Strategic Management: Chapter 12

Shareholder Capitalism

Built on the idea of Milton Friedman who argued that the only social responsibility of business is to increase its profits. I might argue that Friedman's perspective led to the results we saw on slide 3! Shareholder capitalism insists that shareholders provide the risk capital to the firm and so have the most legitimate claim on profits. Geoff's take - in a public stock company, shareholders have very little risk compared with many other stocks such as employees who have developed highly investment-specific capital. Contra has traditionally been the idea that firms have a social responsibility beyond profit maximization.

How to change low opinions of business executives?

Creating shared value Improving corporate governance Improving business ethics

Top management

Develop and set strategy for the firm. Oversee and conduct day-to-day operations of firm.

Managers should focus on three things within the shared value framework:

Expand the existing customer base to include current noncustomers who are excluded from obtaining the firm's products (e.g., BoP). E.g., Micro-finance. Expand the firm's value chains to include nontraditional partners such as NGOs. E.g., Wal-Mart's partnership with environmental NGOs to address environmental issues. Focus on creating regional clusters.

Actions businesses take which undermine any of the larger systems are

NOT sustainable

Information symmetry

One reason managers can act opportunistically is information asymmetry - managers are generally better informed than are the principals. Managers have access to and should use private information - just not for their own benefit!

Board of Directors 2

Selecting, evaluating, and compensating the CEO. Overseeing CEO succession. Reviewing, monitoring, and implementing significant strategic initiatives. Conducting risk assessment. Ensuring fair presentation of financial statements. Ensuring compliance with laws and regulations

Board of Directors

The shareholders of public companies appoint a Board of directors to represent their interests. Board of directors consists of two groups: Inside directors, who are generally part of the company's senior management team. Outside directors who are not employees of the firm. Generally, they're senior executives at other firms. Board independence is critical to effective fulfillment of the Board's governance responsibility. Some data suggests firms perform better when there are more minorities and women on the Board.

Other governance mechanisms

While the board of directors is a primary governance mechanism, there are others: Executive compensation Market for corporate control Auditors, regulators, and industry analysts

Businesses

a subset of the economy, which is a subset of the society, which is a subset of the ecosystem (environment).

Corporate governance

concerns the mechanisms used to direct and control the firm to ensure it pursues its strategic goals in a legal and successful manner. It seeks to address the principal-agent problem caused by separation of ownership and control. I.e., Managers tend to want to act in their own interests rather than in the interests of the shareholders. Managers may act opportunistically.

Publick stock company- American capitalism

founded on the idea of public stock companies that has developed over the last 200 year period. Key characteristics of those companies: Limited liability for investors - the maximum an investor in a limited company can lose is his/her capital (re)invested. Transferability of investment through stock exchanges. Legal personality. The company is regarded as a separate legal "person" with its own rights and obligations distinct from its owners (NB: Hobby Lobby though), Separation of ownership and control. Owners (shareholders) delegate decision making to professional managers. Therefore, each can focus on their expertise: owners - finding good investments; managers - running companies.

Adverse selection

information asymmetry increases the likelihood of selecting an inferior alternative.

Business (and executive) legitimacy

now in question about ethical practices

Porter's Goal

reestablishing the link between superior firm performance and societal progress.

Shared Value

refocusing the firm on simultaneously creating value for society by addressing social needs and challenges while also enhancing shareholder wealth.

Moral hazard

situation in which information asymmetry increases the incentives of one party to take undue risk or shirk their responsibilities.

Shared Value Framework

that managers maintain a dual focus on shareholder value creation and value creation for society. Note that this is complementary to Freeman's idea of stakeholder theory as joint value creation presented earlier this semester.