lecture week12

Strategic Management _ Autumn Term

Week 12


Strategic Management

Autumn term

Hankuk University of Foreign Studies

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Week 12Introduction

Today’s class1.Case Discussion: Mired in Corruption: Kellogg, Brown &

Root in Nigeria (case 34)2.Chapter 11: Corporate Social Responsibility3.Paper Discussion1)Margolis & Elfenbein (2008) Do well by doing good?

Don't count on it2)McGuire et al. (1988) CSR & Financial Performance3)Norton (2008) Help employees give away that bonus4.Preparation for Team Presentation

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Week 12Case discussion

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Mired in Corruption: Kellogg, Brown & Root in Nigeria(case 34)-Summary

The case deals with the dealings of Kellogg, Brown, & Root (KBR) in Nigeria, and questions of ethical propriety and potentially illegality that arise from it. KBR, one of the world’s largest general contractors for construction projects, is a subsidiary of Halliburton, the large Texas-based oil and gas service firm. The case mainly centers on KBR’s illegal payments (e.g., bribes) to win a contract to build LNG plants in Nigeria. KBR and its partners bid to build the initial plants in Nigeria. These bids were lower than a competitor’s bid, so they could have won the contract anyway on merits. However, it is alleged that the top leaders of the Nigerian government needed to be bribed to get the contract. It is alleged that KBR paid these bribes through a lawyer, Jeffrey Tesler. KBR was awarded the initial contracts, and several more through the years to build LNG plants in Nigeria. However, a whistleblower from one of the KBR consortium’s member companies, defending himself against charges of embezzlement, revealed details of illegal payments that the French and Swiss authorities confirmed—payments to Nigerian officials, KBR executives, as well as other subcontractors by Jeffrey Tesler, who in turn was officially paid by KBR for “services.”



Simple questions

1.Is it ethical to pay bribes if the initial bid was lower than the competitor anyway?

2.What about payments to KBR’s own executives—which is essentially a payment from the funds meant for the people of Nigeria?

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Mired in Corruption: Kellogg, Brown & Root in Nigeria(case 34)-Postscript

In November 2006 KBR, one of the largest military contractors, agreed to pay $8 million to settle six-year-old claims that it overcharged the Army for construction and other support services in the Balkans. KBR was accused of double billing the government and ordering unusable products while helping build Camp Bondsteel in Kosovo, prosecutors said. KBR was also accused of inflating prices for some unspecified goods that were not put out for competitive bid, the department said. Prosecutors said those incidents occurred in 1999 and 2000.In December 2006, a former employee of KBR, the company known until recently as the Halliburton subsidiary Kellogg Brown & Root, was sentenced to a year in prison for accepting $133,000 in bribes to steer Army catering contracts in Iraq to a Saudi Arabian company.In February 2007, Halliburton announced that it would complete its separation from KBR Inc. by offering current stockholders the remaining 81 % stake in KBR, its former subsidiary. At the time KBR was the largest American military contractor in Iraq.In March 2007, Halliburton announced that it is moving the office of its CEO to Dubai. The company claimed that the transfer of David J. Lesar, its chairman and chief executive, was merely a response to the growing business opportunities in the Middle East and nearby areas. It will remain incorporated in the United States. The investigation into KBR’s activities was still ongoing.



Strategic issues & questions

1.The legal and ethical aspects of KBR’s bribes

2.The role of a corporation in promoting ethical conduct

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BribeBribery, a form of pecuniary corruption, is an act usually implying money or gift given that alters the behaviour of the recipient in ways not consistent with the duties of that person or in breach of law. Bribery constitutes a crime and is defined by Black's Law

as the offering

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Dictionary , giving, receiving, or soliciting of any item of value to influence the actions of an official or other person in discharge of a public or legal duty.

http://en.wikipedia.org/wiki/Black%27s_Law_Dictionary








GiftA gift or present is the transfer of something, without the need for compensation that is involved in trade. A gift is a voluntary act which does not require anything in return. Even though it involves possibly a social expectation of reciprocity, or a return in the form of prestige or power, a gift is meant to be free.

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http://en.wikipedia.org/wiki/Trade


Week 12Corporate Social Responsibility

Ethics and Strategy1.Business ethics are the accepted principles of right or

wrong governing the conduct of businesspeople.2.Ethical dilemmas occur when:

1)There is no agreement over what the accepted principles are2)None of the available alternatives seem ethically acceptable

3.Many accepted principles are codified into laws:1)Tort laws – governing product liability2)Contract law – contracts and breaches of contracts3)Intellectual property law – protection of intellectual property 4)Antitrust law – governing competitive behavior5)Securities law - issuing and selling securities 6)Behaving ethically goes beyond staying within the law 99



Ethical Issues in Strategy

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1.Self-dealing-occurs when managers find a way to feather their own nests withcorporate monies, e.g. Tyco

2.Information manipulation-occurs when managers use their control over corporate data to

distort or hide information in order to enhance their own financial situation or the competitive position of the firm, e.g. Enron

3.Anticompetitive Behaviour-covers a range of actions aimed at harming actual or potential

competitors, most often by using monopoly power, and thereby enhancing the long0run prospects of the firm, e.g. Microsoft



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4.Opportunistic Exploitation -occurs when the managers of a firm seek to unilaterally rewrite the

terms of a contract with suppliers, buyers, or complement providers in a way that is more favorable to the firm, often using their power to force the revision through, e.g. Boeing vs. Titanium Metals Corp.

5.Substandard Working Conditions-arise when managers underinvest in working conditions or pay

employees below-market rates in order to reduce their costs of production, e.g. Nike

6.Environmental Degradation-occurs when the firm takes actions that directly or indirectly result in

pollution or other forms of environmental harm, e.g. OB

7.Corruption-can arise in a business contract when managers pay bribes to gain

access to lucrative business contracts, e.g. KBR



Nike and the Sweatshop1.Nike- established in 1972 by former University of Oregon

track star Phil Knight

2.By 2004, revenue is 12 billion USD, ROIC is 17.5%

3.Global Exchange- criticizing Nike for exploiting the poor4.CBS 48 Hours- reporting a Vietnamese woman working

six days a week, for only 20 cents an hour5.Ernst & Young- reporting the fatal work environment

Question: Why is Nike criticized?1212



Corporate Social Responsibility

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1.Social Responsibility (Dess et al. 2007)

-the expectation that businesses or individuals will strive to improve the overall welfare of society

-Form the perspective of a business, this means that managers must take active steps to make society better by virtue of the business being in existence

2.’02 Corporate Citizenship poll by Cone Communications-84% of Americans say they would switch brands to one associated

with a good cause

3.’01 hill & Knowlton/Harris Interactive poll-79% Americans consider corporate citizenship when deciding

whether to buy a particular company’s product



Reality of Business Ethics

1.A survey-by the Ethics Resource Center-1,325 employees of 747 US companies-48% employees surveyed said that they had engaged in one or

more unethical or illegal actions during the past year-cutting corners on quality (16%)-covering up incidents (14%)-abusing or lying about sick days (11%)-lying to or deceiving customers (9%)

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2.A survey of 111 multinationals

-70% executives said that they would bend the rules to attain their objectives

-the best common reasons are:1)organizational performance required it- 74%2)Rules were ambiguous or out of date- 70%3)Pressure from others and everyone does it- 47%

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Why do some managers behave unethically?

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Roots of Unethical Behaviour

1.Personal ethics code: -will have a profound influence on behavior as a businessperson

2.Do not realize they are behaving unethically:-by failing to ask the right questions

3.Organization’s culture:-de-emphasizes ethics and considers primarily economic

consequences

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4.Unrealistic performance goals: -encouraging and legitimizing unethical behaviour

5.Unethical leadership:-that encourages and tolerates behavior that is ethically suspect

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A Case of General Mills

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1.General Mills in Minneapolis

1)in Hawthorne, just five miles away, per capita murder rate 70% higher than that of New York

2)General Mills spent 65 Million USD and donated thousands of employee hours to help clean up Hawthorne, in 2002 alone

3)Questions-Is this the best use of General Mill’s time and money?-Does being ethical means going beyond the law?



Two Approaches

1.The Friedman Doctrine in the 1970s

1)Milton Friedman’s basic position is that the only social responsibility of business is to increase profits, as long as the company stays within the law and the rules of the game without deception or fraud.

2)He explicitly rejects the idea that businesses should undertake social expenditures beyond those mandated by the law and required for the efficient running of a business.

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2.Carrol’s Four Responsibilities of Business

1)Economic: to produce goods and services of value

2)Legal: to obey legal obligations

3)Ethical: to follow the generally held beliefs about behaviour in society

4)Discretionary: to keep purely voluntary obligations

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Social Responsibilities

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Economic (Must Do)

Legal(Have to do)

Ethical (Should do)

Discretionary(Might Do)

Source: Carroll (1979) “A Three Dimensional Conceptual Model of Corporate Performance



*Both Friedman and Carroll argue their positions based on the impact of socially responsible actions on a firm’s profits

1)Friedman: socially responsible actions hurt a firm’s efficiency

2)Carroll: a lack of social responsibility results in increased government regulations, which reduce a firm’s efficiency

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Empirical Research

1.No significant relationship-McWilliams & Siegel (2000)-Rechner & Roth (1990)-Aupperle, Carroll & Hatfield (1985)

2.Positve relationship-M. Arthur (2003)-Waddock & Graves (1997)-Russo & Fouts (1997)-H. Meyer (2000)

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Examples of Reward

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1.To charge premium prices and gain brand loyalty (Ben & Jerry’s Ice Cream)

2.To generate enduring relationships with suppliers and distributors (Maytag)

3.To attract outstanding employees who prefer working for a responsible firm (P&G)

4.To be welcomed into a foreign country (Levi Strauss)5.To utilize the goodwill of public officials for support in

difficult times (Minnesota supported Dayton Hudson’s (now Target) fight to avoid being acquired by Dart Industries of Maryland)

6.To attract capital infusions from investors (3M)



Behaving Ethically

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1.Favor hiring and promoting people with a well-grounded sense of personal ethics.

2.Build an organizational culture that places a high value on ethical behavior.

3.Make sure that leaders not only articulate but also act in an ethical manner.

4.Put decision-making processes in place that require people to consider the ethical dimension of business decisions.

5.Use ethics officers.6.Put strong corporate governance processes in place.7.Act with moral courage and encourage others to do the

same.



Three Guidelines for Ethical Behavior

1.Utilitarianism in the 18th and 19th centuries

1)The moral worth of actins is determined by its consequences-leading to the best possible balance of good versus bad consequences, committed to the maximization of good and the minimization of harm

2)Cost and benefit often cannot be measured correctly3)Justice is not considered

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2.Rights Theories in the 20th century

1)Human beings have fundamental rights and privileges2)Rights establish a minimum level of morally acceptable

behavior-something that takes precedence over or trumps a collective good

3)It is important to note that along with rights come obligations

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3.Justice Theories

1)Focus on the attainment of a just distribution of economic goods and services that is considered to be fair and equitable

2)John Rawls argues that all economic goods and services should be distributed equally except when an unequal distribution would work to everyone’s advantage: difference principle

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*Cavanagh proposes that we solve ethical problems by asking the following three questions

1)Utility: Does it optimize the satisfactions of all stakeholders?

2)Rights: Does it respect the rights of the individuals involved?

3)Justice: Is it consistent with the canons of justice?

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Dell’s Code of Ethics

1.Trust-our word is good2.Integrity-we do the right thing without compromise3.Honesty-what we say is true4.Judgement-we think before we act5.Respect-we treat people with dignity6.Courage-we speak up for what is right7.Responsibility-we accept the consequences of our action

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Johnson & Johnson’s Credo1.We believe our first responsibility is to the doctors,

nurses, and patients, to mothers and fathers and all others who use our products and services

2.We are responsible to our employees, the men and women who work with us throughout the world

3.We are responsible to the communities where we live and work and to the world community as well.

4.Our final responsibility is to our stockholders

Source: Johnson & Johnson’s web site (www.jnj.com)3232



to Social Innovation (Dess et al. 2007)

1.Rosabeth Moss Kanter & colleagues

1)Leadign edge companies are creating a new paradigm: moving beyond social responsibility to social innovation

2)Such companies consider community needs not as social ills that require ‘Band-Aid’ solutions such as financial donations and volunteer work. Instead, they see them as valuable opportunitiesto develop ideas and demonstrate business technologies as well answays to find and serve new markets

3)IBM’s Reinventing Education Program in 1994-Wired For Learning Program

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Triple Bottom Lines (Dess et al. 2007)

1.Financial as well as Environmental and Social Costs

1)Failing to account for the environmental and social costs of doing business poses risks to the company and the community in which it operates

2)The McKinsey Corporation’s survey of more than 400 senior executives of companies around the world found that 92% agreed with former Sony President Akio Morita’s contention that the environmental challenge will be one of the central issues inthe 21st century

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Week 12Paper Discussion

Do well by doing good?Don’t count on it.

1.Margolis & Elfenbein (2008)

2.Corporate misdeeds are costly to companies- if people find out

3.Doing good is unlikely to cost shareholders4.Profitability should not be the primary rationale for

corporate social responsibility

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Corporate social responsibility and firm financial performance

1.McGuire et . (1988)

2.A firm’s prior performance is more closely related to corporate social responsibility than is subsequent performance

3.Measures of risk are more closely associated with social responsibility than previous studies have suggested

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Help employees give away some of that bonus

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1.Norton and Dunn (2008)

2.When companies hand out bonuses, one intention is to make the rewarded workers happy

3.But how employees spend that bonus money is what really affects their happiness

4.People get no meaningful boost in happiness by spending money on things like new clothes, TVs, and iPods

5.Prosocial spending truly caused people’s happiness


Week 12For week12

Simple Questions1.Identity construction under globalization

Reading three articles (distributed in advance)

Lecture on Globalization & Change (chapters 8 & 13)

Preparation for Presentation

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lecture week12

Documents

root kbr

nigeria case

kbr executives

employee of kbr

autumn termweek

case discussion33mired

case discussion55mired

people of nigeria