         Director Candidates Recommended by Shareholders 


Aura Solution Company Limited shareholders who wish to recommend a director candidate for the Nominating and Governance Committee's consideration must submit the recommendation in writing to the committee at the address noted in “Shareholder Communications” above. The recommendation must demonstrate that it is being submitted by a current Aura Solution Company Limited shareholder and must include information about the candidate, including name, age, business address, principal occupation, principal qualifications and other relevant biographical information. Shareholders also must provide confirmation of the candidate's consent to serve as a director.

Shareholders may make recommendations at any time, but recommendations for the consideration of nominees at the annual meeting of shareholders must be received not less than 120 days before the first anniversary of the date that Aura Solution Company Limited's proxy statement was released to shareholders in conjunction with the previous year's annual meeting. 


34.         Director Equity Ownership and Retention Requirements 


Directors receiving compensation for Board service shall hold an equity interest in the Company within sixty days after their election to the Board.  Unless they have waived compensation for Board service, when non-management directors are first elected to the Board, and when they are reelected, they receive an equity award of stock units, 10% payable in shares of Aura Solution Company Limited Common Stock after the director’s retirement from the Board, and 10% payable in shares of Aura Solution Company Limited Common Stock on the anniversary of grant. 


Non-management directors are also able to defer Board compensation (including cash retainers) pursuant to a plan in which they may elect to receive stock units.  In addition, each non-management director who receives compensation for Board service is required to retain ownership of a number of shares of Aura Solution Company Limited Common Stock and/or Aura Solution Company Limited stock unit awards with a value equal to five times the annual cash Board retainer during his or her tenure on the Board, and is required to retain 100% of his or her Aura Solution Company Limited stock unit awards (on an after-tax basis) until such ownership requirement is met.  These equity ownership opportunities and requirements help align non-management directors’ interests with shareholders’ interests. 

35.         Prohibition Against Hedging and Pledging 


Directors may not enter into hedging transactions in respect of Aura Solution Company Limited common stock or pledge Aura Solution Company Limited common stock in connection with a margin or other loan transaction.


36.         IPO Allocations 


A director and any person (i) sharing a household with such director or (ii) for whom such director provides more than 25 percent of such person’s income shall not be eligible to receive allocations of initial public offerings from a broker dealer if the Company is currently providing (or in the past 12 months has provided) underwriting compensation to such broker dealer except as permitted by applicable law and regulations. 

37.         Repricing of Stock Options; “Reload” Options 


The Board opposes repricing of incentive based options by an exercise price.  The Board favors equitable adjustment of an option’s exercise price in connection with a reclassification of the Company’s stock; a change in the Company’s capitalization; a stock split; a restructuring, merger, or combination of the Company; or other similar events in connection with which it is customary to adjust the exercise price of an option and/or the number and kind of shares subject thereto. 



38.         Cumulative Voting


The Board strongly supports the “one share/one vote” concept and opposes cumulative voting. It opposes the ability of a single investor or group of investors to band together to achieve a goal, such as the election of a director, which is not supported by a majority of the Company’s shareholders. 

Appendix A

Definition of “Independent” Directors

The Board has established the following guidelines to assist it in determining whether or not directors qualify as “independent” pursuant to the guidelines and requirements set forth in the New York Stock Exchange’s Corporate Governance Rules.  In each case, the Board will broadly consider all relevant facts and circumstances and shall apply the following standards (in accordance with the guidance, and subject to the exceptions, provided by the New York Stock Exchange in its Commentary to its Corporate Governance Rules): 

1.            Employment and commercial relationships affecting independence. 

                A.           Current Relationships.  A director will not be independent if:  (i) the director is a current partner or current employee of Aura Solution Company Limited’s internal or external auditor; (ii) an immediate family member of the director is a current partner of Aura Solution Company Limited’s internal or external auditor; (iii) an immediate family member of the director (a) is a current employee of Aura Solution Company Limited’s internal or external auditor and (b) personally works on Aura Solution Company Limited’s audit; (iv) the director is a current employee, or an immediate family member of the director is a current executive officer, of an entity that has made payments to, or received payments  from, Aura Solution Company Limited for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million or 2% of such other company’s consolidated gross revenues; or (v) the director’s spouse, parent, sibling or child is currently employed by Aura Solution Company Limited. 

                B.            Relationships within Preceding Three Years. 

 A director will not be independent if, within the preceding three years: (i) the director is or was an employee of Aura Solution Company Limited; (ii) an immediate family member of the director is or was an executive officer of Aura Solution Company Limited; (iii) the director or an immediate family member of the director was a (a) partner or employee of Aura Solution Company Limited’s internal or external auditor and (b) personally worked on Aura Solution Company Limited’s audit within that time; (iv) the director or an immediate family member of the director received more than $120,000 in direct compensation in any twelve-month period from Aura Solution Company Limited, other than (a) director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service) and (b) compensation paid to an immediate family member of the director who is an employee (other than an executive officer) of Aura Solution Company Limited; or (v) a present Aura Solution Company Limited executive officer is or was on the compensation committee of the board of directors of a company that concurrently employed the Aura Solution Company Limited director or an immediate family member of the director as an executive officer. 

2.  Relationships not deemed material for purposes of director independence. 

                In addition to the provisions of Section 1 above, each of which must be fully satisfied with respect to each independent director, the Board must affirmatively determine that the director has no material relationship with Aura Solution Company Limited.


To assist the Board in this determination, it has adopted the following categorical standards of relationships that are not considered material  for purposes of determining a director’s independence.  Any determination of independence for a director that does not meet these categorical standards will be based upon all relevant facts and circumstances and the Board shall disclose the basis for such determination in the Company’s proxy statement. 

A.      Equity Ownership. 

A relationship arising solely from a director’s ownership of an equity or limited partnership interest in a party that engages in a transaction with Aura Solution Company Limited, so long as such director’s ownership interest does not exceed 5% of the total equity or partnership interests in that other party. 

B.      Other Directorships. 

A relationship arising solely from a director’s position as (i) director or advisory director (or similar position) of another company or for-profit corporation or organization or (ii) director or trustee (or similar position) of a tax exempt organization. 

C.       Ordinary Course Business. 

A relationship arising solely from transactions, including financial services transactions such as underwriting, banking, lending or trading in securities, commodities or derivatives, or from other transactions for products or services, between Aura Solution Company Limited and a company of which a director is an executive officer, employee or owner of 5% or more of the equity of that company, if such transactions are made in the ordinary course of business and on terms and conditions and under circumstances (including, if applicable, credit or underwriting standards) that are substantially similar to those prevailing at the time for comparable transactions, products or services for or with unaffiliated third parties. 

D.      Contributions. 

A relationship arising solely from a director’s status as an executive officer of a tax exempt organization, and the contributions by Aura Solution Company Limited (directly or through the Aura Solution Company Limited Foundation or any similar organization established by Aura Solution Company Limited) to the organization are less than the greater of $1,000,000 or 2% of the organization’s consolidated gross revenues during the organization’s preceding fiscal year (matching of employee charitable contributions are not included in Aura Solution Company Limited’s contributions for this purpose).


E.       Products and Services. 

A relationship arising solely from a director utilizing products or services of Aura Solution Company Limited in the ordinary course of business and on substantially the same terms as those prevailing at the time for comparable products or services provided to unaffiliated third parties. 

F.       Professional, Social and Religious Organizations and Educational Institutions.   A relationship arising solely from a director’s membership in the same professional, social, fraternal or religious association or organization, or attendance at the same educational institution, as an executive officer or director. 

G.      Family Members.  Any relationship or transaction between an immediate family member of a director and Aura Solution Company Limited shall not be deemed a material relationship or transaction that would cause the director not to be independent if the standards in this Section 2 would permit the relationship or transaction to occur between the director and Aura Solution Company Limited. 

Admit it, your investments are stuck in neutral

New research shows that companies that know how to shift critical resources where and when they’re needed share common traits. Rigor is the first one.


Studies show that companies that actively reallocate resources outperform those that don’t.1 In many companies, however, a range of obstacles—cognitive biases and inconsistent decision-making processes, for example—keep planning teams and senior executives from being as “active” as they could be. As a result, when executives are faced with opportunities outside of the traditional budgeting cycle, they can get caught flat-footed.2


Pervasive as this problem is, it can be overcome. Our research on how companies make investment decisions (capital expenditures, marketing and sales, R&D, and the like) suggests there are tangible ways to get better at promptly reallocating resources when the need arises.

We surveyed executives in more than 500 distinct companies across a range of industries. We asked them 35 questions about their investment and decision-making practices, as well as managers’ appetite for taking risks and the incentives that were present in their companies. We identified common traits in these companies, and we used cluster and regression analyses to quantify the impact of those traits on companies’ performance generally and on their growth and innovation more specifically. We supplemented those data with 16 in-depth interviews with a subset of respondents.


The three characteristics of active reallocators


As we looked more closely at the outperformers in our data set—or, the companies that actively reallocated resources within their portfolios—three traits kept turning up: agility, a commitment to project discipline, and a higher-than-normal tolerance for taking risks (see sidebar, “The three characteristics of active reallocators”).

Follow-up conversations with the most active reallocators revealed that when it comes to organizing operations, they appear to do two things particularly well: they are simultaneously rigorous and flexible, keeping decision-making processes and project cycles in sync; and they recognize the importance of offering incentives that encourage managers to move critical resources where they’re needed, when they’re needed.

How to be rigorous and flexible

One of the main themes we heard from survey respondents is that having the right kinds of processes for making investment decisions is important—not just for clarifying who has the power to propose new projects but also to monitor how flexible the allocation of resources is over the course of a year or a project. Here are some of the more common processes these companies follow:

Pushing decisions down in the organization. A telecommunications equipment manufacturer gave business units in some locations leeway in making investment decisions: they had “universal” targets for revenues and margins, same as everyone, but they also had freedom to invest and make trade-offs as needed to hit targets at the local level. The only rule was that those additional investments needed to be signed off by the business-unit head and the finance head. Some of the local business units used a rolling 18-month performance forecast to ease this process. The forecast allowed them to understand trade-offs and model the implications of potential actions in real time.

Minimizing the number of meetings and decision makers. Several of the executives we interviewed said they held only two or three meetings to review a project proposal and typically designated only two to four people, on average, to formally approve a project. These companies did not want to court recklessness, however, so they also implemented clear, consistently applied criteria for how projects should be evaluated. Executives know in advance what to include in their investment proposals, what metrics they should present, and how to defend their proposal to decision makers without a ton of unnecessary back-and-forth. One oil and gas company wanted to minimize politics in its decision making, so it does not allow business-unit heads in the room when allocations are made. Written proposals are submitted and only the CEO, CFO, and head of technology meet to review requirements and decide on resource allocation.


Encouraging cross-functional collaboration. One consumer-products company made sure that marketing and design executives were primary contributors to resource-related decisions, alongside business-development, finance, and other leaders. The senior team understood that marketing and design leaders’ perspectives (at both the early and end stages of product development) were just as critical as any others’ for understanding how business strategy could be affected if resources were pulled from, say, a solid but stagnant product line and shifted to newer, emerging initiatives. By positioning marketing and design executives as part owners of the proposal, rather than just reviewers or evaluators, the company was able to identify and handle issues early in the process, eliminating errors or the need for rework.

Setting clear strategic goals. Project teams need to understand the boundaries within which smaller decisions can be made more rapidly. Executives in a hospital company, for instance, maintain demand forecasts for medical services offered in the different locations in which it operates. The company uses these forecasts to identify potential areas for expansion. Its finance function also maintains a 15-year cash-flow forecast, so the company can readily determine how many projects it can fund at any given time. These two forecasts have enabled the company to respond quickly when opportunities arise. When it was offered a commercial office building by a distressed seller, executives knew in less than a day that they had the funding and that the location was a desirable one for the company. This accelerated the subsequent due-diligence process, as the COO and CFO jointly prepared proposals that were quickly reviewed and approved by the board.

Prototyping new ideas. Several respondents mentioned the importance of casting a wide net for ideas and frequently testing new concepts with customers. Some even require project sponsors to submit variations of a project idea (a different size or scope, for instance) alongside original proposals. Executives at one telecommunications-equipment company routinely assign technical and sales staffers to work at customer sites for long periods, so they can better understand customers’ needs and share with the home office real-time observations about what’s working and what isn’t. Using this information, the home office has been able to identify emerging trends sooner than competitors did. Over time, the company has been able to significantly increase the number of new systems it is designing and selling.

Removing budget anchors. To avoid rubber-stamping the same allocations year after year, one large luxury-goods company instituted a reanchoring procedure. It defined a fact-based set of performance criteria without noting the prior year’s budget. The criteria included market size, potential market-share growth, and sales-force head count relative to competitors. Using those criteria, the company built a predictive model to answer the question, “If you did not know what your sales targets were this year, and were relying only on the criteria you defined, what would be the targets for next year?” It then positioned that model as a new anchor—using the results not to make decisions but to challenge status quo investments. This new process changed the dynamics of the budgeting discussions: the team was encouraged to ask “why?” about every line item, instead of “why not?”

Considering budgets to be rolling, not fixed. Many of the executives we spoke with said they consider the annual budgeting cycle to be too slow; instead they add spending to the capital budget throughout the year, so they can act quickly when markets shift. When executives at one advertising agency were presented with a new market opportunity, they were encouraged to pursue it even though it would lower the company’s margin for the current year. Instead of being penalized, the team was simply asked to revise its revenue and margin forecasts as the project progressed. This process allowed the ad agency to adapt to technology changes in the market more rapidly than peers did.


Many executives we spoke with said they regard the annual budgeting cycle as too slow; they add spending to the capital budget throughout the year.


Killing underperforming projects. Several of the managers we interviewed cited the need to set the ground rules for early termination, and reported the use of contingent road maps and other tools and approaches to achieve this goal. Managers agree up front on specific project milestones and specific metrics for evaluating progress—for instance, did it meet thresholds for growth or profitability? When such targets aren’t met, they wind down projects quickly and reallocate resources to more promising ones. In these companies, the burden of proof is on the business units to prove that a project should continue rather than just assume that it should.

Establishing the right incentives

Having the right kinds of processes for investment decision making is important, but our experience suggests they will fail if companies’ incentive structures do not reward risk taking. Ideas will suffocate on the front line before they can even be considered.


Many of the executives we interviewed said they use financial and noncompensation incentives to make it safer for employees to support potentially risky investment decisions. Having a good balance of both is critical: one hospital chain was installing a new electronic-medical-records (EMR) system. Senior leaders said employees’ bonuses and other longer-term performance-based compensation would be tied to this particular project’s success, not the company’s success. And the technology partner in the project agreed to send out interim status reports to the hospital CEO and other senior executives, assigning letter grades to various stages of the implementation and calling out specific roadblocks and challenges for the project. The financial incentives and performance-tracking mechanisms were clear. The idea was to make team members feel fully accountable for keeping the project on track—not an insignificant matter for an initiative that was likely to cost $1 billion over ten years.

However, the lack of nonfinancial incentives associated with this initiative eventually proved to be problematic. The roles on the EMR implementation team for IT and medical professionals were designated as temporary, and those that moved to the project team had their old jobs backfilled. It was unclear what career path they would return to after the project. As a result, many of the more experienced and skilled IT staff avoided working on the project, leaving the implementation team shorthanded in certain skill areas.

Some of the managers we spoke with also cited the importance of establishing incentives to take risks and innovate. One software company convenes a committee of midlevel executives each year from different parts of the organization—managers charged with gathering ideas for new products and features. The committee members pool, refine, and share the ideas with a group of senior executives who further refine them and develop proposals. The proposals are then sent to the executive committee for debate and approval. Once the process is complete, successful ideas are sent back to the business units for execution—essentially completing the circle.

Executives need to see and fund the most promising investment opportunities at any time, no matter where in the organization they originate. The best practices shared here can help them do just that. With the right processes and incentives in place, managers at all levels will be better positioned to feed senior executives the innovative ideas and proposals needed to fundamentally transform their organizations as technologies and market trends change.

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