Second lecture
Corporate Governance
and
Social Responsibility
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Developed by Prof. Dr. Majed ElFarra
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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
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
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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\define 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 Directors
•
•
•
•
Corporate Governance
Boards more involved in review and
shaping strategy
Institutional investors more active in
pressuring for corporate performance
Shareholders demand that directors and
executives own more than token
amounts of stock
Nonaffiliated outside directors
increasing
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Board of Directors
Top management responsibilities
•Executive Leadership
Top management
Responsibilities
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•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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Strategic Management Process
Strategic Planning Staff -–Supports top management and
business units in the strategic
planning process.
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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
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Styles of Corporate Governance
High
Degree of
Involvement low
By top
management
Entrepreneurship Partnership
Management
Management
Chaos
Management
Marionette
Management
Low
High
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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The business firm should try to get useful
information about competitors by:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Careful study of trade journals.
Buying competitors' products and taking them apart.
Hiring management consultants who have worked for competitors.
Rewarding competitors' employees for useful "tips."
Questioning competitors' customers and/or suppliers.
Buying and analyzing competitors' garbage.
Advertising and interviewing for non-existent jobs.
Taking public tours of competitors' facilities.
Releasing false information about the company in order to confuse
competitors.
10. Questioning competitors' technical people at trade shows and
conferences.
11. Hiring key people away from competitors.
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Discussion
• What
recommendations
would you make to improve
the effectiveness of today's
corporate governance in Gaza
private sector?
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UN Governance
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Empowering the top management.
Beneficiary participation.
Rotation of top management.
Incentives.
Top management should be from locals.
Periodical review and reporting to board of directors.
Independent local steering committee.
Open channels of communication with public.
Specialized bodies in different services.
Some of the board should be from locals.
System and standards to evaluate top management.
Enriching the strategic staff from outside UN staff.
Power sharing between top and low level management.
Improve the role of CSOs.
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Improving the efficiency of the
PNA Governance
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Choose the best ministers
Qualified and competence legislators.
Separation between authorities
More controlling and monitoring of legislation.
Abide by law the common of the Palestine.
Using external consultants to the legislation council,
regular meeting.
Regular meeting and follow up.
Awareness campaign to all about their duties.
Improve cooperation and team work.
More role for residences\public.
12.
Clear and agreed accountability techniques.
13. Form a controlling committee from the council.
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Improving the efficiency of Board
of Directors in NGOs
1.
2.
3.
4.
5.
6.
7.
8.
Select qualified persons.
People with enough time.
Periodical reports.
Government role.
Provide incentives.
External and internal control development.
Internal monetary committee.
Periodical meeting.
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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: produce goods and services of
value to society.
Legal: abide by law, avoid discrimination.
Ethical: respect beliefs in society.
Discretionary/flexible :pure voluntary
obligations.
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Responsibilities of Business
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Social Responsibility
Benefits
Ben & Jerry’s
Maytag
Procter &
Gamble
Rubbermaid
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•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 attract capital from
investors who view reputable
companies as desirable
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Social Responsibility: Balancing
Commitments to Stakeholders
Stakeholders: Groups, individuals, and organizations that
are directly affected by the practices of an organization
Employees
Customers
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Investors
CORPORATION
Suppliers
Local
Communities
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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
Kohlberg’s Levels of
Moral Development
– Preconventional Level: This level is characterized by a
concern for self. Small children and others who have not
progressed beyond this stage evaluate behaviors on the
basis of personal interest- avoiding punishment or quid pro
quo.
– Conventional\conservative Level: This level is
characterized by consideration of society’s laws and norms.
Actions are justified by an external code of conduct.
– Principled Level: This level is characterized by a
person’s adherence to internal moral code. An individuals at this
level look beyond norms or lows to find universal values or
principles.
– Kholberge places most people in the conventional level with,
fewer than 20%of U.S. adults in the principle level of development
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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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Discussion
•
Identify examples of ethical and unethical business
practices.
–
–
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Ethical Business Practices: Examples: Donating a percentage
of profits to charity and community causes (Ben & Jerry’s
donates 7-1/2% of pre-tax profits, and Levi Strauss donates
2.4% of pre-tax profits to a variety of causes), encouraging
employees to engage in volunteer work using paid work-release
time (Walt Disney’s VoluntEARS program), recycling
(McDonald’s has a far-reaching environmental protection
program).
Unethical Business Practices: Examples: Forwarding
“marketing research” results to sales people, excessive violence
in video games, and of course all forms of illegal behavior (e.g.
deliberately selling cigarettes to minors).
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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\objective.
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Approaches to Ethical
Behavior
Cavanagh proposes that we solve ethical
problems by asking the following three
questions regarding an act or decision:
– Utility: Dose it optimize the satisfactions of
all stakeholders?
– Rights: Dose it respect the rights of the
individuals involved?
– Justice: Is it consistent with the canons of
justice?
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Social Responsibility
Approaches to Ethical Behavior
•
Categorical imperatives\crucial
“golden rules “ Treat others as you would like them to
treat you.
Not restrict others behavior
– A person action is ethical only if that person is willing for
that same action to be taken by every one who is in a
similar situation.
– A person should never treat another human as a means
but always as an end
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Responsibility Toward the
Environment
• Encompasses three
main areas:
1. Air pollution
2. Water pollution
3. Land pollution
–
–
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Toxic\deadly waste
Recycling
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Responsibility Toward
Customers
Consumer Rights
Unfair Pricing
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Ethics 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
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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.
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
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Review
• What are the Carroll’s four social
Responsibilities of companies? Is there a
consensus on the concept of social
responsibilities? What is the relationship
between social responsibility and ethics?
Try to be practical in your answer.
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Discussion
•
Should all CEOs be transformation leaders? Would you like to work for
a transformational leader?
• According to the text, top management must successfully handle two
responsibilities that are crucial to the effective strategic management of the
corporation: (1) provide executive leadership and a strategic vision and (2)
manage the strategic planning process. The successful CEOs often provide
this executive leadership by taking on many of the characteristics of the
transformation leader by communicating a clear strategic vision,
demonstrating a strong passion for the company, and communicating clear
directions to others. Such transformational leaders, like Bill Gates at
Microsoft, Steve Jobs at Apple, and Anita Roddick at The Body Shop, are able
to command respect and energize their employees. They not only articulate a
strategic vision, but they also tend to present a role for others in the company
to identify with and to follow. Their communication of high performance
standards coupled with their confidence in their fellow employees often raises
performance to a high level. Nevertheless, such transformation leaders can be
very difficult to work for and their overconfidence may even get the firm in
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trouble.
Farra