1. Key Topics Ch 3 & 4
© 2015 Cengage Learning

2. Today’s class… Chapter 3 and 4 First group meeting
Stakeholder
Corporate governance
First group meeting
Group discussion of Ethics in Practice Case
Walmart Case Study
© 2015 Cengage Learning

3. Key Topics Stakeholder Corporate Governance Walmart Case Study
Type of stake and stakeholders
Sustainability as stakeholder
Progress of stakeholder involvement based on three views of the firm
Corporate Engagement
Corporate Governance
Board of directors
Sarbanes-Oxley Act (SOX) of 2002 for improving governance
Alternative Model of Corporate Governance
Walmart Case Study
© 2015 Cengage Learning

4. Paradigm change of Stakeholder
Who own the corporation?
Old paradigm: only shareholders and very few stakeholders
New paradigm: shareholders and various stakeholders
Importance of stakeholder…
Increasing due to CSR
Boundary  expanding
E.g., nonhuman stakeholder
© 2015 Cengage Learning

5. Origins of the Stakeholder Concept
Stake - An interest or a share in an undertaking.
Example: Financially, Mr. John Doe holds a 20% stake in the company. Parents have a large stake in their children's education.
Stake can be categorized as:
An Interest
A Right
Ownership
Legal Right
Moral Right 5 5
© 2015 Cengage Learning

6. An interest
When a person or group will be affected by a decision, it has an interest in that decision.
The plant closing will affect people in the community.
This TV commercial demeans women.
A Citizen's interest in a national issue
E.g., US citizens' interest in NAFTA (North American Free Trade Agreement) negotiation: especially, many business people in California is affected
© 2015 Cengage Learning

7. A Right A moral right or a legal right
It is fair to share equal amount of work among team members and keep the noise down in the office while working.
Employment Rights Act 1996, as amended, against suffering any harm because of any reasonable actions they take on health and safety grounds.
Consumer rights when you buy goods and services
© 2015 Cengage Learning

8. Ownership
When a person or group has a legal title to an asset or a property
This company is almost mine because I have more than 50% of stocks.
I own 1,000 stocks out of 10,000 of this corporation. So, I can claim at least 10% of ownership.
© 2015 Cengage Learning

9. Stakeholders Stakeholder -
Any individual or group who can affect or is affected by the actions, decisions, policies, practices, or goals of the organization.
Introduction of Stakeholder (1:26)
© 2015 Cengage Learning

10. Shareholder vs. Stakeholder
….is any person, company or other institution that owns at least one share of a company’s stock.
Shareholders are stakeholders in a corporation
Shareholders are usually not personally liable for the company's debts and other financial obligations. 
Stakeholders are not always shareholders
© 2015 Cengage Learning

11. Who are Business’s Stakeholders?
Business Stakeholder Groups
Media
Suppliers
Special-Interest Groups
Society
Natural Environment:
Part of Sustainability
Competitors
Customers
Community
Stockholders
Employees 11
© 2015 Cengage Learning

12. Getting Important Stakeholders
Sustainability, buzz word and one of the key themes
What is Sustainability? (4:00)
Please try below after class
The Journey of Sustainable Business (12:00)
Unusual stakeholders will become usual
Natural environment
Nonhuman species
Mountain ranges (Himalaya, tallest mountain?)
Future generations
© 2015 Cengage Learning

13. Evolution of stakeholder involvement based on three views
Production View
Managerial View
Stakeholder View
Note: The view has changed as the paradigm changes.
© 2015 Cengage Learning

14. Production and Managerial Views of the Firm (fig 3-2 slightly different)
industrial age
in-between industrial age and information age
© 2015 Cengage Learning

15. Stakeholder View of the Firm
information age and beyond
Natural Environment
Artificial Intelligence
© 2015 Cengage Learning

16. Type of Stakeholders Primary (social) stakeholders – direct
Secondary (social) stakeholders – indirect
Shareholders and investors
Government regulators
Employees and managers
Civic institutions
Customers
Social pressure groups
Local communities
Media and academic commentators
Suppliers and other business partners
Trade bodies
Competitors
© 2015 Cengage Learning

17. Nonsocial Stakeholders
Primary nonsocial stakeholders
Secondary nonsocial stakeholders
Natural environment
Environmental interest groups (e.g., Greenpeace)
Future generations
Animal welfare organizations (e.g., shelter)
Nonhuman species
Strong (maybe dangerous for some businesses) secondary nonsocial stakeholders
© 2015 Cengage Learning

18. Stakeholders of Ford Motor
Primary social stakeholder?
Secondary social stakeholder?
Primary nonsocial stakeholder?
Secondary nonsocial stakeholder?
© 2015 Cengage Learning

19. Stakeholder Typology
© 2015 Cengage Learning

20. Latent Stakeholders One attribute (no overlap) Low salience
1, 2, and 3 from the typology
Dormant, Discretionary, Demanding
One attribute (no overlap)
Low salience
Managers may do nothing about these stakeholders and may not even recognize them as stakeholders.
© 2015 Cengage Learning

21. Expectant Stakeholders
4, 5, and 6
Dominant, Dangerous, Dependent
Two attributes
Moderate salience
Active rather passive
Seen by managers as 'expecting something'.
Likely higher-level engagement with these stakeholders
© 2015 Cengage Learning

22. Definitive stakeholders
All three attributes
High salience
Highly active
Managers (especially, top management) need to give immediate priority to these stakeholders.
© 2015 Cengage Learning

23. Stakeholder Engagement
An approach by which companies successfully implement the transactional level of strategic management capability.
Stakeholder Engagement 2:43, 3:07)
Interaction with stakeholders must be integrated into every level of decision-making in the organization.
A ladder of stakeholder engagement depicts a continuum from low engagement to high engagement.
Transparency: working toward the open corporation.
Sustainability is the latest emphasis on engaging stakeholders.
© 2015 Cengage Learning

24. Key Questions for effective Stakeholder Management
Who are our organization’s stakeholders?
What are our stakeholders’ stakes?
What opportunities and challenges do our stakeholders present to the firm?
What responsibilities (economic, legal, ethical, and philanthropic) does the firm have to its stakeholders?
What strategies or actions should the firm take to best address stakeholder challenges and opportunities?
© 2015 Cengage Learning

25. Corporate Governance
CG is the system corporations are directly controlled.
What is Corporate Governance? (3:00)
Is concerned with the relative roles, rights, and accountability of such stakeholder groups as owners, boards of directors, managers, employees, and other stakeholders.
© 2015 Cengage Learning

26. The Corporation’s Hierarchy of Authority
State Charter
Shareholders
Board of Directors
Management
Employees
Issued by the state - allow right to exist. So, not a major group in a corporation
© 2015 Cengage Learning

27. Roles of Four Major Groups -
Shareholders -
Own stock in the firm, giving them ultimate control (the shareholder-primacy model).
Board of Directors -
Govern and oversee management of the business.
Managers (especially, top management) -
The individuals hired by the Board to manage the business on a daily basis.
Employees -
Hired to perform actual operational work
© 2015 Cengage Learning

28. Shareholders (multi-ownership)
Separation of Ownership from Control Contributes to Governance Problems
Corporate Period
Pre-corporate Period
Shareholders (multi-ownership)
Board of Directors
Management (control)
Owners (ownership, sole
& almost unlimited
responsibility)
Managers (control)
© 2015 Cengage Learning

29. Matters Surrounding Unreasonably High Compensation
CEO Pay-Firm Performance Relationship
Executive Retirement Plans & Exit Packages
SEC Rules as a Solution - Transparency
Excessive CEO Pay
Outside Director Compensation
Why it Pays to Be on a Board of Directors (2:30)
© 2015 Cengage Learning

30. The Need for Board Independence
The board is responsible for effective corporate governance.
Outside directors – are independent from the firm
Inside directors – have some tie to the firm
Board independence from management is crucial to good governance. If not, below scandal can happen again
E.g., Enron Scandal (4:48)
world famous scandal and motivation for SOX
Even today, still not easy……..
© 2015 Cengage Learning

31. Q & A CEO vs. Chairman Can the CEO be a chairmen of the board?
The CEO is ultimately accountable to the board of directors for the company's performance. The chairman of a company is the head of its board of directors.
Can the CEO be a chairmen of the board?
A CEO who may also be chairman of the board as well as other executives of the organization such as its CFO or large shareholders (who may or may not also be employees or officers).
Is a CEO higher than a chairman?
The chairman, as a member of the board of directors, has a higher rank than the president / CEO because the chairman can have a role in hiring and firing the president / CEO, whereas the converse is not the case.
© 2015 Cengage Learning

32. Red Flags Signaling Board Problems
What if you detect below problems?
1. Company has to restate earnings.
2. Poor employee morale.
3. Negative risk assessment from auditor.
4. Poor customer satisfaction track record.
5. Management misses strategic performance goals.
6. Company is target of employee lawsuits.
7. Stock price declines.
8. Quarterly financial results miss analysts’ expectations.
9. Low corporate governance quotient rating.
© 2015 Cengage Learning

33. Improving Corporate Governance (1 of 2)
Sarbanes-Oxley Act (SOX) of 2002 (4:45) – After class especially if your major is Accounting or Finance
Amends securities laws to protect investors in public companies
Enhances public disclosure to require reporting of off- balance sheet transactions, and personal loans to executives
Limits the nonauditing services an auditor can provide to a firm it audits
Makes it unlawful for accounting firms to provide services where conflicts of interests exist
CEOs and CFOs must certify financials, and are held responsible for financial representations
© 2015 Cengage Learning

34. Improving Corporate Governance (2 of 2)
May not be effective unless top management is willing to enforce and strongly implement below….
Changes in boards of directors -
More Board diversity
A greater ratio of outside board members to inside board members
Use of board committees to:
Ensure that financials are not misleading
Ensure that internal controls are adequate
Follow-up allegations of irregularities
Ratify the selection of an external auditor
© 2015 Cengage Learning

35. Corporate Governance Structure Information from SEC
Company’s annual report (Form 10-K)
Proxy statement (Form Def 14A).
Review these documents to get you a better understanding of the company’s corporate governance structure.
Good idea to review your company for the sake of your job security
© 2015 Cengage Learning

36. Walmart Answer questions the textbook After class,
Overview of the Walmart Case: How Powerful (or ethical) Is Walmart? (3:40)
After class,
CSR by Walmart in 2013 (2:36)
Walmart Mexico Scandal (2:27)
© 2015 Cengage Learning