CORPORATE GOVERNANCE
>is the system of rules, practices, and processes by
which a company is directed and controlled.
>encompasses practically every sphere of management.
>is the structure of rules, practices, and processes used
to direct and manage a company.
A company's board of directors is the primary force
influencing corporate governance.
Bad corporate governance can destroy a company's
operations and ultimate profitability.
The basic principles of corporate governance are
accountability, transparency, fairness, responsibility,
and risk management.
CORPORATE GOVERNANCE (OECD)
Corporate governance is the system of stewardship and
control to guide organizations in fulfilling their long-term
economic, moral, legal, and social obligations toward
their stakeholders.
>It is a system of stewardship and control of corporate
entities.
>It is intended to fulfill long-term obligations (economic,
moral, legal, social) of the company; and
>It benefits the stakeholders.
DIFFERENCE BETWEEN MANAGEMENT &
GOVERNANCE
"Governance" is the strategic task of setting the
organization's goals, direction, limitations and
accountability frameworks.
"Management" is the allocation of resources and
overseeing the day-to-day operations of the
organization.
Governance is the ‘what’ - the strategic planning and
leadership of an organization that is carried out by the
appointed Board. This is about planning and the overall
strategy and direction of the organization and ensuring
that this is reviewed on a regular basis. The
management is supported by the Board to deliver on
those strategic plans.
Management is the ‘how’ - the delivery of the strategic
plans and the work of the organization. Management of
an organization is overseeing the day-to-day running of
the organization. Management also plays a crucial role in
the leadership of the organization through supporting
staff and/or volunteers to understand and implement the
strategic vision. This is a different leadership role to the
Board.
GOVERNANCE IS A FIDUCIARY DUTY
MANAGEMENT IS OPERATIONAL OVERSIGHT
A fiduciary duty involves actions taken in the best
interests of another person or entity.
>describes the relationship between an attorney and a
client or a guardian and a ward.
>include duty of care, loyalty, good faith, confidentiality,
prudence, and disclosure.
“It has been successfully argued that an employee may
have a fiduciary duty of loyalty to an employer.”
A breach of fiduciary duty occurs when a fiduciary fails
to act responsibly in the best interests of a client.
THE SARBANES-OXLEY ACT
The Sarbanes-Oxley Act (SOX) is a federal act passed
in 2002 with bipartisan congressional support to
improve auditing and public disclosure in response to
several accounting scandals in the early 2000s. The act
was named after the bill sponsors, Senator Paul
Sarbanes and Representative Michael Oxley, and is also
commonly referred to as SOX.
STRENGTHENING OF EXTERNAL AUDITOR’S
INDEPENDENCE
>The external auditor of a corporate issuer is prohibited
from performing eight non-audit services, namely:
- bookkeeping
- information systems design and implementation
- appraisal or valuation services
- actuarial services,
- internal audit
- management functions or human resources
- investment adviser
- legal service unrelated to audit.
>Corporate officers and directors are prohibited form
fraudulently misleading or coercing their external
auditors in the performance of their examination of the
financial statements.
>Members of the audit team must wait for a one-year
period before accepting employment as CEO, CFO,
or its equivalent in an audit client.
>Audit engagement partners must be rotated every five
years.
PROACTIVE AND MORE INDEPENDENT AUDIT
COMMITTEES:
>All covered companies must have audit committees
wherein majority are to be “independent.”
>Audit committee members may not accept consulting,
advisory, or other compensatory fees from the issuing
company. - are directly responsible for the appointment,
compensation, and oversight of the auditor’s work.
>Disclosure as to the existence of a “financial expert” on
the audit committee.
ASSESSMENT OF INTERNAL CONTROLS OVER
FINANCIAL REPORTING:
>Management is required to make an assessment of the
effectiveness of the company’s internal controls over the
financial reporting process.
>The CEO and CFO must certify the assessment of
internal controls over the financial reporting process.
>Auditors are to perform an attestation of the
management’s assessment of internal controls over the
financial reporting process.
FRAUD PREVENTION:
>Provides criminal penalties for obstruction of justice or
destruction of accounting and other documents.
>Provides protection to “whistleblowers” who report
fraud and other irregularities of corporate officials.
The “agency problem” is a situation that exists when
the “agents” of the corporation use their authority for
their own benefit and not for the benefit of the “principal”
or owners.
The term “agents” pertains to corporate managers
while “principal” pertains to the shareholders of the
company.
BOARD SETUPS
All-executive board - An all-executive set up is a board
comprised solely of executive or corporate managers, as
in the case for small or family-owned corporations.
Board with non-executive directors - is often the case
for publicly listed companies and other regulated entities
such as banks and insurance companies.
INTERNAL CONTROL
-a process effected by an entity’s board of directors,
management, and other personnel designed to provide
reasonable assurance regarding the achievement of
objectives relating to operations, reporting, and
compliance.
ENTERPRISE RISK MANAGEMENT
-a process effected by an entity’s board of directors,
management, and other personnel, applied in strategy
setting and across the enterprise, that is designed to
identify potential events that may affect the entity,
manage risks to be within its risk appetite, and provide
reasonable assurance regarding the achievement of
entity objectives.
SARBANES – OXLEY ACT (SOX LAW)
Section 302 Financial reports and statements must
certify that:
>The documents have been reviewed by signing officers
and passed internal controls within the last 90 days. The
documents are free of untrue statements or misleading
omissions. The documents truthfully represent the
company’s financial health and position.
>The documents must be accompanied by a list of
deficiencies or changes in internal controls and
information on any fraud involving company employees.
Section 401
>Financial statements are required to be accurate.
>Financial statements should also reflect disclosures of
any off-balance liabilities, transactions, or obligations.
Section 404
>Companies must publish a detailed statement in their
annual reports explaining the structure of internal
controls used. The information must also be made
available regarding the procedures used for financial
reporting. The statement should also assess the
effectiveness of the internal controls and reporting
procedures.
Section 409
>Companies are required to urgently disclose drastic
changes in their financial position or operations,
including acquisitions, divestments, and major personnel
departures. The changes are to be presented in clear
unambiguous terms.
Section 802
>Any company official found guilty of concealing,
destroying, or altering documents, with the intent to
disrupt an investigation, could face up to 20 years in
prison and applicable fines.
>Any accountant who knowingly aids company officials
in destroying, altering, or falsifying financial statements
could face up to 10 years in prison.
What is OECD? Organization for Economic
Cooperation Development
~ It is an association of 38 nations in Europe, the
Americans, and the Pacific.
~ It helps member countries formulate economic and
social policies.
~ Members and key partners represent 80% of world
trade.
~ It aids developing countries outside membership and
promotes reform.
Key Principles and issues that OECD addresses.
The Principles covered 6 key areas of corporate
governance:
*Ensuring the basis for an effective corporate
governance framework.
*The rights of Shareholders.
*The equitable treatment of shareholders.
*The role of stakeholders in corporate governance.
*Disclosure and Transparency
*The responsibilities of the board.
>The board of directors of a public company is elected
by shareholders.
>The board makes key decisions on issues such as
mergers and dividends, hires senior managers, and sets
their pay.
>Board of directors candidates can be nominated by the
company's nominations committee or by outsiders
seeking change.
>Public companies must have a board of directors.
Does a CEO Outrank a Board of Directors?
No, the CEO (who may be on the board) and the
directors work together on relevant company issues. The
Board doesn't interfere with the CEO's handling of a
company's daily operations. But it has the authority to
evaluate the performance of a CEO and remove them, if
deemed necessary.
FUNCTIONS OF THE BOARD OF DIRECTORS
A MEMBER OF THE BOARD OUGHT TO BE
INDEPENDENT:
- a person who, apart from shareholdings and fees
received from the corporation, is independent of
management and free from any business or other
relationship which could, or could reasonably be
perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities
as a director.
- Independent directors must be elected by the
shareholders present or entitled to vote in absentia
during the election of directors.
- Independent directors shall be subject to rules and
regulations governing their qualifications,
disqualifications, voting requirements, duration of term
and term limit, maximum number of board memberships
and other requirements that the SEC prescribes to
strengthen their independence.
THERE ARE GENERALLY ACCEPTED PRINCIPLES
AND GUIDELINES THAT DEFINE INDEPENDENCE.
HERE ARE SOME COMMON CRITERIA:
- NO MATERIAL RELATIONSHIP WITH THE COMPANY
- NO RECENT EMPLOYMENT
- NO SIGNIFICANT FINANCIAL INTEREST
- NO SIGNIFICANT BUSINESS RELATIONSHIPS
- NO CROSS-BOARD RELATIONSHIPS
- NO EXECUTIVE ROLE
- NO FAMILY TIES
- NO EXCESSIVE COMPENSATION
- NO LONG-TERM ASSOCIATION
GOVERNANCE OF RELATED PARTY TRANSACTION
- A related-party transaction is an arrangement between
two parties that have a preexisting business relationship.
- Some, but not all, related party-transactions carry the
innate potential for conflicts of interest, so regulatory
agencies scrutinize them carefully.
- Unchecked, the misuse of related-party transactions
could result in fraud and financial ruin for all parties
involved.
CORPORATE SOCIAL RESPONSIBILITY
“Creating a strong business and building a better world
are not conflicting goals – they are both essential
Ingredients for long-term success”
- William Clay Ford Jr. Executive Chairman, Ford
Motor Company
Corporate social responsibility (CSR) - is a business
model in which for-profit companies seek ways to create
social and environmental benefits while pursuing
organizational goals, like revenue growth and
maximizing shareholder value.
Today’s organizations are implementing extensive
corporate social responsibility programs, with many
companies dedicating C-level executive roles and entire
departments to social and environmental initiatives.
These executives are commonly referred to as a chief
officer of corporate social responsibility or chief
sustainability officer (CSO).
INTEGRITY
A component of character that can be developed.
It is the cornerstone of ethical behavior.
It is the quality of being honest with yourself and others
and living a life that is parallel with your moral ideologies.
It is choosing your thoughts and actions based on values
rather than personal gain.
It is choosing your thoughts and actions based on values
rather than personal gain.
Improving personal integrity necessitates probing one’s
philosophies, beliefs, and value system, and taking
conscious strides to conduct and perform in ways that
are coherent with you respective ethical protocol.
The hallmark of ethical leadership.
WAYS TO FOSTER & CULTIVATE INTEGRITY
Recognize facets of your behavior that necessitates
modification and transformation.
Establish your whys and wherefores for not conducting FACTORS INFLUENCING BUSINESS ETHICS
with remarkable personal integrity.
Confront the barriers and impediments that weaken you LEADERSHIP
to divert the truth thus defying moral code. PERFORMANCE & WORKING ENVIRONMENT
Practice truthfulness DEONTOLOGY
Compose an inventory of responsibilities and behaviors BENEFITS OF BUSINESS ETHICS
in which you will become reliable in GOODWILL OF THE PEOPLE
Respect the possessions of other. BUSINESS ETHICS HAVE SUSTANTIALLY IMPROVED
Pay attention to and regard the views and conclusions of THE SOCIETY
others. ETHICAL PRACTICES SUPPORT EMPLOYEES’
Do more than you expect others to do. GROWTH
Anticipate a trial and error progression that entails
STRONG TEAMWORK AND HIGH PRODUCTIVITY
tenacious determination.
HIGH PROFIT
Solicit the support and advice of others.
Develop your accountability.
Grow to be more self-regulating and rise out of rough TYPES OF CSR
times.
ETHICAL CSR: responsibility to circumvent and prevent
damage, impairment and/or social grievances
HOW CORPORATIONS BENEFIT FROM CORPORATE
SOCIAL RESPONSIBILITY ALTRUISTIC CSR: participating and promoting to
support common good at the viable outlays of the
Improve Public Image
company for noble, humane, or charitable causes.
Increases Media Coverage
STRATEGIC CSR: organization’s social welfare
Boosts Employee Engagement
responsibilities that benefit mutually the business and its
Attracts and Retains Investors stakeholders.
Improve the Company’s Brand CHARACTERISTICS OF CSR
Customer Engagement VOLUNTARY
MULTIPLE STAKEHOLDER ORIENTATION
Retain Top Talent
Helps the Business to Stand Out from Competition ALIGNMENT OF SOCIAL AND ECONOMIC
RESPONSIBILITIES

HOW NON- PROFITS BENEFIT FROM CORPORATE PRACTICES & VALUES

SOCIAL RESPONSIBILITY BEYOND PHILANTHROPY
Funding via Matching Gift Programs FORMS AND DIMENSIONS OF CSR
More Volunteer Participation
FORMS OF CSR
Forging Corporate Partnerships
PHILANTHROPIC RESPONSIBILITY:(Be a good
Varied Sources of Revenue
corporate Citizen) involves being a good corporate
Positive Workplace Environment citizen by contributing resources to the community, thus
Increase in Creativity improving the quality of life of others

Encourages Personal and Professional Growth ETHICAL RESPONSIBILITY:(Be Ethical) organization’s

management are to follow generally held beliefs about
Promotes Individual Philanthropy
the behavior in a society.

LEGAL RESPONSIBILITY:(Obey the law) defined by

BUSINESS ETHICS
The study of what is right and wrong in terms of human
behavior and conduct in business.
The study of perceptions of people about morality, moral
norms, moral rules, and ethical principles –as they apply
to people and institutions in business.
government in laws that management are expected to
comply; play by the rules.
ECONOMIC RESPONSIBILITY: (Be Profitable)
organization management are to produce goods and
services of value to society so that the firm may repay its
creditors and shareholders

The study, evaluation, analysis and questioning of ethical DRIVING FORCES BEHIND CSR
standards, policies, moral norms, and ethical theories The shrinking role of government
that managers and decision makers use in resolving
moral issues and ethical dilemmas affecting business. Demands for greater disclosure
Increased customer interests
Growing investors’ pressure
Competitive labor markets
Supplier relations
THE 3 PS OF THE TRIPPLE BOTTOM LINE
PROFIT – The Financial return an organization
generates for shareholders.
PEOPLE – An organization’s comm to positively
impacting
PLANET - An organization’s effect on the environment.
Triple Bottom Line (TBL) – Maintains that companies
should commit to focusing as much on social and
environmental concerns as they do on profits.
KEY TAKEAWAYS
The concept behind the triple bottom line is that
companies should focus as much on social and
environmental issues as they do on profits.
The TBL consists of three elements: profit, people, and
the planet.
The triple bottom line aims to measure the financial,
social, and environmental performance of a company
over time.
TBL may result in retaining employees, increasing
external investments, boosting sales from ESG-
interested customers, and gaining long-term operational
efficiencies.
TBL may also be difficult to measure, costly to
implement, and cause competing strategies across triple
bottom-line components.
Relationship of Corporate Governance to Corporate
Social Responsibility Practices of Selected Publicly
Listed Companies in the Philippines Introduction
Corporations are now moving toward achieving the
common good, with profitability as a secondary concern.
Mother Earth as we know it, must be sustained. In this
undertaking No one must be left behind.” This is the
clamor of the advocates of sustainability like Global
Reporting Initiative.
Corporations are guided by their Corporate Governance
Policies in attaining their vision, mission, goals and
objectives. However, in conformity to sustainability, they
must consider the welfare of their stakeholders
especially for the impact of their activities on them.
As part of giving back to their customers and the general
public, corporations carry out Corporate Responsibility
practices that cater to the needs of the beneficiaries.
Rationale
The Publicly Listed Companies (PLCs)in the Philippines
generate huge revenues that form part of the economy,
but are they contributing to the welfare of their
stakeholders. The Securities and Exchange Commission
has issued guidelines to PLCs regarding the submission
of Sustainability Reports way back 2019. Hence, the 1st
submissions of certain PLCs started in 2019, although
some of them have submitted Sustainability Reports
years back. Examples are PLDT, and BDO.
Methodology
Using the Integrated Reports, Sustainability Reports, and
Corporate Governance Manuals of the selected PLCs,
this study will review their Corporate Governance
policies and CSR practices.
The ESG report of Trucost is used as guide in
determining the governance indicators.
The core components of a CSR practice is used as
guide in describing the CSR activities of the PLCs (Tai, F.
M., & Chuang, S. H. (2014).
Trucost – ESG framework
ESG stands for Environment, Social and Governance.
Trucost is part of S&P (Standard & Poor) Global. A
leader in carbon and environmental data and risk
analysis, Trucost assesses risks relating to climate
change, natural resource constraints, and broader
environmental, social and governance factors.
Companies and financial institutions use Trucost
intelligence to understand their ESG exposure to these
factors, inform resilience and identify transformative
solutions for a more sustainable global economy.
Trucost’s parent company, S&P Global has a
commitment to environmental analysis and product
innovation that allows it to deliver essential ESG
investment-related information to the global marketplace.
S&P Global is a leading provider of transparent and
independent ratings, benchmarks, analytics and data to
the capital and commodity markets worldwide.
Corporate governance is the system of rules, practices,
and processes by which a company is directed and
controlled. Corporate governance essentially involves
balancing the interests of a company's many
stakeholders, which can include shareholders, senior
management, customers, suppliers, lenders, the
government, and the community. As such, corporate
governance encompasses practically every sphere of
management, from action plans and internal controls to
performance measurement and corporate disclosure.
Integrated governance is not only imperative for the
common good, but also in the direct interest of
shareholders and other stakeholders.
Hence, BODs are responsible for a) strengthening the
governance mechanisms of their organizations and their
risk management practices and b) performing according
to the principles of social responsibility.
Some companies have learned the hard way that
ignoring the stakeholder concern on various issues like
child labor in the supply chain, environmental issues,
and tax evasion scandals, has a devastating effect on
share price and corporate reputation.
CSR is “a process with the aim to embrace responsibility
for the company’s actions and encourage a positive
impact through its activities on the environment,
consumers, employees, communities, stakeholders and
all other members of the public sphere who may also be
considered stakeholders”.
Social responsibility is a responsibility and obligation to
protect, foster, increase and enhance the benefit of
stakeholders and social people.
CSR was mainly influenced by four core components:
accountability, transparency, competitiveness, and
responsibility; while developing business strategies,
companies taking accountability and transparency as
priority would strengthen their competitiveness and
generate responsibility and in turn lead to CSR.
CSR’s core components:
Accountability - The PLCs express the managements
responsibility for the financial statements and public
reports prepared for the stakeholders and the general
public.
Transparency - The PLCs submit Sustainability Reports
to the SEC where they disclose the risks posed by their
activities to the stakeholders and how the management
mitigates the negative impact on them.
Competitiveness - The PLCs understand that
customers prefer companies which practice green
practices hence, these companies obtain higher
revenues and increased market value of their shares of
stocks.
Responsibility - By protecting the customers through
accredited participants in their supply chain, the PLCs
honor its commitment to provide high quality products
and services to customers.
Advanced CSR practices of PLCs
BDO:
Rehabilitation of rural health units, benefitted 477,208
beneficiaries in 2022
Financial education program for the poor, 5,037,932
beneficiaries
Finance of environment-friendly solutions, total funding
to 2022, P781 billion
PAL HOLDINGS
Humanitarian Cargo Grant – provide aid to disaster-
stricken and neglected areas byfacilitating the airlift of
essential supplies and relief goods – Typhoon Yolanda
inTacloban, Bohol earthquake, Zamboanga crisis (2013),
Marawi siege (2017)
Medical Travel Grant – transport underprivileged
patients to destinations in the Philippines and abroad for
appropriate medical treatment
RPRSNTPinoyL – encourages talented young people to
enhance their artistic or athletic talents and skills and
showcase them in the world stage as the Best of the
Filipino
Promotion of wildlife conservation – facilitated the
transport of two Philippine eagles, Geothermica and
Sambisig to Singapore in June 2019
PLDT:
Nationwide tree-planting activity on 10th anniversary of
Typhoon Ondoy
On its 90th anniversary, planted 2,500 seedlings at
Central Cebu Protected Landscape and
1,256 trees at Marikina watershed, project called
Telepuno
Holistic program that spans scholarships, livelihood
programs, connectivity and computerization, housing
and educational facilities, training and innovation, &
annual tribute events, project called ‘Gabay Guro’
San Miguel Corporation
Promotes Education to the Youth from low-income
families through scholarship, literacy classes and
support programs like supplemental feeding and book
donation.
Strengthens communities through capability building
activities and basic social services
Supports local enterprises that bring livelihood
opportunities to community groups, dependents, retirees,
& other stakeholders
Aids disaster-stricken communities through relief and
rehabilitation programs.
Protects, preserves, and regenerates the environment.
ABS-CBN
Operation SAGIP – takes the lead for the Humanitarian
Relief and Rehabilitation activities,
Emergency humanitarian assistance program of ABS-
CBN Lingkod Kapamilya Foundation, Inc., provides food
and non-food relief to affected communities of disasters,
engages in rehabilitation and disaster risk-reduction
projects.
Sagip Kapamilya reaches out to communities each time
they are struck by disasters. It also embarks on
sustainable community activity projects such as repair of
damaged schools, feeding programs for children (Sagip
Kalusugan), shelter provision, water system installations,
and scholarships like Programa Genio and BayaniJuan.
Conclusions
1. The PLCs have sound Corporate Governance
mechanisms in place.
2. They have sustainable and programmed Corporate
Responsibility projects benefiting underprivileged
beneficiaries to a large extent.
3. Based on the gathered data on governance and CSR
practices, the researchers suggests an implication that
there is a relationship between Corporate Governance
and Corporate Social Responsibility for the 5 PLCs.
These two factors – Corporate Governance and
Corporate Social Responsibility are drivers to the PLCs
sustained profitability, resources growth, high market
value of their shares, and admirable reputation. Through
sound governance and sustainable CSR practices, the
mission, vision, goals and objectives of the company can
be achieved.
Business Ethics/Social Responsibility/
Environmental Sustainability
Business ethics can be defined as principles of conduct
within organizations that guide decision making and
behavior. Good business ethics is a prerequisite for good
strategic management; good ethics is just good
business!
ETHICS
AN ETHICS CULTURE
WHO IS RESPONSIBLE FOR ENSURING ETHICAL
STANDARDS IN ORGANIZATIONS ARE IN PLACE?
WHAT HAPPENS WHEN ETHICAL STANDARDS ARE
NOT CLEAR?
WHAT IS WHISTLE-BLOWING?
WHISTLEBLOWER
On the simplest level, a whistleblower is someone who
reports waste, fraud, abuse, corruption, or dangers to
public health and safety to someone who is in the
position to rectify the wrongdoing. A whistleblower
typically works inside of the organization where the
wrongdoing is taking place; however, being an agency or
company “insider” is not essential to serving as a
whistleblower. What matters is that the individual
discloses information about wrongdoing that otherwise
would not be known.
Enron Scandal: The Fall of a Wall Street Darling
The story of Enron Corporation depicts a company that
reached dramatic heights only to face a dizzying fall. The
fated company's collapse affected thousands of
employees and shook Wall Street to its core. At Enron's
peak, its shares were worth $90.75; just prior to
declaring bankruptcy on Dec. 2, 2001, they were trading
at $0.26.
Historical cost accounting to mark to market
America's Most Innovative Company" by Fortune for six
consecutive years between 1996 and 2001.
Enron Broadband Services and Blockbuster entered a
partnership to enter the burgeoning VOD market.
Fall 2000: CEO Jeffrey Skilling hid the financial losses of
the trading business and other operations of the
company using mark-to-market accounting.
Enron and Arthur Andersen
SOCIAL RESPONSIBILITY
Do you agree that organizations have tremendous
obligations to society?
Example: Ayala Corporation’s AC Energy
What about Facebook and other Social Media
Companies?
What about San Miguel Corporation? (1,471% increase
from Q1 2020 vs. Q1 2021)
What is a Sustainability Report?
A sustainability report reveals how a firm’s operations
impact the environment
This report should disclose to shareholders information
about labor practices, product sourcing, energy
efficiency, environmental impact, and business ethics
practices.
Example:
Wal-Mart also now encourages and expects its 1.35
million U.S. employees to adopt what it calls Personal
Sustainability Projects, which include such measures as
organizing weight-loss or smoking-cessation support
groups, biking to work, or starting recycling programs.
Employee wellness can be a part of sustainability.
Wal-Mart is installing solar panels on its stores in
California and Hawaii, providing as much as 30 percent
of the power in some stores. Wal-Mart may go national
with solar power if this test works well. Also moving to
solar energy is department-store chain Kohl’s Corp.,
which is converting 64 of its 80 California stores to using
solar power. There are big subsidies for solar
installations in some states.
Reasons why firms should be “Green”
1. Consumer demand for environmentally safe products
and packages is high.
2. Public opinion demanding that firms conduct business
in ways that preserve the natural environment is strong.
3. Environmental advocacy groups now have over 20
million Americans as members.
4. Federal and state environmental regulations are
changing rapidly and becoming more complex.
5. More lenders are examining the environmental
liabilities of businesses seeking loans.
6. Many consumers, suppliers, distributors, and investors
shun doing business with environmentally weak firms.
7. Liability suits and fines against firms having
environmental problems are on the rise.
How to Design an Ethical Organization (Harvard
Business Review)
Unethical behavior takes a significant toll on
organizations by damaging reputations, harming
employee morale, and increasing regulatory costs—not
to mention the wider damage to society’s overall trust in
business.
Creating an ethical culture thus requires thinking about
ethics not simply as a belief problem but also as a
design problem.
Pillars of an Ethical Culture
1. Explicit Values
Strategies and practices should be anchored to clearly
stated principles that can be widely shared within the
organization. A well-crafted mission statement can help
achieve this, as long as it is used correctly.
2. Thoughts During Judgment
Ethical lapses can therefore be reduced in a culture
where ethics are at the center of attention.
3. Incentives
It is a boring truism that people do what they’re
incentivized to do, meaning that aligning rewards with
ethical outcomes is an obvious solution tomany ethical
problems. That may sound simple (just pay people for
acting ethically), but money goes only so far, and
incentive programs must provide a variety of rewards to
be effective.
4. Cultural Norms
Most leaders intuitively recognize the importance of
“tone at the top” for setting ethical standards in an
organization. Easily overlooked is “tone in the middle,”
which may actually be a more significant driver of
employees’ behavior.
Putting Ethical Design Into Practice
HIRING
First impressions are inordinately powerful. For many
employees, an organization’s values were revealed
during the hiring process. Although interviews are
typically treated as opportunities for identifying the best
candidate, they also begin the acculturation process.
EVALUATION
Ethics can also be woven into the design of performance
evaluations to highlight their importance to an
organization as well as to reward and encourage good
behavior.
COMPENSATION
Aligning financial incentives with ethical outcomes may
sound easy in principle, but it is tricky in practice. This is
where a mission statement can help.
Why Strategies Fail?
A SNAPSHOT OF THE PROBLEM
All too often, failures occur because the CEOs’ approach
to strategy isn’t holistic.
Leaders either ignore some components of the
complete strategy landscape or do not recognize the
interdependencies among them.
THE SOLUTION
A complete strategy has to encompass carefully
coordinated choices about the business model with the
highest potential to create value, the competitive position
that captures as much of that value as possible, and the
implantation processes that adapt constantly to the
changing environment while building the capabilities
needed to realize value over the long term.
HOW?
IDENTIFY OPPORTUNITIES
DEFINE THE BEST WAY TO TAP A GIVEN
OPPORTUNITY
FIGURE OUT HOW TO CAPTURE THE VALUE
GENERATED IN THE NEAR TERM
REALIZE VALUE OVER TIME
BUILD A FOUNDATION FOR LONG-TERM
SUCCESS
FIGURE OUT HOW TO CAPTURE THE VALUE
GENERATED IN THE NEAR TERM
INDUSTRY ATTRACTIVENESS: Regardless of the
value created, an industry will be attractive only if its
structure allow participants to earn decent returns.
COMPETITIVE POSITIONING: Identifying a unique
value proposition for a defined customer group
COMPETITIVE INTERACTION: Predict how interactions
among rivals will play out.
INCUMBENT’S MISTAKE
CEOs of established companies often pay too much
attention to defining how their firms will capture value
and too little to new ways to create value and how firms’
activities and capabilities need to evolve over time.
CEOs of mature companies should ask themselves,
“when” did our annual strategy process last generate a
truly breakthrough idea”?
LARGEST U.S. COMPANIES BY MARKET CAP, 2021
(Valuation in $ Trillions)
1. Apple - $ 2.2
2. Microsoft - $ 1.9
3. Amazon - $ 1.7
4. Alphabet - $ 1.5
5. Facebook - $ 0.9
The good news for leaders of incumbent companies is
that the emergence of new approaches doesn’t have to
doom their enterprises. Indeed, if they take a holistic
perspective on strategy, they may discover that those
business models present attractive opportunities
because they create more value.
No incumbent should respond to every new business
model—that would simply be playing whack-a-mole.
Instead, a firm must develop a strategic approach to
identifying the value-creation potential of models and
then determining whether to pursue any new ones by
predicting the outcome of competition among alternative
models.
Example:
Netflix vs. Blockbuster Video and Hollywood Video
Amazon vs. Walmart: Both will survive. Each company is
rushing to replicate the other’s asset base.
ENTREPRENEUR’S MISTAKE
In their excitement to exploit new opportunities they
spotted before anyone else, many entrepreneurs fail to
see that the more value their business model creates,
the more competition they’re likely to face.
When a firm is pursuing a successful new,business
model against intense competition, it’s vital to apply the
three value-capture frameworks in the middle of the
landscape:
To capture sufficient value, a firm has to be in an industry
with an attractive structure and possess a sustainable
competitive advantage.
If you simply cannot achieve operational efficiencies, you
are condemned to fail, regardless of how exciting your
business model is!!!
IMPLEMENTATION: THEY KEY TO REALIZING
VALUE OVER TIME
Identifying a viable business model and a distinctive
competitive position that captures value today doesn’t
ensure success when companies confront ever-changing
opportunities.
To realize value over the long term, firms have to
balance agility and control, by giving project teams the
authority to experiment with new configurations
whileconsistently investing in the capabilities needed for
the future.
Global/International Issues
MULTINATIONAL FIRMS
Organizations that conduct business operations across
national borders are called international firms or
multinational corporations. The strategic-management
process is conceptually the same for multinational firms
as for purely domestic firms; however, the process is
more complex for international firms due to more
variables and relationships.
Multinational corporations (MNCs) face unique and
diverse risks, such as expropriation of assets, currency
losses through exchange rate fluctuations, unfavorable
foreign court interpretations of contracts and
agreements, social/political disturbances, import/export
restrictions, tariffs, and trade barriers. Strategists in
MNCs are often confronted with the need to be
globally competitive and nationally responsive at the
same time.
International companies are importers and exporters,
they have no investment outside of their home country.
Multinational companies have investment in other
countries, but do not have coordinated product offerings
in each country. More focused on adapting their products
and service to each individual local market.
Global companies have invested and are present in
many countries. They market their products through the
use of the same coordinated image/brand in all markets.
Generally one corporate office that is responsible for
global strategy. Emphasis on volume, cost management
and efficiency.
Transnational companies are much more complex
organizations. They have invested in foreign operations,
have a central corporate facility but give decision
making, R&D and marketing powers to each individual
foreign market.
ADVANTAGES OF INTERNATIONAL OPERATIONS
1. Firms can gain new customers for their products.
2. Foreign operations can absorb excess capacity,
reduce unit costs, and spread economic risks over a
wider number of markets.
3. Foreign operations can allow firms to establish low-
cost production facilities in locations close to raw
materials and/or cheap labor.
4. Competitors in foreign markets may not exist, or
competition may be less intense than in domestic
markets.
5. Foreign operations may result in reduced tariffs, lower
taxes, and favorable political treatment.
6. Joint ventures can enable firms to learn the
technology, culture, and business practices of other
people and to make contacts with potential customers,
suppliers, creditors, and distributors in foreign countries.
7. Economies of scale can be achieved from operation in
global rather than solely domestic markets. Larger-scale
production and better efficiencies allow higher sales
volumes and lower-price offerings.
8. A firm’s power and prestige in domestic markets may
be significantly enhanced if the firm competes globally.
Enhanced prestige can translate into improved
negotiating power among creditors, suppliers,
distributors, and other important groups.
DISADVANTAGES OF INTERNATIONAL
OPERATIONS
1. Foreign operations could be seized by nationalistic
factions.
2. Firms confront different and often little-understood
social, cultural, demographic, environmental, political,
governmental, legal, technological, economic, and
competitive forces when doing business internationally.
These forces can make communication difficult in the
firm.
3. Weaknesses of competitors in foreign lands are often
overestimated, and strengths are often underestimated.
Keeping informed about the number and nature of
competitors is more difficult when doing business
internationally.
4. Language, culture, and value systems differ among
countries, which can create barriers to communication
and problems managing people.
5. Gaining an understanding of regional organizations
such as the European Economic Community, the Latin
American Free Trade Area, the International Bank for
Reconstruction and Development, and the International
Finance Corporation is difficult but is often required in
doing business internationally.
6. Dealing with two or more monetary systems can
complicate international business operations.
THE GLOBAL CHALLENGE
(1) how to gain and maintain exports to other nations
and;
(2) how to defend domestic markets against imported
goods. The economy as a whole and even monetary
markets
Protectionism refers to countries imposing tariffs, taxes,
and regulations on firms outside the country to favor their
own companies and people. Most economists argue that
protectionism harms the world economy because it
inhibits trade among countries and invites retaliation.
GLOBALIZATION - is a process of doing business
worldwide, so strategic decisions are made based on
global profitability of the firm rather than just domestic
considerations. A global strategy seeks to meet the
needs of customers worldwide, with the highest value at
the lowest cost.
A global strategy includes designing, producing, and
marketing products with global needs in mind, instead of
considering individual countries alone. A global strategy
integrates actions against competitors into a worldwide
plan. Today, there are global buyers and sellers, and the
instant transmission of money and information across
continents.
Communication Differences Across Countries
1. Italians, Germans, and French generally do not soften
up executives with praise before they criticize.Americans
do soften up folks, and this practice seems manipulative
to Europeans.
2. Israelis are accustomed to fast-paced meetings and
have little patience for American informality and small
talk.
3. British executives often complain that American
executives chatter too much. Informality, egalitarianism,
and spontaneity from Americans in business settings jolt
many foreigners.
4. Europeans feel they are being treated like children
when asked to wear name tags by Americans.
5. Executives in India are used to interrupting one
another. Thus, when American executives listen without
asking for clarification or posing questions, they are
viewed by Indians as not paying attention.
6. When negotiating orally with Malaysian or Japanese
executives, it is appropriate to allow periodically for a
time of silence. However, no pause is needed when
negotiating in Israel.

7. Refrain from asking foreign managers questions such

as “How was your weekend?” That is intrusive to
foreigners, who tend to regard their business and private
lives as totally separate.

EMERGING MARKET

An emerging market economy is the economy of a

developing nation that is becoming more engaged with
global markets as it grows. Countries classified as
emerging market economies are those with some, but
not all, of the characteristics of a developed market.

BRIC countries or Brazil, Russia, India, and China.

These countries are currently considered the top four
emerging markets.

CIVETS countries or Colombia, Indonesia, Vietnam,

Egypt, Turkey, and South Africa.