Module 3: Chapter 4, Chapter 5

What are the four key strategy levels?

(1) Enterprise-level strategy (2) Corporate-level strategy (3) Business-level strategy (4) Functional-level strategy

One conceptualization of the strategic management process includes 6 steps:

(1) goal formulation, (2) strategy formulation, (3) strategy evaluation, (4) strategy implementation, (5) strategic control, and (6) environmental analysis

What caused PA (public affairs) to blossom in the US?

(1) the growing magnitude and impact of government; (2) the changing nature of the political system, especially its progression from a patronage orientation to an issues orientation; (3) the growing recognition by business that it was being outflanked by interests that were counter to its own on a number of policy matters; and (4) the need to be more active in politics outside the traditional community-related aspects, such as the symphony and art museums

Social entrepreneurs play the role of change agents in the social sector by:

- Adopting a mission to create and sustain social value (not just private value) - Recognizing and relentlessly pursuing new opportunities to serve that mission - Engaging in a process of continuous innovation, adaptation, and learning - Acting boldly without being limited by resources currently in hand - Exhibiting heightened accountability to the constituencies served and for the outcomes created

What are the Pros of becoming a B Corp?

- Built in Commitment - Good Publicity - Protection from Investor Pressures - Partners with Similar Values

What are the Cons of becoming a B Corp?

- Lack of Oversight - Legal Uncertainty and Brand Erosion - Investor Wariness

How do companies seek legitimacy?

1. Adapting methods of operating to conform to what it perceives to be the prevailing standard 2. Try to change the public's values and norms to conform to its own practices by advertising and other techniques 3. Enhance its legitimacy by identifying itself with other organizations, people, values, or symbols that have a powerful legitimate base in society

Ranking of Red Flags that Signal Board Problems:

1. Company has to restate earnings 2. Poor employee morale 3. Adverse SOX 404 opinion 4. Poor customer satisfaction track record 5. Management misses strategic performance goals 6. Company is target of employee lawsuits 7. Stock price declines 8. Quarterly financial results miss analysts' expectations 9. Low corporate governance quotient rating

Three different opportunities for PA executives have been created for future consideration in public affairs:

1. Executives can help develop value-based enterprises 2. PA executives can assert themselves as thought leaders in their companies 3. PA specialists have the opportunity to seek alternative arenas of resolution as they can broaden issues to embrace global considerations while they pay close attention to domestic matters.

The steps intended to integrate business and society strategically are:

1. Identifying the points of intersection (inside-out and outside-in) 2. Choosing which social issues to address (generic, value chain social impacts, and social dimensions of competitiveness) 3. Creating a corporate social agenda (responsive and strategic) 4. Integrating inside-out and outside-in practices (getting practices to work together). 5. Creating a social dimension to the value proposition (The company adds a social dimension to its value proposition, thus making social impact integral to the overall strategy.)

What are the issues surrounding executive pay?

1. Performance 2. Pay Levels 3. Transparency

How do CEOs get paid?

1. Salary 2. Bonus 3. Equity 4. Perks 5. Other (benefits such as insurance)

Steps to Take for Board Repair:

1. Spread risk oversight among multiple committees 2. Seek outside help in identifying potential risks 3. Deepen involvement in corporate strategy 4. Align board size and skill mix with strategy 5. Revamp executive compensation 6. Pick compensation committee members who will question the status quo 7. Use independent compensation consultants 8. Evaluate CEO on grooming potential successors 9. Know what matters to your investors

Responsibilities of the Audit Committee

1. To ensure that published financial statements are not misleading 2. To ensure that internal controls are adequate 3. To follow up on allegations of material, financial, ethical, and legal irregularities 4. To ratify the election of the external auditor

Two issues at the heart of CEO pay controversy are:

1. extent to which CEO pay is tied to firm performance 2. overall size of of CEO pay

Three broad ways corporations intersect with society:

1. generic social issues 2. value chain social impacts 3. social dimensions of competitive context

Corporate public policy and the linkage between ethics and strategy are better understood when we think about:

1. the four key levels at which strategy decisions arise 2. the steps in the strategic management process in which these decisions are embedded

Value Shift

A change in a company's core values, such as from integrating ethical and social considerations into its financially driven strategic plans

Global Reporting Initiative (GRI)

A consortium of over 300 global organizations that has undertaken the challenge of standardization. The GRI's Sustainability Reporting Guidelines represented the first global framework for comprehensive sustainability reporting, encompassing the "triple bottom line" of economic, environmental, and social issues. The mission of GRI is to maintain, enhance, and disseminate the guidelines through ongoing consultation and stakeholder engagement.

shareholder lawsuits

A lawsuit initiated by one or more shareholders to recover damages suffered due to alleged actions of the company's management

shareholder resolution

A resolution that a shareholder who meets certain ownership requirements may submit to other shareholders for a vote. Many shareholder resolutions concern social issues. One of the major vehicles by which shareholder activists communicate their concerns to management groups is through the filing of shareholder resolutions. An example of such a resolution is, "The (company name) should name women and minorities to the board of directors." To file a resolution, a shareholder or a shareholder group must obtain a stated number of signatures to require management to place the resolution on the proxy statement so that all the shareholders can vote it on. Resolutions that are defeated (fail to get majority votes) may be resubmitted provided they meet certain SEC requirements for such resubmission.

Corporate Governance

A set of mechanisms by which a firm is being governed, directed, administered, or controlled, and to the goals for which it is being governed. It is concerned with the roles, rights, and accountability of such stakeholder groups as shareholders, directors, managers, employees, etc.

Audit Committee

A subcommittee of the board of directors that is responsible for overseeing both the internal audit function and the annual financial statement audit by independent CPAs. SOX requires it be composed of independent board members, and at least one be identified as a financial expert.

Legislative efforts in corporate governance include:

Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley Act of 2002), Dodd-Frank Wall Street Reform and Consumer Protection Act

shareholder activism

Activities undertaken by shareholders to influence executive decision making in areas ranging from strategic planning to social responsibility Shareholder activists have put forth a record number of proposals that have led to a shift toward greater shareholder power, but have also created tensions between shareholders and board members.

Responsive CSR

Addresses "generic social impacts" through good corporate citizenship and "value chain social impacts" by mitigating harm form negative corporate impacts on society

This model has outside directors, follows common law, and has a market oriented and shareholder-centered governance.

Anglo-American model

What are the principal monitoring committees in an organization?

Audit, nominating and compensation committees

Chapter 5:

Beginning now..

The most important mechanism of corporate governance is...

Board of Directors

Business Level Strategy

Business-level strategy is concerned with the question, "How should we compete in a given business or industry?" Thus, a company whose products or services take it into many different businesses, industries, or markets will need a business-level strategy to define its competitive posture in each of them. A competitive strategy might address whether a product should be low cost or differentiated, as well as whether it should compete in broad or narrow markets and how to do so in a sustainable way.

Legitimation (Process)

Businesses seeking to perpetuate its acceptance by the society

Legitimacy (Condition)

Congruence between the organization's activities and society's expectations

Lack of Oversight: The rigorous B Corp certification process involves annual self-reports with a "third-party standard" for assessing performance, but only 10% of applicants receive on-ground verification. Legal Uncertainty and Brand Erosion: The B Corp represents a certification, whereas the Benefit Corporation is an actual legal entity. Neither is required to adhere to the same standards-inviting legal questions and this could erode the brand. Investor Wariness: Some investors could balk at the emphasis on social good over shareholder returns.

Cons of becoming a B Corp

This model has insider directors, civil law dominates, as well as block ownership, a bank-orientation and stakeholder-coordinated governance.

Continental-European model

Boards of Directors Executive Pay Concentrated Ownership Market for Corporate Control are all mechanisms of...

Corporate Governance beyond law/regulations

Summary: Corporate Public Policy & Enterprise-Level Strategy

Corporate public policy is a firm's posture or stance regarding the public, social, or ethical aspects of stakeholders and corporate functioning. It is a part of strategic management, particularly enterprise-level strategy. Enterprise-level strategy is the broadest, overarching level of strategy, and its focus is on the role of the organization in society. A major aspect of enterprise-level strategy is the integration of important core values into company strategy. The other strategy levels include the corporate, business, and functional levels. The strategic management process entails six stages, and a concern for social, ethical, and public issues may be seen at each stage. In the control stage, the social audit, social performance, sustainability report is crucial.

Corporate-Level Strategy

Corporate-level strategy addresses what are often posed as the most defining business question for a firm, "In what business(es) should we be?" Thus, mergers, acquisitions, and divestitures, as well as whether and how to participate in global markets, are examples of decisions made at this level. A host of issues related to ethics and sustainability arise at this level as well.

social entrepreneurship

Cultural phenomenon that has been growing exponentially. Social entrepreneurs differ from traditional entrepreneurs in that the social enterprise has a mission of societal value creation, and that mission is its reason for being. The social mission is fundamental to social entrepreneurship.

bullet-dodging

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

Delaware supreme Court about "Caremark Standard":

Directors can only be held liable if: 1. The director utterly failed to implement any reporting or information system or controls, or 2. having implemented such a system or controls, consciously failed to monitor or oversee its operations, disabling their ability to be informed of risks or problems requiring their attention.

What strategy can link both corporate strategy and ethics?

Enterprise Strategy

What is the most important form of CEO pay?

Equity ownership because stock options are long term oriented, and reflects underlying interest of shareholders.

Say on Pay movement

Evolved from concerns over excessive executive compensation and failures to link CEO pay to performance.

Business exists solely because society has given it that right. What concept is this?

Fragile mandate

Functional-Level Strategy

Functional-level strategy addresses the question, "How should a firm integrate its various subfunctional activities and how should these activities be related to changes taking place in the diverse functional areas (finance, marketing, human resources, IT and operations)?" Companies need to ascertain that their functional areas conduct themselves in ways that are consistent with the values for which the firm stands.

Compensation Committee

Has the responsibility of evaluating executive performance and recommending terms and conditions of employment, should be composed of outside directors

if a firm is underperforming because managers are unequipped for the job, another firm called a _______ ________ will make an unsolicited attempt to acquire firm by negotiating with board or company shareholders.

Hostile Acquirer. Keeps managers in line to self regulate their behaviors.

Summary: Corporate Governance Affects

In many ways, corporate governance has improved. CEOs no longer enjoy job security when firm performance suffers. Corporations can no longer release false or misleading reports without threat of consequences. The growth in CEO pay has tapered off, although it remains at extremely high levels. These improvements are worthy of note, but they are insufficient to protect the legitimacy of business. Steps were taken to lessen the likelihood of another Enron or another global financial crisis occurring. Continual vigilance must be maintained if corporate governance is to realize its promise and its purpose, that of being responsive to the needs of shareholders and the many individuals and groups who have a stake in the firm, as well as enabling business to be a positive force in society.

Summary: Director-Primacy Model

In the director-primacy model, the board is a mediating hierarch, responsible for balancing the needs of all the stakeholders. At times, the two models of corporate governance converge but more often, they diverge. The Market for Corporate Control is an example. From the shareholder-primacy perspective, the market for corporate control should rein in CEO excesses. The threat of a takeover should motivate a CEO to represent shareholders' best interests. Poison pills become problems because they can blunt the takeover threat by making it prohibitively expensive for an acquirer. In contrast, the director primacy model would see poison pills as an opportunity to slow the speed of a hostile takeover attempt, providing an opportunity to assure that all stakeholders are well represented.

Board member personal liability (Delaware)

It is the duty of the board of directors to ensure that a company has an effective reporting and monitoring system in place. If the board fails to do this, individual directors can be held personally liable for losses that are caused by their failure to meet appropriate standards. (out of pocket liability: board members paying personal liability costs from their personal funds)

__________ is a condition, whereas ____________ is a dynamic process by which business seeks to perpetuate its acceptance

Legitimacy, legitimation

"Organizations are legitimate to the extent that their activities are congruent with the goals and values of the social system within which they function" speaks to the idea of

Legitimacy: organization's activities = society's expectations

What key issues have arisen in shareholder democracy and board elections?

Majority vote Classified boards Proxy access

Team production model

Notes that the work of a corporation requires the combined input of two or more individuals or groups

Who serves on board of directors?

Outsiders, insiders, and affiliated/related

What are two of the controversial practices that emerged from hostile takeovers?

Poison pills and golden parachutes

Shareholders who own a large percentage of a firm's shares (ie. institutional block-holders) have greater motivation to: a) monitor firms b) voice concerns about ineffective management c) use their voting rights (power) to institute organizational change, and d) pose greater threat to market value if they choose to exit the firm

Predictions about Concentrated Ownership

Predictions: a) Poorly managed firms will become targets of takeover attempts. b) This threat motivated top executives to avoid pursuing self-interest at the expense of firm's stakeholders (particularly shareholders) c) Predictions a and b are likely to not hold when poison pills, golden parachutes, and other protection mechanisms have been put in place

Predictions about the Market for Corporate Control

Built-in Commitment: It builds social commitment directly into governance to support the corporation and protect it. Good Publicity: It offers reputational effects with best practices. Protection from Investor Pressures: It can protect the company from pressures by capital markets to capitalize short-term profits. Partners with Similar Values: It offers the chance set a high benchmark for stakeholders with B Lab screenings for certain requirements on working conditions, supply chain management, and relationships with local communities.

Pros of becoming a B Corp

Summary: Public Affairs

Public affairs can be described as the management function that is responsible for monitoring and interpreting a corporation's noncommercial environment and managing its response to that environment. PA is intimately linked to corporate public policy, environmental analysis, issues management, and crisis management. The major functions of PA departments today include government relations, political action, community involvement or responsibility, issues management, global PA, and corporate philanthropy. PA executives are positioned to increase their future status and influence as they embark on such challenges as helping create values-based enterprises, exerting themselves as thought leaders in their companies, and helping seek alternative arenas of resolution as they broaden issues to embrace global considerations. Some companies do not use public affairs departments but choose to organize these activities into different departments such as Sustainability, CSR, and Ethics offices.

Summary: Legitimacy

Recent events in corporate America have served to underscore the importance of good corporate governance and the legitimacy it is supposed to provide for business. To remain legitimate, corporations must be governed according to the intended and legal pattern. Governance debacles, such as the global financial crisis, call not only the legitimacy of individual companies into question but also that of business as a whole.

Summary: SOX & Dodd-Frank

SOX was a landmark piece of legislation, drafted in response to the financial scandals of 2001. As with all efforts to improve corporate governance, it has had both costs and benefits. The demands of SOX have led many firms to go private to avoid the costs involved in compliance; however, evidence indicates that firms have adjusted to the requirements and seen positive outcomes from the requirements. The global financial crisis ushered in the Dodd-Frank Wall Street Reform Act, which brought comprehensive financial regulatory reform, and new requirements that affected the oversight of financial institutions and corporate governance practices, many of which are just being implemented.

The Anglo-American model is a

Shareholder primacy model. This is because shareholders have primacy importance.

Summary: Social entrepreneurship, B Corp, Integrated Reporting

Social entrepreneurship holds the mission of the firm as its ultimate purpose. Creating wealth is necessary for social entrepreneurs if they are to survive and thrive but wealth is more of a means to an end that benefits society. The Benefit Corporation is a new corporate form that makes it possible for social entrepreneurs and other like minded business people to promote the social good as well as wealth creation. Sustainability reports, otherwise known as social responsibility reports, measure how well the firm achieves the triple bottom line of planet, people, and profit. Integrating Reporting is becoming increasingly prevalent as firms try to pull their reporting together into a comprehensive format.

Generic Social Issues

Social issues that are not significantly affected by a company's operations nor materially affect its long-term competitiveness

Value Chain Social Impacts

Social issues that are significantly affected by a company's activities in the ordinary course of business

Corporate Public Policy

The idea that a firm must give specific attention to issues in which basic questions of justice, fairness, ethics, or public policy reside.

Bottom of the Pyramid (BOP)

The largest and poorest socioeconomic group of people, the 4 billion people in the world (nearly 2/3 of the world's population), who live on less than $2 a day.

corporate public affairs (public affairs management)

The management function responsible for monitoring and interpreting the governmental environment of the corporation or industry and for managing the responses necessary to protect the interests of the corporation or industry.

Summary: Shareholder-Primacy Model

The modern corporation is a complex entity and so it is not surprising that reasonable people would differ on the model by which corporate governance should be based. The Anglo American shareholder-primacy model has been a dominant model for years but the director primacy-based team production model is making inroads in U.S. businesses with the idea that it offers a broader stakeholder perspective. In the shareholder-primacy model, the key issue is a separation between ownership and control, which has resulted in problems with managers not always doing what the owners would rather they do. From this perspective, boards of directors are responsible for ensuring that managers represent the best interests of owners, but boards sometimes lack the independence needed to monitor management effectively. This has led to serious problems in the corporate governance arena, such as excessive levels of CEO pay and a weak relationship between CEO pay and firm performance. Of course, at times an effort to solve one problem can create another. The use of stock options in CEO compensation has helped tie CEO pay to firm performance more closely, but it has resulted in skyrocketing levels of pay, as well as in the manipulation of option timing and pricing. Other issues are lavish executive retirement plans and outside director compensation. New SEC rules for transparency may have an impact on the compensation issue in the future.

Strategic CSR

Transforms "value chain social impacts" into activities that benefit society while reinforcing corporate strategy, and advances strategic philanthropy that leverages competitiveness.

Dodd & Frank made the process more

Transparent. By showing their median pay ratio, provide a list of pure firms for benchmarking areas.

A firm engages in strategic management, part of which includes the development of enterprise-level strategy, which poses the question, "For what do we stand?" The answers to this question help the organization form a corporate public policy, which is a more specific posture on the public, social, or stakeholder environment or specific issues within this environment. Some firms call this a... public affairs strategy.

True.

Activists shareholders (corporate gadflies) are no longer dismissed as nuisance and are instead viewed as credible, powerful, and a force to be reckoned with.

True.

Arguably, the most important characteristics for outside directors is the ability to ask difficult questions and speak truthfully about concerns, without letting ties to the firm get in the way.

True.

Enterprise-level strategy is the broadest strategy level (where corporate public policy is created_ and that the other levels are narrower concepts that cascade from it.

True.

Female representation is positively related to board monitoring, strategy involvement, and accounting performance. (Diversity).

True.

In setting the direction for a firm, a manager needs to understand the impact of changes in business strategy on the underlying values of the firm and the new stakeholder relations that will consequently emerge and take shape. Thus, at the enterprise level, the task of setting strategic direction involves understanding the role in society of a particular firm as a whole and its relationships to other social institutions.

True.

In the US, the Dodd-frank Wall Street Reform and Consumer Protection Act requires companies to submit their executive pay packages to a non-binding shareholder vote at least once every three years.

True.

Just as a firm needs to develop policy on functional areas such as human resources, operations, marketing, or finance, it also must develop corporate public policy to address proactively an array of social issues.

True.

Most organizations today convey their enterprise or societal strategy in their vision, missions, or values statements. Others embed their enterprise strategies in codes of conduct.

True.

PA (public affairs) embraces corporate public policy, issues management, and crisis management. In sum, an integrated model of PA suggests that it is the interface of multiple disciplines, including business and society, ethics, CSR, ecological systems, ethics, economics, sociology, political science, reputational management, and strategic management. PA management is most effective when it is thought of as an indispensable part of every manager's job, rather than an isolated function or department.

True.

Research shows a weak correlation between firm performance and CEO pay.

True.

Some analysts suggest that corporations will not be able to fulfill their sustainability and corporate social responsibility goals until corporate boards move away from a singular focus on shareholder wealth maximization.

True.

Sustainability is now a strategic issue with far-reaching implications for organizational purpose, direction, and functioning.

True.

Sustainability reports are important to the context of strategic control. When sustainability goals are developed, these goals serve as standards in the process of measuring, disclosing, and documenting progress on economic, environmental, social, and governance goals. Following the development of goals, actual sustainability performance results are compared to the established goals, and then corrective action is taken to make sure that actual performance and goals are aligned.

True.

To achieve sustainable corporate performance, corporations need a "fundamental change in their goals and how they achieve them." The triple bottom line must be reflected in every aspect of the firm's operations to achieve sustainability.

True.

It has been argued that three basic organizational values undergird all others: transparency, sustainability, and responsibility.

True. Transparency emphasizes the company being open and honest, especially with employees. Sustainability is about conducting today's business in a way that does not rob the future, and responsibility invokes the idea of commitment to integrity and social responsibility.

CEO Duality reduces board's allocation of attention to monitoring even when firm performance is poor. (Duality).

True. Boards don't spend as much time holding CEO accountable for actions when they are not also serving another role. Unfortunately this is also the case when firm is underperforming, which is when boards should be heavily attentive to CEO.

CEOs reduce competitive uncertainty by appointing friends of rival firms' CEOs on their boards. (Social Influence).

True. Impression management and social influence are used to deal with competitive uncertainty. The law prohibits firms from forming ties with competitors through the board of directors. Can lead to price fixing, etc. They will create indirect relationships that will fall under the radar by making friends with a director who is also friends with the CEO of a competitor.

Important questions that flesh out enterprise strategy are:

What is the role of our organization in society? How do our stakeholders perceive our organization? What principles or values does our organization represent? What obligations do we have to society, including to the world? What are the broad implications for our current mix of businesses and allocation of resources?

CEO duality

When the chief executive officer is also the chairman of the board of directors.

Benefit Corporation (B Corp)

a corporate form for businesses whose stated goals are to combine making a profit with benefiting society and the environment

Corporate Public Policy

a firm's posture, stance, strategy, or position regarding the environmental, social, global, and ethical aspects of stakeholders and corporate functioning.

Council of Institutional Investors (CII)

a nonprofit association of corporate, public and union employee benefit funds, issued a policy that both current and former executive officers should be subject to clawback in cases of financial misstatements or fraud

Separation of ownership from control

a situation in which the top management, rather than the shareholders, controls day-to-day operations

Restricted Stock

always has value, even in a down market, and can deliver same value with fewer shares than options because it does not have an exercise price. it incentivizes executives to think for the long term, because the essence of restricted stock is that the employee must remain employed until the stock vests to receive its value.

Sarbanes-Oxley Act of 2002 (SOX, Sarbox)

amended the securities laws to provide better protection to investors in public companies by improving the financial reporting of companies.

Clean Capitalism

an economic system in which prices fully incorporate social, economic, and ecological costs and benefits, and actors are clearly aware of the consequences of their marketplace actions

insider trading

an unethical activity in which insiders use private company information to further their own fortunes or those of their family and friends textbook definition: practice of buying or selling a security by someone who has access to material information that is not available to the public

material information

any information that could affect investment decisions related to a particular security such as stock in a publicly traded company textbook definition: information that a reasonable investor might want to use and that is likely to affect the price of a firm's stock once that information is released to the public

stock option abuses include:

backdating, spring-loading, and bullet-dodging

shareholder engagement

becoming part of a board's policy - a strategy and set of formal procedures for opening communication between shareholders and a company on a variety of issues, including executive compensation, CEO succession, and company financial and ESG performance.

director-primacy model

challenges the status quo and asks whether the balance of power in corporate governance should favor shareholders or board members This is a concept of a corporation that is not owned, but instead is an independent legal entity that owns itself. in it, boards are 'mediating' hierarchs who balance competing interests of stakeholders, boards make the ultimate decision and their primary duty is to the corporation. Given this perspective, board members should be given the autonomy and discretion needed to balance demands that sometimes conflict with each other.

Inside-out linkages

company operations affect society

Clawback Provisions

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

poison pill

defensive provisions to deter hostile takeovers by making the target firm less attractive due to cost of taking over. when acquirer trie to swallow (acquire) by acquiring more than a certain percentage of stock, the poison pill provides that other shareholders be able to purchase shares, thus diluting the suitors holdings and making it expensive (hard to swallow).

Independence, expertise, motivation, bandwidth, and diversity are the key issues in

director selection and retention

Insiders on board of directors are

employed by the firm

Pay-Ratio Disclosure Rule

equity pay provision that requires firms to reveal the difference in salaries between executives and rank-and-file workers. supported by labor unions and institutional investors who believe the requirement could slow down the high rate of growth in CEO pay, as well as motivate boards to think more often of their frontline workers.

outside-in linkages

external societal forces affect companies

backdating

given the option of buying stock at yesterdays price, resulting in immediate and guaranteed wealth increase. puts option 'in the money' rather than 'at the money' where it should be

under the shareholder-primacy model, the board of directors is elected to

govern and oversee the management of the business to certain the manager puts the interests of the shareholders first (second major group)

spring-loading

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

management (third major group)

group of individuals hired by the board to run the company and manage it on a daily basis. Along with board, establishes overall policy. middle and lower level managers carry out this policy and conduct daily supervision of operative employees.

Business Judgment Rule (BJR)

holds that courts should not challenge board members who act in good faith, making informed decisions that reflect the company's best interests instead of their own self-interest. Board members need to be free to take risk without fear of liability

Shared value

holds that economic and social goals are not mutually exclusive - business can pursue profit while also promoting the common good.

When can insider trading be legal?

if it occurs when the information has already been made public

Outsiders on board of directors are

independent from the firm/management

Micro level of legitimacy:

individual business firms achieving and maintaining legitimacy by conforming to societal expectations

board independence is a crucial aspect of good governance. it is here that the difference between

inside directors and outside directors become most pronounced

Top managers in the firm, family members, or others with a professional or personal relationship to the firm or CEO are

inside directors. they may be less objective than other directors and and hesitant to speak out when necessary.

Private Securities Litigation Reform Act of 1995

intended to rein in excessive levels of private securities litigation.

Ceres (the non profit, NGO)

is a national network of investors, environmental organizations, and other public interest groups working with companies and investors to address sustainability challenges and promote sustainability reporting.

charter

issued by the state and overarching the four major groups, gives the corporation the right to exist and stipulates the basic terms of its existence (including corporate governance practices).

fragile mandate

legitimacy is constantly subject to ratification; and it must realize that it has no inherent right to exist.

A business related to its market environment through the products and services it produces and the market it participates in. Strategic management therefore incorporates environmental, ethical, and social concerns with the realization that the long-term viability of a firm is

linked inextricably with its impact on the economy, society, and the environment.

Ponzi Scheme

lures investors in with the fake promise of profit but actually pays earlier investors with later investors' money until the scheme collapses.

In distributed ownership, no shareholder can be deemed as the

majority owner/holder

shareholder-primacy model assets that:

maximizing share value is the ultimate firm goal and that improving corporate governance entails reducing board power, maximizing shareholder power, and tying incentives to share price.

Affiliated/Related on board of directors

no employment relationship, but have some tie with the firm/management

tipper

one who provides information in insider trading

tippee

one who receives information in insider trading

Top managers of other firms, academics, former government officials, etc. all can serve as

outside directors who are independent from the firm and its top managers.

Dodd-Frank Wall Street Reform and Consumer Protection Act

passed in the wake of the global financial crisis and covers 16 major areas of reform affecting banks, credit card companies, credit rating agencies, insurance companies, hedge funds and futures trading.

Risk Committee (board level)

provide oversight about risks regarding strategy and tactics across operational, financial, and compliance areas

Proxy Access

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

golden parachute

provision in an employment contract in which a corporation agrees to make payments to key officers in the event of a change in the control of the corporation.

What committees have come about as a product of enterprise-level strategic thinking?

public policy or issues committees, sustainability committees, ethics committees, governance committees, social audit committees, corporate philanthropy committees, and ad hoc committees to address specific public issues.

macro level of legitimacy:

refers to the corporate system - the totality of business enterprises

Corporate Governance

refers to the method by which a firm is being governed, directed, administered, or controlled and to the goals for which it is being governed. It is concerned with the relative roles, rights, and accountability of such stakeholder groups as owners, boards of directors, managers, employees, and others who have a stake in the firms governance.

Sustainability Reports (social responsibility reports, social audits, and integrated reports (IRs))

represent an effort to measure a firm's overall value creation and to spur integrated thinking that recognizes the interconnections of the range of business functions, as well as the multiple business bottom lines.

Those with concentrated ownership

represent majority holders with clout to influence activism.

Regulation FD (Fair Disclosure)

set limits on the common company practice of selective disclosure when companies disclose meaningful information to shareholders and securities professionals, they must do so publicly so that small investors can enjoy a more level playing field.

agency problems

shareholder interests do not = interests of managers manager (hired agent) begins pursuing self-interest instead of owners best interest

What are the four major groups in the shareholder-primacy model of corporate governance?

shareholders board of directors managers employees

Nominating Committee

should be composed of outside directors, has the responsibility of ensuring that competent, objective board members are selected

Full discloser (transparency)

should be made at regular and frequent intervals and should contain information that might affect the investment decisions of shareholders. Information can include nature and activities of business, financial and policy matters, tender offers, and special problems or opportunities short term and long term.

information asymmetry

situation in which one party is more informed than another because of the possession of private information (insider trading)

Social Dimensions of competitive context

social issues affect the underlying drivers of a firm's competitiveness

Shareholder Democracy Movement

stems from the lack of power shareholders have felt, particularly in board elections.

The director-primacy view stems from a

team production model of corporate governance.

Enterprise-Level Strategy (societal-level)

the broadest level. It is the overarching strategy level that poses such basic questions as "What is the role of the organization in society?" "What do we stand for?" Enterprise Level encompasses the development and articulation of corporate public policy and may be considered the first and most important level at which ethics and strategy are linked. Corporate governance is one of the most important topics at this level.

Core Values

the deeply ingrained principles that guide all of a company's actions and decisions, and they serve as cultural cornerstones.

proxy process

the method by which the shareholders elected boards of directors

Strategic Management

the overall management process that strives to identify corporate purpose and position a firm to succeed in its market environment by achieving competitive advantage.

Majority Vote

the requirement that board members be elected by a majority of votes cast

according to the shareholder-primacy model, shareholders own stock in the firm and...

this gives them ultimate control over the corporation as the firm's owners. (gives right to select board of directors and vote on resolutions). (first major group)

Employees (fourth major group)

those hired to perform the operational work

Classified boards (staggered boards)

those that elect their members in staggered terms. example: 12 members, four might be elected each year, and serve a three year term. Would take 3 years for entire board to be replaced. against: time required to replace board for: need a longer period to make longer-term-oriented strategic decisions

In summary, the Dodd-Frank Act continues to provide rules that are designed for more

transparency for shareholders

Most major companies today have Corporate Responsibility Committees or Corporate Sustainability Committees that

typically deal with diversity, equal employment opportunity, environmental affairs, employee health and safety, consumer affairs, political action, and other public/ethical issues.

Public affairs (and public affairs management)

used to describe the management processes that focus on the formalization and institutionalization of corporate public policy.

Shareholder-Director Exchange (SDX)

working group to develop protocols for director-shareholder engagement for US public companies