Corporate Performance, Governance, and Business Ethics


Terms in this set (...)

Compare interests of key stakeholder groups and explain the purpose of a stakeholder impact analysis
Stakeholders are groups with an interest or claim in a company.

Key internal stakeholders:
1. Stockholders are a unique group of stakeholders, and arguably the most important because they supply the risk capital necessary for business. They seek immediate return in the form of dividends and growth to supply increasing dividends and stock price.
2. Employees look to the company for compensation in exchange for their labor and skills. They seek immediate compensation as well stability and growth in compensation.
3. Managers are also employees but they enjoy a substantial, asymmetric information advantage that can lead to significant problems in the principal agent relationship.
4. Members of the Board of Directors are supposed to monitor and evaluate the performance of the senior managers of the company and look out for the best interests of the shareholders. Directors also enjoy asymmetric information advantage and risk becoming too close to managers, which can lead to favoring the interests of the managers they should be supervising.

Key external stakeholders:
1. Customers buy company products, prefer a variety of products, and seek a stable, dependable relationship with the company they are buying these products from. But they also seek lower prices. The desire for an ongoing relationship is consistent with the company's desire for profits but the lower price goal is not. If dissatisfied, the customers can stop buying. Customers are generally not averse to the company earning a profit, but these customers also do not want to overpay.
2. Suppliers also seek stable, long-term relationships, but also want higher prices from the company, which will reduce company profits.
3. Creditors are essentially another supplier, but one which supplies debt capital and is paid in interest. Creditors value stability or improvement in the company's credit quality.
4. Unions are viewed as an external stakeholder representing internal employees. They generally seek higher wages and compensation for their members, with potentially negative implications for short run profit and long-run survivability for the company.
5. Governments provide rules and regulation and they expect compliance.
6. Local communities provide infrastructure and expect good citizenship.
7. The general public also provides national infrastructure to the firm in exchange for an increase quality of life due to the existence of the firm.

The purpose of the stakeholder impact analysis (SIA) is to force the company to identify which stakeholder groups are most critical to the company and meet the needs of the most important stakeholders. The SIA should:
1. Identify the relevant stakeholders.
2. Identify the interests and concerns of each group.
3. Identify the demands of each group on the company.
4. Prioritize the importance of various stakeholders to the company.
5. Identify the strategic challenges these conflicting demands pose.

Stakeholders are not always in conflict. Many stakeholders are also shareholders. The general public can be shareholders, as are many employees. Employee stock ownership programs in the US have increased the ownership by employees in their employer's stock. Even when there is conflict between stakeholders, in the long run, the twin strategies of maximizing ROIC and growth maximizes the funds available for division among the stakeholders. While not minimizing the real conflicts among stakeholders, all are served by a dual focus on ROIC and growth.
Discuss problems that can arise in principal-agent relationships and mechanisms that may mitigate such problems
The principal-agent relationship PAR arises when one group delegates decision-making or control to another group. PAR can create problems because the group receiving the power (the agent) generally has an asymmetric information advantage over the group making the delegation (the principal). The PAR problem arises if the agent uses the information for their own interests to the detriment of the interests of the principal.
In corporate form of business, shareholders (principles) delegate authority to run the business to executive officers of the company (agents). The board of directors is intended to oversee the executives and look out for the interests of the shareholders.
The PAR problem between shareholders and executives compounds when senior executive officers delegate authority to additional officers who report to them. At each level of delegation, additional layers of information asymmetry occur with the potential for more PAR problems. In each case, the agent has incentives to exploit the information for improper personal gain.

Controlling PAR Problems
Principles should develop corporate governance procedures that:
1. Guide the behavior of agents by setting goals and principles of behavior.
2. Reduce the asymmetry of information.
3. Lead to the removal of agents who misbehave and violate ethical principles.
Discuss roots of unethical behavior and how managers might ensure that ethical issues are considered in business decision making
Unethical behavior arises from:
1. Agents whose personal ethics are flawed. Such agents are more likely to violate business ethics. Strong personal ethics are likely to lead to good business ethics.
2. A failure to realize that an issue may lead to an ethics violation. Asking whether each decision has ethical implications will encourage business ethics.
3. A culture focused only on profit and growth. Asking if it is ethical and profitable will encourage ethical business practices.
4. A flawed business culture where top management sets unrealistic goals leads to ethics violations. Management must communicate that ethical behavior is expected.
5. Unethical leadership that sets the tone for acceptable behavior. Ethical leadership formulates and communicates expectations that include sound ethical behavior.

Various stakeholders have rights that the company must respect. Stockholders are entitled to timely, accurate reporting, as are governments. Suppliers, including employees, should expect contractual obligations to be met. Society can expect adherence to environmental and other regulations. Others argue that business ethics must extend beyond these basics to encompass noblesse oblige. This term encompasses the notion that those who benefit most from society, in this case successful businesses, have an obligation to make contributions back to society.
Compare the Friedman doctrine, Utilitarianism, Kantian Ethics, and Rights and Justice Theories as approaches to ethical decision making
Through the Friedman Doctrine, Milton Friedman has added to the modern debate on business ethics. He narrowly addresses the social responsibility of business (not business ethics) and concludes that the only social responsibility of a business is to increase profits "within the rules of the game," meaning through "open and fair competition without deception or fraud". While Friedman wanted to avoid getting into business ethics, critics have argued that the inclusion of a caveat to follow rules of the game moves the doctrine into the realm of business ethics. Critics have pointed out that when law, regulation, and the rules of the game are poorly defined ethical behavior entails a lot more than making profits.

Utilitarianism argues that business must weigh the consequences to society of each of their actions and seek to produce the highest good for the largest number of people. Utilitarianism entails maximization of positive (good) outcomes and minimization of negative (bad) outcomes such that collective utility is maximized. Modern cost-benefit analysis is an implication of this principal. The flaws of this philosophy include that many costs and benefits of actions are difficult to measure. In addition, utilitarianism fails to consider the injustice that occurs when the greatest good for the many could come at the expense of a smaller subgroup.

Kantian ethics argue that people are different from other factors of production; they are more than just an economic input and deserve dignity and respect. This argument is widely accepted but not sufficient to be a complete philosophy.

Rights theories argue that all individuals have fundamental rights and privileges, and the greatest good of utilitarianism cannot come in violation of the rights of others. Further, managers must have a moral compass (a personal sense of right and wrong) and recognize that their rights impose an obligation to protect the rights of others. Even if an action such as sweatshop labor is legal, it may violate fundamental rights to be unethical.

Justice theories focus on a just distribution of economic output. John Rawls argued that justice is met if all participants would agree the rules are fair if the results would be acceptable when decided under "veil of ignorance." In other words, fair rules are decided ahead of time by participants who don't know their own particular individual characteristics.
Justice theories begin with political liberty, encompassing the right of free speech and to vote, and extend to issues of society's division of wealth and income. They recognize that unequal divisions of wealth and income may be acceptable under the differencing principal, which holds the unequal division must benefit the least advantage members of society. Consider the earlier discussion of production outsourced independent suppliers. Substandard conditions for the workers of those suppliers can be argued as being just, if it is an improvement in those workers' standard of living. The veil of ignorance would be an appropriate test of whether the actions are ethical. Under the standard it is difficult to conceive that members of society would argue in favor of displacing existing domestic jobs into foreign jobs with dangerous and toxic conditions knowing they would not want to work in those jobs themselves.

The veil of ignorance does appear to be a useful tool for managers who must make ethical decisions requiring difficult trade-offs.