Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Chapter 5 Corporate Governance and Corporate Compliance Understanding Business Ethics Stanwick and Stanwick 2 nd Edition

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. But I Fired You First George Perlegos started Atmel in 1984, the company went public in 1991 After Sarbanes Oxley in 2002, the composition of the board shifted from an “insider” board to a dominated “independent” board In 2005 “independent” board members found out that Perlegos and his brother Gust were allegedly misusing company travel funds 1

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. But I Fired You First The board recommended that George, Gust, and general counsel Michael Ross be fired. In May 2007, shareholders voted to support the current board members and reject George’s proposal to remove the board members who were responsible for his termination 2

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Ethical Leadership Defined as the demonstration of normatively appropriate conduct through personal actions and interpersonal relationships – and the promotion of such conduct to followers through two-way communication, reinforcement, and decision-making 3

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Transformational Leadership Focused on developing a long term vision for the company Based on inspirational motivation, idealized influence, individualized consideration, and intellectual stimulation It is argued that ethical leadership is transformational 4

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Transformational Leadership Principles of Ethical Power – Purpose – Perspective – Patience – Persistence 5

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Transactional Leadership Focus on operational and routine activities within the firm It is argued that this is more of a “managership” in which control is used to protect the status quo of the firm Use contingent rewards and management by exception to manage employees 6

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. A Reconciliation of Ethical Values of Leadership Styles Transformational Leaders – Have an organic and interdependent view of external events – Moral altruistic motives are supported by the deontological philosophical frameworks – Focus on social obligations 7

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. A Reconciliation of Ethical Values of Leadership Styles Transactional Leaders – Have an independent view of external events – Mutual altruistic motives are supported by teleological philosophical frameworks – Focus on the individual obligations 8

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. The Transformation from a Moral Person to Ethical Leader Traits Behaviors Decision Making Moral Manager 9

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. The Transformation from a Moral Person to Ethical Leader Moral Manager – Transfer of moral value within the moral manager to those he or she interacts with is based on how the moral manager is able to communicate the ethical values to others 10

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Moral Persons and Moral Managers Unethical Leader – Weak moral person and weak moral manager – Drive to reward their own self-interests – Examples include Jeff Skilling, Bernie Ebbers, and Dennis Kozlowski 11

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Moral Persons and Moral Managers Ethical Leader – Should be the ultimate ethical goal of any manager – Ability to use grounded ethical characteristics and transfer them to others within the organization through the characteristics of a moral manager 12

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Moral Persons and Moral Managers Hypocritical Leader – Manager has destroyed all three of the critical traits of a moral person – Says one thing about ethical values then acts unethically – Example is Martha Stewart 13

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Moral Persons and Moral Managers Inconsistent Leader – A manager who has strong ethical traits, behaviors, and decision making of a moral person, but is not able to transfer those values to other employees Inconsistent because of the contradictory strength of the individual moral values and weak characteristics of a moral manager 14

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Corporate Governance Defined as the system that is used by firms to control and direct their operations and the operations of their representatives, the employees. Provides a method in which the ethical vision can be measured and validated 15

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Board of Directors Designed to represent the interests of the stockholders Agency theory is based on the belief that managers are “agents” of the stockholders because they should be making decisions to benefit the stockholders 16

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Board Member Classifications Inside Board Member – Has direct financial ties to the firm Outside Board Member – Does not have direct financial ties to the firm. 17

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Core Ethical Values that Guide the Behaviors of Board Members Honesty Integrity Loyalty Responsibility Fairness Citizenship 18

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Types of Boards of Directors Passive Board Certifying Board Engaged Board Intervening Board Operating Board 19

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Benefits of A Strong Board of Directors Stanwick and Stanwick found that having a strong board does have a positive impact on the performance of the firm – Having good corporate governance supports the financial requirements established by the shareholders 20

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. CEO Compensation and Ethical Reputation Stanwick and Stanwick Study on the relationship among CEO compensation, ethical reputation, and financial performance – No direct relationship between CEO compensation and the financial performance of the firm 21

Understanding Business Ethics 2 nd Edition © 2014 SAGE Publications, Inc. Questions for Thought 1.In the opening vignette, who has the authority to fire the CEO? Who has the authority to fire a member of the board of directors? What is CEO duality? 2.What are some ways in which a Board of Directors can increase its power? Under what circumstances can its power be decreased? 3.Do you perceive yourself as a transformational or transactional leader? Explain your answer. 22