Strategic Management Huning Final Chap 12

Milton Friedman's Philosophy

"The social responsibility of business is to increase its profits." A survey was created: •For the (degreed) top 25% of income earners •To assess various countries •To inquire whether they agree with Milton Friedman

HP's Boardroom Soap Opera Continues

1. $120 billion in sales •"The HP Way" - an admired corporate culture (1938) §Mark Hurd became CEO in 2005. •Good financial results - lower costs & higher sales 2. 18-month period, HP's market value dropped 80% •$105 billion (April '10) to $23 billion (November '12) 3. Leo Apotheker became CEO in Fall 2010. Meg Whitmanbecame CEO in Fall 2011 4. 2006 First Stage - HP-initiated unethical surveillance to uncover a suspected leak. 5. 2010 (summer) Second Stage - Jodie Fisher, a former adult-movie actress, filed a lawsuit against CEO Mark Hurd. 6. 2010 (fall) Third Stage - (new) CEO Leo Apotheker overpaid for British software company Autonomy ($11B). •HP took nearly $9 billion write-down for this within a year!

Responsibilities of the Board of Directors

1. General strategic oversight and guidance 2. Selecting, evaluating, and compensating the CEO •The board may fire him or her. •Overseeing the company's CEO succession plan 3. Providing guidance for executive compensation 4. Reviewing, monitoring, evaluating, and approving strategic initiatives •Such as large acquisitions 5. Risk assessment & mitigation 6. Ensuring a firm's audited financial statements 7. Ensuring a firm's compliance with laws and regulations

What is the Public Stock company Hierarchy of Authority

1. State Charter 2. Shareholders 3. Board of Directors 4. Management 5. Employees

Corporate Mechanisms to Align Incentives Between Principals & Agents

1.Executive compensation 2.The market for corporate control 3.Financial statement auditors, government regulators, and industry analysts

Michael Porter's Recommendations to Reconnect Economic & Societal Needs

1.Expand the customer base •Bring in nonconsumers such as those at the bottom of the pyramid (large / poor socioeconomic group). 2.Expand traditional internal firm value chains. •Include more nontraditional partners such as nongovernmental organizations (NGOs). 3.Focus on creating new regional clusters: •Such as Silicon Valley in the United States •Electronic City in Bangalore, India •Chilecon Valley in Santiago, Chile

The Shared Value Creation Framework

A model proposing that managers have a dual focus on: •Shareholder value creation •Value creation for society Example: GE's ecomagination initiative •To provide cleaner and more efficient sources of energy •To provide abundant sources of clean water anywhere in the world To reduce emissions

Agency Theory

A theory that views the firm as a nexus of legal contracts •Conflicts that arise should be resolve legally. •The firm needs to design work tasks, incentives, and employment contracts. To minimize opportunism by agents

The Market for Corporate Control

An external corporate-governance mechanism Activist investors who: •Seek to gain control of an underperforming corporation •Buy shares of its stock in the open market •Through leveraged buy outs Defended by poison pills

Bad Apples vs. Bad Barrels

Bad Apples •Individuals who act opportunistically Bad Barrels •An unethical organizational climate To set the ethical tone, leaders must: •Set clear ethical expectations •Put structure, culture and control systems in place •Culture must be aligned •Executive behavior must adhere to values

Auditors, Government Regulators, And Industry Analysts

External-governance mechanisms To avoid misrepresentation of financial results: •Public financial statements must follow GAAP: •Generally accepted accounting principles •Financial statements must be audited Industry analysts often base their buy, hold, or sell recommendations on: •Financial statements filed with the SEC Business news (WSJ, Forbes, CNBC, etc.) - Auditors, government regulators, and industry analysts •SEC- GAAP as reported publicly via EDGAR •The Wall Street Journal, Bloomberg BusinessWeek, Forbes... - Governance Metrics International (GMI Ratings) - The market for corporate control •External governance mechanism •Hostile takeover •Corporate raiders and hedge funds - 2013 − Dell's LBO was a target of Carl Icahn.

Did Goldman Sachs and the "Fabulous Fab" Commit Securities Fraud?

In 2010, the SEC sued the company and an employee, named Fabrice Tourre, for fraud •Did the bank knowingly mislead investors? •Goldman Sachs argued that it is up to clients to assess risk involved in investments. Public pressure mounted. •Goldman Sachs ended up paying $550M to settle the lawsuit, but did not admit wrongdoing. Tourre was convicted of fraud.

The Public Stock Company: Four Benefits

Limited liability for investors Transferability of investor ownership •Through the trading of shares of stock Legal personality •Rights and obligations Separation of legal ownership and management control

The Principal-Agent Problem

Managers, executives, and board members tend to have access to private information concerning important company developments that outsiders, especially investors, are not privy to. Often this informational advantage is based on timing—insiders are the first to learn about important developments before the information is released to the public. Although possessing insider information is not illegal and indeed is part of an executive's job, what is illegal is acting upon it through trading stocks or passing on the information to others who might do so. Insider-trading cases, therefore, provide an example of egregious exploitation of information asymmetry

what is The Shared Value Creation Framework?

Provides guidance to managers Helps reconcile: •Gaining and sustaining competitive advantage and •Corporate social responsibility

Business Ethics

Provides training for: •"behavior that is consistent with the principles, norms, and standards of business practice that have been agreed upon by society" Can differ in various cultures around the globe •Universal norms include: Fairness, honesty, reciprocity

The Board of Directors

Represent the interests of shareholders Tasked with providing oversight Consist of inside and outside directors •Inside directors: usually consist of: CEO, COO, CFO •Outside directors: senior execs from other firms •Interlocked; direct vs indirect Are elected by the shareholders •Shareholders vote to determine who is elected

Traditional View: (Friedman)

Shareholder capitalism: shareholders - the providers of the necessary risk capital and the legal owners of public companies - have the most legitimate claim on profits

Executive Compensation

Stock options are often part of compensation. The average ratio of CEO to employee pay is 300:1. •1980: 40-1 About 2/3 of CEO pay is linked to firm performance. •But this link is weak •Can further increase job stress Can negatively impact job performance

Ethical Leadership Is Critical

Strategic leaders set the tone for the ethical climate within an organization. •Employees take cues from their environment on how to act. CEOs of Fortune 500 companies are under constant public scrutiny. •Ought to adhere to the highest ethical standards •Unethical behavior can destroy the CEO's reputation. Ethical expectations must be clear.

Percent of "Informed Public" Who "Strongly/Somewhat Agree" with Friedman

The countries where the fewest people agreed with Friedman's philosophy were China, Brazil, Germany, Italy, and Spain; fewer than 40 percent of respondents in those countries supported an exclusive focus on shareholder capitalism. Although they have achieved a high standard of living, European countries such as Germany have tempered the free market system with a strong social element, leading to so-called social market economies. The respondents from these countries seemed to be more supportive of a stakeholder strategy approach to business. Some critics, however, would argue that too strong a focus on the social dimension contributed to the European debt crisis because sovereign governments such as Greece, Italy, and Spain took on unsustainable debt levels to fund social programs such as early retirement plans, government-funded health care, and so on. The United States placed roughly in the middle of the continuum—a bit more than half (56 percent) of U.S. respondents subscribed to Friedman's philosophy.

Uber

The most valuable private start-up ever •Offers cab-hailing service via an app •Their unethical, perhaps illegal, activity generated controversy Uber's beginning •Started by two tech entrepreneurs Record breaking growth: •Successfully expanded both in the United States and globally to more than 500 cities in 70 countries •Revenue growth: $400 million in 2014 to $8 billion in 2017

why a company leader's private life is relevant to the company.

The primary issue here is that Mr. Hurd used HP's resources to pay his mistress, and this is unethical, even though Hurd is a strong leader and turned HP's performance around.

poison pill

These are defensive provisions that kick in should a buyer reach a certain level of share ownership without top management approval. Typically, such a plan gives shareholders the right to buy more shares at a discount if one shareholder buys a certain percentage or more of the company's shares. The plan could be triggered, for instance, if any one shareholder buys 20% of the company's shares, at which point every shareholder (except the one who possesses 20%) will have the right to buy a new issue of shares at a discount. If every other shareholder is able to buy more shares at a discount, such purchases would dilute the bidder's interest, and the cost of the bid would rise substantially. Knowing that such a plan could be activated, the bidder could be disinclined to take over the corporation without the board's approval, and would first negotiate with the board in order to revoke the plan.[1]

Why Corporate-governance mechanisms play an important part in aligning the interests of principals and agents

They enable closer monitoring and controlling, as well as provide incentives to align interests of principals and agents.

Assume you work in the accounting department of a large software company. Toward the end of December, your supervisor tells you to change the dates on several executive stock option grants from March 15 to July 30. Why would she ask for this change? What should you do?

This seems like illegal and unethical tax evasive actions are being demanded by the supervisor. Unless there is some legitimate error in the stock option dating, the employee has every right to refuse to make these changes because of the liability issues. Further, if this request is condoned in the organization, it may be time to quit the job or contact the IRS to report the issue.

leveraged buyout (LBO),

a single investor or group of investors buys, with the help of borrowed money (leveraged against the company's assets), the outstanding shares of a publicly traded company in order to take it private. In short, an LBO changes the ownership structure of a company from public to private. The expectation is often that the private owners will restructure the company and eventually take it public again through an initial public offering (IPO).

Insider trading

is an example of information asymmetry. In October 2011, Mr. Raj Rajaratnam, a co-founder of the Galleon Group was sentenced to 11 years in U.S. jail for insider trading. This is one of the longest terms ever for this offense.

§When corporate governance fails

•Accounting scandal •Global financial crisis

§Business ethics

•Agreed-upon explicit code of conduct in business

Adverse Selection

•An increased likelihood of selecting inferior alternatives Moral Hazard - caused by information asymmetry

When Facing an Ethical Dilemma: Is the action within acceptable norms of professional behavior?

•As outlined in the organization's code of conduct •As defined by the profession at large

Shared Value View: (Porter)

•Corporate social responsibility (CSR): obligations extend beyond the economic responsibility and include legal, ethical, and philanthropic societal expectations

Creating Shared Value: Michael Porter's view:

•Executives shouldn't concentrate only on increasing firm profits. •Rather, they should focus on creating shared value. •Economic value (for shareholders) •Social value (address society's needs and challenges) •Societal progress is important. •Capitalism helps shape society.

When Facing an Ethical Dilemma: Would you feel comfortable explaining and defending the decision in public?

•How would the media react? •How would the company's stakeholders feel about it?

Legal conduct vs. Ethical conduct

•Legal (min acceptable standard), but may not be ethical - Mortgage brokers selling "option ARMs" •Ethical, but may not be legal - Pharmaceutical firms discussing pricing to increase affordability

Corporate Governance

•Mechanisms to direct and control a firm •Ensure the pursuit of strategic goal •Address the principal−agent problem •Ask tough questions when needed

GE's Board of Directors

•Members of companies, academia, and government •16 members, 5 different committees They meet about 12 times annually 25% of the board are women (more than usual) •Generally, the larger the company, the greater its gender diversity. •Diverse boards are less likely to fall victim to groupthink.

Uber: Ethically challenged?

•Uber is pushing the envelope of what is acceptable, ethical, and even legal with all its stakeholders. •Regulators, government, drivers, journalists, competitors Primary issues, among others: •Disregard for laws and regulations •Dynamic pricing: supply & demand vs. price gouging? •Competitive tactics: ordering rides from competitors, then canceling them •Allegations of harassment and discrimination

Moral Hazard

•When one party is incentivized to take undue risks or shirk responsibilities because the costs incur to the another party - caused by information asymmetry