CHAPTER 2

Corporate
Governance

STRATEGIC MANAGEMENT & BUSINESS POLICY

10TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

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Corporate Governance

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 Corporate Governance

The relationship among the board of

directors, top management, and
shareholders – determining the direction
and performance of the corporation

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Corporate Governance

Role of Board

–Monitor

–Evaluate and influence

–Initiate and determine

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 Board of Directors Continuum

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Board of Directors

Members --

–Inside directors
•“management directors”
•Officers or execs employed by the firm

–Outside directors
•“non-management directors”
•Execs of other firms not employed by the
board’s corporation

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 Agency Theory

Agency Problem –
–Objectives of owners & agents in conflict
–Difficult for owners to verify agent performance

Risk Sharing Problem –

–Owners & agents risk assessment in conflict

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Stewardship Theory

Executives more motivated to act in best

interest of the corporation than their own
self-interests. Theory that over time, senior
executives tend to view corporation as
extension of selves.

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 Board of Directors

When Outsiders can be considered Insiders

–Affiliated Directors
–Retired Directors
–Family Directors

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Board of Directors

Codetermination

–The inclusion of a corporation’s employees on its

board of directors

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 Board of Directors

Interlocking Directorates

–Direct Interlocking

–Indirect Interlocking

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Board of Directors

Nominations & Elections

–Traditional Approach
•CEO invitation to membership
•Shareholders approval in annual proxy statement
•All nominees usually elected

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 Board of Directors

Nominations & Elections

–Staggered Board Approach

•Staggered terms of service/election

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Board of Directors

Sarbanes-Oxley

–Code of Ethics

–Audit, Nominating, and Compensation

Committees all outside directors

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 Board of Directors

Organization of the Board

–Size

•Charter & Bylaws Determination

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Board of Directors

Corporate Governance

–Review & shaping of strategy

–Pressure for corporate performance
–Demand for executive stock ownership
–Outside directors increasing
–Impact of Sarbanes-Oxley

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 Board of Directors

Transformational leaders

–Change agents through vision for change

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Board of Directors

Successful CEO’s

–Strategic vision
–Passion for the company
–Strong communication
–charisma

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 Board of Directors

Executive Leadership

–Strategic vision
–Role model

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Board of Directors

Executive Leadership

–Communication of performance standards

–Demonstrates confidence in abilities of followers

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 Strategic Management Process

Strategic Planning Staff

–Supports top management & business units in

the strategic planning process

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Strategic Management Process

Strategic Planning Staff

–Identify & analyze company-wide strategic issues

–Generate strategic alternatives

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 Strategic Management Process

Strategic Planning Staff

–Facilitate business units in coordinating activities

related to strategic planning process

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CHAPTER 3
Ethics & Social
Responsibility

STRATEGIC MANAGEMENT & BUSINESS POLICY

10TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

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 Ethics & Social Responsibility

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Corporate Governance

Broader responsibility --

Private corporations have responsibility to

society that extend beyond making a profit

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 Social Responsibility

Milton Friedman
There is one and only one social responsibility of
business—to use its resources and engage in
activities designed to increase its profits so long
as it stays within the rules of the game, which is
to say, engages in open and free competition
without deception or fraud.

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Corporate Governance

Carroll’s 4 Responsibilities

–Economic
–Legal
–Ethical
–Discretionary

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 Carroll’s 4 Responsibilities

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Corporate Stakeholders

Affect or are affected by the

achievement of the corporation’s
objectives

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 Corporate Stakeholders

Stakeholder Analysis –

–Primary stakeholder
•Sufficient bargaining power to affect outcomes

–Secondary stakeholder
•Indirect stake but are affected by corporation’s actions

–Stakeholder Input
•Determine whether input is necessary

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Ethical Behavior

“business ethics”

–Argument that there is no such thing … it is an

oxymoron

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 Ethical Decision Making

Corporate practices --

–Massive write-downs and restatements of profit

–Misclassification of expenses as capital
expenditures
–Pirating corporate assets for personal gain

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Ethical Decision Making

Recent Survey Results --

–70% distrust business executives

–Enron
–WorldCom

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 Reasons for Unethical Behavior

Provocative Question --

–Why are businesspeople perceived to be

acting unethically?

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Reasons for Unethical Behavior

Perceptions caused by --

–Not aware of impropriety

–Cultural norms and values vary
–Governance systems based on rule or
relationships
–Differences in values between
businesspeople and key stakeholders

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 Reasons for Unethical Behavior

Allport-Vernon-Lindzey Study of Values --

–Aesthetic
–Economic
–Political
–Religious
–Social
–Theoretical

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Reasons for Unethical Behavior

Most common reasons for bending rules --

–Organizational performance required it

–Ambiguous or out of date rules
–Pressure from others – everyone else does it

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 Moral Relativism

Morality is relative to some personal, social,

or cultural standard and there is no method
for deciding whether one decision is better
than another.

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Kohlberg’s Levels of Moral Development

1. Preconventional level

–Characterized by a concern for self

•Personal interest
•Avoidance of punishment

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 Kohlberg’s Levels of Moral Development

2. Conventional level

–Characterized consideration of society’s values

•External code of conduct

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Kohlberg’s Levels of Moral Development

3. Principled level

–Characterized by adherence to internal moral

code
•Universal values or principles

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 Encouraging Ethical Behavior

Codes of Ethics

–Specifies how an organization expects its

employees to behave on the job.

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Encouraging Ethical Behavior

Guidelines for Ethical Behavior

–Ethics

–Morality

–Law

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 Encouraging Ethical Behavior

Approaches to Ethical Behavior

–Utilitarian
•Judged by consequences

–Individual Rights
•Fundamental rights in all decisions

–Justice
•Distribution in equitable fashion

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Encouraging Ethical Behavior

Approaches to Ethical Behavior

–Categorical imperative
•“golden rule”
•Means - Ends

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 Strategy Bits

192 U.S. companies surveyed --

–92% monitored employees use of e-mail/Internet

–26% monitored employees electronic activities all

the time

–Almost none had checks in place to protect

employees privacy

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