Miles A. Zachary MGT 4380

1. Leading an Ethical Organization: Corporate Governance, Corporate Ethics, & Social ResponsibilityChapter 10 Miles A. Zachary MGT 4380

2. Corporate Governance • Corporate governance involves: • Making meta-managerial decisions • Approving financial objectives • Advising on strategic issues • Making TMT members aware of laws and regulations • Representing stakeholders (namely shareholders) • Corporate governance is the responsibility of the board of directors—a group of individuals, either elected or appointed, that oversees the activities of an organization or corporation • Effective board members bring resources and capabilities to an organization; sometimes celebrity

3. Corporate Governance • Board composition is a critical factor in the dynamics of board decision-making • Board insiders: members of the board that are employed in the firm • Board outsiders: members of the board external to the firm • Institutional investors such as hedge funds, retirement funds, or banks often request a number of outside board members • CEO duality: when the CEO is also the chairman of the board of directors • Can be controversial since it gives a large amount of power to one person; can create divisions and conflict in the board

4. Managing CEO Compensation • CEO compensation is a balance between competitive pressures and the value of the day-to-day functions of a CEO • “Salary commensurate with experience”—firms must pay for the limited number of quality talent • Market pressures help to dictate the high price firms pay for a CEO • However, the salary is balanced by industry norms and investor pressure

5. Corporate Governance • Agency Problems • The interests of firm management (e.g., the CEO) and the owner(s) (e.g., the board, shareholders) are not always equal • The solution: better alignment • Often done through high CEO compensation and stock options/ownership opportunities • What are some other ways firms can achieve better interest alignment?

6. Managing CEO Compensation • CEO compensation often includes: • Guaranteed salary • Cash/option bonuses • Stock options • Perks • Perks are often the “unsung” benefits of being a CEO

7. Corporate Takeovers • When a firm is doing poorly, sometimes they are poised for a takeover • Leveraged buyout (LBO): a company that is purchased through significant debt then removed from the stock market • Reduction in workforce and streamline/cost savings ensue • Hostile takeover: an attempt to buy a company that is resisted by the target firm • Sometimes the target firm may be saved by a “white knight”; a firm that is a more favorable buyer

8. Corporate Takeovers • Corporate Raider: an individual or a firm that purchases stock in another firm with the intentions of eventually taking it over • E.g., Richard Gere’s character in Pretty Woman is a corporate raider • Shark Repellant: activities conducted by a board to deter or defend the firm from a takeover • Greenmail-buy back large blocks of shares at a premium to retain % ownership • Poison pill-sell considerable amounts of stock to dilute the number of shares a purchaser needs to own the company • Golden parachute-a cash bonus given to executives who help a takeover transition

9. Business Ethics • In response to several notable corporate scandals at Enron, WorldCom, and Tyco, congress legislated the Sarbanes-Oxley Act of 2002 • The law set new or increased standards for the boards of public US companies and accounting firms • Businesses should be careful to not only follow the letter of the law, but the spirit of the law

10. Corporate Social Performance • Corporate social performance is the degree to which a firm’s actions honor ethical values that respect individuals, communities, and the environment • Can be measured by the impact a firm has on: • The community • Product quality/safety • Diversity • Employee relations • Environmental • Ethical corporate governance

11. Corporate Social Performance • Sometimes businesses are created or create new aspects of their business in the name of social good • Social entrepreneurship is the entrepreneurial actions where both economic and social value are created • E.g., Tom’s shoes—buy one, give one

12. Corporate Social Performance

13. Corporate Social Responsibility • While CSR has emerged as an important priority for businesses, it has been less than effectively implemented (Porter & Kramer, 2006) • It has pitted firms against society when they are clearly interdependent • Has been discussed generally as opposed to specifically how it can improve a firm’s strategy and performance

14. Corporate Social Responsibility • How are businesses and societies interdependent? • Firms need societies • Education, health care, and equal opportunity create productive workforce • Good laws protect firm interests and property • Efficient utilization of land, water, energy, and other resources is essential • Societies need firms • Creates jobs • Innovation improves the quality of living • Corporate taxes help fund government operations • Important to mind the “principle of shared value” where in a temporary gain in one will hurt the long-term prosperity of both

15. Corporate Social Responsibility • Three (3) categories of social issues • Generic social issues are important to society, but do not significantly affect the organizations operations or long-term competitiveness • Value chain social impacts are those things that are significantly affected by a firm’s activities in the course of ordinary business • Social dimensions of competitive context are factors in the external environment that affect the underlying drivers of competitiveness in a companies operations • Each of these affect different companies in different industries differently

16. Corporate Social Responsibility

17. Corporate Social Responsibility • The most important thing a firm can do for society is contribute to a prosperous economy • When firms are punished unnecessarily for being productive, it hurts the society it operates in • Firms must, however, avoid seeking short-term profits through deception • Rather, firms should build long-term success by focusing on shared value and using CSR strategically to improve their organization and the world