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Mastering Strategic
Management
Chapter 10.1 & 10.2
Leading an Ethical Organization:
Corporate Governance, Corporate Ethics,
and Social Responsibility
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Creative Commons Attribution 3.0 Unported License (CC-BY).
Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Learning Objectives
•
•
•
•
Key elements of effective corporate governance
Know the 3 levels & 6 stages of moral development
Corporate Ethics
Corporate scandals, Canada & USA Legislative
responses
• Know dimensions of corporate social performance
• Know the 4 generations currently in the workforce, and
key influences that have influenced them
• Understand how decision biases may impede effective
decision making
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Oliberte Shoes (Canada)
• Fair Trade Certified
• 1% of profits for the Planet
• B Corps (Best) - creates higher quality jobs and
improve the quality of life in our communities
• Factory in Ethiopia
This work is licensed under a
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
This work is licensed under a
Creative Commons Attribution 3.0 Unported License (CC-BY).
Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Corporate governance: The processes, policies, & laws
that govern an organization, establishing accountability &
reducing conflicts of interest associated with principleagent issues
Board of directors: A group of individuals, either
elected or appointed, that oversees the activities of an
organization or corporation
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Boards of Directors
• Board outsiders: Most members of the board of
directors are employed outside of the organization
• Board often includes members with special skills sets (Lawyer,
Accountant) to assist Board in managing
• Major Owners sit or appoint representatives on Board
• Institutional investors, that have invested large sums of money
may also have representation on Board
• Board insiders: Members of the Board of Directors
that employed inside of the organization
• CEO is usually member, often non-voting
• Few others… (to avoid inherent conflict of interest)
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
The Board
• Under Canadian & Provincial laws, Boards have
certain legal responsibilities
•
•
•
•
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Taxation (CRA)
Employment Laws
Hold AGMs
Represent stakeholders
Act in best interests of the Corporation
• Boards will typically:
•
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•
•
Hire (& fire) the CEO, set overall org structure
Approve annual Budget, & hire auditors
Contribute to setting overall strategic direction
Approve high level policies & procedures
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
The Agency Problem
• Agency problem: Exists when interests of individuals
that act as agents to manage company, do not align
with interest of the firm’s stockholders
• The composition of the board is critical because the
dynamics of the board play an important part in
resolving the agency problem
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
The Principal–Agent Problem
The principal–agent problem is the problem of devising
compensation system that induce an agent to act in the
best interests of a principal
• owners (stockholders) are the principals and the
executive managers of the firm are their agents
• Historically owners worked in their firms and balanced
short and long term needs
• Executive managers who typically work in a job/firm
for ~ 5 or 6 years, have a much shorter focus
• Creates a conflict
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
The Board
Most Boards have 1 (one)
Employee – the CEO
Why?
CEO duality: Occurs when
the CEO also chairman of
the board, known to
create bitter divide within
corp.
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
CEO Pay
• Board of Dir sets CEO pay, generally includes:
•
•
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Guaranteed salary
Cash bonus
Stock options
Perks
• Corp. must pay competitive wages for scarce talent required to
manage $B corp, competitive environment…
• Boards face increasing scrutiny from investors / AGMs when CEO
pay out of line with industry norms, & when bonuses paid when
losing money / performing poorly
• CEO salary not well correlated with firm success, but highly
correlated with firm size...
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
CEO Perks
• Range from free ice-cream to life-time use of corporate
jet
• Can be effective CEO retention strategy, but potential
for negative press when perceived by (buying) public
as excess
• In publically trade & public companies, CEO pay
generally public information…
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Poor Corp. Governance
Under-performing
firms can be
tempting target
for takeover
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Key Takeaways
• Firms benefit from strong corporate governance
including an active board that monitors CEO actions,
provides strategic advice, and helps to network to other
useful resources
• When such mechanisms are absent, CEO excess may
go unchecked, resulting in negative publicity, poor firm
performance, and even potential takeover by other
firms
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
10.2 Stages of Moral
Development
Psychologist Lawrence Kohlberg suggested 6 distinct
stages of moral development grouped into 3 levels:
• Pre-conventional
• Stage 1 - individuals focus on the direct consequences that
their actions will have—for example, worry about punishment
or getting caught
• Stage 2 - right or wrong is defined by the reward stage, where
a “what’s in it for me” mentality is seen
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Stages of Moral Development
(Level 3 & 4)
Conventional level
• moral reasoning - morality is judged by comparing
individuals’ actions with the expectations of society.
• In stage 3, individuals are conformity driven and act with the
goal of fulfilling social roles. Parents that encourage their
children to be good boys and girls use this form of moral
guidance.
• In stage 4, the importance of obeying laws, social
conventions, or other forms of authority to aid in maintaining a
functional society is encouraged
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Stages of Moral Development
(Level 5 & 6)
Post-conventional level, or principled level, occurs when morality is
more than simply following social rules or norms
• Stage 5 considers different values and opinions.
• Thus, laws are viewed as social contracts that promote the greatest
good for the greatest number of people
• In stage 6, moral reasoning is based on universal ethical
principles.
• For example, the golden rule illustrates one such ethical principle. At
this stage, laws are grounded in the idea of right and wrong. Thus
individuals follow laws because they are just and not because they
will be punished if caught or shunned by society.
• Consequently, with this stage there is an idea of civil disobedience
that individuals have a duty to disobey unjust laws.
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Corporate Scandals
In 90s and early 2000s, a number of corporate scandals
in Canada & USA revealed a lack of board vigilance
In Canada, Nortal was the worse, and arguably the most
famous involves Enron who used accounting loopholes
to hide billions of dollars in failed deals. Before their
scandal was discovered, top management cashed out
millions of stocks, but many ended up in prison…
In response to these scandals at Canada passed X and
USA passed Sarbanes-Oxley Act to tighten the financial
standards for the boards of public and accounting firms
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Corporate Scandals
This work is licensed under a
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Corporate Scandals
This work is licensed under a
Creative Commons Attribution 3.0 Unported License (CC-BY).
Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Corporate Ethics & Social
Responsibility - USA
• Sarbanes-Oxley Act of 2002: set new or increased
standards for boards of public USA companies and
accounting firms
• response corp. scandals at Enron, WorldCom,& Tyco
• 11 aspects represented some of the most far-reaching reforms
in 70 years
• 2010 the USA enacted the Dodd-Frank Wall Street
Reform and Consumer Protection Act
• Significant increase govt control of financial markets
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Corporate Ethics & Social
Responsibility - Canada
• In 2002, Canadian securities regulators pressured to
adopt similar reforms as USA to maintain investor
confidence in the Canadian regulatory system &
protect integrity of Canadian capital markets
• However, lower sense of urgency in Canada since, at
the time, Canada had yet to experience corporate
fraud on the same scale as in the United States.
• Canadian regulators did seize opportunity (of
Sarbanes-Oxley) to introduce desired & long-delayed
corporate and securities law reform in 2003
• Many changes introduced in Canada Securities Act &
Not-for-Profit Corporations Act and (Omnibus) Bill 198
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Fair Trade
• Defined as when all members of the supply chain (from
growers on…) are paid a fair, living wage
• Often requires only a small increase in final price
• Fair Trade acts as to confirm accuracy of claim
• Good public awareness of certification, marketing
• One example of Social Ethics
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Corporate Social Performance
(CSP)
• Social entrepreneurship: Entrepreneurial actions
where both economic and social value creation occur
• Corporate social performance (CSP): The degree to
which a firm's actions honor ethical values that respect
individuals, communities, and the natural environment
• Kinder, Lydenberg and Domini & Co. (KLD), a Boston-based
firm that rates firms on a number of stakeholder-related issues
with the goal of measuring CSP
• Also impacts firm’s ‘Social license to Operate’
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Corporate Social Performance
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Corporate Social Performance
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Corporate SP - Metrics
• Assessing the community dimension of CSP is
accomplished by assessing community strengths such
as charitable or innovative giving that supports
housing, education, or relations with indigenous
peoples, as well as charitable efforts worldwide such
as volunteer efforts or in-kind giving.
• CSP diversity strengths are scored positively when
the company is known for promoting women and
minorities, especially for board membership and the
CEO position. Employment of the disabled and the
presence of family benefits such as child or elder care
would also result in a positive score by KLD.
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Corporate SP – Metrics (con’t)
• The employee relations dimension of CSP gauges
potential strengths such as notable union relations,
profit-sharing and employee stock-option plans,
favorable retirement benefits, and positive health and
safety programs
• The environmental dimension records strengths by
examining engagement in recycling, pollution
prevention, or the use of alternative energies. KLD
would also score a firm positively if profits derived from
environmental products or services were a part of the
company’s business.
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Key Takeaways
• The 6 stages of moral development
• Corporate scandals, and Canada / USA legislative
responses
• Corporate Social Performance, and objective
measures of both positive and negative actions related
to CSP
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Add 4 years in 2015…
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Generations in the Workplace
• Traditionalists - born between 1925 and 1946, fought
in World War II and through The Great Depression.
This generation is now mostly retired
• Baby boomers - born between 1946 and 1964,
corresponding with a ‘boom’ of population following the
end of World War II
• Generation X - born between 1965 & 1980; Gen X
symbolizes the unknown nature of this generation
• Generation Y - born after 1981, this group is also
known as Millenials as well as “The Trophy
Generation” is now entering the workplace
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Generational Influences on
Work Behavior
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Generational Y Purchasing
Power
• Parents play a major role in shaping children’s attitudes about debt,
saving & spending. But 15-25 yr have a sizeable impact on parents’
spending, particularly technology (InSites Consulting)
• 51% say they influence the technology parents’ adopt
• 41% influence parents’ purchase of products & services
• 31% influence parents’ decisions on where to shop
• So what appeals to the Gen Y market? Survey respondents listed the five
most important characteristics for a brand or product as:
1. Up to date
2. Own style
3. Real/authentic
4. Uniqueness
5. Clean reputation
• Coolness & trendiness ranked much farther down list,Gen Y looking for
substance over form, & originality not cookie-cutter
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Rational Decision-Making Model
(only problem, we’re not Rational…)
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility
Key Takeaways
Generational differences provide powerful influences on
the mind-set of employees that should be carefully
considered to effectively manage a diverse workforce.
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Mastering Strategic Management
Chapter 10.1 & 10.2: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and Social Responsibility