Corporate Governance: CSR, Ethics and Strategy Flashcards
Definition Corporate Governance
The set of mechanisms is used to manage relationships among stakeholders and to determine and control the strategic direction and performance of organizations.
- Law, standards, and common practices vary across countries. Important to serve all of them
Essential to
- prevent overdiversification
- preventing empire-building for managerial motives
Separation Ownership vs. managerial control
Basis of the modern corporation
- Shareholders purchasing stock and becoming residual claimants
- Reduce risk by holding diversified portfolios
- Professional managers are contracted to provide decision making
Efficient specialization of tasks
- risk-bearing by shareholders
- decision making by managers
Key conceps of Corporate Governance
Ownership Concentration: relative amounts of stock owned by individual shareholders and institutional investors
>strong incentive to monitor mgmt. Closely
Board of Directors: Individuals resposible for representing the firms owners by monitoring top-level managers strategic decision
Executive compensation: The use of salary, bonuses and long-term incentives to align managers’ interests with shareholders’ interests
Market for corporate control: the purchase of a firm that is underperforming relative to industry rivals in order to improve its strategic competitveness
Agency Problem
- Principal (Shareholder) and agent (managers) have divergent interests and goals
Difficult to verify and monitor that agents behave appropriately and the managers do not behave opportunistically for the principal
Managerial Opportunism: Behavior that prevents maximization of shareholder wealth.
The solution to the agency problem
- Ownership concentration:
- large block shareholders
- influence of institutional owners
- Shareholder activism - Board of Directors:
Group of elected individuals that formally monitor and control the firm’s top-level executives
Has the power to:
- direct affairs of the organization
- punish and reward managers
- protect owners
Composed of insiders, related outsiders, and outsiders
Criticism is that they too readily approve, they have personal ties and that they are not vigilant enough
Enhance the board with more diversity, internal management, formal processes, a “lead director” role, and a change in the compensation.
- Executive Compensation
- Forms include salary, bonuses, stock options or awards
- Factors complicating: complex and non-routine tasks over an extended period
With stock options come unintended consequences: Now not the size but the performance is important
- Market for corporate control
- Individuals or firms take over undervalued firms due to ineffective management. This threat leads to more effective operations.
A takeover can be defended by
- asset restructuring
- change the financial structure of the firm
- shareholder approval
CSR, Ethics and Strategy
CSR: The actions of a firm to benefit society beyond the requirements of law and the direct interest of the firm. Operating business in a manner that meets or exceeds ethical, legal etc. expectations
Ethics: Study of morality and standards of conduct. Moral principles and values that govern the behavior of people, firms and governments
Corruption: The abuse of power to achieve illegitimate personal gain.
Framework pyramid see slides
> Complying with law and regulation
> Ethical Behavior
> CSR
Stakeholder Theory
Corporation operates to serve a broader purpose to create value for society. All stakeholder groups must be considered and so other kinds of value beyond profit can be generated
Should firms engage in CSR and why
Milton Friedman says that the only purpose of a firm is to generate profits within the rules of the game.
Why would engage then:
- Do good, moral obligation
- license to operate
- reputation
- redeem yourself for past
- insure for future
- improve performance
- strengthen brand
Four cases where CSR could be taken into action
- Profitable investment opportunity
- Focus on a niche where customers pay extra
- To maintain a good relationship
- Pursue societal or environmental goals
Mixed evidence whether it pays off or not.
CSR and Strategy
->can be a source of innovation, opportunity, and competitive advantage
- Looking inside out - assess value chain and determine all the social consequences
- Looking outside in - assess social dimensions of the company’s competitive context
Can be a mean for differentiation
International Strategy: Different Expectations across borders
Credible commitment to CSR
CSR is often seen with the cynicism of green washing making up for past mistakes. It is difficult to show real commitment.
“What does this commitment tell you about your past?”
Greenwashing: companies try to make itself or its goods sound more eco-friendly or environmentally safe
Good Example: B-Corporations
Obstacles to CSR
Goals and incentives like profit-making sometimes push bad behavior
Peer pressure or self-interest
Lower standards from third parties
Unethical behavior accumulates in the firm slowly over time
Means justify the outcome
What are B corporations?
a profit company that pledges to achieve social goals as well as business goals
Award, that Corporation receive that stick to CSR practices
