Chapter Eleven Corporate Performance, Governance, and Business Ethics.
-
Upload
alex-amison -
Category
Documents
-
view
219 -
download
2
Transcript of Chapter Eleven Corporate Performance, Governance, and Business Ethics.
Chapter Eleven
Corporate Performance, Governance, and Business
Ethics
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 2
Stakeholders and Corporate Performance
Stakeholders are in an exchange relationship with the company• Contributions: they supply the
organization with important resources• Inducements: in exchange they
expect their interests to by satisfied
Stakeholders are individuals or groups with an interest, claim, or stake in the company, what it does, and how well it performs.
Companies should pursue strategies that maximize long-run shareholder value and
must also behave in an ethical and socially responsible manner.
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 3
Stakeholders and the Enterprise
Figure 11.1
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 4
Identify stakeholders most critical to survival:• Identify which stakeholders• The stakeholders’ interests and concerns• Claims stakeholders are likely to make
on the organization• Stakeholders who are most important
to the organization’s perspective• Identify the resulting strategic challenges
Usually the most important:• Customers • Employees • Stockholders
Stakeholder Impact Analysis
Companies must identify the most important stakeholders and give highest priority to
pursuing strategies that satisfy their needs.
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 5
Risk capital – No guarantee to the stockholders that:
• They will recoup their investment• Or earn a decent return
ESOPs – Employee Stock Option Plans Employees may also be shareholders
Stockholders are a company’s legal owners and the provider of risk capital, a major source of capital to operate a business.
Maximizing long-run profitability & profit growth is the route to maximizing returns to shareholders,
as well as satisfying the claims of most other stakeholder groups.
The Unique Role of Stockholders
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 6
Profitability, Profit Growth and Stakeholder Claims
1. Participating in a market that is growing2. Taking market share away from competitors3. Consolidating the industry via horizontal integration4. Developing new markets through: • Diversification • Vertical Integration • International Expansion
To grow profits, companies must be doing one or more of the following:
Stockholders receive their returns as: Dividend payments Capital appreciation in market value of shares
ROIC is an excellent measure of profitability.A company generating positive ROIC is adding to
shareholders’ equity and increasing shareholder value.
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 7
Agency Theory
Principal-agent relationships• Principal: person delegating authority• Agent: person to whom authority is delegated
The agency problem:• Agents and principals may have different goals.• Agents may pursue goals that are not in the best
interests of their principals.• Agents may take advantage of information asymmetries
to maximize their interests at the expense of principals. • It is difficult for principals to measure performance.• Trust • On-the-job consumption • Empire building
Agency relationships arise whenever one party delegates decision-making authority or control over resources to another.
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 8
The Tradeoff Between Profitability and Revenue Growth Rates
Figure 11.2Need to maximize long-run shareholder returns by seeking the right balance between company growth . . . and profitability and profit growth.
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 9
The Challenge for Principals
1. Shape the behavior of agents so that they act in accordance with goals set by principals
2. Reduce information asymmetry between agents and principals
3. Develop mechanisms for removing agents who do not act in accordance with goals and principals
Confronted with agency problems, the challenge for principals is to:
Principals try to deal with these challenges through a series of governance mechanisms.
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 10
Governance MechanismsGovernance mechanisms serve to limit the agency problem by aligning incentives between agents and principals and by monitoring and controlling agents.
The Board of Directors• Elected by stockholders• Legally accountable• Monitors corporate
strategy decisions• Authority to hire, fire,
and compensate• Ensures accuracy of
audited financial statements
• Inside directors• Outside directors
Stock-Based Compensation• Pay-for-performance• Stock options: The right to buy company shares
at a predetermined price at some point in the future
Financial Statements• Auditors • SEC • GAAP
The Takeover Constraint• Limits strategies that ignore
shareholder interests• Corporate raiders
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 11
How Options Skew the Bottom Line
Table 11.1
Source: D. Henry and M. Conlin, “Too Much of a Good Incentive?” Business Week, March 4, 2002, pp. 38–39.
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 12
Governance Mechanisms Inside a Company
Strategic control systems• To establish standards against which performance can be
measured• To create systems for measuring and monitoring performance • To compare actual performance against targets• To evaluate results and take corrective actions
Balanced Scorecard model approach is used to drive future performance
Employee incentives• Employee stock options and stock ownership plans• Compensation tied to attainment of superior efficiency,
quality, innovation, and responsiveness to customers
Important agency relationships also exist between levels of management within a company. Internal agency problems can be reduced by:
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 13
A Balanced Scorecard Approach
Figure 11.3
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 14
Ethics and Strategy
Business ethics are the accepted principles of right or wrong governing the conduct of businesspeople.
An ethical strategy is one that does not violate the accepted principles.
Ethical dilemmas occur when: • There is no agreement over what the accepted principles are• None of the available alternatives seem ethically acceptable
Many accepted principles are codified into laws:• Tort laws – governing product liability• Contract law – contracts and breaches of contracts• Intellectual property law – protection of intellectual property • Antitrust law – governing competitive behavior• Securities law - issuing and selling securities
Behaving ethically goes beyond staying within the law
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 15
Ethical Issues in StrategyEthical issues are due to a potential conflict between the goals of the enterprise, or the goals of the individual managers, and the rights of important stakeholders: Self-dealing Managers feather their nest with corporate monies Information manipulation Distort or hide information to enhance competitive or personal situation Anticompetitive behavior Actions aimed at harming actual or potential competitors Opportunistic exploitation Of other players in the value chain in which the firm is embedded Substandard working conditions Underinvest in working conditions or pay below market wages Environmental degradation Directly or indirectly take actions that result in environmental harm Corruption Companies pay bribes to gain access to lucrative business contracts.
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 16
The Roots of Unethical Behavior
Why do some managers behave unethically?No simple answers, but some generalizations:1. Personal ethics code: will have a profound
influence on behavior as a businessperson2. Do not realize they are behaving unethically:
by failing to ask the right questions3. Organization’s culture: de-emphasizes ethics
and considers primarily economic consequences4. Unrealistic performance goals: encouraging
and legitimizing unethical behavior5. Unethical leadership: that encourages and
tolerates behavior that is ethically suspect
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 17
Philosophical underpinnings of business ethics that can provide managers with a moral compass to help navigate through difficult ethical issues:The Friedman Doctrine 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.
Utilitarian and Kantian Ethics The moral worth of actions 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.
Rights Theories Recognizes that human beings have fundamental rights and privileges.
Rights establish a minimum level of morally acceptable behavior.
Justice Theories Focus on the attainment of a just distribution of economic goods and
services that is considered to be fair and equitable.
Philosophical Approaches to Ethics
Copyright © Houghton Mifflin Company. All rights reserved. 11 | 18
To make sure that ethical issues are considered in business decisions, managers should: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.
Behaving Ethically