1. Corporate Performance, Governance, and Business Ethics11
Corporate Performance, Governance, and Business Ethics

2. Topics Stakeholder analysis: whose interest should we consider?
Agency theory: how do we understand and manage relationship among key players, e.g. management and owners?
Ethics: what ‘rules’ can or do we apply?
Change management
Business and society/government

3. Stakeholder Impact Analysis
Identify the stakeholders most critical to survival
Identify stakeholders.
Identify stakeholders’ interests and concerns.
As a result, identify what claims stakeholders are likely to make on the organization.
Identify the stakeholders who are most important to the organization’s perspective.
Identify the resulting strategic challenges.
Usually the most important:
Customers, employees, stockholders

4. Stakeholders and the Enterprise

5. Exercises 1st day (#1)
Pick either the company in the Opening Case (Enron) or the Strategy in Action 11.3 (Barings):
List relevant stakeholders and their interests.

6. The Unique Role of Stockholders
Legal owners
Providers of risk capital, a major source of capital
No guarantee that stockholders will recoup their investment or earn a decent return
Maximizing return to stockholders
Employees as stockholders

7. Profitability and Stakeholder Claims
Stockholders’ returns
Dividend payments
Capital appreciation in market value of a share
Maximizing long-run ROIC
Within limits set by law
In a manner consistent with societal expectations

8. Relationship Between ROIC, Stakeholder Satisfaction, and Stakeholder Support

9. Poor Performance
Poor management – each factor in list (next slides) by itself is not sufficient to bring a company down.
Structural shifts are often ignored during good performance, blamed when no one management factor is clear
Difficult to measure due to asymetry of information

10. The Causes of Poor Performance
Poor management
Sheer incompetence
Neglect of core business
Insufficient number of good managers
Dominant, autocratic chief executive with passion for empire-building
Autocratic manager who tries to do it all in the face of complexity and change

11. The Causes of Poor Performance
Poor management (cont’d)
Lack of balanced expertise at the top
Lack of strong middle management
Lack of succession planning
Failure by board to monitor strategic decisions
Unethical behavior

12. The Causes of Poor Performance (cont’d)
High cost structure
Low labor productivity
Low capital productivity
Inadequate financial controls
Inadequate differentiation
Poor product quality
Lack of compelling product attributes

13. The Causes of Poor Performance (cont’d)
Overexpansion
Empire-building that adds little value
Loss of control
Declining profitability
Structural shifts in demand and new competitors
Technology
Economic or political conditions
Social and cultural norms

14. The Causes of Poor Performance (cont’d)
Organizational inertia
Distribution of power and influence in the organization
Organization culture
Preconceptions about the appropriate business model

15. Agency Theory
Problems can arise in a business relationship when one person delegates decision making authority to another

16. Agency Theory continued
Principal-agent relationships
Agency relationship: when one party delegates decision-making authority to another
Principal: person delegating authority
Agent: person to whom authority is delegated
Key issue: asymmetry of information

17. The Agency Problem Agents and principals may have different goals
Agents may pursue goals that are not in the best interests of their principals
Due to information asymmetry, principals may not know any better

18. The Agency Problem continued
Difficult for principals to measure performance
Trust
On-the-job consumption
Empire building

19. Exercise 1st day (#2)
Refer to the Opening Case (Enron) and Strategy in Action 11.3 (Barings): Describe the Agency Problem.
Who was (were) the principal(s)?
Agent(s)?
Assymetry of information

20. The Challenge for Principals
Shape the behavior of agents so that they act in accordance with goals set by principals
Reduce information asymmetry
Develop mechanisms for removing agents who do not act in accordance with goals of principals

21. Governance Mechanisms
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

22. Governance Mechanisms (cont’d)
Stock-based compensation
Pay-for-performance
Stock options
The right to buy company shares at a predetermined price at some point in the future

23. How Options Skew the Bottom Line
Source: D. Henry and M. Conlin, “Too Much of a Good Incentive?” Business Week, March 4, 2002, pp. 38–39.

24. Governance Mechanisms (cont’d)
Financial statements and auditors
SEC
GAAP
The takeover constraint
Corporate raiders
Greenmail

25. Governance Mechanisms Inside a Company
Strategic control systems
To establish standards against which performance can be measured
To create systems for measuring and monitoring performance regularly
To compare actual performance against targets
To evaluate results and take corrective actions

26. A Balanced Scorecard Approach

27. Governance Mechanisms Inside a Company (cont’d)
Employee incentives
Employee stock ownership plans
Stock options
Compensation tied to attainment of superior efficiency, quality, innovation, and responsiveness to customers

28. The Purpose of Business Ethics
To give people the tools for dealing with moral complexity in business
Business decisions have an ethical component
Ethical implications must be weighed before acting

29. Ethics and Strategy Ethical decision Unethical decision
One that typical stakeholders would find acceptable because it aids stakeholders, the organization, or society
Unethical decision
One that a manager would prefer to disguise or hide because it enables a company or individual to gain at the expense of society or other stakeholders

30. Shaping the Ethical Climate of an Organization
Top managers must use their leadership position to incorporate an ethical dimension into the values they stress
Ethical values must be incorporated into the company’s mission statement
Ethical values must be acted on

31. Comparing Utilitarian, Moral Rights, and Justice

32. Comparing Utilitarian, Moral Rights, and Justice

33. Comparing Utilitarian, Moral Rights, and Justice

34. Exercise 1st day (#3) Refer to the Closing Case: Chainsaw Al . . . .
Explain the ethical situation in this case from the point of view of the Board of Directors. (Use the questions at the end as a guide.)

35. Exercises 2nd day (#1) NIKE: Discuss what the ethical challenge is?
List relevant stakeholders and their interests.
Applying model you are comfortable with, what is the ethical dilemma or challenge?
What would be the ethical issue from the point of view of Chairman of NIKE?

36. Thinking Through Ethical Problems
Does my decision fall within the accepted values or standards that typically apply in the organizational environment?
Am I willing to see the decision communicated publicly to all stakeholders affected by it?

37. Thinking Through Ethical Problems
Would the people with whom I have a significant personal relationship approve of the decision?
Can I tell my mother?

38. Exercises 2nd day (#2) Refer to articles #1, 2, and 3.
Define the list of relevant stakeholders and their interests.
Apply a model you are comfortable with and describe the ethical decision(s) or challenge(s).
What would you do if you were heading these companies?

39. Thinking Through Ethical Problems (cont’d)
Step 1: Identify which stakeholders the decision would affect and in what ways
Step 2: Judge the ethics of the proposed strategic decision given the information from Step 1
Step 3: Establish moral intent (resolve to place moral concerns ahead of other concerns)
Step 4: Engage in ethical behavior

40. Strategic Change: Improving Performance
Changing the leadership
New leader is often from outside the company
New leader must make difficult decisions, motivate, listen, and delegate
Changing the strategy
Redefine strategic focus
Divest unwanted assets
Improve profitability
Make acquisitions

41. Strategic Change: Improving Performance (cont’d)
Changing the organization
Unfreezing the organization
Big bang theory of change
Senior managers must be committed to it
Movement
Speed
Involving employees
Refreezing the organization
Culture, socialization, management education programs
Hiring policies, control and incentive systems

42. CASE BRIEF Refer to articles # 4 & 5 (hand out 3/09).
Discuss a key ethical issue common to both situations described in these articles, from the perspective of a member of the Board of Directors of the company or companies involved.
Include in your discussion, what can agency theory tell us about the challenge or challenges, if any, posed by these situations to an ethically responsible member of the Board of Directors.

43. Exercise 2nd day
NIKE’s attempt to improve on their corporate responsibility
How much is enough?
How can an organization contain unethical behavior? From a responsible board’s perspective?
What does Agency theory tell us

44. Governance and ethics Finish articles on lobbying
Business and government
Role of government vis business
Lobbying
Implementing change

45. Business and government
What is the role of business in the economy?
Why lobby?
Lobbying has been going on for years
Objectives of these lobbying activities?
Are these legitimate activities?
Ethical issues?

46. Corporate Governance
Examine the activities in each of articles 4 & 5 that were “questionable”
Stakeholders and interests
What laws were violated?
Ethical challenge

47. Exercise 3rd day Pick either article #4 or #5.
Take the perspective of senior management, i.e. CEO of the company
Identify the stakeholders and their interest
Which model do you use and what should be or should have been the course of action?

48. Exercise Refer to articles 1, 2, 3, 4, & 5:
Which is illegal and unethical? Which is illegal?
Explain!