Corporate Governance and Ethics - Chapter 12

Because learning changes everything. ® Chapter 12 Corporate Governance and Business Ethics © 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written cons...

Because learning changes everything. ® Chapter 12 Corporate Governance and Business Ethics © 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.  Learning Objectives 1. Describe the shared value creation framework and its relationship to competitive advantage. 2. Explain the role of corporate governance. 3. Apply agency theory to explain why and how companies use governance mechanisms to align interests of principals and agents. 4. Evaluate the board of directors as the central governance mechanism for public stock companies. 5. Evaluate other governance mechanisms. 6. Explain the relationship between strategy and business ethics. © McGraw Hill  The Shared Value Creation Framework Provides guidance to managers. Helps reconcile gaining and sustaining competitive advantage with corporate social responsibility. Creates a larger “pie” to benefit shareholders and stakeholders. © McGraw Hill  Public Stock Company: Four Benefits 1. Limited liability for investors. 2. Transferability of investor ownership through stock. 3. Legal personality, with rights and obligations. 4. Separation of legal ownership and management control. © McGraw Hill  The Public Stock Company: Hierarchy of Authority Exhibit 12.1 Access the text alternate for slide image. © McGraw Hill  Milton Friedman’s Philosophy “The social responsibility of business is to increase its profits.” A survey was created: For the (degreed) top 25% of income earners. To assess various countries. To inquire whether they agree with Friedman. The results… © McGraw Hill  Global Survey of Attitudes toward Business Responsibility Exhibit 12.2 Source: Depiction of data from Edelman’s, Trust Barometer, 2011 as included in “Milton Access the text alternate for slide image. Friedman goes on tour,” The Economist, (2011, Jan. 27). © McGraw Hill  Creating Shared Value Executives shouldn’t concentrate only on increasing firm profits. Rather, they should focus on creating shared value. Economic value (for shareholders). Social value (address society’s needs and challenges). Societal progress is important. Capitalism helps shape society. © McGraw Hill  Reconnecting Economic and Societal Needs 1. Expand the customer base to bring in nonconsumers. 2. Expand traditional internal firm value chains to include non-traditional partners. 3. Focus on creating new regional clusters (such as Silicon Valley). © McGraw Hill  Corporate Governance The mechanisms to: Direct and control an enterprise. Ensure that it pursues strategic goals successfully and legally. Offers checks and balances. Attempts to address the principal-agent problem. © McGraw Hill  The Principal-Agent Problem Exhibit 12.3 Access the text alternate for slide image. © McGraw Hill  Agency Theory A theory that views the firm as a nexus of legal contracts. Conflicts that arise should be resolved legally. The firm needs to design work tasks, incentives, and employment contracts… To minimize opportunism by agents. © McGraw Hill 12  Adverse Selection and Moral Hazard Both caused by information asymmetry. Adverse Selection An increased likelihood of selecting inferior alternatives. Moral Hazard When one party is incentivized to take undue risks or shirk responsibilities, The costs are incurred to the other party. © McGraw Hill  The Board of Directors Centerpiece of corporate governance. Represent the interests of shareholders. Tasked with providing oversight. Consist of inside and outside directors. Inside directors: usually consist of CEO, COO, CFO. Outside directors: senior execs from other firms. Are elected by the shareholders. Shareholders vote to determine who is elected. © McGraw Hill  Responsibilities of the Board of Directors Strategic oversight and guidance. CEO selection, evaluation, compensation, succession. Guide executive compensation. Review, monitor, evaluate, approve strategic initiatives. Risk assessment and mitigation. Ensure financial statements are accurate. Ensure compliance with laws and regulations. © McGraw Hill  Other Governance Mechanisms Used to align incentives between principals and agents. Include: 1. Executive compensation. 2. The market for corporate control. 3. Financial statement auditors, government regulators, and industry analysts. © McGraw Hill  1. Executive Compensation Stock options are often part of compensation. The average ratio of CEO to employee pay is 300:1. About 2/3 of CEO pay is linked to firm performance. Incentives can negatively affect performance. © McGraw Hill  2. The Market for Corporate Control An external corporate-governance mechanism. Activist investors who: Seek to gain control of an underperforming corporation. Buy shares of its stock in the open market through buyouts. © McGraw Hill 18  3. Auditors, Regulators and Industry Analysts External-governance mechanisms. To avoid misrepresentation of financial results: Public financial statements must follow GAAP: Generally accepted accounting principles. Financial statements must be audited. Industry analysts often base their buy, hold, or sell recommendations on: Financial statements filed with the SEC. Business news (WSJ, Forbes, CNBC, etc.) © McGraw Hill  Business Ethics An agreed-upon code of conduct in business Provides training for: Behavior that is consistent with the principles, norms, and standards of business practice that have been agreed upon by society. Can differ in various cultures around the globe. Universal norms include fairness, honesty, and reciprocity. © McGraw Hill  When Facing an Ethical Dilemma Is the action within acceptable norms of professional behavior? As outlined in the organization’s code of conduct. As defined by the profession at large. Would you feel comfortable explaining and defending the decision in public? How would the media react? How would company’s stakeholders feel about it? © McGraw Hill  Bad Apples vs. Bad Barrels Bad Apples. Bad Barrels. Individuals who act An unethical opportunistically. organizational climate. To set the ethical tone, leaders must: Set clear ethical expectations. Put structure, culture, and control systems in place. Align formal and informal culture must be aligned. Adhere to the company vision and values. © McGraw Hill  The MBA Oath As a business leader I recognize my role in Therefore, I promise that: society. I will manage my enterprise with loyalty and care, and My purpose is to lead people and manage will not advance my personal interests at the expense of resources to create value that no single my enterprise or society. individual can create alone. I will understand and uphold, in letter and spirit, the laws My decisions affect the well-being of and contracts governing my conduct and that of my individuals inside and outside my enterprise. enterprise, today and tomorrow. I will refrain from corruption, unfair competition, or business practices harmful to society. I will protect the human rights and dignity of all people affected by my enterprise, and I will oppose Exhibit 12.4 discrimination and exploitation. Developed by Harvard I will protect the right of future generations to advance their standard of living and enjoy a healthy planet. Business School students: I will report the performance and risks of my enterprise Helps anchor future managers accurately and honestly. to professional values. I will invest in developing myself and others, helping the management profession continue to advance and create A guideline for integrity in sustainable and inclusive prosperity. business. In exercising my professional duties according to these principles, I recognize that my behavior must set an Source: MBA Oath and Max example of integrity, eliciting trust and esteem from those I serve. I will remain accountable to my peers and Anderson. to society for my actions and for upholding these standards. This oath I make freely, and upon my honor. © McGraw Hill Because learning changes everything. ® www.mheducation.com © 2019 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.