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CHAPTER

3

Employees, Stockholders, and Corporate Governance

PowerPoint Presentation Design by Charlie Cook © 2014 Routledge, Inc., Taylor and Francis Group. All rights reserved.

Learning Outcomes

After studying this chapter, you should be able to:

1.

Analyze old and new employment relationship differences 2.

Compare and contrast employment contracts in union and nonunion organizations 3.

List and briefly describe six employee rights, in addition to organizing and collective bargaining 4.

Compare and contrast mediators, arbitrators, and ombuds 5.

Define corporate stakeholders and describe their primary power 6.

Explain how the government helps to protect stockholders 7.

Differentiate between inside and outside members of the board of directors and the potential problem of insiders 8.

Define the key terms in this chapter

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Employer–Employee Relations

Why People Work

Wages and benefits

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Social needs Sense of self-worth

Employer–Employee Relations (cont’d)

Employer –Employee Relationship

Performance of the business Stakeholders and competitors Society and government

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The New Employment Relationship

The Social Contract

Expectations Rights

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Duties

Figure 3.1

From the Old to the New Employment Relationship

Old Employment Relationship

Getting a job and being trained to do the work, with continual company training to update your skills Job security, believing the firm will take care of you professionally Good opportunities for advancement within the firm Long-term employment, with one employer and career Loyalty to and identification with employer Steady pay increases with good benefits, especially retirement benefits or pension Management versus labor adversarial relations

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New Employment Relationship

Getting the job based on current skills and experience, and being responsible for updating your own skills Job at risk, knowing layoffs are always a possibility and that you are responsible for your career future Fewer opportunities for advancement within firm, with more opportunities elsewhere Short-term employment and contract workers, with multiple jobs and careers Loyalty to self and identification with profession Pay based on performance with fewer benefits Management and labor collaborative relations

Management and Unions: Labor Relations

Labor unions

• Represent their members’ special interests with employers through collective bargaining to establish employment contract governing wages and benefits, work hours and conditions, job security and other issues.

• Have been on the decline since the 1950s.

• Can use the labor strike as a powerful strategic action to get what it wants during negotiations.

Management –Labor Union Collaboration

Is required to compete in the global economy, rather than fighting among themselves.

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Figure 3.2

Labor Legislation

The Norris-LaGuardia Act (1932) The act made the yellow dog contract illegal. Until 1932, employers could require employees to sign a yellow dog contract, which stated that as a condition of employment the employee would not join a union or engage in union activities. If the employee did, he or she was legally fired.

The Wagner Act (also known as the National Labor Relations Act, 1935) and the NLRB

The act gave employees the right to unionize without fear of prosecution, and it listed unfair practices of employers.

other mutual aid and Section 7 states: “Employees shall have the right to self-organize, to form, join or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in concerted activities for the purpose of collective bargaining or protection.” The Wagner Act also established the National Labor Relations Board (NLRB). The purpose of the NLRB is to enforce the provisions of the Wagner Act and to conduct elections to determine whether employees will unionize and who will be their representative in collective bargaining.

The Fair Standards Act (1938)

The act established minimum wages.

As of January 1, 2012, the federal minimum rate was $7.25, but the state minimums can be higher, such as in Oregon and Washington.

The Taft-Hartley Act (1947) The Landrum-Griffin Act (also known as the Labor Management Reporting and Disclosure Act, 1959) The Worker Adjustment and Retraining Notification Act (WARN) of 1988

Through the Wagner Act, union membership grew as did union power. In fact, unions became so powerful that the Taft-Hartley Act

was passed to offset some of the imbalance of power between labor and management.

It amended the Wagner Act to include a list of unfair practices by unions.

The act was passed to protect union members from corrupt or discriminatory union activities, as it required regulation of internal union affairs.

Unions are still having some problems. For example, Teamster President Ron Carey was investigated for fundraising abuses in his reelection campaign.

WARN requires employers with a 100 or more employees to give 60 days advanced notice of plant closings or mass layoffs of their employees.

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Figure 3.3

Union Organizing © Routledge

Collective Bargaining and Government Help

National Labor Relations Board (NLRB) Federal Mediation and Conciliation Service (FMCS) Mediator Arbitrator

Oversees the union organizing, and election, and certification process to ensure that unions and employers comply with the various labor relations laws .

Serves as a neutral third party to assist in the collective bargaining process.

Is a neutral party who helps management and labor settle their disagreements.

Is a neutral party who makes a binding decision that must be followed by management and labor.

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Employee Job Security Rights

Employment-at Will Doctrine Due Process

Holds that the employment relationship is voluntary and that employees can be fired or quit for any or no reason.

Is the employee’s right to be treated fairly and to receive an impartial review of a complaint.

Ombuds Grievance committees

Investigates employee complaints and helps to settle them fairly.

Hear complaints, somewhat like a court of peers, managers, or a mix of both.

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Safety and Health Health Care Workplace Violence

Employee Rights in the Workplace

Workplace Rights Issues

Privacy Rights Substance and Honesty Tests Freedom of Speech and Whistleblowing

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Stockholders: Classification and Objectives

© Routledge Individuals Stockholders Institutions Capital Appreciation Dividends

Figure 3.4

Corporate Power Stakeholders Stockholders (owners) Board of Directors (overseers) Management (controllers) Employees (workers) © Routledge

Figure 3.5

Stockholder Rights

      To share in the profits through dividend payments, when and if declared by the board of directors To sell their shares of stock To vote on:  Board of director members    Major mergers and acquisitions Bylaw and charter changes Stockholder proposals To know about the affairs of the corporation through information transparency and disclosure To receive an annual report with financial performance and condition To take the corporation and its officers to court through stockholder lawsuits

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Corporate Structure

Corporate charter Stockholders Board of directors Managers Employees

Is granted by the state giving the firm the right to operate under basic terms of its existence and governance.

Are legal owners who elect the corporate board of directors.

Oversee strategic direction and provide governance for upper management actions.

Plan, organize, lead, and control firm resources to achieve corporate goals.

Work to provide the corporation’s products and perform other functions.

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Protection of Stockholder Rights

Security and Exchange Commission (SEC)

• Is the primary government agency protector of publicly traded stockholder rights.

• Requires full disclosure of vital company information to shareholders.

• Regulates use of confidential information to prevent insider trading.

Sarbanes Oxley Act of 2002

• Mandated reform of corporate governance to enhance corporate responsibility for financial and accounting fraud.

• Created the Public Company Accounting Oversight Board (PCAOB) to oversee the activities of the auditing profession.

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Figure 3.6

Sarbanes-Oxley Act of 2002: Reforming Corporate Governance Stockholders

 Requires shareholders’ vote to approve stock option plans  

Managers

 Requires full disclosure of complex financial transactions and changes in firm financial conditions “in plain English”  Requires executives to disclose stock sales within two days  Requires CEOs and CFOs to give written certification of the truth of corporate financial statements, with the possible penalty of jail for 20 years and $5 million in fines for falsification  Requires executives to pay back any bonuses or profits from stocks received based on financial reports that had to be changed at a later date Prohibits the firm from giving personal loans to managers Prohibits executives from making stock transactions when employee pension blackouts prohibit employee stock transactions

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Figure 3.6

Sarbanes-Oxley Act of 2002: Reforming Corporate Governance Boards of Directors

 Requires the majority of board members to be outside directors, not employees  Requires at least one financial expert be a member of the corporate audit committee  Requires the audit committee to approve the selection of auditors, auditor consulting contracts, and 401(k) plans

Outside Auditors

 Requires the establishment of an independent board to oversee the audit of public corporations  Prohibits accounting firms from providing auditing and other services that would create conflicts of interest, thereby limiting consulting work  Requires the rotation of the lead outside auditor firm every five years

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Shareholder Activism

Activists in Action

Shareholder resolutions Annual meetings

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Public pressure

Corporate Governance: A System of Checks and Balances

Stockholders © Routledge Board of Directors Managers

The Board of Directors: Responsibilities and Composition

•

Establish and enforce governance control by:

 Setting corporate objectives  Developing strategies and policies  Selecting top managers to achieve objectives and strategies (and removing them when necessary)  Setting executive employee compensation •

Structure of the board:

 Inside directors  Outside directors  Committees

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Typical Corporate Committees

Executive Committee Audit Committee Compensation Committee Public Policy Committee Nominating Committee

Salary Benefits Bonuses

Executive Employee Compensation

Executive Compensation Factors

Stock Options Personal Perks Retirement and Golden Parachutes

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Nonmarket and Market Strategies and Ethics

Strategies to build ethical information communication Strategies for coalition building with board of directors Strategies emphasizing social responsibility

Firm Performance Benefits © Routledge

Information and Action Strategies for Dealing with Union Activists

•

Management can resist unionization by:

 Holding mandatory and one-on-one meetings with employees to present their side  Using management consultants to stop unionization  Distributing antiunion leaflets  Mailing antiunion letters  Using antiunion videos  Using striker replacement workers  Subcontracting work overseas

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Information and Action Strategies for Dealing with Stockholder Activists

•

Management can deal with activists by:

 Ignoring and opposing activists when activist power of ownership is weak.

 Negotiating with activists when activist power of ownership is strong.

 Using a poison pill strategy to make the cost of a hostile takeover too expensive for the activists to attempt.

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Using Political and Legal Strategies to Avoid Employee Rights Lawsuits

•

Management can avoid employee lawsuits by:

 Using ethical HR policies that promote diversity.

 Offering family-friendly workplaces with flexible benefits and working hours, and using telecommuting to help employees balance work and family life.

 Cooperating with employees seeking the benefits of the Family and Medical Leave Act.

 Offering employee assistance programs (EAPs).

 Working with OSHA to set reasonable safety and health standards.

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Effective Corporate Governance Strategies

•

Take a stakeholder approach to governance by:

 Paying executives an ethical and fair compensation based on performance, and fully disclosing the entire package.

 Not allowing the CEO and chairman of the board positions to be held by the same individual.

 Setting limitations on the number of inside directors and CEO power to nominate candidates to the board.

 Encouraging the nomination of multiple candidates for each director position to give stockholders more choices when voting.

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Key Terms

arbitrators boards of directors collective bargaining corporate charter corporate governance due process employee rights employment-at-will employment relationship inside directors

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insider trading labor unions mediator ombuds privacy rights Sarbanes-Oxley Act shareholder resolutions stockholders stock option whistleblowing