STRATEGIC MANAGEMENT & BUSINESS POLICY 15e EDITION

STRATEGIC MANAGEMENT & BUSINESS POLICY 15e EDITION

Learning Objectives 2-1 Describe the role and responsibilities of the board of directors in corporate governance 2-2 Explain how the composition of a board can affect its operation 2-3 Describe the impact of the Sarbanes–Oxley Act on corporate governance in the United States 2-4 Discuss trends in corporate governance 2-5 Explain how executive leadership is an important part of strategic management After reading this chapter, you should be able to: Describe the role and responsibilities of the board of directors in corporate governance Explain how the composition of a board can affect its operation Describe the impact of the Sarbanes–Oxley Act on corporate governance in the United States Discuss trends in corporate governance Explain how executive leadership is an important part of strategic management corporate governance2018

Case study Case 1: The Recalcitrant Director at Byte, Inc.
corporate governance2018

Corporation: a mechanism established to allow different parties to contribute capital, expertise and labor for their mutual benefit Corporation is governed by the board of directors that oversees top management with the concurrence/agreement of the shareholders. corporate governance2018

Corporate governance: the relationship among the board of directors, top management and shareholders in determining the direction and performance of the corporation corporate governance2018

Responsibilities of the Board
Effective Board Leadership Strategy of the Organization Risk vs. Initiative Succession Planning Sustainability corporate governance2018

Responsibilities of the Board of Directors
Sets corporate strategy, overall direction, mission, or vision Hires and fires the CEO and top management Controls, monitors, or supervises top management Reviews and approves the use of resources Cares for shareholders’ interests Assures that the corporation is managed in accordance with state laws, security regulations and conflict of interest situations corporate governance2018

Responsibilities of the Board (2 of 2)
Due care the board is required to direct the affairs of the corporation but not to manage them If a director or the board as a whole fails to act with due care and, as a result, the corporation is in some way harmed, the careless director or directors can be held personally liable for the harm done. In a legal sense, the board is required to direct the affairs of the corporation but not to manage them. It is charged by law to act with due care. If a director or the board as a whole fails to act with due care and, as a result, the corporation is in some way harmed, the careless director or directors can be held personally liable for the harm done. corporate governance2018

Average time spent by boards
A 2008 global survey of directors by McKinsey & Company revealed the average amount of time boards spend on a given issue during their meetings Strategy—24% Execution (prioritizing programs and approving mergers and acquisitions)—24% Development of incentives and measuring performance)—20% Governance and compliance -17% Talent management—11% corporate governance2018

Role of the Board in Strategic Management
Monitor developments inside and outside the corporation Evaluate and Influence management proposals, decisions and actions Initiate and Determine the corporation’s mission and strategies corporate governance2018

Board of Directors Continuum

Members of a Board of Directors
Inside Directors are officers or executives employed by the board’s corporation, working in the corporation. Outside Directors are executives of other firms but are not employees of the board’s corporation. In USA, Canada the majority of board members outsiders. In Japan insiders the majority. corporate governance2018

Affiliated directors- not employed by the corporation, handle legal or insurance work Retired executive directors- used to work for the corporation, partly responsible for past decisions affecting current strategy Family directors- descendents of the founder and own significant blocks of stock corporate governance2018

Agency theory problems arise in corporations because top management is not willing to accept responsibility for their decisions unless they own a substantial amount of stock in the corporation. (Agent=manager) Stewardship/caring theory it suggests that executives tend to be more motivated to act in the best interests of the corporation than in their own self-interests. Stewardship theory focuses on the higher-order needs, such as achievement and self-actualization. The theory argues that senior executives over time tend to view the corporation as an extension of themselves. corporate governance2018

Codetermination: Should Employees Serve on Boards? (1 of 3)
the inclusion of a corporation’s workers on its board began only recently in the United States Although the movement to place employees on the boards of directors of U.S. companies shows little likelihood of increasing, the European experience reveals an increasing acceptance of worker participation on corporate boards. Codetermination, the inclusion of a corporation’s workers on its board, began only recently in the United States. Although the movement to place employees on the boards of directors of U.S. companies shows little likelihood of increasing (except through employee stock ownership), the European experience reveals an increasing acceptance of worker participation (without ownership) on corporate boards. corporate governance2018

Co-determination: Should Employees Serve on Boards?
Corporations such as Chrysler, Northwest Airlines, United Airlines (UAL), and Wheeling-Pittsburgh Steel added representatives from employee associations to their boards as part of union agreements or Employee Stock Ownership Plans (ESOPs). corporate governance2018

Interlocking/sharing directorate
Occurs when two firms share a director or when an executive of one firm sits on the board of a second firm. An indirect interlock occurs when two corporations have directors who also serve on the board of a third firm, such as a bank. corporate governance2018

Interlocking could be direct or indirect:
Interlocking Directorates- useful for gaining both inside information about an uncertain environment and objective expertise about potential strategies and tactics Interlocking could be direct or indirect: Direct interlocking directorate- when two firms share a director or when an executive of one firm sits on the board of a second Indirect interlocking directorate- when two corporations have directors who serve on the board of a third firm corporate governance2018

Organization of the Board
Board of Directors Organization of the Board Size Determined by charter and bylaws The average large, publicly held U.S. firm has 10 directors on its board. The average small, privately held company has 4-5 members. In Japan, 14; Non-Japan Asia, 9; Germany, 16; UK, 10; and France, 11. corporate governance2018

Organization of the Board (3 of 4)
Lead director consulted by the Chair/CEO regarding board affairs and coordinates the annual evaluation of the CEO 96% of U.S. companies that combine the Chairman and CEO positions had a lead director. Many of those who prefer that the Chairman and CEO positions be combined agree that the outside directors should elect a lead director. This person is consulted by the Chair/CEO regarding board affairs and coordinates the annual evaluation of the CEO. Ninety-six percent of U.S. companies that combine the Chairman and CEO positions had a lead director. corporate governance2018

Organization of the Board (4 of 4)
The most effective boards accomplish much of their work through committees. Although they do not usually have legal duties, most committees are granted full power to act with the authority of the board between board meetings. The most effective boards accomplish much of their work through committees. Although they do not usually have legal duties, most committees are granted full power to act with the authority of the board between board meetings. corporate governance2018

Nomination and Election of Board Members (1 of 2)
97% of large U.S. corporations use nominating committees to identify potential board members Staggered boards only a portion of board members stand for re-election when directors serve more than one-year terms Ninety-seven percent of large U.S. corporations now use nominating committees to identify potential directors. In contrast, only 60% of European corporations use nominating committees. Many 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. This is called a staggered board. corporate governance2018

Nomination and Election of Board Members (2 of 2)
Main reasons individuals serve on a board: Interested in the business—79% Make a difference—65% Stay active in business community—50% Recruited by friend on the board—25% Compensation—14% Networking opportunities—11% Notoriety/prestige—9% Recruited by friend, not on the board—4% A survey of directors of U.S. corporations revealed the following as the main reasons individuals serve on a board: Interested in the business—79% Make a difference—65% Stay active in business community—50% Recruited by friend on the board—25% Compensation—14% Networking opportunities—11% Notoriety/prestige—9% Recruited by friend, not on the board—4% corporate governance2018

Nomination and Election of Board Members
Criteria for a good director include: Willingness to challenge management when necessary Special expertise that is important to the company Available for outside meetings to advise management Expertise on global issues Understands the firm’s key technologies and processes Brings external contacts that are potentially valuable to the firm Has detailed knowledge of the firm’s industry Has high visibility in their field Is accomplished at representing the firm to stakeholders corporate governance2018

Approximately 70% of the top executives of U. S
Approximately 70% of the top executives of U.S. publicly held companies hold the dual/double designation of Chairman and CEO corporate governance2018

Impact of the Sarbanes-Oxley Act on U.S. Corporate Governance
designed to protect shareholders from excesses and failed oversight of boards of directors. It includes: whistleblower procedures: include, bans auditors from providing both external and internal audit services to the same company. It also requires that a firm internal auditor independent from management. improved corporate financial statements In response to the many corporate scandals uncovered since 2000, the U.S. Congress passed the Sarbanes–Oxley Act in June This act was designed to protect shareholders from the excesses and failed oversight that characterized criminal activities at Enron, Tyco, WorldCom, Adelphia Communications, Qwest, and Global Crossing, among other prominent firms. It includes whistleblower procedures. Both the CEO and CFO must certify the corporation’s financial information. The act bans auditors from providing both external and internal audit services to the same company. It also requires that a firm identify whether it has a “financial expert” serving on the audit committee who is independent from management. corporate governance2018

Help investors Evaluating Governance through:
Rating agencies S&P Corporate Governance Scoring System They developed rating tools and criteria. Avoiding Governance Improvements, through adopting: Multiple classes of stock: insider investors have extra votes to avoid outside domination. Transform Public firms to private ownership Controlled companies: owner controls 50%+ of stock. corporate governance2018

Evaluating Governance
S&P Corporate Governance Scoring System researches four major issues: Ownership structure and influence Financial stakeholder rights and relations Financial transparency and information disclosure Board structure and processes The S&P Corporate Governance Scoring System researches four major issues: Ownership structure and influence Financial stakeholder rights and relations Financial transparency and information disclosure Board structure and processes corporate governance2018

Trends in Corporate Governance
Boards shaping company strategy Institutional investors active on boards Shareholder demands that directors and top management own significant stock More involvement of non-affiliated outside directors Increased representation of women and minorities Boards evaluating individual directors Smaller boards Splitting the Chairman and CEO positions Shareholders may begin to nominate board members Society expects boards to balance profitability with social needs of society corporate governance2018

Responsibilities of Top Management
Executive leadership is the directing of activities toward the accomplishment of corporate objectives. Sets the tone for the entire corporation Strategic vision- description of what the company is capable of becoming corporate governance2018

Responsibilities of Top Management
Transformational Leaders provide change and movement in an organization by providing a vision for that change. Characteristics include: CEO articulates a strategic vision for the corporation CEO presents a role for others to identify with and to follow CEO communicates high performance standards and also show confidence in the followers’ abilities to meet these standards corporate governance2018

Cutting-Edge Approaches To Leadership
Three contemporary approaches to leadership: First: Transformational-Transactional Leadership Transactional - leaders who guide or motivate their followers in the direction of established goals by clarifying role and task requirements. corporate governance2018 © Prentice Hall, 2002 17-32

Cutting-Edge Approaches To Leadership
Transformational - inspire followers to transcend\increase their own self-interests for the good of the organization. Capable of having profound effect on followers. Pay attention to concerns of followers. change followers’ awareness of issues. Excite and inspire followers to put forth extra effort. Built on top of transactional leadership. Good evidence of superiority of this type of leadership. corporate governance2018 © Prentice Hall, 2002 17-33

Major responsibilities include:
Managing the Strategic Planning Process Strategic planning staff- supports both top management and the business units in the strategic planning process Major responsibilities include: Identifying and analyzing company-wide strategic issues, and suggesting corporate strategic alternatives to top management Work as facilitators with business units to guide them through the strategic planning process corporate governance2018

Styles of Corporate Governance
High Entrepreneurship Management Partnership Management low Chaos Management Marionette Management Low Degree of Involvement By top management Degree of involvement by board of directors corporate governance2018

Chaos Management When both the board of directors and top management have little involvement in the strategic management process. The board waits for top management to bring it proposals. Top management is operationally oriented and continues to carry out strategies, policies, and programs specified by the founding entrepreneur who died years ago. There is no strategic management being done here. corporate governance2018

Entrepreneurship Management A corporation with an uninvolved board of directors but a highly involved top management has entrepreneurship management. The board is willing to be used as a rubber stamp for top management's decisions. The CEO, operating alone or with a team, dominates the corporation and its strategic decisions. corporate governance2018

Marionette\dummy Management Probably the rarest form of strategic management style, Marionette management occurs when the board of directors is deeply involved in strategic decision making, but top management is primarily concerned with operations. Such a style evolves when a board is composed of key stockholders who refuse to delegate strategic decision making to the president. This style also occurs when a board fires a CEO but is slow to find a replacement. Marionette Management occurred at Winnebago Industries when the company's Board of Directors, chaired by its founder, 72-year-old John K. Hanson, took away Ronald Haugen's title as chief executive officer, but left him as company president. corporate governance2018

When does a corporation need a board of directors?
Who should and should not serve on a board of directors? Should a CEO be allowed to serve on another company’s board of directors? What would be the result if the only insider on a corporation’s board were the CEO? Should all CEOs be transformational leaders? Would you like to work for a transformational leader? corporate governance2018

Social Responsibility
Broader responsibility: Private corporation has responsibilities to society that extend beyond making a profit. corporate governance2018

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…” corporate governance2018

Carroll’s Four Responsibilities Economic: produce goods and services of value to society. Legal: abide by law, avoid discrimination. Ethical: respect beliefs in society. Discretionary/ voluntery :pure voluntary obligations. corporate governance2018

Responsibilities of Business

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 attract capital from investors who view reputable companies as desirable Ben & Jerry’s Maytag Procter & Gamble Rubbermaid corporate governance2018

Discussion What is the relationship between corporate governance and social responsibility? The board of directors is in a unique position to view the corporation as a whole and to evaluate management's performance in terms of stakeholder criteria. corporate governance2018

Social Responsibility: Balancing Commitments to Stakeholders
Stakeholders: Groups, individuals, and organizations that are directly affected by the practices of an organization Employees Investors CORPORATION Customers Suppliers Local Communities corporate governance2018

It refers to the way in which a business tries to balance its commitments to certain groups and individuals in its social environment. Customers: Treat customers fairly and honestly (Examples of companies with excellent reputations in this area: L.L. Bean, Nordstrom, Dell Computer Corporation) Employees: Treat employees fairly, with respect for their dignity and basic human needs (Examples of companies with excellent reputations in this area: 3M, Southwest Airlines) Investors: Manage financial resources honestly and openly Suppliers: Seek mutually beneficial partnerships Local Communities: Minimize damage and maximize contributions to local communities corporate governance2018

Reasons for Unethical Behavior
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. corporate governance2018

Kohlberg’s Levels of Moral Development Preconventional Level Concern for self Conventional\conservative Level Consideration of laws and norms Principled Level Adherence to internal moral code corporate governance2018

Code of Ethics: Specifies how an organization expects its employees to behave while on the job. corporate governance2018

The Evolution of Social Responsibility
Entrepreneurial Era: In the late 1800s, big business began to flourish, but labor strife, predatory\greedy business practices, and environmental degradation were rampant\out of control. Issued nation’s first law regulating basic business practices. The Great Depression: The collapse of business and banking institutions in the 1930s, combined with widespread job loss, led to a redefinition of the role of business to include protecting and enhancing the general welfare of society. corporate governance2018

The Evolution of Social Responsibility
3- The Era of Social Activism: Social unrest in the 1960s and 1970s led to laws that further expanded the role of business in promoting general welfare. When at that time characterized business as a negative social force. Many companies were blamed to promote Vietnam war to sell weapons. 4- Contemporary Social Consciousness: Through the economic expansion of the 1990s, many firms have begun to integrate socially conscious thinking into their production and marketing plans. In many industries, this approach has manifested itself in environmentally friendly products. Another emerging example is the extension of employment benefits to domestic partners, use recycling materials.. corporate governance2018

What Is Ethical Behavior?
Ethics: Right and wrong, good and bad, in actions that affect others. shaped by personal values and morals Ethical Behavior: Conforming to generally accepted ethical norms. Business ethics: Ethical or unethical behaviors of managers and employers of an organization. corporate governance2018

Discussion Identify examples of ethical and unethical business practices. Ethical Business Practices: Examples: Donating a percentage of profits to charity and community causes (Ben & Jerry’s donates 7-1/2% of pre-tax profits, and Levi Strauss donates 2.4% of pre-tax profits to a variety of causes), encouraging employees to engage in volunteer work using paid work-release time (Walt Disney’s VoluntEARS program), recycling (McDonald’s has a far-reaching environmental protection program). Unethical Business Practices: Examples: Forwarding “marketing research” results to sales people, excessive violence in video games, and of course all forms of illegal behavior (e.g. deliberately selling cigarettes to minors). corporate governance2018

Assessing Ethical Behavior
Approaches to Ethical Behavior Utility: Does a particular act optimize the benefits to those who are affected by it? Do all relevant parties receive “fair” benefits? Individual Rights: Does the act respect the rights of all individuals involved? Justice: Is the act consistent with what’s fair? E.g., level of salary, working hours. Caring: Is the act consistent with people’s responsibilities to each other? Every party will be committed toward each other, the consultant will finish his duty and the company will pay. Now let’s examine the Ethical Norms that we can use when gathering information. We can examine the issue we are facing in terms of: Utility: Utility answers the question, “Does a particular act optimize the benefits to those who are affected by it?” and the question, “Do all relevant parties receive ‘fair’ benefits?”. Rights: Rights answers the question, “Does the act respect the rights of all individuals involved?”. Justice: Justice answers the question, “Is the act consistent with what’s fair?”. Caring: Caring answers the question, “Is the act consistent with people’s responsibilities to each other?”. If we return to our example of the prepayment for consulting services by one of our customers, let’s apply these four ethical norms: Utility: The answer to these two questions is yes in this case. The customer receives the ability to deduct the expense during his or her current fiscal year and the consulting firm receives the revenue. Rights: The answer to this question is yes. The fiscal calendar year of the customer is respected as is the right for the consultant to receive payment. Justice: The answer is yes because the customer is paying a fair price, and is just paying in advance. The consultant is receiving payment in advance for agreed-upon services. Caring: The answer is yes because the consultant is putting the money in “escrow,” or is holding it and only taking it into its books as it provides the services, while the customer is receiving the right to pay in advance and thus take a tax advantage during the current fiscal year. Teaching Tips: Please join again with your same class team. In your team please refer back to one of the ethical issues you picked in our earlier discussion. Please discuss your example through the use of these norms. Let’s share our examples with the class. Answers will vary but can build upon examples presented earlier in this slide. corporate governance2018 © 2009 Pearson Education, Inc.

Approaches to Ethical Behavior Categorical imperatives\crucial “golden rules” Not restrict others behavior corporate governance2018

Responsibility Toward the Environment
Encompasses three main areas: Air pollution Water pollution Land pollution Toxic\deadly waste Recycling corporate governance2018

Areas of Social Responsibility
Green Marketing: The marketing of environmentally friendly goods: e.g., power saving computers and monitors Includes a number of strategies and practices: Production processes Product modifications Carbon offsets/balance Packaging reduction Sustainability corporate governance2018 © 2009 Pearson Education, Inc.

Areas of Social Responsibility
Green washing: Using advertising to project a green image without adopting substantive environmentally friendly change. Federal Trade Commission (FTC) started hearings in January 2008 regarding green marketing claims. corporate governance2018 © 2009 Pearson Education, Inc.

Responsibility Toward Customers
Consumer Rights Unfair Pricing Ethics in Advertising corporate governance2018

Responsibility Toward Customers
Involves providing quality products and pricing products fairly Consumerism Social activism dedicated to protecting the rights of consumers in their dealings with businesses Basic Consumer Bill of Rights To possess safe products To be informed about all relevant aspects of a product To be heard To choose what to buy To be educated about purchases To receive courteous/considerable service corporate governance2018 © 2009 Pearson Education, Inc.

Areas of Social Responsibility (cont’d)
Unfair Pricing Collusion/agreement: When two or more firms agree to collaborate on such wrongful acts as price fixing. Price gouging/scoring: Responding to increased demand with overly steep (and often unwarranted) price increases Ethics in Advertising Truth in advertising Morally objectionable/offensive advertising, e.g., using naked woman picture in ads. corporate governance2018 © 2009 Pearson Education, Inc.

Responsibility Toward Employees
Legal and social commitments: Legally, companies are required to refrain from discrimination against any worker based on race, gender, religion, nationality or other irrelevant factors. Ethically, many people feel that companies should ensure that the workplace is physically and socially safe. How far should companies extend themselves to help employees who are laid off? corporate governance2018

Responsibility Toward Investors
Responsibility towards investors has several components: Improper financial management: Offenses are typically unethical, rather than illegal. Examples include excessive salaries, and lavish\plentiful or frivolous perks\bonus (e.g. regular corporate “retreats” to exotic\interesting island resorts). Check kiting: Illegal practice of writing checks against money that has not yet arrived at the bank on which it is drawn. Insider trading: Illegal practice of using confidential information to gain from the purchase or sale of stocks. Misrepresentation of finances: Typically, this takes the form of overly optimistic projections of earnings. corporate governance2018

Review What are the Carroll’s four social Responsibilities of companies? Is there a consensus on the concept of social responsibilities? What is the relationship between social responsibility and ethics? Try to be practical in your answer. corporate governance2018

Discussion Should all CEOs be transformation leaders? Would you like to work for a transformational leader? According to the text, top management must successfully handle two responsibilities that are crucial to the effective strategic management of the corporation: (1) provide executive leadership and a strategic vision and (2) manage the strategic planning process. The successful CEOs often provide this executive leadership by taking on many of the characteristics of the transformation leader by communicating a clear strategic vision, demonstrating a strong passion for the company, and communicating clear directions to others. Such transformational leaders, like Bill Gates at Microsoft, Steve Jobs at Apple, and Anita Roddick at The Body Shop, are able to command respect and energize their employees. corporate governance2018

STRATEGIC MANAGEMENT & BUSINESS POLICY 15e EDITION

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STRATEGIC MANAGEMENT & BUSINESS POLICY 15e EDITION

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