Transcript BA 469 lecture ch11

11
Corporate Performance,
Governance, and Business Ethics
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Topics
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Stakeholder analysis: whose interest
should we consider?
Agency theory: how do we understand
and manage relationship among key
players, e.g. management and owners?
Ethics: what ‘rules’ can or do we apply?
Change management
Business and society/government
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Stakeholder Impact Analysis
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Identify the stakeholders most critical to survival
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Identify stakeholders.
Identify stakeholders’ interests and concerns.
As a result, identify what claims stakeholders are
likely to make on the organization.
Identify the stakeholders who are most important to
the organization’s perspective.
Identify the resulting strategic challenges.
Usually the most important:
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Customers, employees, stockholders
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Stakeholders and the
Enterprise
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Exercises 1st day (#1)
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Pick either the company in the Opening
Case (Enron) or the Strategy in Action
11.3 (Barings):
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List relevant stakeholders and their
interests.
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The Unique Role of
Stockholders
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Legal owners
Providers of risk capital, a major source
of capital
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No guarantee that stockholders will recoup
their investment or earn a decent return
Maximizing return to stockholders
Employees as stockholders
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Profitability and Stakeholder
Claims
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Stockholders’ returns
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Dividend payments
Capital appreciation in market value of a
share
Maximizing long-run ROIC
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Within limits set by law
In a manner consistent with societal
expectations
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Relationship Between ROIC,
Stakeholder Satisfaction, and
Stakeholder Support
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Poor Performance
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Poor management – each factor in list
(next slides) by itself is not sufficient to
bring a company down.
Structural shifts are often ignored
during good performance, blamed when
no one management factor is clear
Difficult to measure due to asymetry of
information
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The Causes of Poor
Performance
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Poor management
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Sheer incompetence
Neglect of core business
Insufficient number of good managers
Dominant, autocratic chief executive with
passion for empire-building
Autocratic manager who tries to do it all in
the face of complexity and change
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The Causes of Poor
Performance
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Poor management (cont’d)
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Lack of balanced expertise at the top
Lack of strong middle management
Lack of succession planning
Failure by board to monitor strategic
decisions
Unethical behavior
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The Causes of Poor
Performance (cont’d)
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High cost structure
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Low labor productivity
Low capital productivity
Inadequate financial controls
Inadequate differentiation
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Poor product quality
Lack of compelling product attributes
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The Causes of Poor
Performance (cont’d)
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Overexpansion
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Empire-building that adds little value
Loss of control
Declining profitability
Structural shifts in demand and new
competitors
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Technology
Economic or political conditions
Social and cultural norms
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The Causes of Poor
Performance (cont’d)
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Organizational inertia
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Distribution of power and influence in the
organization
Organization culture
Preconceptions about the appropriate
business model
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Agency Theory
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Problems can arise in a business
relationship when one person delegates
decision making authority to another
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Agency Theory
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Principal-agent relationships
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continued
Agency relationship: when one party
delegates decision-making authority to
another
Principal: person delegating authority
Agent: person to whom authority is
delegated
Key issue: asymmetry of information
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The Agency Problem
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Agents and principals may have different
goals
Agents may pursue goals that are not in the
best interests of their principals
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Due to information asymmetry, principals may not
know any better
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The Agency Problem
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continued
Difficult for principals to measure
performance
Trust
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On-the-job consumption
Empire building
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Exercise 1st day (#2)
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Refer to the Opening Case (Enron) and
Strategy in Action 11.3 (Barings):
Describe the Agency Problem.
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Who was (were) the principal(s)?
Agent(s)?
Assymetry of information
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The Challenge for Principals
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Shape the behavior of agents so that
they act in accordance with goals set by
principals
Reduce information asymmetry
Develop mechanisms for removing
agents who do not act in accordance
with goals of principals
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Governance Mechanisms
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The board of directors
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Elected by stockholders
Legally accountable
Monitors corporate strategy decisions
Authority to hire, fire, and compensate
Ensures accuracy of audited financial
statements
Inside directors
Outside directors
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Governance Mechanisms
(cont’d)
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Stock-based compensation
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Pay-for-performance
Stock options
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The right to buy company shares at a
predetermined price at some point in the future
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How Options Skew the Bottom
Line
Source: D. Henry and M. Conlin, “Too Much of a Good Incentive?” Business Week,
March 4, 2002, pp. 38–39.
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Governance Mechanisms
(cont’d)
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Financial statements and auditors
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SEC
GAAP
The takeover constraint
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Corporate raiders
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Greenmail
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Governance Mechanisms
Inside a Company
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Strategic control systems
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To establish standards against which
performance can be measured
To create systems for measuring and
monitoring performance regularly
To compare actual performance against
targets
To evaluate results and take corrective
actions
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A Balanced Scorecard
Approach
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Governance Mechanisms
Inside a Company (cont’d)
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Employee incentives
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Employee stock ownership plans
Stock options
Compensation tied to attainment of
superior efficiency, quality, innovation, and
responsiveness to customers
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The Purpose of Business
Ethics
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To give people the tools for dealing with
moral complexity in business
Business decisions have an ethical
component
Ethical implications must be weighed
before acting
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Ethics and Strategy
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Ethical decision
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One that typical stakeholders would find
acceptable because it aids stakeholders,
the organization, or society
Unethical decision
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One that a manager would prefer to
disguise or hide because it enables a
company or individual to gain at the
expense of society or other stakeholders
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Shaping the Ethical Climate of
an Organization
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Top managers must use their leadership
position to incorporate an ethical
dimension into the values they stress
Ethical values must be incorporated into
the company’s mission statement
Ethical values must be acted on
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Comparing Utilitarian, Moral
Rights, and Justice
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Comparing Utilitarian, Moral
Rights, and Justice
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Comparing Utilitarian, Moral
Rights, and Justice
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Exercise 1st day (#3)
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Refer to the Closing Case: Chainsaw Al .
...
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Explain the ethical situation in this case
from the point of view of the Board of
Directors. (Use the questions at the end as
a guide.)
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Exercises 2nd day (#1)
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NIKE: Discuss what the ethical
challenge is?
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List relevant stakeholders and their
interests.
Applying model you are comfortable with,
what is the ethical dilemma or challenge?
What would be the ethical issue from the
point of view of Chairman of NIKE?
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Thinking Through Ethical
Problems
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Does my decision fall within the
accepted values or standards that
typically apply in the organizational
environment?
Am I willing to see the decision
communicated publicly to all
stakeholders affected by it?
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Thinking Through Ethical
Problems
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Would the people with whom I have a
significant personal relationship approve
of the decision?
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Can I tell my mother?
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Exercises 2nd day (#2)
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Refer to articles #1, 2, and 3.
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Define the list of relevant stakeholders and
their interests.
Apply a model you are comfortable with
and describe the ethical decision(s) or
challenge(s).
What would you do if you were heading
these companies?
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Thinking Through Ethical
Problems (cont’d)
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Step 1: Identify which stakeholders the
decision would affect and in what ways
Step 2: Judge the ethics of the
proposed strategic decision given the
information from Step 1
Step 3: Establish moral intent (resolve
to place moral concerns ahead of other
concerns)
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Step 4: Engage in ethical behavior
Strategic Change: Improving
Performance
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Changing the leadership
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New leader is often from outside the
company
New leader must make difficult decisions,
motivate, listen, and delegate
Changing the strategy
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Redefine strategic focus
Divest unwanted assets
Improve profitability
Make acquisitions
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Strategic Change: Improving
Performance (cont’d)
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Changing the organization
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Unfreezing the organization
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Movement
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Big bang theory of change
Senior managers must be committed to it
Speed
Involving employees
Refreezing the organization
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Culture, socialization, management education
programs
Hiring policies, control and incentive systems
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CASE BRIEF for 12 Mar 07
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Refer to articles # 4 & 5 (handed out 3/06
and links next slide).
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Discuss a key ethical issue common to both
situations described in these articles, from the
perspective of a member of the Board of Directors
of the company or companies involved.
Discuss what can agency theory tell us about the
challenge or challenges, if any, posed by these
situations to an ethically responsible member of
the Board of Directors.
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Articles
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Halliburton
Making Drugs
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Exercise 2nd day
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NIKE’s attempt to improve on their
corporate responsibility
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How much is enough?
How can an organization contain
unethical behavior? From a responsible
board’s perspective?
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What does Agency theory tell us
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Governance and ethics
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Finish articles on lobbying
Business and government
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Role of government vis business
Lobbying
Implementing change
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Business and government
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What is the role of business in the
economy?
Why lobby?
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Lobbying has been going on for years
Objectives of these lobbying activities?
Are these legitimate activities?
Ethical issues?
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Corporate Governance
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Examine the activities in each of articles
4 & 5 that were “questionable”
Stakeholders and interests
What laws were violated?
Ethical challenge
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Exercise 3rd day
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Pick either article #4 or #5.
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Take the perspective of senior
management, i.e. CEO of the company
Identify the stakeholders and their interest
Which model do you use and what should
be or should have been the course of
action?
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Exercise
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Refer to articles 1, 2, 3, 4, & 5:
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Which is illegal and unethical? Which is illegal?
Explain!
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