CORPORATE PERFORMANCE, GOVERNANCE, AND BUSINESS ETHICS Chapter 11 CORPORATE PERFORMANCE, GOVERNANCE, AND BUSINESS ETHICS

Learning Objectives Understand relationship between stakeholder management & corporate performance Explain why maximizing returns to stockholders often viewed as primary goal Describe governance mechanisms to align interest of stockholders & management Explain why governance methods don’t always work Identify ethical issues that arise in business & causes of unethical behavior Identify what managers do to improve the ethical climate and ensure decisions don’t violate ethical principles 11-2 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

“There are worse things than war; and all of them come with defeat.” -Ernest Hemingway 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Stakeholders and Corporate Performance Stakeholders: Individuals/groups with an interest/claim/or stake in company Internal (e.g., employees, stockholders) External (e.g., customers, creditors, governments) Company must consider stakeholder claims in developing & implementing strategy 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Stakeholders and the Enterprise Figure 11.1 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Stakeholder Impact Analysis Identify: Stakeholders Stakeholders’ interests/concerns Claims stakeholders likely to make Stakeholders most important from organization’s perspective Resulting strategic challenges 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Unique Role of Stockholders Company’s legal owners and providers of risk capital, a major source of capital to operate a business. Maximizing long-run profitability & profit growth is route to maximizing returns to shareholders, as well as satisfying claims of most other stakeholder groups. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Profitability, Profit Growth, and Stakeholder Claims To grow profits, companies must be doing one or more of the following: Participating in growing market Taking market share away from competitors Consolidating industry via horizontal integration Developing new markets Stockholders receive their returns as: Dividend payments Capital appreciation in market value of shares 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Agency Theory Agency relationship - whenever one party delegates decision-making authority or control over resources to another. Principal-Agent Relationships Principal Agent Agency Problem: Agents & principals may have different goals Agents goals not in best interests of principals Agents may take advantage of information asymmetries to maximize interests at expense of principals Difficult for principals to measure performance Authority 11 -9 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Tradeoff Between Profitability & Revenue Growth Rates Maximize long-run shareholder returns by seeking right balance between company growth . . . profitability and profit growth. Figure 11.2 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Challenge for Principals Confronted with agency problems: Shape behavior of agents to act in accordance with goals set by principals Reduce information asymmetry between agents & principals Develop mechanisms for removing agents not acting in accordance with goals of principals Principals try to deal with these challenges through a series of governance mechanisms. 11 -11 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Governance Mechanisms Governance mechanisms limit agency problem by aligning incentives between agents & principals - monitor/control. Mechanisms include: Board of Directors Stock-Based Compensation Financial Statements & Auditors Takeover Constraint 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Governance Mechanisms Inside Company Internal agency problems can be reduced by: Strategic Control Systems Establish standards for performance Create systems- measure & monitor performance Compare actual against targets Evaluate results- take corrective actions Employee Incentives Stock options and ownership plans Compensation tied to attainment of superior efficiency, quality, innovation, and responsiveness to customers 11 -13 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Balanced Scorecard Approach Figure 11.3 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Ethics- accepted principles of right/wrong governing conduct ... Ethics and Strategy Ethics- accepted principles of right/wrong governing conduct ... Ethical dilemmas: No agreement over accepted principles None of available alternatives seem acceptable Many accepted principles codified in laws: Tort – product liability Contract– contracts/breaches of contracts Intellectual property– protection of intellectual property Antitrust law – competitive behavior Securities law – issuing/selling securities Behaving ethically=beyond staying within law 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

An ethical strategy is one that does not violate the accepted principles.

Ethical Issues in Strategy Self-dealing Information manipulation Anticompetitive behavior Opportunistic exploitation Substandard working conditions Environmental degradation Corruption 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Roots of Unethical Behavior Why do some managers behave unethically? Personal ethics code- profound influence on behavior Don’t realize behaving unethically- failing to ask right questions Organization culture- doesn’t emphasize ethics; only considers economic consequences Unrealistic goals- encourage/legitimize unethical behavior Unethical leadership- encourages/tolerates behavior that is ethically suspect 11 -18 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Behaving Ethically To make sure ethical issues are considered in business decisions, managers should: Hire/promote people with sense of personal ethics. Place high value on ethical behavior and ingrain in the organizational culture. Ensure leaders articulate and act in ethical manner. Require that ethics be part of decision-making process. Use ethics officers. Enforce strong corporate governance processes. Act with moral courage- encourage others to do so. 11 -19 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

“Conscience is the inner voice that warns us somebody may be looking.” - H. L. Mencken “A company’s ethical conduct is something like a big flywheel. It might have a lot of momentum, but it will eventually slow down and stop unless you add energy.” - William Adams 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.