Learning Activity #1: IndividualI need the initial post by Thursday and once i post it, I can send the student responses that I will need replies to. Please make the initial post several paragraphs and use as many sources as possible. At least 5 if you can. The replies can be like 3 paragraphs using at least one source. This week we read of the role of board of directors in large, publicly traded corporations to ensure that the Sarbanes-Oxley Act of 2002 is implemented in a way that mitigates unethical or illegal behavior. Select one of the following industry’s listed below and identify positive and negative examples of corporate social behavior – explain how that behavior affected (positively or negatively) that industry and what can/should be done to mitigate that behavior. As always, please support and justify your answer using APA formatted references. AirlineBankingHealthcareRetailFast FoodOil/Gas Wall Street (Investment/wealth management, Investment Banking)Learning Activity #2: IndividualIrrespective of your individual/personal thoughts on climate change/global warming, do environmental sustainability initiatives exert any measurable impacts on an organization’s [your current employer or assignment #1 company] sustainable profitable growth?, why, why not? Present substantive supporting argument(s). SourcesStrategic Management:Chapter 10: Leading an Ethical Organization: Corporate Governance, Corporate Ethics, and Social Responsibility, Pages 314-338.Sustainability – The Only StrategyGlobal Consumerism and SustainabilityCreating Value Through Sustainable DesignThe Climate Challenge: Achieving Zero Emissions
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Chapter 10 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
Chapter 10
Leading an Ethical Organization: Corporate
Governance, Corporate Ethics, and Social
Responsibility
LEARNING OBJECTIVES
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1.
What are the key elements of effective corporate governance?
2.
How do individuals and firms gauge ethical behavior?
3.
What influences and biases might impact and impede decision making?
TOMS Shoes: Doing Business with Soul
Under the business model used by TOMS Shoes, a pair of their signature alpargata footwear is
donated for every pair sold.
Image courtesy of Parke Ladd, http://www.flickr.com/photos/parke-ladd/5389801209.
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In 2002, Blake Mycoskie competed with his sister Paige on The Amazing Race—a reality show where
groups of two people with existing relationships engage in a global race to win valuable prizes, with the
winner receiving a coveted grand prize. Although Blake’s team finished third in the second season of the
show, the experience afforded him the opportunity to visit Argentina, where he returned in 2006 and
developed the idea to build a company around the alpargata—a popular style of shoe in that region.
The premise of the company Blake started was a unique one. For every shoe sold, a pair will be given to
someone in need. This simple business model was the basis for TOMS Shoes, which has now given away
more than one million pairs of shoes to those in need in more than twenty countries worldwide.
[1]
The rise of TOMS Shoes has inspired other companies that have adopted the “buy-one-give-one”
philosophy. For example, the Good Little Company donates a meal for every package purchased.
[2]
This
business model has also been successfully applied to selling (and donating) other items such as glasses
and books.
The social initiatives that drive TOMS Shoes stand in stark contrast to the criticisms that plagued Nike
Corporation, where claims of human rights violations, ranging from the use of sweatshops and child labor
to lack of compliance with minimum wage laws, were rampant in the 1990s.
[3]
While Nike struggled to
win back confidence in buyers that were concerned with their business practices, TOMS social initiatives
are a source of excellent publicity in pride in those who purchase their products. As further testament to
their popularity, TOMS has engaged in partnerships with Nordstrom, Disney, and Element Skateboards.
Although the idea of social entrepreneurship and the birth of firms such as TOMS Shoes are relatively
new, a push toward social initiatives has been the source of debate for executives for decades. Issues that
have sparked particularly fierce debate include CEO pay and the role of today’s modern corporation. More
than a quarter of a century ago, famed economist Milton Friedman argued, “The social responsibility of
business is to increase its profits.” This notion is now being challenged by firms such as TOMS and their
entrepreneurial CEO, who argue that serving other stakeholders beyond the owners and shareholders can
be a powerful, inspiring, and successful motivation for growing business.
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This chapter discusses some of the key issues and decisions relevant to understanding corporate and
business ethics. Issues include how to govern large corporations in an effective and ethical manner, what
behaviors are considered best practices in regard to corporate social performance, and how different
generational perspectives and biases may hold a powerful influence on important decisions.
Understanding these issues may provide knowledge that can encourage effective organizational leadership
like that of TOMS Shoes and discourage the criticisms of many firms associated with the corporate
scandals of the late 1990s and early 2000s.
[1] Oloffson, K. 2010, September 29. In Toms’ Shoes: Start-up copy “one-for-one” model.Wall Street Journal.
Retrieved from http://online.wsj.com/article/SB1000142405274870411 6004575522251507063936.html
[2] Nicolas, S. 2011, February. The great giveaway. Director, 64, 37–39.
[3] McCall, W. 1998. Nike battles backlash from overseas sweatshops. Marketing News, 9, 14.
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10.1 Boards of Directors
LEARNING OBJECTIVES
1.
Understand the key roles played by boards of directors.
2.
Know how CEO pay and perks impact the landscape of corporate governance.
3.
Explain different terms associated with corporate takeovers.
The Many Roles of Boards of Directors
“You’re fired!” is a commonly used phrase most closely associated with Donald Trump as he dismisses
candidates on his reality show, The Apprentice. But who would have the power to utter these words to
today’s CEOs, whose paychecks are on par with many of the top celebrities and athletes in the world? This
honor belongs to the board of directors—a group of individuals that oversees the activities of an
organization or corporation.
Potentially firing or hiring a CEO is one of many roles played by the board of directors in their charge to
provide effective corporate governance for the firm. An effective board plays many roles, ranging from the
approval of financial objectives, advising on strategic issues, making the firm aware of relevant laws, and
representing stakeholders who have an interest in the long-term performance of the firm.
Effective boards may help bring prestige and important resources to the organization. For
example, General Electric’s board often has included the CEOs of other firms as well as former senators
and prestigious academics. Blake Mycoskie of TOMS Shoes was touted as an ideal candidate for an “allstar” board of directors because of his ability to fulfill his company’s mission “to show how together we
can create a better tomorrow by taking compassionate action today.”
[1]
The key stakeholder of most corporations is generally agreed to be the shareholders of the company’s
stock. Most large, publicly traded firms in the United States are made up of thousands of shareholders.
While 5 percent ownership in many ventures may seem modest, this amount is considerable in publicly
traded companies where such ownership is generally limited to other companies, and ownership in this
amount could result in representation on the board of directors.
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The possibility of conflicts of interest is considerable in public corporations. On the one hand, CEOs favor
large salaries and job stability, and these desires are often accompanied by a tendency to make decisions
that would benefit the firm (and their salaries) in the short term at the expense of decisions considered
over a longer time horizon. In contrast, shareholders prefer decisions that will grow the value of their
stock in the long term. This separation of interest creates an agency problem wherein the interests of the
individuals that manage the company (agents such as the CEO) may not align with the interest of the
owners (such as stockholders).
The composition of the board is critical because the dynamics of the board play an important part in
resolving the agency problem. However, who exactly should be on the board is an issue that has been
subject to fierce debate. CEOs often favor the use of board insiders who often have intimate knowledge of
the firm’s business affairs. In contrast, many institutional investors such as mutual funds and pension
funds that hold large blocks of stock in the firm often prefer significant representation
by board outsiders that provide a fresh, nonbiased perspective concerning a firm’s actions.
One particularly controversial issue in regard to board composition is the potential for CEO duality, a
situation in which the CEO is also the chairman of the board of directors. This has also been known to
create a bitter divide within a corporation.
For example, during the 1990s, The Walt Disney Company was often listed in BusinessWeek’s rankings
for having one of the worst boards of directors.
[2]
In 2005, Disney’s board forced the separation of then
CEO (and chairman of the board) Michael Eisner’s dual roles. Eisner retained the role of CEO but later
stepped down from Disney entirely. Disney’s story reflects a changing reality that boards are acting with
considerably more influence than in previous decades when they were viewed largely as rubber stamps
that generally folded to the whims of the CEO.
Managing CEO Compensation
One of the most visible roles of boards of directors is setting CEO pay. The valuation of the human capital
associated with the rare talent possessed by some CEOs can be illustrated in a story of an encounter one
tourist had with the legendary artist Pablo Picasso. As the story goes, Picasso was once spotted by a
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woman sketching. Overwhelmed with excitement at the serendipitous meeting, the tourist offered Picasso
fair market value if he would render a quick sketch of her image. After completing his commission, she
was shocked when he asked for five thousand francs, responding, “But it only took you a few minutes.”
Undeterred, Picasso retorted, “No, it took me all my life.”
[3]
Picasso’s Garçon á la pipewas one of the most expensive works ever sold at more than $100 million.
Image courtesy of Wikipedia,http://en.wikipedia.org/wiki/File:Gar%C3%A7on_%C3%A0_la_pipe.jpg.
This story illustrates the complexity associated with managing CEO compensation. On the one hand, large
corporations must pay competitive wages for the scarce talent that is needed to manage billion-dollar
corporations. In addition, like celebrities and sport stars, CEO pay is much more than a function of a day’s
work for a day’s pay. CEO compensation is a function of the competitive wages that other corporations
would offer for a potential CEO’s services.
On the other hand, boards will face considerable scrutiny from investors if CEO pay is out of line with
industry norms. From the year 1980 to 2000, the gap between CEO pay and worker pay grew from 42 to 1
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to 475 to 1.
[4]
Although efforts to close this gap have been made, as recently as 2008 reports indicate the
ratio continues to be as high as 344 to 1, much higher than other countries, where an 80 to 1 ratio is
common, or in Japan where the gap is just 16 to 1.
[5]
Meanwhile, shareholders need to be aware that
research studies have found that CEO pay is positively correlated with the size of firms—the bigger the
firm, the higher the CEO’s compensation.
[6]
Consequently, when a CEO tries to grow a company, such as
by acquiring a rival firm, shareholders should question whether such growth is in the company’s best
interest or whether it is simply an effort by the CEO to get a pay raise.
In most publicly traded firms, CEO compensation generally includes guaranteed salary, cash bonus, and
stock options. But perks provide another valuable source of CEO compensation. In addition to the
controversy surrounding CEO pay, such perks associated with holding the position of CEO have
also come under considerable scrutiny. The term perks, derived from perquisite,
refers to special privileges, or rights, as a function of one’s position. CEO perks have ranged in magnitude
from the sweet benefit of ice cream for life given to former Ben & Jerry’s CEO Robert Holland, to much
more extreme benefits that raise the ears of investors while outraging employees. One such perk was
provided to John Thain, who, as former head of NYSE Euronext, received more than $1 million to
renovate his office. While such perks may provide powerful incentives to stay with a company, they may
result in considerable negative press and serve only to motivate vigilant investors wary of the value of
such investments to shop elsewhere.
The Market for Corporate Governance
An old investment cliché encourages individuals to buy low and sell high. When a publicly traded firm
loses value, often due to lack of vigilance on the part of the CEO and/or board, a company may become a
target of a takeover wherein another firm or set of individuals purchases the company. Generally, the top
management team is charged with revitalizing the firm and maximizing its assets.
In some cases, the takeover is in the form of a leveraged buyout (LBO) in which a publicly traded company
is purchased and then taken off the stock market. One of the most famous LBOs was of RJR Nabisco,
which inspired the book (and later film) Barbarians at the Gate. LBOs historically are associated with
reduction in workforces to streamline processes and decrease costs. The managers who instigate buyouts
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generally bring a more entrepreneurial mind-set to the firm with the hopes of creating a turnaround from
the same fate that made the company an attractive takeover target (recent poor performance).
[7]
Many takeover attempts increase shareholder value. However, because most takeovers are associated with
the dismissal of previous management, the terminology associated with change of ownership has a
decidedly negative slant against the acquiring firm’s management team. For example, individuals or firms
that hope to conduct a takeover are often referred to as corporate raiders. An unsolicited takeover attempt
is often dubbed a hostile takeover, with shark repellent as the potential defenses against such attempts.
Although the poor management of a targeted firm is often the reason such businesses are potential
takeover targets, when another firm that may be more favorable to existing management enters the
picture as an alternative buyer, a white knight is said to have entered the picture.
The negative tone of takeover terminology also extends to the potential target firm. CEOs as well as board
members are likely to lose their positions after a successful takeover occurs, and a number of antitakeover
tactics have been used by boards to deter a corporate raid. For example, many firms are said to
pay greenmail by repurchasing large blocks of stock at a premium to avoid a potential takeover. Firms
may threaten to take a poison pill where additional stock is sold to existing shareholders, increasing the
shares needed for a viable takeover. Even if the takeover is successful and the previous CEO is dismissed,
a golden parachute that includes a lucrative financial settlement is likely to provide a soft landing for the
ousted executive.
KEY TAKEAWAY
x
Firms can benefit from superior corporate governance mechanisms such as an active board that monitors
CEO actions, provides strategic advice, and helps to network to other useful resources. When such
mechanisms are not in place, CEO excess may go unchecked, resulting in negative publicity, poor firm
performance, and potential takeover by other firms.
EXERCISES
1.
Divide the class into teams and see who can find the most egregious CEO perk in the last year.
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2.
Find a listing of members of a board of directors for a Fortune 500 firm. Does the board seem to be
composed of individuals who are likely to fulfill all the board roles effectively?
3.
Research a hostile takeover in the past five years and examine the long-term impact on the firm’s stock
market performance. Was the takeover beneficial or harmful for shareholders?
4.
Examine the AFL-CIO Executive Paywatch website (http://www.aflcio.org/corporatewatch/paywatch) and
select a company of interest to see how many years you would need to work to earn a year’s pay enjoyed
by the firm’s CEO.
[1] Bunting, C. 2011, February 23. Board of dreams: Fantasy board of directors. Business News Daily. Retrieved
from http://www.businessnewsdaily.com/681-board-of-directors-fantasy-picks-small-business.html
[2] Lavelle, L. 2002, October 7. The best and worst boards: How corporate scandals are sparking a revolution in
governance. BusinessWeek, 104.
[3] Kay, I. 1999. Don’t devalue human capital. Wall Street Journal—Eastern Edition, 233, A18.
[4] Blumenthal, R. G. 2000, September 4. The pay gap between workers and chiefs looks like a chasm. Barron’s, 10.
[5] Feltman, P. 2009. Experts examine pay disparity, other executive compensation issues.SEC Filings Insight, 15, 1–
6.
[6] Tosi, H. L., Werner, S., Katz., J. P., & Gomez-Mejia, L. R. 2000. How much does performance matter? A metaanalysis of CEO pay studies. Journal of Management, 26, 301–339.
[7] Wright, M., Hoskisson, R. E., & Busenitz, L. W. 2001. Firm rebirth: Buyouts as facilitators of strategic growth and
entrepreneurship. Academy of Management Executive,15, 111–125.
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10.2 Corporate Ethics and Social Responsibility
LEARNING OBJECTIVES
1.
Know the three levels and six stages of moral development suggested by Kohlberg.
2.
Describe famous corporate scandals.
3.
Understand how the Sarbanes-Oxley Act of 2002 provides a check on corporate ethical behavior in the
United States.
4.
Know the dimensions of corporate social performance tracked by KLD.
Stages of Moral Development
How do ethics evolve over time? Psychologist Lawrence Kohlberg suggests that there are six distinct
stages of moral development and that some individuals move further along these stages than
others.
[1]
Kohlberg’s six stages were grouped into three levels: (1) preconventional, (2) conventional, and
(3) postconventional.
The preconventional level of moral reasoning is very egocentric in nature, and moral reasoning is tied to
personal concerns. In stage 1, individuals focus on the direct consequences that their actions will have—
for example, worry about punishment or getting caught. In stage 2, right or wrong is defined by the
reward stage, where a “what’s in it for me” mentality is seen.
In the conventional level of 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. You might witness encouragement under this stage
when using a cell phone in a restaurant or when someone is chatting too loudly in a library.
The postconventional 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. Following democratic principles or
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voting to determine an outcome is common when this stage of reasoning is invoked. In stage 6, moral
reasoning is based on universal ethical principles. For example, the golden rule that you should do unto
others as you would have them do unto you 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.
Corporate Scandals and Sarbanes-Oxley
In the 1990s and early …
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