Prentice Hall, 2002Chapter 2 Wheelen/Hunger 1 Chapter 2 Corporate Governance and Social...

Prentice Hall, 2002 Chapter 2Wheelen/Hunger

1

Chapter 2Corporate Governance

and

Social Responsibility

PowerPoint Slides

Dr.Vijaya Kumar

Skyline College


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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.


3

Corporate Governance

•Setting corporate strategy, overall direction, mission or vision

•Hiring and firing the CEO and top management

•Controlling, monitoring, or supervisingtop management

•Reviewing and approving the use of resources

•Caring for shareholder interests

Board of Directors


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Corporate GovernanceRole 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


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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


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Board of Directors Continuum

PhantomRubber Stamp

Minimal Review

Nominal Participation

Active Participation Catalyst

Never knows what to do, if anything; no degree of involvement.

Permits officers to make all decisions. It votes as the officers recom-mend on action issues.

Formally reviews selected issues that officers bring to its

Involved to a limited degree in the perform-ance or review of selected key decisions, indicators, or programs of management.

Takes the leading role in establishing and modifying the mission, objectives, strategy, and policies. It has a very active strategy committee.

Low

(Passive)High

(Active)

Approves, questions, and makes final de-cisions on mis-sion, strategy, policies, and objectives. Has active board committees. Performs fiscal and manage-ment audits.

DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT


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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.


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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.


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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


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Board of DirectorsMembership 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


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Board of Directors

Codetermination– The inclusion of a corporation’s workers

on its board of directors.


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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.


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Board of Directors

Nominations & Elections

Traditional Approach:– CEO invites members to serve – Shareholders approve in annual proxy

statement – All nominees are usually elected


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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.


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Board of DirectorsNominations & Elections

Criteria for Selection

Board of Director

Membership

•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


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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


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Board of DirectorsCorporate 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


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Styles of Corporate Governance

Entrepreneurship

management

Partnership

management

Chaos

management

Marionette

management

De

gre

e o

f In

vo

lve

me

nt

By

To

p M

ana

gem

en

t

Degree of InvolvementBy Board of Directors

High

Low

Low High


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Board of DirectorsTrends 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


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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


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Top Management

Responsibilities of Top Management:

• Provide executive leadership and a strategic vision

• Manage the strategic planning process


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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.


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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


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Strategic Management Process

Strategic Planning Staff --

–Supports top management and business units in the strategic planning process.


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Strategic Management ProcessStrategic 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


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Key question for strategic decision makers:

“Should strategic decision makers be responsible only to shareholders or do they have broader responsibilities?”


27


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…”


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Carroll’s Four Responsibilities

• Economic

• Legal

• Ethical

• Discretionary


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Social ResponsibilityBenefits

Ben & Jerry’s

Maytag

Procter &Gamble

Levi Strauss

•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


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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.


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Social ResponsibilityKohlberg’s Levels of Moral Development

– Preconventional Level– Concern for self

– Conventional Level– Consideration of laws and norms

– Principled Level– Adherence to internal moral code


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Code of Ethics:– Specifies how an organization

expects its employees to behave while on the job.


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EthicsThe consensually accepted standards of behavior for an occupation, trade, or profession

MoralityThe precepts of personal behavior based on religious or philosophical grounds

LawFormal codes that permit or forbid certain behaviors


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Approaches to Ethical Behavior

• UtilitarianUtilitarianActions and plans judged by consequences

• Individual RightsIndividual RightsPeople have fundamental rights to be respected in all decisions

• JusticeJusticeDistribution of costs and benefits to be equitable, fair, and impartial


36

Social ResponsibilityImpact of the Internet

Issues –

• Cybersquatting

• Taxation

• Public Interest

Prentice Hall, 2002Chapter 2 Wheelen/Hunger 1 Chapter 2 Corporate Governance and Social...

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