1. Social Responsibility
Chapter 2
Corporate Governance
and
Social Responsibility
PowerPoint Slides
Dr.Vijaya Kumar
Skyline College
Prentice Hall, 2002
Chapter 2
Wheelen/Hunger

2. Corporate Governance Defined:
Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation.
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3. Corporate Governance Board of Directors
Setting corporate strategy, overall direction,
mission or vision
Hiring and firing the CEO and top management
Controlling, monitoring, or supervising
top management
Reviewing and approving the use of resources
Caring for shareholder interests
Board of
Directors
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4. Role of the Board in strategic management
Corporate Governance
Role of the Board in strategic management
Monitor
Developments inside and outside the corporation
Evaluate & Influence
Review proposals, advise, provide suggestions and alternatives
Initiate & Determine
Delineate corporation’s mission and specify strategic options
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5. Board of Directors Members: Inside directors Outside directors
“Management directors”
Officers or executives employed by corporation
Outside directors
“Non-management directors”
May be executives of other firms but not employed by board’s corporation
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6. Board of Directors Continuum
DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT
Low
High
(Passive)
(Active)
Rubber
Minimal
Nominal
Active
Phantom
Stamp
Review
Participation
Participation
Catalyst
Never knows
Permits officers
Formally
Involved to a
Approves,
Takes the
what to do, if
to make all
reviews
limited degree
questions, and
leading role in
anything; no
decisions. It
selected issues
in the perform-
makes final de-
establishing
degree of
votes as the
that officers
ance or review
cisions on mis-
and modifying
involvement.
officers recom-
bring to its
of selected key
sion, strategy,
the mission,
mend on action
decisions,
policies, and
objectives,
issues.
indicators, or
objectives. Has
strategy, and
programs of
active board
policies. It has
management.
committees.
a very active
Performs fiscal
strategy
and manage-
committee.
ment audits.
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7. Agency Theory
Problems arise in corporations because the agents (top management) are not willing to bear responsibility for their decisions unless they own a substantial amount of stock in the corporation.
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8. Stewardship Theory
Executives tend to be more motivated to act in the best interest of the corporation than their own self-interests. Theory argues that over time, senior executives tend to view the corporation as an extension of themselves.
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9. Board of Directors “Outsider” overly simplistic term --
Some outsiders are not truly objective and could be considered insiders.
Examples:
Affiliated Directors
Retired Directors
Family Directors
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10. Board of Directors Membership Trends (Survey, 1999)
75% of boards have at least 1 female director
25% of boards have two female directors
60% of boards have at least one minority member
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11. Board of Directors Codetermination
The inclusion of a corporation’s workers on its board of directors.
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12. Interlocking Directorates
Board of Directors
Interlocking Directorates
Direct Interlocking Directorate –
When two firms share a director or when an executive of one firm sits on the board of a second firm.
Indirect Interlocking Directorate –
When two corporations have directors who also serve on the board of a third firm.
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13. Nominations & Elections
Board of Directors
Nominations & Elections
Traditional Approach:
CEO invites members to serve
Shareholders approve in annual proxy statement
All nominees are usually elected
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14. Nominations & Elections
Board of Directors
Nominations & Elections
Staggered Board Approach:
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.
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15. Nominations & Elections Criteria for Selection
Board of Directors
Nominations & Elections
Criteria for Selection
Wiling to challenge management
Special expertise
Availability for advice and meetings
Expertise on global issues
Understands key technologies
External contacts valuable to the firm
Detailed knowledge of industry
High visibility in field
Accomplished in representing firm to stakeholders
Board of
Director
Membership
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16. Organization of the Board
Board of Directors
Organization of the Board
Size
Determined by charter and bylaws
Average for publicly-held, large firm is 11 directors
Average for small/medium private firms is 7 to 8 directors
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17. Board of Directors Corporate Governance
No consistent link between board membership, leadership, structure, and financial performance of firm
Investors pay more for a firm’s stock when positive toward good corporate governance—
Belief that
Good governance leads to better performance over time
Reduces risk of company finding itself in trouble
Governance is a major strategic issue
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18. Styles of Corporate Governance
High
Entrepreneurship
management
Partnership
Chaos
Marionette
Degree of Involvement
By Top Management
Low
Low
Degree of Involvement
By Board of Directors
High
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19. Trends in Corporate Governance
Board of Directors
Trends in Corporate Governance
Boards more involved in reviewing, evaluating, and shaping strategy
Institutional investors active on boards; pressure on CEO for firm performance
Shareholders demand directors own more than token amounts of the firm’s stock
Non-affiliated outside directors increasing
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20. Trends in Corporate Governance
Board of Directors
Trends in Corporate Governance
Boards becoming smaller
Boards taking more control of board functions
Corporations becoming more global; international experience needed
Societal expectations that boards balance profitability and social responsibility
Diversity of board members
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21. Responsibilities of Top Management:
Provide executive leadership and a strategic vision
Manage the strategic planning process
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22. Top Management Executive Leadership – Strategic Vision –
The directing of activities toward the accomplishment of corporate objectives. Sets the tone for the entire corporation.
Strategic Vision –
A description of what the company is capable of becoming. Often communicated in the mission statement.
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23. CEO and Clear Strategic Vision
Top Management
CEO and Clear Strategic Vision
Common Characteristics:
CEO articulates a strategic vision
CEO presents a role for others
CEO communicates high performance standards and shows confidence in followers
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24. Strategic Management Process
Strategic Planning Staff --
Supports top management and business units in the strategic planning process.
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25. Strategic Management Process
Strategic Planning Staff
Responsibilities:
Identify and analyze company-wide strategic issues, suggest corporate strategic alternatives
Work as facilitators with business units to guide them through the strategic planning process
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26. Social Responsibility
Key question for strategic decision makers:
“Should strategic decision makers be responsible only to shareholders or do they have broader responsibilities?”
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27. Social Responsibility
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…”
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28. Social Responsibility
Carroll’s Four Responsibilities
Economic
Legal
Ethical
Discretionary
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29. Social Responsibility
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30. 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 be welcomed into a foreign country
Ben & Jerry’s
Maytag
Procter &
Gamble
Levi Strauss
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31. Social Responsibility
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.
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32. Social Responsibility
Kohlberg’s Levels of
Moral Development
Preconventional Level
Concern for self
Conventional Level
Consideration of laws and norms
Principled Level
Adherence to internal moral code
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33. Social Responsibility
Code of Ethics:
Specifies how an organization expects its employees to behave while on the job.
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34. Social Responsibility
Ethics
The consensually accepted standards of behavior for an occupation, trade, or profession
Morality
The precepts of personal behavior based on religious or philosophical grounds
Law
Formal codes that permit or forbid certain behaviors
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35. Social Responsibility
Approaches to Ethical Behavior
Utilitarian
Actions and plans judged by consequences
Individual Rights
People have fundamental rights to be respected in all decisions
Justice
Distribution of costs and benefits to be equitable, fair, and impartial
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36. Social Responsibility
Impact of the Internet
Issues –
Cybersquatting
Taxation
Public Interest
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