MGT 444 Shin quiz 3

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Stakeholder theory question

"Why should the stakeholder theory be accepted or preferred over alternative concepts" (Donaldson & Preston, p.73)

Freidman''s assumptions

- "Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money." (p.2) - "Will not the stockholders fire him [corporate executives engaging in CSR]?" (p.3) -"His customers and his employees can desert him for other producers and employers less scrupulous in exercising their social responsibilities." (p.3)

Two views about human nature of executive managers

- Agency theory -Stewardship theory

What does it mean that stakeholder management distorts good risk-taking? How is it different from the argument in question 5 above?

- Managers cannot diversity investment as much as shareholders · Not as excited about taking risks and loosing everything · Shareholders have variable pay, incentive to take risk to increase their 'value'

How do you solve the agency problem?

- Match goals of both parties - Monitoring/incentives - Information problem- disclosure, share information

Shareholder value proponents argue that maximizing shareholder value maximizes the value of the whole company, why?

- Max residual claim, max whole company

how many votes do shAREHOLDERS GET WHEN ELECTING BOD

- One vote per share

what are Shareholders legal rights?

- Right to share in dividend payments - Right to vote on the election of directors and major corporate changes such as mergers and liquidations -right to submit a non binding proposal (resolution) to the board of directors

Key assumptions about human nature under agency theory:

- Selfish, opportunistic, individualistic

How are BOD elected?

- shareholders vote for them in Annual elections called proxy statements

Could Payless have avoided failure?

- should have adapted to online shopping earlier - could have went into different economies - should have updated their inventory system

ExxonMobil and environmental activists presentation

--An activist investor was able to win a battle to get 3 directors on the board of Exxon. --The winning hedge fund is called Engine No.1 and the win would not have been possible without the support of some of Exxon's biggest investors, BlackRock, Vanguard and State Street. --The article mentions that analysts say it is hard to overstate the impact this defeat will have on corporations across the country.

"Im just allergic to capitalism" Do you think Dickerson was mismanaging the company, or do you think the activist investors were ruining the company's distinct culture and strategy?

--if you Adopt Milton Friedman point of view, CSR is basically A managers abusing their power to use the money from the shareholders without approval from the shareholders in this case, obviously, the major show that did not approve. All the spending on the employee right so from a business point of view, you could argue that this is a good example, a manager your opportunities. stakeholder theory is sometimes criticized for encouraging manager opportunities and where managers use shareholders money to enrich themselves in the name of benefiting the stakeholder. If you're taking their point of view, you may think that. The investors action against the company was justified and , so the replacing the CEO was a good move. --on the other hand, you may think that the value of the company and the culture of the company was actually A good one. It had a sound strategy that attracts distinct group of customers and sellers who are not satisfied with the existing mass-produced model like Amazon and Michael's score. Now, because of this intervention from the investor back of my capital companies moving is distinctiveness is this is trying to become just another Amazon, of course, not as successful as Amazon, maybe that is a that is a detriment to the company's existing strength right. You can take either approach well, of course.

what was the outcome of starboard's intervention?

--they found a way to improve the system (less waste and better performance) --the investor became the chairman -stock went up and restaurant performed very well

What are the differences between a B Corp and a public benefit corporation?

-Bcorp: is not a legal status, it was not given by the government, it is awarded by a private nonprofit organization called phila.They don't have any legal obligation or requirements were privileged.BCorp does not have any legal obligation, and if you Bcorp and if you incorporated in one of those 34 states that have a public benefit corporation law, then you are required to convert your legal status to a public benefit corporation. -public benefit corporation: is a legal status as a warrior by the state government don't miss that state it's one of those 34 states that have public benefit a law from public benefit corporation law legally obligated to demonstrate the benefit that is generated by the company's business,

B Corp

-Certified by B Lab (independent non-profit, non-governmental organization) -Most B Corps are privately held (exceptions: Laureate Education and Lemonade) -If incorporated in states with public benefit corporation laws, must become a public benefit corporation (PBC)

Can companies solve societal problems? Is solving societal problems only the government's job?

-Friedman's position: Friedman doesn't think corporate executives can solve societal problems because it isn't their expertise. -You may say, well, I disagree, to the business can do a lot, although they are not experts, although it's not their business. But by transforming the way that they conduct their business, they can make a meaningful impact on the society and world. So it's not just a government job, but the business can engage based in ethically with the world, of course, there are many different ways that they can do it. Of course, Chris Friedman will criticize it by doing so you're using shareholder money right if you can address that criticism, and you can use the concepts and theories that we learn here then it'd be a if you have a good answer.

Laureate Education, a certified B Corp, went public as a public benefit corporation. Is it ethically justifiable that the company adopted a dual-class stock structure?

-Laureate education is a full profit college Is a certified B corp and it went public as a public benefit corporation remember it has those people status right equal public and benefit corporation Now the question is you thing is justifiable that the company, adopted a duall class stock structure. Now, another stay on top of those three, it also has a dual class structure is, this is an interesting company that has all kinds of data point on that gives us so many things to think about your structure to which we'll talk about it right, -objectivism: to one focus focusing on individuals rationally deficient, so the owners wanted to protect their control right there with a company, and that was rationally selfish thing for them to do and and it allows them to achieve the greatest potential for for the company and if It is generally consider ethical I mean, and you have to really focus on individual coefficient is rather than organization of course in that theory, it has to be individual person who pursues the selfish motive. -people at the lower level disadvantaged population following rawls theories of justice

Public benefit corporation (PBC)

-Legal status available in 36 states and DC -Different from traditional C-corporation -Different from non-profits -Directors must consider non-financial interest of stakeholders

what stakeholder theory is not

-ST requires changes to law -ST is socialism and refers to the entire economy -ST is a comprehensive moral doctrine -ST applies only to corporations

Key characteristic of publicly traded corporations:

-Separation of ownership and control ("agency problem")

What are the consequences of CSR?

-for customers price goes up because products are gonna be organic and fair trade - for employees, money will go to CSR rather than to bonuses - for investors, they are gonna realize their money is being used in a different way so they are gonna pull their money out and invest in a different company -for CEOs, they will lose money because of lost investors and possibly get fired

Do you think the Business Roundtable's announcement was a meaningful change in the direction of corporate America, or was it just a "hypocritical window dressing"?

-in one way, you can say that this business Roundtable announcement was a meaningful change is a significant break from the previous 10 about shareholder value principle maximizing value of shoulder because now there are third that businesses have to respond to balance the interest of stakeholders right and also it combines the theory and this case of business Roundtable -OR you can say Well, this is, nothing but a window dressing And you can post Friedman's argument that this is, as usual activities to maximize their own profits and driven by the self-interest of any company or a group of companies in this case, but this Roundtable is claiming that they are doing it for moral reasons Is it's probably because they wanted to get more attention more visibility and they want to improve their reputation so that's simply hypocritical window dressing Code into treatment.

Based on the friedman doctrine Can business have responsibilities?

-individual business people can have responsibility as individuals, as citizens -as residents of the society, you may have responsibility -As a person in an organization and because, you have responsibilities That doesn't mean that the organization or the company can have responsibilities just making that distinction very clear.

Friedman argues, "the doctrine of "social responsibility" involves the acceptance of the socialist view that ___ mechanisms, not ___ mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses." (p.3)

-political mechanism Well he makes a decision between political mechanism, which is based on conformity. -Market mechanism which is based on unanimity and and as it goes to have to be separate if you are confused that undermines our our democratic principle because we are forcing the investors to use their money on CSR which they not approved.

B Lab charges certification fees up to $50,000 per year. Is the B Lab's certification of B Corps ethically justifiable?

-utilitarian theory:, for example, and to see the the total benefits and total cost to see which one outweighs the other, you may say, to the benefit of applying this that the certification is great, because it may not only improves. The quality of life for all the stakeholders and benefits, their well being of them, but also it benefits the bottom line is the business, it also known enriches their their employees.And also, in the end if it's if it's a publicly traded company can benefit this the shareholders of the people. that's the benefit, and you can think about the cause of obviously there's this financial costs. -you can think about the opportunity cost of not pursuing more aggressive their revenue growth to a profit right if you can somehow compared to the benefits and costs that you can finally conclude that is ethical justifiable.

home depot debate about CSR

A company can make good-will expenditures "that are entirely justified in its own self-interest." I see that as an extension of the most fundamental truth in capitalism, that in any voluntary exchange both parties benefit. If we ignore Friedman's crystalline perception — that profits are the driving focus — then the entire mission, good will included, falls apart. When we turn the idea of profit into a callous slur, as Friedman's laziest critics often do, we are demeaning the essential propelling force that enables all these interconnected good works to occur. (Ken Langone, Home Depot founder)

Student article: Shareholders asked oil giant Chevron to cut emissions. Now some want the chairman ousted

A shareholder advocacy group named Majority Action is pushing for a change in leadership ●Shareholders displeased with the lack of change in carbon emission standards ● Chairman and board members aren't too concerned ● The company is profiting so no need to change at this time

CEO duality

A situation in which the CEO also serves as chair of the board of directions -Lots of companies, more than half, have this duality problem

Explain how a staggered board (also known as classified board) works in a corporation.

A staggered board (or a classified board) is a board of directors that is split into multiple classes (usually three classes). Every director has a multi-year term with the expiration of the term staggered over multiple years. In each year, only a subset of directors stands for reelection. [Rubric: Correctly identifying each of the three defining features as listed below: 1 point/each] [Note: A correct answer must include the following features of a staggered board: (a) directors have multiple-year terms of appointment, (b) the board is split into multiple classes (groups), and (c) directors' terms are staggered so that not all directors are up for reelection every year; that is, in each year, only a subset of directors stand for reelection, meaning that the rest of the directors cannot be replaced in that year. Optionally, you may add that a staggered board is used as a defense against shareholder interventions as it makes it impossible for shareholders to replace the entire board at once. However, such an answer describes the function of a staggered board, not a definition of it, so it doesn't sufficiently explain how it works.]

According to Robert Phillips, R. Edward Freeman, and Andrew Wicks in their article "What Stakeholder Theory Is Not," there are eight common misinterpretations of stakeholder theory. Choose one misinterpretation that is an example of a straw man (or straw person) argument and explain why it is a good example of a straw man (or straw person) argument.

A straw man (or straw person) argument is an argument that misrepresents or distorts an opponent's argument to make it easier to refute. [Among the eight misinterpretations of stakeholder theory that are listed in the article, six of them can be considered straw man arguments, while the two others ("stakeholder theory is an excuse for managerial opportunism" and "stakeholder theory cannot provide a sufficiently specific objective function") are evil genie arguments. You can pick any one of the six to answer the question, as long as you clearly explain (a) what is a straw man argument, and (b) why this misinterpretation is an example of a straw man argument, which requires you to demonstrate why this misinterpretation is not what stakeholder theory actually proposes.] For example, stakeholder theory has never argued that business must treat all stakeholders equally; it has only argued that business must attend to the diverse interests of various stakeholders. Therefore, it is false to assert that stakeholder theory urges that all stakeholders must be treated equally (Phillips, Freeman, & Wicks, 2003: p.488).

According to Anant Sundaram and Andrew Inkpen in their article "The Corporate Objective Revisited," (a reading for April 5) why does stakeholder management distort entrepreneurial (good) risk-taking incentives? Explain their justification inside the box below. Focus on this justification, not any other justifications.

What is shareholder activism?

Actions taken by shareholders with the explicit intention of influencing corporations' policies and practices

Student article: Exxonʼs Board Defeat Signals the Rise of Social-Good Activists

An activist investor was able to win a battle to get 3 directors on the board of Exxon. The winning hedge fund is called Engine No.1 and the win would not have been possible without the support of some of Exxon's biggest investors, BlackRock, Vanguard and State Street. The article mentions that analysts say it is hard to overstate the impact this defeat will have on corporations across the country.

who are the stakeholders?

Any groups that can affect or are affected by the business operation of the corporation

what are the four types of refrence points to analyze if U.S. CEOs are paid to much?

Are they paid too much compared to average workers? Are U.S. CEOs paid too much compared to CEOs in other countries? Are they paid too much for firm performance? Are they paid too much compared to people in other fields (e.g., lawyers, investment bankers, celebrities, etc.)?

Who sets executive compensation?

BOD

Proxy statement

BOD will be elected at shareholder meeting, includes compensation pays, and also must be approved

Why are there so few B Corps that are publicly traded?

Bcorps are privately owned just because to be certified, you have to you have to satisfy all these 2stringent requirements to demonstrate that your company is benefiting the stakeholders, the environment, employees and customers and the supplier right oftentimes those schools that difficult to measure when you are publicly traded and which means that you are now obligated to to consider the interest of children Many, many of us are worried that Wall Street or the investors have pressure on the companies to become more focused on short term profits, especially, including the short term stock price right and oftentimes it's inconsistent or not compatible with pursuing the stakeholder interest.

What do an auto mechanic and a CEO at a publicly traded corporation have in common?

Both agents

Why should companies engage in CSR? Four popular justifications:

Brand images and corporate reputation A "license" to operate Sustainability Moral duty

In his essay "The Social Responsibility of Business is to Increase Its Profits," Milton Friedman argues that corporate executives engaging in corporate social responsibility (CSR) activities are "in effect imposing taxes." Explain what he means by "imposing taxes." Who imposes the taxes on whom, and what the taxes really are? Do not simply summarize Friedman's article; instead, focus on the question.

By "imposing taxes," Friedman means that corporate executives who spend shareholders' money for corporate social responsibility (CSR) activities are in effect collecting money (i.e., taxes) and decide how the tax proceeds are spent. Unlike the political system of democracy where tax money is expected to be spent on behalf of taxpayers, shareholders provide money but by doing CSR the shareholders' money is not being spent on behalf of shareholders.

article: Stakeholder' Talk Proves Empty Again

Corporate leaders have been busy presenting themselves as guardians of the interests of"stakeholders," such as customers, employees, suppliers and communities as well as shareholders. Our recent research, however, casts serious doubt on whether corporations are matching the talk with action.Because board approval is commonly sought for any major decision, we inferred that the CEOs didn't view the statement as a meaningful commitment to change how they do business.

Based on the Friedman doctrine does it mean that corporate executive cannot exercise his or her individual responsibility to society?

Freidman says that as long as he or she is using his or her own money that's okay or you're using your time, or outside your work hours like on Sundays you go to some organization and do some charity work and voluntary work. But it becomes a problem when the CEO or the manager is using the company's money or companies time. Okay, this is a distinction, but it's okay for individuals as individual citizens we're residents to do those things but don't use the company's time or money or resources

Alphabet article

Google was controlled by the two co-founders And those co-founders on the board have a strong influence over the company. They basically, control the company, and the way that they control the company is because the stock they own. They have 10 times more voting power than the general public who own the stock. And the way to do it is they when they sell the stock they have certain classes that class a class B, or sometimes quite fit. Class B stockholders have 10 times voting power than class A which caused a problem so the shareholders requested company to change the rules, the bylaws so that they eliminate these these multiple stock system okay it's called dual class stock structure,

starbucks debate about CSR

In 2013, I stood in front of Starbucks shareholders and posed this question: "What is the role and responsibility of a for-profit public company?" Friedman's flawed answer is not his legacy. His legacy is the question itself — which today's leaders must answer with a renewed commitment to balancing moral purpose and high performance. I've asked this question since opening my first coffee shop in 1986. My answer, a rebuke of Friedman's single-minded focus on profits, appeared in our company's original mission statement: "We wish to be an economic, intellectual and social asset in communities where we operate." We would do this not at the expense of profits, but to grow them. (Howard Schultz, Starbucks emeritus chairman)

Student article: Tesla investors suing over Elon Musk's 2018 tweet say they've won a key ruling

In 2018, CEO of Tesla, Elon Musk, published a Tweet stating he had been considering taking the company private at a whopping $420 per share After tweet was posted, Tesla share prices dropped significantly resulting in the company losing billions in the stock market. Shareholders launched a lawsuit against Elon Musk, suing him for damages caused by the Twitter post. Recently, a federal judge ruled that Musk's tweet was not accurate and misleading. Elon Musk's lawyers suggest that this tweet is truthful because he was indeed "Considering" taking Tesla private at the time and had the support from Saudi Arabia sovereign wealth fund. Elon makes deal with SEC as result of case. Musk forced to resign as Tesla chairman and appoint independent chairman. Tesla forced to implement system where musk's tweets/communication is reviewed.

article : Sen. Elizabeth Warren,Republicans, CEOs & BlackRock'sFink Unite Around 'AccountableCapitalism'

In an opinion piece in today's print edition of the Wall Street Journal titled"Companies Shouldn't Be Accountable Only to Shareholders," Sen. ElizabethWarren announced that she will introduce legislation called the Accountable Capitalism Act to require all corporations with more than $1 billion in revenue to become federally chartered and adopt a new model of corporate governance based on the benefit corporation model already in use in 34 states.

In the New York Times article "How Wall Street Bent Steel," Suzanne Berger says, "We've got a financial system in the U.S. where California teachers have to protect their pension funds by hurting manufacturing in Ohio." Explain what she means by this comment and how California teachers are involved in this situation. Do not simply restate or rephrase her comment; instead, explain the meaning of her statement using the context provided in the article.

"Agency cost":

Inefficiencies created by agency problem

Which ethical theory is appropriate for a basis of normative justification of stakeholder theory?

Justice theory Ethics of care for stakeholders utilitrianism

How does Kaplan answer the question "Are U.S. CEOs overpaid"? How does Walsh's answer to the question differ from Kaplan's?

Kaplan says no they are underpaid because the company does a stellar performance Walsh says yes they are overpaid compared to the workers.

Which reference points does Steven Kaplan use? Which ones did James Walsh use?

Kaplan: used average workers , other countries and firms performance Walsh: just analyzed the firms performance

article: Idealism That May Leave Shareholders Wishing for Pragmatism

Laureate itself has a form of governance that is especially unfriendly to shareholders, which also raises questions about Laureate's public benefit status. While Laureate is listing its stock as a public benefit corporation, it will also be going public with dual-class stock, which will maintain its current owners' control over the company. This includes K.K.R. which will indirectly hold a greater than 10percent interest in the company. This doesn't make sense. K.K.R. is out to sell its stake at the highest price possible, not benefit other causes. So one has to wonder how strongly Laureate will even pay heed to this standard. As for K.K.R., is this all about public relations more than anything else?That leads to a final criticism. Companies today, even for-profit entities, can do many things that are not immediately profitable. They make donations and support causes all the time. So the real question may be, what is this corporate form good for?

What do the board of directors do?

Main goal is to look out for the shareholders' interests bu they also monitor advise Hire, pay, fire CEO (if necessary) Approve business plans Adopt long-range strategy

Agency theorists criticize stakeholder theory for being an excuse for managerial opportunism. Their concern is that opportunistic managers who are driven by self-interest would enrich themselves at the expense of the shareholders. Robert Phillips, R. Edward Freeman, and Andrew Wicks, in their article "What Stakeholder Theory is Not," (a reading for April 7) respond by arguing that such a criticism is a version of the evil genie argument. What do Phillips, Freeman, and Wicks mean by that? Explain their logic in the box below.

Managerial opportunism, where unethical managers act in their own self-interest at the expense of other parties, is a major problem in shareholder value principle. The separation of ownership and control creates the agency problem where selfish and opportunistic managers can act solely in the interest of themselves instead of maximizing shareholders' wealth. In fact, managerial opportunism has led to many corporate scandals in the name of shareholder value maximization. Because managerial opportunism is no more a problem for stakeholder theory than shareholder value principle, agency theorists' criticism that stakeholder theory is an excuse for managerial opportunism is a version of the evil genie argument, which means an argument that is no more (or less) problematic for any one theory than any alternative theories. [Rubric: A correct explanation of managerial opportunism: 1 point. A correct description of an evil genie argument: 1 point. A correct application of the evil genie argument to the case of managerial opportunism criticism: 1 point. A logical and coherent answer: 1 point.]

"Im just allergic to capitalism" Why was Black-and-White Capital dissatisfied?

Mr wonder was not satisfied, because the company was spending too much on what the employees, the administrative costs was too high, all these cooking class yoga class and paternity leave we're not really generating profits, and the shoulders today was the major reason why the company was not growing fast enough.

What explains the different results at Olive Garden and Timken?

Olive Garden stayed around and made alot of changes and Timken they left. Olive garden was focused on long term profits Timken was focused on short term profits

How has ownership structure of corporations changed since the Berle and Means' era?

Ownership has shifted so now big investment companies own a significant amount of he company (over 5%)

Who are the activists?

Pension funds (CalPERS, CalSTRS, NYC Pension Funds) Mutual funds (Vanguard, BlackRock) Labor unions (AFL-CIO, UAW, Teamsters) Private equities, hedge funds (Kohlberg Kravis Roberts [KKR], Starboard Value, Relational Investors, Black-and-White Capital) Religious organizations (Sisters of Charity of St. Elizabeth) Others: foundations, endowments, individual investor Proxy advisory firms: Institutional Shareholder Services (www.issgovernance.com) Council of Institutional Investors (www.cii.org)

student article: Disney Forced To Face Activist Shareholder Inquiring About China

Proposal: A Disney's shareholder presented a resolution at the Walt Disney Company Annual shareholders meeting asking for an annual reports on the company's efforts to determine human rights protection in foregin countries, namely China . This all came about when the film credits for Mulan offered a "special thanks" to eight Chinese Government Entities. Resolution: proxy vote which was initially rejected claiming that the shareholder was trying to micromanage the company. SEC told Disney that NLPC had the right to put the proxy vote before the company's shareholders

"Im just allergic to capitalism" Consider three groups at Etsy: shareholders, employees, and customers. Are their interests aligned? Why was Chad Dickerson fired?

Seth wonder, the hedge fund manager started investing in Etsy and got anxious because he realized that the company was losing money, not growing fast enough And spending a lot of money on a particular thing. --on the accounting books and the company spending on administration was excessively high 24% of total revenue (average about 10%) so he started criticizing the company when he has 2% of its stock -- CEO Chad dickerson wanted continue with Friedmans values of shareholder value and CSR so he continued to invest in the employees, supporting the customer. --shareholders, got anxious from the criticism and the BOD was under pressure from the investor so they decided to defy a large group of employees and CEO was kicked out, he was replaced by someone who was brought in by the investor right. --the shareholders interest was to maximize the profit and one of the biggest barrier was the excessive spending on employees.-- The employee's interestwas the company's culture and what it represents. They strongly rejected the normal or orthodox form of capitalism, where the profit motive of driving and the business here they found alternative model, they were attracted and the company was providing all these perks (like cooking class yoga class generous paternity). All these things were valuable to the employees and that's why they were working hard and they were committed to this employee. --The customers ( they are the ones with directly provide good to to etsy) interests are to make profit and also to develop their merchandise and grow but it can be difficult because to enforce some of those rules in it and and especially when, the customers wanted to expand their operation by hiring more employees. --This was prohibited by Chris because he wanted to focus on their core value of supporting small independent merchants and small independent artists, they did not have to have more. --The corporate model of manufacturing, includes hiring employees So some customers thought it was frustrating, because the FDA was not allowing them to grow so you can see that the interest of these three groups shareholders employees and and and sellers or customers will not were aligned.

What are their methods?

Shareholder resolutions Proxy fights Public campaigns (e.g., letters, focus lists, media campaigns) Private negotiations

Who controls corporations?

Shareholder, Board of Directors and the CEO. It is NOT just the CEO

whoa are the stakeholders in stakeholder theory

Stakeholders consist of various groups with heterogeneous interests (employees, suppliers, customers, etc.) Therefore, corporations should balance the interests of multiple stakeholder groups

Article: When Shareholder Democracy Is ShamDemocracy

That's the number of publicly traded companies where directors actually lost their elections last year, meaning that more than 50 percent of the shareholders withheld their votes of approval. Yet despite these resounding votes of no confidence, they remained in their posts.She noted that the reason such a thing was possible was that many companies operate under a "plurality" voting system, in which directors run unopposed and just one vote is enough to be elected. And even companies that require a majority vote may decline to accept a director's resignation.

"Im just allergic to capitalism" Etsy is no longer a B Corp. Why?

The CEO did not plan to renew because being equal, comes with a requirement among several other requirements that the B corp must go through this legal procedure to become what is known as public benefit Corporation. if you are before you have to eventually become a public benefit corporation, if you are publicly traded company. I guess the short answer to this question is because Etsy did not become a public benefit corporation, where is the publicly traded company as Why is no longer eligible to renew as a be equal abrasion, okay that happened in 2017, so it is still not equal.

student article: Investors turn ire on firms whose executives are set to cash in

The Problem: Investors are angry at the compensation policies of the firms. They believe the managers should not receive the big bonus after also receiving government support. Foxtons has been hit by a pay revolt after 44% of its shareholders failed to back the award of a near £1m bonus to its chief executive while refusing to pay back millions of pounds in taxpayer-funded government support during the coronavirus.

article: Move Over, Shareholders: Top CEOs SayCompanies Have Obligations to Society

The leaders of some of America's biggest companies are chipping away at the long-held notion that corporate decision-making should revolve around what is best for shareholders. Some activist investors and academics have said encouraging companies to focus on a range of stakeholders amounts to grandstanding that misdirects resources. They argue that shareholders, not CEOs, should be the ones influencing society.

According to Friedman, what are the political principles that underlie the market mechanism and political mechanism, respectively?

The political principles that underlie the market mechanism was unanimity, because everyone agreed to be there, and anyone who did not agree to be there doesn't have to be there, no one is forced into any transaction on the market. Now political mechanism is based on conformity. The political principles that underlie the political mechanism is conformity, because you often have to conform to the existing leadership rules or laws right. Now there's very little option to defy on exit and political on The institution.

proxy access

The right of shareholders to place nominees on the ballot -Nominate board on own, in very first place · This creates problem among shareholders, do not represent interests of shareholders

who took action in the olive garden case ?

The star board (an investment hedge fund company)

How is Ben & Jerry's different from other ice cream companies?

The suppliers, The ingredients, the quality of the product, and sustainability because it affect the consumers They also try to balance the interest of different stakeholders, including employees the fires, the natural environment, and residents in the Community which applies to the stakeholder principle. Also, the flavor of marketing will focus more on the social mission and social responsibility.

Why does the government regulate compensation for corporate executives but not other people?

Their impact on the economy and society's larger than celebrities and sports stars. they have no other impact besides entertainment

what was the problem at olive garden

There was a lot of waste in terms of food, service and labor, performance wasn't good, stock price was down so managers started to notice

What was the activist investor's tactic?

They pressured the company to split into two by criticizing the company publically

According to Dobbin and Jung, how did agency theory contribute to the economic crisis?

They rejected the prescription that would moderate the risks which caused the recession

Why does Friedman call profitable CSR activities "hypocritical window dressing"? (p.5)

Well he's basically saying that if a company is doing CSR driven by their own self interest then its hypocritical and the company is just doing it to show off to thers that they are ding so many great things. Its just business and nit actually for goo intentions which is hypocritical.

Normative Example

You should do X (You should eat vegetables everyday, because it's the right thing to do) Prescriptive: What you should do (because it is morally right)

What is a proxy fight?

a technique used to gather enough stockholder votes to control a targeted company

What does compensation benchmarking do to CEO compensation? How does it cause the average CEO pay to rise year after year?

all the companies look at each other and it keeps rising because they are benchmarking off each other

What was the private equity firms' tactic?

by selling, liquidating and firing workers

Why has shareholder activism become more popular in recent years?

corporate ownership used to be dispersed but now they can influence companies and theres a rise on shareholder value which has given more power to the shareholders

How is the Payless case different from the Timken case?

different because there was no shareholder influence like in timken

T/F All stakeholders must be treated equally

false

T/F ST cannot provide a sufficient specific objective function

false

T/F ST is a comprehensive moral doctrine

false

investors prefer companies to be

focused and broken up

Based on the friedman doctrine What is the nature of corporate executive? What is his or her fundamental duty

fundamental duty: a corporation Nature of a corporate executive: a corporate executive the manager is the agent of the individual who owned the corporation So the duty of the manager is to the corporation, where the owner of the corporation, not to the society.

how to control the board ?

get in a proxy fight

how did starboard intervene?

going to the shareholder meeting and got into a 'proxy fight'

What would Kaplan say about multimillion dollar compensation awarded to Harold Hamm, former CEO and chairman of Continental Resources?

he earned it, he derserved it and he worked for every penny

Should shareholder activism be allowed to address societal problems such as environmental issues and human rights (so-called "ESG")?

he would be against it

from an investor's point of view being extremely diversified is

inefficient

Private Equity

investments in companies that are not traded on a stock exchange

Why was the San Diego investor interested in the Ohio steel company?

it was an oppourtunity to make money and unlock shareholder value and create value and wealth for shareholders

main argument of shareholder value principle:

maximize shareholder value

What is the political principle that CSR undermines?

no representation without taxation because of the business taxes that corporations pay to the government , the money that corporations collect

When the company's manager said "it just feels like the right thing to do," what kind of justification was she using--descriptive, instrumental, or normative?

normative justification that focuses on doing X doing something, simply because you believe that the right thing to do

How was California teachers' retirement fund involved in this?

not directly but they had pension funds invested in the company

Senator Elizabeth Warren proposed a legislation to require all corporations with more than $1 billion in revenue to become public benefit corporations. Is this ethically justifiable?

nozic theory of rights: if you guys do have some memory of that He he considers the individuals negative right as the fundamental value to be protected right, so if investors are investing a certain company, and of course it is their money today they have rights over their investment. And then the company is required by law to convert to public a benefit corporation, they can potentially reduce the Potential for the company to generate greater profits, then returned, the project to the shareholders who invested company in the first place right that could be considered as an infringement of the investment investors negative right, the right over their private property right so In this case, then nozic would consider this that unethical as a violation of negative right right, you can think of it, you can approach this question from other angles, you can use. Rawls theory of justice: that focus more on the benefits to the list of values, members of society, for example, in this case public benefit corporation may may benefit people at the bottom of the society in some cases

What were the main causes of Payless's downfall?

online businesses, inventory systems, private equity's fault because these were their tactics

goal incongruence

principals and agents may have different goals

Does private equity create more productive and dynamic companies by reallocating jobs and capital?

private equity supports argue this

what kind of company is timken

publically traded company

How is private equity's corporate governance different from traditional corporate governance system?

shareholders have a voice in a public company but in a primary company they have no say

What was the outcome?

shareholders won and company lost but the stock didn't go up that much and employees were fired

information asymmetry

situation in which one party is more informed than another ex) mechanic and average person

timken cares more about stakeholders or shareholders?

stakeholders

tinker does two different things that are

steel and bearing

Before private equities came to Payless, what were the strengths and weaknesses of Payless?

strengths- cheap, low cost structure, low workers, good supply chain, good at investing and cutting down assets weaknesses- online retailers started to pop out, bad organizational culture, no motivation, didn't understand consume demands

who won the proxy fight?

the alternative won so they replaced the board and fire the CEO

Article: Netflix Changes Bylaws to Allow Shareholders toNominate Board Members

the company's board adopted a provision to let certain investors nominate new members of the board and have them included in its annual meeting proxy materials — something most Netflix stockholders have voted in favor of over the last several years.

What is a dual-class stock structure?

the structure of stuff offered in the public market public stock exchange, where there are multiple classes of stuff that have a different amounts of voting rights which is different from classify Board, which is about different classes of director.

Should the government regulate shareholder activism?

there is very little currently

who is timken?

they are one of the biggest steal manufatcurers in canton ohio

What was the outcome? in the payless case

they went bankrupt and all the workers lost their jobs

Is it morally justified to "use the company to create positive change in the world" as a Ben & Jerry's manager in the video says?

this statement from Ben and jerry's is not consistent with the shareholder value princable, however, it affects the stakeholder manager view right

How do stakeholders fare when private equity targets a company like Payless?

thye dont like it because they usually put them out of business

T/F ST does not applies only to corporations

true

investors thought timken was

undervalue

Should the government regulate private equity industry?

use a theory

Is shareholder activism ethically justified?

use an ethical theory to explain

Does shareholder activism create value, or does it transfer value from stakeholders to shareholders?

yes and no

AGENTS

•Managers •Pursue managerial interest (career, pay, status, reputation) •Cannot easily diversify portfolio •More risk averse

principals

•Shareholders (investors) •Pursue shareholders' interest (maximize shareholder value) •Can diversify portfolio •Less risk averse

Maximizing shareholder values

"Shareholder value has long since become the mantra of the business culture. Corporate boards shower executives with stock options to "align" them with shareholders. "Underperforming" companies find themselves under siege from activist investors. Increasing shareholder involvement is viewed as the way to fix whatever ails corporate governance. Over time, "maximizing shareholder value" became viewed as the primary task of the corporation." (NYT, 8/10/2012)

What does Lynn Stout mean by "fishing with dynamite"?

"Shareholders as a class want companies to be able to treat their stakeholders well, because this encourages employee and customer loyalty ("specific investment")."

Why did Gordon Gekko say "Greed is good"? How is this related to his message to Teldar Paper shareholders?

"Greed is right, greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit." In one scene, Gekko appears at the annual shareholders' meeting being held by Teldar Paper. Gekko owns shares, but wants more. He wants control of the company, though his motives for doing so are hidden. It is there that he delivers the speech that includes the movie's most famous line. "Greed," he tells the shareholders of Teldar, "is good." For him, it really is greed — the unseemly and excessive love of money. But Teldar's shareholders don't need personally to embrace greed in the Gordon Gekko sense. All they need to do is to see that their interests are not being served well, and to understand that Gekko's own greed is likely to serve them better: he wants to make a killing on the Teldar deal, and if they let him do so, they'll all make a little money themselves, along the way. His greed is good for them.

criticism

"I have always believed that if you focus on maximizing shareholder value, you will have the very best people, the very best products and the very best facilities." (Sunbeam Corporation, chairman's letter to shareholders in 1996 annual report) "If you see an annual report with the term 'stakeholders', put it down and run, don't walk, away from the company. It means the company has its priorities upside down... Stakeholders don't pay a penny for their stake. There is only one constituency I am concerned about and that is the shareholders." (Albert Dunlap, former CEO/chairman of Sunbeam, in his 1996 book Mean Business)

Shareholders have three ways to influence companies:

-Buy or sell the stock ("Wall Street Walk") -Vote their representation onto the board -Introduce and vote for proposals (resolutions)

5 Justifications for shareholder value principle

1) Maximizing shareholder value maximizes the value of the whole firm - fixed claims - residual claims 2) Stakeholder management distorts entrepreneurial risk-taking incentives 3) Having more than one objective function is a recipe for confusion 4) Non-shareholding stakeholders can become shareholders, but the reverse is not easy 5. The law fills the judicial void for stakeholders

Proposed solutions to agency problem or "separation of ownership and control"

1) Monitoring/Discipline (Stick) 2) Incentives (Carrots)

What did Berle and Means find in the 1930s?

Did not have significant owners. Half were in control of managers. Shareholders were fragments -in most corporations, ownership of shares was dispersed As much as half, did not have significant ownership (more than 5%) Fragmented entities, didn't have institution investors (big investors) BAsically: That the ownership of the corporation was dispersed or scattered

Whare are the main differences between CSR activities at Etsy and Ben & Jerry's?

Etsy was careless with its expenses and hired alot of employees where as ben n jerrys changed its farming practices to make sure it aligned with their moral standards

How do Phillips, Freeman, and Wicks respond to the criticism that stakeholder theory is an excuse for managerial opportunism? Is this a straw man or evil genie argument?

Evil genie because managerial oppurtuism is a problem for both shareholder and stakeholder theory

Instrumental Example

If you do X, you will get Y (If you eat vegetables everyday, you stay healthy/ you get a prize) Prescriptive: What you should do (because it helps you achieve your goal)

Why are only a small group of Netflix directors, not the entire board, up for reelection in 2022?

In addition to removing supermajority votes, Netflix said it will allow shareholders to call special meetings and will change the voting standard for its directors in uncontested elections

According to Thomas Donaldson and Lee Preston in their article "The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications," what is an instrumental justification of stakeholder management? In the box below, explain how one can establish an instrumental justification of stakeholder management.

Instrumental justification establishes a framework for examining the connections, if any, between the practice of stakeholder management and the achievement of various corporate performance goals. The principal focus of interest here has been the proposition that corporations practicing stakeholder management will, other things being equal, be relatively successful in conventional performance terms

How is instrumental justification of stakeholder theory different from normative justification using utilitarianism?

Instrumental justification: Focus only on company Utilitarianism: Also look at the bottomline outcome so you look at everyones outcome Both: look at the outcome only

T/F Stakeholder theory (ST) is an excuse for managerial opportunism

false

who owns apple

investment companies not managers . management does not have much stake

What is common between Teldar Paper and Apple Inc.?

investment companies own them not managers .

examples of desirable corporate strategy for stakeholder theory

manager investor relationships, downsizing. avoid diversifying acquisitions

How are shareholders different from non-shareholders?

shareholders have variable, residual claims, and certain control rights (But, the actual control of the company is in the hands of managers, who are (in most cases) not the "owners"), bondholders have fixed claims

which theory are normative, descriptive and instrumental justifications part of?

stakeholder theory

Why does James Walsh criticize Steven Kaplan's analysis of the relationship between CEO pay and financial performance of the firm?

the analysis kaplan gave seems biased because he didn't assess the firms performance in a complete way.

Why did agency theory urge companies to focus on core competencies?

the chief challenge involves persuading agents to prioritize their principal's best interest while placing their self-interest second. If done correctly, the agent will nurture their principal's wealth, while incidentally enriching their bottom lines.

What kind of control rights do shareholders have?

the power to protect his/her majority stake in the company should the organization be faced with a merger or acquisition in the future.

How is the voting power of shareholders at Facebook and Alphabet Inc. different from shareholders of other companies?

they have dual stock class structures

T/F ST does not require changes to law

true

T/F ST is not primarily concerned with distribution of financial outputs

true

T/F ST is not socialism and refers to the entire economy

true

design of executive compensation for stakeholder theory

use salary and other rewards including intruistic rewards

design of executive compensation for shareholder value principle

use stock based incentives (stock options, restricted stocks)

According to Phillips, Freeman, and Wicks, is stakeholder theory socialism? Why or why not?

According to Sundaram and Inkpen, why does the law fill the judicial void for stakeholders?

Nonshareowning stakeholders have explicit contracts with the firm, whereas a shareholder's contract is implicit (because all it amounts to is a claim on the firm's residual cash flows). The interests of stakeholders such as employees, suppliers, bondholders, communities, and customers are protected by contract law and by regulation

Descriptive Example

People are doing X

Stakeholder principle

Primary objective of corporation is to attend to the stakeholder interests Supports CSR

Shareholder value principle

Primary objective of corporation is to maximize shareholder value Rooted in agency theory

What does Lynn Stout mean by "satisficing alternative"?

Rather, firms can pursue several objectives, and try to do decently well (or at least sufficiently well) at each rather than maximizing only one. Simon called this "satisficing," a word that combines "satisfy" with "suffice." "The disappointing results of shareholder primacy suggest the satisficing approach may be better not only for shareholders, but for the rest of us as well."

What does "separation of ownership and control" mean?

Separation between the people who own the asset and control the asset

Descriptive

The theory is used to describe, and sometimes to explain, specific corporate characteristics and behaviors. ex) 60% of children at your school eat vegetables every day

Normative

The theory is used to interpret the function of the corporation, including the identification of moral or philosophical guidelines for the operation and management of corporations. Normative concerns dominated the classic stakeholder theory statements from the beginning and this tradition has been continued in the most recent versions. Even Friedman's (1970) famous attack on the concept of corporate social responsibility was cast in normative terms ex) You should eat vegetables because it is the right thing to do

Which two conditions cause agency problem?

Goal incongruence Information asymmetry

What are the main reasons why some lawmakers want to regulate the business of private equity?

private equity firms put businesses out and then people areleft jobless

how would you make sure managers run the company well (and return money to shareholders)?

"The central economic and policy problem to be solved is to allocate decision and control rights to parties who have the incentive and the information they need to use resources efficiently to create wealth, while, at the same time, ensuring that the controlling parties are accountable to all of the other participants who have investments at risk. Meanwhile, the mechanisms that ensure accountability must not be so cumbersome that the company bogs down in procedural hassles." (Blair, p.19) Basically accountability

normative justification

"The ultimate justification for the stakeholder theory is to be found in its normative base." (pp.87-88) The right of property ownership: "the right to carry out a circumscribed list of actions," "The right of ownership is not an unrestricted right" (p.83) How is ownership of corporate stocks different from ownership of other assets? "The normative principles that underlie the contemporary pluralistic theory of property rights provide the foundation for the stakeholder theory." (p.85)

Corporate governance

"who among the various participants in the corporate enterprise controls what, who makes what decisions, and who has what responsibilities for and what claims against the revenues and assets of the company... Corporate governance is about setting up rules that determine these things" (Blair, p.19) Blair says it is the whole set of legal, cultural, and institutional arrangements that determine what publicly traded corporations can do, who controls them, how that control is exercised, and how the risks and returns from the activities they undertake are allocated" (Blair, p.3) basically: Rules and expectations that manage the expectations between management, board of directions and Ownership and control

Say-on-pay

Advisory, nonbinding, precatory vote to approve the compensation of the named (i.e., top-5) executives at least every three years The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) In January 2011, SEC released the final rules to implement "Say on Pay" effective 2011 Already implemented in the UK, Australia, the Netherlands, Norway, and Sweden (on an advisory basis) "Because the vote on this proposal is advisory in nature, it will not affect any compensation already paid or awarded to any named executive officer and will not be binding on or overrule any decisions by the LDC Committee or the Board."

What are the main differences between agency theory and stewardship theory?

Agency theory: describes the relationship between agents and principals Stewardship theory: assumes human beings are genuinely diligent, responsible, and accountable. Take care of someone else's money · Design different system to give responsibilities

evil genie

An argument that is no more (or less) problematic for any one argument than any alternatives

Straw Man

An argument that misrepresents or distorts an opponent's position to make it easier to refute

How is CEO compensation different from compensation awarded to other high earners such as lawyers, movie stars, and top athletes?

CEO compensation is usually a fixed amount and has nothing to do with the market or their performance

How does CEO compensation illustrate the agency problem in corporate governance?

CEOs are paid by directors, not out of their own pockets but with other people's money, a clear example of the agency problem in our investment system."

examples of desirable corporate strategy for shareholder value principle

CSR, investment in employee talent, manage community and customer relations

According to James Walsh, why is Steven Kaplan not a positive role model?

He didin't use all of the information from his source so his motive is questioned and he is also an extremely well-compensated insider in the governance regime he so passionately defends.

How would Milton Friedman react to Ben & Jerry's social mission?

He would disagree. He believes that the sole responsibility of a corporation is to just make money.

According to Donaldson and Preston, why isn't a descriptive justification of stakeholder theory sufficient?

Just cause your company is doing it doesn't mean other companies should too

How is the voting power of shareholders at Lyft and Pinterest different from shareholders of other companies?

One share of stock does not equal one vote — at least not for Lyft, Pinterest, These companies all have multi-class stock structures, meaning that some of their stock — usually that which belongs to the founders — has much more powerful voting rights than others and therefore much more impact when it comes to company decisions.

how long do BOD serve

One-year team (each director serves one year and is up for reelection the next year)

What are the primary duties of the board of directors of publicly traded corporations in the U.S context? Write your answer inside the box below.

The primary duties are to select and oversee a well-qualified and ethical chief executive officer who, with other management, runs the corporation on a daily basis, and to monitor management's performance and adherence to corporate and ethical standards. (The Business Roundtable, p.5)

What does Steven Kaplan mean by a "X-ray machine" and "physical search" near the end of his article?

Under current rules,all companies must provide detailed disclosures oftop executive compensation. This is like sendingall companies through the X-ray machine at theairport. When shareholders believe a company hasCEO pay problems (i.e., the X-ray identifies a potential problem), shareholders can ask a com-pany to have a nonbinding shareholder vote onexecutive compensation in its annual proxy

Why did agency theory recommend that companies use debt financing?

Under the theory, shareholders came to favor firms that used debtfinancing, taking debt financing as a signal of management's conviction thata new endeavor will pay off.

What does it mean that shareholders are residual claimants?

after all factors of production/service have received their remuneration, the person/agent supposed to receive the left/residual amount

For an auto mechanic, who is a principal, and who is an agent?

agent is the mechanic, principal is the customer

whose benefits should corporations serve?

all stakeholders

assumptions about manager's human nature stakeholder theory

altruistic, collectivist, professional ethics

main argument of stakeholder theory

attend to stakeholder interest and to balance interest of stakeholder groups

refrene points in CEO compensation

average workers other countries firms performance other fields

what is the purpose of corporations?

benefit its shareholders

What kind of justification do Ben & Jerry's managers use to justify their social mission?

brans images and corporate reputation, moral duty and sustainability

bondholder example

creditor

Is agency theory a descriptive, instrumental, or normative justification of shareholder value principle?`

descriptive

primary role of board of directors in shareholder value principle

discipline, mentor

What is the main difference between dispersed and concentrated ownership?

dispersed - where the main shareholder has less than 20% of the ownership of the company; concentrated - where the main shareholder owns more than 50% of the company's ownership.

According to Dobbin and Jung, which agency theory prescriptions were adopted by American companies? Which ones were not adopted?

focus on core competencies, use debt financing, make boards more independent Which ones were not adopted? aligning incentives

How is private equity governance different from traditional corporate governance at publicly traded companies?

private equity companies are not controlled by shareholders

Plurality Voting vs. majority voting

plurality voting: the candidate with the most votes will win majority voting: the candidate with the majority will win (50% or more of the vote)

According to Lori Ryan, Ann Buchholtz, and Robert Kolb in their article "New Directors in Corporate Governance and Finance: Implications for Business Ethics Research," what is the shareholder empowerment action that would give investors the right to place competing nominees for director seats on companies' official proxies? Write your answer inside the box below.

MGT 444 Shin quiz 3

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