Corporate Governance Models

Corporate Governance Perspectives

• There are four main perspectives in corporate governance literature: the principal-agent model, the myopic market model, the abuse of executive power model, and the stakeholder model.

The Principal-Agent or Finance Model

• The dominant theory of corporate governance, it posits that corporations primarily exist to maximize shareholders’ wealth.
• Shareholders lack sufficient control over managerial actions due to their distance from daily operations.
• Argues regulation enhances the power and control of shareholders.
• Agency theory suggests managers (agents) may prioritize their own interests over those of shareholders (principals), leading to the "agency problem".
• Economic interactions are a series of contracts between principals and agents, outlining duties, rewards, and monitoring rights.

The Myopic Market Model

• Shares the principal-agent theory's aim of maximizing shareholders’ wealth.
• Maximizing shareholder well-being isn't the same as share price maximization because the market undervalues long-term investments.
• Anglo-American corporate governance is flawed due to excessive focus on short-term returns, profits, performance, stock prices, and expenditures.
• Corporate governance reform should encourage long-term perspectives for both shareholders and managers.
• Encourages "relationship investing" by increasing shareholder loyalty and limiting short-term shareholder voting rights.
• Empowers stakeholders like employees and suppliers with long-term relationships with the corporation.

The Abuse of Executive Power Model

• Suggests Anglo-American companies face widespread abuse of executive power.
• Current corporate governance gives too much power to management, who might misuse it for personal gain at the expense of shareholders and society.

The Stakeholder Model

• Presents a fundamental challenge to the principal-agent model.
• The corporation’s objective should extend beyond just maximizing shareholder wealth.
• Recognizes the well-being of other groups (employees, suppliers, customers, and managers) with long-term associations and "stakes" in the firm’s success.
• The corporation should aim for economic equitability, social accountability, and efficiency.
• Successful stakeholder management can improve a corporation's performance in profitability, stability and growth.
• Stakeholder management strategies involve trust, long-term contracts, interlocking shareholdings, ethical behavior, and employee participation in decision-making.

Common Assumptions in Corporate Governance

• The debate traces back to a 19th-century argument on the nature of the corporation.
• The aggregate theory views a corporation as an artificial person created by law for convenience, a collective name for its members.
• The nature-entity theory argues a corporation is a real person with its own enduring personality and the capacity to act.
• This suggests an "individualistic" view versus a "holistic" view, influencing the shareholder vs. stakeholder debate.
• Economists focus on the organization of economic actors regardless of legal form.
• Both shareholder and stakeholder perspectives aim to discover an optimal governance structure to solve the agency problem or abuse of executive power.
• Market governance (principal-agent model) and hierarchical governance (other three models) are competing alternatives.

Issues with Current Corporate Governance Analysis

• Claims of universal principles and optimal governance structures are not fully supported in practice.
• The lack of solid and objective foundation for building an optimal and universal structure is questionable.
• The theoretical entities about corporate governance, including preoccupied concepts of market governance and hierarchical governance and their related assumptions, must be questionable.
• Corporate governance issues require a reinterpretation beyond static economic logic.

A Process Philosophy Approach to Corporate Governance

• A process approach emphasizes interrelatedness, interconnection, interdependence, and interrelationship.
• Experiences refer to action, activity, and acting rather than fixed things and forms.
• All constituents are naturally "bound" together to form a particular whole through inter-relational acting.
• Process is essentially related to a time dimension.
• The self-identity of a process must be manifested within a period through which a unitary whole is realized.
• Opportunity to view the corporation as a human construction, a social world fully constituent of human minds and direct experiences in addition to physical materials, which are fundamentally processual in nature.
• This worldview has no pre-given, neutral and fixed essence and meaning unless it is individually experienced and understood and collectively perceived and constructed.
• Its own logic and intrinsic value is embedded in its social processes characterized by interrelatedness, systemic-wholeness and periodic-historicity.
• Option to turn attention away from the theoretical abstraction of governance models to the fundamental human experience and practice of governing processes.

From Governance to Governing

• Theories of corporate governance remain trapped in idealized models.
• Corporate governance is a process of governing, constantly emerging from social interactions within historical and contextual specifications.
• All participants actively shape perceptions and priorities.
• Principles, assumptions, issues, problems, and solutions are always being constructed, reconstructed, changed, and renewed.
• "Governing" is a descriptive action verb better suited to describe ongoing activities than the static noun "governance".
• "Governing" directs attention to emerging practices, people involved, and their experiences.
• It avoids abstracted theorizing and modeling and suggests the present and future.

Framework vs. Regulatory Approach to Corporate Governance

• Two main approaches exist: a framework, principles-based approach (UK) and a regulatory, rules-based approach (US).
• Most developed countries follow one, supported by the stock exchanges.
• Both systems require conformance.
• In the UK, conformance is achieved through corporate governance codes developed from the work of Cadbury.
• In the US, principles are legislated through the Sarbanes-Oxley Act of 2002.
• The ‘comply or explain’ concept is the trademark of corporate governance in the UK.

Regulatory Approach

• Requires adherence to a given set of corporate governance requirements.
• Offers limited discretion in application and interpretation.
• May lack flexibility to adapt to new and changing circumstances and business environments.
• Narrowly defines "rules".
• Often becomes a tick-box exercise.
• Provides clear guidance on appropriate and inappropriate actions.

Principles-Based Approach

• Requires compliance with or explanation of key principles.
• Allows different organizations to interpret and apply principles differently.
• Offers flexibility to handle changing circumstances and business environments.
• Broadly defines "rules".
• Less of a tick-box activity, more a set of guiding practices.
• Behavior is more open to interpretation.

Recognizing an Ethical Issue (Ethical Awareness)

• Recognizing ethical issues can be challenging in practice due to gray areas.
• Failure to acknowledge or be aware of ethical issues is a major risk.
• Employees may engage in questionable behavior to achieve firm objectives.
• Complexity of work environment makes it harder to define and reduce ethical issues
• Business decisions may involve a dilemma where all alternatives have negative consequences.
• An ethical issue requires thought, discussion, or investigation before a decision.
• New ethical issues emerge constantly because the business world is dynamic.

Foundational Values for Identifying Ethical Issues

• Integrity, honesty, and fairness are widely used values for evaluating activities.
• Ethical issues can arise from almost any decision.
• Understanding these values can help identify and develop discussions and a constructive dialogue.
• It is equally important to emphasize appropriate conduct associated with these values as it is to discover inappropriate conduct.

Integrity

• Refers to being whole, sound, and in unimpaired condition and is important for all business activities.
• It is a foundational value for building an internal organizational culture of trust.
• It represents uncompromising adherence to a set or group of values, where an organization’s integrity usually rests on its enduring values and unwillingness to deviate from standards of behavior as defined by the firm and industry.
• Businesses are expected to follow laws and regulations
• Living up to these expectations builds trust and facilitates business exchanges.

Honesty

• Refers to truthfulness or trustworthiness.
• To be honest is to tell the truth to the best of your knowledge without hiding anything.
• Dishonesty can be defined as a lack of integrity, incomplete disclosure, and an unwillingness to tell the truth.
• Lying, cheating, and stealing are actions usually associated with dishonest conduct.
• Dishonesty is complex and relates to both individual and organizational pressures.
• Employees may lie to help achieve performance objectives.
• Lying can be defined as untruthful statements that result in damage or harm; "white lies"; and statements meant to engage or entertain without malice.

Fairness

• Is the quality of being just, equitable, and impartial.
• Overlaps with justice, equity, equality, and morality.
• Three fundamental elements motivate people to be fair: equality, reciprocity, and optimization.
• Equality is about the distribution of benefits and resources.
• Reciprocity is an interchange of giving and receiving in social relationships, where an action that has an effect upon another is reciprocated with an action that has an approximately equal effect. An ethical issue regarding reciprocity for business relates to executive compensation.
• Optimization is the trade-off between equity (equality) and efficiency (maximum productivity).
• Ideas of fairness are sometimes shaped by vested interests.

Ethical Issues and Dilemmas in Business

• An ethical issue is a problem, situation, or opportunity that requires a decision between right and wrong, ethical or unethical actions.
• An ethical dilemma requires a choice among actions with negative outcomes, where there is not a right or ethical choice, only less unethical or illegal choices.
• Classifying relevant issues is a constructive step toward resolution.
• Pressing ethical issues for shareholders include core values, shareholder participation in electing directors, executive compensation, legal compliance, lobbying and political activities, reputation management, integrity in data management, and supply chain relationships and human rights.
• Ethical issues can be classified in relation to misuse of company time and resources, abusive or intimidating behavior, lying, conflicts of interest, bribery, corporate intelligence, discrimination, sexual harassment, fraud, insider trading, intellectual property rights, and privacy issues.

Misuse of Company Time and Resources

• Time theft can be difficult to measure but costs companies hundreds of billions annually.
• The average employee "steals" 4.25 hours per week through various means.
• Employees misuse company resources by using company computer software and Internet services for personal business.

Abusive or Intimidating Behavior

• Refers to physical threats, false accusations, being annoying, profanity, insults, yelling, harshness, ignoring someone, and unreasonableness.
• The lack of civility is common in the workplace.
• The productivity level of many organizations has been damaged by time spent unraveling problematic relationships
• Bullying is associated with a hostile workplace where someone (or a group) is threatened, harassed, belittled, verbally abused, or overly criticized.
• Bullying damages workplace productivity with verbal, nonverbal, and manipulative threatening expressions.
• Suggested steps to minimize workplace bullying include creating policies that place reprimand letters and/or dismissal for such behavior, emphasizing mutual respect in the employee handbook, and encouraging employees to report the conduct.

Lying

• Lies by commission create a perception or belief by words that intentionally deceive the receiver of the message.
• Lies by commission also entail intentionally creating "noise" within the communication that knowingly confuses or deceives the receiver.
• Omission lying is intentionally not informing others of any differences, problems, safety warnings, or negative issues relating to the product or company that significantly affect awareness, intention, or behavior.

Conflicts of Interest

• Exist when an individual must choose whether to advance his or her own interests, those of the organization, or those of some other group.
• To avoid conflicts of interest, employees must be able to separate their private interests from their business dealings
• Organizations must also avoid potential conflicts of interest when providing products.

Bribery

• Is the practice of offering something (often money) in order to gain an illicit advantage from someone in authority.
• The determination hinges on whether it is used to gain an advantage in a relationship.
• Active bribery is committed by the person who promises or gives the bribe.
• Passive bribery is an offense committed by the official who receives the bribe.
• Bribes have been associated with the downfall of many managers, legislators, and government officials.

Corporate Intelligence

• Is the collection and analysis of information on markets, technologies, customers, and competitors, as well as on socioeconomic and external political trends.
• There are three distinct types of intelligence models: a passive monitoring system for early warning, tactical field support, and support dedicated to top management strategy
• Corporate intelligence can be a legitimate inquiry into meaningful information used in staying competitive.

Discrimination

• Occurs on the basis of race, color, religion, sex, marital status, sexual orientation, public assistance status, disability, age, national origin, or veteran status.
• Many companies have initiated affirmative action programs to help build workforces that reflect their customer base.

Sexual Harassment

• Is any repeated, unwanted behavior of a sexual nature perpetrated upon one individual by another.
• To establish sexual harassment, an employee must understand the definition of a hostile work environment, for which three criteria must be met. The conduct was unwelcome; the conduct was severe, pervasive, and regarded by the claimant as so hostile or offensive as to alter his or her conditions of employment; and the conduct was such that a reasonable person would find it hostile or offensive.

Fraud

• Occurs when individuals engage in intentional deceptive practices to advance their own interests over those of the organization or some other group.
• Marketing fraud involves the process of dishonestly creating, distributing, promoting, and pricing products.
• Marketing fraud destroys customers’ trust in a company.
• Consumer fraud occurs when consumers attempt to deceive businesses for their own gain.

Financial Misconduct

• Played a significant role in the financial crisis.
• The difference between bad business decisions and business misconduct can be hard to determine.

Insider Trading

• Involves insiders who possess information that is not yet public.
• Illegal insider trading is the buying or selling of stocks, this act puts insiders in breach of their fiduciary duty.
• Legal insider trading involves legally buying and selling stock in an insider’s own company, but not all the time.
• To deter insider trading, insiders are prevented from buying and selling their company stock within a six-month period.

Intellectual Property Rights

• Involve the legal protection of intellectual property such as music, books, and movies.
• Digital copyrights continue to be a controversial issue in the United States and across the world, and existing laws are often difficult to enforce.

Privacy Issues

• Center on the number of people using the Internet increases, consumer awareness of information collection, and consumer control over how companies use the personal information they collect.
• Electronic monitoring allows a company to determine whether productivity is being reduced because employees spend too much time on personal activities.

The Institutionalization of Business Ethics

• Managing Ethical Risk Through Mandated and Voluntary Programs.
• Voluntary practices include the beliefs, values, and voluntary contractual obligations of a business.
• Most firms engage in philanthropy

Voluntary boundary

• A management-initiated boundary of conduct (beliefs, values, voluntary policies, and voluntary contractual obligations).

Core practice

• A highly appropriate and common practice that helps ensure compliance with legal requirements, industry self-regulation, and societal expectations.

Mandated boundary

• An externally imposed boundary of conduct (laws, rules, regulations, and other requirements).
• Mandated boundaries are externally imposed boundaries of conduct, such as laws, rules, regulations, and other requirements.

Elements of Ethical Culture

• The elements include values, norms, artifacts, and behavior.
• An ethical culture creates an environment to structure behavior that is evaluated by stakeholders.
• Norms dictate and clarify desirable behaviors through principles, rules, policies, and procedures.
• Artifacts are visible, tangible external symbols of values and norms.

Mandated Requirements for Legal Compliance

• Laws and regulations are established by governments to set minimum standards for responsible behavior.
• Public policy is dynamic and often changes in response to business abuses and consumer demands for safety and equality.
• Laws are categorized as either civil or criminal.
• Civil law defines the rights and duties of individuals and organizations (including businesses).
• Criminal law not only prohibits specific actions but also imposes fines or imprisonment as punishment for breaking the law.

Laws Regulating Competition

• The issues surrounding the impact of competition on businesses’ social responsibility arise from the rivalry among businesses for customers and profits.
• Intense competition sometimes makes managers feel their company’s survival is threatened.

Gatekeepers and Stakeholders

• Trust is the glue that holds businesses and their stakeholders together.
• Sometimes these parties are referred to as gatekeepers.
• Gatekeepers include accountants, who are essential to certifying the accuracy of financial information, as well as lawyers, financial rating agencies, and even financial reporting services.

Accountants

• Measure and disclose financial information, with an assurance of accuracy, to the public.
• Accountants make specific assumptions about their clients, where one assumption is the corporation is an entity separate and distinct from its owners, and that it continues to operate as such in the future
• If there is a choice between equally acceptable accounting methods, they should use the one least likely to overstate or misdirect.
• Another critical gatekeeper group are risk assessors of financial products, where the top three companies in the world that independently assess financial risks are Standard & Poor’s, Moody’s, and Fitch.

The Sarbanes–Oxley (Sox) Act

• Was passed in 2002 to establish a system of federal oversight of corporate accounting practices.
• The law requires corporations to establish codes of ethics for financial reporting and develop greater transparency in financial reporting to their investors and other stakeholders.

Strategic Philanthropy

• Is the synergistic and mutually beneficial use of an organization’s core competencies and resources to deal with key stakeholders so as to bring about organizational and societal benefits.
• It uses the profit motive, but argues that philanthropy must have at least a long-term positive impact.

The Importance of Institutionalization in Business Ethics

• Institutionalization involves embedding values, norms, and artifacts in organizations, industries, and society.
• The institutionalization of business ethics has advanced rapidly over the last 20 years as stakeholders recognized the need to improve business ethics.
• The government stepped in when scandals and misconduct damaged consumers, investors, and other key constituents important for businesses.