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CORPORATE PERFORMANCE, GOVERNANCE, & BUS ETHICS

CORPORATE PERFORMANCE, GOVERNANCE, & BUS ETHICS. CHAPT. 11, BUS 189 SPRING 2010 DR. MARK FRUIN. CRISIS IN CORPORATE GOVERNANCE?. ENRON, WORLD COM, ARTHUR ANDERSON, WALL STREET COLLAPSE, GM & CHRYSLER BANKRUPTCY & BAIL OUT, & SO ON…

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CORPORATE PERFORMANCE, GOVERNANCE, & BUS ETHICS

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  1. CORPORATE PERFORMANCE, GOVERNANCE, & BUS ETHICS CHAPT. 11, BUS 189 SPRING 2010 DR. MARK FRUIN

  2. CRISIS IN CORPORATE GOVERNANCE? • ENRON, WORLD COM, ARTHUR ANDERSON, WALL STREET COLLAPSE, GM & CHRYSLER BANKRUPTCY & BAIL OUT, & SO ON… • PRESSURES FOR PERFORMANCE VERSUS NORMS OF BEHAVIOR, DISCLOSURE & SOCIAL RESPONSIBILITY • OR, IS FRAUDULENT BEHAVIOR IN THE GENES? • ARE PRESSURES FOR PERFORMANCE THE SAME AS SAYING ANYTHING GOES? • RAISING THE QUESTION • WHY DO FIRMS EXIST • TO WHOM ARE THEY (FIRMS) MOST RESPONSIBLE? • CORPORATIONS ARE TREATED AS INDIVIDUALS LEGALLY • UNITARY OWNERSHIP & CONTROL ARE ASSUMED • WHAT SORT OF RESPONSIBILITIES DO THEY HAVE?? (BESIDES MAKING MONEY)

  3. WHAT ARE THE LEGAL REQUIREMENTS VS MORAL EXPECTATIONS? • FIRMS ARE REQUIRED TO DO A LOT LEGALLY • KEEP ACCURATE ACCOUNTS • REPORT FULLY & HONESTLY (SARBANNES OXLEY) • PAY TAXES • LAWS AGAINST DISCRIMINATION • LAWS AGAINST POLLUTION • PRODUCT LIABILITY • ANTI-TRUST LAWS (COMPETE FAIRLY) • FIRMS ARE EXPECTED TO DO MORE MORALLY • MAINTAIN EMPLOYMENT • SUSTAIN COMMUNITIES • BE A GOOD CORPORATE CITIZEN • DO NO HARM • TO NOT BE GREEDY

  4. CAUSES OF POOR PERFORMANCE • POOR MANAGEMENT • POOR DECISION MAKING • POOR COORDINATION • POOR IMPLEMENTATION • HIGH COST STRUCTURES • LACK OF ADEQUATE DIFFERENTIATION • OVEREXPANSION • STRUCTURAL SHIFTS IN DEMAND & NEW COMPETITION • ORGANIZATIONAL INERTIA • !!COMPETITION IS BURIED IN CAUSE #5!!

  5. NOT MENTIONED IN BOOK • CHANGING CONCEPTIONS OF WORK AND ORGANIZATION • FROM AGRICULTURE & MANUFACTURING TO SERVICES (FOR USA) • FROM VERTICALLY INTEGRATED TO LESS V.I. FIRMS (BUT NOT YET TO VIRTUAL FIRMS) • THEORY X VS. THEORY Y • LOSS OF TRADITIONAL MEANING-GIVING RELATIONSHIPS • CLOSE CONNECTIONS BETWEEN FIRMS AND COMMUNITIES • CLOSE CONNECTIONS BETWEEN FIRMS AND FOUNDING INVESTORS & GOVERNMENT (LOCAL & REGIONAL) • TURNOVER/LAYOFFS AFFECT SENSE OF BELONGING

  6. IN A GLOBAL WORLD • EVERYTHING IS FOR SALE • FIRMS GO EVERYWHERE IN SEARCH OF COMPETITIVE ADVANTAGE • TRADITIONAL TIES ARE BROKEN • TRADITIONAL IDEAS OF RECIPROCITY AND RESPONSIBILITY UNDERMINED BY RELENTLESS COMPETITION & DISTANT OPPORTUNITIES • TREADMILL NEVER STOPS • ALWAYS NEW COMPETITION

  7. IMPROVING PERFORMANCE (BACK TO BOOK) • CHANGE LEADERSHIP • WE SAW THIS WITH McDONALD’S & WALT DISNEY • CHANGE STRATEGY • WE SAW THIS WITH McDONALD’S & WALT DISNEY • CHANGE ENVIRONMENT (NOT IN BK) • BOTH McD & WALT DISNEY DO FABULOUSLY WELL OVERSEAS • CHANGE ORGANIZATIONS • UNFREEZE ORGANIZATION • CHANGE & IN A TIMELY WAY • “REFREEZE” ORGANIZATION

  8. STAKEHOLDERS & PERFORMANCE • INTERNAL & EXTERNAL STAKEHOLDERS • SOME STAKEHOLDERS LACK VOICE • NEAR, DISTANT & REMOTE STAKEHOLDERS • HOW IS CLOUT COUNTED & EXERCISED? • ALL STAKEHOLDERS ARE IN EXCHANGE RELATIONSHIPS WITH COMPANY • FIRM MUST TAKE (CONFLICTING CLAIMS) INTO ACCOUNT WHEN FORMULATING STRATEGIES

  9. STAKEHOLDERS VS SHAREHOLDERS • IN COUNTRIES WITH STRONG PROPERTY RIGHTS EMPHASIS, SHAREHOLDERS ARE AMONG STRONGEST STAKEHOLDERS • “COMPANIES EXIST TO MAXIMIZE VALUE FOR SHAREHOLDERS” MENTALITY VERSUS FIRMS EXIST FOR THE BENEFIT OF OTHERS MENTALITY • SHAREHOLDERS BENEFIT FROM DIVIDENDS PAID & SHARE APPRECIATION • SHARE APPRECIATION HINGES ON LONG-RUN RETURN ON INVESTED CAPITAL (ROIC)

  10. AGENCY THEORY (& PROBLEM) • AGENCY THEORY LOOKS AT SITUATIONS WHERE DECISION MAKING IS DELEGATED FROM PRINCIPAL TO AGENT • CEO AS PRINCIPAL VS CEO AS AGENT • BERLE AND MEANS FIND THAT SEPARATION OF OWNERSHIP & CONTROL (MGMT) THE “NORM” AS EARLY AS 1920s IN LARGE US FIRMS • AGENCY PROBLEM ARISES WHEN PRINCIPALS & AGENTS HAVE DIFFERENT GOALS, INFORMATION & VALUES • CEO COMPENSATION • CEO AS EMPIRE BUILDERS • CEO VERSUS OTHER CORPORATE EXECUTIVES • SUBSIDIARY CEO VS HOLDING CO/CORPORATE CEO

  11. GOVERNANCE MECHANISMS • BOARD OF DIRECTORS • INSIDE Vs OUTSIDE DIRECTORS • STOCK BASED COMPENSATION • WHEN STOCK OPTIONS ARE EXPENSED • REDUCTIONS IN NET PROFITS, p. 389 • FINANCIAL STATEMENTS/AUDITING • “GAMING” THE SYSTEM • CONFLICT OF INTEREST BETWN AUDITING, CONSULTING & RETAINING THE BUSINESS • DIFFICULTIES OF DISCHARGING FIDUCIARY DUTIES

  12. WHEN THE GOVERNMENT • IS THE RESIDUAL STAKEHOLDER • A LOT OF FOLKS SAY • “THEY WON’T MISS IT” • I DESERVE THIS FOR ALL THE YEARS I’VE BEEN PAYING TAXES (AND NOT GETTING ANYTHING FOR IT) • IF WE CAN GET AWAY WITH IT, WE DESERVE IT/IT’S OURS

  13. GOVERNANCE & TAKEOVERS • ACCURACY OF FINANCIAL INFORMATION AFFECTS TAKEOVERS • PRICES PAID • PROBLEMS ANTICIPATED • STRATEGIES LAID (“THE BEST LAID PLANS OF MICE AND MEN…”) • CAN THOSE TAKING OVER DO A BETTER JOB THAN THOSE CURRENTLY RUNNING THE COMPANY? • HOW DIFFERENT PARTS OF THE COMPANY ARE VALUED AFFECTS GOVERNANCE

  14. GOVERNANCE MECHANISMS ON THE INSIDE • BALANCED SCORECARD • FINANCES BALANCED BY FUNCTIONAL STRATEGIES AND GOODNESS OF FIT • STRATEGIC CONTROL SYSTEMS • ESTABL GOALS & TARGETS • MEASURE, MONITOR & MANAGE • ETHICS AND COMPANY CULTURE • IS THE CULTURE ONE OF GETTING AHEAD & DAMN THE CONSEQUENCES? • WHEN BOSSES DO BAD THINGS, WHAT DO YOU DO? • ASK FOR A RAISE (TO KEEP YOUR MOUTH SHUT)? • GO OVER YOUR BOSS? • ASK FOR A TRANSFER? • SOMETHING ELSE?

  15. ETHICAL MODELS • UTILITARIAN MODEL • GREATEST GOOD FOR THE GREATEST NUMBER • A QUESTION OF NUMBERS • MORAL RIGHTS MODEL • PROTECT & PROMOTE BASIC RIGHTS • A QUESTION OF WHAT’S MOST IMPORTANT • JUSTICE MODEL • WHO SHOULD BENEFIT AND WHY • PROCEDURAL JUSTICE • DISTRIBUTIVE JUSTICE • IN A GLOBAL WORLD, HAVES AND HAVE-NOTS

  16. MAJOR CHALLENGES TO CORP PERFORMANCE & GOVERNANCE • MAINTAIN CONSISTENT ROIC? • UNDERSTAND GLOBALIZATION AND POSITION COMPANY ACCORDINGLY? • HOW ARE EMERGING ECONOMIES, NEW MARKETS & TECHNOLOGIES AFFECTING OUR FUTURE? • GLOBAL WARMING/CLIMATE CHANGE? • IRREVERSIBLE ENVIRONMENTAL EFFECTS • SEA TEMPERATURE RISING • GLACIERS MELTING • ASSOCIATED WEATHER CHANGES, LIKE HURRICANES • OTHER • SCHWARTZENEGGER - A NEW TYPE OF POLITICIAN? • A NEW SOCIAL CONTRACT

  17. THUS, MAJOR CHALLENGES TO STRATEGY • FUNCTIONAL LEVEL STRATEGY WILL LIKELY BECOME MORE IMPORTANT • ENERGY EFFICIENCY AND CARBON EMISSIONS ADDED TO FUNCTIONAL STRATEGIES • LABOR/FACTORY CONDITIONS OF THE PAST 10-20 YEARS: DRIVE FOR EFFICIENCY AND QUALITY • BUSINESS LEVEL STRATEGY WILL BE IMPACTED IN TERMS OF PUBLIC OPINION, REPUTATION FOR PRODUCT DESIGN, REPUTATION FOR SUPPLY CHAIN MANAGEMNT • CORPORATE LEVEL STRATEGY WILL BE AFFECTED - HOW?

  18. WALT DISNEY • BY CREATING A WORLD WHERE FANTASY IS MASS PRODUCED & REIGNS SUPREME IS THE WALT DISNEY COMPANY BENEFITING SOCIETY? • WALT DISNEY TRIES TO CONTROL EVERY-THING POSSIBLE IN ITS THEME PARKS, FROM THE LENGTH OF EMPLOYEES’ HAIR TO EVERY- THING CONSUMED AND DRUNK • IS THIS LEGAL & IS IT MORALLY DEFENSIBLE? • WHICH STAKEHOLDERS ARE MOST IMPORTANT TO THE WALT DISNEY CO? WHAT EVIDENCE SUPPORTS YOUR ANSWER? • WHAT DOES WALT DISNEY OWE SOUTHERN CALIFORNIA & FLORIDA • IF DISNEYLAND & DISNEYWORLD CONSISTENTLY LOST MONEY, WOULD WALT DISNEY BE JUSTIFIED IN CLOSING THE PARKS?

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