1. Corporate Performance, Governance, and Business Ethics
Chapter Eleven
Corporate Performance, Governance, and Business Ethics

2. Stakeholders and Corporate Performance
Stakeholders are individuals or groups with an interest, claim, or stake in the company, what it does, and how well it performs.
Stakeholders are in an exchange relationship with the company
Contributions: they supply the organization with important resources
Inducements: in exchange they expect their interests to by satisfied
Companies should pursue strategies that maximize long-run shareholder value and
must also behave in an ethical and socially responsible manner.
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3. Stakeholders and the Enterprise
Figure 11.1
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4. Stakeholder Impact Analysis
Identify stakeholders most critical to survival:
Identify which stakeholders
The stakeholders’ interests and concerns
Claims stakeholders are likely to make on the organization
Stakeholders who are most important to the organization’s perspective
Identify the resulting strategic challenges
Usually the most important:
Customers • Employees • Stockholders
Companies must identify the most important stakeholders and give highest priority to pursuing strategies that satisfy their needs.
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5. The Unique Role of Stockholders
Stockholders are a company’s legal owners and the provider of risk capital, a major source of capital to operate a business.
Risk capital –
No guarantee to the stockholders that:
They will recoup their investment
Or earn a decent return
ESOPs – Employee Stock Option Plans
Employees may also be shareholders
Maximizing long-run profitability & profit growth is the route to maximizing returns to shareholders, as well as satisfying the claims of most other stakeholder groups.
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6. Profitability, Profit Growth and Stakeholder Claims
To grow profits, companies must be doing one or more of the following:
Participating in a market that is growing
Taking market share away from competitors
Consolidating the industry via horizontal integration
Developing new markets through:
• Diversification • Vertical Integration • International Expansion
Stockholders receive their returns as:
Dividend payments
Capital appreciation in market value of shares
ROIC is an excellent measure of profitability.
A company generating positive ROIC is adding to shareholders’ equity and increasing shareholder value.
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Agency Theory
Agency relationships arise whenever one party delegates decision-making authority or control over resources to another.
Principal-agent relationships
Principal: person delegating authority
Agent: person to whom authority is delegated
The agency problem:
Agents and principals may have different goals.
Agents may pursue goals that are not in the best interests of their principals.
Agents may take advantage of information asymmetries to maximize their interests at the expense of principals.
It is difficult for principals to measure performance.
Trust • On-the-job consumption • Empire building
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8. The Tradeoff Between Profitability and Revenue Growth Rates
Need to maximize long-run shareholder returns by seeking the right balance between company growth and profitability and profit growth.
Figure 11.2
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9. The Challenge for Principals
Confronted with agency problems, the challenge for principals is to:
Shape the behavior of agents so that they act in accordance with goals set by principals
Reduce information asymmetry between agents and principals
Develop mechanisms for removing agents who do not act in accordance with goals and principals
Principals try to deal with these challenges through a series of governance mechanisms.
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10. Governance Mechanisms
Governance mechanisms serve to limit the agency problem by aligning incentives between agents and principals and by monitoring and controlling agents.
The Board of Directors
Elected by stockholders
Legally accountable
Monitors corporate strategy decisions
Authority to hire, fire, and compensate
Ensures accuracy of audited financial statements
Inside directors
Outside directors
Stock-Based Compensation
Pay-for-performance
Stock options:
The right to buy company shares at a predetermined price at some point in the future
Financial Statements
Auditors • SEC • GAAP
The Takeover Constraint
Limits strategies that ignore shareholder interests
Corporate raiders
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11. How Options Skew the Bottom Line
Table 11.1
Source: D. Henry and M. Conlin, “Too Much of a Good Incentive?” Business Week, March 4, 2002, pp. 38–39.
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12. Governance Mechanisms Inside a Company
Important agency relationships also exist between levels of management within a company. Internal agency problems can be reduced by:
Strategic control systems
To establish standards against which performance can be measured
To create systems for measuring and monitoring performance
To compare actual performance against targets
To evaluate results and take corrective actions
Balanced Scorecard model approach is used to drive future performance
Employee incentives
Employee stock options and stock ownership plans
Compensation tied to attainment of superior efficiency, quality, innovation, and responsiveness to customers
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13. A Balanced Scorecard Approach
Figure 11.3
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Ethics and Strategy
Business ethics are the accepted principles of right or wrong governing the conduct of businesspeople.
Ethical dilemmas occur when:
There is no agreement over what the accepted principles are
None of the available alternatives seem ethically acceptable
Many accepted principles are codified into laws:
Tort laws – governing product liability
Contract law – contracts and breaches of contracts
Intellectual property law – protection of intellectual property
Antitrust law – governing competitive behavior
Securities law - issuing and selling securities
Behaving ethically goes beyond staying within the law
An ethical strategy is one that does not violate the accepted principles.
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15. Ethical Issues in Strategy
Ethical issues are due to a potential conflict between the goals of the enterprise, or the goals of the individual managers, and the rights of important stakeholders:
Self-dealing
Managers feather their nest with corporate monies
Information manipulation
Distort or hide information to enhance competitive or personal situation
Anticompetitive behavior
Actions aimed at harming actual or potential competitors
Opportunistic exploitation
Of other players in the value chain in which the firm is embedded
Substandard working conditions
Underinvest in working conditions or pay below market wages
Environmental degradation
Directly or indirectly take actions that result in environmental harm
Corruption
Companies pay bribes to gain access to lucrative business contracts.
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16. The Roots of Unethical Behavior
Why do some managers behave unethically?
No simple answers, but some generalizations:
Personal ethics code: will have a profound influence on behavior as a businessperson
Do not realize they are behaving unethically: by failing to ask the right questions
Organization’s culture: de-emphasizes ethics and considers primarily economic consequences
Unrealistic performance goals: encouraging and legitimizing unethical behavior
Unethical leadership: that encourages and tolerates behavior that is ethically suspect
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17. Philosophical Approaches to Ethics
Philosophical underpinnings of business ethics that can provide managers with a moral compass to help navigate through difficult ethical issues:
The Friedman Doctrine
Milton Friedman’s basic position is that the only social responsibility of business is to increase profits, as long as the company stays within the law and the rules of the game without deception or fraud.
Utilitarian and Kantian Ethics
The moral worth of actions is determined by its consequences – leading to the best possible balance of good versus bad consequences. Committed to the maximization of good and the minimization of harm.
Rights Theories
Recognizes that human beings have fundamental rights and privileges. Rights establish a minimum level of morally acceptable behavior.
Justice Theories
Focus on the attainment of a just distribution of economic goods and services that is considered to be fair and equitable.
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Behaving Ethically
To make sure that ethical issues are considered in business decisions, managers should:
Favor hiring and promoting people with a well-grounded sense of personal ethics.
Build an organizational culture that places a high value on ethical behavior.
Make sure that leaders not only articulate but also act in an ethical manner.
Put decision-making processes in place that require people to consider the ethical dimension of business decisions.
Use ethics officers.
Put strong corporate governance processes in place.
Act with moral courage and encourage others to do the same.
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