Chapter 10- Leading an Ethical Organization: Corporate Governance, Corporate Ethics, and Social Responsibility

Board of Directors

A group of individual that oversees the activities of an organization or corporation.

Corporate Governance

The processes, policies, and laws that govern an organization (often corporations) to establish accountability and try to eliminate conflicts of interest associated with the principle-agent problems.

Stakeholders

An effective board plays many roles ranging from the approval of financial objectives, advising on strategic issues, making the company aware of relevant laws, and representing ___________ who have an interest in the long-term performance of the company.

Agency Problems

The interest of the individuals that act as agents to manage the company may not align with the interest of the company’s stockholders.

Board Insiders

Often have intimate knowledge of the company’s business affairs

• Favored by CEOs

Institutional Investors

such as mutual funds and pension funds that hold large blocks of stock in the company often prefer significant representation by board outsiders that provide a fresh, nonbiased perspective concerning a company’s actions.

CEO Duality

A situation where the CEO is also the chairman of the board of directors, which has been known to create bitter divide within a corporation.

One of the most visible roles of boards of directors:

the setting of CEO pay

The Market for Corporate Governance

• In some cases, the takeover is in the form of a leveraged buyout (LBO) in which a publicly traded company is purchased and then taken off the stock market.

• Many takeover attempts increase shareholder value.

• Because most takeovers are associated with the dismissal of previous management, the terminology associated with change of ownership has a decidedly negative slant against the acquiring company’s management team.

Leveraged Buyout

a publicly traded company is purchased and then taken off the stock market

Takeover Terms

• Corporate raider

• Hostile takeover

• Shark repellent

• White knight

• Golden parachute

• Poison pill

• Greenmail

Corporate Raider

Invades a firm by purchasing its stock

Hostile Takeover

an attempt to purchase a company that is strongly resisted by the targeted firm’s CEO and/or board

Shark Repellent

Defenses against takeovers

White Knight

A firm that rescues a target firm by offering a friendly takeover as an alternative to a hostile one

Golden Parachute

A financial package (often including stock options and bonuses worth millions of dollars) given to executives likely to lose their jobs after a takeover. These parachutes make taking over a firm more costly and thus less attractive

Poison Pill

When executives are desperate to avoid a takeover, they may be forced to swallow a poison pill. This involves making the firm’s stock unattractive to raiders by letting shareholders buy stock at a discount

Greenmail

Occurs when an unfriendly firm focuses a target company to repurchase a large block of stock at a premium to thwart a takeover attempt

Stages of Moral Development

• Level 1 (Preconventional Level)

• Level 2 (Conventional Level)

• Level 3 (Postconventional Level)

Level 1 (Preconventional Level)

Here moral reasoning is closely tied to personal concerns

• Step 1: Obedience and punishment orientation (”How can I avoid punishment?”)

  • An individual’s motivation to behave ethically is drive by the fear of getting caught and punishment

• Step 2: Self-Interest orientation (”What’s in it for me?”)

  • Right or wrong is a function of rewards in this stage, where a “you scratch my back and I’ll scratch yours” mentality dominates

Level 2 (Conventional Level)

Here moral reasoning arises from comparing one’s actions with society’s expectations

• Stage 3: Interpersonal accord and harmony

  • Individuals act with the goal of fulfilling social roles, such as student, parent, and worker

• Stage 4: Authority and social order- maintaining orientation

  • The desire to maintain a functional society by obeying laws drives behaviors

Level 4 (Postconventional Level)

Here morality is more than simply following social rules or norms

• Stage 5: Social contract orientation

  • Laws are viewed as social contracts that promote the greatest good for the greatest number of people. Unjust laws and policies must therefore be resisted.

• Stage 6: Universal ethical principles

  • Moral reasoning is based on universal ethical principles such as the “golden rule” that you should treat others as you would want them to treat you

Corporate Scandals and Sarbanes-Oxley

In response to notable corporate scandals at Enron, WorldCom, Tyco, and other companies, Congress passed sweeping new legislation with the hopes of restoring investor confidence while preventing future scandals

Sarbanes-Oxley Act

A law that set new or increased standards for the boards of public U.S. companies and accounting companies

Measuring Corporate Social Performance

• Social entrepreneurship

• Corporate Social Performance

• KLD

Social entrepreneurship

a concept in which a business is created with a goal of bettering both business and society

Corporate Social Performance

in which a commitment to individuals, communities, and the natural environment is valued alongside the goal of creating economic value

KLD

conducts ongoing research on social, governance, and environmental performance metrics of publicly traded companies and reports such statistics to institutional investors.

Generational Influences on Work Behavior

A powerful environmental influence that can be seen in organizations today is based on generational differences. Currently, four generations of workers co-exist in many organizations:

1. Baby Boomers

2. Generation X

3. Millennials

4. Generation Z

Baby Boomers

born between 1946 and 1964, corresponding with a “boom” of population following the end of World War II.

Generation X

includes the generation born between 1965 and 1980, which is marked by an X symbolizing their unknown nature

Millennials

include the generation born between 1981 and 1990. As of 2015, this generation makes up the largest share of the U.S. workforce.

Generation Z

generally refers to the generation of individuals born in the late 1990s to 2000s. Generation Z is the first to grow up fully engaged with devices such as iPads and smartphones from a very young age.

Rational Decision making

Involves problem identification, establishment and weighing of decision criteria, generation and evaluation of alternatives, selection of the best alternative, decision implementation, and decision evaluation.

Characteristics of Rational Decision Making

• There are several problems with this model when applied to many complex decisions.

• Many strategic decisions are not presented in obvious ways and many CEOs may not be aware their companies are having problems until it’s too late to create a viable solution.

• Rational decision making assumes that options are clear and that a single best solution exists.

• Rational decision making assumes no time or cost constraints.

• Rational decision making assumes accurate information is available.

The most common biases with the potential to affect business decision making include:

• Anchoring and adjustment bias

• Availability bias

• Escalation of commitment

• Self-serving bias

• Hindsight bias

• Judgements about correlation and causality

• Misunderstandings about sampling

• Overconfidence bias

• Representativeness

• Framing

• Satisficing

Anchoring and adjustment bias

Individuals react to arbitrary or irrelevant numbers when setting financial or other numerical targets.

Availability bias

Readily available information is incorrectly assessed to also be more likely.

Escalation of commitment

To continue on a failing course of action even after it becomes clear that this may be a poor path to follow.

Self-serving bias

When good outcomes are attributed to personal characteristics but undesirable outcomes are attributed to external circumstances.

Hindsight Bias

Mistakes seem obvious after they have already occurred.

Judgements about correlation and causality

To make inaccurate attributions about the causes of events.

Misunderstandings about sampling

To draw broad conclusions from small sets of observations instead of more reliable sources of information derived from large, randomly drawn samples.

Overconfidence bias

When individuals are more confident in their abilities to predict an event than logic suggests is actually possible.

Representativeness

When managers use stereotypes of similar occurrences when making judgments or decisions.

Framing

When the way information is presented alters the decision an individual will make.

Satisficing

When individuals settle for the first acceptable alternative instead of seeking the best possible (optimal) decision.