Chapter 2

1. Chapter 2 Corporate Governance and Social Responsibility PowerPoint Slides Dr.Vijaya Kumar Skyline College Chapter 2 Wheelen/Hunger

2. Corporate Governance Defined: Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation. Chapter 2 Wheelen/Hunger

3. Corporate Governance • Setting corporate strategy, overall direction, • mission or vision • Hiring and firing the CEO and top management • Controlling, monitoring, or supervising • top management • Reviewing and approving the use of resources • Caring for shareholder interests Board of Directors Chapter 2 Wheelen/Hunger

4. Corporate Governance Role of the Board in strategic management • Monitor • Developments inside and outside the corporation • Evaluate & Influence • Review proposals, advise, provide suggestions and alternatives • Initiate & Determine • Delineate corporation’s mission and specify strategic options Chapter 2 Wheelen/Hunger

5. Board of Directors Members: Inside directors • “Management directors” • Officers or executives employed by corporation Outside directors • “Non-management directors” • May be executives of other firms but not employed by board’s corporation Chapter 2 Wheelen/Hunger

6. Board of Directors Continuum DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT High Low (Active) (Passive) Rubber Minimal Nominal Active Phantom Stamp Review Participation Participation Catalyst Permits officers Formally Involved to a Approves, Takes the Never knows what to do, if to make all reviews limited degree questions, and leading role in decisions. It selected issues in the perform- makes final de- establishing anything; no degree of votes as the that officers ance or review cisions on mis- and modifying involvement. officers recom- bring to its of selected key sion, strategy, the mission, mend on action decisions, policies, and objectives, issues. indicators, or objectives. Has strategy, and programs of active board policies. It has management. committees. a very active Performs fiscal strategy and manage- committee. ment audits. Chapter 2 Wheelen/Hunger

7. 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. Chapter 2 Wheelen/Hunger

8. 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. Chapter 2 Wheelen/Hunger

9. Board of Directors “Outsider” overly simplistic term -- Some outsiders are not truly objective and could be considered insiders. Examples: • Affiliated Directors • Retired Directors • Family Directors Chapter 2 Wheelen/Hunger

10. Board of Directors Membership Trends (Survey, 1999) • 75% of boards have at least 1 female director • 25% of boards have two female directors • 60% of boards have at least one minority member Chapter 2 Wheelen/Hunger

11. Board of Directors Codetermination • The inclusion of a corporation’s workers on its board of directors. Chapter 2 Wheelen/Hunger

12. Board of Directors Interlocking Directorates Direct Interlocking Directorate – • When two firms share a director or when an executive of one firm sits on the board of a second firm. Indirect Interlocking Directorate – • When two corporations have directors who also serve on the board of a third firm. Chapter 2 Wheelen/Hunger

13. Board of Directors Nominations & Elections Traditional Approach: • CEO invites members to serve • Shareholders approve in annual proxy statement • All nominees are usually elected Chapter 2 Wheelen/Hunger

14. Board of Directors Nominations & Elections Staggered Board Approach: Corporations whose directors serve terms of more than one year, divide the board into classes, and stagger elections so that only a portion of the board stands for election each year. Chapter 2 Wheelen/Hunger

15. Board of Directors Nominations & Elections Criteria for Selection • Wiling to challenge management • Special expertise • Availability for advice and meetings • Expertise on global issues • Understands key technologies • External contacts valuable to the firm • Detailed knowledge of industry • High visibility in field • Accomplished in representing firm to stakeholders Board of Director Membership Chapter 2 Wheelen/Hunger

16. Board of Directors Organization of the Board • Size • 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 Chapter 2 Wheelen/Hunger

17. Board of Directors Corporate Governance • No consistent link between board membership, leadership, structure, and financial performance of firm • Investors pay more for a firm’s stock when positive toward good corporate governance— Belief that • Good governance leads to better performance over time • Reduces risk of company finding itself in trouble • Governance is a major strategic issue Chapter 2 Wheelen/Hunger

18. Entrepreneurship management Partnership management Chaos management Marionette management Styles of Corporate Governance High Degree of Involvement By Top Management Low High Degree of Involvement By Board of Directors Low Chapter 2 Wheelen/Hunger

19. Board of Directors Trends in Corporate Governance • Boards more involved in reviewing, evaluating, and shaping strategy • Institutional investors active on boards; pressure on CEO for firm performance • Shareholders demand directors own more than token amounts of the firm’s stock • Non-affiliated outside directors increasing Chapter 2 Wheelen/Hunger

20. Board of Directors Trends in Corporate Governance • Boards becoming smaller • Boards taking more control of board functions • Corporations becoming more global; international experience needed • Societal expectations that boards balance profitability and social responsibility • Diversity of board members Chapter 2 Wheelen/Hunger

21. Top Management • Responsibilities of Top Management: • Provide executive leadership and a strategic vision • Manage the strategic planning process Chapter 2 Wheelen/Hunger

22. 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. Chapter 2 Wheelen/Hunger

23. Top Management CEO and Clear Strategic Vision Common Characteristics: • CEO articulates a strategic vision • CEO presents a role for others • CEO communicates high performance standards and shows confidence in followers Chapter 2 Wheelen/Hunger

24. Strategic Management Process Strategic Planning Staff -- • Supports top management and business units in the strategic planning process. Chapter 2 Wheelen/Hunger

25. Strategic Management Process Strategic Planning Staff Responsibilities: • Identify and analyze company-wide strategic issues, suggest corporate strategic alternatives • Work as facilitators with business units to guide them through the strategic planning process Chapter 2 Wheelen/Hunger

26. Social Responsibility Key question for strategic decision makers: “Should strategic decision makers be responsible only to shareholders or do they have broader responsibilities?” Chapter 2 Wheelen/Hunger

27. Social Responsibility Friedman’s Traditional View “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits…” Chapter 2 Wheelen/Hunger

28. Social Responsibility Carroll’s Four Responsibilities • Economic • Legal • Ethical • Discretionary Chapter 2 Wheelen/Hunger

29. Social Responsibility Chapter 2 Wheelen/Hunger

30. Social ResponsibilityBenefits • 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 and money policing contracts • Can attract outstanding employees who prefer working for a responsible firm • More likely to be welcomed into a foreign country Ben & Jerry’s Maytag Procter & Gamble Levi Strauss Chapter 2 Wheelen/Hunger

31. 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. Chapter 2 Wheelen/Hunger

32. Social Responsibility Kohlberg’s Levels of Moral Development • Preconventional Level • Concern for self • Conventional Level • Consideration of laws and norms • Principled Level • Adherence to internal moral code Chapter 2 Wheelen/Hunger

33. Social Responsibility Code of Ethics: • Specifies how an organization expects its employees to behave while on the job. Chapter 2 Wheelen/Hunger

34. 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 Chapter 2 Wheelen/Hunger

35. 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 Chapter 2 Wheelen/Hunger

36. Social Responsibility Impact of the Internet Issues – • Cybersquatting • Taxation • Public Interest Chapter 2 Wheelen/Hunger