Chapter 11 Flashcards
What are stakeholders
Individuals or groups with an interest in claims or stakes of the company and how well it performs
Who are included in stakeholders
- Stockholders
- Creditors
- Employees
- Customers
- Communities
- General Public
What are the stockholder expectations
- Stockholders want a return on their investments
- Creditors want to be repaid with interest
- Employees expect a good income
- Customers want a high quality and reliable products
- Suppliers seek for revenues and dependable buyers
- Government want a good businesss practice and fair competition
- Unions want benefits
- Communities want companies who are responsible
- General public wants quality of life to be improved
What is the stakeholder impact analysis
Enables a company to identify the stakeholders most critical to its survival and makes sure that the satisfaction of their needs are paramount
Who are the 3 critical stakeholderrs
- Customers
- Employees
- Stockholders
What are internal stakeholders
Stock holders and employees
What are external stakeholders
Individual groups that have some claim on the company (banks, bondholders, communities)
What are the role of stockholders
Legal owners and providers of risk capital
What does it mean to have a positing ROIC
Company is able to cover all of its ongoing expenses and have money left over to add to the shareholders equity
How do stockholders receive a return on their investment in a company’s stock
Dividends and capital appreciation
What has taken a significant importance in stockholders
Maximizing returns to stockholders because employees have become stockholders for their own company
What should management always strive for
Profit growth to maximize shareholder value
What are different ways to grow profits
- Increase margins earned on products and services
- Participate in a market that is growing
- Take market share from competitors
- Develop new markets through innovation, geographic expansion and diversification
What is the flow chart of value creation
- Willingness to pay - Customers
- Price (Interest, dividends, and retained earnings) - Capital Providers
- Costs ( Taxes, salaries, cogs) - Government, Employees and Suppliers
- Opportunity Cost
What is the agency theory
One party makes the decision making authority or control over resources to another
Who is the principal
Delegating authority
Who is the agent
Person that is being delegated
What is information asymmetry
- Problem arises if a principal and agent have different goals or if an agent takes action that is not in the best interest of the principal
- Agent tends to have more information than the principal
What is the agency problem
Misleading principals for personal gain, behave unethically or break laws or engage in behaviors that principles would never condone
What are on the job consumption
Behaviour of senior managements use of company funds to acquire perks
What are CEO pay packages
Making significantly more than average workers
What are empire building
Buying many new businesses to increase the size of the company through diversification to satisfy a desire for power, status, security and income
What are the 4 main types of governance mechanisms for aligning stockholder and management interests
- Board of Directors
- Stock Based Compensation
- Financial Statements
- Take over Constraint
What are the roles of Board of Directors in the corporate governance system
- They are the centerpiece of corporate governance system
- They are voted from stock holders
- Can legally be accountable for the companys action
- Monitors corporate strategies to ensure consistency with stockholders interest
- Legal authority to hire, fire and compensate corporate employees
- Responsible for companys audited financial statements
What are outside directors
Full-time, professional directors who hold positions on the boards of several companies and bring objectivity to monitor and evaluate processes
What are the stock based compensations
Giving managers stock options to have the right to purchase company’s shares to predetermined price at some point in the future to help motivate managers to adopt strategies that increase share price
What are the role of financial statements
To avoid misrepresenting financial information, the government requires all public companies to have their accounts audited
What are the takeover constraints
- Risk of being acquired by another company and limits the extent which managers can pursue strategies and take actions that put their own interest above stockholders
What happens when share price falls
Company will fall worthless and may become an attractive acquisition to target target
What are stock options
The right to purchase the company’s shares at predetermined strike price at some point in the future
Why do stockholders have residual power
They can sell their shares
What is greenmail
The practice of buying enough shares in a company to threaten a takeover, forcing the company to buy them back at a high price
How can the agency problem be reduced
- Strategic Control Systems
- Incentive Systems
What is takeover constraint
Risk of being acquired by another company
What are strategic control systems
Formal, target setting, measurement and feedback systems that allow managers to evaluate whether a company is executing the strategies necessary to maximize its long term profitability
What is the purpose of strategic control systems
- What are establish standards and targets - performance can be measured
- Create systems to monitor and measure performance on a regular basis
- Compare actual performance against the established targets
- Evaluate results and take corrective action if necessary
What is the balanced score card
Puts strategy and vision to establish goals and assumes that employees will adopt whatever behaviour and take whatever measures necessary to meet or exceed goals
What does the balance scorecard measure
- Customer perspective
- Internal perspective
- Innovation and learning perspective
- Financial perspective
What are positive incentive systems
Systems put in place to motivate employees to work towards goals that are central to maximize long term profits
What are ethics
Accepted principles of right or wrong that govern the conduct of a person
What are business ethics
Accepted principles of right and wrong governing the conduct of company employees
What are the laws govern
- Product liability
- Contract and breaches of contract
- Protection of intellectual property
- Competitive Behaviour
- Selling of securities
What are the different rights of stakeholders
- Stockholders: Timely and accurate information about their investment
- Customers: Be fully informed about the products and services they purchase
- Employees: Safe working conditions, fair compensations, treatment
- Competitors: Expect that the firm will abide by the rules of competition and not violate the basic principles of anti trust laws
- Communicate and the general public: Firm will not violate the basic expectations that society places on enterprises
What are ethical dilemmas
Situations where there is no agreement over what the accepted principles of right and wrong are
What is unethical behavior
Rises when managers decide to put the attainment other own personal or goals of the company
What are the main conflicts faced between the goals of the enterprise
Goals of individual managers vs the fundamental rights of important stakeholders that must be respected
What are examples of unethical behaviour
- Self dealing
- Information Manipulation
- Anti Competitive Behaviour
- Opportunistic exploitation
- Sustandard Working Conditions
- Environmental Degradation
- Corruption
What is self dealing
Managers find a way to feather their own nests with corporate monies
What is information manipulation
Managers use their control over corporate data to distort or hide information to enhance their financial situation
What is anti competitive behaviour
Covers range of actions aimed to harm actual or potential competitors by using monopoly power
What are the examples of anti competitive behaviour
- Predatory Pricing
- Price Fixing
- Dumping
- Dividing Territories
- Patent Abuse
- Rigging Bids
What are opportunistic exploitation
Unethical behaviour that is used by managers to unilaterally rewrite the terms of a contract with suppliers, buyers or complement providers in a way that favors the firm
What are exploitation
Managers seek unilaterally rewrite terms of contracts with buyers, suppliers or complement providers in a way that is favorable to the company often using their power to force a. revision to the contract
What are substandard working conditions
Managers underinvesting in safe working conditions or pay employees below market rates
What is environmental degradation
Companys action directly or indirectly results in pollution or other forms of environmental harm to violate the right of of local communities and general public
What is corruption
Rise when manager pay bribes to gain access to lucrative business contracts
What is bribery
Offering, promising, giving, accepting or soliciting an advantage as an inducement for an action which is illegal, unethical or breach of trust
What are personal ethics
Generally accepted principles of right and wrong governing the conduct of individuals
What are sources of not behaving ethically
- No personal ethics
- No incorporate ethical considerations
- Culture deemphasize business ethics and considers all decisions to be purely economic
- Pressure from top management
- Unethical Leadership
How do managers behave ethically
- Hire people with well grounded sense of personal ethics
- Make sure leaders walk the talk
- Build a culture that places high value on ethical behaviour
- Put decision making processes in place that consider ethical dimensions
- use ethical officers
- Put strong governance in place
- Act with moral courage
What are the code of ethics
Formal statement of the ethical priorities to which a business adheres
