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MBA 670 Capsim: Strategic Decision Making

Project 5 - Creating an International Business Plan

Learning Topics

MBA 670: Strategic Decision Making

Project 5 Learning Topics

1 Assess the Characteristics of MediCorp's Potential Customers in the Selected Country

International Cultural Differences Communications, teamwork, organizational hierarchy, and positive attitudes toward management roles are essential in any organization. These are crucial in international business, as problems are often exacerbated by subtle cross-cultural differences. When defining roles in multinational teams whose members have diverse attitudes and expectations about organizational hierarchy, these cultural differences can present a challenge.

Culture is a system of values and norms that is shared among a group of people. The ways people interact socially, their mutual expectations, and the values they share all have consequences for doing business and managing across cross-cultural boundaries.

How a country's cultural differences relate to international business can be seen in the following examples:

• In Japan, social hierarchy and respect for seniority are highly valued and are reflected at the workplace. Those in senior management positions command respect and expect a formality and deference from junior team members.

• In Scandinavian countries, societal equality is emphasized. Workplaces therefore tend to have a comparatively flat organizational hierarchy. In turn, this organization can result in relatively informal communication and an emphasis on cooperation across the organization.

• The way to address colleagues and business partners varies in different countries. While Americans and Canadians tend to use first names, in Asian countries such as South Korea, China, and Singapore, colleagues tend to use the formal address, Mr. or Ms. So do Germans and many Europeans.

• The concept of punctuality also differs between cultures. Where an American may arrive at a meeting a few minutes early, an Indian or Mexican colleague may arrive well after the scheduled start time and still be considered on time.

• Attitudes to work also differ. While some may consider working long hours a sign of commitment, others may view it as an encroachment on their personal time and a sacrifice of essential family time.

• Greeting customs are highly culture- and situation-specific. In the United States and Canada, a simple handshake while looking a person in the eye is the norm. In Japan, bowing is the traditional greeting—the deeper the bow, the greater the respect shown. In India, you put hands together as in prayer and say "namaste." In Arab countries, men might hug and kiss each other (but not a woman) on the cheek.

• In Latin America and the Middle East, the acceptable physical distance needed to respect someone's personal space is much shorter than what most Europeans and Americans feel comfortable with.

• Different cultures have different meaning for identical words. The Swedish vacuum cleaner manufacturer Electrolux introduced a print advertisement with the tagline "Nothing sucks like an Electrolux." While the ad was successful in Britain, it was a disaster in the US market.

Several scholar-practitioners have studied cultural differences and their influence on international business. At the end of the 1970s, the Dutch social psychologist Dr. Geert Hofstede published an internationally recognized standard for understanding cultural differences. Hofstede studied IBM employees in more than 50 countries. Initially, he identified four dimensions that could distinguish one culture from another. Later, he added fifth and sixth dimensions, in cooperation with Dr. Michael H. Bond and Dr. Michael Minkov.

1. The six dimensions of national culture are as follows:

2. power distance index (high vs. low)

3. individualism vs. collectivism

4. masculinity vs. femininity

5. uncertainty avoidance index (high vs. low)

6. long- vs. short-term orientation (also known as pragmatic vs. normative)

7. indulgence vs. restraint

Hofstede demonstrated that there are national and regional cultural groups that influence the behavior of societies and organizations. The table below describes these dimensions of country cultures and their implications for international business.

Dimensions of National Culture and Implications on International Business

Country cultural dimension Characteristics Implications

Power distance index—High

Degree of inequality between people with and without power

Centralized organizations

More complex hierarchies

Large gaps in compensation, authority, and respect

Power distance index—Low

Power is shared and widely dispersed in organizations

Decentralized authority

Fewer layers of management

Supervisors and employees are considered almost as equals

Individualism vs. collectivism—High

Preference for a loosely knit social framework in which individuals are expected to take care of only themselves and their immediate family

High value on people's time, need for privacy and freedom

Expectation of individual rewards for hard work

Individualism vs. collectivism—Low

Loyalty to the group to which they belong

People take responsibility for one another's well-being

Work for intrinsic rewards

Maintaining harmony among group members overrides other moral issues

Saying no can cause loss of face, unless it's intended to be polite

Masculinity vs. femininity—High

Preference for achievement, heroism, assertiveness, and material rewards for success.

Organizations are more competitive and hierarchical Strong egos— feelings of pride and importance are attributed to status

Dimensions of National Culture and Implications on International Business

Country cultural dimension Characteristics Implications

Masculinity vs. femininity—Low

Preference for cooperation, modesty, caring for the weak, and quality of life

Organizations are more consensus-oriented

Workplace flexibility and work-life balance important

Uncertainty avoidance index— High

Rigid codes of belief and behavior, intolerant of unorthodox behavior and ideas

Attempt to make life as predictable and controllable as possible

Many societal conventions

Allowed to show anger or emotions High-energy society

People feel that they are in control of their lives

Uncertainty avoidance index— Low

Relaxed attitude in which practice counts more than principles

More open or inclusive

Less sense of urgency

Titles are less important

Respect those who can cope under all circumstances

Long- vs. short-term orientation—High

Value persistence, perseverance, and being able to adapt. More thrifty

Thrift and education seen as positive values

More willing to compromise

Virtues and obligations are emphasized

Long- vs. short-term orientation—Low

Value tradition, current social hierarchy, and fulfilling social obligations

Care more about immediate gratification than long-term fulfillment

Strong convictions

Values and rights are emphasized

Less willing to compromise, as this would be viewed as weakness

Indulgence vs. restraint—High

Encourage relatively free gratification of people's own drives and emotions

Optimistic

Importance of freedom of speech

Debate and dialogue in meetings or decision making

Emphasize flexible working and work-life balance

Indulgence vs. restraint—Low

More emphasis on suppressing gratification and more regulation of people's conduct and behavior

Stricter social norms

Pessimistic

Controlled and rigid behavior

Express negativity about the world only during informal meetings

Clearly, every country culture distinguishes itself by the way it conducts its interpersonal relationships and its attitudes toward time and environment. Hofstede's framework, outlined above, is widely used. However, there are others. Parson (1951) views five orientations covering the ways human beings deal with each other:

• universalism vs. particularism

• individualism vs. communitarianism

• neutral vs.emotional

• specific vs. diffuse

• achievement vs. ascription

Gannon (2004) describes country cultures through the use of a cultural metaphor. A cultural metaphor is "any major phenomenon, activity, or institution with which its members closely identify cognitively and/or emotionally." This framework uses a four-stage model of cross-cultural understanding using process and goal orientation and degree of emotional expressiveness. The cultural metaphors from 30 countries studied by Gannon include the following:

• American football

• German symphony

• French wine

• the Brazilian samba

• the Japanese garden

• the Indian Dance of Shiva

• the Mexican fiesta

• Russian ballet

The differences in country cultures imply that for managers in international business there is a need to develop cross-cultural literacy and an understanding that there is a connection between culture and national competitive advantage. There is also a connection between culture and ethics in decision making.

An awareness of the cultural background of your customers and business partners in a new country is an important aspect of international business, as it will help you clearly convey your message and adapt to new business settings.

References

Gannon, M. J. (2004). Understanding global cultures: Metaphorical journeys through 28 nations, cluster of nations and continents. Thousand Oaks, CA: Sage Publications.

Hofstede, G., Hofstede, G.J., & Minkov, M. (2010). Cultures and organizations: Software of the mind. New York, NY: McGraw Hill.

Parsons. T. (1951). The Social System. New York, NY: Free Press.

2 Develop a Marketing Strategy

Modes of Entry What is the best way to enter a new market? Should a company first establish an export base or license its products to gain experience in a newly targeted country or region? Or does the potential associated with first-mover status justify a bolder move, such as entering an alliance, making an acquisition, or even starting a new subsidiary? Many companies move from exporting to licensing to a higher investment strategy, in effect treating these choices as a learning curve. Each has distinct advantages and disadvantages.

Exporting is the marketing and direct sale of domestically produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since it does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.

While relatively low risk, exporting entails substantial costs and limited control. Exporters typically have little control over the marketing and distribution of their products, face high transportation charges and possible tariffs, and must pay distributors for a variety of services. Further, exporting does not give a company firsthand experience in staking out a competitive position abroad, and it makes it difficult to customize products and services to local tastes and preferences.

Licensing essentially permits a company in the target country to use the property of the licensor. Such property, such as trademarks, patents, and production techniques, is usually intangible. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance.

Because little investment on the part of the licensor is required, licensing can provide a very large return on investment. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost. Thus, licensing reduces cost and involves limited risk. However, it does not mitigate the substantial disadvantages associated with operating from a distance. As a rule, licensing strategies inhibit control and produce only moderate returns.

Strategic alliances and joint ventures have become increasingly popular in recent years. They allow companies to share the risks and resources required to enter international markets. And although returns also may have to be shared, these arrangements give companies a degree of flexibility not afforded by going it alone through direct investment.

There are several motivations for companies to consider a partnership as they expand globally, including facilitating market entry, risk and reward sharing, technology sharing, joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.

Such alliances often are favorable when (1) the partners' strategic goals converge while their competitive goals diverge; (2) the partners' size, market power, and resources are small compared to the industry leaders; and (3) partners are able to learn from one another while limiting access to their own proprietary skills.

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include (1) conflict over asymmetric new investments, (2) mistrust over proprietary knowledge, (3) performance ambiguity, that is, how to "split the pie," (4) lack of parent firm support, (5) cultural clashes, and (6) if, how, and when to terminate the relationship.

Ultimately, most companies will aim at building their own presence through company-owned facilities in important international markets. Acquisitions and greenfield start-ups represent this ultimate commitment. Acquisition is faster, but starting a new, wholly owned subsidiary might be the preferred option if no suitable acquisition candidates can be found.

Also known as foreign direct investment (FDI), acquisitions and greenfield start-ups involve the direct ownership of facilities in the target country and, therefore, the transfer of resources including capital, technology, and personnel. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.

Coca-Cola and Illycaffé

In March 2008, the Coca-Cola company and Illycaffé Spa finalized a joint venture and launched a premium ready-to-drink espresso-based coffee beverage. The joint venture, Ilko Coffee International, was created to bring three ready-to-drink coffee products—caffè, an Italian chilled espresso-based coffee; cappuccino, an intense espresso, blended with milk and dark cacao; and latte macchiato, a smooth espresso, swirled with milk—to consumers in 10 European countries. The products will be available in stylish, premium cans (150 milliliters for caffè and 200 milliliters for the milk variants). All three offerings will be available in 10 European Coca-Cola Hellenic markets, including Austria, Croatia, Greece, and Ukraine. Additional countries in Europe, Asia, North America, Eurasia, and the Pacific were slated for expansion at a later date.

The Coca-Cola Company is the world's largest beverage company. Along with Coca-Cola, recognized as the world's most valuable brand, the company markets four of the world's top five nonalcoholic sparkling brands, including Diet Coke, Fanta, Sprite, and a wide range of other beverages, including diet and light beverages, waters, juices and juice drinks, teas, coffees, and energy and sports drinks. Through the world's largest beverage distribution system, consumers in more than 200 countries enjoy the company's beverages at a rate of 1.5 billion servings each day.

Based in Trieste, Italy, Illycaffé produces and markets a unique blend of espresso coffee under a single brand leader in quality. Over 6 million cups of Illy espresso coffee are enjoyed every day. Illy is sold in over 140 countries around the world and is available in more than 50,000 of the best restaurants and coffee bars. Illy buys green coffee directly from the growers of the highest quality Arabica through partnerships based on the mutual creation of value. The Trieste-based company fosters long-term collaborations with the world's best coffee growers—in Brazil, Central America, India, and Africa— providing know-how and technology and offering above-market prices.

Entry Strategies: Timing

In addition to selecting the right mode of entry, the timing of entry is critical. Just as many companies have overestimated market potential abroad and underestimated the time and effort needed to create a real market presence, so have they justified their overseas' expansion on the grounds of an urgent need to participate in the market early. Arguing that there existed a limited window of opportunity in which to act, which would reward only those players bold enough to move early, many companies made sizable commitments to foreign markets even though their own financial projections showed they would not be profitable for years to come. This dogmatic belief in the concept of a first-mover advantage (sometimes referred to as pioneer advantage) became one of the most widely established theories of business. It holds that the first entrant in a new market enjoys a unique advantage that later competitors cannot overcome (i.e., that the competitive advantage so obtained is structural and therefore sustainable).

Some companies have exemplified this concept. Procter & Gamble (P&G), for example, has always trailed rivals such as Unilever in certain large markets, including India and some Latin American countries, and the most obvious explanation is that its European rivals were participating in these countries long before P&G entered. Given that history, it is understandable that P&G erred on the side of urgency in reacting to the opening of large markets such as Russia and China. For many other companies, however, the concept of pioneer advantage was little more than an article of faith and was applied indiscriminately and with disastrous results to country-market entry, to product-market entry, and, in particular, to the new economy opportunities created by the Internet.

The get-in-early philosophy of pioneer advantage remains popular. And while there are clear examples of its successful application—the advantages gained by European companies from being early in colonial markets provide some evidence of pioneer advantage—first-mover advantage is overrated as a strategic principle. In fact, in many instances, there are disadvantages to being first. First, if there is no real first- mover advantage, being first often results in poor business performance, as the large number of companies that rushed into Russia and China can attest to. Second, pioneers may not always be able to recoup their investment in marketing required to kick-start the new market. When that happens, a fast follower can benefit from the market development funded by the pioneer and leapfrog into earlier profitability. For a more detailed discussion, see Tellis & Golder (2002).

This ability of later entrants to free-ride on the pioneer's market development investment is the most common source of first-mover disadvantage and suggests two critical conditions necessary for real first- mover advantage to exist. First, there must be a scarce resource in the market that the first entrant can acquire. Second, the first mover must be able to lock up that scarce resource in such a way that it creates a barrier to entry for potential competitors. A good example is provided by markets in which it is necessary for foreign firms to obtain a government permit or license to sell their products. In such cases, the license, and perhaps government approval, more generally, may be a scarce resource that will not be granted to all comers. The second condition is also necessary for first-mover advantage to develop. Many companies believed that brand preference created by being first constituted a valid source of first-mover advantage, only to find that, in most cases, consumers consider the alternatives available at the time of their first purchase, not which came first.

Starbucks’ Global Expansion

Starbucks' decision to expand abroad came after an extended period of exclusive focus on the North American market. From its founding in 1971, it grew to almost 700 stores by 1995, all within the United States and Vancouver, Canada. It was not until the next decade that Starbucks made its first entry into other international markets. By 2006, Starbucks operated approximately 11,000 stores—with 70 percent in the United States and 30 percent in international markets—and international revenue had grown to almost 20 percent of Starbucks' total revenue. Starbucks offered the same basic coffee menu internationally as it did in the United States. However, the range of food products and other items, such as coffee mugs stocked, varied somewhat according to local customs and tastes.

Along with many other companies that pursue global expansion, Starbucks continually faces questions about where and how to further increase its global presence. Should the emphasis be on growth in existing countries or on increasing the number of countries in which it has a presence? How important is the fact that international markets so far have proven less profitable than US and Canadian markets?

Starbucks in Japan

Interestingly, Starbucks' first move outside the United States and Canada was a joint venture in Japan. At the time, Japan had the second-largest economy in the world and was consistently among the top five coffee importers.

The decision to use a joint venture to enter Japan followed intense internal debate. Concerns among senior executives centered on Starbucks' lack of local knowledge, and questions were raised about the company's ability to attract the local talent necessary to grow the Japanese business quickly enough. Starbucks was acutely aware that there were significant differences between doing business in Japan and in the United States and that it might not have enough experience to be successful on its own.

Among other factors, operating costs were predicted to be double those of North America, and Starbucks would have to pay to ship coffee to Japan from its roasting facility in Kent, Washington (near Seattle). In addition, retail space in Tokyo was two to three times as expensive as in Seattle. Just finding rental space in such a populous city might prove to be a tremendous challenge. Starbucks concluded it needed to form an alliance with a local group that had experience with complex operations and real estate.

Starbucks executives worried that a licensing deal would not be the right solution. Specifically, they were concerned about a possible loss of control and insufficient knowledge transfer to learn from the experience. A joint venture was thought to be a better answer, and, after a long search, Starbucks approached Sazaby, Inc., operators of upscale retail and restaurant chains, whose president had approached Starbucks years earlier about the potential of opening Starbucks stores in Japan. Similarity in values, culture, and community development goals between Starbucks and Sazaby were important considerations in concluding the 50-50 deal. The two companies were equally represented on the board of directors of the newly created Starbucks Coffee Japan. Starbucks was the sole decision-making power in matters relating to brand, product line advertising, and corporate communications, while decisions regarding real-estate operational issues and human resources were handled by Sazaby. Despite strong local competition, the venture was successful from the start. By fiscal year 2000, Starbucks Coffee Japan became profitable more than two years ahead of schedule.

Starbucks in the United Kingdom

Unlike its expansion into Asia and later, the Middle East, Starbucks chose to enter the United Kingdom through acquisition rather than partnerships. Speed was a major factor in Starbucks' decision to enter the fast-growing UK market by acquisition. In addition, the culture, language, legal environment, management practices, and labor economics in the United Kingdom were considered sufficiently similar to those that Starbucks' management already knew. This meant that a wholly owned UK subsidiary could be successfully established from the outset. In May 1998, Starbucks acquired the Seattle Coffee Company, which had had a presence in the United Kingdom for some time. This fast-growing chain was modeled on its own style of operations and, at the time of the purchase, had 56 retail units. The Seattle Coffee Company was an attractive acquisition target because of its focus—relatively small market capitalization and established retail units. By 2005, Starbucks had 469 stores in the United Kingdom, which made it the third-largest country, after the United States and Japan, to serve Starbucks coffee.

second largest market at the time, reflecting a major increase in local competition. Additional international challenges were a result of Starbucks' chosen entry mode. Although joint ventures provided Starbucks with local knowledge about the market and a low-risk entry into unproven territory, joint ventures did not always reap the rewards that the partners had anticipated. One key factor was that it was often difficult for Starbucks to control the costs in a joint venture, resulting in lower profitability.

Licensing in China

In a number of developing markets, including China, Starbucks chose to enter into minority share licensing agreements with high-quality, experienced local partners in order to minimize market-entry risks. Under these agreements, the local partners absorbed the capital costs (real estate, store construction) of bringing the Starbucks brand abroad. These steps eliminated the need for substantial general and administrative expenses by Starbucks and enabled it to establish a presence in foreign markets much more quickly than it would have if it had to invest its own capital and absorb start-up losses.

Risk was also a major consideration when Starbucks looked to enter China. While offering high-volume opportunities in an untapped coffee market, the prevailing culture and politics in China potentially posed significant problems. In April 2000, Beijing city authorities ordered Kentucky Fried Chicken to close its

Another major concern with starting operations in China was recruiting the right staff. Uniformity of customer experience and coffee quality was the key driver behind the Starbucks brand. Failure to recruit the staff to ensure these key criteria not only would mean failure for the Chinese retail outlets but also could harm the company's image globally.

Although these factors made licensing an attractive entry model, with growing experience in the Chinese market, Starbucks is steadily reducing its reliance on the licensing model and switching to its core company-operated business model to increase control and reap greater rewards.

Starbucks' globalization history shows that while it was a first mover in the United States, it was forced to push harder in international markets to compete with existing players. In Japan, Starbucks was initially a huge success and became profitable two years earlier than anticipated. However, just two years after Starbucks Japan had become profitable, the company announced a loss of $3.9 million in Japan, its second largest market at the time, reflecting a major increase in local competition. Additional international challenges were a result of Starbucks' chosen entry mode. Although joint ventures provided Starbucks with local knowledge about the market and a low-risk entry into unproven territory, joint ventures did not always reap the rewards that the partners had anticipated. One key factor was that it was often difficult for Starbucks to control the costs in a joint venture, resulting in lower profitability.

Glossary

exporting The marketing and direct sale of domestically produced goods in another country fast follower A firm that uses the benefits from prior market development by a pioneering firm

to achieve profitability more quickly foreign direct A firm's direct ownership of facilities in a target country market investment (FDI) greenfield start-ups Wholly-owned subsidiaries created by firms to gain entry in foreign markets joint ventures Methods by which firms share the resources and risks required to enter

international markets licensing Permits a firm (licensee) in the target country to use the intangible property of the

licensor for a fee strategic alliances Methods by which firms share the resources and risks required to enter

international markets

Key Points

• Selecting global target markets, entry modes, and deciding how much to adapt the company's basic value proposition are intimately related. The choice of customers to serve in a particular country or region with a particular culture determines how and how much a company must adapt its basic value proposition. Conversely, the extent of a company's capabilities in tailoring its

offerings around the globe limits or broadens its options to successfully enter new markets or cultures.

• Few companies can afford to enter all markets open to them. The track record shows that picking the most attractive foreign markets, determining the best time to enter them, and selecting the right partners and level of investment has proven difficult for many companies, especially when it involves large emerging markets such as China.

• Research shows there is a pervasive the-grass-is-always-greener effect that infects global strategic decision making in many companies—especially those without global experience—and causes them to overestimate the attractiveness of foreign markets.

• Four key factors in selecting global markets are (1) a market's size and growth rate, (2) a particular country or region's institutional contexts, (3) a region's competitive environment, and (4) a market's cultural, administrative, geographic, and economic distance from other markets the company serves.

• There is a wide menu of options regarding market entry, from conservative strategies, such as first establishing an export base or licensing products to gain experience in a newly targeted country, to more aggressive options, such as entering an alliance, making an acquisition, or even starting a new subsidiary.

• Selecting the right timing of entry is equally critical. Many companies have overestimated market potential abroad, underestimated the time and effort needed to create a real market presence, and have they justified their overseas expansion on the grounds of an urgent need to participate in the market early.

References

Davila, A., Foster, G., Putt, C., & Somjen, A. (2006). Starbucks: A global work-in-progress (Case No. IB74). Retrieved from https://www.gsb.stanford.edu/faculty-research/case-studies/starbucks-global-work- progress

Tellis, G. J., & Golder, P. (2002). Will and Vision: How latecomers grow to dominate markets. New York, NY: McGraw Hill.

Licenses and Attributions

Fundamentals of Global Strategy v. 1.0 was adapted by Saylor Academy and is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensor. UMUC has modified this work and it is available under the original license.

All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity of information located at external sites.

Governance and Accountability Who Owns the Corporation? The Legal Debate

Do shareholders own the company? To most people, this idea is so axiomatic that the question hardly seems worth asking. However, the long-simmering debate about the age-old argument over the board's responsibilities to shareholders versus the rights of all company stakeholders flared up again recently, drawing attention once again to that central question (Bernstein, 2008).

In the latest round of this debate, two leading corporate governance experts—Lucian Bebchuk, Harvard Law School professor and ardent shareholder-rights proponent, and Martin Lipton, founding partner of Wachtell, Lipton, Rosen & Katz and a stalwart defender of the view that management's prerogative is to act in the best interest of the corporation—squared off in the pages of the Virginia Law Review (see

https://saylordotorg.github.io/text_fundamentals-of-global-strategy/

https://creativecommons.org/licenses/by-nc-sa/3.0/

Bebchuk, 2007, p. 675; Lipton & Savitt, 2007, p. 733). The central issue in this debate is whether directors of a public company owe their primary fiduciary duty to its shareholders, as Bebchuk insists, or if they have to consider the prerogatives of all the stakeholders, as Lipton maintains.

Bebchuk (2007) cites a widely quoted 1988 ruling by the Delaware courts that "the shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests" and points out that corporate law gives boards the authority to hire and fire management and set the company's overall direction. Next, he argues that since directors are expected to serve as the shareholders' guardians, shareholders must have the power to replace them. Thus, the fear of being replaced is supposed to make directors accountable and provide them with incentives to serve shareholder interests.

He continues by noting just how infrequently US directors are actually challenged, much less removed, and concludes that shareholder power to replace directors in the United States is largely a myth. To make shareholder power real, he supports the proposal that directors be elected by a secret ballot open to rival candidates nominated by shareholders. To put them on an equal footing with the slate proposed by the board's nominating committee (usually with management input), he suggests that challengers be reimbursed by the corporation if they receive a threshold number of votes.

Taking the opposing view and challenging the widely accepted argument that a company's primary goal is to maximize shareholder value, Lipton challenges the very notion that corporations are the private property of stockholders. "Shareholders do not own corporations," he says. "They own securities—shares of stock—which entitle them to very limited electoral rights and the right to share in the financial returns produced by the corporation's business operations" (Lipton & Savitt, 2007, p. 733). Directors, he argues, are not merely representatives of shareholders who have a legal responsibility to put investor interests first. Instead, the role of the board is simply and dutifully to seek what is best for the company itself, which means balancing the interests of shareholders as well as other stakeholders, such as management and employees, creditors, regulators, suppliers, and consumers. He concludes that Bebchuk's notion that a board's primary fiduciary obligation is to shareholders is a myth of corporate law.

Focus of US Governance Law: Conduct or Accountability?

Governance in the United States has evolved as a medley of federal law—including not only corporation law but also tax and labor law—state law, and a series of codes of various self-regulating authorities ranging from the NYSE to the accounting industry. State law has traditionally been the ultimate arbiter of governance issues. In contrast, in the United Kingdom, corporate reform can be affected simply through an act of Parliament.

This unusual history of governance law in the United States has created an opening to support different interpretations of a variety of its provisions. For example, the law not only identifies shareholders as the owners of the corporation but also defines them as investors who receive ownership in the corporation in return for money or assets they invest. It stipulates that shareholders are responsible for electing a board of directors, the operators of the corporation who have overall responsibility for the business of the corporation, but it does not meaningfully address the implementation of this statute. It also specifies that the board of directors, rather than its shareholders, directs a company's business and affairs.

Additional guidance about a board's fiduciary role is contained in statutes governing the role and conduct of individual board members. Specifically those defining a director's obligation in terms of such principles as the duty of care, duty of loyalty, and the business judgment rule. The duty of care requires directors to be informed, prior to making a business decision, of all material information reasonably available to them in the exercise of their management of the affairs of a corporation. The duty of loyalty protects the corporation and its shareholders. It requires directors to act in good faith and in the best interests of the corporation and its shareholders. The prevalent legal standard is that the duty of loyalty requires that the director be "disinterested," such that he or she "neither appears on both sides of a transaction nor expects to derive any personal financial benefit from it," and his or her decision must be "based on the corporate merits of the subject before the board rather than extraneous considerations or influences" (The American Law Institute, 1994, p. 61). The business judgment rule protects directors from liability for action taken by them if they act on an informed basis in good faith and in a manner they reasonably believe to be in the best interests of the corporation's shareholders. The business judgment rule does not apply in cases of fraud, bad faith, or self-dealing.

As long as these principles are adhered to and as long as directors are careful and loyal to corporate and shareholder interests, they have wide discretion to exercise their business judgment as they see fit. None of these principles provide clear guidance to the central question of who owns the corporation.

Corporate Purpose: A Societal Perspective

One reason that US governance law is sometimes indeterminate is that the enormous differences between the two legal views described above reflect a broader, philosophical debate on the role and purpose of corporations in society. Indeed, opposing views on the purpose and accountability of the corporation—shareholders versus stakeholders, or private (property) versus public (social and political entity) conceptions of the corporation—have been part of the governance debate for well over 100 years.

Shareholder capitalism, until recently prevalent mainly in the United States and the United Kingdom, holds that a company is the private property of its owners. From a legal perspective, the Anglo-American corporation is essentially a capital market institution, primarily accountable to shareholders, charged with creating wealth by exploiting market opportunities. Stakeholder capitalism, on the other hand, embodies a more organic view of the corporation in which companies have broader obligations that balance the interests of shareholders with those of other stakeholders, notably employees but also including suppliers, distributors, customers, and the community at large. Under this set of beliefs, the corporation is seen as an institution with a continuing purpose, and therefore, with a life of its own. Shareholders and wealth creation for owners do not dictate its priorities. Rather, a deep concern for employees, suppliers, and customers, and implicitly for its own continued existence, defines the corporate mission.

Stakeholder capitalism can take different forms, reflecting the degree of commitment to different stakeholders. Germany's legal system, for example, makes it clear that firms do not have a sole duty to pursue the interests of shareholders. Under Germany's system of codetermination, employees and shareholders in large companies hold an equal number of seats on the companies' supervisory boards, and the interests of both parties must be taken into account in decision making. In Denmark, employees in firms with more than 35 workers elect one-third of the firm's board members, with a minimum of two. In Sweden, companies with more than 25 employees must have two labor representatives appointed to the board. These employee board members have all the rights and duties of other board members.

The situation differs somewhat in France. French firms with more than 50 workers have employee representatives at board meetings, but they do not have the right to vote. More conventional codetermination systems exist for former public-sector French firms that have been privatized. These systems can be introduced voluntarily by companies. In Finland, companies can also voluntarily adopt employee representatives on the board. Across the European Union (EU) as a whole, another type of worker participation in decision making is the works council, a group that has a say in such issues as layoffs and plant closures. A corporation with at least 1,000 employees, of which there are 150 or more in at least two EU countries, must have a European Works Council.

Japanese firms also differ from those in the United States and the United Kingdom. Japanese executives do not have a fiduciary responsibility to stockholders, but they can be liable for gross negligence in performing their duties. At the same time, it is accepted practice in Japan that managers align their priorities with the interests of a variety of stakeholders. For example, a recent survey revealed that if Japanese executives feel that the company is going through a tough period financially, keeping their employees on the job is much more important than maintaining dividends to shareholders. Specifically, only 3 percent of Japanese managers said companies should maintain dividend payments to stockholders under such circumstances. This compares with 41 percent in Germany, 40 percent in France, and 89 percent in both the United States and the United Kingdom.

In the United States, these issues also continue to be debated. Some time ago Reason (2005) magazine featured a spirited debate featuring the late Milton Friedman, former senior research fellow at the Hoover Institution and Paul Snowden Russell Distinguished Service Professor of Economics at the University of Chicago; John Mackey, founder and CEO of Whole Foods Market; and others, on the purpose of the corporation. Friedman, a Nobel laureate in economics and the author of a famous 1970 New York Times Magazine article titled "The Social Responsibility of Business Is to Increase Its Profits," had no patience with capitalists who claimed that "business is not concerned 'merely' with profit but also with promoting desirable 'social' ends; that business has a 'social conscience' and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution, and whatever else may be the catchwords of the contemporary crop of reformers" (Friedman, 1970).

He wrote that such people are "preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades."

Mackey disagreed vehemently with Friedman. A self-described ardent libertarian who likes to quote Ludwig von Mises on Austrian economics and Abraham Maslow on humanistic psychology, and is a student of astrology, Mackey believes Friedman's view of business is too narrow and underestimates the humanitarian potential of capitalism. Selected portions of this debate are reprinted below, beginning with Mackey's passionate, personal vision of the social responsibility of business.

In 1970 Milton Friedman wrote that "there is one and only one social responsibility of business— to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." That's the orthodox view among free market economists—that the only social responsibility a law-abiding business has is to maximize profits for the shareholders.

I strongly disagree. I'm a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor's perspective, the purpose of the business is to maximize profits. But that's not the purpose for other stakeholders—for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate. (Friedman, Mackey, & Rodgers, 2005)

Mackey continues, "We have not achieved our tremendous increase in shareholder value by making shareholder value the primary purpose of our business…the most successful businesses put the customer first, ahead of the investors. In the profit-centered business, customer happiness is merely a means to an end: maximizing profits. In the customer-centered business, customer happiness is an end in itself, and will be pursued with greater interest, passion, and empathy than the profit-centered business is capable of."

Not surprisingly, Friedman respected Whole Foods' success but took issue with its business philosophy.

"Maximizing profits is an end from the private point of view," he wrote. "It is a means from the social point of view. A system based on private property and free markets is a sophisticated means of enabling people to cooperate in their economic activities without compulsion; it enables separated knowledge to assure that each resource is used for its most valued use, and is combined with other resources in the most efficient way."

Mackey replied, "While Friedman believes that taking care of customers, employees, and business philanthropy are means to the end of increasing investor profits, I take the exact opposite view: Making high profits is the means to the end of fulfilling Whole Foods' core business mission. We want to improve the health and well-being of everyone on the planet through higher-quality foods and better nutrition, and we can't fulfill this mission unless we are highly profitable. High profits are necessary to fuel our growth across the United States and the world. Just as people cannot live without eating, so a business cannot live without profits. But most people don't live to eat, and neither must a business live just to make profits" (Friedman, Mackey, & Rodgers, 2005).

Mackey's logic was perhaps most effectively first articulated by Peter Drucker in 1974 in his famous book Management: Tasks, Responsibilities and Practices. "The purpose of a business is not to make a profit," Drucker wrote. "Profit is a necessity and a social responsibility. A business, regardless of the economic and legal arrangements of society, must produce enough profit to cover the risks of committing today's economic resources to the uncertainties of the future; to produce the capital for the jobs of tomorrow; and to pay for all the non-economic needs and satisfactions of society from defense and the administration of justice to the schools and the hospitals, and from the museums to the boy scouts. But profit is not the purpose of business. Rather a business exists and gets paid for its economic contribution. Its purpose is to create a customer" (Drucker, 1974, p. 67).

This discussion raises questions that transcend the legal debate on fiduciary obligations. It asks us to consider questions, such as, What does society want from corporations? What are the moral obligations and responsibilities of business? Who has the right to make such decisions in a public company? Is shareholder wealth maximization the right objective? What obligations does a company have to other stakeholders, such as employees or suppliers, and the community at large? Are these objectives necessarily in conflict with each other? If so, how should trade-offs be made? Furthermore, the discussion suggests that to be consistent and effective, directors and boards should have ready answers to many, if

not all, of the questions and know where they agree or disagree. As we shall see, regrettably, this is not true. Not only has the United States, as a society, changed its perspective on this issue several times, but also, today, the majority of directors remain confused, sometimes intimidated, by the law and often are unwilling or unable to debate these issues openly.

The Primacy of Shareholder Interests: A Historical Perspective

During the first part of the nineteenth century, the corporation was viewed as a social instrument for the state to carry out its public policy goals, and each instance of incorporation required a special act of the state legislature. The function of the law was to protect stakeholders by making sure corporations would not pursue activities beyond their original charter or state of incorporation. By the end of the nineteenth century, states began to allow general incorporation, which fueled an explosive growth in the creation of companies for private business purposes. In its aftermath, concern for stakeholder welfare gave way to the concept of managing the corporation for shareholders' profits. This section draws on Sundaram and Inkpen (2004).

In 1919 the primacy of shareholder value maximization was affirmed in a ruling by the Michigan State Supreme Court in Dodge vs. Ford Motor Company. Henry Ford wanted to invest Ford Motor Company's considerable retained earnings in the company rather than distribute it to shareholders. The Dodge brothers, minority shareholders in Ford Motor Company, brought suit against Ford, alleging that his intention to benefit employees and consumers was at the expense of shareholders. In their ruling, the Michigan court agreed with the Dodge brothers:

A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes (Dodge v. Ford Motor Co., 1919).

In The Modern Corporation and Private Property, published in 1932, Adolph Berle and Gardiner Means provided important intellectual support for the shareholder value norm. In this now classic book, the authors called attention to a new phenomenon affecting corporations in the United States at the time. They noted that ownership of capital had become widely dispersed among many small shareholders, yet control was concentrated in the hands of just a few managers. Berle and Means warned that the separation of ownership and control would destroy the very foundation of the existing economic order and argued that managing on behalf of the shareholders was the sine qua non of managerial decision making because shareholders were property owners.

Following the 1929 stock market crash and the Great Depression, stakeholder concerns were being voiced once again. If the corporation is an entity separate from its shareholders, it was argued, it has citizenship responsibilities (Dodd, 1932, p. 1145–1163). According to this point of view, rather than being an agent for shareholders, the role of management is that of a trustee with citizenship responsibilities on behalf of all constituencies, even if it means a reduction in shareholder value. In the following years, states adopted a number of stakeholder statutes reflecting this new sense of corporate responsibility toward nonshareholding constituencies, such as labor, consumers, and the natural environment.

By the end of the twentieth century, however, despite state-level legislative efforts to the contrary, American-style market-driven capitalism had prevailed and the pendulum swung back to the shareholder. Friedman's (1970) view that the "sole social responsibility of business is to increase profits" energized a push back on corporate social responsibility. In the meantime, agency theory emerged. Agency theory is directed at the dilemma in which one party (the shareholder as the principal) delegates work to another (management as the agent) who performs that work. Agency theory is concerned with resolving two problems that can occur in such a relationship. The first is the agency problem that arises when (1) the desires or goals of the principal and agent conflict and (2) it is difficult or expensive for the principal to verify what the agent is actually doing. The issue here is that the principal cannot verify that the agent has behaved appropriately. The second is the problem of risk sharing that arises when the principal and agent have different attitudes toward risk. In this situation, the principle and the agent may prefer different actions because of the different risk preferences and the concept of the corporation as a nexus of contracts (Easterbrook & Fischel, 1991). The nexus of contracts theory views the firm not as an entity but as an aggregate of various inputs brought together to produce goods or services. Employees provide labor. Creditors provide debt capital. Shareholders initially provide equity capital and subsequently bear

the risk of losses and monitor the performance of management. Management monitors the performance of employees and coordinates the activities of all the firm's inputs. The firm is seen as simply a web of explicit and implicit contracts establishing rights and obligations among the various inputs making up the firm.

To protect the interests of other stakeholders, 30 states in the United States enacted stakeholder statutes that allowed directors to consider the interests of nonshareholder constituencies in corporate decisions. Thus, the law gave boards latitude in determining what is in the best long-term interests of the corporation and how to take the interests of other stakeholders into account. Nevertheless, the mainstream US corporate law remains committed to the principle of shareholder wealth maximization.

Governance Without a Shared Purpose?

The lack of a clear, shared consensus about why a company exists, to whom directors are accountable, and what criteria they should use to make decisions—in the law as well as in society at large—is a significant obstacle to increasing the effectiveness of the corporate governance function. When boards operate with tacit assumptions about their objectives and loyalties, they may hide potential disagreements among their members and sacrifice effectiveness. Such hidden disagreements make it difficult to get consensus on complex issues, such as what qualifications a CEO should have, whether or not to outsource parts of the value chain, or how to evaluate and compensate top management.

Lorsch (1989) first identified the confusion among directors about their accountabilities. Based on their beliefs, he categorized directors as belonging to one of three groups: traditionalists, rationalizers, or broad constructionists. Each has a different vision of what the modern corporation's fundamental purpose is and, therefore, to whom and for what a board should be held accountable.

Traditionalists see themselves as accountable to shareholders only. For them, there is no need to debate the fundamental purpose of the modern corporation—it is and always has been the maximization of shareholder value. They do not believe there is a conflict between putting the shareholder first and responding to the needs of other constituencies, and therefore experience little role ambiguity or conflict. Members of this group find support for their position in a narrow interpretation of current state and federal law. They also tend to view the highly publicized abuses at Enron, WorldCom, Vivendi, and other companies as anomalies made possible by imperfections in the current system, rather than as indicators of more systemic problems.

A second, larger group—the rationalizers—experiences more anxiety about their role as directors. They recognize that, in today's complex, global economy, real tensions can occur between the interests of different constituencies and that not all decisions can be reduced to the simple formula that assumes what is good for the shareholder is good for everyone else. Examples include whether or not to close a domestic plant in favor of manufacturing in a low-cost, foreign location; whether or not to outsource production to lower cost suppliers; or how to respond to pressures for greener operations.

The final group, which Lorsch labels the broad constructionists, recognizes specific responsibilities to constituencies other than shareholders and is willing to act on its convictions. Directors belonging to this group constantly struggle to balance their views with the more traditional view of a director's accountabilities and—to stay within the boundaries of the law—frame their decisions in terms of what is in the best long-term interest of the corporation as a whole.

Lorsch summarized his findings stating, "Thus we found the majority of directors felt trapped in a dilemma between their traditional legal responsibility to shareholders, whom they consider too interested in short- term payout, and their beliefs about what is best, in the long run, for the health of the company." He further observed that in many boards a group norm had evolved, prohibiting open discussion of a board's true purpose and that a lot of directors were unaware of recent rulings in the evolving legal context that grant them the latitude to consider constituencies other than shareholders.

In recent years the issue of a board's primary role and accountability has, if anything, become even more confusing. Despite strong rhetoric from many quarters advocating maximization of shareholder value as a company's primary goal, there is a growing recognition that a company and the board have broader responsibilities. This trend reflects the fact that real—that is, economic and psychological rather than legal—ownership of the corporation is moving from shareholders to employees, customers, and other stakeholders that make up the human capital of the firm.

This trend has created problems for directors. As Carter & Lorsch (2004) note, "Boards have a real challenge in deciding to whom they are really responsible and where their commitments ultimately lie. Directors must think about and discuss among themselves the constituencies and the time horizons they have in mind as they think about the board's responsibilities. Many boards have skirted discussion of these complex issues. They seem too abstract, and reaching a consensus among board members about them can take more of that most precious commodity—time—than directors want to devote."

Is Shareholder Value Maximization the Right Objective?

In their widely cited book The Value Imperative—Managing for Superior Shareholder Returns, McTaggart, Kontes, and Mankins (1994) write, "Maximizing shareholder value is not an abstract, shortsighted, impractical, or even, some might think, sinister objective. On the contrary, it is a concrete, future-oriented, pragmatic, and worthy objective, the pursuit of which motivates and enables managers to make substantially better strategic and organizational decisions than they would in pursuit of any other goal. And its accomplishment is essential to the welfare of all the company's stakeholders, for it is only when wealth is created that customers will continue to enjoy a flow of new, better, and cheaper products and the world's economies will see new jobs created and old ones improved."

Implicit in this statement are three important assumptions, all of which can be challenged:

• Shareholder value is the best measure of wealth creation for the firm.

• Shareholder value maximization produces the greatest competitiveness.

• Shareholder value maximization fairly serves the interests of the company's other stakeholders.

With respect to the first assumption, it can be argued that firm value, which also includes the values to all other financial claimants, such as creditors, debt holders, and preferred shareholders, is a better indicator of wealth. The importance of distinguishing between firm value and shareholder value lies in the fact that managers and boards can make decisions that transfer value from debt holders to shareholders and decrease total firm and social value while increasing shareholder value.

The second assumption—that shareholder value maximization produces the greatest long-term competitiveness—can also be challenged. An increasingly influential group of critics, which also includes a substantial number of CEOs, thinks product-market rather than capital-market objectives should guide corporate decision making. They worry that companies that adopt shareholder value maximization as their primary purpose lose sight of producing or delivering a product or service as their central mission, and that shareholder value maximization creates a gap between the mission of the corporation and the motivations, desires, and capabilities of the company's employees who only have direct control over real, current, corporate performance. They note that shareholder value maximization is simply not inspiring for employees, even though they often share in some of the gains through benefit, bonus, or option plans. To many of them, shareholders are nameless and faceless, under no obligation to hold their shares for any length of time, never satisfied, and always asking, "What will you do for me next?" Worse, they say, not only does shareholder-value appreciation fail to inspire employees, it may encourage them to view maximizing one's financial well-being as a legitimate or even the only goal. Instead, they want companies to create a moral purpose that not only provides a clear focus on creating competitive advantage for the company but also unites its purpose, strategy, goals, and shared values into one overall, coherent management framework that has the power to motivate constituents and the legitimacy of the corporation's actions in society (Ellsworth, 2002, p. 6).

The third assumption—that shareholder maximization is congruent with fairly serving the interests is the firm's other stakeholders—is perhaps most controversial. Proponents of shareholder value maximization—including many economists and finance theorists—are adamant that maximizing shareholder value is not only superior as a fiduciary standard or management objective but also as a societal norm. Jensen (2001), for example, writes, "Two-hundred years of research in economics and finance have produced the result that if our objective is to maximize the efficiency with which society utilizes its resources (that is to avoid waste and to maximize the size of the pie), then the proper and unique objective for each company in the society is to maximize the long-run total value of the firm. Firm value will not be maximized, of course, with unhappy customers and employees or with poor products.

Therefore, consistent with stakeholder theory value-maximizing firms will be concerned about relations with all their constituencies. A firm cannot maximize value if it ignores the interest of its stakeholders."

McTaggart et al. (1994) also believe shareholder value maximization allows managers and boards to resolve any conflicts to everyone's long-term benefit. Consider, for example, their prescription for resolving trade-offs between customer- and shareholder-focused investments. "As long as management invests in higher levels of customer satisfaction that will enable shareholders to earn an adequate return on their investment, there is no conflict between maximizing shareholder value and maximizing customer satisfaction. If, however, there is insufficient financial benefit to shareholders from attempts to increase customer satisfaction, the conflict should be resolved for the benefit of shareholders to avoid diminishing both the financial health and long-term competitiveness of the business."

Not surprisingly, stakeholder theorists take a different point of view. They argue that shareholders are but one of a number of important stakeholder groups and that, like customers, suppliers, employees, and local communities, have a stake in and are affected by the firm's success or failure. To stakeholder theory advocates, an exclusive focus on maximizing stockholder wealth is both unwise and ethically wrong. Instead, the firm and its managers have special obligations to ensure that the shareholders receive a fair return on their investment. But the firm also has special obligations to other stakeholders, which go above and beyond those required by law (Freeman, 1984, p. 17).

More recently, Ian Davis, managing director of McKinsey, criticized the shareholder value maximization doctrine on altogether different grounds. He observed that, in today's global business environment, the concept of shareholder value is rapidly losing relevance in the face of the larger role played by government and society in shaping business and industry elsewhere in the world. "In much of the world," he wrote, "government, labor and other social forces have a greater impact on business than in the U.S. or other more free-market Western societies. In China, for example, government is often an owner. If you're talking in China about shareholder value, you will get blank looks. Maximization of shareholder value is in danger of becoming irrelevant (Davis, 2006).

Finally, a growing number of parties, including CEOs, while not questioning that shareholder value maximization is the right objective, are concerned about its implementation. They worry that the stock market has a bias toward short-term results and that stock price, the most common gauge of shareholder wealth, does not reflect the true long-term value of a company. Lucent Technologies CEO Henry Schacht, for example, has stated, "What has happened to us is that our execution and processes have broken down under the white-hot heat of driving for quarterly revenue growth" (Loomis, 2003).

Stakeholder Theory: A Viable Alternative?

Although the recognition of stakeholder obligations has been with us since the birth of the modern corporate form, the development of a coherent stakeholder theory awaited a shift in legal thinking from a perspective on shareholders as owners to one of investors, more on a par with providers of other inputs that a company needs to produce goods or services. Whereas the ownership perspective, rooted in property law, provides a natural basis for the primacy of shareholder rights, the view of the corporation as a bundle of contracts permits a different view of the fiduciary obligations of corporate managers. According to Freeman and McVea (2001), "The stakeholder framework does not rely on a single overriding management objective for all decisions. As such it provides no rival to the traditional aim of 'maximizing shareholder wealth.' To the contrary, a stakeholder approach rejects the very idea of maximizing a single-objective function as a useful way of thinking about management strategy. Rather, stakeholder management is a never ending task of balancing and integrating multiple relationships and multiple objectives.

To pragmatists, the rejection of a single criterion for making corporate decisions is problematic. Directors occasionally face situations in which it is impossible to advance the interests of one set of stakeholders and simultaneously protect those of others. Whose interests should they pursue when there is an irreconcilable conflict? Consider the decision whether or not to close down an obsolete plant. The closing will harm the plant's workers and the local community but will benefit shareholders, creditors, employees working at a more modern plant to which the work previously performed at the old plant is transferred, and communities around the modern plant. Without a single guiding decision criterion, how should the board decide?

The problem is not just one of uncertainty or unpredictability. Ultimately, the stakeholder model is flawed because of its failure to account adequately for what Bainbridge (1993) calls "managerial sin." The

absence of a single decision-making criterion allows management to freely pursue its own self-interest by playing shareholders off against nonshareholders. When management's interests coincide with those of shareholders, management can justify its decision by saying that shareholder interests prevailed in this instance, and vice versa. The plant closing decision described above provides a useful example: Shareholders and some nonshareholder constituents benefit if the plant is closed, but other nonshareholder constituents lose. If management's compensation is tied to firm size, we can expect it to resist any downsizing of the firm. The plant likely will stay open, with the decision being justified by the impact of a closing on the plant's workers and the local community. In contrast, if management's compensation is linked to firm profitability, the plant will likely close, with the decision being justified by management's concern for the firm's shareholders, creditors, and other constituencies that benefit from the closure decision.

It has been argued that shareholders, in fact, are more vulnerable to management misconduct than nonshareholder constituencies. Legally, shareholders have essentially no power to initiate corporate action and, moreover, are entitled to vote on only very few corporate actions. Under the Delaware code, shareholder voting rights are essentially limited to the election of directors and the approval of charter or bylaw amendments, mergers, sales of substantially all of the corporation's assets, and voluntary dissolutions. As a formal matter, only the election of directors and the amendment of the bylaws do not require board approval before shareholder action is possible.

In practice, of course, even the election of directors, absent a proxy contest, is predetermined by the existing board nominating the following year's board. Rather, formal decision-making power resides mainly with the board of directors. As a practical matter, of course, the sheer mechanics of undertaking collective action by thousands of shareholders preclude them from meaningfully affecting management decisions. In effect, shareholders, just like nonshareholder constituencies, have but a single mechanism by which they can negotiate with management—withholding their inputs (capital). But withholding inputs may be a more effective tool for nonshareholders than it is for shareholders. Some firms go for years without seeking equity investments. If the management groups in these firms disregard shareholder interests, the shareholders have no option other than to sell out at prices that will reflect management's lack of concern for shareholder wealth. In contrast, few firms can survive for long without regular infusions of new employees and new debt financing. As a result, few management groups can prosper while ignoring nonshareholder interests. Nonshareholder constituencies often also are more effective in protecting themselves through the political process. Shareholders—especially individuals—typically have no meaningful political voice. In contrast, many nonshareholder constituencies are represented by cohesive, politically powerful interest groups. Unions, for example, played a major role in passing state antitakeover laws. Environmental concerns are increasingly a factor in regulatory actions. From this point of view, it can be argued that an explicit focus on balancing stakeholder interests is not only impractical but also unnecessary because nonshareholder constituencies already have adequate mechanisms to protect themselves from management misconduct.

Resolving the Conflict: Toward Enlightened Value Maximization?

Jensen (2001) believes the inherent conflict between the doctrine of shareholder value maximization and the objectives of stakeholder theory can be resolved by melding together "enlightened" versions of these two philosophies:

Enlightened value maximization recognizes that communication with and motivation of an organization's managers, employees, and partners is extremely difficult. What this means in practice is that if we simply tell all participants in an organization that its sole purpose is to maximize value, we will not get maximum value for the organization. Value maximization is not a vision or a strategy or even a purpose; it is the scorecard for the organization. We must give people enough structure to understand what maximizing value means so that they can be guided by it and therefore have a chance to actually achieve it. They must be turned on by the vision or the strategy in the sense that it taps into some human desire or passion of their own—for example, a desire to build the world's best automobile or to create a film or play that will move people for centuries. All this can be not only consistent with value seeking, but a major contributor to it.

Indeed, it is a basic principle of enlightened value maximization that we cannot maximize the long-term market value of an organization if we ignore or mistreat any important constituency. We cannot create value without good relations with customers, employees, financial backers, suppliers, regulators, and communities. But having said that, we can now use the value criterion for choosing among those

competing interests. I say "competing" interests because no constituency can be given full satisfaction if the firm is to flourish and survive. Moreover, we can be sure—again, apart from the possibility of externalities and monopoly power—that using this value criterion will result in making society as well off as it can be. (Jensen, 2001, p. 16)

Thus, Jensen defines "enlightened" stakeholder theory simply as stakeholder theory with the specification that maximizing the firm's total long-term market value is the right objective function. The words "long- term" are key here. As Jensen notes, "In this way, enlightened stakeholder theorists can see that although stockholders are not some special constituency that ranks above all others, long-term stock value is an important determinant (along with the value of debt and other instruments) of total long-term firm value. They would recognize that value creation gives management a way to assess the tradeoffs that must be made among competing constituencies, and that it allows for principled decision making independent of the personal preferences of managers and directors (Jensen, 2001, p. 17).

Even though shareholder value maximization is increasingly being challenged on pragmatic as well as moral grounds, its roots in private property law, however—a profound element in the American ethos— guarantee that it will continue to dominate the US approach to corporate law for the foreseeable future. As a practical matter, the courts have given boards increasing latitude in determining what is in the best long-term interests of the corporation and how to take the interests of other stakeholders into account. This latitude makes it imperative that directors openly and fully discuss these issues and agree on a clear, unambiguous statement of purpose for the corporation.

Glossary

agency theory a theory that attempts to reconcile the relationship between shareholders and the agent of the shareholders (for example, the corporation's managers)

board of directors an elected group of business individuals who have overall responsibility for the business of the corporation

broad constructionists

directors who recognize and are willing to act on responsibilities to constituencies other than shareholders

business judgment rule

a rule that protects directors from liability if they act on an informed basis in good faith and in a manner they reasonably believe to be in the best interests of the corporation's shareholders. This does not apply in cases of fraud, bad faith, or self- dealing

duty of care a statute that requires directors, before making a business decision, to be informed of all material information reasonably available to them in exercising their management of the corporation's affairs

duty of loyalty a statute that protects a corporation and its shareholders by requiring directors to act in good faith and in the corporation's and shareholders' best interests

enlightened stakeholder theory

a theory that corporate value cannot be maximized unless the corporation concerns itself with all its constituent stakeholders, with the specification that maximizing the corporation's long-term market value is the right goal

enlightened value maximization

a theory that recognizes that corporate decision-makers need to be more sensitive to nonshareholder constituencies, that maximizing shareholder value does not produce the most value for the organization

management executives who act in a trustee manner toward a corporation's nonshareholders, including labor, consumers, and the environment

rationalizers

directors who recognize the tensions that occur in the interests among different constituencies but who nevertheless act primarily for the sake of shareholders

shareholder capitalism

an economic system of capitalism that holds that a company is the private property of its owners

shareholder value the value of profit that a corporation earns for employees, suppliers, and other creditors

shareholder value maximization

a doctrine that holds that a company's ultimate success can be measured by the extent to which shareholders' wealth and stock value are increased

stakeholder capitalism

an economic system of capitalism that holds that companies balance the interests of shareholders with those of other stakeholders, primarily employees but also suppliers, distributors, customers, and the community at large; holds the view that companies have a broader obligation than shareholder capitalism

stakeholder theory

a theory that corporate value cannot be maximized unless the corporation concerns itself with all its constituent stakeholders

strategy a method for guiding management's choices about where to compete--which customers to serve, with what products and services, and how to deliver those products to customers effectively and profitably

traditionalists directors who see themselves as being accountable only to shareholders

value maximization

the maximization of a corporation's common stock by increasing the wealth of that corporation's shareholders

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McTaggart, J., Kontes, P., & Mankins, M. (1994). The value imperative—Managing for superior shareholder value. New York: Free Press.

Sundaram, A. K., & Inkpen, A. C. (2004, May–June). The corporate objective revisited. Organization Science, 15(3), 350–363.

Licenses and Attributions

2.1 Who Owns the Corporation? The Legal Debate from Corporate Governance v. 1.0 was adapted by Saylor Academy and is available under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensor. UMUC has modified this work and it is available under the original license.

4 Prepare Strategy Implementation Plan

Balanced scorecard (BSC) Dziak, M. (2018). Balanced scorecard (BSC). Salem Press Encyclopedia. Retrieved from

http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct=true&db=ers&AN=100259212& site=eds-live&scope=site

A balanced scorecard (BSC) is a method of analyzing organizations and creating strategies to meet organizational goals. Balanced scorecards align an organization's goals and strategies with many performance measures and other factors such as customer satisfaction, financial performance, internal efficiency, and innovations. By setting targets and analyzing performance in these categories, organization leaders can assess whether the group is meeting its goals and make informed decisions about how to correct any problems within the organization.

First popularized in the early 1990s by Drs. Robert Kaplan and David Norton, balanced scorecards underwent a long process of refinement in the next few years. By the twenty- first century, the third major version of the balanced scorecard system became a major management tool in organizations around the world. Many kinds of organization, including businesses and industries, government offices, and nonprofit groups, employ balanced scorecard methods. History of Balanced Scorecards

In the early 1990s, Dr. Robert Kaplan of Harvard Business School and Dr. David Norton began studying and writing about various methods of measuring performance in businesses and other organizations. The researchers noted that many traditional methods were critically flawed and ineffective. Some approaches were too vague or subjective.

Others focused only on the financial bottom line and left out all the other details of business. Kaplan and Norton began searching for more effective alternatives. They developed a new method of performance measurement referred to as a balanced scorecard. The balance in the term refers to carefully weighed interactions between financial factors (traditionally favored in performance measurements) and non-financial factors (previously overlooked elements such as goals and strategies). The researchers claimed that balancing these elements would give leaders comprehensive insights into the successes and failures of their organizations.

A generic strategy map, showing "perspectives" across the page and "objectives" in linked boxes, is a documentation element associated with BSC. By Mrgs123 (Powerpoint) [Public domain], via Wikimedia Commons

https://saylordotorg.github.io/text_corporate-governance/s04-governance-and-accountability.html

https://creativecommons.org/licenses/by-nc-sa/3.0/

http://search.ebscohost.com.ezproxy.umuc.edu/login.aspx?direct=true&db=ers&AN=100259212&site=eds-live&scope=site

Although balanced scorecards became popular in the early 1990s, their roots reach back farther. Kaplan and Norton may have drawn inspiration from the self-assessment endeavors of several firms, such as Analog Devices, in the mid-1980s. Some elements of balanced scorecards may even be traceable to General Electric performance reports from the 1950s, or even to a French measurement system known as Tableau de Bord (Dashboard) whose elements date back to the early 1900s. Measures and Perspectives A balanced scorecard is based on an assortment of interrelated organizational elements. Scorecard users analyze these elements and set targets for how an organization will address each element to meet its overall goals. In time, performance reports can be matched against the targets to help analyze how well or poorly the organization is proceeding toward its goals. Among the most important factors on a balanced scorecard are the vision and strategy of the organization's leaders. The vision and strategy must take into account many other factors, including the knowledge of leaders and workers; the innovations used in training, research, and planning; the efficiency demonstrated in the internal workings of the group; the satisfaction of customers and other stakeholders; and the financial performance of the group. All of these factors are interconnected and must be addressed properly to ensure the overall success of the organization. The balanced scorecard also acknowledges a number of perspectives through which various data and measurements must be assessed. These perspectives help to ensure that the parts of an organization all work together to benefit people inside and outside the organization. Some important perspectives relate to the ongoing learning and training of organization members; how effectively an organization operates on a daily basis; whether the organization is financially feasible; and how customers and stakeholders perceive the organization and its work. Development and Uses The first balanced scorecard system, as proposed by Kaplan and Norton in the early 1990s, was a relatively simple framework for performance measurement. This framework used a limited variety of measuring criteria that was analyzed through four main perspectives: financial, customer, internal processes, and learning and growth. This early version, known later as the first generation, contained the essential elements of a balanced scorecard, but was still unrefined. Many users found the available measures and perspectives too narrow to fit a wide range of organizations and goals, or had difficulty choosing appropriate measures or targets. For these reasons, many early balanced scorecards were unsuccessful. In the mid-1990s, second generation balanced scorecards resolved some of the weaknesses of the initial version. The new scorecard design provided clearer objectives to help leaders choose the best targets and goals. It also included a Strategic Linkage Model (or Strategy Map) to assist leaders in choosing performance measures and justifying their choices. About 2000, a third generation appeared. It offers users greater ease of implementation and more focus on planning stages. Through improved planning, leaders may find better ways to choose and agree upon common goals and strategies, as well as set shared targets and measures. This generation of balanced scorecards has proven more successful than its predecessors and has become widely used. Advances in the balanced scorecard system have turned it from a passive academic analysis into a dynamic tool that helps leaders create and implement strategies in the daily life of an organization. Users report that balanced scorecards may help organizations form and carry out plans; align shared goals and

A balanced scorecard strategy map for a public-sector organization. By Parveson (Own work) [Public domain], via Wikimedia Commons

strategies within an organization; better maintain finances and customer relationships; and gather feedback on an organization's progress. In the twenty-first century, balanced scorecards have become one of the most influential management tools in the world. More than 50 percent of large firms in the United States, Europe, and Asia employ balanced scorecard methods. The system is also gaining popularity in many African and Middle Eastern nations. Criticism of Balanced Scorecards The balanced scorecard method has been criticized on several different points. The academic community has criticized Kaplan and Norton for not citing any earlier papers in their original publication. Meanwhile, the method itself has been criticized for not providing any conclusions, recommendations, or synthesis of the data; it is simply a list of metrics. Some critics have also pointed out that these metrics can be subjective and hard to quantify. Finally, balanced scorecards have been criticized for prioritizing the needs of financial stakeholders above all else, which is not necessarily a detriment to their use in traditional commercial organizations, but makes them a poor fit for nonprofits and other such organizations where the financial bottom line may not be the primary concern. Some companies, however, have used the framework of balanced scorecards while altering the categories to better fit their organization's needs.

Bibliography "Balanced Scorecard Basics." Balanced Scorecard Institute Strategy Management Group. Balanced

Scorecard Institute, a Strategy Management Group Company. Web. 26 Jan. 2015. balancedscorecard.org/Resources/About-the-Balanced-Scorecard

De Flander, Jeroen. "Six Crucial Facts about the Balanced Scorecard." QPR, 12 May 2016,

www.qpr.com/fi/node/684 Accessed 31 Oct. 2016. Kaplan, Robert S. and David P. Norton. "Using the Balanced Scorecard as a Strategic Management

System." Harvard Business Review. Harvard Business School Publishing. Jul. 2007. Web. 26 Jan. 2015. https://hbr.org/2007/07/using-the-balanced-scorecard-as-a-strategic-management- system

Wahyuningsih, Mariette. "How Apple Uses the Balanced Scorecard." Performance Magazine, 24 Mar.

2016, www.performancemagazine.org/apple-uses-balance-scorecard. "What Is a Balanced Scorecard?" 2GC Active Management. 2GC Limited. 2014. Web. 26 Jan. 2015.

http://web.archive.org/web/20140620093448/http://2gc.eu/files/2GC-FAQ1- What‗is‗a‗Balanced‗Scorecard‗140616.pdf

Wilhite, Tamara. "Balanced Scorecard Pros and Cons." ToughNickel, 23 Apr. 2016,

toughnickel.com/business/Balanced-Scorecard-Pros-and-Cons. Accessed 31 Oct. 2016.

5 Complete Your Final Business Plan

Please use this template

1. Title page

o states the client organization, selected country, the client's product, type of legal structure, and the alliance partner

o date submitted

o your name

o course title, course and section number

o professor’s name

2. Table of contents

o page numbers for each major section

3. Executive summary

o summarizes the results of your analysis and how you arrived at the recommendation

o belongs on a separate page from the introduction to the report

o Start your executive summary as follows: “Business Plan for [selected client organization] to enter [selected country] $(size of market in US Dollars) market for [product/service] through a [type of legal structure] with [selected alliance partner].”

4. Introduction (first page of report body)

o states the purpose of the report

o explains what the report will do

o introduces the industry, country, and client's name

5. Marketing strategy

o market analysis

o characteristics of potential customers in the country

o use of web networks and social media for e-marketing

6. Governance and CSR

7. Financial projections

8. Strategy implementation

9. Conclusion

o Summary of the recommendations and rationale

10. Reference

o APA-style reference page

11. Appendices

o if needed

Writing the Executive Summary An executive summary is a brief document typically directed at top-level managers who sometimes make decisions based upon a reading of this summary alone. As a result, the executive summary must be concise but comprehensive, meaning that it must present in summary form all major sections of the main report, such as:

• purpose

• problem

• methods of analyzing the problem

• results of analysis

• recommendations

To repeat, because of the critical role it plays, the executive summary is often the first and only part read by key decision makers. Therefore, it must be designed so that it can be read independently of the main document. Typically, figures and tables are not referenced in the executive summary. Uncommon terminology, symbols and acronyms are avoided. If the executive summary is sufficiently persuasive, the entire proposal will then be read in full. Therefore, your summary is key to the success of your proposal and should reflect these characteristics:

Perfect Miniaturization. The executive summary should contain the same sections in the same order as the full report.

Major Findings Only. Because it is a distilled version of the full report, the summaryshould include only the proposal's principal points and major evidence. Most charts, tables, and deep-level analysis are reserved for full proposal.

Proportional. The executive summary should typically be only 10% the length of the full proposal it distills. Therefore, the executive summary for a 10-page proposal would be 1 page or less.

Stand Alone. The summary should be written in a way that it can be read as a stand- alone document. Before submitting it, allow a test subject to read the summary. The subject should be able to give to you the basics of the full proposal from one reading of the summary.

Flawless. Like a job resume, even the most minor error of proofreading or grammar can spell rejection.

SAMPLE EXECUTIVE SUMMARY:

Executive Summary Purpose of Report The City of Savannah’s recycling program was designed and implemented in order to meet the city’s civic responsibilities and to comply with the State of

Subheadings The summary’s subheadings should reflect the report’s main divisions. Subheadings of

Georgia’s Comprehensive Solid Waste Management Act as it relates to aluminum, glass and plastic containers. The purpose of this report is to: Determine the degree of public awareness of the recycling program Suggest ways to increase citizen participation in the program Methods A questionnaire survey was conducted to assess the community’s current recyclying habits and to ascertain the degree of participation in city’s program. A total of 1,041 responses were analyzed. Because Savannah’s recyclying program collects only aluminim, glass and plastic containers, these were the only materials included in the survey. Findings and Conclusions A substantial majority (64%) of respondents rated recycling as “Important” or “Very Important.” A lesser percentage (38%) indicated that they currently recycle at work. An even smaller percentage (17%) particicpate in the city’s program. Two major reasons for their non-participation were highlighted: Not knowing the location of the city’s recycling centers Lack of convenient acccess to the recycling centers Results of this study indicate that citizens view recycling as important and will do so when convenient. However, locations of the city’s recycling centers are either unknown or too inconvenient for the program to achieve the desired level of participation. A substantial effort needs to be made to overcome these barriers. Recommendations for Increasing Participation Cost-effective, scalable recommendations include:

• Increasing promotion of the city’s recycling program through a coordinated campaign of PSAs.

• Relocating recycling bins and adding attractive signage

• Doubling the number of recycling bins

• Developing an incentive program for business participation

the executive summary should not be worded the same as those of the main report. Purpose Statement Provide purpose of the report in a concise format using present tense. Findings & Conclusions Results are reported in condensed form without reference to tables or appendices. Lists are used when possible. Recommendations Recommendations should also be in list form as much as possible.