Chapter 13- Corporate Governance and Ethics


Terms in this set (...)

notion is steering the corporation and raises 3 questions:
1. where will we steer the corporation
2. who will act as the pilot?
3. how will we steer, or what principles will guide the journey?
corporate governance
processes and structures that provide the ultimate decision-making authority for the firm. raises questions:
what is purpose of the corporation?
who is the corporation run for?
a legal structure for organizing where the organization is a distinct and separate entity form its owners, also known as shareholders
1. shareholders
2. stakeholders
2 entities in question when the question of who is the corporation run for? arises
individual proprietorship
a legal structure for organizing where the same person owns and runs the business. how most business was carried out for the first 100 years in U.S.
a legal structure for organizing where the owners of a business share ownership. The organization is not separate form its owners and usually includes professional service firms. many existed early on in the US business world
were uncommon in business world at first, then grew by offering investors a share of ownership in the company (stock).
1. shareholder primacy model
2. stakeholder model
2 sides within the argument of the purposes of the corporation
shareholder primacy model
belief that a corporation should be run, primarily or exclusively, for the benefit of its shareholder
stakeholder model
the belief that a corporation should be run for the benefit of its entire stakeholder set, with no group enjoying primacy in decision making
legal entity that is the business and can be thought of as a nexus of contracts between participating parties
nexus of contracts
a model of the corporation suggesting that the firm is the sum total of its contracts with different stakeholders
shareholder primacy model
believe that shareholders have special type of contract with the corporation b/c investors exchange money with corporation w/out a clearly specified payment in return and put money at risk but receive two property rights in return
1. right to claim residual earnings of the corporation
2. right to monitor the management team to ensure team is working in their best interest
2 property rights that are given to shareholders in exchange for putting their money "at risk" without a guaranteed return
property rights
the rights of owners to
1. claim the residual earning of the corporation, or the profits after all other stakeholders have been paid
2. monitor the management team to make sure that the team works in their best interests
shareholder primacy model
3 reasons supporting this view include:
1. shareholders are the legal owners of the corporation's assets. executive team is hired by board of directors (shareholder's oversight group) and hsould be legally and morally obligated to work for the owners of the corporation
2. financial capital is the most important input in making a business successful
3. in societies where businesses try to maximize welfare for a different group, they don't actually and end up causing real damage to economies, communities, and the natural environment
shareholder primacy model
critiques of this view include:
1. shareholders don't really own the corporation since shareholders own stock they can easily trade
2. shareholders have different objectives for investing in a firm (long-term investment like Warren Buffet vs. short-term like speculators wanting quick returns) and managers must make trade-offs to satisfy one group or other
3. failures like Enron serve as evidence that managing for shareholder value creates negative consequences for firms, investors, and society at large
stakeholder model/theory
idea that since the community grants the corporation the right to exist, the managers should run the corporation for the benefit of the community as a whole
any person or group that can affect or is affected by the activities of the corporation
primary stakeholder group
shareholders, customers, suppliers, employees, and local communities
secondary stakeholder group
competitors, national/global communities, special-interest groups
stakeholder model
2 reasons supporting this view include:
1. executives and managers spend most of their time interacting and managing demand and needs of different stakeholder groups (better understanding customers, negotiating wages, etc.)
2. stakeholder groups have the right to be considered in decisions that will have impact on them- intrinsic stakeholder model
intrinsic stakeholder model
belief that stakeholder groups have right to be considered in decisions that will have impact on them and serves as support for stakeholder model view
stakeholder model
2 critiques of this view include:
1. mangers need to focus on a single objective and making shareholder value the final decision criteria gives managers a clear direction for the tough tradeoffs they must make in the course of formulating and implementing strategy
2. dark side that stakeholders may make, and try to enforce, unreasonable and narrow-minded claims on the firm
audit their performance
what companies should do in relation to stakeholder groups on a regular basis
agency problem
shareholder's property rights being twofold: having claim on profits of the firm and right to monitor the performance of the managers of the corporation is recognized as way to overcome this problem
agency problem
consequence of the separation of ownership (shareholders/principals) and control (managers/agents) in the corporation. occur when the goals of principals differ from those of agents
owners of a resource or piece of property. in corporations, these are shareholders who want to maximize the return on the dollars they've put into the firm and want corporation managed in way that maximizes revenue and minimizes cost, leaving most profit
individuals or groups hired to administer the property or resources of principles. in corporations, these are managers and serve this role for shareholders.
want to maximize own utility which may entail maximizing the profit of the corporation or may mean engaging in behaviors that increase their income, leisure, power, status, or any thing they care about
principals and agents
two entities that have different goals
corporate raiders/takeover artists
group of investors who come in after stock price falls to make a public offer to purchase shares from unsatisfied investors at value below what they belief worth is in order to buy enough shares to take control of the company and implement their own strategy
tender offer
an offer by those hoping to control the corporation (corporate raiders/takeover artists) to purchase shares of dissatisfied investors
proxy fight
an attempt by dissatisfied investors or stakeholders to gain seats on the board of directors, or to influence corporate policy
agency problems
these destroy value in situations when:
1. the principals' investments are sunk and difficult to recover
2. the principals' ability to monitor and supervise the actions and decisions fo the agents (managers of corp) is limited
1. board of directors
2. compensation and incentives
2 tools shareholders/principals use to monitor their managers/agents
board of directors
group of individuals who monitor the executive team of the corporation and ensure that those executives are acting in the best interest of the shareholders. US corporate law requires that all publicly held corporations have them
fiduciary duty
the legal obligation of an agent (directors and executives) to act in the best interests of the principal, or owner (shareholders). includes 1. duty of loyalty to work for the optimal good of the owners
2. the duty of care to not take undue risk that would jeopardize the principle
inside directors
executives or managers working inside the company who also hold seats on the board of directors
outside directors
members of the board of directors not employed by the corporation in any other role
other constituency law
laws that allow the board of directors to freely consider the needs of stakeholders other than shareholders when making critical strategic decisions for the firm
way to align agent's and principal's incentives to mitigate agency problem. includes giving manager/employees incentive further than salary when the company makes a profit
pay for performance
variable or contingent compensation that focuses managers on key variables, designed to align their interests with the shareholders
1. bonuses
2. stock-based compensation
2 types of pay for performance principals employe
additional compensation paid to executives, managers and employees when they meet certain performance objectives. can be discretionary and given for any reason principal desires or nondiscretionary and tied to specific performance measure
stock-based compensation
payment to organizational members in the form of options or grants or stock/shares to align incentives. aligns interests of executives and employees with those of shareholders . turns managers into shareholders
stock option
gives managers the right to buy a certain number of the corporation's shares at a specified future date for a specified price per share
stock grants
a gift or grant of stock given to organizational members, primarily executives. usually comes with restrictions that prohibit the sale of those shares for a specified period of time
agency problem
has caused the nature of executive compensation to change since its discovery and bulk of CEO's compensation now comes from stock compensation
board of directors
body designated to look after the interests of shareholders and/or stakeholders and monitor managers
ethical values
values that define for an individual, group, or society things that are morally right or wrong
1. utilitarianism
2. Rights and Duties
3. Human Freedom
4. ethic of care
4 arguments in debate about what constitutes ethical behavior
debate about what constitutes ethical behavior that
believes a good society creates the greatest good for the greatest number of people. involves calculating what's right by looking at the benefits created by the action and then subtracting out the costs (i.e. the utility of the action)
moral philosophy that provides the foundation for economics
rights and duties
debate about what constitutes ethical behavior that
believes a good society ensures a basic set of rights for its citizens. belief that people have fundamental rights that cannot be violated or traded away an duties they cannot ignore which may conflict with what is of greatest utility. views people as ends in themselves and views it immoral to use people in any way as a means to an end. puts duty on companies to provide full and fair information about potential risks of products
human freedom
debate about what constitutes ethical behavior that
a good society creates the most freedom for people to act as they please. aligned with a promotion of limited government and efficient markets. behavior which promotes human freedom of expression and development
ethic of care
debate about what constitutes ethical behavior that
in a good society, individuals care for each other, exhibit empathy with others, and focus on meaningful relationships. believes concerns for utility, rights, duties, and human freedom are all worth aims. but in pursuit of these goals, we need to be concerned about other people, empathetic to their plight, and mindful of the impact of exclusion. views strategies that marginalize groups or threaten relationships as immoral
1. caring for and avoiding harm to individuals
2. concern about fairness and condemnation of cheating
3. recognition of things as sacred or degraded
4. praise of liberty and condemnation of oppression
4 ethical dimensions that lay the foundation for ethical behavior in businesses
caring for and avoiding harm to individuals
ethical dimensions that includes animals and the natural environment in its consideration. puts requirements on companies to avoid undue harm to environment
concern about fairness and the condemnation of cheating
ethical dimensions where
fairness for some groups means equality and means equity or merit for others. comes up with issue of insider trading
recognition of things as sacred or degraded
ethical dimensions that deals with
many cultures revering sites as holy places or venerate people who exhibit particular virtuous behavior. or groups who view actions or elements as degraded, impure, or polluted. must be considered when companies enter markets where religious values and laws are strong
praise of liberty and condemnation of oppression
ethical dimensions that promotes idea that
products, services, or policies that promote human development, flourishing, freedom, and growth are praise-worth, while those that oppress people or cultures face condemnation
pattern of behaviors and beliefs that are considered appropriate and correct for organizational members. "how things are done in any organization"
acts like a third governance mechanism b/c it pilots the organization by helping each individual employee or manager decide what to do
neither good or bad but will influence how people perceive and react to ethical challenges they face as they do their jobs
1. tells us the correct way to perceive the world around us
2. provides us with a set of reasons that justify our actions
2 ways that culture influences how individuals will respond to ethical challenges
mission statement
a formal declaration of a company's shared/core values, business objectives, and ethical aspirations. an effective one clarifies a company's stakeholders and how they should be treated
1. shared values
2. style
2 organizational elements within the 7S model that are the core of a company's culture
code of ethics
companies should make a formal version of this a part of their shared values (along with a mission statement)
organizational element that is the most important way in which abstract shared values become real to members of the organization
tone at the top
what matters in organization and provides the most important cue for employees to follow as they try to figure out how they should act at work
provides the final question of corporate governance:
what values will guide the journey?
successful corporate governance
when this exists within a company, helps ensure that a company knows who its key stakeholders or primary beneficiaries are, and then works to create value for them
board of directors
good governance relies on having this to guide decision making and oversee the executive team
may be the most power, yet subtle, form of corporate governance