Business Ethics and Corporate Governance

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Business Ethics and Corporate Governance
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Outline

• The Corporation
• Ethics
• Corporate Boards A Multi-Dimensional Ethics
  Approach
• The Future

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The Corporation
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Defining the Corporation

• A corporation
• Is a legal entity that produces and/or
  distributes goods and services
• Issues stock (shares of ownership)
• Provides owners limited liability for corporate
  actions
• Is designed to create wealth

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Private and Public Corporations

• Private Corporation
• Ownership is usually held by a few and shares are
  not traded on the open market.
• Owners decide to whom they sell shares in the
  company, and for what price

• Public Corporation
• Ownership (shares) traded on the open market,
  such as Korean Stock Market and the New York
  Stock exchange
• The company does not control trading or price

Focus on Pubic Companies
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Corporate Structure (US Model)

• Management
• CEO, President, CFO, COO, and senior management
  team determine and implement strategy

• Board of Directors
• Chair, Board Members are or represent owners
• Auditing Committee
• Compensation Committee
• Other Committees
• For example, Microsoft has an Ethics Committee
• Ensure that Management is using owner money well

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Corporate Structure (US Model) A New Business
Function

• Management
• CEO, President, CFO, COO, and senior management
  team determine and implement strategy
• Corporate Ethics Program
• Reports to
• VPs
• Board of Directors

• Board of Directors
• Chair, Board Members are or represent owners
• Auditing Committee
• Compensation Committee
• Other Committees
• For example, Microsoft has an Ethics Committee
• Ensure that Management is using owner money well

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Stakeholders

• Stakeholders are individuals or groups that
  influence or are affected by corporate
  activities.
• Board of Directors, management, owners
• Business partners
• Current and retired employees, and their families
• Suppliers
• Lenders
• Customers
• Government
• Communities where business operates and sells
• Regions, Nations, Cities
• The Globe (Some environmental issues are global)

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Who Should Boards Represent?

• Owners, of course the traditional view
• Should they also represent
• Former and Current employees, and their families?
• Business Partners
• Suppliers?
• Lenders?
• Customers?
• Government?
• Communities where business operates and sells?
• The environment?
• Ethics helps us answer these questions

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Ethics
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Defining Ethics

• Ethics is the study and practice of
• How to live a good life
• How to build good families and communities
• But what is good life, and what is good
  relationship, family, and community?
• We can start with
• The individual or
• The family/community

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An Ethic Based on Individuals

• Individuals
• Have equal political rights
• Deserve to be treated fairly
• Have the right to live as they want, as long as
  they do not harm the rights of others
• This includes the right to live badly
• A good society is one that treats individuals
  fairly and protects their rights. This requires
• Efficient, non-corrupt government and business
• A clean, non-toxic environment

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An Ethic Based on Relationships, Family and
Community

• Relationships, Families, and Communities require
• Loyalty
• Honor
• Friendship
• Humility
• Self-sacrifice
• A clean, non-toxic environment
• A good individual has the qualities that promote
  stable, long-lasting relationships, families, and
  communities.

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Different Countries

• What is the ethical base of
• The United States?
• Korea?
• Other countries?

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Two Hypotheses

• Countries that focus too much on one ethic will
  get in trouble
• Focus on individualism alone will encourage
  people to get as much for themselves as they can,
  harming other peoples rights and the
  environment.
• Recent corporate scandals in U.S.
• Focus on family/community will encourage people
  to follow traditions that do not work in changing
  times, harming families and communities
• Lifetime employment practices in some cultures
• A healthy, sustainable culture needs to integrate
  the two ethics
• Use the strengths of each to oppose the
  weaknesses of each

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A Multi-Dimensional Ethic

• A Multi-Dimensional Ethic will
• Protect individuals and encourage individual
  development
• Promote strong families and friendships
• Build a politically and economically strong
  country (region, globe?)
• Be fair and just
• Protect the environment
• . . . And create wealth
• A Multi-Dimensional Ethic is the only path to
  long-term sustainable wealth creation

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Ethical Corporate Boards

• Multi-Dimensional Ethics

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Ethical Responsibilities of Corporate Boards

• Traditional U.S. view
• The owners have property rights in the company.
• Boards are ethically responsible to make sure the
  owners property rights are protected.
• Other stakeholders should be considered only if
  they affect the property rights of owners

• Owner Based Multi-Dimensional View
• The board has a special role to represent owners
• The board has general duties not to harm other
  stakeholders, and when possible to promote their
  interests.
• Balanced Multi-Dimensional view
• The board should represent all stakeholders
  equally

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The Future
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A New Stakeholder Environment

• Non-Owner Stakeholders are getting more power
• Civil Society Organizations (CSOs)
• Green Peace, and environmental group
• Educate 4 Justice, a labor rights group
• Governments and Inter-Governmental Organizations
• Business Industry Groups
• UN Global Compact
• A Network of CSOs, governments, businesses, and
  academics

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Winning in the New Stakeholder Environment

• Traditional US view creates hostility in
  stakeholders and hinders wealth creation
• Balanced Multi-Dimensional view will hinder
  wealth creation
• Owner Based Multi-Dimensional view is the most
  sustainable alternative.

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Trends in Corporate Boards

• The U.S. is moving toward an Owner Based
  Multi-Dimensional View
• Individual based
• Europe has an Owner based Multi-Dimensional view
• Individual and Group based
• Asia has an Owner Based Multi-Dimensional view
• Relationship and group based
• Globalization will push each toward the others.

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Globalization and Corporate Boards A Prediction

• The quality of corporate boards is important when
  evaluating risks of investment, contracts, joint
  ventures, and other corporate activities
• The world business and financial community will
  put pressures on corporations to standardize
  Board structure and oversight
• Cultural differences will make the Owner Based
  Multi-Dimensional approach the best sustainable
  alternative.