1. Governance & the International Firm 325325 UniMelb 1 Governance & International Firm Week 1: What is business? Shareholder vs Stakeholder Model Peter Verhezen verhezen@unimelb.edu.au peter@verhezen.net

2. Governance & the International Firm 325325 UniMelb 2 Key considerations n Given my assessment of “facts” - i.e. real situation - what should I do or how should I react (Values)? Descriptive or empirical vs prescriptive or normative n Major factors in Good Governance & Responsible Corporate Behavior: –Social and Organizational responsibility –Personal Integrity & “morality” – Trust(worthiness) Moral competence –Bottom line thinking versus(?) “social” (ethical) thinking n Ethics enquires about the ‘right conduct in one’s life’

3. Governance & the International Firm 325325 UniMelb 3 Stakeholder versus Shareholder theory

4. Governance & the International Firm 325325 UniMelb 4 Shareholder vs Stakeholder theory n Different perspectives n Shareholder Model: max shareholder value n Stakeholder Model: the importance of Social Contract, not just a business contract

5. Governance & the International Firm 325325 UniMelb 5 Shareholder vs Stakeholder theory n Stakeholder Model –Different stakeholders affecting the decisions of firm –Not all stakeholder may have an equal importance –Economic-Social-Environmental concerns are taken into account

6. Governance & the International Firm 325325 UniMelb 6 Shareholder vs Stakeholder theory n Shareholder Model / Governance in a strict sense: –Audit –Remuneration of Top Management –Risk assessment n Stakeholder Model / Governance in a broad sense: –OECD def: Governance is the system by which business corporations are directed and controlled. It specifies the distribution of rights and responsibilities among different participants (or stakeholders) of the corporation and spells out the rules and procedures for making decisions on corporate affairs. By doing so, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performances

7. Governance & the International Firm 325325 UniMelb 7 Shareholder versus Stakeholder theory n Friedman’s Shareholder’s theory n Freeman’s Stakeholder’s theory

8. Governance & the International Firm 325325 UniMelb 8 Stakeholder Model: Corporate and personal Responsibility

9. Governance & the International Firm 325325 UniMelb 9 Managers and communication n “There is no simple algorithm or formula to follow in making ethical judgments. Judging with integrity often requires using careful analysis and reasoning, as well as relying on one’s basic intuitions. A company that acts with integrity takes into account consequences, rights and justice, weighs them in cases of conflict; and ultimately acts in accord with its best lights.” n Richard T. DE GEORGE

10. Governance & the International Firm 325325 UniMelb 10 The essence of Governance (broad sense) is related to Business Ethics n An ethical manager lives and acts according to his/her own and corporate values n Managing with integrity n Examples of Business missions

11. Governance & the International Firm 325325 UniMelb 11 Overview Concepts in Governance (broad sense) n Individual conduct n Functional operations n Organizational policy and strategy n Organizational constitution n Economic systems without personal commitment and integrity, no socio-ethical and environmental policy can be achieved

12. Governance & the International Firm 325325 UniMelb 12 Some Perspectives in BE – Some perspectives of Reflective thinking in BE: n Utilitarianism/ConsequentialismGoal-oriented n ContractarianismRights-oriented n Deontology/CommunitarismDuty-oriented n Virtuous Corporate behaviorMoral character n Pragmatic Process EthicsMoral experiences

13. Governance & the International Firm 325325 UniMelb 13 An Ethics of responsibility

14. Governance & the International Firm 325325 UniMelb 14 Ethics of Responsibility n Peter DRUCKER’s definition on BE: “primum non nocere” (not knowingly to harm) n Laura NASH’s practical view on BE: –12 questions for examining the ethics of a Business Decision

15. Governance & the International Firm 325325 UniMelb 15 Ethics of Responsibility Laura NASH’s Laura NASH’s 12 analytical questions Business Decision in BE 1. 1. Have you defined the problem accurately? 2. 2. How would you define the problem if you stood on the other side of the fence 3. 3. How did this situation occur in the first place? 4. 4. To whom and to what do you give your loyalty as a person and as a member of the corporation? 5. 5. What is your intention in making decision? 6. 6. How does this intention compare with the probable results

16. Governance & the International Firm 325325 UniMelb 16 Ethics of Responsibility Laura NASH’s Laura NASH’s 12 analytical questions Business Decision in BE 7. Whom could your decision or action injure? 8. Can you discuss the problem with the affected parties before you make your decision? 9. Are you confident that your position will be as valid over a long period of time as it seems now? 10. Could you disclose without qualm your decision or action to your boss, your CEO, the Board of Directors, your family, society as a whole? 11. What is the symbolic potential of your action if understood? If misunderstood? 12. Under what conditions would you allow exceptions to your stand?

17. Governance & the International Firm 325325 UniMelb 17 Corporate and personal Responsibility n Multiple stakeholder relationships and responsibilities n Why managing with ‘responsibility’? –Because it reduces risks (i.e. no moral legitimation) –Because it is profitable –Because it is correct to do so –Because we have to (according to law or through pressure) n Formal versus Informal (often tacit or unspoken) rules

18. Governance & the International Firm 325325 UniMelb 18 Integrity and loyalty

19. Governance & the International Firm 325325 UniMelb 19 Corporate and personal Responsibility – Integrity – Loyalty n Integrity requires 3 steps (S. CARTER): 1.Discerning what is right and what is wrong (= moral reflection); 2.Acting on what you have discerned, even at personal cost (keeping commitments and being steadfast); 3.Saying openly that you are acting on your understanding of right and wrong (unashamed of doing the right).

20. Governance & the International Firm 325325 UniMelb 20 Corporate and personal Responsibility – Integrity – Loyalty n Integrity does not tell us what is right or wrong. The notion of ‘Conscience’ proposes that the knowledge of ‘right and wrong’ is there waiting to be discovered; either placed by God in Creation, or placed a good society (as ARISTOTLE suggested). A certain aspect of “passivity” is here assumed… n Part of the concern is that we really have no adequate account (yet) of how societal mores change.

21. Governance & the International Firm 325325 UniMelb 21 Corporate and personal Responsibility – Integrity – Loyalty n Warren BENNIS: “Integrity is the basis of trust which is not as much an ingredient of leadership as it is a product”. A reputation for integrity, which one must possess in order to be trusted by colleagues, must be earned. n The test of integrity comes only when doing the right entails a significant cost. (A. CAMUS: “the struggle alone toward the heights is enough to fill man’s soul.” n The proper inquiry is not only What is right? But Can I do what is right?

22. Governance & the International Firm 325325 UniMelb 22 Corporate and personal Responsibility – Integrity – Loyalty n Can Integrity be legislated? Freedom of the individual? (ETZIONI:”in order not to trivialize its moral voice, a community must focus on serious, recent, and especially repeat infractions –which are all too common – rather than taint everyone in sight with a broad brush.”) n R. RORTY: Integrity does not demand of us that we suspend judgment on our different interpretations of morality or of history. Integrity simply demands that we take the time for genuine reflection to be certain that the one we are pressing is right.

23. Governance & the International Firm 325325 UniMelb 23 “Why good managers make bad ethical choices?” n 4 rationalizations for questionable conduct: –Believing that the activity is not really illegal or immoral –It is in the individual’s or corporation’s best interest –It will never be found out –Because it helps the company, their leaders will condone it