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CORPORATE GOVERNANCE & BUSINESS ETHICS - Coggle Diagram
CORPORATE GOVERNANCE & BUSINESS ETHICS
Shared Value Creating Framework
Public Stock Companies
Characteristics/advantages
Transferability of investor ownership
Legal personality
Limited liability for investors
Separation of legal ownership & management control
Hierarchy of authority
BOD
Management
Shareholders
Employees
State charter
Creating Shared Value
Concept
Creating economic value for shareholders (shareholder value creation)
Creating social value by addressing society's needs and challenges (value creation for society)
The role
Seeks to enhance a firm's competitiveness (by identifying connections between economic & social needs)
Creating a competitive advantage (by addressing business opportunities)
Porter's recommendation
Expand traditional internal firm value chains to include more nontraditional partners, such as nongovernmental organizations (NGOs)
Focus on creating new regional clusters
Expand the customer base to bring in non-consumers, such as bottom of pyramid
Corporate Governance (CG)
The role
Ensure that firm pursues its strategic goals successfully and legally
Attempts to address the principle-agent problem
Mechanisms to direct & control firm
Principal-agent problem
Information asymmetry (agents are generally better informed than principals
A core part of agency theory
Role
Principal: hires, monitors, compensates
Agent: performs work, provides time and talents
Source: separation of ownership & control
Agency theory
Views the firm as a nexus of legal contracts
Types
Adverse selection
Moral hazard
Board of directors (BOD)
Centerpiece of CG
Composed of
Inside directors
Outside directors
Shareholders' goals (not uniform)
Institutional investors (e.g retirement funds) => long-term viability & profitable growth
Hedge funds (often demand changes in a firm’s strategy) => to profit from short-term movements of stock prices
Responsibilities
Overseeing the company's CEO succession plan
Provide guidance to the CEO in the selection, evaluation, and compensation of other senior executives
Selecting, evaluating, and compensating the CEO
Reviewing, monitoring, evaluating, and approving strategic initiatives and corporate actions (ex large acquisitions)
Risk assessment & mitigation
Ensure financial statements are accurate
Ensure the firm's compliance with laws and regulations
Other governance mechanisms
The market for corporate control
Financial statement auditors, government regulators, and industry analysts
Executive compensation
Strategy & Business Ethics
Business ethics
An agrees-upon code of conduct in business, based on societal norms
Universal norms
Fairness
Honesty
Reciprocity
Law & ethics are not synonymous
Manager's actions can be completely legal (minimum acceptable standard), but ethically questionable
Actions can be ethical, but may not be legal
Codes of conduct (codes of ethics)
Beyond the minimum acceptable standard codified in law
Allow organization to overcome moral hazards & adverse selections
Formalized rules & standards that describe what the company expect of its employees to behave & represent the company in business dealing
Decision making
When facing an ethical dilemma
Can ask whether the intended course of action falls within the
acceptable norms of professional behavior
as outlined in the organization’s code of conduct and defined by the profession at large.
The manager should imagine whether he or she would feel comfortable explaining and defending the decision in public (consider the media report & stakeholders feel)
Bad apples VS bad barrels
Bad apples
Unethical behavior attributed to the personal characteristics of individuals
Bad barrels
Organizational & societal variables in the system influence unethical decisions & behaviors within the organization
Bad barrels can spoil the apples
Implications for Strategic Leaders
Effective CG & solid business ethics are critical to sustaining competitive advantage over time
A variety of CG mechanisms can be affective in addressing the principal-agent problem
A strategist needs to look beyond shareholders & apply a stakeholder perspective to ensure long-term survival & success of the firm
Fairness & transparency are critical to maintaining good relationship
Need to live organizational core values by example
Must help employees to “walk the talk”; leading by ethical example often has a stronger effect on employee behavior than words alone.