Corporate Governance

1
Chapter 2

• Corporate Governance
• Social Responsibility

2
Top Management

• Responsibilities of Top Management
• Provide executive leadership and a strategic
  vision
• Manage the strategic planning process
• Strategic Planning Staff --
• Supports top management and business units in the
  strategic planning process.

3
Top Management

• Executive Leadership
• The directing of activities toward the
  accomplishment of corporate objectives. Sets the
  tone for the entire corporation.
• Strategic Vision
• A description of what the company is capable of
  becoming. Often communicated in the mission
  statement.

4
Agency Theory

• Problems arise in corporations because the
  agents (top management) are not willing to bear
  responsibility for their decisions unless they
  own a substantial amount of stock in the
  corporation.

5
Stewardship Theory

• Executives tend to be more motivated to act in
  the best interest of the corporation than their
  own self-interests. Theory argues that over
  time, senior executives tend to view the
  corporation as an extension of themselves.

6
Social Responsibility

• Key question for strategic decision makers
• Should strategic decision makers be responsible
  only to shareholders or do they have broader
  responsibilities?
• The Triple Bottom Line balancing economic,
  social, and ecological performance

7
Social Responsibility

• Friedmans Traditional View
• Shareholders (principals) - have right to max
  market value, a right to surplus, and right to
  give some, all, or none of that surplus to
  charity
• Managers (agents) - have a moral responsibility
  to carry this out (only moral responsibility)
• Manager is incompetent to make moral decisions
  about use of firms resources
• Criterion of performance straightforward

8
Profit Maximization

• Difficulty
• 1) many businesses use full cost rather than
  marginal cost accounting methods
• 2) there are other strategic decisions
• Unrealistic assumptions
• economic assumptions not valid in practice
• Complex and unlikely view of nature of human
  beings
• Moral aspects

9
Application of Cost-benefit Analysis

• Just between you and me, shouldnt the World
  Bank be encouraging more migration of the dirty
  industries to the LDCs (less developed
  countries)?I think the economic logic behind
  dumping a load of toxic waste in the lowest wage
  country is impeccable and we should face up to
  that.
• Lawrence Summers
• Chief Economist World Bank

10
What Do the Executives Say?

• It is my belief that corporations are created
  for a purpose beyond making money. Sustained
  growth in shareholder value may be the end
  result, but it cannot be the sole purpose.
• Bill George, CEO Medtronics

11
Carrolls Pyramid of CSR

• Philanthropic
• Responsibilities
• Ethical
• Responsibilities
• Legal Responsibilities
• Economic Responsibilities

12
Social Responsibility

• Ethics
• The consensually accepted standards of behavior
  for an occupation, trade, or profession
• Morality
• The precepts of personal behavior based on
  religious or philosophical grounds
• Law
• Formal codes that permit or forbid certain
  behaviors

13
Social Responsibility

• Approaches to Ethical Behavior
• Utilitarian
• Actions and plans judged by consequences
• Individual Rights
• People have fundamental rights to be respected
  in all decisions
• Justice
• Distribution of costs and benefits to be
  equitable, fair, and impartial

14
Social Responsibility

• Moral Relativism
• Morality is relative to some personal, social or
  cultural standard and that there is no method for
  deciding whether one decision is better than
  another.

15
Absolutism - Principles of Eternal Law

• We should act in the way that our Creator wanted
  us to act, with kindness and compassion towards
  others
• revealed source of truth vs reasoned source of
  truth
• Golden Rule - Buddhism, Christianity,
  Confucianism, Hinduism, Islam, Judaism, Taoism,
  traditional native religions

16
Business Ethics - Oxymoron or Practical Reality?

• Ethical Concerns have not been well integrated
  into strategic management.
• Why?

17
Integration of Ethical Concerns with Strategic
Management

• Establishment of a mission
• Assessment of environment
• Assessment of resources and capabilities
• Establishment of objectives
• Identification of strategic options, selecting a
  strategy
• Strategic implementation, monitoring, and review

18
Total Ethics

• Idea that businesses must understand ethical
  responsibility not as a response to external
  pressures or threats, but rather as an integral
  component of daily activities.

19
Ethics on the Rise

• Ethics guidelines and training
• Ethics codes, values statements, CSR reports,
  standards, awards, etc.
• Boards more active in setting ethical guidelines
• Whistleblowing policies
• Number of ethics officers
• Ethics consulting (b business)
• Stakeholder consultations
• Ethical reporting triple bottom line

20
2 Strains of Conventional Wisdom Ethics
costs Ethics pays
Ethical Commitment
Economic Advantage
Ethical Commitment/ Economic Advantage
(V.S. P.61)
21
Arguments for CSR

• Enlightened self-interest
• efficient use of natural resources
• other strategic goals besides max profits
• injurious impacts of business
• corporate self-regulation
• Noblesse oblige

22
A More Realistic Relationship
Ethical Commitment

Economic Advantage
Partial Overlap
(V.S. p.61)
23

• Transparency, sustainability, and the new
  integrity are fast becoming the basis for
  competition, innovation, and cost reduction.
• David Ticoll Don Tapscott, 2003
• The naked corporation How the age of
  transparency will revolutionize business

24
Does Ethics Pay?Depends on what your Bottom
Line is.

• Ethics counts and so does strong sustained
  profitability.
• Lynn Sharp Paine

25
A changing model

• Shareholders ? stakeholders
• Insular ? engaged
• Compliant ? accountable
• Unsustainable ? sustainable