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Corporate Performance, Governance, and Business Ethics

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Title: Corporate Performance, Governance, and Business Ethics


1
11
  • Corporate Performance, Governance, and Business
    Ethics

2
Topics
  • Stakeholder analysis whose interest should we
    consider?
  • Agency theory how do we understand and manage
    relationship among key players, e.g. management
    and owners?
  • Ethics what rules can or do we apply?
  • Change management
  • Business and society/government

3
Stakeholder Impact Analysis
  • Identify the stakeholders most critical to
    survival
  • Identify stakeholders.
  • Identify stakeholders interests and concerns.
  • As a result, identify what claims stakeholders
    are likely to make on the organization.
  • Identify the stakeholders who are most important
    to the organizations perspective.
  • Identify the resulting strategic challenges.
  • Usually the most important
  • Customers, employees, stockholders

4
Stakeholders and the Enterprise
5
Exercises 1st day (1)
  • Pick either the company in the Opening Case
    (Enron) or the Strategy in Action 11.3 (Barings)
  • List relevant stakeholders and their interests.

6
The Unique Role of Stockholders
  • Legal owners
  • Providers of risk capital, a major source of
    capital
  • No guarantee that stockholders will recoup their
    investment or earn a decent return
  • Maximizing return to stockholders
  • Employees as stockholders

7
Profitability and Stakeholder Claims
  • Stockholders returns
  • Dividend payments
  • Capital appreciation in market value of a share
  • Maximizing long-run ROIC
  • Within limits set by law
  • In a manner consistent with societal expectations

8
Relationship Between ROIC, Stakeholder
Satisfaction, and Stakeholder Support
9
Poor Performance
  • Poor management each factor in list (next
    slides) by itself is not sufficient to bring a
    company down.
  • Structural shifts are often ignored during good
    performance, blamed when no one management factor
    is clear
  • Difficult to measure due to asymetry of
    information

10
The Causes of Poor Performance
  • Poor management
  • Sheer incompetence
  • Neglect of core business
  • Insufficient number of good managers
  • Dominant, autocratic chief executive with passion
    for empire-building
  • Autocratic manager who tries to do it all in the
    face of complexity and change

11
The Causes of Poor Performance
  • Poor management (contd)
  • Lack of balanced expertise at the top
  • Lack of strong middle management
  • Lack of succession planning
  • Failure by board to monitor strategic decisions
  • Unethical behavior

12
The Causes of Poor Performance (contd)
  • High cost structure
  • Low labor productivity
  • Low capital productivity
  • Inadequate financial controls
  • Inadequate differentiation
  • Poor product quality
  • Lack of compelling product attributes

13
The Causes of Poor Performance (contd)
  • Overexpansion
  • Empire-building that adds little value
  • Loss of control
  • Declining profitability
  • Structural shifts in demand and new competitors
  • Technology
  • Economic or political conditions
  • Social and cultural norms

14
The Causes of Poor Performance (contd)
  • Organizational inertia
  • Distribution of power and influence in the
    organization
  • Organization culture
  • Preconceptions about the appropriate business
    model

15
Agency Theory
  • Problems can arise in a business relationship
    when one person delegates decision making
    authority to another

16
Agency Theory continued
  • Principal-agent relationships
  • Agency relationship when one party delegates
    decision-making authority to another
  • Principal person delegating authority
  • Agent person to whom authority is delegated
  • Key issue asymmetry of information

17
The Agency Problem
  • Agents and principals may have different goals
  • Agents may pursue goals that are not in the best
    interests of their principals
  • Due to information asymmetry, principals may not
    know any better

18
The Agency Problem continued
  • Difficult for principals to measure performance
  • Trust
  • On-the-job consumption
  • Empire building

19
Exercise 1st day (2)
  • Refer to the Opening Case (Enron) and Strategy in
    Action 11.3 (Barings) Describe the Agency
    Problem.
  • Who was (were) the principal(s)?
  • Agent(s)?
  • Assymetry of information

20
The Challenge for Principals
  • Shape the behavior of agents so that they act in
    accordance with goals set by principals
  • Reduce information asymmetry
  • Develop mechanisms for removing agents who do not
    act in accordance with goals of principals

21
Governance Mechanisms
  • The board of directors
  • Elected by stockholders
  • Legally accountable
  • Monitors corporate strategy decisions
  • Authority to hire, fire, and compensate
  • Ensures accuracy of audited financial statements
  • Inside directors
  • Outside directors

22
Governance Mechanisms (contd)
  • Stock-based compensation
  • Pay-for-performance
  • Stock options
  • The right to buy company shares at a
    predetermined price at some point in the future

23
How Options Skew the Bottom Line
Source D. Henry and M. Conlin, Too Much of a
Good Incentive? Business Week, March 4, 2002,
pp. 3839.
24
Governance Mechanisms (contd)
  • Financial statements and auditors
  • SEC
  • GAAP
  • The takeover constraint
  • Corporate raiders
  • Greenmail

25
Governance Mechanisms Inside a Company
  • Strategic control systems
  • To establish standards against which performance
    can be measured
  • To create systems for measuring and monitoring
    performance regularly
  • To compare actual performance against targets
  • To evaluate results and take corrective actions

26
A Balanced Scorecard Approach
27
Governance Mechanisms Inside a Company (contd)
  • Employee incentives
  • Employee stock ownership plans
  • Stock options
  • Compensation tied to attainment of superior
    efficiency, quality, innovation, and
    responsiveness to customers

28
The Purpose of Business Ethics
  • To give people the tools for dealing with moral
    complexity in business
  • Business decisions have an ethical component
  • Ethical implications must be weighed before acting

29
Ethics and Strategy
  • Ethical decision
  • One that typical stakeholders would find
    acceptable because it aids stakeholders, the
    organization, or society
  • Unethical decision
  • One that a manager would prefer to disguise or
    hide because it enables a company or individual
    to gain at the expense of society or other
    stakeholders

30
Shaping the Ethical Climate of an Organization
  • Top managers must use their leadership position
    to incorporate an ethical dimension into the
    values they stress
  • Ethical values must be incorporated into the
    companys mission statement
  • Ethical values must be acted on

31
Comparing Utilitarian, Moral Rights, and Justice
32
Comparing Utilitarian, Moral Rights, and Justice
33
Comparing Utilitarian, Moral Rights, and Justice
34
Exercise 1st day (3)
  • Refer to the Closing Case Chainsaw Al . . . .
  • Explain the ethical situation in this case from
    the point of view of the Board of Directors. (Use
    the questions at the end as a guide.)

35
Exercises 2nd day (1)
  • NIKE Discuss what the ethical challenge is?
  • List relevant stakeholders and their interests.
  • Applying model you are comfortable with, what is
    the ethical dilemma or challenge?
  • What would be the ethical issue from the point of
    view of Chairman of NIKE?

36
Thinking Through Ethical Problems
  • Does my decision fall within the accepted values
    or standards that typically apply in the
    organizational environment?
  • Am I willing to see the decision communicated
    publicly to all stakeholders affected by it?

37
Thinking Through Ethical Problems
  • Would the people with whom I have a significant
    personal relationship approve of the decision?
  • Can I tell my mother?

38
Exercises 2nd day (2)
  • Refer to articles 1, 2, and 3.
  • Define the list of relevant stakeholders and
    their interests.
  • Apply a model you are comfortable with and
    describe the ethical decision(s) or challenge(s).
  • What would you do if you were heading these
    companies?

39
Thinking Through Ethical Problems (contd)
  • Step 1 Identify which stakeholders the decision
    would affect and in what ways
  • Step 2 Judge the ethics of the proposed
    strategic decision given the information from
    Step 1
  • Step 3 Establish moral intent (resolve to place
    moral concerns ahead of other concerns)
  • Step 4 Engage in ethical behavior

40
Strategic Change Improving Performance
  • Changing the leadership
  • New leader is often from outside the company
  • New leader must make difficult decisions,
    motivate, listen, and delegate
  • Changing the strategy
  • Redefine strategic focus
  • Divest unwanted assets
  • Improve profitability
  • Make acquisitions

41
Strategic Change Improving Performance (contd)
  • Changing the organization
  • Unfreezing the organization
  • Big bang theory of change
  • Senior managers must be committed to it
  • Movement
  • Speed
  • Involving employees
  • Refreezing the organization
  • Culture, socialization, management education
    programs
  • Hiring policies, control and incentive systems

42
CASE BRIEF
  • Refer to articles 4 5 (hand out 3/09).
  • Discuss a key ethical issue common to both
    situations described in these articles, from the
    perspective of a member of the Board of Directors
    of the company or companies involved.
  • Include in your discussion, what can agency
    theory tell us about the challenge or challenges,
    if any, posed by these situations to an ethically
    responsible member of the Board of Directors.

43
Exercise 2nd day
  • NIKEs attempt to improve on their corporate
    responsibility
  • How much is enough?
  • How can an organization contain unethical
    behavior? From a responsible boards
    perspective?
  • What does Agency theory tell us

44
Governance and ethics
  • Finish articles on lobbying
  • Business and government
  • Role of government vis business
  • Lobbying
  • Implementing change

45
Business and government
  • What is the role of business in the economy?
  • Why lobby?
  • Lobbying has been going on for years
  • Objectives of these lobbying activities?
  • Are these legitimate activities?
  • Ethical issues?

46
Corporate Governance
  • Examine the activities in each of articles 4 5
    that were questionable
  • Stakeholders and interests
  • What laws were violated?
  • Ethical challenge

47
Exercise 3rd day
  • Pick either article 4 or 5.
  • Take the perspective of senior management, i.e.
    CEO of the company
  • Identify the stakeholders and their interest
  • Which model do you use and what should be or
    should have been the course of action?

48
Exercise
  • Refer to articles 1, 2, 3, 4, 5
  • Which is illegal and unethical? Which is
    illegal?
  • Explain!
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