3 Chapter Outline 12.1 The Shared Value Framework 12.2 Corporate GovernanceAgency TheoryThe Board of DirectorsOther Governance Mechanisms12.3 Strategy and Business Ethics12.4 Implications for the Strategist
5 HP’s Boardroom Soap Opera Continues ChapterCase 12HP’s Boardroom Soap Opera Continues2006 First Stage – HP-initiated unethical surveillance to uncover a suspected leak.2010 (summer) Second Stage – Jodie Fisher, a former adult-movie actress, filed a lawsuit against CEO Mark Hurd.2010 (fall) Third Stage – (new) CEO Leo Apotheker overpaid for British software company Autonomy ($11B).HP took nearly $9 billion write-down for this within a year!
6 12.1 The Shared Value Framework Guidance to managers on competitive advantageEconomic imperativeCorporate social responsibilityintroduced in Ch. 1Creates a larger pieBenefits shareholders and other stakeholders
7 Public Stock Companies and Shareholder Capitalism Public stock companies are vital in free market economies.Four attractive characteristics of public firms:Limited liability for investorsTransferability of investor interestLegal personalitySeparation of ownership and control
8 MILTON FRIEDMAN VS. MICHAEL PORTER Traditional View: (Friedman)Shareholder capitalism: shareholders – the providers of the necessary risk capital and the legal owners of public companies – have the most legitimate claim on profits.Shared Value View: (Porter)Corporate social responsibility (CSR): obligations extend beyond the economic responsibility and include legal, ethical, and philanthropic societal expectations
9 12.2 Corporate Governance AGENCY THEORY BOARD OF DIRECTORS A theory that views the firm as a nexus of legal contractsBOARD OF DIRECTORSThe centerpiece of corporate governance, composed of inside and outside directors who are elected by the shareholdersOTHER GOVERANCE MECHANISMSExecutive compensationThe market for corporate controlFinancial statement auditors, government regulators, and industry analysis
11 Corporate Governance (cont’d) Agency TheoryViews a firm as a nexus of legal contractsRelationships among shareholders, managers, and hierarchies.Front-line employees have an advantage over management.Firms need to design work tasks.Adverse SelectionMisrepresentation of a jobBeyond his/her ability to do thingsMoral HazardDifficulty to ascertain whether the agent gives his/her best
12 The Board of Directors Centerpiece of corporate governance ChapterCase−problems can drain shareholder valueDifferent shareholder goalsInstitutional investorsIndividual short-term investorsInside directorsGenerally part of the company’s senior management teamOutside directors –Not employees of the firmSenior executives from other firms or full-time professionals
13 GE’s Board of Directors Strategy Highlight 12.1GE’s Board of Directors16/17 members are independent outside directorsComprised of business, academia, & governmentDuality – Jeffrey Immelt, the one inside director, is both the CEO and chairperson of the board, a declining practice due to the conflict of interestGE’s board has 5 committees.Boardroom diversity (28% for GE) in backgrounds and expertise is considered an asset: More diverse boards are less likely to fall victim to groupthink.
14 EXECUTIVE COMPENSATION Salary, bonus, and stock options (long-term incentives)CEO pay - two issues:CEO pay compared to average employee payU.S. ratio 2012: 300 to 1, 1980: 40 to 1Average CEO pay in Fortune 500 firm: $11 millionFirm performance and CEO payMcKesson high salary but also high performanceHome Depot, HP….NOT
15 Other Governance Mechanisms The market for corporate controlExternal governance mechanismHostile takeoverCorporate raiders and hedge funds2013−Dell’s LBO was a target of Carl Icahn.Auditors, government regulators, and industry analystsSEC−GAAP as reported publicly via EDGARThe Wall Street Journal, Bloomberg Businessweek, Forbes…GovernanceMetrics International (GMI Ratings)
16 12.3 Strategy and Business Ethics Agreed-upon explicit code of conduct in businessLegal conduct vs. Ethical conductLegal (min acceptable standard), but may not be ethicalMortgage brokers selling “option ARMs”Ethical, but may not be legalPharmaceutical firms discussing pricing to increase affordabilityWhen facing an ethical dilemma:Do the actions fall into acceptable norms of professional behavior?Does it feel comfortable explaining and defending the decision in public?
17 Did Goldman Sachs and the “Fabulous Fab” Commit Securities Fraud? Strategy Highlight 12.2Did Goldman Sachs and the “Fabulous Fab” Commit Securities Fraud?The SEC alleged that Goldman violated its fiduciary responsibility and defrauded its clients.Collateralized Debt Obligation (CDO) such as AbacusRoll-up of risky investments into a AAA-rated CDORating agencies falsely viewed these as safe investments!Goldman Sachs settled by paying a $550 millionDid not admit any wrongdoingMr. Tourre convicted of securities fraud in Aug. 2013
18 12.4 Implications for the Strategist Effective corporate governance and business ethicsCritical to gaining and sustaining competitive advantageStrategic leaders need to take actions with integrity.IBM emphasizes its values across the globe.Example of an employee falling ill at a training sessionAn expectation among IBMers- a “lived” valueGlaring ethical lapses in the last 10 years call for:Ethical values and code of conductProfessionalization of management