July 12, 2022

After completing the text readings, find a stock owned organization whose web site mentions corporate governance (search ?corporate governance at _XYZ_?). How does the organiza

Directions

After completing the text readings, find a stock owned organization whose web site mentions corporate governance (search “corporate governance at _XYZ_”).

How does the organization appear to ensure that the organization’s goals are aligned with the those of the shareholders? Are stakeholders (employees, vendors, customers, communities) also addressed? Do you think the organization is doing a poor, fair or excellent job of balancing the interests of shareholders and stakeholders?

Support your opinions with information from the organization’s web site or articles about their structure and governance.

Unit 6: Discussion 1

Directions

After completing the text readings, find a stock owned organization whose web site mentions corporate governance (search “corporate governance at _XYZ_”).

Support your opinions with information from the organization’s web site or articles about their structure and governance.

Strategic Management

Jeff Dyer

Third Edition

Chapter 13

Corporate Governance and Ethics

Professor’s Goals for this Lecture

There are many types of problems that can be solved for a company by doing a cost analysis. A cost analysis can be used to solve problems as diverse as marketing (e.g., how much to spend to acquire additional customers) or HR (how much labor costs go down per unit with increases in volume). The principle tools to be learned in this chapter are designed to help the student examine the relationship between a company’s size (measured in volumes produced or market share) and cost per unit. This is primarily reinforced by teaching students how to create a scale/experience curve (both done in the same way with “cost per unit” on the “Y” axis but the scale curve uses volume for a given year on the “X” axis whereas the experience curve uses cumulative volume on the “X” axis. The students will have the opportunity to examine the relationship between scale/experience in the following assignments:

– the homework assignment involving calculating an experience curve in semiconductors

– Fry’s Credit Card Mini-case (in lecture); considers the relationship between total number of subscribers (X axis) and cost per subscriber (Y axis)

– the Southwest Case (after lecture); considers the relationship between total passengers flown (or market share) and performance (profitability) in the industry

Corporate Governance

Gubernare—a Latin word meaning to steer

3 questions:

Where to steer?

Who steers?

How to steer?

I’m going to spend just a few minutes here. I like the notion of steering the ship because it creates a unifying image for things that may seem quite disconnected. An important lesson about ethics—and one reason for talking about it in this context—is that many ethical problems arise in business when “ethics” is seen as something disconnected from the regular operations of the business.

That’s like when employees say: “I just spend a day doing ethics training, but now I’m ‘back to my real work.’”

The Purposes of the Corporation

Corporate Governance- The processes and structures that provide the ultimate decision making authority for the firm

Corporation- A legal structure for organizing where the organization is a distinct and separate entity from its owners

Individual Proprietorship- A legal structure for organizing where the same person owns and runs the business.

Partnerships- A legal structure for organizing where the owners of a business share ownership

Where to Steer? The Purposes of the Corporation

Shareholder Primacy model

The residual claimant, at risk

Legal owners

Financial capital the critical resource

A single objective to maximize

I’m going to spend between 15-20 minutes on the shareholder vs. stakeholder debate.

I like to frame the debate about the purposes of the corporation in terms of its history. Students need to understand that the debate about whether business is good or evil isn’t new; the criticisms they read about business activity and its negative effects, or articles and reports that extol the virtues of the market and business are all variations on a theme that goes back to the earliest days of the Industrial Revolution.

Berle’s position embodies the classic, Chicago-School of economics: Corporations are legal persons owned—in a very real and legal sense—by their shareholders. Shareholders have the most at risk because they get paid last; all other stakeholders have contracted with the firm for a fixed return (suppliers for contracted costs, employees for wages, etc.,). Shareholders have agreed to put up their money, the most critical resource the firm needs, without a guaranteed return, but they take that risk because of the potential upside that “what’s left” after all other stakeholders have been paid (the profit of the business) might be quite large.

In fact, they will only be willing to take such a risk when the corporation takes as its primary objective the maximization of their return.

Shareholder Primacy Model

Shareholder Primacy-the belief that a corporation should be run, primarily or exclusively, for the benefit of its shareholders.

Nexus Of Contracts- A model of the corporation suggesting that the firm is the sum total of its contracts with different stakeholders.

Property Rights- The rights of owners to: (1) claim the residual earnings of the corporation, or the profits after all other stakeholders have been paid, and/or (2) monitor the management team to make sure that the team works in their best interests.

Where to Steer? The purposes of the corporation

The Stakeholder primacy model

Stakeholders have rights to voice

Describes what managers actually do

Stakeholders can assist in creating competitive advantage

Merrick Dodd, another attorney, took the opposite view. He believed agreed with Dodd that corporations were legal entities with obligations; however, he argued that the corporation could not exist without a charter from the state, and therefore the corporation’s first duty was to provide for the good of the community.

Dodd’s view laid the foundation for a normative stakeholder view, that the corporation has legal and moral obligations to work for the benefit of all its stakeholders—customers have a right to products that do no harm, employees have a right to fair wages and safe working conditions, etc.

The stakeholder view, represented by Ed Freeman in his classic 1984 book, argues that, if we look at what managers actually do, we find that they are constantly making decisions about how to satisfy the needs and demands of different stakeholders. This is the descriptive stakeholder model: since managers spend most of their time managing stakeholders, they ought to learn how to do it successfully.

A final version of the stakeholder view is instrumental and argues that firms that learn how to effectively serve their stakeholders create competitive advantages. Firms that manage customers well tend to build a durable type of brand equity, or in terms of employees, greater loyalty and productivity.

After introducing the Berle and Dodd positions, I’ll often invite students to weigh in on this debate. I’ve always had fairly lively debates as there will be a number of students on both sides of the issue.

I don’t think there is any resolution; however, if we look at how business works today versus a generation ago, there is clearly more pressure on businesses to prove that they take the legitimate concerns of their stakeholders into account.

Stakeholder Model

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.

Stakeholder- Any person or group that can affect or is affected by the activities of the corporation.

Mapping Stakeholder Influence page 262.

A great place for Cases 1 and/or 2

If your discussion of these issues will include the cases, this is a great place to use Case 1 (distributing corporate profits) or Case 2 (staying open late).

Each case is designed to run for about 20 minutes, so if you are combining the case and lecture, I’d suggest using only one case.

Governance: Boards and Incentives

Agency Problem- A consequence of the separation of ownership (shareholders/principals) and control (managers/agents) in the corporation. Agency problems occur when the goals or principals differ from those of agents.

Principals- The owners of a resource or piece of property. In the corporation, shareholders are considered principles.

Agents- Individuals or groups hired to administer the property or resources of principals. The managers of a corporation are considered to be agents of the

shareholders.

Tender Offer- An offer by those hoping to control the corporation 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.

Who steers? The agency problem

Modern corporations

Owned by principles

Managed by agents

Interests may differ, hurting principles

How to solve?

Monitor the agents

Align incentives

This is usually the shortest section of the lecture, whether I’m combining cases or doing a stand alone session.

If students have had a finance or accounting class, it’s likely that they’ve been introduced to Agency Theory. A useful engagement strategy is to have a student describe the basics of agency theory and the agency problem.

Student descriptions usually leave out the last bullet point. Some students will remember stock payments and aligning incentives, but the last bullet point makes a great place for the instructor to enter and lead the discussion.

The agency problem

Shareholders:

Return on Investment

Suppliers:

Reliable partner

Customers:

Reliable Products

Employees:

Stable Jobs

Government:

Good Citizen

Natural Environment:

Sustainable Practices

Managers:

Maximize Utility

I’ll spend a few minutes here.

This slide helps as a review of the agency problem, but it’s also useful because it helps students see that the agency problem is independent of whether the corporation is run for shareholders or stakeholders.

The challenge is that executives and managers, those who run the corporation, want to maximize their own utility (which may include income, security, power, and social status). They may choose to do so in ways counter to the interests of other stakeholders for two reasons:

They have more knowledge of the business, its markets, and organizational needs. This means that they can justify their decisions in terms that sound like they are working for the good of the business, but they are really working for their own gain.

It’s difficult and expensive for individual stakeholders (this is especially true for shareholders) to get information about managerial actions and to monitor those actions.

One solution: The board of directors

Appointed by principles

Two fiduciary duties

Loyalty

Care

Inside directors bring expertise

Outside directors bring expertise and objectivity

I’ll review this slide for just a couple of minutes. I’m going to give a brief overview of the roles and functions of the board—to provide both expertise and resources to the organization and to monitor corporate activities.

What’s most important for students to understand on this slide is the directors have TWO fiduciary duties, each of equal importance at law. They are obligated to work for the benefit of the principles, or the duty of loyalty. This duty underpins the shareholder primacy model and justifies the board being very concerned about maximizing the returns the business earns.

The second duty is the duty of care; this means that the Board is obligated to steer the corporation away from undue risk, peril, or harm. It is this duty that enables the board to scrutinize the financial affairs of the company, to weigh in on major decisions such as new strategic initiatives, and to be involved in major activities such as mergers, acquisitions, or sales.

Board of Directors

Board Of Directors- A group of individuals who monitor the executive team of the corporation and ensure that those executives are acting in the best interests of

the shareholders.

Fiduciary Duty- The legal obligation of an agent, a fiduciary, to act in the best interests of the principal, or owner. Fiduciary duties include the duty of loyalty, to work for the optimal good of the owner, and the duty of care, to not take undue risk

that would jeopardize the principal.

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.

Another solution: Incentives

Agents will act like principles if they have the same interests

Pay for performance, compensation at risk

Bonuses

Stock Options

Stock Grants

If I’m going to linger in this section, it’s on this slide. I’ll briefly explain what each type of incentive is:

Bonuses are extra cash payments for hitting pre-defined targets

Stock options are legal instruments that give holders the privilege of purchasing shares at a pre-specified price (the strike price). This price may or may not equal the market price when the option is exercised.

Stock grants are gifts of shares to an individual.

I’ll ask students to Google the latest data on the gap between CEO compensation and average worker pay. I’ll then allow a discussion of up to 10 minutes about 1) is such an arrangement fair?, 2) how does such a gap benefit our society? (largely by encouraging innovation and risk taking), and 3) what risks does such a gap pose?

This brief discussion provides a nice transition to the next discussion on ethics.

Incentives

Pay For Performance- Variable or contingent compensation that focuses managers on key variables, designed to align their interests with the shareholders.

Bonuses- Additional compensation paid to executives, managers, and employees when they meet certain performance objectives.

Stock-based Compensation- Payment to organizational members in the form of shares in the corporation.

Stock Option- The right to buy a certain number of the corporation’s shares at a specified future date for a specified price.

Stock Grant- A gift, or grant, of stock given to organizational members, primarily executives.

How to Steer? Four ethical views

Utilitarianism (John Stuart Mill)

Greatest good for the greatest number

Rights (Immanuel Kant)

Treat everyone as an end, never a means

Liberty (Robert Nozick)

Freedom of expression

Ethic of Care (Carol Gilligan)

Relationships matter most

This next discussion can be kind of tricky. Depending on how you’ve arrayed the previous discussion, you may have 20-40 minutes remaining. If I’m running short on time, I’ll skip this slide and move right on to the next one.

If students have had an ethics course before, then this slide will serve as a brief review. I like this slide because it helps students crystalize in their minds the four major schools of ethical thought that weigh in for business decision making.

Utilitarianism underlies economic versions of the good society. When faced with an ethical decision, one counts up the potential benefits that will accrue to individuals for each alternative. Then one subtracts the harms that follow such a decision, for each alternative. The alternative that provides the greatest net benefit is the most ethical choice.

Deontology (labeled Rights in the slide) holds that as one faces ethical choices, one makes sure that no fundament rights are violated for anyone. Kant also believed that decision makers should never choose alternatives that use people as a means to an end. For example, placing workers in dangerous working conditions in order to cut costs and increase profits is immoral on two counts: 1) it violates an individual’s right to personal safety, and 2) it treats them as merely a means of making money and diminishes their intrinsic worth as people.

Liberty, or libertarianism, argues that the ethical choice is the one that preserves human freedom. The ethical imperative for libertarians is freedom of choice and expression; therefore, actions by others (including but not limited to governments) that restrict human freedom are morally questionable, if not downright wrong. For example, employer policies that allow supervisors to monitor the computer usage of their employees constitutes a violation of privacy.

The Ethic of Care holds that the ethical choice is the one that preserves, nurtures, and sustains human relationships, conceived of as both small and large. Kindness, concern for others, and the positive treatment of all stakeholders becomes a moral imperative. The ethic of care shares much in common with the Rights view and both of these schools of thought support a stakeholder view of business.

Corporate Ethics

Ethical Values- Values that define for an individual, group, or society things that are morally right or wrong.

A good society creates the greatest good for the greatest number of people.

The good society ensures a basic set of rights for its citizens.

The good society creates the most freedom for people to act as they please.

In a good society, individuals care for each other, exhibit empathy with others, and focus on meaningful relationships.

Corporate Culture and Ethics

Culture- A pattern of behaviors and beliefs that are considered

appropriate and correct for organizational members.

Mission Statement- A formal declaration of a company’s core values, business objectives, and ethical aspirations.

4 ethical concerns

Avoiding harm to individuals

Fairness and honesty

Recognition of sacred/ transcendent

Liberty and overcoming oppression

So, what do all these abstract ethical have to say about the types of actions businesses engage in? What types of ethical challenges do managers face, and what issues should they be most concerned about?

Avoiding harm—managers need to very concerned, both legally and morally, about engaging in activities that create harm. That harm may come through unsafe products (think about all the auto recalls over the last few years), services (such as false or deceptive advertising), or processes (working conditions or compensation policies).

Fairness and honesty—this ethical concern underlies our beliefs about the value of competition; as long as firms don’t cheat or take unfair advantage, then competition tends to produce great outcomes because they are fair. Concerns about honesty underpin our entire system of financial reporting and corporate accountability.

Recognition of sacred/transcendent—for managers this has relevance in terms of the natural environment (which many people believe is sacred, whether they are religious or not), and the cultural sensitivity around the world. Companies that fail to understand the transcendent nature of local cultures and traditions run into serious legal and stakeholder challenges.

Liberty and overcoming oppression—This doesn’t seem to apply to business, until one things about issues such as technology and compensation. The chapter contains a nice vignette on Google in China: would the company allow the government to filter (censor) web content? If so, how did the company reconcile censorship with its stated goal of “do no harm?”

The four concerns have been adapted from

Jonathan Haidt, The Righteous Mind: Why Good People Are Divided by Politics and Religion (New York: Vintage Books, 2013). See also Geert H Hofstede, Culture’s Consequences : Comparing Values, Behaviors, Institutions, and Organizations across Nations (Thousand Oaks, CA: Sage Publications, 2001).

Ethics along the value chain

Value Chain element	Ethical Challenges	Moral Dimension	Example
Firm Infrastructure	Honest accounting and record keeping	Fairness/cheating	Financial fraud at Enron, and World Com (2001)
Human Resources	Whistle blower policies	Liberty/ Oppression	Brad Birkenfeld reporting tax fraud at UBS (2005)
Technology Development	Electronic monitoring, information security	Liberty/oppression	Cisco selling routers to China (2011)
Procurement	Working conditions at subcontractors	Fairness/ Avoiding harm	Nike and working conditions in Vietnam (1996)
Logistics	Transportation safety	Sanctity/degradation	Exxon Valdez oil spill (1989)
Operations	Working hours and housing	Fairness/ Avoiding harm	Worker housing at Foxconn (Apple) (2012)
Marketing/sales	Truth in advertising	Fairness/cheating	Horse meat in hamburgers at Burger King (2013)
After Sales Service	Product recalls	Avoiding Harm	Toyota recall for braking systems (2009)

This table can be a time sink, or it can be a great opportunity to engage your students. I like to have them think of additional examples of each of the value chain challenges described in the table. You can prime them by discussing one or two of them, or by giving them a few minutes to use the internet to find related scandals.

This is a great place to finish out the theoretical and lecture/based version of this chapter. It helps students see that abstract ethical issues influence, and are influenced by, the firms purpose and strategy.

If you have chosen to do this all in one day, you can use the final 10-20 minutes of the course to discuss one or two of the final vignettes. Vignette 3 (The plant location decision) allows students to apply the abstract concepts presented in the last 2 slides in a very practical setting. This vignette combines avoiding harm with a company’s production process.

Vignette 4 (Using products as intended) to highlight issues of doing harm, honesty and reporting. It also takes place in the sales and marketing area of the value chain, which allows students (many of whom will end up in sales positions) to work through some of the ethical issues involved in this function.

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Strategic Management

Jeff Dyer

Third Edition

Chapter 14

Strategy and Society

Professor’s Goals for this Lecture

– the homework assignment involving calculating an experience curve in semiconductors

– Fry’s Credit Card Mini-case (in lecture); considers the relationship between total number of subscribers (X axis) and cost per subscriber (Y axis)

– the Southwest Case (after lecture); considers the relationship between total passengers flown (or market share) and performance (profitability) in the industry

Three types of value

Economic Value—increases in income, wealth, or profit

Social Value—Increases in well-being in non-economic areas

Literacy

Health and sickness

Housing

Shared value–when creating economic value also creates social value

I’d spend about 10 minutes here and invite student to think about ways (and examples) in which

Economic value fails to enhance social value (perhaps the crisis over fast food and soda leading to diabetes)

Situations where creating social value destroys economic value (this might be housing projects that depress real estate values, or education programs that fail to produce their own outcomes but also leave students unprepared for jobs).

Situations where shared value might actually exist—this might be Cisco Systems training academies that train low income individuals to become Cisco certified engineers.

Sustainable stakeholder advantages

Social value organizations rely on repeat transactions

Universities and legacies

Community agencies and ongoing partners

The ability to consistently gather resources from key stakeholders such as donors, volunteers, students, etc.

I’m going to spend about 5 minutes here helping students that the ability to create meaningful and ongoing relationships with stakeholders really matters, and that organizations only do that when the create real, lasting value for that stakeholder.

The example here would be university donations. Ask the students to think about a major donation or gift to the university. Did it come from an Alumnus? (probably) Why? (because the university created long term value—through education and socialization—and maintained a long term relationship with the donor)

Value Net

Value Net- A model of value creation that describes how an organization

interacts with others in its environment to create value.

Customers- Individuals or groups that purchase, or receive, the outputs of the organization.

Suppliers- Individuals, groups, or organizations that provide important inputs for the organization.

Competitor- An individual or organization that makes customers value the organization’s output less because it offers its own product or service.

Complementor- An individual or organization that makes customers value the organization’s output more because of its product or service.

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After completing the text readings, find a stock owned organization whose web site mentions corporate governance (search ?corporate governance at _XYZ_?). How does the organiza

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