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Why CSR?

Chapter 3
1. Corporate Governance:
a. Corporate governance is the formal system of oversight,
accountability, and control for organizational decisions
and resources = the system of rules, practices and
processes by which a company is directed and
b. It essentially involves balancing the interests of the
many stakeholders in a company these include its
shareholders, management, customers, suppliers,
financiers, government and the community
c. Oversight: a system of checks and balances that limit
the employees
d. Accountability: ensure that
e. Control:
2. Corporate governance major issues:
a. Shareholder rights
b. Executive compensation
c. Organizational ethics programs
d. Board composition and structure
e. Auditing, control and risk management
f. CEO selection and executive successions plans
3. Corporate governance framework
a. Most businesses operate under the belief that the
purpose of business is to maximize profits for
b. The stakeholder model places the board of directors in a
position to balance the interests and conflicts of various
c. Directors and officers of corporations are placed in
positions of trust and must exercise a duty of diligence
and a duty of loyalty in decision making
d. Board of director job is to ensure that the organization
do not go off track of the organizational objectives.
4. History of corporate governance
a. Before early 1990s, same people owned and controlled
corporations little CG (e.g.: barber, pizza palour owner)
b. 1942 U.S. Securities and Exchange Commission (SEC)
is formed, requiring corporations to allow shareholder
resolutions to be brought to a vote of all shareholders
c. Mid 1990s the goal of business is to align the interests
of principals (owners - state, shareholders, nonprofit
groups, families, indv, etc) and agents so that
organizational value and viability are maximized model
of corporate

d. mid 1990s boards of directors play a greater role in

strategy formulation, and there is movement toward
corporate governance committees
e. 2002 Sarbanes-Oxley Act brought sweeping changes in
corporate governance
f. 2008-2009 Collapse of U.S. financial system discloses
corruption and need for greater oversight and control
5. Model of corporate governance
a. Shareholder model
i. Maximizes wealth for investors and owners
ii. Develops and improves the formal system of
performance accountability between management
and the firms shareholders
iii. Makes decisions based on what is ultimately best
for investors
iv. Focuses on aligning investor and management
b. Stakeholder model
i. Considers the interests of employees, suppliers,
government agencies, communities, and other
groups with which the firm interacts
ii. Assumes a collaborative and relational approach
to business
iii. Focuses on continuous improvement,
accountability, and engagement with internal and
external constituents
6. Issues in corporate governance systems
a. Boards of directors
i. Independence
ii. Quality and experience
iii. Performance
b. Shareholders and investors
i. Shareholder activism
ii. Social investing
iii. Investor confidence
c. Internal control and risk management
i. Internal and external audits
ii. Control systems
iii. Risk management
d. Financial misconduct
e. Executive compensation
7. Boards of directors:
a. Assume legal responsibility for firms resources and
b. Appoint top executive officers
c. Maintain a fiduciary (trust) duty

d. Monitor decisions made by managers on behalf of the

e. Growing interest in hiring outside directors to bring in
more independent thought and action things become
more challenging and to prevent focusing only on their
own interest
8. Shareholders and investors
a. Shareholders are concerned with ownership investment
in publicly traded firms
i. Greater input on company strategy and decisions
b. Investor is a genera; term for any individual or
organization that provides capital to another firm
i. Financial
ii. Human
iii. Intellectual
9. Characteristics of a successful shareholder activism campaign
a. Activism is a broad term that could encompass engaging
in dialog with management, submitting shareholder
resolutions, attending annual meetings, and other
mechanisms designed to communicate shareholder
interests to a corporation.
General issues in social investing
a. Environmental
b. Workplace equity and safety
c. Product safety and testing
d. Global operations
e. Human rights
Internal control and risk management
a. Controls are used to safeguard corporate assets and
resources, protect the reliability of organizational
information, and ensure compliance with regulations,
laws and contracts.
i. Limit employee and management opportunism
ii. Ensure that board members have access to timely
and quality information
iii. Implement internal and external audits to link risk,
controls and corporate governance
iv. Anticipate and remedy organizational risks
1. Minimize negative situations
2. Uncertainty needs to be hedged
Financial misconduct
a. The failure to understand and manage ethical risks
played a key role in the financial crisis of 2008-2009
b. Complex financial schemes, inappropriate risk levels,
opportunity for personal gain, financial incentives, and a
lack of effective corporate governance led to the
financial crisis




c. Subprime (making loans to people who may have

difficulty maintaining the repayment schedule) lending
created thousands of mortgage foreclosures and
d. Derivatives, a financial trading instrument, have been
called financial weapons of mass destructions
e. The average executive makes 344 times the average
workers salary
i. Up from 40 times the average salary in the 1960s
f. Two contrasting perspectives
i. Executives assume a great deal of risk and
therefore deserve great rewards
ii. No executive is worth millions of dollars regardless
of investor return
g. Plans that base achievement on several performance
goals are growing in popularity
OECD Principles of corporate governance
a. Basis for an affective corporate governance framework
b. Rights of shareholders and key owners
c. Equitable treatment of shareholders
d. Role of stakeholders in corporate governance
e. Disclosure and transparency
f. Responsibilities of the board
Implementing OECD principles of corporate governance
a. Create systems that articulate divisions of
responsibilities and are consistent with the rule of law
b. Ensure the rights of shareholders to vote and influence
corporate strategy
c. Recruit greater number of skilled, independent members
on boards of directors
d. Eliminate techniques that protect failing management
and strategy
e. Promote wider use of international accounting standards
f. Promote better disclosure of executive pay and
Future of corporate governance
a. Boards will be held responsible for developing company
purpose statements that cover stakeholder interests
b. Annual reports will include more nonfinancial
c. Boards will be required to perform self-assessments
d. Board member selection process will become
increasingly formalized
e. Boards will need to work more as teams
f. Board membership will require more time
g. Focus will move from a shareholder model to a
stakeholder model

h. Systems will ensure greater organizational-level of

accountability and control
i. General support for corporate governance will rise
j. Governments will play a more significant role