SMMCG8 [CS-4]Stakeholders and Governance
Public Firms & Their Role in Society
Corporate Social Responsibility
Mechanisms of Corporate Governance
Recent Developments
Sociopolitical environment
The Pyramid of Corporate Social
Responsibility
Milton Friedman
agency problem
shareholder centric
fundamental questions
how companies and their managers behave
Three core areas
the public firm
corporate social responsibility
mechanisms of governance
Note
Companies have always operated within a nexus of different stakeholders
External stakeholders
customers
suppliers
governments
communities
Internal stakeholders
shareholders
bondholders
employees
board managers
An age of shareholder primacy
in developed western, English-speaking economies
has gotten elevated above all else
shareholders and shareholder returns become a driving force
public corporations take money from equity investors
a market-centric neoliberal worldview
financial markets
Using mechanisms
lessen the problem of the separation of shareholder ownership
Lessen the risk bearing principals
Mechanisms
Managers need to care about stock price
threat that they may be taken over
Called market for corporate control
If managers have very good performance
going to show up in the numbers and then there is a market for managers as well
be recruited by other companies
increased the performance
in different ways
manipulating the numbers
reduce the investment base of the company
making the asset base of the company go down
role of the board of directors
in charge of evaluating the CEO and top management team of the company
can also be a mechanism for reducing agency costs
compensation can be heavily weighted towards stock options
Manager have lots of stock in the company
gave them then the incentive to manipulate the market to get the stock price higher in artificial ways
Goldilocks principle
some intermediate range where you will get better performance in terms of compensation
debt
If you're a manager in a company that has a large level of debt, you have no room like many years ago
if you're a company that's on the verge of bankruptcy
make you focus on budget and being efficient not wasteful
relevant in the grocery business
very low profit margin
high volume but low profit margin business
there's not a lot of room for really high net present value or highs economic return projects
a high- tech company
being efficiens a good thing
primary problem is being ready for the
technology and the next big move you're going
going to need a lot of free cash flow for the next big investment
Ethical Responsibilities
Legal Responsibilities
Philanthropic Responsibilities
Economic Responsibilities
gain and sustain competitive advantage
obey the laws and regulations
do what is right, just and fair
corporate citizenship
Corporate governance
the only social responsibility of business is to increase profits so long as it stays within the rules of the game
Question
does CSR help build competitive advantage?
characteristics
limited liability for investors
transferability of investor interest
legal personality
buy and sell stock
responsibility
separation of ownership and control
ownership
stockholders
control
managers
Hierarchy of authority
state charter
shareholders
board of directors
management
employees
Answer
depend on where you do business?
less interested
more interested
United Arab Emirates, Japan, and India
China, Brazil, and Germany
value creation framework
expand the internal firm value chains by including more non-traditional partners such as NGOs
focusing on creating new regional clusters
What's your customer base and how are you bringing in non-consumers
empirical literature
if a company can do well in finance, it can also do well in CSR.
not good
only uesd in the economic and legal responsibility
Agency costs
definition
represents the relationships among the stakeholders that is used to determine and control the strategic direction and performance of the organization
definition
the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals because it's impossible to use governance mechanisms to guarantee total compliance by the agent
the principal is the one paying to have something done and the agent is the one who does it
how to reduce the agency cost
occur
the agent is the manager
the principal is the shareholders
when the manager does not act in the best interest of the shareholder
provide the agent with more incentives
incentive costs
the principal can monitor the agent's behavior more
monitoring costs
there can be penalties for non-compliance
enforcement cost
example: McDonald
principal
The franchisor of McDonald's
franchisee
the franchisee of the particular McDonald's store that you may attend is the owner of that particular store
in the era of social media
the need for control of quality is even greater than ever
solution
use a mix of incentives, monitoring, and enforcement within their franchise contract
try and get better performance
how to get the ancient actually act in the way that the person who's paying wants them to act
different mechanisms
the corporation tries to minimize the cost
mechanisms to direct and control the firm
ensure the pursuit of the strategic goals
addressing the principal agent problem
when it fails
have accounting scandals
have global financial crisis
asymmetric information
examples
Bernie Madoff
Bernie Madoff was trusted by all the principals who gave Bernie Madoff money
insider information
not really a fair playing field for buying and selling of stock
Agency theory
adverse selection problem
moral hazard problem
misrepresents their abilities to the employer
difficulty to ascertain whether the agent gives best
views the firm as a nexus of legal contracts
relationships among shareholders, managers, and hierarchies
firms need to design work tasks
no one was monitoring him
Two financial crises
Accounting scandals
Enron Corporation, WorldCom, and Tyco
Managerial actions affect the economy
stakeholder management is quite important and needed
Agency problems
Managers acting in their own self-interests
Global financial crisis
In the real estate bubble burst
Stakeholder impact analysis
Step-by-step procedures
Step3
What opportunities and threats do all these stakeholders present?
Managers can think of trying to balance, and some ways in a positive sense of the word politician
Step4
What economic, legal, ethical, and philanthropic responsibilities do we have as the stakeholder?
All different levels of analysis
Step2
What are the stakeholders' interests and claims?
Managers cannot simply have a simplified version of maximize the share price
Intertwined with the decisions of the stakeholders
Step5
What should we do to effectively address the stakeholder concerns?
What impacts corporate performance
Issues of corporate governance
Step1
Who are the stakeholders?
Whoever can be affected or affect the corporation
e.g.
community
employees
customers
suppliers
21st century
overemphasize the interest of shareholders
much emphasis on measurable short-term financial metrics
Solution
set the goal of being carbon-neutral
pay attention to the long-term impact through sustainability goals
e.g
climate crisis
adopted the balanced scorecard
provide a more comprehensive company performance and health assessment
ecosystem strategies or ecosystem thinking in business
think of the company as member of a business ecosystem with various elements
cooperation and partnership with stakeholders
especially important for the long run success of companies
interest with each other on their platform in order to create value
consider all the stakeholders they gather in the ecosystem
the dilemma of capitalism
seek some degree of protection from ,from not for shareholders
poison pill provisions
make it difficult and costly for shareholders to replace the company's management
take the company private
shield it from the whims and pressures of the public financial markets
led to huge growth in the private equity industry
e.g
suppliers and complementers
government entities and customers
What the board of director should do?
inside and outside director
selecting, evaluating and compensating the CEO
overseeing CEO succession plans
providing guidance on executives and their compensation
reviewing, monitoring and approving the strategic initiatives
conducting a risk assessment and mitigating those risks
ensuring a firm's audited finacial statements
ensuring a firm's compliance laws and regulations
difference in national institutions and culture
free market economies
not absolute free
China
directed capitalism
U.S.
free market capitalism
Germany
France
stakeholder capitalism
state owned enterprises
be involved in the strategic plans
expand company's mission
e.g
corporate social responsibility
sustainability goals
Angency is not that important
G8
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