MGMT 320 Final

fiji

"every drop is green"

OECD guidelines

*universalist approach •The Organisation for Economic Co-operation and Development (OECD) is a group of 33 nations that works to further democracy and economic growth •The OECD's Guidelines for Multinational Enterprises are "recommendations" to multinational corporations −Sustainability, human rights, human capital development, consumer interests, corporate governance, etc. •How the OECD Guidelines Work −Each government that joins in the guidelines sets up an office, called a "national contact point" −Any individual or group can file a complaint at one of these offices alleging violations by a corporation −The office then goes through a three-step process 1.It assesses the complaint 2.If there is merit, it offers to mediate the dispute between the parties 3.If mediation is rejected or fails, it can issue a "final statement" about the matter, including recommendations to the disputants •OECD Guidelines in Action −The Dongria Kondh are an indigenous tribe in Northeast India −Vedanta, an Indian mining corporation headquartered in the UK, sought to extract bauxite from tribe's mountain −Survival international worked with the OECD to pressure Vedanta to relent −Although the OECD could not directly intervene, the attention led, in part, to the Indian government's decision to shut the site down

weatherford international

- makes machinery used for oil and natural gas drilling and provides services to energy companies ranging from flushing pipes on drill rigs to cooking meals for crews - wanted to move to bermuda for more relaxed tax laws - established bermuda corporation and then made delaware headaches a subsidiary of the bermuda parent - moved to switzerland to avoid pressures from congress

4 ways of building more sustainable businesses

1. environmental standards 2. market based mechanisms 3. information disclosure 4. no intervention

starbucks csr

1. ethical sourcing - goal = 100% ethical sourcing by 2015 2. front of store recycling - goal = 100% front of store recycling by 2015 3. reusable cups - goal = 5% of beverages made in customers' tumblers by 2015 - goal from 2010 = 25% by 2015 4. volunteerism - goal = 1 million hours of community service per year by 2015

five tiers of internationalization of MNCs

1. export sales 2. foreign sales office 3. licensing 4. direct investment 5. global production

three elements of social responsibility

1. market actions - responses to competitive forces in markets - these actions dominate 2. externally mandated actions - those required either by government regulation or civil regulation 3. voluntary actions - actions go beyond those compelled by law or regulation

1962 consumer bill of rights

1. right to safety - companies must test products, issue warning labels when appropriate, immediately notify consumers of defective products, and issue recalls when necessary 2. right to choose - companies must allow consumers a variety of options from different companies (no monopolies, no predatory pricing) - monopolistic practices: Walmart lawsuits agains predatory pricing of prescriptions, Microsoft sued by DOJ for monopolistic practices 3. right to be heard - companies must allow consumers to voice complaints and handle these complaints responsibly - expressing dissatisfaction - channels include customer support lines of businesses and the Better Business Bureau 4. right to be informed - companies must provide consumers with enough information to make intelligent, informed product choices - exaggerated claims or "puffery" - brand sincerity - deceptive practices: AT&T renaming expensive package "The Basics", Harry & David's "Dark Choco raspberries" don't technically have rasberries - marketing to vulnerable populations: H&R block

enron

Background: •Enron was founded in 1985 via a merger of two relatively small, regional natural gas companies: Houston Natural Gas and InterNorth •Ken Lay quickly became the CEO −Largest gas pipeline business in the U.S. −Expanded electric power and natural gas businesses −Added power plants into its portfolio •In the late 80s and early 90s, Enron was expanding in two distinct directions: −Asset-light retail energy markets −Capital investment in international energy assets (e.g. power plants in India and water in Latin America) •For six consecutive years through 2000, Fortune magazine declared Enron the most innovative of Fortune's "most admired companies" •A month before its collapse, Enron also made Fortune's list of the 50 fastest growing companies, and it was by far the largest company on their list. why was company originally admired? •There are at least three reasons: −It created wealth for shareholders −It created a high-paying place for employees −It created a new, exciting business model 3 things that got the company in trouble: 1.Mark-to-market accounting •Otherwise known as fair value accounting, in contrast to historical cost accounting •Measures the value of an asset based on its current market value instead of its book value −Works fine when there's a clear market to mark to, but that was not the case with Enron, and so they inflated their numbers. •Example #1: −In 1996, Enron acquired Mariner Energy, a deepwater exploration company based out of Houston, at $185 million. −The company was privately owned and therefore had no clear "market" value −Through fair value accounting, it reported that the company was worth $367.4 million. Post bankruptcy, it was valued at roughly 1/3 of that number. 2.Energy deregulation •In 1996, the Electric Utility Industry Restructuring Act opened the door for a deregulated energy market in California −The stated intent was to lower prices for consumers by increasing competition •Enron found many "arbitrage opportunities", wherein they would take advantage of the system to make profit without actually providing and societal value −Ricochet: Also called megawatt laundering. Buy in-state power, move it to another state, and then sell it back to California at an inflated price −Death Star: Enron would arrange to deliver more power to California's grid than it could handle. They would then receive money for "relieving congestion" by simply keeping that power where it was. 3.Special purpose entities (SPEs) •With an SPE, a company gives the entity an asset and related debt to take some risk and debt off its balance sheets •Example: −Using an SPE to park troubled assets with falling values, such as the broadband provider Rhythm NetConnections •Paid Andy Fastow millions in management fees, creating a clear conflict of interest •In addition to raising questions due to its sheer number of SPEs, Enron ultimately got in trouble because many were too closely tied to Enron itself (did not have at least 3% of total capital taken from an outside source) −Raised to 10% after Enron failure at 3 level: •No checks and balances: Poor oversight from Arthur Andersen, the Board of Directors, and the government •Poor leadership: A lack of ethical leadership from Ken Lay, Jeff Skilling, and Andy Fastow, leading to a problematic organizational culture •Employees not stepping up: Persistent tendencies among employees to look the other way and morally disengage possible interventions at 4 levels: •As a society: −Better government regulation, such as SOX and the Dodd Frank Act •As organizations: −Better board oversight −Fewer conflicts of interests from auditors −Require rotation of audit firms, not just managing partners −Stop allowing auditing firms to sell other services −Stop allowing employees of auditing firms to take jobs at auditees −Long-term executive compensation systems •As leaders: −Be a moral person: Set a good example in your everyday interactions −Be a moral manager: −Reward good behavior, not just narrow financial outcomes. −Don't be "morally mute" and be willing to talk about ethical issues directly •As employees: −Build your moral awareness: Try to see tough decisions from multiple perspectives −Don't morally disengage. Take responsibility for your own actions, and seek advice on tough decisions

no intervention needed

Benefits: - maximum flexibility Drawbacks: - unclear who will join in without any intervention example: interface carpets •Interface carpets illustrates shared value through sustainability - customers could lease not purchase carpet tiles, and interface would replace worn tiles which would be recycled - environmental product declaration (epd) that was like a nutrition label but listed all environmental stats I = P x A x T I = (P x A)/T I = environmental impact P = population A = affluence T = technology other examples of sustainability as a source of competitive advantage: - Herman Miller and waste reduction - IBM and water usage - Starbucks and energy usage

story of mark hurd

CEO of HP in 2005 - successful and effective CEO --> cost-cutting, made major acquisitions, doubled HPs share price, in 5 years turned HP into he world's largest IT company 2010 received letter from lawyer of Jodi Fisher accusing Hurd of sexual harassment - Fisher was adult film star, but was hired as consultant to help Hurd make introductions and brief him before major events - Hurd maintained innocence but it came out that he falsely did not put her name on several expense accounts, he had viewed her pornographic web pages multiple times - board worried about implications if it came out that CEO and adult film star were close, and worried Hurd lied to them after evidence changed his story Hurd reached undisclosed settlement with Fisher --> board then had unanimous vote calling for his resignation --> he complied - HP's share price dropped 14% and did not fully recover for 6 months - there was ridicule and disagreement about their decision - CEO of Oracle, Larry Ellison, hired Hurd as co-president and stated that HP made the worst personnel decision and did not act in best interests of shareholders/employees/partners - Hurd waved his rights to his stock options and stayed at oracle

shared value (porter article)

CSR efforts are not as productive as they could be because: 1. they pit business against society, when the two are interdependent 2. pressure companies to think of corporate social responsibility in generic ways instead of in they way most appropriate to each firm's strategy emergence of CSR: - backlash of Nike abusive labor practices in with Indonesian suppliers - Shell Oil's decision to sink an obsolete oil rig - pharmaceutical companies having to address AIDS even though its not the main concern in their main market - Nestle, world's largest purveyor of bottle water, has become major target in debate about access to fresh water, despite the fact that agricultural irrigation uses 70% but people don't have one corporation to target four justifications for CSR: moral obligation, sustainability, license to operate, and reputation Ben & Jerry's, Newman's Own, Patagonia, and the Body Shop = corporations that have distinguished themselves through an extraordinary long term commitment to social responsibility inside-out linkages = a company impinges upon society through its operations in the normal course of business outside-in linkages = external social conditions influence corporations for better and for worse value chain social impacts = those that are significantly affected by the company's activities in the ordinary course of business social dimensions of competitive context = factors in the external environment that significantly affect the underlying drivers of competitiveness in those places where the company operates best corporate citizenship initiatives involve far more than writing a check: they specify clear, measurable goals and track results - GE is great example --> adopt underperforming public high schools near several of its major US facilities - GE donates money and managers/employees take active role in mentoring and tutoring students - all showed significant improvement and graduation rate in 4 out of 5 worst schools double from 30% to 60% Strategic CSR: - Toyota's Prius has produced competitive advantage and environmental benefits - Urbi, a Mexican construction company, builds housing for disadvantaged buyers using financing vehicles such as flexible mortgage - Credit Agricole, France's largest bank, offers specialized financial products related to the environment like financing packages for energy saving home improvements - Nestle works with small farmers in developing nations to source basic commodities --> investment in local infrastructure has improved healthcare and education while giving them reliable access to commodities it needs to stay profitable Whole Foods: built its entire value proposition around social issues *should measure social impact rather than stakeholder satisfaction want strategic CSR not responsive CSR

CPSC

Consumer Product Safety Commission −Protect against unreasonable injuries associated with consumer projects −Recent action: Recalled Polly Pocket dolls with hazardous magnets swallowed by children

coal in china

Current state of the coal industry in China •Some have argued that the negative effects of coal reached a peak in 2014, due to factors including: −Economic slowdown −Clean coal policies −Policies that limit coal use and encourage hydropower and nuclear power •However, challenges remain. For example: −Concerns that pollution isn't being curbed fast enough remain −Mass layoffs in the coal industry have led to unrest, due in part to falling coal prices •Here and elsewhere, a mix of policy solutions and voluntary change through innovation in the energy sector is likely needed

FTC

Federal Trade Commission −Maintain free and fair competition; protect consumers from misleading practices −Recent action: Sued Devry University for false claims of job prospects, and Luminosity for false claims of stopping cognitive decline

FDA

Food and Drug Administration −Regulation and supervision of food and drug safety −Recent action: Banned candy flavored cigarettes, and recently proposed a ban on tanning salons for all minors

shareholder resolution (discussed in class)

Microsoft: - shareholder wanted a board committee on environmental sustainability - board response was against it - highlighted current initiatives that they are doing to address environmental issues •The resolution did not pass. But at 3.6% is can be voted on again in the next year •In 2013, the average company (among 94 of the Fortune 250 with SEC filings) received an average of 1.24 shareholder proposals •Even if a resolution passes, it isn't binding. Basically, the shareholders are still just asking for a change.

NHTSA

National Highway Traffic Safety Administration

comcast and sears examples (class)

Sears: - early 1990s Sears began to incentivize specific sales goals for its auto repair staff during each shift - # of unnecessary repairs increased dramatically - in investigation by the CA department of consumer affairs, 34/38 cars were given unnecessary work - 18 class action lawsuits were commenced nationwide - millions of dollars paid out in refunds, investigation costs, training

relativism

The relativist approach: •Relativism: Ethical values depend in part on local norms. Different groups have different values, and we should be cautious in using universal standards to judge them as "right" or "wrong" •The relativist approach gives us valuable insights into local customs and practices •Emphasis on cultural sensitivity - understanding and acting in line with another culture's laws, norms, and expectations −Norms for doing business in other countries? −Sexual harassment training? −What's the best way to convey your qualifications as a job applicant? •Anonymous ethics hotlines −Part of SEC, SOX, and federal sentencing guidelines −Rejected on legal grounds in France PROS: - gives us valuable insight into local norms - helps to ensure cultural sensitivity CONS: - breaks down when conflict with a fundamental moral principle occurs example: - on downside, can be sued to rationalize unethical behavior - Rana Plaza garment factory collapse in bangladesh - extreme example: slavery in the supply chain

unilever example (book)

Unilever group cooperated with Oxfam international, a confederation of progressive NGOs fighting world poverty, to study the overall impact of its branch company in indonesia Oxfam is suspicious of corporations and had ruthlessly challenged unilever's profit-seeking actions final report detailed a wondrous economic effect in a country where half the population lives below $2 a day UI is the 13th largest company in the country and sells personal/home products - over 5 years made net profit of $212 million but its operations created monetary value of $63 million along its value chain - put majority of share back into the indonesian economy

sullivan principles

a 1977 code of conduct that required MNC's in south africa to do business in a nondiscriminatory way

the corporate charter

a document issued by a state government to create a corporation

so many sustainability examples

acid rain = formed when emissions of sulfur dioxide and nitrogen oxides, by-products of the burning of fossil fuels by utilities, manufacturers, and motor vehicles, combine with natural water vapor in the air and fall to earth as rain or snow that is more acidic than normal - mountain top removal = using explosives to blow up mountains, destructive to rivers and surrounding environment - government had made stricter regulations that attracted companies to the highest quality low-sulfur coal which were in areas that required mountain top removal EPA = environmental protection agency = created in 1970, nation's main pollution control agency, protect the environment hydraulic fracturing (fracking): extracting natural gas from underground shale formations - pros = gas boom has reduced american dependence on foreign oil and created jobs and tax revenue, natural gas burns cleaner than oil or coal producing less pollution - cons = trucks/heavy equipment cause air pollution, chemicals injected underground cary a host of toxins, fluid that returns to the surface (blowback) is contaminated and dumped into water supplies - 2005 congress exempted hydraulic fracturing from the safe drinking act, "halliburton loophole" stages of corporate environmental responsibility 1. pollution prevention 2. product stewardship 3. clean technology chief sustainability officer = supervise extensive staffs of specialists and coordinated the work of managers in many areas, including research and development, marketing, and operations, whose work was related to a firm's sustainability mission greenwashing = companies mislead consumers regarding the environmental benefits of a product or service superfund = established toxics release inventory germany = great progress in reducing solid waste stream - govt passed series of strict recycling laws --> required to take back almost all packaging mwaste - incentive was that they had to pay for trash pickup but not for recycling pickup

coca-cola case

adapts to foreign business climates 1. Eurasia and Africa 2. Europe 3. Latin America 4. North America 5. Pacific protects brand by setting rising standards for corporate citizenship adopted codes of business conduct, human rights statement, workplace rights policy

philip morris

company spent $115 million on charity and $150 million on these TV ads company donated money to help finish construction of homeless teen shelter "philip morris spending more money to publicize its good deeds that it's spending on the good deeds themselves"

cvs

decision to stop selling tobacco sincerity questioned because CEO highly publicized and advertised the decision

what makes for good CSR?

effectiveness: shared value sincerity: impact consistency

FDI vs. portfolio investment

fdi = funds invested by a parent MNC for starting, acquiring, or expanding an affiliate in a foreign nation portfolio investment = the limited, speculative purchase of stocks and bonds in a foreign company by individuals or equity funds

theory vs. reality in the power structure of corporate governance

flow of authority in corporate governance THEORY federal/state regulation --> state charters --> shareholders --> BOD --> CEO --> employees REALITY federal/state regulation --> state charters --> CEO --> BOD --> employees --> shareholders

price gouging (class handout)

hurricane charley and price gouging •In 2004, Hurricane Charley claimed 22 lives and $11 billion in damage, mostly in Florida •The hurricane also stirred up a debate about price gouging −$2 bags of ice for $10 −Tree removal for $23,000 −$250 generator for $2000 −77 year old elderly woman and handicapped daughter charged $160 for $40 hotel room •Many Floridians were furious that people would "try to capitalize on other people's hardship and misery" •The attorney general stated "It is astounding to me, the level of greed that someone must have in their soul to be willing to take advantage of someone suffering in the wake of a hurricane." •Florida does have a law against price gouging, and over 2,000 lawsuits were filed. One hotel had to pay $70,000 in penalties and restitution •However, some experts balk at the notion of a "fair price" •Thomas Sowell, a free-market economist, called price gouging an "emotionally powerful but economically meaningless expression that most economists pay no attention to, because it seems too confused to bother with." −Higher prices for ice, bottled water, roof repairs, generators, and motel rooms have the advantage, Sowell argued, of limiting the use of such things by consumers and increasing incentives for suppliers in far-off places to provide the goods and services most needed in the hurricane's aftermath. If ice fetches ten dollars a bag when Floridians are facing power outages in the August heat, ice manufacturers will find it worth their while to produce and ship more of it. There is nothing unjust about these prices, Sowell explained; they simply reflect the value that buyers and sellers choose to place on the things they exchange. •Some states do have laws against price gouging. For example, California has a law limiting price increases during disasters to 10% •On the other side, a recent article in the Harvard Business Review has argued that there are at least two drawbacks to such laws 1.Price limits encourage hoarding 2.Businesses are no longer incentivized to boost their supply •One proposed solution: government subsidies for merchants, increasing incentives while keeping prices fair.

standco case: walmart bribery

in class case: - Standco was american grocery retailer set on being low cost/efficient operation - decided to expand south rather than the typical east/west --> expanded to Mexico - Time magazine came out saying Mexican officials were taking bribes with foreign companies for preferential treatment - launched internal investigation and found questionable practices but no evidence linking to specific time magazine story - blogger wrote story about stands bribery operations --> media tied standco to time story even though no evidence •2012: Allegations of $24 million in bribes to government officials and a subsequent cover-up •As of August 2015, Wal-Mart has spent over $650 million on FCPA and compliance-related costs following the bribery scandal •"Wal-Mart's situation highlights the benefit of upfront compliance efforts rather than putting out fires after the fact." −Center for Responsible Enterprise and Trade

ford pinto case (class)

in the 1960s, competition among the four US auto manufacturers (GM, For, Chrysler, American Motors) was fierce - competition from abroad was cutting into the American companies' revenues, particularly with foreign companies' inexpensive subcompact models in June 1967 Lee Iacocca became President of Ford and pushed for a new subcompact that could compete with the imports - became a huge competitive advantage when oil embargoes in 1973 caused a spike in demand for subcompacts, amplified by looming government mandated fuel economy standards (18mpg) enacted in 1978 - Ford sold over 2 million pintos in 6 years of production, 1971-1977 At least 27 people died in fiery accidents - accidents were partly caused by the placement of the fuel tank - Mother Jones published a widely read investigative report condemning the company - Ford was successfully sued on multiple occasions; in the first case to go to court alone, juries aware $3 million in compensatory damages and $125 million in punitive damages to the victims (was landmark punitive sum at the time --> judge reduced punitive damages to $3.5 million - could have been avoided with an $11 fuel tank liner What went wrong? 1. development time was quick - company only had 25 months 2. rules were strict - Pinto was not to weigh an ounce over 2000 pounds and not to cost a cent over $2000 - any modification, even if it provided extra safety, was rejected if it impacted the 2000s rule 3. the company culture was not focused on safety - President Lee famously said "safety doesn't sell" 4. company focused on the minimum requirements of the law - rear end crash tests identified the risk of fire from collisions at 30 mpg - an upcoming regulation would have made this illegal, but lobbying stalled it 5. company relied on cost-benefit analysis to make its final decision *Ford grossly underestimated legal and repetitional costs - juries and customers were offended by the idea of putting a dollar figure on life and failure to disclose risk to consumers *Ford overlooked customers' rights and expectations

examples of CEOs that emphasize csr

john mackey, wholefoods: shared value creation harish manwani, unilever: shared value creation

vedanta example

largest mining corporation in india claims to be environmentally conscious company claimed to have agreement with indigenous people Dongria Kondh to remove three square miles and mining atop the sacred mountain - they did not Dongria Kondh turned to survival international for help alleging Vedanta had acted against OECD guidelines british office mediated and encouraged cooperation indian ministry got involved and stopped the mine

green gasoline exercise

low emissions vs. standard emissions - game where you compete for profits - only before round 3 could you send a representative to discuss

ethical leader matrix and class examples

moral person + moral manager = ethical leader - James Burke, CEO of johnson & johnson --> 1982 people killed from cyanide laced tylenol --> recalled 31 million bottles nationwide, praised for compassion and open communication about crisis --> pioneered tamper resistant packaging - Tim Cook saying they don't consider ROI when trying to make Apple devices accessible to the blind immoral person + moral manager = hypocritical leader - Lord John Browne, British Petroleum immoral person + immoral manager = unethical leader - Al Dunlap, Sunbeam

relative effects (book)

most studies report a positive correlation between responsibility and profitability - but many have mixed, inconclusive, or negative findings

global corporate responsibility

norms, principles, cod

global compact

not a code of conduct, does not enforce the principles, but it advances them as an "aspirational" set of "shared values" challenges global corporations to collaborate with UN agencies, labor unions, NGOs, and governments in embracing a set of "universal values" 10 principles condense basic ideas form international declarations and conventions made under UN auspices over the years

product liability discussion (from text)

product liability = a doctrine in the law of torts that covers redress for injuries cases by defective products - consumers can file product liability lawsuits when harmed tort system = designed to provide compensation to victims and deter future misconduct

the story of harvey wiley

professor at purdue university --> studied food chemistry and worked with Indiana state officials to detect adulteration in food products became chief chemist at the department of agriculture in 1883 - he worked tirelessly to uncover danger, pollution, mislabeling, dilution, and cheating in nation's groceries - struggled because states had pure food laws but were all not consistent --> no enforcement/support at federal level he needed evidence to support his claims: - he designed serious of "hygienic table trials" where he fed participants preservatives and monitored for signs of distress - feed them every meal with different doses of borax, a then common preservative - washington post reporter nicknamed the men the "poison squad" - public became captivated by poison squad and put pressure on congress to pass wiley's pure food bill - tested other preservatives to new volunteers for next 5 years - all had signs of illness of headaches, bowel movements, or became severely ill - 1906 --> congress passed the Pure Food and Drug Act preventing the manufacture, sale, or transportation of adulterated or misbranded or poisonous or deleterious foods, drugs, medicines, and liquors (press called new law the Wiley Act) his campaign for pure food came at time when small and local markets for goods and services were expanding to national size --> idea of a class of people with a well defined interest in safe, pure, and honest commodities emerged --> this class came to be called consumers

merck and river of blindness example (book)

river blindness has tortured humanity in tropical regions - parasitic worms - releasing larvae in people's skin that causes welts, lumps, and eventually moves to the eyes causing blindness 1976, Merck & Co discovered a compound that killed animal parasites - faced decision that it would be very hard to bring a new drug to market and was concerned that people with the disease were amongst the poorest in the world - Merck "medicine is for the people, not for profits" - humanitarian corporate culture - went ahead with drugs --> cost $200 million - after it was tested to be successful, realized people/governments couldn't afford to purchase the drug, Merck committed to manufacture and ship at no cost --> have given away more than 2.5 billion pills amounting to $3.9 billion

details of shareholders, conditions under which shareholders can propose resolutions

role of the shareholer: •Although stockholders are technically "in charge" as owners, their power is limited and diffuse •Stockholders own stock certificates, but not an identifiable part of a company propose resolutions: •Shareholders who own $2,000 or more of a company can propose resolutions, provided: −They submit no more than one per year −The resolution is no longer than 500 words and is submitted 120 days before the annual meeting −The shareholder is present at the meeting to present the resolution

bluewashing

the act of a corporation cloaking its lack of social responsibility by insincere membership in the UN Global Compact

consumerism as a protective movement

the pursuit of consumers' rights and power

consumerism as an ideology

the pursuit of material goods beyond subsistence in pursuit of happiness/identity/etc

moral muteness

three key motives: 1.Desire for harmony: Fear that moral talk is confrontational. It will stir up conflict 2.Desire for efficiency: Fear that moral talk is distracting. It will get in the way of our goals 3.Desire to look powerful: Fear that moral talk will make me seem weak or too idealistic morally mute manager: - Sandy Weill, CEO of citigroup - philanthropic in personal life but silent on moral issues in workplace

other governance failures/controversies in book (tyco, adelphia, world com, lehman brothers

tyco: - CEO Kozlowski took as much as $125 million in corporate funds for personal use - Kozlowski conspired with CEO Swartz to misrepresent the company's financial condition and boost stock price adelphia communications: - founder John Rigas and son concealed $2.3 billion in off balance sheet debt, stole $100 million from company, and lied about financial condition worldcom: - CEO ebbers and CFO sullivan concealed falling revenues and rising expenses in $11 billion accounting fraud *each of these companies declared bankruptcy lehman brothers: - used repo 105 --> raise cash using repurchasing agreements

zumanda case

zumanda corporation - leading producer of consumer appliances has succeeded in technological innovation, in 1949 was first company to manufacture a combo refrigerator-freezer new "Opti-Fresh" refrigerators - uses chemical R-510B as new high-tech refrigerant and will be marketed as "super-freon" technology - CEO made company-wide announcement that opti-fresh should not use more than 250kWh of energy per year or cost more than $1,00 to produce - energy efficient --> extends shelf life of perishables so could reduce high levels of malnutrition in developing nations European-based competitor = Vortex zumanda partnered with S.H.A.R.E., a UN sponsored foreign assistance organization - to win contract they sold them 12.5 million refrigerators for $995 providing profit margin of only $20 per unit - but volume and publicity were advantages to meet the delivery date, zumanda cut its normal drafting board to production time from 43 to just 25 months - june 2013 zumanda refrigerators rolled off production lines, tested prototypes against safety standards proposed by US CPSC - met safety standards within temperature ranges according to US code BUT when tested against conditions likely to be met in equatorial climates they encountered problems: 1. in desert climates --> the sealant on the hoses containing super-freon dried out and cracked 2. in humid climates --> the hoses swelled *both have potential for super-freon leaks *only way to ensure all refrigerators would perform flawlessly would be to modify the production line and reinforce the heat/humidity resistant insulation zumanda determined probability that refrigerator would present fatal toxic hazard was 0.00017 - reinforcement would cost $700 more per unit financial liability would be $200,725 for each death and $67,000 for each hospitalization likelihood of significant indirect impacts would be minimal delay to retool production line would cause S.H.A.R.E. to cancel contract - would never recoup costs of investment and there would be layoffs and downsizing across the country

H&R Block Case

• At the industry's peak in the 2000s, over 12 million people took out RALs, and paid more than $1 billion in fees • In 2007, H&R Block began offering "Instant Money Loans" that provide money prior to W-2s coming out in • According to Ernst: "The association of the high-cost paystub loans with tax preparation generally is not good for consumers and clearly takes the professional tax-services industry into a direction that we should all wish to avoid." • Still, Ernst warned that Block would respond aggressively rather than "sit by and let competitors capture clients because of the standard they're willing to set for this product." • Block began to offer the loans "in a manner consistent with our values and concern for our clients' financial needs." • Echoing its ad campaign, the company said its Instant Money loan "is the lowest-priced pretax-season loan in the industry— about half the cost of the competition," and less costly than other short-term loans, including credit card cash advances. • In 2007 the DOJ sued Jackson Hewitt, alleging more than $70 million in fraud. Franchisers settled and agreed to leave the industry. The company filed for bankruptcy and is now privately held • As of this year, all RALs are essentially illegal. The IRS stopped providing banks with the needed debt indicator. The FDIC sued one holdout that tried to offer RALs without the indicator, saying the loans were unsound. • The IRS force responsible for this change was headed by Ernst, who resigned from H&R Block in 2007 and became a deputy commissioner at the IRS • Reflecting on the industry's norms in the mid-200s, Ernst lamented that "Some of the worst impulses took over"

evolution of csr in US

•1700s - 1800s −Owners donated directly to churches, poorhouses, etc. •Late 1800s - early 1900s −A new class of millionaires began to give on a larger scale −Steven Girard changed the climate of education in the United States by bequeathing $6 million for a school to educate orphaned boys −Andrew Carnegie gave $350 million during his life to social causes. For example, he donated 7,689 organs to churches •Early 1900s - mid 1900s −Three new themes began to emerge: 1.Managers came to be seen as trustees with a responsibility for the welfare of employees, customers, and other stakeholders 2.Managers have a duty to balance these groups' interests 3.Managers ultimately act in service to the public, improving lives through their organizations In 1971 −Corporate social responsibility reached maturity −According to the committee for economic development, businesses have three concentric circles of responsibility: −The inner circle: Efficient economic function to produce products, jobs, and economic growth −The intermediate circle: Sensitivity to societal values and priorities (e.g. diversity in hiring) −The outer circle: Direct improvements to society that are not related to the business itself (e.g. charitable donations)

sincerity problem

•A big risk is that people will perceive an organization's CSR as "greenwashing" - an insincere attempt to improve a company's image without real concern for improving society. •What can organizations do to demonstrate their sincerity? 1.Impact: Programs must actually have a positive effect on society −Effect should be clear −Effect should be measurable −Company should be transparent, even when it fails to meet its goals 2.Consistency: Programs must not be overshadowed by silence or a negative impact in other domains −Programs should be aligned −Blind spots should be identified and addressed −Companies must show persistence over time

hardware store study (class)

•A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20. −Please rate this action as: completely fair, acceptable, unfair, or very unfair −82% of people in a random telephone survey think this is unfair or very unfair −Only 24% of students in a business school class thought it was unfair

world com governance reform recommended by the SEC

•As part of its settlement with the SEC, WorldCom received 78 recommendations for improving its governance mechanisms. Here are just a few examples: −CEO should not serve on any other for-profit corporate boards. Other board members should not serve on more than three. −The role of CEO and chairman should be split −Director compensation should include 25% stock, which they must hold for at least six months after leaving the board −All stock sales by directors must be disclosed two days in advance by press release −CEO compensation should not exceed $15 million −The audit committee should meet at least eight times per year −The full board should annually review the company's ethics program

ceo duality - both arguments

•CEO duality: A practice whereby a single person is both the CEO and Chairman of the Board −What are the pros vs. cons of CEO duality? −The number of companies choosing to separate the two roles has roughly doubled in the S&P500 over the past 20 years, from 20% to 40%

csr

•Corporate Social Responsibility: The duty of a corporation to create wealth in ways that avoid harm to, protect, or enhance societal assets

what is governance?

•Corporate governance: The system by which the corporation is directed and controlled. •Corporation: A legal entity, registered with a state, that is separate from the individuals that own it −Usually created to conduct business −Ownership is split into shares of stock −The owners of this stock are the stockholders Why governance? (background) •Shareholders are the owners of the corporation, but don't have the time/knowledge to run it •Managers are hired to run the company on a day-to-day basis

federal regulation of governance

•Dodd Frank Act −Passed in 2010 −A few notable provisions related to governance −All board members that set executive compensation must be independent −Proxy statement must disclose the relationship between executive compensation and firm financial performance −Proxy statement must also disclose the ratio of median employee pay to CEO pay −Accounting restatements must lead to the recouping of performance-based financial compensation of executives −Companies must submit executive compensation packages to a (nonbinding) vote every three years •Sarbanes Oxley (SOX) −Passed in 2002 −Increases the oversight responsibilities of boards −Holds managers accountable −A few notable provisions −Introduces government oversight into the auditing process −Requires that companies rotate audit partners every five years −Requires boards of directors to create audit committees to oversee the auditing process, with at least one financial expert −Requires CEOs and CFOs to certify financial report accuracy •Say-on-pay is a term used to describe shareholders' votes for vs. against executive pay packages −Intended to incentivize executives and the board of directors to adhere to their fiduciary duties −Increasingly popular in countries around the world (enacted in the U.K in 2002; votes are now binding in Switzerland) Use in the United States is recent (Thomas & Van Der Elst, 2015) −First appeared in the form of proposals for inclusion on proxy statements in 2006, but were largely ignored −Legislated in 2009 as a condition to receiving TARP funds −Requirement of publically held corporations since 2011 under the Dodd-Frank Act. −2015 was the 5th proxy season under these new rules - 2015, 61 companies from the Russell 3000 failed to receive majority support - although he results of say-on-pay votes are nonbonding, they can pressure the board and have broader ramifications

effective vs. ineffective moral voice

•Effective moral voice focuses on shared purpose and goals, aiming to build consensus and help the organization succeed. - discussing - solving problems - questioning - mentoring - raising issues early before the problem spreads •Ineffective moral voice is one-directional, and creates opposition rather than agreement. - shaming - judging - attacking - saving concerns for the exit interview

moral person + moral manager

•Ethical Leader = Moral Person + Moral Manager −The moral person component is about your own behavior −The moral manager component is about how you encourage others to act Moral person: - being honest - being fair - being trustworthy - holding to your values moral manager: - rewarding ethical behavior and disciplining unethical behavior - explicitly communicating ethics and values to employees - encouraging employees to follow the law and other standards - encouraging employees to see ethics as a part of daily business

ethical leader

•Ethical leaders act ethically in their everyday interactions, and encourage their followers to act ethically through explicit communication, reinforcement, and decision-making

ceo compensation and class exercise determining Satya nadella's compensation

•Executive compensation has increased dramatically over time −In 1950, the highest paid executive in the U.S. was Charles Wilson, CEO of General Motors. He received $4.7 million in 2005 dollars. −In 2005, the highest paid executive in the U.S. was Lee Raymond, CEO of Exxon. He received $405 million in 2005 dollars. •The board's compensation committee sets the pay and benefits of top executives •Elements of compensation include a combination of the following −Base salary −Annual bonus (if targets are hit) −Stock options −Performance shares −Restricted stock

three governance mechanisms

•Governance Mechanisms: Mechanisms put in place to (a) align incentives between principals and agents and (b) monitor and control agents 1.Boards of Directors 2.Executive Compensation Systems 3.Government Legislation

crisis of 1894

•In 1894, New Yorkers (and those living in other large cities) faced an unprecedented environmental crisis. A convention of city leaders was abandoned after 3 days of tense discussion in which no adequate solution was identified. Some critics predicted that this crisis would lead to the demise of urban civilization •Growth in horse draw carriages exploded in the late 1800s. By 1880 there were over 150,000 horses in New York each producing 22 lbs. of manure per day. •Manhattan described as "stinking with the emanations of putrefying organic matter" •Manure created a toxic dust in the summer, a disgusting swamp in the winter, and brought flies that spread disease. Tens of thousands died each year as a result •By 1912, automobiles outnumbered horses in New York. By 1917 horse drawn carriages were completely gone •But automobiles brought new problems like air pollution which is now estimated to kill 200,000 US residents each year and 2 million deaths globally •Today, automobile emissions are a major source of environmental degradation •Some economists have argued that the great horse manure crisis should lessen our worrying over the current global environmental crisis. Do you agree? Are there key differences?

foreign corrupt practices act

•In 1977, the United states passed the Foreign Corrupt Practices Act (FCPA) to provide clear guidelines on bribery −Prohibits corrupt payments to foreign officials for the purpose of obtaining or keeping business −Makes an exception for "facilitating payments" given to ensure that individuals perform their normal duties (e.g. delivering mail) −Note that this only applies to foreign officials, not employees of private companies (i.e. commercial bribery)

how to find right balance between universalism vs. relativism

•In a famous article Values in Tension, Wharton professor Tom Donaldson argues for three core, universal guidelines 1.Respect for human dignity: Individuals must not treat others simply as tools; they must recognize a person's value as a human being 2.Respect for basic rights: Individuals have basic rights that must be respected 3.Good citizenship: Members of a community must work together to support and improve the institutions on which the community depends

information disclosure

•Information disclosure programs require businesses to report emissions data, which the government then publishes −Example: Toxics Release Inventory −Companies that release more than 25,0000 pounds of toxic chemicals annually are required to report to the EPA Benefits: - very few enforcement costs - allows organizations to reduce pollution in a cost-effective way Drawbacks: - unlikely to motivate companies to change their behavior

world class bull case

•Key players −Christopher Knox: Salesman −Dale Landry: CFO of Armadillo Gas & Power −Carol Landry: Dale's spouse −Jeremy Silva: Vice President of Sales −Samantha Williams: Vice President of Human Resources

three criticisms of the board's effectiveness discussed in class

•Many people are skeptical of a board's effectiveness for three reasons: 1.The board's information comes from management 2.Directors are chosen after being nominated by the existing board and approved by a majority vote of shareholders −Management has a huge say in who is nominated −Directors usually run uncontested! 3.Directors are usually CEOs themselves, and CEOs usually sit on other boards, so there can be a "don't rock the boat" mentality −Board Interlock: A term to describe individuals who sit on multiple boards

market based mechanisms

•Market-based mechanisms provide economic incentives for improving environmental performance, rather than outright requirements •Two examples −Cap and trade limits the total amount of pollution that can be released −Example: Acid rain −Carbon tax puts a price on emitting carbon. −Example: Ireland's car registration tax Benefits: - gives businesses more flexibility - encourages improvement Drawbacks: - gives businesses a license to pollute - can lead to regional pollution imbalances

what is MNC?

•Multinational Corporation: An entity headquartered in one country that does business in one or more foreign countries −Over the past 50 years, the average tariff rate on manufactured goods has fallen from 40% to 4% −Regulations prohibiting foreign companies from entering domestic markets have also fallen dramatically −From 1970-2005, the volume of world merchandise trade has grown 27-fold −In 2008, the U.N. estimated that 82,000 corporations control the assets of affiliated entities in foreign countries

governance as a response to the agency problem

•Principal-agent relationships often work well, but not always −Agency Problem: A problem that arises when managers pursue strategies that are not in the interests of stockholders −What might a manager do that's in their own best interests, but not the best interests of the shareholders? •Large companies include stockholders and managers. Stockholders are often called principals, and managers are often called agents −Principal: A person delegating authority to an agent, who acts on the principal's behalf −Agent: A person to who authority is delegated by a principal •To align the interests of agents and principals, the principals put governance mechanisms in place

shared value

•Shared Value: Policies and practices that provide a social benefit and enhance the company's competitiveness by aligning with the company's mission - Programs enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. •Addresses two problems −The idea that what's good for society is bad for business −The idea of CSR as a "generic" phenomenon responsive vs. strategic: carbon emissions - responsive for wells fargo - strategic for toyota

sustainability

•Sustainability: The capacity of an entity or system to continue to function over time through renewal, maintenance, etc. •Modern challenges include: −Depletion of fossil fuels −Increased pollution −Too little fresh water −Less arable land −Growing population −Growing inequality −Decline in biodiversity −Threats to marine ecosystems −Climate change

details of board of director's duties, composition, dynamics

•The Board of Directors is (in theory) hired by shareholders to minimize agency problems •Laws impose two general duties on directors −Represent the interests of stockholders −Exercise due diligence in supervising management Composition/Selection: •The average board has 11 members −Most state incorporation laws require a minimum of 3, but companies typically have between 7 and 15 •Directors are chosen after being nominated by the existing board and approved by a majority vote of shareholders •Independent Directors: Directors who are not employees of the company, and do not have business dealings that would compromise impartiality Dynamics: •The average board meets eight times a year, although many meet monthly •Agendas include committee reports, mandatory governance matters, and presentations by company executives •Board presides over meetings Duties: •Typical board functions include: −Review and approve the corporation's goals and strategies −Select the CEO, evaluate his or her performance, and remove that person if necessary −Give advice and counsel to management −Create governance policies for the firm, including compensation policies −Evaluate the performance of individual directors, board committees, and the board as a whole −Nominate candidates for election as directors −Exercise oversight of ethics and compliance programs

EPA

•The Environmental Protection Agency is the principle agency in charge of air, water, and land −The largest regulatory agency in the U.S. government −17,000 employees and a $5.9 billion budget −4,581 rules passed since 1970

three measures of globalization

•Three measures of globalization: −Economic globalization is based on trade and investment flows (trade as % of GDP, FDI as % of GDP, tariff rates, etc.) −Political globalization is based on political cooperation (number of embassies in a country, participation in international organizations) −Social globalization is based on information and idea flow (telephone traffic, foreign population, internet use, McDonalds and Ikea stores per capita)

tragedy of the commons

•Tragedy of the commons: When individuals, acting independently and rationally according to each one's self-interest, behave contrary to the whole group's long-term best interests by depleting some common resource −Each farmer fills the land with as many of his/her own animals as possible. Collectively, overgrazing destroys the pasture for all. −Each fisherman catches as many fish for himself/herself as possible. Collectively, the fish population is depleted and all are worse off. −Each consumer buys goods at the cheapest possible price. Collectively, the less eco-friendly production methods hurt all. ex. deadliest catch

universalism

•Universalism: Ethical principles transcend industries and cultures. There is a universal standard that should be followed, even if it contradicts a local norm. *Morals Principles Survey •The care/harm moral foundation −It is moral to alleviate suffering and never harm others −It is moral to be caring, kind, and compassionate •The fairness/cheating moral foundation −It is moral to treat others equally and never cheat −It is moral to be fair and just •The universalist approach is also reflected in organizations' codes of conduct −Texas Instruments' global approach to ethical integrity: 1."Are we complying with all legal requirements on a local level?" 2."Do some of our practices need to be adapted based on local laws and customers of a specific locale?" 3."On what basis do we define our universal standards that apply to TI employees everywhere?" −Starbucks C.A.F.E. practices "zero tolerance" areas PROS: - allows people to transcend cultural norms - provides guidance when cultures conflict CONS: - risks a mislabeling of diversity as immortality when taken too far

environmental standards

•With environmental standards, the government creates regulations that require business firms to comply with specific standards, e.g. by mandating emissions levels or requiring the use of certain technologies. −Also referred to as command and control Benefits: - limits can be enforced in courts - standards are clear and mandatory Drawbacks: - can be very expensive to implement due to regulatory apparatus - can hamper innovation ex. GE and the hudson river cleanup - govt regulation forced GE to take action - project considered a success, but for big environmental problems, the right course of action can be difficult to determine •Air: The Clean Air Act (1970) −Requires the EPA to set maximum concentrations for criteria pollutants −Mandates control of hazardous air pollutants −Example issue: Mountaintop removal •Water: The Clean Water Act (1972) −Requires the EPA to set water quality criteria −Requires the EPA to set criteria for point sources −Example issue: BP oil spill •Land: Toxic Substances Control Act (1976) −Requires the EPA to inventory and potentially ban toxic substances −Example issue: Lead paint