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CHAPTER 11

CORPORATE PERFORMANCE, GOVERNANCE, AND BUSINESS ETHICS

LEARNING OBJECTIVES

§  Understand the rela:onship between stakeholder management and corporate performance

§  Explain why maximizing returns to stockholders is oIen viewed as the preeminent goal in many corpora:ons

§  Describe the various governance mechanisms that are used to align the interests of stockholders and managers

LEARNING OBJECTIVES

§  Explain why these governance mechanisms do not always work as intended

§  Iden:fy the main ethical issues that arise in business and the causes of unethical behavior

§  Iden:fy what managers can do to improve the ethical climate of their organiza:on, and to make sure that business decisions do not violate good ethical principles

FIGURE 11.1 -‐ STAKEHOLDERS AND THE ENTERPRISE

STEPS IN STAKEHOLDER IMPACT ANALYSIS §  Iden:fy stakeholders along with their interests and concerns

§  Iden:fy the probable claims of stakeholders on the organiza:on

§  Iden:fy important stakeholders from the organiza:on’s perspec:ve

§  Iden:fy the resul:ng strategic challenges

PROFITABILITY, PROFIT GROWTH, AND STAKEHOLDER CLAIMS §  Stockholders receive a return on investment from dividend payments and capital apprecia:on in the market value of a share

§  Ways to grow profits §  Par:cipa:ng in a market that is growing §  Taking market share from compe:tors §  Consolida:ng the industry through horizontal integra:on

§  Development of new markets through interna:onal expansion, ver:cal integra:on, or diversifica:on

AGENCY THEORY

§  Business rela:onship problems when decision-‐ making authority is delegated from one person to another

§  Informa(on asymmetry: Agent has more informa:on about the resources being managed than the principal

§  On-‐the-‐job consump(on: Describes the behavior of senior management’s use of company funds to acquire perks

§  Empire building -‐ Buying new businesses to increase the size of the company through diversifica:on

FIGURE 11.2 -‐ THE TRADEOFF BETWEEN PROFITABILITY AND REVENUE GROWTH RATES

CHALLENGES FOR PRINCIPALS

§  Shaping the agents’ behavior to act in accordance with the goals set

§  Reducing the informa:on asymmetry §  Developing mechanisms for removing agents who do not act in accordance with the goals

BOARD OF DIRECTORS

§  Inside directors: Senior employees of the company

§  Outside directors: Not full-‐:me employees of the company §  Provide objec:vity to the monitoring and evalua:on of processes

STOCK-‐BASED COMPENSATION

§  Stock op(ons: Right to purchase company stock at a predetermined price at some point in the future §  Strike price -‐ Stock’s trading price when the op:on was originally granted

§  Mo:vate managers to adopt strategies that increase the share price of the company

§  Has become increasingly controversial §  Aligns management and stockholder interests

FINANCIAL STATEMENTS AND AUDITORS §  Quarterly and annual reports of publicly traded companies are filed with the SEC §  To give accurate informa:on about the way the agents run the company

§  SEC requires that the accounts be audited by an independent and accredited accoun:ng firm §  To make sure managers do not misrepresent the financial informa:on

TAKEOVER CONSTRAINT

§  Risk of being acquired by another company §  Corporate raiders -‐ Purchase large blocks of shares in companies that appear to be pursuing strategies inconsistent with maximizing stockholder wealth §  Greenmail: Pushing companies to either change their strategy to benefit stockholders, or charging a premium for the stocks when the company wants to buy them back

GOVERNANCE MECHANISMS INSIDE A COMPANY §  Strategic control systems -‐ Formal target-‐se^ng, measurement, and feedback systems

§  Employee incen:ves -‐ Mo:vate employees to work toward goals central to maximizing long-‐ term profitability

FIGURE 11.3 -‐ A BALANCED SCORECARD APPROACH

ETHICS AND STRATEGY

•  Accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization

Ethics

•  Accepted principles of right or wrong governing the conduct of businesspeople

Business ethics

•  Situations where there is no agreement over exactly what the accepted principles of right and wrong are

Ethical dilemmas

•  Responsibility of people of high birth to give something back to the society that made their success possible

Noblesse oblige

UNETHICAL BEHAVIOR ARISING FROM AGENCY PROBLEMS

Self-dealing Information manipulation Anticompetitive

behavior

Opportunistic exploitation

Substandard working

conditions Environmental degradation

Corruption

ROOTS OF UNETHICAL BEHAVIOR

§  Personal ethics: Generally accepted principles of right and wrong governing the conduct of individuals

§  Failing to ask oneself if a decision is ethical §  Some organiza:onal cultures de-‐emphasize business ethics

§  Pressure to meet unrealis:c performance goals §  Unethical leadership

BEHAVING ETHICALLY

§  Favor hiring and promo:on with a well-‐grounded sense of personal ethics

§  Build an organiza:onal culture that places a high value on ethical behavior §  Code of ethics: Formal statement of the ethical priori:es to which a business adheres

§  Ensure that leaders prac:ce and preach ethical behavior

BEHAVING ETHICALLY

§  Ensure people consider the ethical dimension of business decisions

§  Use ethics officers §  Put strong governance processes in place §  Act with moral courage