Chapter 11 CORPORATE PERFORMANCE, GOVERNANCE, AND BUSINESS ETHICS

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Learning Objectives Understand relationship between stakeholder management & corporate performanceUnderstand relationship between stakeholder management & corporate performance Explain why maximizing returns to stockholders often viewed as primary goalExplain why maximizing returns to stockholders often viewed as primary goal Describe governance mechanisms to align interest of stockholders & managementDescribe governance mechanisms to align interest of stockholders & management Explain why governance methods don’t always workExplain why governance methods don’t always work Identify ethical issues that arise in business & causes of unethical behaviorIdentify ethical issues that arise in business & causes of unethical behavior Identify what managers do to improve the ethical climate and ensure decisions don’t violate ethical principlesIdentify what managers do to improve the ethical climate and ensure decisions don’t violate ethical principles

11 -3 “There are worse things than war; and all of them come with defeat.” -Ernest Hemingway -Ernest Hemingway 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Stakeholders and Corporate Performance oStakeholders: Individuals/groups with an interest/claim/or stake in company Internal (e.g., employees, stockholders)Internal (e.g., employees, stockholders) External (e.g., customers, creditors, governments)External (e.g., customers, creditors, governments) oCompany must consider stakeholder claims in developing & implementing strategy Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Stakeholders and the Enterprise Figure Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Identify: oStakeholders oStakeholders’ interests/concerns oClaims stakeholders likely to make oStakeholders most important from organization’s perspective oResulting strategic challenges Stakeholder Impact Analysis Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Company’s legal owners and providers of risk capital, a major source of capital to operate a business. Maximizing long-run profitability & profit growth is route to maximizing returns to shareholders, as well as satisfying claims of most other stakeholder groups. Unique Role of Stockholders Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Profitability, Profit Growth, and Stakeholder Claims 1)Participating in growing market 2)Taking market share away from competitors 3)Consolidating industry via horizontal integration 4)Developing new markets To grow profits, companies must be doing one or more of the following: Stockholders receive their returns as:  Dividend payments  Capital appreciation in market value of shares Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Agency Theory Principal-Agent Relationships Principal Agent Principal Agent Agency Problem: Agents & principals may have different goalsAgents & principals may have different goals Agents goals not in best interests of principalsAgents goals not in best interests of principals Agents may take advantage of information asymmetries to maximize interests at expense of principalsAgents may take advantage of information asymmetries to maximize interests at expense of principals Difficult for principals to measure performanceDifficult for principals to measure performance Agency relationship - whenever one party delegates decision-making authority or control over resources to another Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Authority

Tradeoff Between Profitability & Revenue Growth Rates Figure 11.2 Maximize long-run shareholder returns by seeking right balance between company growth... profitability and profit growth Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Challenge for Principals 1.Shape behavior of agents to act in accordance with goals set by principals 2.Reduce information asymmetry between agents & principals 3.Develop mechanisms for removing agents not acting in accordance with goals of principals Confronted with agency problems: Principals try to deal with these challenges through a series of governance mechanisms Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Governance Mechanisms  Governance mechanisms limit agency problem by aligning incentives between agents & principals - monitor/control.  Mechanisms include: Board of DirectorsBoard of Directors Stock-Based CompensationStock-Based Compensation Financial Statements & AuditorsFinancial Statements & Auditors Takeover ConstraintTakeover Constraint Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Governance Mechanisms Inside Company o Strategic Control Systems Establish standards for performanceEstablish standards for performance Create systems- measure & monitor performanceCreate systems- measure & monitor performance Compare actual against targetsCompare actual against targets Evaluate results- take corrective actionsEvaluate results- take corrective actions oEmployee Incentives Stock options and ownership plansStock options and ownership plans Compensation tied to attainment of superior efficiency, quality, innovation, and responsiveness to customersCompensation tied to attainment of superior efficiency, quality, innovation, and responsiveness to customers Internal agency problems can be reduced by: Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Balanced Scorecard Approach Figure Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Ethics and Strategy Ethics- accepted principles of right/wrong governing conduct... o Ethical dilemmas: No agreement over accepted principlesNo agreement over accepted principles None of available alternatives seem acceptableNone of available alternatives seem acceptable o Many accepted principles codified in laws: Tort – product liabilityTort – product liability Contract– contracts/breaches of contractsContract– contracts/breaches of contracts Intellectual property– protection of intellectual propertyIntellectual property– protection of intellectual property Antitrust law – competitive behaviorAntitrust law – competitive behavior Securities law – issuing/selling securitiesSecurities law – issuing/selling securities o Behaving ethically=beyond staying within law Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

An ethical strategy is one that does not violate the accepted principles

Ethical Issues in Strategy  Self-dealing  Information manipulation  Anticompetitive behavior  Opportunistic exploitation  Substandard working conditions  Environmental degradation  Corruption Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

1.Personal ethics code- profound influence on behavior 2.Don’t realize behaving unethically- failing to ask right questions 3.Organization culture- doesn’t emphasize ethics; only considers economic consequences 4.Unrealistic goals- encourage/legitimize unethical behavior 5.Unethical leadership- encourages/tolerates behavior that is ethically suspect Roots of Unethical Behavior Why do some managers behave unethically? Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

1.Hire/promote people with sense of personal ethics. 2.Place high value on ethical behavior and ingrain in the organizational culture. 3.Ensure leaders articulate and act in ethical manner. 4.Require that ethics be part of decision-making process. 5.Use ethics officers. 6.Enforce strong corporate governance processes. 7.Act with moral courage- encourage others to do so. To make sure ethical issues are considered in business decisions, managers should: Behaving Ethically Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

“Conscience is the inner voice that warns us somebody may be looking.” - H. L. Mencken - H. L. Mencken “A company’s ethical conduct is something like a big flywheel. It might have a lot of momentum, but it will eventually slow down and stop unless you add energy.” - William Adams - William Adams Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.