Revisiting the Purpose of the Firm: Executive Leadership Development in the Context of Corporate Governance Reform Catherine C. Giapponi Charles F. Dolan School of Business Fairfield University

Executive Leadership and Corporate Governance Reforms in the United States Enron, WorldCom Debacles – Corporate Greed, Excess, and Fraud Legal/Regulatory Response – Sarbanes-Oxley Act of 2002 (Pub.L. No ) – Security Exchange Commission Regulations (SEC Release Nos ; ;IC-26001) – Exchange Rules (New York Stock Exchange, NASDAQ)

Legal Reforms Monitor Executive Behavior Control Executive Behavior Protect Shareholder Interest

Legal Reforms Legal Response: – Agency Theory (Berle and Means, 1932; Jensen and Meckling, 1976; Fama, 1980; Fama and Jensen, 1983) Principal-Agent Conflict Increased Financial Disclosure/Transparency (Information Asymmetry) Board Independence (Audit, Compensation Committees) Gatekeepers (Auditors, Directors, Securities Analysts) – Purpose of the Firm: Neoclassical Economic Theory of the Firm (Coase, 1937; Alchian and Demsetz, 1972; Friedman, 1985) Maximization of Profit and Shareholder Wealth

Effectiveness of Legal Reforms Post Sarbanes-Oxley: – Executive Compensation Issues – Announcements of Restatement of Earnings – Corporate Scandals and Fraud – Current Economic Crisis Some positive change - but why have legal reforms fallen short? – Law is Insufficient – cant regulate everything – Short-Term Orientation of the Markets (Pressure) Investors/Analysts/Market Focus on the Bottom Line Technology: Short- term Analysis of Firm Performance

Effectiveness of Legal Reforms Governance Law: Control, Monitoring, Oversight (Reactive) Role of Business Education: Foundation Building (Proactive) – Role of business education in corporate governance reform – Leadership education and development – Change in Business Culture

Executive Leadership: Underlying Assumptions About the Purpose of the Firm How do underlying assumptions about the purpose of the firm shape executive leadership and managerial behavior?

Executive Leadership: Underlying Assumptions About the Purpose of the Firm Competing and Complementary Theories: – Economic and Shareholder Capitalism Theory (Jensen and Meckling, 1976; Friedman, 1985; Williamson, 1975) – Stakeholder Theory (Dodd, 1932; Freeman, 1984; Epstein, 1987; Evan and Freeman, 1988) – Social Systems Theory (Ackoff, 1986, 1994; Ackoff and Gharajedaghi, 1985) – Hybrid Theories (Double and Multiple Agency) (Child and Rodrigues, 2003)

Executive Leadership: Underlying Assumptions About the Purpose of the Firm View of Profit Maximization: An End or Means to Broader Social Purpose?

Executive Leadership Behavior What do these theories infer with respect to executive leadership behavior? – Leader Motivation (personal motivation) – Mechanisms to Control Behavior – Interest Alignment – Short-Term vs. Long-Term Orientation

Executive Leadership Behavior Executive Leaders: How do their underlying assumptions about the purpose of the firm affect the way they lead? – Strategic Vision – Strategic Goals and Strategic Initiatives – Strategic Decision Making – Strategy Implementation – Corporate Performance (Evaluation and Measurement)

Common Understanding of the Purpose of the Firm Competing Theories: Is there a common understanding of the purpose of the firm? Do we need a common understanding of the purpose of the firm in order to develop corporate leaders for the next millennium? What is the ultimate purpose of the firm? How should these questions impact leadership development at the graduate and undergraduate levels of our Jesuit business schools?

Social Systems View of the Firm Social Systemic End: Development (Ackoff, 1974, 1981, 1994) – An increase in an entitys potential – Development: …to encourage and facilitate the development of society and their stakeholders. An entity develops to the extent that it increases its ability and desire to encourage and facilitate the development of others, society, and the enterprises stakeholders (Ackoff, 1994:48). Profit and Shareholder Wealth Maximization: An end or a means to pursue development as a meta-ideal? – Development and the Common Good – Development and Global Sustainability – Development and the Corporations Role in Raising the Bottom of the Economic Pyramid – Development and the Shareholders, Employees, Customers, Suppliers, Business Partners, Local Communities

Leadership: Education and Development Challenge our students to: – Re-examine and reflect on their underlying assumptions about the purpose of the firm Is profit maximization and the enhancement of shareholder wealth the ultimate end or the means to broader ends? – Consider how these assumptions affect their behavior, business strategy and decisions, the implementation of strategic initiatives, and evaluation of business performance