Tema 2 PDF

FUTURE DIRECTION AND VALUE It´s very important in the Strategic Management process to define the 4 basic concepts that guide a firm´s future operations: vision, missions, strategic objectives and values à how are we going to do things (how would we like to do things) and, based on what we believe,...

FUTURE DIRECTION AND VALUE It´s very important in the Strategic Management process to define the 4 basic concepts that guide a firm´s future operations: vision, missions, strategic objectives and values à how are we going to do things (how would we like to do things) and, based on what we believe, what are the different actions/tactic and how are we going to make it happen. 1. Vision: it describes what a company desires to achieve in the long-run, generally in a time from 5 to 10 years, or sometimes even longer (depends on the industry the firm is). It shouldn´t be reviewed every year à what you want to achieve should take even longer. 2. Mission: it constitutes the future picture of how you want the company to develop. It´s the management´s view of what the company wants to achieve in the future. *Changing the CEO doesn´t necessarily force the firm to change the vision and mission. Google: the main point when searching in google was to search things you didn´t know about (to stay as little as possible in the google search) à now they want to give you the information at the exact same moment. 3. Strategic objectives: high-level and measurable goals outlining what an organization wants to achieve, with a clearly defined deadline. 4. Values: a set of guiding principles and fundamental beliefs that help teams work toward a common business goal. For the effectiveness of this entire system of vision, mission, strategic objectives and values, it must involve all the organization´s members (from the most senior managers down to grassroots employees). The responsibility for achieving the vision is a reciprocal one (shared gains and shared sacrifice). The current perception of what a firm will or should be in the more distant future, and it lays down the criteria the organization has to apply to mark out the path to be followed à what will we be, what should we be and what do we want to be in the future? It requires defining the firm´s strategic purpose, strategic intent or core project. One of the leader´s key roles is to define the vision. The vision should be a marker for each individual´s actions à when faced with the different alternatives that may crop up in their everyday activity, they should be able to choose the ones that most closely match the established vision. The vision would single out the differences between the present situation and the one targeted à map out the route the firm should take. A well-designed vision prepares a firm for the future and shapes the definition of the mission and strategic objectives that need to be in tune with it. BASIC REQUIREMENTS: - Incorporate a profound sense of success - Be stable over time - Make the workforce´s effort and commitment to its achievement worthwhile The vision should be a realistic dream that is worth the collective effort à a realistic interpretation of what management would like the firm to be in the future. - It requires the creativity, instinct and intuition of top managers - It shouldn´t be unachievable or an idyllic situation that involves circumstances that are far removed from an attainable reality - It implies a suitable consideration of: o The market o Technological, economic and social conditions to be faced in the future o Skills and capabilities that are or should become available This prepares the organization to tackle the different challenges it faces. !!The definition of the vision shouldn´t be addressed in terms of profit or value creation for shareholders. These are necessary and general conditions for all firms, which ensure their very survival over the long term. Its design will depend on the type of firm involved and the ambition with which each one seeks to formulate it. Each of the formulations may be appropriate depending on each firm´s specific characteristics. Its definition in just a few words or in a succinct phrase tends to be more effective than a long-winded document. It constitutes a firm´s identity and personality at the present time and as regards the future à what is the essence of our business and what do we want it to be? It´s an important issue a firm needs to tackle when focusing and defining its future operations. - It considers firm´s reason for existing and how it understands its business - It constitutes a statement of principles through which the firm presents itself to society - It provides the firm and its members with a valid reference in terms of its own identity à must be known by all the organization´s members, as it´s a way of identifying the firm´s beliefs and marshalling all its stakeholders - It tends to remain stable over time, though it evolves like the rest of the organization´s key features  *It may be reappraised in response to changes in the environment, manifest difficulties in effectively implementing it, or changes in the firm´s top management Any definition should contain the firm´s essence, being therefore specific to each company and underpinning its individuality, whereby firms in the same industries may often have different missions. Its definition involves the following variables: Definition of the scope of the firm (the different business in which a firm operates or may operate in the future): this definition is linked to the products or services provided, the markets served or the geographic sphere covered. Define a mission as the customers´ generic needs the firm satisfies through its operations. Identification of the core capabilities a firm has developed or may develop in the future, which highlight the way it competes on the markets. Based on them, a firm achieves its sustainable competitive advantage. Values, beliefs and attitudes: the mission can contain the sets of values and beliefs prevailing in the organization, the approach it adopts to its operations or the principles that govern its relations with its various stakeholders. *General missions permit a large amount of leeway in a firm´s future development. Yet they may also lead to a certain degree of disorientation in terms of identifying what´s truly essential. *Specific missions may restrict the possibilities of development, although it will help to focus an organization´s efforts on the achievement of its objectives. Although an explicit or formal exposition of the mission may seem convenient (rendering it readily understandable to all the organization´s members), its definition is often implicit and not written down, becoming part of the employee´s mindsets. *When the option is taken to set it down in writing à do it in a straightforward manner that is not overly long, making it clear and easy to understand. Identifying the mission may be more difficult in diversified firms where both the products and operating markets and the skills and expertise available are very different to one another. In this case, the aim is to find a common purpose that gives meaning to the firm as a whole. If this is achieved, it will pave the way for identifying and selecting possible strategic options for future development. Otherwise, it will be necessary to establish different missions for the various businesses or business units through which the firm operates. In such case, each one of these operating areas would have its own identity. The major gap between the future a firm pursues and its present reality means that a considerable effort may be required to achieve it. In order to overcome these shortfalls and proceed in the right direction, the organization should break the vision down into strategic objectives. These objectives (interim and less ambitious) are called business challenges à how will we become what we want to be? They seek to establish concrete outcomes that are to be achieved in the short-to- medium terms. Their design, therefore, operationalizes the vision and provides the firm with signposts on the path being followed. Well-defined strategic objectives should have 4 key components: a) A measurable attribute or characteristic (“growth in the firm´s degree of internationalization”). If you don´t give a point of reference, people will get frustrated as they don’t know how many resources or time they need for its achievement. b) A yardstick for measuring the attribute (“percentage of foreign sales over the total”) c) A target that is to be met (“reach 50%”) d) A timeframe for its achievement (“within 2 years”) The set of objectives designed in this way forces the organization to improve and take the necessary steps to advance in the right direction towards the realization of its vision. The achievement of each one will act as a stimulus and motivation for creating new challenges that are progressively more ambitious. They may serve as a reference for strategic control, whereby any unforeseen deviations can be identified and corrected. They may serve as a reference for introducing a suitable reward system that galvanizes all the organization´s members into making the required effort. SMART GOALS: functional strategies (they need more work as they have to be more defined and brought down to the ground) - Specific: it´s concrete and tangible – everyone knows what it looks like - Measurable: it has an objective measure of success that everyone can understand - Attainable: it´s challenging, but should be achievable with the resources available - Relevant: it meaningfully contributes to larger objectives like the overall mission - Timely: it has a deadline or a timeline of progress milestones. TYPES OF STRATEGIC OBJECTIVES: 1. According to the nature of the objectives: o Financial: linked to profitability and value creation (higher profits, share price, return on assets) o Non financial (strategic): related to the way the firm competes on the markets (new businesses, market share, cost-cutting, customer service) Whenever you start a business, you normally don´t focus on the financial aspects because you want to enter in a specific market. Then you care about the money. GLOVO had an initial strategy of having as many customers as possible. Once they entered in the market and built the brand, they started to focus on non-financial aspects. And, as it became more mature, the higher the priority for financial strategies are in order to have a sustainable business. 2. According to the timeframe: the preference between short and long-term objectives (though strategies can´t be changed every single year) o Managers normally tend to be subject to the posting of short-term results that fulfil shareholder´s interests o This shouldn´t interfere with the design of longer term objectives for ensuring the company´s good positioning in the future and the possibility of obtaining new income. 3. According to the degree of precision: o Open-ended objectives: improving from day to day. The expediency of an open-ended approach shouldn´t be underestimated, as it will never be fulfilled, and that is why it involves the continuous striving for improvement. o Set targets: annual growths. 4. According to scope: o Ambitious: o “Impossible”: the attempt to achieve them releases an additional energy and creativity that don´t appear if the objectives are readily achievable. 5. According to the strategic level: this constitutes a holistic system capable of lending consistency to the objectives and strategies of the company´s key parts and marshal the internal efforts for achieving the vision. o Corporate: o Competitive: o Functional: Problem associated with setting strategic objectives à possible proliferation of objectives for the same strategic level or for the same manager or team. In fact, objectives are not always compatible à necessary to establish priorities and choose to pursue certain ones and discard or postpone others. *Especially at the corporate level, a few key strategic objectives allow focusing the firm´s energy and resources and pushing more effectively toward the achievement of the corporate vision. *If you don´t have clear objectives, you have nothing to achieve. Then you would have to analyze internal and external aspects to determine how are you going to achieve the strategy and the objectives. Just as this vision tends doesn´t tend to change over time, and the mission does so sporadically, strategic objectives are more sensitive to changes in the environment and to internal ones. It seems advisable to update them with some frequency. A firm´s performance is an indicator of the quality of the endeavor made by management and the organization as a whole in pursuit of its success (better performance=greater level of success). USEFUL FOR: - It applies a criterion for guiding strategic decisions - Assesses the strategy´s degree of success or failure - Assesses the quality of the management team´s work PROBLEMS: - It´s difficult to pin down in terms of its measurement - Success or failure depends partly on how performance is defined and measured (an improvement in one of the possible measurement variables may involve a loss in another) - The choice of its definition and metrics is not irrelevant for stakeholders Performance can be measured through accounting indicators or economic indicators) ACCOUNTING PROFIT: the difference between the income and the expenditure corresponding to a period of time; the difference between the book value of a firm´s capital at the beginning and end of the period in question. ACCOUNTING INDICATORS: *EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization): the difference between the value of sales and their cost, deducting operating and administrative expenses. Deducting depreciations, amortizations and provisions from EBITDA gives the net operating income à EBIT (Earnings Before Interest and Tax) Deducting interest and tax from EBIT gives net income (NI) à indicator of a firm´s capacity for generating rents for its shareholders. This indicators don´t consider the resources used, making it difficult to compare firms of different sizes. Resolving this problem requires resorting to relative measures related to returns or profitability: *ROA (return on assets): measure of the economic performance of assets à ratio between operating income (EBITDA or EBIT) and the firm´s total average assets for a business year. *ROE (return on equity): measure of financial performance à dividing net income by the sum of equity. It´s an indicator of end performance à it considers the result of the firm´s economic activity and the outcome of the financial structure designed. ECONOMIC PROFIT: It reflects the firm´s profit considering the cost of production factors, including that of equity. ECONOMIC INDICATOR: *EVA (Economic Value Added): measure of profitability based on the concept of economic profit. It´s the difference between EBIAT (Earnings Before Interest and After Tax) and the product between the book value of the firm´s assets and the average costs of the capital invested including equity capital. It represents the surplus value a firm generates after taking into account the financial cost of its assets à it integrates aspects of economic performance with aspects of financial performance. A firm´s value for shareholders is given by its capacity to generate rents or earnings à by the return on its productive assets by virtue of which someone is prepared to pay for their ownership. To know if a firm is creating value, its value needs to be determined at a given moment in time, which may be calculated on the basis of theoretical value and market value. Firm´s theoretical value: calculating the current net value of the future cash flows generated by the economic entity, discounted at an appropriate rate adjusted to inflation and risk à a firm will create value when its theoretical value increases. Firm´s market value or capitalization: the product of the number of shares and the price of each one à value is created when there are positive differences in capitalization at 2 different moments in time. From a shareholder´s perspective à although the earnings from capital gains for shareholders involves the increase in the firm´s value over a year divided by its capitalization at the start of the year, this return is not the same thing as value creation for the shareholder (difference between the true return and the minimum acceptable Ke they require to invest in the firm). This value creation only takes place when this return is higher than the shareholder´s minimum required rate of return (Ke) à it will create value for shareholders when the return is higher than the Ke. In many instances shareholders may establish other benchmark criteria for estimating the return on their investment: § Whether the return obtained is positive § Comparing the return with a risk-free asset, with firms in the same industry or other stock market index When establishing objectives: Ø Who establishes the objectives à distribution of power within the firm (shareholders, managers) Ø The objectives and interests of the firm´s people and groups may come into conflict with those of the firm as a whole. Therefore, it´s important to analyze the way of resolving such conflicts. [[[The principle of maximizing shareholder wealth has an economic-financial focus. However, it´s subject to certain limitations, which shareholders should take into account. These limitations stem from the presence in the firm of other stakeholders that call for the fulfilment of their own objectives that differ from those of shareholders. So there´s a need to assess the role played in the identification of the firm´s objectives by stakeholders. An especially prominent stakeholder group is the one formed by the firm´s top management. Today, the classical figure of entrepreneur as owner, managing director and supreme decision-maker in the firm has become redundant following the appearance of a professionalized managing class that governs the firm´s destinies without necessarily holding any of its stock. This managerial class normally has considerable decision-making power due to its greater knowledge, autonomy and permanent contact with the reality of the business world. This separation between ownership and management may raise a number of major issues for value creation, as top managers have specific interests in the firm, arising from their own utility function, which may come into conflict with the owner´s. Conflicts may also arise between different types of shareholders or between members of the board of directors. These conflicts of interest may undermine the achievement of the firm´s core objective. The study of the control mechanisms that regulate this kind of relationships à corporate governance. In spite of these limitations, the firm´s objective can be formulated only in terms of the maximization of value. All decisions need to be taken with regard to that objective, whose achievement is measured and controlled by the financial markets, and it appears therefore as a general criterion of choice assessed from outside the firm.]]] People or groups of people related to a firm who have their own objectives, whereby the achievement of these objectives is linked to the firm´s operations à the pursuit of these specific objectives is conditioned by the firm´s objective and performance. Theory of Organizational Equilibrium: a firm´s objectives are understood to be the result of a negotiation and adjustment process between the various stakeholders, whereby they all consider their own particular objectives have been fulfilled, at least at a sufficiency level. The conflict of objectives between stakeholders is due to the inability to meet all their expectations fully. Negotiation is used to strike a balance, setting an objective that goes some way to integrating the objectives of all those involved. Any imbalance or non- integration affecting each group´s interests leads to a bargaining process or confrontation between them, with the firm´s survival becoming a priority objective that is more important than individual or group interests. This means that all stakeholder groups have the same decision-making power and the same freedom to take part. In practice it doesn´t happen exactly. It should be accepted then that the group wielding the greatest power in the firm conditions all the other groups, imposing its objectives and restricting those of the other stakeholders. WHY STAKEHOLDERS ANALYSIS IS SO RELEVANT? § Firm´s resources are scarce à difficult to simultaneously address different stakeholder objectives at the highest level, which creates a situation of conflict § If stakeholders aren´t satisfied with the objectives they´ve achieved, they may put pressure on top management and even withdraw their support. 1. IDENTIFICATION OF STAKEHOLDERS AND THEIR OBJECTIVES: - Internal stakeholders: shareholders, managers and the workforce/employees à they influence within the company (they have to be aligned) *Shareholders invest through equity (they own a percentage of the company) - External stakeholders: customers, suppliers, financial institutions, labor organizations, local community, social organizations and the state à somehow you can have an influence on them When identifying stakeholders and their particular objectives: è Their influence is rarely manifested on an individual basis, being instead a collective force through the sharing of common interests è The same individual may belong to more than one stakeholder group, and its interests and behavior will depend on the one in which it´s included for the analysis. è The existence of these groups responds to formal criteria derived from the organization´s ordinary business (departments, business units), and concrete situations in which for sundry reasons (crisis, threats, special opportunities) they may spontaneously arise. 2. EVALUATING EACH GROUP´S IMPORTANCE: evaluation will inform the decisions made and actions finally taken, paying greater attention to one specific group or dismissing another. STAKEHOLDER MAP à identify major stakeholders and classify them according to their importance and possible impact upon the firm´s objectives. a) Power: the real possibility of imposing one´s own objectives on other stakeholders. Such power may stem form a hierarchical position (formal authority) or from the ability to influence (informal authority) /Status of its members /Availability of basic strategic resources for the firm /Control of key external factors for its operations b) Legitimacy: the perception that a stakeholder´s objectives are socially desirable or accepted à they fall in line with a social system´s rules, values or beliefs. Legitimacy is provided by the appraisal of other, not by each group to itself. c) Urgency: a stakeholder´s interest in exerting influence and adopting a hands-on approach in order to achieve its objectives, which depends on the importance it attributes to that achievement. Groups may be active or passive toward the achievement of their objectives CRUCIAL STAKEHOLDERS: stakeholder that meets all three characteristics o it would have a great interest in influencing the firm´s objectives o it would be socially legitimated to do so o it would have the power mechanisms required to impose its own objectives EXPECTANT STAKEHOLDERS: they meet 2 characteristics, which require a certain amount of attention from the firm´s management. LATENT STAKEHOLDERS: they meet only one characteristic NO STAKEHOLDER: without any of those characteristics. 3. THE IMPLICATIONS FOR MANAGEMENT: THE IMPORTANCE OF EACH STAKEHOLDER DETERMINES: - The degree of attention to be paid à priority will be given to those objectives associated with the most relevant stakeholders - The effort made to attend and fulfil its objectives - The effort made to keep them informed about the firm´s performance POTENTIAL DAMAGE FOR MANAGEMENT: - To strike a certain balance between the different objectives of relevant stakeholders à failing to do so may jeopardise its very own survival - The possibility of wielding excessive power by any one group is limited by market conditions à increasingly more competitive markets - Creating value as a requirement for survival The fact that many companies separate ownership and management à diverging interests and information asymmetry between these 2 groups. Agency theory considers the problems that may emerge in a business relationship when one person delegated decision-making authority to another one. It may be understood then how top managers don´t always proceed in a manner that is advantageous to shareholders, as they have different utility functions. Top manager´s interests, derived from their own utility function, have monetary components (remunerations, incentives) and non-monetary ones (promotion, autonomy, prestige, power), besides security and permanence in management. Consequently, the interests of top managers may easily come into conflict with shareholder´s objectives à the maximization of shareholder´s wealth will be replaced by objectives that are more meaningful to managers. The issue arises of the control of management by shareholders in order to avoid the former acting alone when setting the company´s objectives and without suitably catering for the latter´s objectives à compatibility between shareholder and management interests. The issue of shareholder control over management and the mechanisms available for exercising that control à corporate governance. Each company will choose the governance mechanism it deems most suitable bearing in mind the cost (money, time and resources) each one involves as regards their efficacy. A. INTERNAL MECHANISMS OF MANAGEMENT CONTROL: Those originating within the company itself, which are designed by shareholders to exercise direct control over the company´s most senior managers, which pass on to the managers reporting to them. i. DIRECT SUPERVISION: THE BOARD OF DIRECTORS: Direct supervision à continuous control shareholders exercise over managers in order to ensure they conduct themselves in keeping with their interests. Control of the board of directors à body representing shareholders in decision- making. Control of large shareholders (interested in avoiding any discretional approach by top management that may compromise their interests) Hiring of independent auditors or consultants for performing control duties or holding internal audits in different areas of the firm. Mutual observance between managers, stemming from the internal organizational hierarchy that favors the control of top managers over the rest. The board´s main remit involves general supervision: - Strategic responsibility à orienting and driving company policy - Surveillance responsibility à controlling the management echelons  - Reporting responsibility à acting as a go-between with shareholders TYPES OF DIRECTORS: a) Inside directors: those who are also top managers within the firm b) Outside directors: representing shareholders and not holding a management position. a.1) Proprietary: representing major o reference shareholders a.2) Independent: representing minority shareholders or the company´s floating capital Not involved in executive management à they act on behalf of shareholders´ interests, especially independent ones , as they defend general objectives. In fact, inside directors end up controlling the board, whereby it fails to fulfil its key role of controlling management. Therefore, governments and stock markets have sought to redress this situation by adopting various measures (operating regulations or codes of good governance) to uphold the key role the board of directors plays in a company in the defense of shareholders´ interests. CODE OF GOOD GOVERNANCE (2015): based on 25 principles and 64 recommendations governed by the principle of “compliance or explanation” being applicable to all listed companies. Although their application is voluntary, firms are to explain the reasons for possible non- compliances. *Section of recommendations includes criteria on corporate social responsibility. - Restriction on voting: the General Meeting of Shareholders shouldn´t restrict the maximum number of votes a single shareholder may cast, generally avoiding any measures that hinder a public offering of shares (Rec. 1) - Regulations on the General Meeting of Shareholders: transparency of information, right to attend and take part, and policies on attendance fees (Rec. 6-11) - Size of the board: no fewer than 5 members and no more than 15 to ensure its efficacy and participation (Rec. 13) - Policy on the appointment of directors: it is to be specific, objective and verifiable, favoring the diversity of knowledge, experiences and gender (Rec. 14) - Composition of the board: a clear majority of outside directors, with only the minimum required number of inside directors. A balance should be struck between directors representing major shareholders and independent ones. Public transparency is recommended regarding directors (Rec. 15-19) - Chair: to avoid the Chair accumulating too much power when this person is also the firm´s most senior executive, one of the independent directors will be appointed as coordinator director with special powers to convene meeting of the board, include points of the agenda, coordinate outside directors and head the board´s assessment of the Chair (Rec. 33-34)  - Remuneration of directors: the appropriate remunerations are specified for each type of director, especially the variables linked to the firm´s performance, seeking to avoid the excessive assumption of risk and the rewarding of a poor performance (Rec. 56-64) The code of government also includes recommendations related to: Reporting to shareholders The equal treatment of shareholders Restrictions on the dismissal and resignation of directors The board´s ordinary business The creation of special committees à executive, auditing and appointment, and remunerations The performance assessment of the board, its members and its various committees The promotion of social responsibility policies ii. INCENTIVE SCHEMES: To link top manager´s interests to those of shareholders through the arrangement of contracts that associate management´s own objectives with value creation. - Systems of direct variable remuneration: linking the manager´s salaries to the posting of profits or to value creation. They involve the achievement of management targets, firm performance or special bonuses. - Systems based on shareholding: through the delivery to top management of fully or partially paid-up stock, rights over increases in the value of stock, or stock options (important instrument when delivering shares in the company at a pre- set purchase price and date). Then, the greater the value creation, the greater a manager´s incentive to exercise the options at the preordained moment. - Professional promotion: by linking a professional career to the successes achieved in management or to the length of service in the company à avoid the threat of dismissal if there´s no value creation. - Other forms of remuneration: o Payment in kind (provision of housing, cars) o Contributions to pension funds o Welfare services (medical insurance, life assurance) o Public acknowledgement of work well done B. EXTERNAL MECHANISMS OF MANAGEMENT CONTROL: Based on the disciplinary power sundry markets may exert on top management without shareholders having to assume any extra costs for their use. If these mechanisms are successful, shareholders will have a greater ability to control management à they will have less discretionary power à the objectives of both these groups will tend to converge.  I. THE MARKET FOR CORPORATE CONTROL: If managers don´t maximize a firm´s value due to the desire to achieve personal objectives at the expense of shareholders, and the firm´s financial performance doesn´t fulfil its full potential à outside investors could be encouraged to purchase the firm and replace its current management (public takeover bids to gain control) II. THE CAPITALS MARKET: If managers perform well, this will be mirrored in the capitals market by an increase in the company´s valuation (higher share price). If the market value is lower than it should be, the current shareholders may act to remove the firm´s top management or they may arrange changes in stock ownership through the market of corporate control in order to oust the present management. The debt capital market (DCM) also requires managers to obtain a minimum return to cover interest and the repayment of capital. III. THE LABOUR MARKET FOR TOP MANAGEMENT: This market values the knowledge and experience of senior executives and how they apply themselves to value creation in the firms they are working for. Those managers who have made a significant contribution to the firm´s performance will tend to be more highly valued on the market, increasing their present and future earning power. However, senior executives tend to arrange “golden parachute” clauses in their contracts to protect themselves if they are fired, which limits shareholders´ punitive powers. IV. THE MARKET FOR GOODS AND SERVICES: The sole option in a perfectly competitive market is the optimum assignment of the resources that maximize a firm´s value. When a firm operates in a competitive environment, the market´s competitive forces exert pressure on it so that its objective is the maximization of value. Therefore, if it´s not fulfilled, the firm´s very survival will be compromised. Set of principles, beliefs, standards and commitments designed to steer a firm´s progress toward the achievement of its vision and mission (inform the way in which to do so). The basic adage is that the end doesn´t always justify the means à the way in which the firm goes about its business conditions the validity of its vision and missions and renders its operation more or less appealing to its stakeholders. Its values have to be consistent with the vision and the mission because they are general guidelines for achieving them both. è They are operating guidelines that seek to influence the way in which the organization´s members conduct their business  è They reflect the way in which the firm relates to its stakeholders. A firm´s approach to the demands of a social nature made by society at large in response to its operations, to the evaluation and compensation of the social costs it generates, and to the extension of the scope of its objectives through the definition of the social role it should play. It transforms the classical governance formula based on the bilateral relationship between shareholders and management into another multilateral one involving all stakeholders It modifies the decision-making process by extending the criteria of economic efficiency to include the consideration of the environmental and social impact of the firm´s operations It´s of voluntary application Some authors have maintained that a firm shouldn´t assume any kind of social responsibility because it´s incompatible with the classical principle of maximizing profits or value creation à social responsibility is a self-imposition that reduces a firm´s earnings è Friedman: a firm´s overriding responsibility lies in providing the best possible returns for its shareholders, and any tendency that advocates its social responsibility is a substantially subversive doctrine capable of undermining the foundations of a free society In contrast, a firm has to be considered as a social institution that is not impervious to the political and social impacts of its environment à the assumption of responsibility by a firm doesn´t need to be incompatible with the objective of value creation for shareholders. By adopting a criteria of social responsibility, a firm may advance its relationships with different stakeholders, reduce conflicts and improve the conditions of its environment à more sustainable. This reinforces the legitimacy and reputation of the firm itself, which in the long-term may help to create more value. CONTENT OF CSR: a) Economic-functional area: related to the company´s normal operations in terms of the production of goods and services society requires. o Creation of direct and indirect employment o Generation of income and wealth o The occupational training of workers o The provision of funds for public policies through the payment of tax A firm´s economic activity contributes to society à no contradiction between economic and social responsibility, with the economy being considered an essential and basic part of society. b) Quality of life era: related to how a firm is raising or lowering the general standard of living in society and what it´s doing to mitigate the negative externalities caused by its operations. o Produce high quality or socially accepted goods o Maintain proper relations with a firm´s employees, customers or suppliers o Measure the effort made to preserve the environment *Environmental management and the notion of sustainable business activity are framed within this level. c) Social action/investment area: the degree to which a firm uses its financial and human resources to resolve issues in the community. o Sponsor education, culture, sports and art At this level, a firm transcends its function as the manufacturer of goods or the provider of services to become a partner in resolving the problems of society at large. Each company should choose its own levels of social responsibility, with its system of objectives incorporating those specific to shareholders and those of all the other social groups involved in it. The key question is whether the social responsibility is beneficial for companies and why companies in a market economy decide to embrace it. Ø Legal factors: legal influences are determined by respect for the laws and regulations with which society (through institutions elected for that purpose) chooses to furnish itself. *The minimum threshold companies are required to observe. Ø Political factors: these stem from the need to consider a firm´s stakeholders, especially those adjudged to be the most significant ones. Regarding internal stakeholders à employees tend to be the priority group Regarding external stakeholders à consumers when they apply social, environmental or ethical criteria in their purchase decisions Ø Strategic and competitive factors: SR may enable a company to improve its competitive positioning and create value. Mechanisms through which a firm may generate value: v Create valuable intangible assets like legitimacy or reputation v Differentiate products and processes to imbue them with attributes or specifications that are positively valued by customers v Improve the competitive context within which the firm operates v Reduce risks in stakeholder relations and avoid the costs of socially irresponsible behavior v Access valuable resources in better conditions than other companies  Ø Ethical-moral factors: SR is linked to a company´s values and the ethical behavior of its shareholders and management, as well as to those of the society in which it operates à society´s ethical criteria tend to be more readily assumed by a company and exert pressure on it to perform in a socially responsible manner. IMPACT THAT SOCIAL RESPONSIBILITY HAS ON FIRM PERFOMANCE: Orlitzky: there´s a strong, positive relationship between social responsibility and performance. This relationship occurs in different industries and different geographical contexts. There´s a kind of virtuous cycle à firms investing in social responsibility record a better long-term performance, which enables them to reinforce their investment. In spite of this, several authors note that there are objective difficulties for measuring social responsibility, which could explain the diversity of conclusions reached in the different empirical studies. When this relationship is positive à a firm might be expected to be socially responsible out of its own interest, as it doesn´t conflict with value creation for shareholders. è There´s no reason for the market to penalize socially responsible firms è Managers may use social responsibility as another instrument at the service of strategy for improving performance è There would be no need for excessive interventionism on the part of the public authorities to force socially responsible behavior, as firms would conduct themselves in that manner out of choice. The professional or public behavior that identifies what is or is not considered acceptable by society (including the law) and by the conscience and values of stakeholders. There´s no agreement on what is or what is not considered acceptable in dealings with stakeholders, so each firm has to decide how far it wants to go in its relationship with them. Therefore, a firm´s level of ethical conduct may be a crucial differentiating factor for attracting customers and/or investors. Business ethics: moral fundaments that characterize the relationships that firms maintain with social agents or stakeholders (what is right or wrong, good or bad, damaging or beneficial regarding decisions and actions in business transactions) à how people´s moral standards are applied to the firm´s operations and objectives. The pertinence of the study of business ethics lies in the rapid process of moral decline in public life, brought to light trough business scandals involving finances or corruption, and send shock waves through public opinion due to their scale and frequency. The need for an ethical approach to business is an issue that has been widely discussed. For some, partly as a result of the scandals, a firm can sometimes be perceived as an agent in a wild and adulterated world governed by the “minimal ethics” consisting of avoiding problems with the judicial and legal systems. From the opposite standpoint, it may be reasoned that without a high level of ethics, it´s impossible to gain the confidence of those stakeholders with whom the company has dealings, being a prerequisite for the high performance of business over the long-term. Ethical behavior also may save on many costs in terms of litigations and fines, and it may avoid the deterioration in relations with stakeholders. There´s a need to spell out the moral content of what is and what is not acceptable and implement the appropriate mechanisms for ensuring employee´s general conduct is ethical. To achieve this, it´s advisable to draw ethical codes or codes of conduct that include the firm´s commitments to its members and the latter´s commitments toward the firm itself, for fully upholding the law and ethics in their professional undertakings. The interest in their definition lies in the fact that all the organization´s members will be directly and explicitly capable of understanding their content. ETHICAL CODE: - Behaviors expressly forbidden for employees, pursuant to legal or contractual provisions. - The promotion of positive values that a firm may embrace and that express its culture and personality - The procedural guidelines for certain situations involving professional conduct or decisions that are bordering on the fringes of ethical principles - Sanctions (in the event of non-compliance) imposed both in-house (warning, demotion, dismissal) and by the courts (civil, criminal, administrative) Corporate governance, social responsibility and business ethics are closely interrelated issues with each other and with values. Governance is related to manager´s proper attitude toward the fulfilment of the main corporate objectives à rendering it essential for top management to behave in an ethical manner. Thus, many codes of conduct seek to regulate this behavior in order to favor the firm´s general interests. While social responsibility sets out to satisfy stakeholder expectations in terms of their objectives, governance focuses its attention on the relationship between the interests of shareholders and management. A firm´s corporate social responsibility reports tend to include aspects of good governance along with information on the ethical values or codes of conduct implemented. Over and above codes of good governance and firm´s efforts in pursuit of sustainability, it´s the people working in them who need to embrace these values à what a truly sustainable firm will do. Otherwise, the lack of consistency between the values expressed and its true behavior may compromise its relationship with its stakeholders and its business performance.