Social Responsibility Chapter 2 Corporate Governance and Social Responsibility PowerPoint Slides Dr.Vijaya Kumar Skyline College Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Corporate Governance Defined: Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation. Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Corporate Governance Board of Directors Setting corporate strategy, overall direction, mission or vision Hiring and firing the CEO and top management Controlling, monitoring, or supervising top management Reviewing and approving the use of resources Caring for shareholder interests Board of Directors Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Role of the Board in strategic management Corporate Governance Role of the Board in strategic management Monitor Developments inside and outside the corporation Evaluate & Influence Review proposals, advise, provide suggestions and alternatives Initiate & Determine Delineate corporation’s mission and specify strategic options Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Board of Directors Members: Inside directors Outside directors “Management directors” Officers or executives employed by corporation Outside directors “Non-management directors” May be executives of other firms but not employed by board’s corporation Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Board of Directors Continuum DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT Low High (Passive) (Active) Rubber Minimal Nominal Active Phantom Stamp Review Participation Participation Catalyst Never knows Permits officers Formally Involved to a Approves, Takes the what to do, if to make all reviews limited degree questions, and leading role in anything; no decisions. It selected issues in the perform- makes final de- establishing degree of votes as the that officers ance or review cisions on mis- and modifying involvement. officers recom- bring to its of selected key sion, strategy, the mission, mend on action decisions, policies, and objectives, issues. indicators, or objectives. Has strategy, and programs of active board policies. It has management. committees. a very active Performs fiscal strategy and manage- committee. ment audits. Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Agency Theory Problems arise in corporations because the agents (top management) are not willing to bear responsibility for their decisions unless they own a substantial amount of stock in the corporation. Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Stewardship Theory Executives tend to be more motivated to act in the best interest of the corporation than their own self-interests. Theory argues that over time, senior executives tend to view the corporation as an extension of themselves. Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Board of Directors “Outsider” overly simplistic term -- Some outsiders are not truly objective and could be considered insiders. Examples: Affiliated Directors Retired Directors Family Directors Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Board of Directors Membership Trends (Survey, 1999) 75% of boards have at least 1 female director 25% of boards have two female directors 60% of boards have at least one minority member Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Board of Directors Codetermination The inclusion of a corporation’s workers on its board of directors. Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Interlocking Directorates Board of Directors Interlocking Directorates Direct Interlocking Directorate – When two firms share a director or when an executive of one firm sits on the board of a second firm. Indirect Interlocking Directorate – When two corporations have directors who also serve on the board of a third firm. Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Nominations & Elections Board of Directors Nominations & Elections Traditional Approach: CEO invites members to serve Shareholders approve in annual proxy statement All nominees are usually elected Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Nominations & Elections Board of Directors Nominations & Elections Staggered Board Approach: Corporations whose directors serve terms of more than one year, divide the board into classes, and stagger elections so that only a portion of the board stands for election each year. Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Nominations & Elections Criteria for Selection Board of Directors Nominations & Elections Criteria for Selection Wiling to challenge management Special expertise Availability for advice and meetings Expertise on global issues Understands key technologies External contacts valuable to the firm Detailed knowledge of industry High visibility in field Accomplished in representing firm to stakeholders Board of Director Membership Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Organization of the Board Board of Directors Organization of the Board Size Determined by charter and bylaws Average for publicly-held, large firm is 11 directors Average for small/medium private firms is 7 to 8 directors Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Board of Directors Corporate Governance No consistent link between board membership, leadership, structure, and financial performance of firm Investors pay more for a firm’s stock when positive toward good corporate governance— Belief that Good governance leads to better performance over time Reduces risk of company finding itself in trouble Governance is a major strategic issue Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Styles of Corporate Governance High Entrepreneurship management Partnership Chaos Marionette Degree of Involvement By Top Management Low Low Degree of Involvement By Board of Directors High Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Trends in Corporate Governance Board of Directors Trends in Corporate Governance Boards more involved in reviewing, evaluating, and shaping strategy Institutional investors active on boards; pressure on CEO for firm performance Shareholders demand directors own more than token amounts of the firm’s stock Non-affiliated outside directors increasing Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Trends in Corporate Governance Board of Directors Trends in Corporate Governance Boards becoming smaller Boards taking more control of board functions Corporations becoming more global; international experience needed Societal expectations that boards balance profitability and social responsibility Diversity of board members Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Responsibilities of Top Management: Provide executive leadership and a strategic vision Manage the strategic planning process Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Top Management Executive Leadership – Strategic Vision – The directing of activities toward the accomplishment of corporate objectives. Sets the tone for the entire corporation. Strategic Vision – A description of what the company is capable of becoming. Often communicated in the mission statement. Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

CEO and Clear Strategic Vision Top Management CEO and Clear Strategic Vision Common Characteristics: CEO articulates a strategic vision CEO presents a role for others CEO communicates high performance standards and shows confidence in followers Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Strategic Management Process Strategic Planning Staff -- Supports top management and business units in the strategic planning process. Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Strategic Management Process Strategic Planning Staff Responsibilities: Identify and analyze company-wide strategic issues, suggest corporate strategic alternatives Work as facilitators with business units to guide them through the strategic planning process Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Social Responsibility Key question for strategic decision makers: “Should strategic decision makers be responsible only to shareholders or do they have broader responsibilities?” Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Social Responsibility Friedman’s Traditional View “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits…” Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Social Responsibility Carroll’s Four Responsibilities Economic Legal Ethical Discretionary Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Social Responsibility Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Social Responsibility Benefits Environmental concerns may enable the firm to charge premium prices and gain brand loyalty Trustworthiness may help generate enduring relationships with suppliers and distributors without spending time and money policing contracts Can attract outstanding employees who prefer working for a responsible firm More likely to be welcomed into a foreign country Ben & Jerry’s Maytag Procter & Gamble Levi Strauss Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Social Responsibility Moral Relativism Morality is relative to some personal, social or cultural standard and that there is no method for deciding whether one decision is better than another. Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Social Responsibility Kohlberg’s Levels of Moral Development Preconventional Level Concern for self Conventional Level Consideration of laws and norms Principled Level Adherence to internal moral code Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Social Responsibility Code of Ethics: Specifies how an organization expects its employees to behave while on the job. Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Social Responsibility Ethics The consensually accepted standards of behavior for an occupation, trade, or profession Morality The precepts of personal behavior based on religious or philosophical grounds Law Formal codes that permit or forbid certain behaviors Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Social Responsibility Approaches to Ethical Behavior Utilitarian Actions and plans judged by consequences Individual Rights People have fundamental rights to be respected in all decisions Justice Distribution of costs and benefits to be equitable, fair, and impartial Prentice Hall, 2002 Chapter 2 Wheelen/Hunger

Social Responsibility Impact of the Internet Issues – Cybersquatting Taxation Public Interest Prentice Hall, 2002 Chapter 2 Wheelen/Hunger