Miles A. ZacharyMGT 4380

Leading an Ethical Organization: Corporate Governance, Corporate Ethics,

& Social ResponsibilityChapter 10

Corporate governance involves:Making meta-managerial decisionsApproving financial objectivesAdvising on strategic issuesMaking TMT members aware of laws and regulationsRepresenting stakeholders (namely shareholders)

Corporate governance is the responsibility of the board of directors—a group of individuals, either elected or appointed, that oversees the activities of an organization or corporation

Effective board members bring resources and capabilities to an organization; sometimes celebrity

Corporate Governance

Board composition is a critical factor in the dynamics of board decision-makingBoard insiders: members of the board that are

employed in the firmBoard outsiders: members of the board external to the

firmInstitutional investors such as hedge funds, retirement

funds, or banks often request a number of outside board members

CEO duality: when the CEO is also the chairman of the board of directorsCan be controversial since it gives a large amount of power

to one person; can create divisions and conflict in the board

Corporate Governance

CEO compensation is a balance between competitive pressures and the value of the day-to-day functions of a CEO“Salary commensurate with experience”—firms

must pay for the limited number of quality talent

Market pressures help to dictate the high price firms pay for a CEO

However, the salary is balanced by industry norms and investor pressure

Managing CEO Compensation

Agency ProblemsThe interests of firm management (e.g., the

CEO) and the owner(s) (e.g., the board, shareholders) are not always equal

The solution: better alignmentOften done through high CEO compensation and

stock options/ownership opportunitiesWhat are some other ways firms can achieve

better interest alignment?

Corporate Governance

CEO compensation often includes:Guaranteed salaryCash/option bonusesStock optionsPerks

Perks are often the “unsung” benefits of being a CEO

Managing CEO Compensation

When a firm is doing poorly, sometimes they are poised for a takeoverLeveraged buyout (LBO): a company that is

purchased through significant debt then removed from the stock marketReduction in workforce and streamline/cost savings

ensueHostile takeover: an attempt to buy a company

that is resisted by the target firmSometimes the target firm may be saved by a

“white knight”; a firm that is a more favorable buyer

Corporate Takeovers

Corporate Raider: an individual or a firm that purchases stock in another firm with the intentions of eventually taking it overE.g., Richard Gere’s character in Pretty Woman is a

corporate raiderShark Repellant: activities conducted by a board to

deter or defend the firm from a takeoverGreenmail-buy back large blocks of shares at a premium

to retain % ownershipPoison pill-sell considerable amounts of stock to dilute

the number of shares a purchaser needs to own the company

Golden parachute-a cash bonus given to executives who help a takeover transition

Corporate Takeovers

In response to several notable corporate scandals at Enron, WorldCom, and Tyco, congress legislated the Sarbanes-Oxley Act of 2002

The law set new or increased standards for the boards of public US companies and accounting firms

Businesses should be careful to not only follow the letter of the law, but the spirit of the law

Business Ethics

Corporate social performance is the degree to which a firm’s actions honor ethical values that respect individuals, communities, and the environment

Can be measured by the impact a firm has on:The communityProduct quality/safetyDiversityEmployee relationsEnvironmentalEthical corporate governance

Corporate Social Performance

Sometimes businesses are created or create new aspects of their business in the name of social good

Social entrepreneurship is the entrepreneurial actions where both economic and social value are createdE.g., Tom’s shoes—buy one, give one

Corporate Social Performance

Corporate Social Performance

While CSR has emerged as an important priority for businesses, it has been less than effectively implemented (Porter & Kramer, 2006)It has pitted firms against society when they

are clearly interdependentHas been discussed generally as opposed to

specifically how it can improve a firm’s strategy and performance

Corporate Social Responsibility

How are businesses and societies interdependent?Firms need societies

Education, health care, and equal opportunity create productive workforce

Good laws protect firm interests and propertyEfficient utilization of land, water, energy, and other

resources is essentialSocieties need firms

Creates jobsInnovation improves the quality of livingCorporate taxes help fund government operations

Important to mind the “principle of shared value” where in a temporary gain in one will hurt the long-term prosperity of both

Corporate Social Responsibility

Three (3) categories of social issuesGeneric social issues are important to society, but do

not significantly affect the organizations operations or long-term competitiveness

Value chain social impacts are those things that are significantly affected by a firm’s activities in the course of ordinary business

Social dimensions of competitive context are factors in the external environment that affect the underlying drivers of competitiveness in a companies operations

Each of these affect different companies in different industries differently

Corporate Social Responsibility

Corporate Social Responsibility

The most important thing a firm can do for society is contribute to a prosperous economyWhen firms are punished unnecessarily for

being productive, it hurts the society it operates in

Firms must, however, avoid seeking short-term profits through deception

Rather, firms should build long-term success by focusing on shared value and using CSR strategically to improve their organization and the world

Corporate Social Responsibility