The German Jordanian University (GJU)

Summer Semester 2011MGT 316

Instructor: Montaser Tawalbeh

Business EthicsSchool of Managerial and Logistic Sciences

Part 1. Defining Business Ethics

Business Ethics A Real World Approach

Andrew W. Ghillyer2nd Edition

New York, NYISBN 9780071100656

Part 2. The Practice of Business Ethics

Chapter 5. Corporate Governance

- Corporate Governance- What does corporate governance look like?- In pursuit of corporate governance- Two governance methodologies: “comply or

explain” or “comply or else”.- “In the know” or “in the dark”

Part 2. The Practice of Business Ethics

Chapter 5. Corporate Governance

- The chairman and the CEO- Effective corporate governance- Twenty-two questions for diagnosing your

board- The dangers of a corporate governance checklist- A fiduciary responsibility

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceFrontline Focus

“Incrimination Evidence” (p.107)

Q1, 2, and 3. (p.107)

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceCorporate Governance“Is the process or system by which business corporations are

directed and controlled”. The business world has seen an increasing number of scandals in

recent years, and numerous organisations have been exposed for poor management practices and fraudulent financial reporting.

Before, the development of large corporations, which are separate legal entities, managers and owners started to hire professional managers to run the business on their behalf.

The development of a separate entity allowed organisations to raise funds from individual shareholders to grow their operations.

The involvement of these individual shareholders diluted the

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceCorporate GovernanceOwnership of the original owners and also brought in a new group to

which the managers of the business would now be accountable. As the corporations grew in size, and pension funds and other institutional investors purchased larger blocks of shares, the potential impact of the individual shareholder was greatly diminished, and the managers were presented with a far more powerful owner to whom they were now accountable.

Corporate governance is concerned with how well organisations meet their obligations to all these people.

Corporate governance is about the way in which boards oversee the running of a company by its managers, and how board members are in turn accountable to shareholders and the company.

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceWhat does corporate governance look like?The owners of the corporation supply equity or risk capital to

the company by purchasing shares in the corporation.The board of directors:Is elected by the owners to represent their interests in the

effective running of the corporation. They are a group of individuals hired to oversee governance of an organisation. Elected by vote of the shareholders at the annual general meeting (AGM), the true power of the board can vary from institution to another from a powerful unit that closely monitors the management of the organisation, to a body that merely rubber-stamps the decisions of the chief executive officer (CEO) and executive team.

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceThe Audit committee:An operating committee staffed by members of the board of

directors plus independent or outside directors. The committee is responsible for monitoring the financial policies and procedures of the organisation-specifically the accounting policies, internal controls, and the hiring of external auditors.

Compensation committee:An operating committee staffed by members of the board of

directors plus independent or outside directors. The committee is responsible for setting the compensation for the CEO and other senior executives. Typically, this compensation will consist of a base salary, performance bonus, stock options, and other perks.

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceThe Corporate Governance CommitteeThe corporate governance committee represents a more public

demonstration of the organisation’s commitment to ethical business practices. The committee monitors the ethical performance of the corporation and oversees compliance with the company’s internal code of ethics as well as any federal and state regulations on corporate conduct.

See Figure 5.1 Governance of the Modern Corporation (p. 110)

Corporate Governance Committee

AuditCommittee

Compensation Committee

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Progress Check QuestionsQ1, Q2, Q3, and Q4. (p.110).

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceIn Pursuit of Corporate Governance

While the issue of corporate governance has reached new heights of media attention in the wake of recent corporate scandals, the topic itself has been receiving increasing attention for over a decade.

Successful governance in the world in the 21st century requires companies to adopt an inclusive approach. The company must be open to institutional activism and there must be greater emphasis on the sustainable or non-financial aspects of its performance.

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceIn Pursuit of Corporate Governance

Boards must apply the test of fairness, accountability, responsibility and transparency to all acts or omissions and be accountable to the company but also responsive and responsible towards the company’s identified stakeholders. The correct balance between conformance with governance principles and performance in an entrepreneurial market economy must be found, but this will be specific to each company.

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceTwo governance methodologies: “Comply or Explain” or

“Comply or Else”

Comply or Explain: A set of guidelines that require companies to abide by a set of operating standards or explain why they choose not to.

Comply or Else: A set of guidelines that require companies to abide by a set of operating standards or face stiff financial penalties.

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Progress Check QuestionsQ5, Q6, Q7, and Q8. (p.112).

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate Governance“In the know” or “ In the dark”

With the exception, perhaps, of corporate governance committees, each of the corporations that have faced charges for corporate misconduct in recent years used the governance model shown in Figure 5.1. When questioned, the boards of these corporations all shared similar stories of being “ambushed” or kept in the dark about the massive frauds the senior executives of their corporations allegedly carried out.

What about employees and investors seeking to put their retirement funds in dependable companies?

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Ethical Dilemma (ps. 113, 114, 115)

Case 5.1, A Tale of two boardsQ1, Q2, Q3, & Q4.

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceEffective corporate governance

• Effectively governed organizations have mechanisms to oversee the long-term strategy of the company and the appointment of the personnel who are held responsible of delivering the strategy.

• The appointment of those personnel includes selection, ongoing evaluation and compensation.

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceEffective corporate governance

Six steps for the board to be effective:1. Create climate of trust and condor 2. Foster a culture of open decent3. Mix up roles4. Ensure individuals accountability 5. Let the board assess leadership talent 6. Evaluate the board performance

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceTwenty two questions for diagnosing your board

Walter Salmon recommended a checklist of 22 questions to assess the quality of the company’s board to mention some:

1. Are there three or more outside directors for every insider?2. Are the insiders limited to the CEO, the COO, and the CFO?3. Do your directors routinely speak to senior managers who

are not represented on the board?

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Ethical Dilemma (p.118)

Case 5.2 “Richard Grasso and the NYSE”Q1, Q2, Q3, & Q4.

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Corporate GovernanceA Fiduciary Responsibility

• Corporate governance is about managers fulfilling a fiduciary responsibility to the owners of their companies

• “ A company pays to promote good corporate governance”• Corporate governance do not defend against fraud or

incompetence, it just tests how far such aberrations (abnormal) can be discouraged and how quickly they can be brought to light.

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Progress Check QuestionsQ13, Q14, Q15, and Q16. (p.121).

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Life Skills (p.65)

Governing Your Career

Part 2. The practice of Business Ethics Chapter 5. Corporate Governance

Frontline FocusIncriminating Evidence” – Marco Makes a Decision (p.

123)- Answer Q1, Q2, and Q3.