prentice hall, 2004chapter 2 wheelen/hunger 1 corporate governance and social responsibility

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Corporate Governance

and

Social Responsibility

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Corporate Governance

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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.

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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 Continuum

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Board of Directors

Members:

Inside directors– “Management directors”– Officers or executives employed by

corporation

Outside directors– May be executives of other firms but not

employed by board’s corporation

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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 DirectorsTop management responsibilities

Top management Responsibilities

•Executive Leadership

•Strategic vision•Presents a role of others to identify with and follow•Communicates high performance standards and shows confidence in followers’ abilities

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Styles of Corporate Governance

High Entrepreneurship Management

Partnership Management

low Chaos Management

Marionette Management

Low High

Degree of Involvement

By top management

Degree of involvement by board of directors

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Styles of Corporate Governance

• Chaos Management• When both the board of directors and top management

have little involvement in the strategic management process.

• The board waits for top management to bring it proposals. • Top management is operationally oriented and continues

to carry out strategies, policies, and programs specified by the founding entrepreneur who died years ago.

• There is no strategic management being done here.

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Styles of Corporate Governance

• Entrepreneurship Management• A corporation with an uninvolved board of

directors but a highly involved top management has entrepreneurship management.

• The board is willing to be used as a rubber stamp for top management's decisions.

• The CEO, operating alone or with a team, dominates the corporation and its strategic decisions.

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Styles of Corporate Governance

• Marionette Management• Probably the rarest form of strategic management style, • marionette management occurs when the board of directors is deeply

involved in strategic decision making, but top management is primarily concerned with operations.

• Such a style evolves when a board is composed of key stockholders who refuse to delegate strategic decision making to the president.

• This style also occurs when a board fires a CEO but is slow to find a replacement.

• Marionette Management occurred at Winnebago Industries when the company's Board of Directors, chaired by its founder, 72-year-old John K. Hanson, took away Ronald Haugen's title as chief executive officer, but left him as company president.

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Styles of Corporate Governance

• Partnership Management• Probably the most effective style of strategic management,• partnership management is epitomized\embodied by a

highly involved board and top management. The board and top management team work closely to establish the corporate mission, objectives, strategies, and policies.

• Board members are active in committee work and utilize strategic audits to provide feedback to top management on its implementations of agreed-upon strategies and policies.

• This appears to be the style emerging in a number of successful corporations such as General Electric Company.

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Social Responsibility

Broader responsibility:

• Private corporation has responsibilities to society that extend beyond making a profit.

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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…”

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Social Responsibility

Carroll’s Four Responsibilities

• Economic

• Legal

• Ethical

• Discretionary/flexible

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Responsibilities of Business

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Social Responsibility: Balancing Commitments to Stakeholders

Stakeholders:Stakeholders: Groups, individuals, and organizations that Groups, individuals, and organizations that are directly affected by the practices of an organizationare directly affected by the practices of an organization

Employees Investors

Local Communities

Customers SuppliersCORPORATION

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Social Responsibility

• It refers to the way in which a business tries to balance its commitments to certain groups and individuals in its social environment.

• Customers: Treat customers fairly and honestly (Examples of companies with excellent reputations in this area: L.L. Bean, Nordstrom, Dell Computer Corporation)

• Employees: Treat employees fairly, with respect for their dignity and basic human needs (Examples of companies with excellent reputations in this area: 3M, Southwest Airlines)

• Investors: Manage financial resources honestly and openly• Suppliers: Seek mutually beneficial partnerships• Local Communities: Minimize damage and maximize contributions to

local communities• Discussion: Who are the major stakeholders at your school? How

does the school prioritize these stakeholders? What are your thoughts about this prioritization?

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Reasons for Unethical Behavior

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 Responsibility

Code of Ethics:– Specifies how an organization

expects its employees to behave while on the job.

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What Is Ethical Behavior?

Ethics: Right and wrong, good and bad, in actions that affect others. shaped by personal values and morals

Ethical Behavior: Conforming to generally accepted ethical norms.Business ethics: Ethical or unethical behaviors of managers and employers of an organization.

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• Encompasses three main areas:

1. Air pollution

2. Water pollution

3. Land pollution– Toxic\deadly waste– Recycling

Responsibility Toward the Environment

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Responsibility Toward Customers

Consumer RightsConsumer Rights

Unfair PricingUnfair Pricing

Ethics in AdvertisingEthics in Advertising

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Responsibility Toward Employees

• Legal and social commitments: Legally, companies are required to refrain from discrimination against any worker based on race, gender, religion, nationality or other irrelevant factors. Ethically, many people feel that companies should ensure that the workplace is physically and socially safe.

• How far should companies extend themselves to help employees who are laid off?

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Responsibility Toward Investors

• Improper financial management:

• Offenses are typically unethical, rather than illegal. Examples include excessive salaries, and lavish\plentiful or frivolous perks\bonus (e.g. regular corporate “retreats” to exotic\interesting island resorts).

• Check kiting:

• Responsibility towards investors has several components:• Illegal practice of writing checks against money that has not yet arrived at the

bank on which it is drawn.

• Insider trading:

• Illegal practice of using confidential information to gain from the purchase or sale of stocks.

• Misrepresentation of finances:

• Typically, this takes the form of overly optimistic projections of earnings.