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SMMCG9[CS-4]
Corporate responsibility
social responsibility
managers' responsibilities
economic
legal
keep economic interest but also follow the rules
the highest level of bloom's taxonomy
Doing the right things beyond the corporation
A corporate citizen to the world
firms can do well on finance by doing good CSR
depend on the country the firm in
countries are less interested in CSR
United Arab Emirates, Japan, and India
countries are more interested in CSR
China, Brazil, and Germany
economic responsibilities
Milton Friedman statement- CSR is only increase profits
Gain and sustain competitive advantage
corporate governance
reduce agency cost
monitoring costs
establish principals that can monitor the agent's behavior more
enforcement cost
penalties for non-compliance ones
incentive costs
provide the agent with more incentives
relationships among the stakeholders
control strategic direction
agency costs
shareholders
managers
The manager doesn't act in the best interest of the shareholder.
Used to determine and control the strategic direction and
performance of the organization
Mechanisms
To ensure the pursuit of the strategic goals of the company
Can minimize the agency cost
contractual relationships among all the stakeholders of the firm
employees have legal rights
customers have legal rights for having certain expectations.
asymmetric problem
e.g.
Ponzi
sell stock
adverse selection
e.g. the job seeker lie
moral problem
e.g. the employee not putting in very much effort
Public firms&their role in society
Firms
Goal
To maximize returns for shareholders
Public corporations take money from equity investors.
The residual claimants of value created by the company.
Publicly traded corporation
(Public stock company)
4 characteristics
Limited liability of investors
Transferability of invetors
The owners of stock can buy and sell stock.
Legal personality
The board of directors is responsible for all of the stakeholders in the corporation.
Separation of ownership & control
The hierarchical nature of a publicly traded company
State charter
Shareholders
Board of directors
Management
Employees
Stakeholder impact analysis
Step1.Who are the stakeholders?
Whoever can be affected or affect the corporation or typically included the stakeholders.
Step2.What are the stakeholders interest and claims?
A manager has to think about both the shareholders & employees’ saying.
Step3.What are all the opportunities and threats to all these stakeholders present?
Need to a systematic analysis of all the stakeholder groups and what are their interests.
Trying to get as a decision that keeps the coalition together like a politician.
Step4.What economic, legal, ethical, and philanthropic responsibilities do we have the stakeholder?
Step5.What should we do to effectively address the stakeholder concerns?
shareholder-centric worldview
market-centric neoliberal
intellectual movement in economics&finance
Mechanisms of Corporate Governance
Why manager care about financial performance?
board of directors
corporate governance around the world
monitoring by institutional investors
Debts
compensation heavily weighted toward stock option
monitor by boards of directors
separate chairperson and CEO
the market for corporate control
internal control of multi-divisional
management poor, stock price decline
recruitment of executives from outside the firm
investors that have large investment may monitor very closely
use Goldilocks principle to intermediate range where will get better performance of manager
reducing agency costs
chairperson and CEO both impact each other
in tech company will slow down the new technology
normal company
tech company
minimize free cash flow
minimize agency cost is not the primary problem
select, evaluate and compensate CEO
oversee CEO succession plan
general strategic oversight and guidance
provide guidance on executives and their compensation
conduct a risk assessment and mitigation
ensure a firm's audited financial statement
review, monitor and improve strategic initiatives
ensure a firm's compliance with laws and regulation
difference in national institution and culture
state — directed capitalism (less freedom)
free market (more freedom)
don't have perfectly free market economy