MGMT 440 Exam 1

Shareholder Activism

-Activism is about driving change. Shareholders turn to it when they think management isn't maximizing a company's potential. Activism can include anything from a full-blown proxy contest that seeks to replace the entire board, to shareholder proposals asking for policy changes or disclosure on some issue. In other cases, shareholders want to meet with a company's executives or directors to discuss their concerns and urge action. The form activism takes often depends on the type of investor and what they want.

philanthropic efforts

CSR may include philanthropic efforts such as charitable donations or programs that encourage employee volunteerism by providing paid time off for such activities

Motivated Blindness

Description (What): We overlook the unethical behavior of others when it is in our interest to remain ignorant. Importance (Why consider): It does little good to simply note that conflicts of interest exist in an organization. A decade of research shows that awareness of them doesn't necessarily reduce their untoward impact on decision making. Nor will integrity alone prevent them from spurring unethical behavior, because honest people can suffer from motivated blindness. Executives should be mindful that conflicts of interest are often not readily visible and should work to remove them from the organization entirely, looking particularly at existing incentive systems. Mechanism (How): Part of the answer lies in powerful conflicts of interest that helped blind them to their own unethical behavior and that of the companies they rated. It's well documented that people see what they want to see and easily miss contradictory information when it's in their interest to remain ignorant—a psychological phenomenon known as motivated blindness. This bias applies dramatically with respect to unethical behavior.

Implementation of Sustainable investing

Different ways in which sustainable investing is done by asset managers 1) ESG Integration 2) Restriction Screening 3) Thematic Investing 4) Shareholder Engagement 5) Impact Investment

Operational activism

Hedge fund activists used to focus mostly on capital allocation issues, such as dividends and share buybacks. Many then began looking for company combinations and break-ups—mergers, carveoutsand spin-offs. Now, there is a greater focus on operational activism, which has more of a long-term focus. Activists join the board (or appoint independent directors), replace members of management and help execute a new strategy. While many hedge funds had been thought of as being too focused on short-term gains, the longer-term operational activism has helped to shift that perception.

Type of activist investors

Individual Institutional Investors Hedge Funds (institutional investors and hedge funds have the most impact)

Owners

Owners (who in publicly traded organizations can include shareholders) are the individuals who hold significant shares of the firm. Owners are liable for the impacts the organization has, and have a significant role in strategy. Owners often make substantial decisions regarding both internal and external stakeholders.

Reliability

Requirement: The reporting organization shall gather, record, compile, analyze, and report information and processes used in the preparation of the report in a way that they can be subject to examination, and that establishes the quality and materiality of the information.•Guidance: Individuals other than those who prepared the report are expected to be able to review internal controls or documentation that supports the information in the report. The decision-making processes underlying the report are to be documented in a manner that allows for the examination of key decisions, such as processes for determining the report content and topic Boundaries, or stakeholder engagement.

Comparability

Requirement: The reporting organization shall select, compile, and report information consistently. The reported information shall be presented in a manner that enables stakeholders to analyze changes in the organization's performance over time, and that could support analysis relative to other organizations. •Guidance: It is important that stakeholders are able to compare information on the organization's current economic, environmental, and social performance against the organization's past performance, its objectives, and, to the degree possible, against the performance of other organizations. When necessary, it is important to provide context that helps report users understand the factors that can contribute to differences in impacts or performance between organizations. To facilitate comparability over time, it is important to maintain consistency in the methods used to calculate data, the layout of the report, and explanations of methods and assumptions used to prepare information.

The Sarbanes Oxley Act

Requires that an individual blow the whistle on an employee who they have evidence has violated the law

Motivators for Asset Managers (sustainable investing)

Risk/costs Returns/benefits Mission Alignment

Whistle-blower process

Whistle-blowers may make their allegations internally (to other people within the affected organization) or externally (to regulators, law enforcement agencies, the media, or groups concerned with the issues)

Timing and Critically of business roundtable statement

"This is tremendous news because it is more critical than ever that businesses in the 21st century are focused on generating long-term value for all stakeholders and addressing the challenges we face, which will result in shared prosperity and sustainability for both business and society"

Manager's role

-Accountability and responsibility -Communication -Monitor and respond -Available as a resource

Incentive Systems 3 Parts

1) Goals 2) Performance measurement 3) Incentives

5 Barriers to Ethical Breakdowns

1) Ill Conceived Goals 2) Motivated Blindness 3) Indirect Blindness 4) The Slippery Slope 5) Overvaluing Outcomes

Diversity Programs (3 principles)

1) engagement 2) contact 3) social accountability

Scale and impact of business roundtable statement

181 chief executives have lent their signatures... from the leaders of companies including JPMorgan Chase, Apple, Amazon and Walmart. The new statement of purpose was endorsed by 181 of the Business Roundtable's 188 CEO members, including the leaders of two of the world's biggest investors: BlackRock Inc. and Vanguard Group Inc. It is a major philosophical shift for the association, which counts the chief executives of dozens of the biggest U.S. companies as its members.

Incentives

Branch employees were provided financial incentive to meet cross-sell and customer service targets, with personal bankers receiving bonuses up to 15 to 20 percent of their salary and tellers receiving up to 3 percent. The Wells Fargo compensation system emphasized cross selling as a performance metric for awarding incentive pay to employees. but the senior-executive bonus system did not include this metric (disconnect contribute to a failure to recognize the problem earlier.

The Slippery Slope

Description (What): We are less able to see others' unethical behavior when it develops gradually. Importance (Why consider): To avoid the slow emergence of unethical behavior, managers should be on heightened alert for even trivial-seeming infractions and address them immediately. They should investigate whether there has been a change in behavior over time. And if something seems amiss, they should consider inviting a colleague to take a look at all the relevant data and evidence together-in effect creating an "abrupt" experience, and therefore a clearer analysis, of the ethics infraction. Mechanism (How): If we find minor infractions acceptable, research suggests, we are likely to accept increasingly major infractions as long as each violation is only incrementally more serious than the preceding one.

Overvaluing Outcomes

Description (What): We give a pass to unethical behavior if outcomes are good Importance (Why consider): An employee may make a poor decision that turns out well and be rewarded for it, or a good decision that turns out poorly and be punished. Rewarding unethical decisions because they have good outcomes is a recipe for disaster over the long term Mechanism (How): Many managers are guilty of rewarding results rather than high-quality decisions. People's inclination to judge actions on the basis of whether harm follows rather than on their actual ethicality. Managers can make the same kind of judgment mistake, overlooking unethical behaviors when outcomes are good and unconsciously helping to undermine the ethicality of their organizations.

Indirect Blindness

Description (What): We hold others less accountable for unethical behavior when it is carried out through third parties Importance (Why consider): Managers routinely delegate unethical behaviors to others, and not always consciously. They may tell subordinates, or agents such as lawyers and accountants, to "do whatever it takes" to achieve some goal, all but inviting questionable tactics. When an executive hands off work to anyone else, it is that executive's responsibility to take ownership of the assignment's ethical implications and be alert to the indirect blindness that can obscure unethical behavior. Mechanism (How): People have a cognitive bias that blinds them to the unethicality of outsourcing dirty work. We are instinctively more lenient in our judgment of a person or an organization when an unethical action has been delegated to a third party—particularly when we have incomplete information about the effects of the outsourcing. But when we're presented with complete information and reflect on it, we can overcome such "indirect blindness" and see unethical actions—and actors—for what they are.

Ill-conceived goals

Description (What): We set goals and incentives to promote desired behavior but they encourage a negative one. Importance (Why consider): Leaders setting goals should take the perspective of those whose behavior they are trying to influence and think through their potential responses. This will help head off unintended consequences and prevent employees from overlooking alternative goals, such as honest reporting, that are just as important to reward if not more so. When leaders fail to meet this responsibility, they can be viewed as not only promoting unethical behavior but blindly engaging in it themselves. Mechanism (How): Research shows that as the uncertainty involved in completing a task increases, the guesswork becomes more unconsciously self-serving. A system designed to promote ethical behavior backfires. Part of the managerial challenge is that employees and organizations require goals in order to excel. Indeed, among the best-replicated results in research on managerial behavior is that providing specific, moderately difficult goals is more effective than vague exhortations to "do your best." But research also shows that rewarding employees for achieving narrow goals such as exact production quantities may encourage them to neglect other areas, take undesirable "ends justify the means" risks, or—most important from our perspective—engage in more unethical behavior than they would otherwise.

Diversity

Diversity is the presence of difference within a given setting. I'm referring to a diversity of identities, like race and gender (the current hot topics), and, in some cases ethnicity, religion, nationality, or sexual orientation. HR folks may think of these identities as protected classes—identities that have received (and still receive) systematic discriminatory treatment, and create advantages and barriers to opportunity and resources. Person is not diverse, no matter how many norms or glass ceilings they shatter. No matter how outside of the norm I am, I am not a "diverse person". Diversity is about a collective or a group and can only exist in relationship to others. To be a diverse organization simply means that you have the presence of differences of identity (e.g., gender and people of color) throughout your organization.

employees

Employees are primary internal stakeholders. Employees have significant financial and time investments in the organization, and play a defining role in the strategy, tactics, and operations the organization carries out. Well run organizations take into account employee opinions, concerns, and values in shaping the strategy, vision, and mission of the firm.

Equity

Equity is an approach that ensures everyone access to the same opportunities. Equity recognizes that advantages and barriers exist, and that, as a result, we all don't all start from the same place. Equity is a process that begins by acknowledging that unequal starting place and makes a commitment to correct and address the imbalance. Equitable processes seek to identify these imbalances and then create processes where the disparate outcomes wouldn't exist.

Arguments for CSR

Financial:Proponents of corporate social responsibility (CSR) argue that socially responsible practices can have a positive impact on the bottom line.•Non-financial rewards:Proponents of CSR argue that socially responsible practices can have a positive impact on the organization by improving employee recruitment and retention, managing environmental risks by reducing harmful accidents, and differentiating brand to achieve greater consumer loyalty.•Benefits to the environment and social welfare: CSR proponents may also argue for the recognition of a "triple bottom line" performance that includes not only financial returns for owners but also social and environmental benefits for the greater society.

Thematic Investing

Focus on themes and sectors dedicated to specific ESG issues. The more material the issue is to the valuation of each company, the more impactful the approach is likely to be on financial returns. Ex: climate change adaptation and mitigation

Shareholder Engagement

Gives investors additional opportunities to reduce risk and drive change in the direction they want, even within companies that may start off with poor ESG performance, but can potentially improve over time. Whereas restriction screens can be achieved with a passive portfolio, approaches like direct engagement may require a manager that is active, able to engage company management and takes a structured approach to sustainable investing.

Performance measurement (incentive system)

If the branch did not hit its targets, the shortfall was added to the next day's goals. The company also published scorecards that ranked individual branches on sales metrics, including cross-selling. The independent report suggests that employee pressure was a greater contributor to misconduct than financial incentives. Management characterized low-quality accounts, including products later canceled or never used and products that the customer did not want or need, as "slippage" and believed a certain amount of slippage was the cost of doing business in any retail environment.

Mission Alignment

In an era of big data and transparency, mission-aligned asset owners are better able to understand and tailor what they own—whether in the form of equity, bonds, real estate or any other asset class—in a way that genuinely reflects their mission statements. Clarification: this is the mission of the investment company (such as mutual funds) and not the mission of the company they are investing in.

Shareholder Proposals

In some cases, institutional investors submit—or indicate they plan to submit—a proposal if direct engagement with the company and its directors doesn't produce changes. Other investors view a shareholder proposal as a way to begin the conversation with a company. These proposals often focus on governance practices or policies, executive compensation, or the company's behaviors as a corporate citizen. Proponents watch how the major institutional investors are voting on issues, and have a sense of which shareholders may be likely to support their proposal going in. Investors also often reach out to other shareholders to encourage support for their measure.

Inclusion

Inclusion is about folks with different identities feeling and/or being valued, leveraged, and welcomed within a given setting (e.g., your team, workplace, or industry). You can have a diverse team of talent, but that doesn't mean that everyone (particularly those with marginalized identities —women and people of color) feels welcome or are valued, is given opportunities to grow, or gets career support from a mentor. Inclusion is not a natural consequence of diversity.

Individual investor

Individual investors who put their own money. Individual investors may submit lots of shareholder proposals, but they usually lack the backing to drive real change.

External Stakeholders

Integrating businesses into society results in a wide variety of interactions with a number of different external stakeholder groups. Business are complex pieces in the social ecosystem, both impacted by and impacting a wide variety of groups in the external environment. There are quite a few external stakeholders for businesses to keep in mind when making decisions and carrying out operations. Examples:These include but are not limited to customers, suppliers, creditors, communities, governments, and society at large.

Restriction Screening

Intentionally avoids investments generating revenue from objectionable activities, sectors or geographies. These strategies can provide downside protection and risk-mitigation benefits depending on the nature of the screen. If restriction screens lead to avoiding company-specific risk, they can play a positive role in maximizing risk-adjusted returns. Clarification: ESG integration is an inclusion criteria (identify and include firms on the basis of ESG and financial performance) but restriction screening is an exclusion criteria (how to avoid certain firms and exclude them from the investment portfolio)

Internal Stakeholders

Internal stakeholders are individuals or groups who are directly and/or financially involved in the operational process. This includes employees, owners, and managers. Each of these groups is potentially rewarded directly for the success of the firm.

Communication

Manager's fulfill this responsibility by making sure employees are aware of the organization's ethical code and have the opportunity to ask questions to clarify their understanding

Monitor and Respond

Managers also monitor the behavior of employees in accordance with the organization's expectations of appropriate behavior. They have a duty to respond quickly and appropriately to minimize the impact of suspected ethical violations.

Accountability and Responsibility

Managers hold positions of authority that make them accountable for the ethical conduct of those who report to them Managers may be responsible for creating/implementing changes to the ethical codes or guidelines

Managers

Managers play a substantial role in determining the strategy of the organization, and a significant voice in operational decisions. Managers are also accountable for the decisions made, and act as a point of contact between shareholders, the board of directors, and the organization itself.

Internal

Many companies establish internal processes through which employees can come forward if they suspect an ethical or legal violation has occurred. some processes allow anonymity, and have an ombudsperson who handles these matters on a confidential basis/advises the employee about their options

CSR efforts

Many organizations promote their CSR efforts as a way of shaping public perceptions, attracting customers, and building good will with stakeholders. Public companies often report CSR policies and activities in their annual reports; some create separate documents or use their websites to describe and publicize their CSR-related efforts.

Integrate social values into operational and business strategies

Many organizations seek to have an even greater impact through CSR initiatives that integrate social values into operational and business strategies. For example, to protect scarce natural resources, a firm may make a commitment to use only recycled materials in its packaging of consumer goods.

Stakeholders

People or organizations with a legitimate interest in a given situation, action, or enterprise. Organizational management is largely influenced by the opinions and perspectives of internal and external stakeholders. A stakeholder is any group, individual, or community that is impacted by the operations of the organization, and therefore must be granted a voice in how the organization functions. External stakeholders have no financial stake in the organization, but are indirectly influenced by the organization's operations.

ESG Integration

Proactively considering ESG criteria alongside financial analysis. This is in line with the role of risk and return as important drivers of the move toward sustainable investing, since integration tends to be focused on identifying long-term risks and capturing opportunities arising from sustainability trends.

Theater one: Focusing on philanthropy

Programs in this theater are not designed to produce profits or directly improve business performance. Examples include donations of money or equipment to civic organizations, engagement with community initiatives, and support for employee volunteering. Corporate social responsibility may include philanthropic efforts such as charitable donations or programs that encourage employee volunteerism by providing paid time off for such activities

Theater Two: Improving Operational Effectiveness

Programs in this theater function within existing business models to deliver social or environmental benefitsin ways that support a company's operations across the value chain, often improving efficiency and effectiveness. Thus they may—but don't always—increase revenue, decrease costs, or both. •Examples include sustainability initiatives that reduce resource use, waste, or emissions, which may in turn reduce costs; and investments in employee working conditions, health care, or education, which may enhance productivity, retention, and company reputation.

Proxy Access

Proxy access allows certain shareholders to include their director nominees in the company's proxy Statement. Proxy fights are long, expensive and draining for a company. There is greater recognition that the directors nominated by activists can sometimes add real value to the boardroom. So for many companies, it's just not worth the cost and distraction of a proxy fight. Clarification: Proxy access is simply seeking access to place a limited number of alternative board candidates on the company's proxy card (ballot) for the company's annual shareowner meeting. In a proxy fight a dissident shareowner circulates an alternative proxy card with a rival slate of board candidates.

Materiality

Requirement: The report shall cover topics that - 1) reflect the reporting organization's significant economic, environmental, and social•impacts; or 2) substantively influence the assessments and decisions of stakeholders.•Guidance: Materiality is the principle that determines which relevant topics are sufficiently important that it is essential to report on them. Not all material topics are of equal importance, and the emphasis within a report is expected to reflect their relative priority. An organization is faced with a wide range of topics on which it can report. Relevant topics, which potentially merit inclusion in the report, are those that can reasonably be considered important for reflecting the organization's economic, environmental, and social impacts, or influencing the decisions of stakeholders. In this context, 'impact' refers to the effect an organization has on the economy, the environment, and/or society (positive or negative). Applying this principle ensures that the report prioritizes material topics. Other relevant topics can be included, but with less prominence. •Clarification: think of it as real impact instead of mere words for PR purposes.

Completeness

Requirement: The report shall include coverage of material topics and their Boundaries, sufficient to reflect significant economic, environmental, and social impacts, and to enable stakeholders to assess the reporting organization's performance in the reporting period. •Guidance: •List of material topics covered in the report:Together, the topics covered in the report are expected to besufficient to reflect the organization's significant economic, environmental and/or social impacts, and to enable stakeholders to assess the organization. In determining whether the information in the report is sufficient, the organization considers both the results of stakeholder engagement processes and broad-based societal expectations that are not identified directly through stakeholder engagement processes.•Topic Boundaries:the topic Boundary is a description of where the impacts occur for a material topic, and the organization's involvement with those impacts. Organizations might be involved with impacts either through their own activities or as a result of their business relationships with other entities.An organization preparing a report in accordance with the GRI Standards is expected to report not only on impacts it causes, but also on impacts it contributes to, and impacts that are directly linked to its activities, products or services through a business relationship.•Time:Time refers to the need for the selected information to be complete for the time period specified by the report. As far as practicable, activities, events, and impacts are expected to be presented for the reporting period in which they occur. In making estimates of future impacts (both positive and negative), the reported information is expected to be based on well-reasoned estimates that reflect the likely size and nature of impacts.

Balance

Requirement: The reported information shall reflect positive and negative aspects of the reporting organization's performance to enable a reasoned assessment of overall performance.•Guidance: The overall presentation of the report's content is expected to provide an unbiased picture of the organization's performance. The report is expected to avoid selections, omissions, or presentation formats that are reasonably likely to unduly or inappropriately influence a decision or judgment by the report reader. The report is expected to include both favorable and unfavorable results, as well as information that can influence the decisions of stakeholders in proportion to their materiality. The report is also expected to distinguish clearly between facts and the organization's interpretation of them.

Arguments against CSR

Shareholder primacy:Some critics see CSR as unrelated to the primary aim of the business- making a profit for its shareholders. Too often it competes with a duty to maximize shareholder value. corporation's purpose is to maximize returns to its shareholders (or shareholder value) and that it does not have responsibilities to society as a whole.•Not managerial responsibility:Part of the critics' argument is that managers should not select social causes on behalf of a diverse set of owners. Rather, CSR opponents believe that corporations benefit society best by distributing profits to owners, who can then make charitable donations or take other socially responsible actions as they see fit.•Greenwashing:Critics may also see some CSR efforts as attempts at public manipulation or greenwashing...to draw attention away from unpopular practices such as polluting the environment or outsourcing jobs overseas. Greenwashing refers to instances where businesses have spent significantly more resources advertising being "green" (that is, operating with consideration for the environment) than investing in the environmentally sound practices themselves. Critics view these as misleading, even cynical, attempts to shape public perception about a company without its actually having to benefit the environment

The Business Roundtable Statement supersedes decades long assertions of shareholder primacy

Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed principles of shareholder primacy- that corporations exist principally to serve shareholders. With [this] announcement, the new Statement supersedes previous statements and outlines a modern standard for corporate responsibility. Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders

Goals (incentive system)

Some outside observers alleged that the bank's practice of setting daily sales targets put excessive pressure on employees. Branch managers were assigned quotas for the number and types of products sold. If the branch did not hit its targets, the shortfall was added to the next day's goals. The Wells Fargo compensation system emphasized cross selling as a performance metric for awarding incentive pay to employees.

Risk/costs

Sustainable investing has enabled investors to think more systematically about risks of unexpected, costly issues arising from ESG factors that can hurt long-run returns. Incorporating these criteria as a value-added part of the investment process provides an element of downside protection.

Leadership Failure

The Wells Fargo cross-selling scandal highlights the challenge of a high-performing executive whose behavior ultimately does not align with company values. the board report criticized CEO John Stumpfand community banking head Carrie Tolstedt for leadership failures. Stumpfdid not appreciate the scope and scale of sales practices violations. [The report] was critical of [Tolstedt's] management style, describing her as "obsessed with control, especially of negative information about the community bank" and faulting her for maintaining "an 'inner circle' of staff that supported her, reinforced her views, and protected her."

Returns/benefits

The benefits of sustainable investing may accrue through positive corporate reputation, reduced operating costs, new market opportunities or ethical management practices. Moreover, consumer trends point toward greater returns for sustainable companies. Nearly nine in 10 (87%) U.S. consumers say they will purchase a product because of a company's stance on an issue they care about, and 78% say they want companies to address important social issues. Among millennials, this is even more pronounced. Millennials are more than twice as likely as other generations to purchase products from companies they view as sustainable.

Reputational impact

The dollars involved in the Wells Fargo cross-selling scandal were small (less than $6 million in direct fees) but the reputational damage to the bank was massive. Note: The subsequent settlements were substantial as well (we can think of this as the price the bank paid to stop the reputational damage).

Organizational structure and corporate control functions

The report asserted that "corporate control functions were constrained by [a] decentralized organizational structure" and described the corporate control functions as maintaining "a culture of substantial deference to the business units." Group risk leaders "took the lead in assessing and addressing risk within their business units" and yet were "answerable principally to the heads of their businesses." Risk management ... generally took place in the lines of business, with the business people and the group risk officers and their staffs as the "first line of defense."

Social Accountability

The third tactic, encouraging social accountability, plays on our need to look good in the eyes of those around us. Business practices that generate social accountability: Corporate diversity task forces: help promote social accountability. CEOs usually assemble these teams, inviting department heads to volunteer and including members of underrepresented groups. Every quarter or two, task forces look at diversity numbers for the whole company, for business units, and for departments to figure out what needs attention. After investigating where the problems are—recruitment, career bottlenecks, and so on—task force members come up with solutions, which they then take back to their departments. They notice if their colleagues aren't volunteering to mentor or showing up at recruitment events. Accountability theory suggests that having a task force member in a department will cause managers in it to ask themselves, "Will this look right?" when making hiring and promotion decisions. Task forces are the trifecta of diversity programs. In addition to promoting accountability, they engage members who might have previously been cool to diversity projects and increase contact among the women, minorities, and white men who participate. Diversity managers: boost inclusion by creating social accountability. When people know they might have to explain their decisions, they are less likely to act on bias. So simply having a diversity manager who could ask them questions prompts managers to step back and consider everyone who is qualified instead of hiring or promoting the first people who come to mind

Reason for Ethical Breakdown

The vast majority of managers mean to run ethical organizations, yet corporate corruption is widespread. Part of the problem, is that some leaders are out-and-out crooks, and they direct the malfeasance from the top. But that is rare. Much more often employees bend or break ethics rules because those in charge are blind to unethical behavior and may even unknowingly encourage it. Few managers grasp how their own cognitive biases and the incentive systems they create can conspire to negatively skew behavior and obscure it from view. Only by understanding these influences can leaders create the ethical organizations they aspire to run

Institutional investors

These include pension funds, asset managers, mutual funds and insurance companies. Institutional investors are normally long-term shareholders. Many hold their shares in index funds, which are popular for their low fees. Institutions that provide index funds can't just sell a position if they think a stock is underperforming, or if they believe the company's governance practices hinder it's long- term value. And so they turn to activism. Through activism, they can bring attention to their private and entrepreneurial firms concerns and drive the change that they believe will create long-term value—including through changes in corporate governance practices. Institutional investors such as Vanguard are vocal about their belief that companies with strong corporate governance practices can deliver better value in the long run.

"Vote no" campaigns

Vote no" campaigns urge shareholders to withhold their votes from director candidates or to vote against a company's say on pay. The vote doesn't actually have to fail for a vote no campaign to be a success. Overall shareholder support both for directors and for say on pay is typically above 90%. So if support levels fall to the 60s or 70s, it sends a stark message about shareholder dissatisfaction. It also generates media scrutiny, and can affect a director's reputation. Directors often serve on multiple boards, and low support levels at one company can affect how that director is viewed at his or her other companies as well.

Shareholder engagement

When institutional investors have concerns, they often start by engaging one-on-one with the company. In prior years, engagement was mostly between the portfolio manager and the company's investor relations team or members of management, and focused largely on company performance. Today, investors' corporate governance teams are often driving the meetings—sometimes alone and sometimes in combination with portfolio managers. At times shareholders ask to meet with directors. They may have identified issues in the company's executive compensation plans, its governance policies or practices, or its strategic plan. Other times, shareholders are looking to lay the foundation of an open dialogue with the directors. So when issues do arise in the future, they have an existing relationship upon which to build.

Engagement

When someone's beliefs and behavior are out of sync, that person experiences what psychologists call "cognitive dissonance." Experiments show that people have a strong tendency to "correct" dissonance by changing either the beliefs or the behavior. So, if you prompt them to act in ways that support a particular view, their opinions shift toward that view. When managers actively help boost diversity in their companies, something similar happens: They begin to think of themselves as diversity champions. Different ways of driving engagement:•College recruitment programs: targeting women and minorities. Our interviews suggest that managers willingly participate when invited. That's partly because the message is positive: "Help us find a greater variety of promising employees!"And involvement is voluntary•Mentoring:is another way to engage managers and chip away at their biases. In teaching their protégés the ropes and sponsoring them for key training and assignments, mentors help give their charges the breaks they need to develop and advance. The mentors then come to believe that their protégés merit these opportunities—whether they're white men, women, or minorities. That is cognitive dissonance—" Anyone I sponsor must be deserving"—at work again.

Corporate Social Responsibility (CSR)

a company's sense of obligation towards social and physical environments in which it operates. Corporate social responsibility (CSR) can be described as embracing responsibility and encouraging a positive impact through the company's activities related to the environment, consumers, employees, communities, and other stakeholders. Also referred to as corporate citizenship or socially responsible business, is a form of corporate self-regulation integrated into a business model. Organizations that embrace CSR hold themselves accountable to others for their actions and seek to make a positive impact on the environment, their communities, and the larger society.

Whistle-blower

a person who tells the public or someone in authority about alleged misconduct occurring in a government department, private company, or organization

The GRI reporting principles

are fundamental to achieving high quality sustainability reporting. An organization is required to apply the Reporting Principles if it wants to claim that its sustainability report has been prepared in accordance with the GRI Standards. Each of the Reporting Principles consists of a requirement and guidance on how to apply the principle, including tests. The tests are tools to help an organization assess whether it has applied the principle; they are not disclosures that are required to be reported.

Hedge Funds

attract big dollars from investors looking for above-average returns. So they are always looking for untapped value. Hedge fund activists often see that untapped value in the way a company is run, or the strategy it pursues. They see ineffective management, a stale board, or a company missing out on new opportunities. They see the potential for a new capital allocation strategy or changes in operations that will increase share value. And when their efforts to engage with executives or directors about these ideas fail, they often try to elect different directors.

Contact

contact between groups can lessen bias. Business practices that generate contact:•Self-managed teams:which allow people in different roles and functions to work together on projects as equals. Such teams increase contact among diverse types of people, because specialties within firms are still largely divided along racial, ethnic, and gender lines.•Cross-training:Rotating management trainees through departments is another way to increase contact. Typically, this kind of cross-training allows people to try their hand at various jobs and deepen their understanding of the whole organization. But it also has a positive impact on diversity, because it exposes both department heads and trainees to a wider variety of people

Subjective

ethical decisions making requires judgement and interpretation, the application of a set of values to a set of perceptions, and estimates of the consequences of an action

The Reporting Principles for defining report quality:

guide choices on ensuring the quality of information in a sustainability report, including its proper presentation. The quality of information is important for enabling stakeholders to make sound and reasonable assessments of an organization, and to take appropriate actions.

The Reporting Principles for defining report content:

help organizations decide which content to include in the report. This involves considering the organization's activities, impacts, and the substantive expectations and interests of its stakeholders.

Impact Investment

investments to enterprises/funds structured to deliver specific social or environmental impacts. works more like Venture Capital (VC) and provides capital to private and entrepreneurial firms The opportunistic nature of impact investing approaches is perhaps unsurprising given the bespoke nature of such strategies and potentially more limited availability of investment products. Clarification: bespoke means customize the investment strategy based on the target company.

Available as a Resource

managers make themselves available as a resource to counsel and assist employees who face ethical dilemmas or who suspect an ethical breach.

Ethics

moral principles that guide a person's behavior. These morals are shaped by social norms, cultural practices, and religious influences.

Ambiguity

most ethical decisions exist in a gray area where there is no clear cut or obvious decision that can be determined solely though quantitative analysis or consideration of objective data or info

The No Fear Act

prohibits federal managers and supervisors from engaging in unlawful discrimination and retaliation.

The Whistleblower Protection Act

safeguards government employees from management retaliation.

Matter of degree

sometimes ethical decisions involve choosing not between good and bad, but between good and better or between bad and worse

Compliance and Ethics Program

supports the organization's business objectives, identifies the boundaries of legal and ethical behavior, and establishes a system to alert management when the organization is getting close to (or crossing) a legal or ethical boundary. Once an issue is detected, management must be prepared to respond quickly to minimize the impact on the organization.

Sustainable investing

the practice of making investments in companies or funds that aim to achieve market-rate financial returns while considering positive social and/or environmental impact. Environmental, social and governance (ESG): refers to the range of factors that are considered by sustainable investors

Ethical Decision Making

the process of assessing the moral implications of a course of action.

A systemic failure inspite of checks and balances

the senior management incentive system had protections consistent with best practices for minimizing risk, including bonuses tied to instilling the company's vision and values in its culture, bonuses tied to risk management, prohibitions against hedging or pledging equity awards, hold-past retirement provisions for equity awards, and numerous triggers for clawbacksand recoupment of bonuses in cases where they were inappropriately earned.Wells Fargo had the elements in place of a properly functioning governance system, including risk management, audit, legal, and human resources. Furthermore, each of these groups was—at least to some degree—aware of sales practice violations in the consumer bank. And yet no one recognized the systemic nature of the problem or took the necessary steps to address it.

All decisions have an ethical or moral dimension because

they have an effect on others

Ethics Training

training aimed to help employees address the moral dimension of business decisions. This can include workshops, guest lectures, and manager/employee discussions. Most training focuses on clarifying and communicating an organization's ethical code so employees understand what is expected. Also focusing on how to take action when ethics are involved in a decision.

Theater Three: Transforming the Business Model

transforming the business model to create shared value.Programs in this theater create new forms of business specifically to address social or environmental challenges. Improved business performance—a requirement of initiatives in this theater—is predicated on achieving social or environmental results.Theater three programs need not be comprehensive. Most are narrow initiatives undertaken with a focused market segment or product line in mind, but with significant potential to alter the company's social or environmental impact and financial performance. Theater three initiatives almost always call for a new business model rather than incremental extensions.•Clarification: The authors associate mainly the transforming the business model with creating shared value.•Shared Value: Creating economic value in ways that also create value for society. Idea that corporate success and social welfare relate; that a company succeeds and competes in a better society because it needs a healthy, educated workforce and sustainable resources. The shared value model takes a long-term view on financial return of corporate social responsibility (CSR), maintaining that the competitiveness of a company and the health of the communities around it are mutually dependent.