Chapter 2

Corporate Governance
and
Social Responsibility

PowerPoint Slides
Anthony F. Chelte
Western New England College

Prentice Hall, 2002 Chapter 2 1

Wheelen/Hunger
 Corporate Governance
Defined:
Refers to the relationship among
the board of directors, top
management, and shareholders
in determining the direction and
performance of the corporation.

Prentice Hall, 2002 Chapter 2 2

Wheelen/Hunger
 Corporate Governance
•Setting corporate strategy, overall
direction,
mission or vision

•Hiring and firing the CEO and top

management
Board of
Directors •Controlling, monitoring, or supervising
top management

•Reviewing and approving the use of

resources

•Caring for shareholder interests

Prentice Hall, 2002 Chapter 2 3

Wheelen/Hunger
 Corporate Governance
Role of the Board in strategic management

– Monitor
• Developments inside and outside the corporation

– Evaluate & Influence

• Review proposals, advise, provide suggestions and
alternatives

– Initiate & Determine

• Delineate corporation’s mission and specify strategic
options

Prentice Hall, 2002 Chapter 2 4

Wheelen/Hunger
 Board of Directors
Members:
Inside directors
– “Management directors”
– Officers or executives employed by
corporation

Outside directors
– “Non-management directors”
– May be executives of other firms but not
employed by board’s corporation

Prentice Hall, 2002 Chapter 2 5

Wheelen/Hunger
 Board of Directors Continuum

DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT

Low High
(Passive) (Active)

Rubber Minimal Nominal Active

Phantom Stamp Review Participation Participation Catalyst

Never knows Permits officers Formally Involved to a Approves, Takes the

what to do, if to make all reviews limited degree questions, and leading role in
anything; no decisions. It selected issues in the perform- makes final de- establishing
degree of votes as the that officers ance or review cisions on mis- and modifying
involvement. officers recom- bring to its of selected key sion, strategy, the mission,
mend on action decisions, policies, and objectives,
issues. indicators, or objectives. Has strategy, and
programs of active board policies. It has
management. committees. a very active
Performs fiscal strategy
and manage- committee.
ment audits.

Prentice Hall, 2002 Chapter 2 6

Wheelen/Hunger
 Agency Theory

Problems arise in corporations

because the agents (top
management) are not willing to bear
responsibility for their decisions
unless they own a substantial
amount of stock in the corporation.

Prentice Hall, 2002 Chapter 2 7

Wheelen/Hunger
 Stewardship Theory

Executives tend to be more

motivated to act in the best interest
of the corporation than their own
self-interests. Theory argues that
over time, senior executives tend to
view the corporation as an extension
of themselves.

Prentice Hall, 2002 Chapter 2 8

Wheelen/Hunger
 Board of Directors
“Outsider” overly simplistic term --
Some outsiders are not truly objective
and could be considered insiders.

Examples:
• Affiliated Directors
• Retired Directors
• Family Directors

Prentice Hall, 2002 Chapter 2 9

Wheelen/Hunger
 Board of Directors
Membership Trends
(Survey, 1999)

• 75% of boards have at least 1 female

director
• 25% of boards have two female directors
• 60% of boards have at least one minority
member

Prentice Hall, 2002 Chapter 2 10

Wheelen/Hunger
 Board of Directors

Codetermination
– The inclusion of a corporation’s workers
on its board of directors.

Prentice Hall, 2002 Chapter 2 11

Wheelen/Hunger
 Board of Directors
Interlocking Directorates

Direct Interlocking Directorate –

– When two firms share a director or when an
executive of one firm sits on the board of a
second firm.

Indirect Interlocking Directorate –

– When two corporations have directors who
also serve on the board of a third firm.

Prentice Hall, 2002 Chapter 2 12

Wheelen/Hunger
 Board of Directors

Nominations & Elections

Traditional Approach:
– CEO invites members to serve
– Shareholders approve in annual proxy
statement
– All nominees are usually elected

Prentice Hall, 2002 Chapter 2 13

Wheelen/Hunger
 Board of Directors

Nominations & Elections

Staggered Board Approach:

Corporations whose directors serve terms of
more than one year, divide the board into
classes, and stagger elections so that only a
portion of the board stands for election each
year.

Prentice Hall, 2002 Chapter 2 14

Wheelen/Hunger
 Board of Directors
Nominations & Elections
Criteria for Selection
•Wiling to challenge
management
•Special expertise
•Availability for advice and
meetings
Board of •Expertise on global issues
Director •Understands key technologies
Membership •External contacts valuable to
the firm
•Detailed knowledge of industry
•High visibility in field
•Accomplished in representing
firm to stakeholders

Prentice Hall, 2002 Chapter 2 15

Wheelen/Hunger
 Board of Directors
Organization of the Board

• Size
– Determined by charter and bylaws
– Average for publicly-held, large firm is 11
directors
– Average for small/medium private firms is 7 to
8 directors

Prentice Hall, 2002 Chapter 2 16

Wheelen/Hunger
 Board of Directors
Corporate Governance

 No consistent link between board

membership, leadership, structure, and
financial performance of firm
 Investors pay more for a firm’s stock when
positive toward good corporate governance—
Belief that
• Good governance leads to better performance over
time
• Reduces risk of company finding itself in trouble
• Governance is a major strategic issue
Prentice Hall, 2002 Chapter 2 17
Wheelen/Hunger
 Styles of Corporate Governance

High
Degree of Involvement

Entrepreneurship Partnership
By Top Management

management management

Chaos Marionette
management management
Low
Low Degree of Involvement High
By Board of Directors
Prentice Hall, 2002 Chapter 2 18
Wheelen/Hunger
 Board of Directors
Trends in Corporate Governance

• Boards more involved in reviewing,

evaluating, and shaping strategy
• Institutional investors active on boards;
pressure on CEO for firm performance
• Shareholders demand directors own more
than token amounts of the firm’s stock
• Non-affiliated outside directors increasing

Prentice Hall, 2002 Chapter 2 19

Wheelen/Hunger
 Board of Directors
Trends in Corporate Governance

• Boards becoming smaller

• Boards taking more control of board
functions
• Corporations becoming more global;
international experience needed
• Societal expectations that boards balance
profitability and social responsibility
• Diversity of board members

Prentice Hall, 2002 Chapter 2 20

Wheelen/Hunger
 Top Management
Responsibilities of Top Management:

• Provide executive leadership and a

strategic vision

• Manage the strategic planning process

Prentice Hall, 2002 Chapter 2 21

Wheelen/Hunger
 Top Management

Executive Leadership –
– The directing of activities toward the
accomplishment of corporate objectives. Sets
the tone for the entire corporation.

Strategic Vision –
– A description of what the company is capable
of becoming. Often communicated in the
mission statement.

Prentice Hall, 2002 Chapter 2 22

Wheelen/Hunger
 Top Management
CEO and Clear Strategic Vision

Common Characteristics:
• CEO articulates a strategic vision
• CEO presents a role for others
• CEO communicates high performance
standards and shows confidence in
followers
Prentice Hall, 2002 Chapter 2 23
Wheelen/Hunger
 Strategic Management Process

Strategic Planning Staff --

–Supports top management and
business units in the strategic
planning process.

Prentice Hall, 2002 Chapter 2 24

Wheelen/Hunger
 Strategic Management Process
Strategic Planning Staff

Responsibilities:
• Identify and analyze company-wide
strategic issues, suggest corporate
strategic alternatives
• Work as facilitators with business
units to guide them through the
strategic planning process

Prentice Hall, 2002 Chapter 2 25

Wheelen/Hunger
 Social Responsibility

Key question for strategic decision makers:

“Should strategic decision makers be

responsible only to shareholders or do
they have broader responsibilities?”

Prentice Hall, 2002 Chapter 2 26

Wheelen/Hunger
 Social Responsibility
Friedman’s Traditional View

“There is one and only one social

responsibility of business – to use its
resources and engage in activities
designed to increase its profits…”

Prentice Hall, 2002 Chapter 2 27

Wheelen/Hunger
 Social Responsibility
Carroll’s Four Responsibilities

• Economic
• Legal
• Ethical
• Discretionary

Prentice Hall, 2002 Chapter 2 28

Wheelen/Hunger
 Social Responsibility

Prentice Hall, 2002 Chapter 2 29

Wheelen/Hunger
 Social Responsibility
Benefits
•Environmental concerns may enable
Ben & Jerry’s the firm to charge premium prices and
gain brand loyalty

•Trustworthiness may help generate

Maytag enduring relationships with suppliers
and distributors without spending time
and money policing contracts
Procter &
•Can attract outstanding employees
Gamble who prefer working for a responsible
firm

Levi Strauss •More likely to be welcomed into a

foreign country
Prentice Hall, 2002 Chapter 2 30
Wheelen/Hunger
 Social Responsibility
Moral Relativism

– Morality is relative to some

personal, social or cultural
standard and that there is no
method for deciding whether one
decision is better than another.

Prentice Hall, 2002 Chapter 2 31

Wheelen/Hunger
 Social Responsibility
Kohlberg’s Levels of
Moral Development

– Preconventional Level
– Concern for self

– Conventional Level
– Consideration of laws and norms

– Principled Level
– Adherence to internal moral code
Prentice Hall, 2002 Chapter 2 32
Wheelen/Hunger
 Social Responsibility

Code of Ethics:
– Specifies how an organization
expects its employees to behave
while on the job.

Prentice Hall, 2002 Chapter 2 33

Wheelen/Hunger
 Social Responsibility

Ethics
The consensually accepted standards of behavior
for an occupation, trade, or profession

Morality
The precepts of personal behavior based on
religious or philosophical grounds

Law
Formal codes that permit or forbid certain
behaviors
Prentice Hall, 2002 Chapter 2 34
Wheelen/Hunger
 Social Responsibility

Approaches to Ethical Behavior

• Utilitarian
Actions and plans judged by consequences
• Individual Rights
People have fundamental rights to be
respected in all decisions
• Justice
Distribution of costs and benefits to be
equitable, fair, and impartial

Prentice Hall, 2002 Chapter 2 35

Wheelen/Hunger
 Social Responsibility
Impact of the Internet

Issues –

• Cybersquatting

• Taxation

• Public Interest

Prentice Hall, 2002 Chapter 2 36

Wheelen/Hunger