Wheelen/Hunger

1
Chapter 2

• Corporate Governance
• and
• Social Responsibility
• PowerPoint Slides
• Anthony F. Chelte
• Western New England College

2
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 supervising
• top management
• Reviewing and approving the use of resources
• Caring for shareholder interests

Board of Directors
4
Corporate Governance

• Role 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 corporations mission and specify
  strategic options

5
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 boards corporation

6
Board of Directors Continuum
DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT


Low
High
(Passive)
(Active)
Rubber

Minimal

Nominal

Active

Phantom
Stamp
Review
Participation
Participation
Catalyst
Never knows

Permits officers

Formally

Involved to a

Takes the

Approves,

what to do, if

to make all

reviews

limited degree

leading role in

questions, and

anything no

decisions. It

selected issues

in the perform-
establishing

makes final de-
degree of

votes as the

that officers

ance or review

and modifying

cisions on mis-
involvement.
officers recom-
bring to its

of selected key

the mission,

sion, strategy,

mend on action

decisions,

objectives,

policies, and

issues.

indicators, or

strategy, and

objectives. Has

programs of

policies. It has

active board

management.
a very active

committees.

strategy

Performs fiscal

committee.
and manage-
ment audits.
7
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.

8
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.

9
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

10
Board of Directors

• Membership 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

11
Board of Directors

• Codetermination
• The inclusion of a corporations workers on its
  board of directors.

12
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.

13
Board of Directors

• Nominations Elections
• Traditional Approach
• CEO invites members to serve
• Shareholders approve in annual proxy statement
• All nominees are usually elected

14
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.

15
Board of Directors

• Nominations Elections
• Criteria for Selection

• 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

Board of Director Membership
16
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

17
Board of Directors

• Corporate Governance
• No consistent link between board membership,
  leadership, structure, and financial performance
  of firm
• Investors pay more for a firms 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

18
Styles of Corporate Governance
High
Degree of Involvement By Top Management
Low
High
Degree of Involvement By Board of Directors
Low
19
Board of Directors

• Trends 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 firms stock
• Non-affiliated outside directors increasing

20
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

21
Top Management

• Responsibilities of Top Management
• Provide executive leadership and a strategic
  vision
• Manage the strategic planning process

22
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.

23
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

24
Strategic Management Process

• Strategic Planning Staff --
• Supports top management and business units in the
  strategic planning process.

25
Strategic Management Process

• Strategic 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

26
Social Responsibility

• Key question for strategic decision makers
• Should strategic decision makers be responsible
  only to shareholders or do they have broader
  responsibilities?

27
Social Responsibility

• Friedmans 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

28
Social Responsibility

• Carrolls Four Responsibilities
• Economic
• Legal
• Ethical
• Discretionary

29
Social Responsibility
30
Social ResponsibilityBenefits

• 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

Ben Jerrys
Maytag
Procter Gamble
Levi Strauss
31
Social Responsibility

• 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.

32
Social Responsibility

• Kohlbergs Levels of
• Moral Development
• Preconventional Level
• Concern for self
• Conventional Level
• Consideration of laws and norms
• Principled Level
• Adherence to internal moral code

33
Social Responsibility

• Code of Ethics
• Specifies how an organization expects its
  employees to behave while on the job.

34
Social Responsibility

• Ethics
• The consensually accepted standards of behavior
  for an occupation, trade, or profession
• Morality
• The precepts of personal behavior based on
  religious or philosophical grounds
• Law
• Formal codes that permit or forbid certain
  behaviors

35
Social Responsibility

• Approaches to Ethical Behavior
• Utilitarian
• Actions and plans judged by consequences
• Individual Rights
• People have fundamental rights to be respected
  in all decisions
• Justice
• Distribution of costs and benefits to be
  equitable, fair, and impartial

36
Social Responsibility

• Impact of the Internet
• Issues
• Cybersquatting
• Taxation
• Public Interest