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Chapter Eleven

Corporate Performance, Governance, and Business Ethics

Stakeholders and Corporate Performance

Stakeholders: Individuals or groups with an interest, claim, or stake in the company, in what it does, and in how well it performs.
Internal Stakeholders (e.g. employees, stockholders, etc.) External Stakeholders (e.g. customers, creditors, governments, etc.)

A company must consider stakeholder claims in developing and implementing strategy

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Stakeholders and the Enterprise

Figure 11.1

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Stakeholder Impact Analysis

Identify stakeholders Identify stakeholders interests and concerns Identify what claims stakeholders are likely to make on the organization Identify stakeholders who are most important, from the organizations perspective Identify resulting strategic challenges

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The Unique Role of Stockholders

Stockholders are a companys legal owners and the provider of risk capital, a major source of capital to operate a business. Maximizing long-run profitability & profit growth is the route to maximizing returns to shareholders, as well as satisfying the claims of most other stakeholder groups.

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Profitability, Profit Growth, and Stakeholder Claims

To grow profits, companies must be doing one or more of the following:
1. 2. 3. 4. Participating in a market that is growing Taking market share away from competitors Consolidating the industry via horizontal integration Developing new markets Dividend payments Capital appreciation in market value of shares

Stockholders receive their returns as:

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Agency Theory
Agency relationships arise whenever one party delegates decision-making authority or control over resources to another. Principal-Agent Relationships
Principal: person delegating authority Agent: person to whom authority is delegated

The Agency Problem:

Agents and principals may have different goals Agents may pursue goals that are not in the best interests of their principals Agents may take advantage of information asymmetries to maximize their interests at the expense of principals It is difficult for principals to measure performance Trust On-the-job consumption Empire building
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The Tradeoff Between Profitability and Revenue Growth Rates

Need to maximize long-run shareholder returns by seeking the right balance between company growth . . . and profitability and profit growth.

Figure 11.2

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The Challenge for Principals

Confronted with agency problems, the challenge for principals is to:
1. Shape the behavior of agents so that they act in accordance with goals set by principals 2. Reduce information asymmetry between agents and principals 3. Develop mechanisms for removing agents who do not act in accordance with goals and principals Principals try to deal with these challenges through a series of governance mechanisms.
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Governance Mechanisms
Governance mechanisms serve to limit the agency problem by aligning incentives between agents and principals and by monitoring and controlling agents. These mechanisms include:
The Board of Directors Stock-Based Compensation Financial Statements The Takeover Constraint
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Governance Mechanisms Inside a Company

Internal agency problems can be reduced by:

Strategic control systems

Employee incentives

To establish standards against which performance can be measured To create systems for measuring and monitoring performance To compare actual performance against targets To evaluate results and take corrective actions Balanced Scorecard model approach is used to drive future performance

Employee stock options and stock ownership plans Compensation tied to attainment of superior efficiency, quality, innovation, and responsiveness to customers

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A Balanced Scorecard Approach

Figure 11.3

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Ethics and Strategy

Business ethics are the accepted principles of right or wrong governing the conduct of businesspeople.
Ethical dilemmas occur when:
There is no agreement over what the accepted principles are None of the available alternatives seem ethically acceptable

Many accepted principles are codified into laws:

Tort laws governing product liability Contract law contracts and breaches of contracts Intellectual property law protection of intellectual property Antitrust law governing competitive behavior Securities law - issuing and selling securities

Behaving ethically goes beyond staying within the law

An ethical strategy is one that does not violate the accepted principles.
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Ethical Issues in Strategy

Self-dealing Information manipulation Anticompetitive behavior Opportunistic exploitation Substandard working conditions Environmental degradation Corruption
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The Roots of Unethical Behavior

Why do some managers behave unethically?
No simple answers, but some generalizations: 1. Personal ethics code: will have a profound influence on behavior as a businessperson 2. Do not realize they are behaving unethically: by failing to ask the right questions 3. Organizations culture: de-emphasizes ethics and considers primarily economic consequences 4. Unrealistic performance goals: encouraging and legitimizing unethical behavior 5. Unethical leadership: that encourages and tolerates behavior that is ethically suspect
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Philosophical Approaches to Ethics

Philosophical underpinnings of business ethics that can provide managers with a moral compass to help navigate through difficult ethical issues:

The Friedman Doctrine

Milton Friedmans basic position is that the only social responsibility of business is to increase profits, as long as the company stays within the law and the rules of the game without deception or fraud.

Utilitarian and Kantian Ethics

The moral worth of actions is determined by its consequences leading to the best possible balance of good versus bad consequences. Committed to the maximization of good and the minimization of harm.

Rights Theories
Recognizes that human beings have fundamental rights and privileges. Rights establish a minimum level of morally acceptable behavior.

Justice Theories
Focus on the attainment of a just distribution of economic goods and services that is considered to be fair and equitable.
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Behaving Ethically
To make sure that ethical issues are considered in business decisions, managers should:


5. 6. 7.

Favor hiring and promoting people with a well-grounded sense of personal ethics. Build an organizational culture that places a high value on ethical behavior. Make sure that leaders not only articulate but also act in an ethical manner. Put decision-making processes in place that require people to consider the ethical dimension of business decisions. Use ethics officers. Put strong corporate governance processes in place. Act with moral courage and encourage others to do the same.
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