Chapter 2 Corporate Governance and Social Responsibility Power

Chapter 2 Corporate Governance and Social Responsibility Power. Point Slides Dr. Vijaya Kumar Skyline College 1

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. 2

Corporate Governance • Setting corporate strategy, overall direction, mission or vision Board of Directors • 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 3

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 corporation’s mission and specify strategic options 4

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 5

Board of Directors Continuum DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT High (Active) Low (Passive) Phantom Never knows what to do, if anything; no degree of involvement. Rubber Stamp Minimal Review Nominal Participation Active Participation Catalyst Permits officers to make all decisions. It votes as the officers recommend on action issues. Formally reviews selected issues that officers bring to its Involved to a limited degree in the performance or review of selected key decisions, indicators, or programs of management. Approves, questions, and makes final decisions on mission, strategy, policies, and objectives. Has active board committees. Performs fiscal and management audits. Takes the leading role in establishing and modifying the mission, objectives, strategy, and policies. It has a very active strategy committee. 6

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. 7

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. 8

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 9

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 10

Board of Directors Codetermination – The inclusion of a corporation’s workers on its board of directors. 11

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. 12

Board of Directors Nominations & Elections Traditional Approach: – CEO invites members to serve – Shareholders approve in annual proxy statement – All nominees are usually elected 13

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. 14

Board of Directors Nominations & 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 15

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 16

Board of Directors Corporate Governance Ø No consistent link between board membership, leadership, structure, and financial performance of firm Ø 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 17

Styles of Corporate Governance Degree of Involvement By Top Management High Entrepreneurship Partnership management Chaos Marionette management Low Degree of Involvement By Board of Directors High 18

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 firm’s stock • Non-affiliated outside directors increasing 19

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 20

Top Management Responsibilities of Top Management: • Provide executive leadership and a strategic vision • Manage the strategic planning process 21

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. 22

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 23

Strategic Management Process Strategic Planning Staff -– Supports top management and business units in the strategic planning process. 24

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 25

Social Responsibility Key question for strategic decision makers: “Should strategic decision makers be responsible only to shareholders or do they have broader responsibilities? ” 26

Social Responsibility 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…” 27

Social Responsibility Carroll’s Four Responsibilities • • Economic Legal Ethical Discretionary 28

Social Responsibility 29

Social Responsibility Benefits 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 30

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. 31

Social Responsibility Kohlberg’s Levels of Moral Development – Preconventional Level – Concern for self – Conventional Level – Consideration of laws and norms – Principled Level – Adherence to internal moral code 32

Social Responsibility Code of Ethics: – Specifies how an organization expects its employees to behave while on the job. 33

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 34

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 35

Social Responsibility Impact of the Internet Issues – • Cybersquatting • Taxation • Public Interest 36