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

2. 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.

3. “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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

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

17. 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.

18. 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.

19. 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.

20. “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.