Key Topics

Ch 3 & 4

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 Covering Key Topics…
• …need more time than expected
• Because importance of each topic is different
• That is why “Discussions” for each group on
the Blackboard was created.
– It can be used for any group things….

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 Focus of the Book:
three themes based on view point of managerial approach

Managerial Not technical but based

on business perspective
Approach

Business Stakeholder
Ethics Sustainability Management

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 Key Topics
Stakeholder
• Type of stake and stakeholders
• Sustainability as stakeholder
• Progress of stakeholder involvement based
on three views of the firm
• Corporate Engagement
Corporate Governance
• Board of directors
• Sarbanes-Oxley Act (SOX) of 2002 for
improving governance
• Alternative Model of Corporate Governance
Walmart Case Study

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 Origins of the Stakeholder Concept
Stake - An interest or a share in an undertaking.
• Stake of student: grade, tuition, etc.

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 An interest
• The plant closing will affect our community.
• This TV commercial demeans women.
• A Citizen's interest in a national issue
– E.g., US citizens' interest in NAFTA (North
American Free Trade Agreement) negotiation.
– Reform or not??

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 Moral Right
• Respectful or fair treatment
– Respect your co-worker, subordinate, etc.
• A sense of fairness
– E.g., It is fair to share equal amount of work
among team members and keep the noise down
in the office while working.

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 Legal Right
• Maternity rights
– Maternity leave for husband
• Right to legal advice (from lawyer) if arrested
• Consumer rights when you buy goods and
services

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 Ownership
• When a person or group has a legal title to an
asset or a property
– This company is almost mine. I have more than
50% of stocks.
– I own 1,000 stocks out of 10,000 of this
corporation. So, I can claim at least 10% of
ownership.

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 Stakeholders
Stakeholder -
• Any individual or group who can affect or
is affected by the actions, decisions,
policies, practices, or goals of the
organization.
• Stakeholder is a variant of the concept of
stockholder (or shareholder) – an
investor/owner of businesses.

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 Shareholder vs. Stakeholder
• ….is any person, company or other institution that
owns at least one share of a company’s stock.
• Shareholders are stakeholders in a corporation
– Shareholders are usually not personally liable for the
company's debts and other financial obligations. 
• Stakeholders are not always shareholders

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Who are Business’s Stakeholders?
Stockholders Employees

Customers Community Competitors

Business Stakeholder Groups

Special-Interest
Suppliers Media
Groups

Natural Environment:
Society
Part of Sustainability

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 Getting Important Stakeholders
Sustainability, buzz word and one of key themes
• What is Sustainability? (4:00)
• Please try below after class
– The Journey of Sustainable Business (12:00)
Primary nonsocial stakeholders
– Natural environment
– Nonhuman species
• Mountain ranges (Himalaya, tallest mountain?)
– Future generations

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Evolution of stakeholder involvement
based on three views

Production Managerial Stakeholder

View View View

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 Production and Managerial Views
of the Firm (fig 3-2 slightly different)

industrial age

in-between
industrial age and
information age

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 Stakeholder View of the Firm

information age
and beyond

Natural Environment

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 Type of Stakeholders
Primary social Secondary social
stakeholders (direct) stakeholders (indirect)
Shareholders and investors Government regulators
Employees and managers Civic institutions
Customers Social pressure groups
Local communities Media and academic
commentators
Suppliers and other Trade bodies
business partners
Competitors

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 Nonsocial Stakeholders
Primary nonsocial
stakeholders
Natural environment
Future generations
Nonhuman species
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Secondary nonsocial
stakeholders
Environmental interest
groups (e.g., Greenpeace)
Animal welfare
organizations (e.g., shelter)
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 Key Questions for effective
Stakeholder Management
1. Who are our organization’s stakeholders?
2. What are our stakeholders’ stakes?
3. What opportunities and challenges do our
stakeholders present to the firm?
4. What responsibilities (economic, legal, ethical,
and philanthropic) does the firm have to its
stakeholders?
5. What strategies or actions should the firm
take to best address stakeholder challenges
and opportunities?

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 Stakeholder Engagement
• An approach by which companies successfully
implement the transactional level of strategic
management capability.
• Stakeholder Engagement (end @ 2:43, 3:07)
• Interaction with stakeholders must be integrated into
every level of decision-making in the organization.
• A ladder of stakeholder engagement depicts a
continuum from low engagement to high
engagement.
• Transparency: working toward the open corporation.
• Sustainability is the latest emphasis on engaging
stakeholders.

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 Corporate Governance
• Refers to the method by which a firm is
being governed, directed, administered, or
controlled, and to the goals for which it is
being governed.
• What is Corporate Governance? (2:10)
• Is concerned with the relative roles, rights,
and accountability of such stakeholder
groups as owners, boards of directors,
managers, employees, and other
stakeholders.

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 The Corporation’s
Hierarchy of Authority
State Charter
Issued by the state - allow
right to exist. So, not a major
group in a corporation

Shareholders

Board of Directors

Management

Employees
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Roles of Four Major Groups -
Shareholders -
• Own stock in the firm, giving them ultimate
control (the shareholder-primacy model).
Board of Directors -
• Govern and oversee management of the
business.
Managers (especially, top management) -
• The individuals hired by the Board to
manage the business on a daily basis.
Employees -
• Hired to perform actual operational work

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Separation of Ownership from Control
Contributes to Governance Problems

Corporate Period
Pre-corporate Period
Shareholders
(multi-ownership)
Owners
(ownership, sole
& almost unlimited Board of
responsibility) Directors

Managers
(control) Management
(control)

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 Red Flags Signaling Board Problems
• What if you detect below problems?

1. Company has to restate earnings.

2. Poor employee morale.
3. Negative risk assessment from auditor.
4. Poor customer satisfaction track record.
5. Management misses strategic performance goals.
6. Company is target of employee lawsuits.
7. Stock price declines.
8. Quarterly financial results miss analysts’ expectations.
9. Low corporate governance quotient rating.

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 The Need for Board Independence
• The board is responsible for effective corporate
governance.
• Outside directors – are independent from the firm
• Inside directors – have some tie to the firm
• Board independence from management is crucial to
good governance. If not, below scandal can happen again
• E.g., Enron Scandal (4:48)
• world famous scandal and motivation for SOX
• Even today, still not easy……..

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Matters Surrounding Unreasonably
High Compensation

CEO Pay-Firm Performance Relationship

Excessive CEO Pay

Executive Retirement Plans & Exit Packages

Outside Director Compensation

Why it Pays to Be on a Board of Directors (2:30)

SEC Rules as a Solution - Transparency

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Improving Corporate Governance (1 of 2)
• Sarbanes-Oxley Act (SOX) of 2002 (4:45) – After
class especially your major is Accounting or Finance
• Amends securities laws to protect investors in public
companies
• Enhances public disclosure to require reporting of off-
balance sheet transactions, and personal loans to
executives
• Limits the nonauditing services an auditor can provide to a
firm it audits
• Makes it unlawful for accounting firms to provide services
where conflicts of interests exist
• CEOs and CFOs must certify financials, and are held
responsible for financial representations

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Improving Corporate Governance (2 of 2)
• May not be effective unless top management is
willing to enforce and strongly implement below….
Changes in boards of directors -
• More Board diversity
• A greater ratio of outside board members to
inside board members
Use of board committees to:
• Ensure that financials are not misleading
• Ensure that internal controls are adequate
• Follow-up allegations of irregularities
• Ratify the selection of an external auditor

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 Q&A
What is the chairman of a company?
– A chairman is an executive elected by a company's board
of directors that is responsible for presiding over board or
committee meetings.
Is a CEO higher than a chairman?
– The chairman, as a member of the board of directors, has
a higher rank than the president / CEO because the
chairman can have a role in hiring and firing the
president / CEO, whereas the converse is not the case.

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 Q&A
CEO vs. Chairman
– The CEO is ultimately accountable to the board of directors
for the company's performance.
– The chairman of a company is the head of its board of
directors.
Can the CEO be a chairmen of the board?
– A CEO who may also be chairman of the board as well as
other executives of the organization such as its CFO or
large shareholders (who may or may not also be
employees or officers).

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 An Alternative Model of
Corporate Governance 1
• shareholder primacy (Wikipedia)
• Shareholder-centric model
• Shareholder primacy is a theory in corporate
governance holding that shareholder interests
should be assigned first priority relative to all
other corporate stakeholders.
• According the law - Own only stock and thus have no
legal right to control the firm

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 An Alternative Model of
Corporate Governance 2
• Director primacy is board-centric, but shareholder
wealth focused.
– More broader: Boards have a duty to shareholders, but
boards members are the ultimate decision makers and
their primary duty is to the corporation.
– Works better in the long-term by providing needed
autonomy for boards directors.

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 Corporate Governance Structure
information from SEC
• www.sec.gov
– Company’s annual report (Form 10-K)
– Proxy statement (Form Def 14A).
• Review these documents to get you a better
understanding of the company’s corporate
governance structure.
– Good idea to review your company for the sake of your
job, security, etc.

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 Walmart
• Answer questions on the link instead of the textbook
questions)
– Overview of the Walmart Case: How Powerful (or ethical)
Is Walmart? (3:40)
• After class,
– CSR by Walmart in 2013 (2:36)
– Walmart Mexico Scandal (2:27)

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