Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 1-1 BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance BA Business Environment Week 7 ~ Part 1 Fall 2003

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 1-2 BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Agenda Chapter 19 Intro - Corporate Governance Current Event Presentations Case #21 - Pizza Redlining Search the Web AFL-CIO sponsors PayWatch. A web site that tracks CEO pay and perks. For more information see:

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 1-3 BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Two Major Themes Legitimacy and the Corporate Governance Problem Improving Corporate Governance

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 1-4 BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Legitimacy Legitimacy is a condition indicating congruence between an organization’s activities and society’s expectations. Legitimatization is a dynamic process to perpetuate acceptance (to changing norms).

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 1-5 BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Micro v. Macro Levels of Legitimacy Micro Focus on individual business Seek legitmacy in several ways –Adapt to perceived societal expectations –Attempt to change societal expectations –Identify percieved as legitimate Macro Focus is on business system as a whole Fragile Subject to ratification –No inherent right to exist Rarely addressed

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 1-6 BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Corporate Governance Issue of corporate governance –Method and goals Components of corporate governance –Shareholders –Board of directors – Executive Managers –Employees Search the Web The Corporate Library is an independent investment research firm specializing in corporate governance and board effectiveness.

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 1-7 BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance The Four Major Internal Stakeholder Groups Shareholders - owners, should have ultimate control Board of Directors - govern and oversee the management of the business Management - hired by board to run the company and manage daily Employees - hired to perform actual operational work

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 1-8 BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Separation of Ownership from Control Intended roles vs. Actual roles Owners >> Investors Manager agent >> self-interest Independent board >> mgmt team player

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 1-9 BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Precorporate vs. Corporate

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Role of the Board “What a CEO really expects from a board is good advice and counsel, both of which will make the company stronger and more successful; support for those investments and decisions that serve the interests of the company and its stakeholders; and warnings in those cases in which investments and decisions are not beneficial to the company and its stakeholders.” ~ Kenneth Lay, former CEO, Enron Centre for Business Ethics at the University of St. Thomas in Houston, Aprill 1999.

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Effectiveness of Board Ineffective boards –Rubber stamp boards –CEO dominated boards –Conflict of interest boards Effective boards –Address issues listed above –Use outside directors –Management challenge and dissent

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance CEO: Pay vs. Performance As pay rose performance fell Increase use of stock options Options lead to risk aversion Average $13.1 million in 2000 CEO pay 531 x pay of average worker Only 85 x in 1990 Average board member makes ~$75K

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Consequences of Mergers, Takeovers and Acquisitions Greenmail - buyout suitor at above market $ Poison pill - to dilute suitors holdings Golden parachutes - payments to CEO at change in corporate control Insider trading scandals - personal gain Risk arbitrage - buying and selling of companies on the verge of collapse

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Improving Corporate Governance Changes in boards of directors –Appointing “outside” directors who will monitor management more carefully than “inside” directors. Use of stronger board committees – Establish audit, nominating, compensation, and public issues committees. Board should “get tough” with the CEO – demand accountability

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Increased Role for Shareholders Type of shareholders –Financial performance –Social activists Shareholder initiatives –Rise of shareholder activists Filing of shareholder resolutions –Shareholder lawsuits –SEC regulations –Private Securities Litigation Reform Act of 1995 –Securities Litigation Uniform Standards Act of 1998

Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved BA Business Environment Chapter 19 Owner Stakeholders and Corporate Governance Corporate Initiatives Reestablish a good relationship with owners by observing frequent full disclosure especially during issues of potential corporate takeovers.