Post on 27-Dec-2015
CORPORATE GOVERNANCE
• Gubernare—a Latin word meaning to steer
• 3 questions:• Where to steer?• Who steers?• How to steer?
WHERE TO STEER? THE PURPOSES OF THE
CORPORATION
Shareholder Primacy model• The residual claimant, at risk• Legal owners• Financial capital the critical resource• A single objective to maximize
WHERE TO STEER? THE PURPOSES OF THE
CORPORATION• The Stakeholder primacy model• Stakeholders have rights to voice• Describes what managers actually do• Stakeholders can assist in creating
competitive advantage
WHO STEERS?THE AGENCY PROBLEM
Modern corporations• Owned by principles• Managed by agents
• Interests may differ, hurting principles
• How to solve?– Monitor the agents– Align incentives
THE AGENCY PROBLEM
Shareholders:Return on Investment
Suppliers:Reliable partner
Customers:Reliable Products
Employees:Stable Jobs
Government:Good Citizen
Natural Environment:Sustainable Practices
Managers:Maximize Utility
?
ONE SOLUTION: THE BOARD OF DIRECTORS
• Appointed by principles• Two fiduciary duties
– Loyalty– Care
• Inside directors bring expertise• Outside directors bring expertise and
objectivity
ANOTHER SOLUTION: INCENTIVES
• Agents will act like principles if they have the same interests
• Pay for performance, compensation at risk– Bonuses– Stock Options– Stock Grants
HOW TO STEER?FOUR ETHICAL VIEWS
• Utilitarianism (John Stuart Mill)– Greatest good for the greatest number
• Rights (Immanuel Kant)– Treat everyone as an end, never a means
• Liberty (Robert Nozick)– Freedom of expression
• Ethic of Care (Carol Gilligan)– Relationships matter most
4 ETHICAL CONCERNS
• Avoiding harm to individuals
• Fairness and honesty
• Recognition of sacred/ transcendent
• Liberty and overcoming oppression
ETHICS ALONG THE VALUE CHAIN
Value Chain element Ethical Challenges Moral Dimension Example
Firm Infrastructure Honest accounting and record keeping
Fairness/cheating Financial fraud at Enron, and World Com (2001)
Human Resources Whistle blower policies Liberty/ Oppression Brad Birkenfeld reporting tax fraud at UBS (2005)
Technology Development Electronic monitoring, information security
Liberty/oppression Cisco selling routers to China (2011)
Procurement Working conditions at subcontractors
Fairness/ Avoiding harm Nike and working conditions in Vietnam (1996)
Logistics Transportation safety Sanctity/degradation Exxon Valdez oil spill (1989)
Operations Working hours and housing Fairness/ Avoiding harm Worker housing at Foxconn (Apple) (2012)
Marketing/sales Truth in advertising Fairness/cheating Horse meat in hamburgers at Burger King (2013)
After Sales Service Product recalls Avoiding Harm Toyota recall for braking systems (2009)