BUS3 189 - Ch. 12 (Corporate Governance and Business Ethics)

What is the Public Stock Company?

An institutional arrangement that provides goods and services, employment, taxes, and increase in living standards

Corporations have a social responsibility to their shareholders.

What is the nature of a corporation to provide for those shareholders?

• Investors have limited liability

• Investor ownership is transferrable

• Firm has legal personality and continuity

• Legal ownership and management control are separated

Shareholder Capitalism (Traditional View for responsibility of corporate managers)

Primary responsibility is to increase profits for shareholders–they provide risk capital and are legal owners of public companies

Stakeholder Capitalism or Shared View Value (Current View for responsibility of corporate managers)

Broader responsibility includes value creation for society in addition to shareholder value creation

CSR (Corporate Social Responsibility)

Obligations extend beyond economic and legal responsibilities to ethical and philanthropic expectations of society

ESG (Environment, Society, Governance)

Criteria in addition to financial performance

CSV (Creating Shared Value)

A holistic approach to create value for all stakeholders

PEOPLE + PLANET + PROFITS

Corporate Governance

Mechanisms to direct and control the enterprise to ensure its managers strategic goals successfully and legally

Problems arise because of _____ __ _____and _____.

separation of ownership; control

Separation and ownership control problems are shared with what 2 different types of shareholders?

• Principals desire maximization of returns

• Agents interested in maximizing compensation, benefits, job security, status, power

(Principals) delegate decision making authority to hired Managers (Agents)

Infromation asymmetry is another reason for behavior problems by Agents but can occur at ___ levels of the hierarchy.

ALL

Adverse Selection (Problems of Information Asymmetry)

Principal recruits an Agent for a position that is beyond their misrepresented capabilities

Moral Hazard (Problems of Information Asymmetry)

Agent takes undue risks and/or shirks responsibilities, because costs incur to the Principal

Why is the Board of Directors a governance mechanism elected by shareholders?

Board balances different shareholder goals (e.g. institutional investors versus short-term investors)

Functions of the Board of Directors

• Selecting, evaluating, compensating, and terminating the CEO

• Overseeing CEO succession plan

• Providing guidance on executives & their compensation

• Reviewing, approving, monitoring strategic initiatives and corporate actions

• Conducting risk assessment and mitigation

• Ensuring firm’s audited financial statements are true and accurate

• Ensuring firm’s compliance with laws and regulations

Executive compensation

• Salary, bonus, and stock options (long-term incentives)

• US CEO pay compared to average employee pay: 350 to 1

• Median CEO pay in S&P 500 firms in 2021: $15 million

• 2/3 of CEO pay is linked to firm performance

Market for Corporate Control

• External governance mechanism

• Hostile takeover

• Corporate raiders and hedge funds

• Leveraged buy out

Other governance mechanisms:

Financial statements auditors, government regulators, industry analysts

Business Ethics

Agreed-upon code of conduct in business, based on societal norms

But, business ethics differ across the globe – some norms are universal, such as fairness, honesty, reciprocity

Business Ethics in Corporate Governance

Strategic leaders are expected to act with integrity – role models for employees

Ethical values and codes of conduct should be explicit to discourage ethical lapses

What are some tests for facing ethical dilemmas?

Do the actions fall into acceptable norms of professional behavior? (defined by organization’s codes of conduct and the profession’s codes of conduct)

Will I feel comfortable explaining and defending the decision or action in public? (to the media and other stakeholders)