Topic 2Topic 2

Defining the Company’s Defining the Company’s Mission and Social Mission and Social

ResponsibilityResponsibility

Prof. Niki Lukviarman, SE, MBA, DBA, Akuntan

Topic OutlineTopic Outline

What is a Company Mission?What is a Company Mission?

Formulating a MissionFormulating a Mission

Overseeing the Strategy MakersOverseeing the Strategy Makers

Agency TheoryAgency Theory

The Stakeholder Approach to Company The Stakeholder Approach to Company ResponsibilityResponsibility

What is a Company Mission?What is a Company Mission?

The fundamental purpose that sets a firm apart from other firms of its type and identifies the scope of its operations in product and market terms.

Why we exist?Mission statements are enduring statements of purpose that distinguish one business from other similar firms (David 1999)

Characteristics of a Mission StatementCharacteristics of a Mission Statement

Embodies the business philosophy of the Embodies the business philosophy of the firm’s strategic decision makersfirm’s strategic decision makers

Implies image firm seeks to projectImplies image firm seeks to project

Reflects firm’s self-conceptReflects firm’s self-concept

Indicates Indicates • firm’s principal product or service areasfirm’s principal product or service areas• primary customer needs the firm will primary customer needs the firm will

attempt to satisfyattempt to satisfy

Questions Addressed By a Questions Addressed By a Mission StatementMission Statement

Why is this firm in business?Why is this firm in business?What are our economic goals?What are our economic goals?What is our operating philosophy in terms of quality, What is our operating philosophy in terms of quality, company image, and self-concept?company image, and self-concept?What are our core competencies and competitive What are our core competencies and competitive advantages?advantages?What customers do and can we serve?What customers do and can we serve?How do we view our responsibilities to stockholders, How do we view our responsibilities to stockholders, employees, communities, environment, social employees, communities, environment, social issues, competitors?issues, competitors?

Components of a Components of a Mission StatementMission Statement

Specifies basic type of product or service to be offeredSpecifies basic type of product or service to be offeredIdentifies primary market or customer groups to be Identifies primary market or customer groups to be servedservedSpecifies the technology to be used in production or Specifies the technology to be used in production or deliverydeliveryReflects the firm’s fundamental concern for survival Reflects the firm’s fundamental concern for survival through growth and profitabilitythrough growth and profitabilityReflects the firm’s managerial philosophyReflects the firm’s managerial philosophyIdentifies the public image the firm seeksIdentifies the public image the firm seeksSpecifies the self-concept those affiliated with the firm Specifies the self-concept those affiliated with the firm should have of it should have of it

Examples of MissionExamples of MissionStatement ComponentsStatement Components

Customer-market

To anticipate and meet market needs of farmers, ranchers,and rural communities within North America (CENEX)

Product-service

AMAX’s principal products are molybdenum, coal, ironore, copper, lead, zinc, petroleum and natural gas,. potashphosphates, nickel, tungsten, silver, gold, and magnesium

Examples of MissionExamples of MissionStatement ComponentsStatement Components

Geographic domain

We are dedicated to total success of Corning Glass Works asa worldwide competitor

Technology

The common technology in these areas relates to discreteparticle coatings (NASHUA)

Concern for Survival

In this respect, the company will conduct its operations prudently, and will provide the profits and growth which will assure Hoover’s ultimate success

Examples of MissionExamples of MissionStatement ComponentsStatement Components

Philosophy

Self-concept

Concern for Public Image

We are committed to improve health care throughout the world (Baxter Travenol)

Hoover Universal is a diversified, multi-industry corporation with strong manufacturing capabilities, entrepreneurial policies, and individual business unit autonomy

We are responsible to the communities in which we live and work and to the world community as well (Johnson & Johnson)

Newest Trends in Mission ComponentsNewest Trends in Mission Components

Sensitivity to customer wantsSensitivity to customer wants• ““The customer is our top priority!”The customer is our top priority!”• Emphasis on extensive product safety Emphasis on extensive product safety

programsprograms

Concern for qualityConcern for quality• ““Quality is job one!”Quality is job one!”• Emphasis on quality in manufacturingEmphasis on quality in manufacturing• New philosophy – quality is the normNew philosophy – quality is the norm

Newest Trends in Mission ComponentsNewest Trends in Mission Components

Statements of company visionStatements of company vision• Developed to express the aspirations of the Developed to express the aspirations of the

executive leadershipexecutive leadership• Presents the firm’s strategic intentPresents the firm’s strategic intent• ““A computer on every desk, and in every A computer on every desk, and in every

home, running on Microsoft software”home, running on Microsoft software”

Key Elements of Customer Key Elements of Customer Service-Driven OrganizationsService-Driven Organizations

A mission statement or sense of mission makes customer A mission statement or sense of mission makes customer service a priorityservice a priority

Customer service goals are clearly definedCustomer service goals are clearly defined

Customer service standards are clearly definedCustomer service standards are clearly defined

Customer satisfaction with existing products and services is Customer satisfaction with existing products and services is continuously measuredcontinuously measured

Ongoing efforts are made to understand customers to Ongoing efforts are made to understand customers to determine where the organization should be headeddetermine where the organization should be headed

Corrective action procedures are in place to remove barriers Corrective action procedures are in place to remove barriers to servicing customers in a timely and effective fashionto servicing customers in a timely and effective fashion

Customer service goals have an impact on organizational Customer service goals have an impact on organizational actionaction

Deming’s 14 Steps to QualityDeming’s 14 Steps to Quality

Create constancy of purposeCreate constancy of purpose

Adopt the new philosophyAdopt the new philosophy

Cease dependence on mass Cease dependence on mass inspection to achieve qualityinspection to achieve quality

End the practice of awarding End the practice of awarding business on price tag alonebusiness on price tag alone

Improve constantly the system of Improve constantly the system of production and serviceproduction and service

Institute training on the jobInstitute training on the job

Institute leadershipInstitute leadership

Drive out fearDrive out fearBreak down barriers between Break down barriers between departmentsdepartmentsEliminate slogans, exhortations, Eliminate slogans, exhortations, and numerical targetsand numerical targetsEliminate quotas and Eliminate quotas and management by objectivesmanagement by objectivesRemove barriers that rob Remove barriers that rob workers, etc. of their right to workers, etc. of their right to pride of workmanshippride of workmanshipInstitute a vigorous program of Institute a vigorous program of education/self-improvementeducation/self-improvementEveryone works to accomplish Everyone works to accomplish goalsgoals

Responsibilities of theResponsibilities of theBoard of Directors (Board of Directors (Ind=DekomInd=Dekom))

To establish and update the company missionTo establish and update the company mission

To elect the company’s top officers, the foremost To elect the company’s top officers, the foremost of whom is the CEO (of whom is the CEO (Ind, by AGMSInd, by AGMS))

To establish the compensation levels of the top To establish the compensation levels of the top officers, including their salaries and bonusesofficers, including their salaries and bonuses

To determine the amount and timing of the To determine the amount and timing of the dividends paid to stockholdersdividends paid to stockholders

Responsibilities of theResponsibilities of theBoard of DirectorsBoard of Directors

To set broad company policy on such matters as To set broad company policy on such matters as labor-management relations, product or service labor-management relations, product or service lines of business, and employee benefit lines of business, and employee benefit packagespackagesTo set company objectives and to authorize To set company objectives and to authorize managers to implement the long-term strategies managers to implement the long-term strategies that the top officers and the board have found that the top officers and the board have found agreeableagreeableTo mandate company compliance with legal and To mandate company compliance with legal and ethical dictates ethical dictates

Concepts of Agency TheoryConcepts of Agency Theory

Involves separation of owners (principals) and Involves separation of owners (principals) and managers (agents) of a firmmanagers (agents) of a firm

• Potential exists for owners’ wishes to be ignoredPotential exists for owners’ wishes to be ignored

Involves delegation of decision-making authority Involves delegation of decision-making authority by owners to managersby owners to managers

Potential agency costs can includePotential agency costs can include• Agency problemsAgency problems• Actions taken to minimize agency problemsActions taken to minimize agency problems

How Can Agency Problems Occur?How Can Agency Problems Occur?

Moral hazard problemMoral hazard problem• Owners have access to limited informationOwners have access to limited information• Owners cannot monitor every executive decisionOwners cannot monitor every executive decision• Executives often free to pursue own interestsExecutives often free to pursue own interests

Adverse selectionAdverse selection• Stockholders have limited ability to determine Stockholders have limited ability to determine

competencies of executives at time of hirecompetencies of executives at time of hire• Problems of overlapping priorities between owners Problems of overlapping priorities between owners

and executives likely to occurand executives likely to occur

Potential Agency Relationship ProblemsPotential Agency Relationship Problems

1.1. Executives pursue growth in company Executives pursue growth in company size rather than in earningssize rather than in earnings

2.2. Executives attempt to diversify their Executives attempt to diversify their corporate riskcorporate risk

3.3. Executives avoid riskExecutives avoid risk4.4. Managers act to optimize their personal Managers act to optimize their personal

payoffspayoffs5.5. Executives act to protect their statusExecutives act to protect their status

Solutions to the Agency ProblemSolutions to the Agency Problem

Define agent’s responsibilities in a contract, Define agent’s responsibilities in a contract, including elements like bonuses to align including elements like bonuses to align executives’ and owners’ interestsexecutives’ and owners’ interests

Pay executives a premium for their servicesPay executives a premium for their services

Structure a back-loaded compensation plan for Structure a back-loaded compensation plan for executivesexecutives

Create teams of executives across different Create teams of executives across different organizational units to focus on overall organizational units to focus on overall organizational performanceorganizational performance

Stakeholder Approach toStakeholder Approach toCompany ResponsibilityCompany Responsibility

Incorporating stakeholders’ interests in the Incorporating stakeholders’ interests in the mission statement involves;mission statement involves;

• IdentificationIdentification of the stakeholdersof the stakeholders• UnderstandingUnderstanding the stakeholders’ specific the stakeholders’ specific

claims vis-à-vis the firmclaims vis-à-vis the firm• ReconciliationReconciliation of these claims and assignment of these claims and assignment

of priorities to themof priorities to them• CoordinationCoordination of the claims with other elements of the claims with other elements

of the company missionof the company mission

Inputs to Development of Mission StatementInputs to Development of Mission Statement

Inside Stakeholders

Executive officersBoard of directorsStockholdersEmployees

Outside Stakeholders

CustomersSuppliersCreditorsGovernmentsUnionsCompetitorsGeneral public

Company Mission

Social ResponsibilitySocial Responsibility

View of Outsiders

View of Insiders

Insiders’ claims need to be subordinated to the greater good of the society; that is, to the greater good of outsiders

The competing claims of outsiders should be balanced against one another in a way that protects the company mission

Strategies to Address CSRStrategies to Address CSR

The 4 E’s

Make it easy for consumer to be green

Empower consumers with solutions

Enlist the support of the consumer

Establish credibility with all publics

Why Should Managers Be ConcernedWhy Should Managers Be ConcernedAbout Social Responsibility?About Social Responsibility?

A company’s right to existdepends on its responsivenessto the external environment

Government threatens increased regulation ifbusinesses do not meet

changing social standards

A responsive corporatesocial policy may enhancea firm’s long-term viability

The Debate: The Debate: Arguments Against CSRArguments Against CSR

A business bears a responsibility only for A business bears a responsibility only for the financial well-being of its stockholders the financial well-being of its stockholders (Milton Friedman)(Milton Friedman)

Corporate actions motivated by anything Corporate actions motivated by anything other than shareholder wealth other than shareholder wealth maximization threatens that well-being. maximization threatens that well-being.

The Debate: Arguments for CSRThe Debate: Arguments for CSR

Business does not function in a vacuumBusiness does not function in a vacuum• Exists to serveExists to serve• Depends on its environmentDepends on its environment• Has responsibility to ensure well-being of Has responsibility to ensure well-being of

environmentenvironment

Stockholders’ interests may transcend the Stockholders’ interests may transcend the financialfinancialBest way for a company to maximize Best way for a company to maximize shareholder wealth shareholder wealth Act in a socially Act in a socially responsible mannerresponsible manner

Cost-Benefit Analysis of CSRCost-Benefit Analysis of CSR

Analysis ofCSR has not

been successfulbecause …

Some CSR activities incur no dollarcosts

Socially responsible behavior does not come at a prohibitive cost

Socially responsible practices maycreate savings, thus increasing profits

CSR TodayCSR Today

Three broad trends are driving Three broad trends are driving businesses to adopt CSR frameworksbusinesses to adopt CSR frameworks

• The resurgence of environmentalismThe resurgence of environmentalism• Increasing buyer powerIncreasing buyer power• Globalization of businessGlobalization of business

CSR’s Effect on the Mission StatementCSR’s Effect on the Mission Statement

In developing mission statements, managers In developing mission statements, managers must identify all stakeholder groups and weigh must identify all stakeholder groups and weigh their relative rights and abilities to affect the their relative rights and abilities to affect the firm’s success;firm’s success;

• Some companies are proactive in their approach to Some companies are proactive in their approach to CSR, making it an integral part of their raison d’CSR, making it an integral part of their raison d’êêtre tre (e.g., Ben and Jerry’s ice cream)(e.g., Ben and Jerry’s ice cream)

• Others are reactive, adopting socially responsible Others are reactive, adopting socially responsible behavior only when they must (e.g., Exxon after the behavior only when they must (e.g., Exxon after the ValdezValdez incident) incident)

CSR; the case of IndonesiaCSR; the case of Indonesia

Mandated by regulation; Undang-undang Mandated by regulation; Undang-undang Republik Indonesia Nomor 40 tahun 2007 Republik Indonesia Nomor 40 tahun 2007 tentang “Perseroan Terbatas”tentang “Perseroan Terbatas”

Stated in Chapter V (article 74) on Stated in Chapter V (article 74) on “tanggungjawab sosial dan lingkungan”“tanggungjawab sosial dan lingkungan”

Mandatory of PT to adopt CSR policy, Mandatory of PT to adopt CSR policy, especially for PT in its operations deal with especially for PT in its operations deal with natural resourcesnatural resources

CSR; the case of IndonesiaCSR; the case of Indonesia

CSR activities should be planned under CSR activities should be planned under the budget that should be calculated on the budget that should be calculated on cost-basis cost-basis

CSR program should be implemented with CSR program should be implemented with due care, properly and fairdue care, properly and fair

There will be penalties for PT that do not There will be penalties for PT that do not adopted such mandatory requirement to adopted such mandatory requirement to implement CSR based on UU PT 40/2007implement CSR based on UU PT 40/2007

Social AuditSocial Audit

A social audit attempts to measure a company’s actual social

performance against the social objectives it has set for itself

Uses of a Social AuditUses of a Social Audit

Usesinclude …

Monitoring and evaluating firm social performance

Scanning external environment

Scanning external environment

Determining firm vulnerabilities

Institutionalizing CSRwithin firm