Management Lectures 2-3 PDF

💰 The corporation, its stakeholders, and its shareholders We define Business as: an organization that is engaged in making a product or a service for profit. We define Society as: human beings (members of a community) and...

💰 The corporation, its stakeholders, and its shareholders We define Business as: an organization that is engaged in making a product or a service for profit. We define Society as: human beings (members of a community) and the social structures they create together. We get the main idea that companies, like Amazon, combine the idea of business and society which generates even bigger profits due to the satisfaction of all its stakeholders. The Stakeholder Concept Stakeholders are people and groups that affect or are affected by an organization’s decisions, policies, and operations. ⇒ Shareholders are also regarded as stakeholders. Stakeholder vs Shareholder Stakeholders believe that corporations should create value for society, their purpose is to satisfy a need in the society, accountability should be taken towards the key stakeholder, and all their interest’s must be taken into account. The corporation, its stakeholders, and its shareholders 1  Shareholders believe that the firm is the property of its owners, the purpose of an organization is to make profits, managers and board of directors are agents of shareholders and have no other obligations towards other, and owners’ interests take precedent over the interests of others. The kinds of stakeholders: 1. Market vs Non-market a. Market: Employees, Shareholders, Customers, Suppliers, Retailers, and Creditors b. Non-market: Communities, Government, Competitors, General Public, Business Support Groups, and NGOs. 2. Internal vs External Stakeholder Power 1. Voting Power (Shareholders) 2. Economic Power (Suppliers, Customers, and Others) 3. Legal Power (Government) 4. Informational Power (Customers, Activists, and Others) The 4 key questions in the Stakeholder Analysis: 1. Who are the relevant stakeholders? 2. What are the interests of each stakeholder? 3. What is the power of each stakeholder? 4. How likely are coalitions to form? Stakeholders Interests Nature of Power -fair pay for work and benefits, working -publicity, work actions or going on Employees (Market) in a safe environment, and stable a strike, and union bargaining employment power Shareholders -voting rights, rights to inspect - ROI and Stock value (Market) company books - regular order for goods, paid promptly, -refusing to meet orders and Suppliers (Market) treated ethically supplying competitors The corporation, its stakeholders, and its shareholders 2  -value and quality for money spent, safe Customers (Market) and reliable products, and accurate -purchase goods from competitors information -economic development, social Government (Non- -regulation and laws and allowing improvements, and raise revenues market) or disallowing commercial activity through taxes Competitors (Non- -compete fairly, cooperation, and seek -pressing government and suing market) new customers companies that compete unfairly General Public (Non- - protect social values and minimize -networking, pressing government, market) risks and condemning or praising Facts many consumers believe that companies should accomplish business goals while improving society and the environment 42% of consumers would refuse to purchase a company’s products if they are irresponsible when it comes to the environment (ESG rules) 65% of consumers say that they would switch from an environmentally harmful company to a competitor who is friendly to the environment Shareholder rights and Corporate Governance They are investors who own a corporation through the purchase of company stock (the most important market shareholders) There are two types of shareholder: Individual: “Main Street” Investors Institutional (pensions, mutual funds, and insurance companies): “Wall Street” investors Types of Ownership Public limited Company - limited liability, all listed companies are public, offers shares to the general public, and demanding document filing requirements Private limited Company - does not offer shares to the general public, the number of shares is often limited, and the document filing is not as demanding The corporation, its stakeholders, and its shareholders 3  Objective of stock ownership and legal rights of Shareholders 1. Capital Gain ( increase of stock price) 2. ROI - dividends 3. some shareholders look for long-term appreciation while others for short-term returns Their legal rights: to receive dividends to vote on members of board of directors major mergers or acquisitions bylaw and charter changes to sell their own shares of stock to others to receive annual reports on the company’s financial health to sue the company and its officers Corporate Governance It is a process by which a company is controlled or governed through systems of internal governance that determine strategic decisions and balance divergent interests Shareholders ⇒ Board of Directors ⇒ Top Management Board of Directors typical size of 9-11 members average tenure is 8-10 years may include CEOs of other companies, major shareholders, bankers, etc. Their duties are: establish corporate decisions develop strategy and broad policies protect stakeholder interests review management’s performance select top-level personnel to carry out these objectives The corporation, its stakeholders, and its shareholders 4  Two systems: One tier, common in the US → one board only, the executives and the supervisors are combined into one board. (Amazon) Two tier, common in some EU countries (German Law) → two different boards, supervisory board and executive board. (Volkswagen) Key features of a board of effective boards: Select outside directors to fill positions hold open elections for members of the board hold elections for all directors annually Diversify board membership (Skills, gender, experience, etc.) Appoint an independent lead director The Agency Problem Modern corporations have separated ownership and control Owners/shareholders do not manage day-to-day company operations which are now left to hired professionals Aligning Owner-Manager incentives through executive compensation: Pay for perfomance by granting stock options as bonuses A risk of this practice could result in the involvement of unethical practices in order to get perfomance bonuses (Insider Trading, Financial Disclosure) The corporation, its stakeholders, and its shareholders 5