corporate goveronance and social...

Second lecture

Corporate Governance

and

Social Responsibility

Prentice Hall, 2004 Chapter 2

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Defined:

Refers to the relationship among the board of directors, top


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the board of directors, top management, and shareholders in determining the direction and performance of the corporation.


•Setting corporate strategy, overall direction,

mission or vision

•Hiring and firing the CEO and top management

•Controlling, monitoring, or supervising

Board of

Directors


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•Controlling, monitoring, or supervising

top management

•Reviewing and approving the use of resources

•Caring for shareholder interests

Directors


Role of the Board in strategic management

– Monitor• Developments inside and outside the corporation


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– Evaluate & Influence• Review proposals, advise, provide suggestions and alternatives

– Initiate & Determine• Delineate\define corporation’s mission and specify strategic options

Board of Directors Continuum


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Board of Directors

Members:

Inside directors

– “Management directors”

– Officers or executives employed by


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– Officers or executives employed by

corporation

Outside directors

– May be executives of other firms but not

employed by board’s corporation

Board of Directors

Organization of the Board

• Size– Determined by charter and bylaws


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– Determined by charter and bylaws

– Average for publicly-held, large firm is 11 directors

– Average for small/medium private firms is 7 to 8 directors

Board of Directors


• Boards more involved in review and shaping strategy

• Institutional investors more active in pressuring for corporate performance


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pressuring for corporate performance

• Shareholders demand that directors and executives own more than token amounts of stock

• Nonaffiliated outside directors increasing

Board of DirectorsTop management responsibilities

•Executive Leadership

•Strategic vision


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Top management

Responsibilities

•Strategic vision

•Presents a role of others to

identify with and follow

•Communicates high

performance standards and

shows confidence in followers’

abilities

Strategic Management Process

Strategic Planning Staff --

–Supports top management and


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business units in the strategic planning process.

Strategic Management Process

Strategic Planning Staff

Responsibilities:

• Identify and analyze company-wide

strategic issues, suggest corporate


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strategic issues, suggest corporate

strategic alternatives

• Work as facilitators with business

units to guide them through the

strategic planning process

Styles of Corporate Governance

High Entrepreneurship

Management

Partnership

Management

low Chaos

Management

Marionette

Management

Degree of

Involvement


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Management Management

Low High

By top

management

Degree of involvement by board of directors

Styles of Corporate Governance

• Chaos Management

• When both the board of directors and top management have little involvement in the strategic management process.


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• The board waits for top management to bring it proposals.

• Top management is operationally oriented and continues to carry out strategies, policies, and programs specified by the founding entrepreneur who died years ago.

• There is no strategic management being done here.

Styles of Corporate

Governance• Entrepreneurship Management

• A corporation with an uninvolved board of directors but a highly involved top management has entrepreneurship management.


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has entrepreneurship management.

• The board is willing to be used as a rubber stamp for top management's decisions.

• The CEO, operating alone or with a team, dominates the corporation and its strategic decisions.

Styles of Corporate

Governance• Marionette Management

• Probably the rarest form of strategic management style,

• marionette management occurs when the board of directors is deeply involved in strategic decision making, but top management is primarily concerned with operations.

• Such a style evolves when a board is composed of key stockholders


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• Such a style evolves when a board is composed of key stockholders who refuse to delegate strategic decision making to the president.

• This style also occurs when a board fires a CEO but is slow to find a replacement.

• Marionette Management occurred at Winnebago Industries when the company's Board of Directors, chaired by its founder, 72-year-old John K. Hanson, took away Ronald Haugen's title as chief executive officer, but left him as company president.

Styles of Corporate

Governance• Partnership Management

• Probably the most effective style of strategic management,

• partnership management is epitomized\embodied by a highly involved board and top management. The board


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highly involved board and top management. The board and top management team work closely to establish the corporate mission, objectives, strategies, and policies.

• Board members are active in committee work and utilize strategic audits to provide feedback to top management on its implementations of agreed-upon strategies and policies.

• This appears to be the style emerging in a number of successful corporations such as General Electric Company.

The business firm should try to get useful

information about competitors by:

1. Careful study of trade journals.

2. Buying competitors' products and taking them apart.

3. Hiring management consultants who have worked for competitors.

4. Rewarding competitors' employees for useful "tips."

5. Questioning competitors' customers and/or suppliers.


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5. Questioning competitors' customers and/or suppliers.

6. Buying and analyzing competitors' garbage.

7. Advertising and interviewing for non-existent jobs.

8. Taking public tours of competitors' facilities.

9. Releasing false information about the company in order to confuse competitors.

10. Questioning competitors' technical people at trade shows and conferences.

11. Hiring key people away from competitors.

Discussion

• What recommendations would you make to improve the effectiveness of today's boards of directors?

• Add more outsiders (people not affiliated with the corporation) to the board of directors. Keep the percentage of insiders (typically top management) to less than 50% of board membership.

• Separate the positions of CEO and Chairman so that top management cannot unduly influence the board's meetings and agenda. This should improve the board's ability to


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influence the board's meetings and agenda. This should improve the board's ability to properly evaluate top management. If they can't separate Chair from CEO, select a Lead Director from the outside directors.

• Use a committee composed of outsiders to nominate potential new directors. This will help to ensure that potential members are not friends of top management

• Nominate people to the board who have knowledge valuable to the board and who have expertise of value to top management. These should be people who will have the respect of top management and who can both advise and criticize top management as needed.

• Require board members to own substantial amounts of stock in the corporation to ensure that they have a personal as well as professional stake in the welfare of the corporation.

Improving the efficiency of the

PNA Governance 1. Choose the best ministers

2. Qualified and competence legislators.

3. Separation between authorities

4. More controlling and monitoring of legislation.

5. Abide by law the common of the Palestine.5. Abide by law the common of the Palestine.

6. Using external consultants to the legislation council,

7. regular meeting.

8. Regular meeting and follow up.

9. Awareness campaign to all about their duties.

10. Improve cooperation and team work.

11. More role for residences\public.

12. Clear and agreed accountability techniques.

13. Form a controlling committee from the council.Prentice Hall, 2004 Chapter 2

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Improving the efficiency of Board

of Directors in NGOs

1. Select qualified persons.

2. People with enough time.

3. Sperate

4. Periodical reports.


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4. Periodical reports.

5. Government role.

6. Provide incentives.

7. External and internal control development.

8. Internal monetary committee.

9. Periodical meeting.


Broader responsibility:


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• Private corporation has responsibilities to society that extend beyond making a profit.


Friedman’s Traditional View

“There is one and only one social


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“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits…”


Carroll’s Four Responsibilities

• Economic: produce goods and services of value to society.


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value to society.

• Legal: abide by law, avoid discrimination.

• Ethical: respect beliefs in society.

• Discretionary/flexible :pure voluntary obligations.

Responsibilities of Business


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Benefits

Ben & Jerry’s

Maytag

•Environmental concerns may enable

the firm to charge premium prices and

gain brand loyalty

•Trustworthiness may help generate

enduring relationships with suppliers

and distributors without spending time


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Maytag

Procter &

Gamble

Rubbermaid

and distributors without spending time

and money policing contracts

•Can attract outstanding employees

who prefer working for a responsible

firm

•More likely to attract capital from

investors who view reputable

companies as desirable

Social Responsibility: Balancing

Commitments to StakeholdersStakeholders:Stakeholders: Groups, individuals, and organizations that Groups, individuals, and organizations that

are directly affected by the practices of an organizationare directly affected by the practices of an organization

Employees Investors


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Local

Communities

Customers SuppliersCORPORATION


• It refers to the way in which a business tries to balance its commitments to certain groups and individuals in its social environment.

• Customers: Treat customers fairly and honestly (Examples of companies with excellent reputations in this area: L.L. Bean, Nordstrom, Dell Computer Corporation)


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Nordstrom, Dell Computer Corporation)

• Employees: Treat employees fairly, with respect for their dignity and basic human needs (Examples of companies with excellent reputations in this area: 3M, Southwest Airlines)

• Investors: Manage financial resources honestly and openly• Suppliers: Seek mutually beneficial partnerships• Local Communities: Minimize damage and maximize contributions

to local communities

• Discussion: Who are the major stakeholders at your school? How does the school prioritize these stakeholders? What are your thoughts about this prioritization?

Reasons for Unethical Behavior

Moral Relativism

–Morality is relative to some


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–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.


Kohlberg’s Levels of

Moral Development

–Preconventional Level– Concern for self


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– Concern for self

–Conventional\conservative Level– Consideration of laws and norms

–Principled Level– Adherence to internal moral code


Code of Ethics:

–Specifies how an organization


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–Specifies how an organization

expects its employees to behave

while on the job.

What Is Ethical Behavior?

Ethics: Right and wrong, good and bad, in actions that affect others. shaped by personal values and morals


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personal values and morals

Ethical Behavior:Conforming to generally accepted ethical norms.

Business ethics: Ethical or unethical behaviors of managers and employers of an organization.

Discussion

• Identify examples of ethical and unethical business practices.

– Ethical Business Practices: Examples: Donating a percentage of profits to charity and community causes (Ben & Jerry’s donates 7-1/2% of pre-tax profits, and Levi Strauss donates


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donates 7-1/2% of pre-tax profits, and Levi Strauss donates 2.4% of pre-tax profits to a variety of causes), encouraging employees to engage in volunteer work using paid work-release time (Walt Disney’s VoluntEARS program), recycling (McDonald’s has a far-reaching environmental protection program).

– Unethical Business Practices: Examples: Forwarding “marketing research” results to sales people, excessive violence in video games, and of course all forms of illegal behavior (e.g. deliberately selling cigarettes to minors).


Approaches to Ethical Behavior

•• UtilitarianUtilitarian

Actions and plans judged by consequences

•• Individual RightsIndividual Rights


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•• Individual RightsIndividual Rights

People have fundamental rights to be respected in all decisions

•• JusticeJustice

Distribution of costs and benefits to be equitable, fair, and impartial\objective.


Approaches to Ethical Behavior


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•• Categorical imperativesCategorical imperatives\\crucialcrucial

“golden rules”

Not restrict others behavior

• Encompasses three

main areas:

1. Air pollution

2. Water pollution

Responsibility Toward the

Environment


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2. Water pollution

3. Land pollution

– Toxic\deadly waste

– Recycling

Responsibility Toward

CustomersConsumer RightsConsumer Rights


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Unfair PricingUnfair Pricing

Ethics in AdvertisingEthics in Advertising


Employees

• Legal and social commitments: Legally, companies are required to refrain from discrimination against any worker based on race, gender, religion, nationality or other


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race, gender, religion, nationality or other irrelevant factors. Ethically, many people feel that companies should ensure that the workplace is physically and socially safe.

• How far should companies extend themselves to help employees who are laid off?


Investors• Improper financial management:

• Offenses are typically unethical, rather than illegal. Examples include

excessive salaries, and lavish\plentiful or frivolous perks\bonus (e.g.

regular corporate “retreats” to exotic\interesting island resorts).

• Check kiting:


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• Check kiting:

• Responsibility towards investors has several components:

• Illegal practice of writing checks against money that has not yet

arrived at the bank on which it is drawn.

• Insider trading:

• Illegal practice of using confidential information to gain from the

purchase or sale of stocks.

• Misrepresentation of finances:

• Typically, this takes the form of overly optimistic projections of

earnings.

Discussion • Should all CEOs be transformation leaders? Would you like to work for

a transformational leader?

• According to the text, top management must successfully handle two

responsibilities that are crucial to the effective strategic management of the

corporation: (1) provide executive leadership and a strategic vision and (2)

manage the strategic planning process. The successful CEOs often provide

this executive leadership by taking on many of the characteristics of the this executive leadership by taking on many of the characteristics of the

transformation leader by communicating a clear strategic vision,

demonstrating a strong passion for the company, and communicating clear

directions to others. Such transformational leaders, like Bill Gates at

Microsoft, Steve Jobs at Apple, and Anita Roddick at The Body Shop, are able

to command respect and energize their employees. They not only articulate a

strategic vision, but they also tend to present a role for others in the company

to identify with and to follow. Their communication of high performance

standards coupled with their confidence in their fellow employees often raises

performance to a high level. Nevertheless, such transformation leaders can be

very difficult to work for and their overconfidence may even get the firm in

trouble. Prentice Hall, 2004 40

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