CHAPTER Corporate Governance, Business Ethics, and Strategic Leadership McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc.
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McGraw-Hill/Irwin
CHAPTER
12
Corporate Governance, Business Ethics, and Strategic Leadership
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Part 3 Strategy Implementation 12 –2
LO 12-1 Describe and evaluate the relationship between strategic management and the role of business in society.
LO 12-2 Conduct a stakeholder impact analysis.
LO 12-3
Critically evaluate the relationship between corporate social performance (CSR) and competitive advantage.
LO 12-4
Describe the role of corporate governance and evaluate different governance mechanisms.
LO 12-5
Describe and evaluate the relationship between business strategy and ethics.
LO 12-6
Describe the different roles that strategic leaders play and how to become a strategic leader.
12 –3
ChapterCase 12
HP’s CEO Mark Hurd Resigns amid Ethics Scandal
•
Mark Hurd
CEO of HP after Carly Fiorina Low profile, no-nonsense, strategy execution forte •
Highly successful
Increasing market shares for computers and printers Stock rose 110% (well above that of NASDAQ) •
2010 sexual harassment scandal
Forced to resign With $45 million severance package Hired by Oracle
12 –4
Strategic Management and the Role of Business in Society
•
The public stock company is the backbone of our economy.
•
Four characteristics of public firms:
Limited liability for investors Transferability of investor interest Legal personality Separation of ownership and control
12 –5
EXHIBIT 12.1
The Public Stock Company: Hierarchy of Authority 12 –6
Strategic Management and the Role of Business in Society
•
21 st century already two financial crises
Accounting scandals: Enron, WorldCom, Tyco… Global financial crisis: real estate bubble burst
•
Lessons
Managerial actions affect economy Ethical business produces wealth but unethical practices destroy it Stakeholder management is needed
12 –7
EXHIBIT 12.2
Honesty and Ethics Ranking of Different Professions “How would you rate the honesty and ethical standards of people in different fields?” 12 –8
EXHIBIT 12.3
Stakeholder Impact Analysis
12 –9
EXHIBIT 12.4
The Pyramid of Corporate Social Responsibility 12 –10
LO 12-1
Describe and evaluate the relationship between strategic management and the role of business in society.
LO 12-2
Conduct a stakeholder impact analysis.
LO 12-3 Critically evaluate the relationship between corporate social performance (CSR) and competitive advantage.
LO 12-4 Describe the role of corporate governance and evaluate different governance mechanisms.
LO 12-5
Describe and evaluate the relationship between business strategy and ethics.
LO 12-6
Describe the different roles that strategic leaders play and how to become a strategic leader.
12 –11
Corporate Social Responsibility
•
Milton Friedman circa 1962
: “ the only social responsibility of business is … to increase profits so long as it stays within the rules of the game”
•
Today’s businesses tend to do more than just making profits
But does CSR help build competitive advantage? The answer might depend on
where
business … you do UAE, Japan, and India are
less
interested in CSR China, Brazil, and Germany are
more
interested in CSR
12 –12
EXHIBIT 12.5
Global Survey of Attitudes toward Business At least somewhat agree that… “the social responsibility of business is increasing profits” 12 –13
Corporate Social Responsibility
•
Shared value-creation framework
Expand customer base and bring in non-consumers Expand internal firm value chains by including more non-traditional partners such as NGOs Focus on creating new regional clusters
•
GE recognizes a convergence between shareholders and stakeholders
•
Empirical evidence supports that… “firms can do well ($) by doing good (CSR)” 12 –14
Corporate Governance
•
Corporate governance
represents the relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations.
•
Agency costs
are the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals because it is impossible to use governance mechanisms to guarantee total compliance by the agent.
12 –15
Corporate Governance
•
Corporate governance
Mechanisms to direct and control a firm Ensure the pursuit of strategic goal Address the principal –agent problem
•
When corporate governance failed
Accounting scandal Global financial crisis Bernard Madoff Ponzi scheme
•
Information asymmetry
Insider information ImClone and Galleon Group
12 –16
Corporate Governance
•
Agency theory
Views a firm as a nexus of legal contracts Relationships among shareholders, managers, and hierarchies Firms need to design work tasks
•
Adverse selection
Misrepresentation of a job Beyond his/her ability to do things
•
Moral hazard
Difficulty to ascertain whether the agent gives his/her best
12 –17
Agency Problems
• Berle and Means in The Modern Corporation inquired whether we have “any justification for assuming that those in control of a modern corporation will also choose to operate it in the interests of the stockholders?” (1932: p. 121) • What are the “institutions of capitalism” which lessen the problem of the separation of (share holder) ownership (the risk-bearing principals) from control (managerial decision-making agents)?
12 –18
Agency Problems
• What are the “institutions of capitalism” that lessen the problem of the separation of ownership from control?
1. Takeovers (the market for corporate control); 2. Recruitment of executives from outside the firm; 3. Monitoring by boards of directors; 4. Compensation heavily weighted toward stock options; 5. Monitoring by institutional investors; 6. Debt (minimize free cash flow; e.g., LBOs); 7. Separate Chairperson and CEO; and 8. Internal control of Multidivisional -- “miniature capital market”
Board of Directors
•
Centerpiece of corporate governance
Inside
and
outside
directors General strategic oversight and guidance
Selecting, evaluating, and compensating the CEO
Overseeing CEO succession plan
–
Recently problematic at both HP and Apple
Providing guidance on executives and their compensation
Reviewing, monitoring, and approving strategic initiatives
Conducting a risk assessment and mitigation
Ensuring a firm’s audited financial statements
Ensuring a firm’s compliance with laws and regulations 12 –20
STRATEGY HIGHLIGHT 12.1
GE’s Board of Directors
•
Diversity of GE’s board of directors (17 members)
Business, academia, politicians 4 women, 2 ethnic minorities 15 board members are independent outside directors Less likely to fall victim to
groupthink
Organized into committees to function •
The separation of CEO/Board Chair duality
Due to recent global financial crisis
1 –21
Other Governance Mechanisms
•
Executive compensation
Stock options Performance-oriented compensation in recent years
•
The market for corporate control
External governance mechanism Hostile takeover Corporate raiders and hedge fun ds
•
Auditors, government regulators, and industry analysts
Wall Street Journal, Bloomberg Businessweek, Forbes… Credit rating agencies CEO Compensation Dan Ariely Video
12 –22
Corporate Governance Around the World
• •
Difference in national institutions and culture “Free” market economies?
State-directed capitalism (less freedom). Ex: China Free market capitalism (more freedom). Ex: U.S
.
•
Germany
Stakeholder capitalism Kurzarbeit
•
France
Stakeholder capitalism
•
China
State-owned enterprises
12 –23
LO 12-1
Describe and evaluate the relationship between strategic management and the role of business in society.
LO 12-2
Conduct a stakeholder impact analysis.
LO 12-3
Critically evaluate the relationship between corporate social performance (CSR) and competitive advantage.
LO 12-4
Describe the role of corporate governance and evaluate different governance mechanisms.
LO 12-5 Describe and evaluate the relationship between business strategy and ethics.
LO 12-6 Describe the different roles that strategic leaders play and how to become a strategic leader.
12 –24
EXHIBIT 12.7
Roles that Strategic Leaders Play
12 –25
EXHIBIT 12.8
Strategic Leaders: The Level 5 Pyramid 12 –26