Ethics: Chapter 3 and 4

The Business Judgement Rule

Protects board members if the decisions are: made in good faith based on adequate information in the company's best interest, and not in the director's own interests Good faith is central to defense The argument in favor of this is that board members need to be free to take risks without fear of liability

Tipper

Provides the material information

Tippee

Receives the material information

What challenges do stakeholders present?

Representative of how the firm handles its stakeholders The potential for a threat

Who are business stakeholders?

Stockholders, employees, customers, community, competitors, Stakeholder groups: suppliers, Special Interest Groups, media, society, general public

Stakeholder thinking

The process of always reasoning in stakeholder terms throughout the management process. Increases the complexity of decision making, but most consistent with today's business environment. Facilitated by: Stakeholder culture Stakeholder management capability Stakeholder corporation model Principles of stakeholder management

Proximity

The spatial distance between the organization and its stakeholders

4 Stakeholder types

The supportive stakeholder (high potential for cooperation, low for threat) strategy: Involve The marginal stakeholder (low potential for cooperation and threat) strategy: monitor The nonsupportive stakeholder (high potential for threat, low for cooperation) strategy: defend The mixed-blessing stakeholder (high potential for threat and cooperation) strategy: collaborate **see slide 29 on chapter 3 ppt!

Who are our stakeholders' stakes?

To identify them, consider their typology: Power, legitimacy, urgency.

Multifiduciary (Stakeholder approach)

Views stakeholders as a group to which management has a fiduciary responsibility -Management has the same fiduciary obligation to all stakeholders that it has to its shareholders. Whole Foods. Consistent with the Normative value of stakeholder management.

Strategic (Stakeholder approach)

Views stakeholders primarily as factors managers should manage in pursuit of shareholder profits -stakeholders are important only in the context of maximizing profitability and shareholder value. Consistent with instrumental (strategic) value of stakeholder management

Red Flags Signaling Board Problems

Company has to restate earnings Poor employee morale Negative risk assessment from auditor Poor customer satisfaction track record Management misses strategic performance goals Company is target of employee lawsuits Stock prices decline Quarterly financial results miss analysts' expectations Low corporate governance quotient rating

Stakeholder Synthesis (Stakeholder approach)

Considers stakeholders as a group to whom management owes an ethical, but not a fiduciary, obligation -synthesizes strategic and multifiduciary approach--recognizes that management does not owe equal duty to all stakeholders. Preserves primacy of shareholders. Emphasizes ethical obligation to other stakeholders not to harm, coerce, lie, cheat, steal, etc.

The roles of employees

Hired to perform actual operational work

Power

Refers to the ability or capacity of a stakeholder to produce an effect

Urgency

Refers to the degree to which the stakeholder's claim demands immediate attention or response

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 Is concerned with the relative roles, rights, and accountability of such stakeholder groups as owners, board of directors, managers, employees, and other stakeholders ENRON disaster is viewed first and foremost as a failure of this

The corporation's hierarchy of authority

State Charter (corporations are creatures of the state, not federal) Shareholders (founders, generally.) Board of Directors (oversee the business. Hire senior management, etc. impotent) Management (CEOs, typically are in control of the business) Employees

Clawback provisions

compensation recovery mechanisms that enable a company to recoup CEO pay, typically in the event of a financial restatement or executive's misbehavior

Stakeholder

Any individual or group who can affect or is affected by the actions, decisions, policies, practices, or goals of the organization. A variant of stockholder, who is an investor/owner of a business

What responsibilities does the firm have to its stakeholders?

Apply Corporate Social Responsibility-- Economic Legal Ethical Philanthropic

The Shareholder Democracy Movement

Arises from the fact that although they are new owners, shareholders may find their votes are not counted. They seek: A majority vote Banning Classified or Staggered boards Proxy Access

The roles of shareholders

Own stock in the firm, giving them ultimate control (the shareholder primacy model)

Who is responsible for monitoring CEO performance and dismissing a poorly performing CEO?

The Board of Directors

Material information

information that a reasonable investor might want to use, and is likely to affect the price of a firm's stock

Normative value (of stakeholder model) *likely on exam

Gives intrinsic value to stakeholders and implies or imposes ethical obligations to these stakeholders The answer to the question: How does a company incorporate CSR into its management practices?

Backdating

Allows the recipient to purchase stock at yesterday's price, resulting in immediate wealth increase

Stock Options

Allows the recipient to purchase stock in the future at the price it is today. Align of incentives.

Three values of the stakeholder model

Descriptive Value Instrumental Value Normative Value

What strategies or actions should management take?

Do we deal directly or indirectly with stakeholders? Do we take the offense or the defense in dealing with stakeholders? Do we accommodate, negotiate, manipulate, or resist stakeholder overtures? Do we employ a combination of the above strategies or pursue a singular course of action?

Issues surrounding compensation for CEOs

CEO pay firm performance relationship Excessive CEO pay Executive retirement plants and exit packages Outside director compensation Transparency/SEC rules

The roles of board of directors

Govern and oversee management of the business

Legitimacy

Refers to the perceived validity or appropriateness of the stakeholder's claim to a stake. A condition that prevails when there is a congruence between an organization's activities and society's expectations

The Role of the SEC

Responsible for protecting investor interests Critics argue that they are more focused on the needs of businesses rather than that of investors Failed to stop the Bernard Madoff Ponzi scheme before losing investors billions, although they had been warned of the scheme a decade earlier

A Majority Vote

the requirement that board members be elected by a majority of votes cast, rather than by plurality

True or False: A stockholder is a stakeholder, but a stakeholder is not always a stockholder

True. Stakeholders are more broad than purely just stockholders.

Bullet-dodging

Delaying of a stock option grant until right after bad news.

What opportunities do stakeholders present

Build productive working relationship with stakeholders. The potential for cooperation

Transparency

Working toward the open corporation

The roles of managers

The individuals hired by the board to manage the business on a daily basis

Legitimation

A dynamic process by which business seeks to perpetuate its acceptance Enron placed into question the legitimacy of business and what legitimation steps need to be taken

Stakeholder engagement

An approach by which companies successfully implement the transactional level of strategic management capability 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

A stake can be categorized as

An interest A Right (either legal or moral) Ownership

Stake

An interest or a share in an untertaking

Banning Classified or Staggered Boards

Electing members in staggered terms means that it might take 3 or more years to replace a board.

Stakeholder culture

Embraces the beliefs, values and practices that organizations have developed for addressing stakeholder issues and relationships **see slide 34 chapter 3 ppt for spectrum!

True or False: Separation of ownership from control does not contribute to governance problems

False. When you separate ownership from managers, management ends up with the information and can do what they will. Causes agency problems, forcing management to (sometimes) take action.

Instrumental Value (of stakeholder model) *likely on exam

Gives managers tools to take effective action based on the stakeholder concepts in order to maximize profitability and shareholder value

Secondary Stakeholders

Have a public or special interest stake in the organization that is more indirect Includes: government/regulators, civic institutions, social pressure groups, media/academics, Trade organizations, competitors *not a set list, these can change

Primary Stakeholders

Have direct stake in the organization and its success Include: shareholders/investors, employees/managerial partners, customers, local communities, suppliers/other business *not a set list, these can change

The organizational Fraud Triangle- Enron

Leadership, Management controls, and culture

Typology of Stakeholder Attributes

Legitimacy Power Urgency Proximity **study slide 19! May need to replicate it in some way (Particularly the middle parts, 4,5,6,7)

Many corporate CEOs and boards go to great lengths to protect themselves from takeovers, using:

Poison pills (discourages a hostile takeover by making the firm difficult to take on) Golden parachutes (company agrees to pay key officers in the event of a change in control of the corporation)

Three views of the firm

Production: inputs/outputs, supply, etc. Suppliers to firm to customers. Managerial: Management from ownership. Job to maximize shareholder value. Interchangeable relationship, a back and forth from Corporation and its management to suppliers, owners, customers and employees. This gave rise for the need of corporate governance. Duty of employees is to maximize value for shareholders. Stakeholder: useful. Instrumental to have a sophisticated understanding of stakeholder management. Consistent with being a good corporate citizen. You owe a duty to the stakeholder (Mackey POV) A very complex perspective. Expands upon the already expanded managerial perspective. **see slides 8 -9 on chapter 3 ppt

Stakeholder Approaches

Strategic Multifiduciary Stakeholder Synthesis

The higher dependent the board, and the more insiders on the board... (i.e. CEO is on board)

The higher the CEOs are paid.

The more independent the board, and more outside people on the board... (i.e. CEO is not on board)

The lower the CEOs are paid.

Insider Trading

The practice of buying or selling a security by someone who has access to material information that is not available to the public "illegal as hell"

T/F: Sustainability is the latest emphasis on engaging stakeholders

True. This has become a more increasingly important issue within modern times

Key questions in stakeholder management

Who are our stakeholders? What are our stakeholders' stakes? What opportunities and challenges do our stakeholders present to the firm? What economic, legal, ethical, and philanthropic responsibilities does the firm have to its stakeholders? What strategies or actions should the firm take to best address stakeholder challenges and opportunities?

Proxy Access

Would provide shareholders with the opportunity to propose nominees for the board of directors.

Dodd Frank Act

a law enacted in the aftermath of the financial crisis of 2008-2009 that strengthened government oversight of financial markets and placed limitations on risky financial strategies such as heavy reliance on leverage Evolved from concerns over excessive executive compensation. Advisory vote by shareholders on senior executive pay.

Spring Loading

granting of a stock option at today's price but with the inside knowledge that something good is about to happen that will improve the stock's value

Sarbanes-Oxley Act of 2002

provides sweeping new legal protection for employees who report corporate misconduct Enhances public disclosure by requiring the reporting of off balance sheet transactions and personal loans to executives. CEOs and CFOs must clarify financials Mandates creation of audit committee to board of directors with independence directors and a financial expert Limits the non auditing services an auditor can provide to a firm it audits Make sit unlawful for accounting firms to provide services where conflicts of interests exist.

Descriptive value (of stakeholder model)

provides us with the language, concepts and terms to recognize, describe and understand a business's relationship with its constituencies.