Chapter 2
Corporate Governance
and
Social Responsibility
PowerPoint Slides
Dr.Vijaya Kumar
Skyline College
Prentice Hall, 2002
Chapter 2
Wheelen/Hunger
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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 corporation’s mission and specify strategic
options
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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
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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.
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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.
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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.
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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
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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
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Board of Directors
Codetermination
– The inclusion of a corporation’s workers
on its board of directors.
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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.
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Board of Directors
Nominations & Elections
Traditional Approach:
– CEO invites members to serve
– Shareholders approve in annual proxy
statement
– All nominees are usually elected
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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.
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Board of Directors
Nominations & Elections
Criteria for Selection
Board of
Director
Membership
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•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
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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
 No consistent link between board
membership, leadership, structure, and
financial performance of firm
 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
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Styles of Corporate Governance
Degree of Involvement
By Top Management
High
Entrepreneurship
Partnership
management
management
Chaos
Marionette
management
management
Low
Low
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Degree of Involvement
By Board of Directors
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High
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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
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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
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Top Management
Responsibilities of Top Management:
•
Provide executive leadership and a
strategic vision
•
Manage the strategic planning process
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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.
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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
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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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Social Responsibility
Key question for strategic decision makers:
“Should strategic decision makers be
responsible only to shareholders or do
they have broader responsibilities?”
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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
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Social Responsibility
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Social Responsibility
Benefits
Ben & Jerry’s
•Environmental concerns may enable
the firm to charge premium prices and
gain brand loyalty
Maytag
•Trustworthiness may help generate
enduring relationships with suppliers
and distributors without spending time
and money policing contracts
Procter &
Gamble
Levi Strauss
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•Can attract outstanding employees
who prefer working for a responsible
firm
•More likely to be welcomed into a
foreign country
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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.
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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
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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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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
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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
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Social Responsibility
Impact of the Internet
Issues –
•
Cybersquatting
•
Taxation
•
Public Interest
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