STRATEGIC MANAGEMENT & BUSINESS POLICY 13TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER Corporation: a mechanism established to allow different parties to contribute capital, expertise and labor for their mutual benefit Corporation is governed by the board of directors that oversees top management with the concurrence/agreement of the shareholders. Prentice Hall, Inc. ©2012 2-2 Corporate governance: the relationship among the board of directors, top management and shareholders in determining the direction and performance of the corporation Prentice Hall, Inc. ©2012 2-3 Due care: Board of directors are responsible that the corporation is not harmed by members of the board. Directors can be held liable Prentice Hall, Inc. ©2012 2-4 Responsibilities of the Board of Directors 1. Sets corporate strategy, overall direction, mission, or vision 2. Hires and fires the CEO and top management 3. Controls, monitors, or supervises top management 4. Reviews and approves the use of resources 5. Cares for shareholders’ interests 6. Assures that the corporation is managed in accordance with state laws, security regulations and conflict of interest situations Prentice Hall, Inc. ©2012 2-5 Role of the Board in Strategic Management • Monitor developments inside and outside the corporation • Evaluate and Influence management proposals, decisions and actions • Initiate and Determine the corporation’s mission and strategies Prentice Hall, Inc. ©2012 2-6 Board of Directors Continuum 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 7 Members of a Board of Directors Inside Directors are officers or executives employed by the board’s corporation Outside Directors are executives of other firms but are not employees of the board’s corporation Prentice Hall, Inc. ©2012 2-8 Members of a Board of Directors Affiliated directors- not employed by the corporation, handle legal or insurance work Retired executive directors- used to work for the corporation, partly responsible for past decisions affecting current strategy Family directors- descendents of the founder and own significant blocks of stock Prentice Hall, Inc. ©2012 2-9 Members of a Board of Directors Agency theory problems arise in corporations because top management is not willing to accept responsibility for their decisions unless they own a substantial amount of stock in the corporation. (Agent=manager) • Stewardship theory it suggests that executives tend to be more motivated to act in the best interests of the corporation than in their own self-interests. Stewardship theory focuses on the higher-order needs, such as achievement and self-actualization. • The theory argues that senior executives over time tend to view the corporation as an extension of themselves. Prentice Hall, Inc. ©2012 2-10 • Co-determination: Should Employees Serve on Boards? • Corporations such as Chrysler, Northwest Airlines, United Airlines (UAL), and Wheeling-Pittsburgh Steel added representatives from employee associations to their boards as part of union agreements or Employee Stock Ownership Plans (ESOPs). Prentice Hall, Inc. ©2012 2-11 A direct interlocking directorate • Occurs when two firms share a director or when an executive of one firm sits on the board of a second firm. • An indirect interlock occurs when two corporations have directors who also serve on the board of a third firm, such as a bank. Prentice Hall, Inc. ©2012 2-12 Interlocking Directorates- useful for gaining both inside information about an uncertain environment and objective expertise about potential strategies and tactics Direct interlocking directorate- when two firms share a director or when an executive of one firm sits on the board of a second Indirect interlocking directorate- when two corporations have directors who serve on the board of a third firm Prentice Hall, Inc. ©2012 2-13 Board of Directors Organization of the Board • Size – Determined by charter and bylaws • The average large, publicly held U.S. firm has 10 directors on its board. The average small, privately held company has 4-5 members. In Japan, 14; Non-Japan Asia, 9; Germany, 16; UK, 10; and France, 11. 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 14 Nomination and Election of Board Members 97% of U.S. boards use nominating committees to identify potential board members Staggered boards- only a portion of board members stand for re-election when directors serve more than one year terms Prentice Hall, Inc. ©2012 2-15 1. 2. 3. 4. 5. 6. 7. 8. 9. Nomination and Election of Board Members Criteria for a good director include: Willingness to challenge management when necessary Special expertise that is important to the company Available for outside meetings to advise management Expertise on global issues Understands the firm’s key technologies and processes Brings external contacts that are potentially valuable to the firm Has detailed knowledge of the firm’s industry Has high visibility in their field Is accomplished at representing the firm to stakeholders Prentice Hall, Inc. ©2012 2-16 Approximately 70% of the top executives of U.S. publicly held companies hold the dual/double designation of Chairman and CEO Prentice Hall, Inc. ©2012 2-17 Lead Director- is consulted by the Chair/CEO regarding board affairs and coordinates the annual evaluation of the CEO • 96% of U.S. companies that combine the Chairman and CEO positions had a lead director Prentice Hall, Inc. ©2012 2-18 Impact of the Sarbanes-Oxley Act on U.S. Corporate Governance Sarbanes Oxley Act 2002- designed to protect shareholders from excesses and failed oversight of boards of directors – Whistleblower procedures – Improved corporate Prentice Hall, Inc. ©2012 2-19 Impact of the Sarbanes-Oxley Act on U.S. Corporate Governance • Evaluating Governance – Rating agencies – S&P Corporate Governance Scoring System • Avoiding Governance Improvements – Multiple classes of stock – Public to private ownership – Controlled companies Prentice Hall, Inc. ©2012 2-20 Trends in Corporate Governance 1. Boards shaping company strategy 2. Institutional investors active on boards 3. Shareholder demands that directors and top management own significant stock 4. More involvement of non-affiliated outside directors 5. Increased representation of women and minorities 6. Boards evaluating individual directors 7. Smaller boards 8. Splitting the Chairman and CEO positions 9. Shareholders may begin to nominate board members 10. Society expects boards to balance profitability with social needs of society Prentice Hall, Inc. ©2012 2-21 Responsibilities of Top Management Executive leadership is the directing of activities toward the accomplishment of corporate objectives. Sets the tone for the entire corporation Strategic vision- description of what the company is capable of becoming Prentice Hall, Inc. ©2012 2-22 Responsibilities of Top Management Transformational Leaders provide change and movement in an organization by providing a vision for that change. Characteristics include: • CEO articulates a strategic vision for the corporation • CEO presents a role for others to identify with and to follow • CEO communicates high performance standards and also show confidence in the followers’ abilities to meet these standards Prentice Hall, Inc. ©2012 2-23 Managing the Strategic Planning Process Strategic planning staff- supports both top management and the business units in the strategic planning process Major responsibilities include: • Identifying and analyzing company-wide strategic issues, and suggesting corporate strategic alternatives to top management • Work as facilitators with business units to guide them through the strategic planning process Prentice Hall, Inc. ©2012 2-24 1. When does a corporation need a board of directors? 2. Who should and should not serve on a board of directors? 3. Should a CEO be allowed to serve on another company’s board of directors? 4. What would be the result if the only insider on a corporation’s board were the CEO? 5. Should all CEOs be transformational leaders? Would you like to work for a transformational leader? Prentice Hall, Inc. ©2012 2-25 Styles of Corporate Governance Degree of Involvement By top management High Entrepreneurship Partnership Management Management low Chaos Management Marionette Management Low High Degree of involvement by board of directors 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 26 Styles of Corporate Governance • Chaos Management • When both the board of directors and top management have little involvement in the strategic management process. • The board waits for top management to bring it proposals. • Top management is operationally oriented and continues to carry out strategies, policies, and programs specified by the founding entrepreneur who died years ago. • There is no strategic management being done here. 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 27 Styles of Corporate Governance • Entrepreneurship Management • A corporation with an uninvolved board of directors but a highly involved top management has entrepreneurship management. • The board is willing to be used as a rubber stamp for top management's decisions. • The CEO, operating alone or with a team, dominates the corporation and its strategic decisions. 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 28 Styles of Corporate Governance • Marionette\dummy Management • Probably the rarest form of strategic management style, • Marionette management occurs when the board of directors is deeply involved in strategic decision making, but top management is primarily concerned with operations. • Such a style evolves when a board is composed of key stockholders who refuse to delegate strategic decision making to the president. • This style also occurs when a board fires a CEO but is slow to find a replacement. • Marionette Management occurred at Winnebago Industries when the company's Board of Directors, chaired by its founder, 72-year-old John K. Hanson, took away Ronald Haugen's title as chief executive officer, but left him as company president. 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 29 Social Responsibility Broader responsibility: • Private corporation has responsibilities to society that extend beyond making a profit. 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 30 Social Responsibility Friedman’s Traditional View “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits…” 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 31 Social Responsibility Carroll’s Four Responsibilities • • • • Economic: produce goods and services of value to society. Legal: abide by law, avoid discrimination. Ethical: respect beliefs in society. Discretionary/flexible :pure voluntary obligations. 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 32 Responsibilities of Business 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 33 Social Responsibility Benefits Ben & Jerry’s Maytag •Environmental concerns may enable the firm to charge premium prices and gain brand loyalty •Trustworthiness may help generate enduring relationships with suppliers and distributors without spending time and money policing contracts Procter & Gamble •Can attract outstanding employees who prefer working for a responsible firm Rubbermaid •More likely to attract capital from investors who view reputable companies as desirable 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 34 Discussion • What is the relationship between corporate governance and social responsibility? The board of directors is in a unique position to view the corporation as a whole and to evaluate management's performance in terms of stakeholder criteria. Social Responsibility: Balancing Commitments to Stakeholders Stakeholders: Groups, individuals, and organizations that are directly affected by the practices of an organization Employees Customers 17 ، تموز31 Investors CORPORATION Local Communities Developed by Prof. Dr. Majed ElFarra Suppliers 36 Social Responsibility • • • • • • It refers to the way in which a business tries to balance its commitments to certain groups and individuals in its social environment. Customers: Treat customers fairly and honestly (Examples of companies with excellent reputations in this area: L.L. Bean, Nordstrom, Dell Computer Corporation) Employees: Treat employees fairly, with respect for their dignity and basic human needs (Examples of companies with excellent reputations in this area: 3M, Southwest Airlines) Investors: Manage financial resources honestly and openly Suppliers: Seek mutually beneficial partnerships Local Communities: Minimize damage and maximize contributions to local communities 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 37 Reasons for Unethical Behavior Moral Relativism – Morality is relative to some personal, social or cultural standard and that there is no method for deciding whether one decision is better than another. 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 38 Social Responsibility Kohlberg’s Levels of Moral Development – Preconventional Level – Concern for self – Conventional\conservative Level – Consideration of laws and norms – Principled Level – Adherence to internal moral code 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 39 Social Responsibility Code of Ethics: – Specifies how an organization expects its employees to behave while on the job. 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 40 What Is Ethical Behavior? Ethics: Right and wrong, good and bad, in actions that affect others. shaped by personal values and morals Ethical Behavior: Conforming to generally accepted ethical norms. Business ethics: Ethical or unethical behaviors of managers and employers of an organization. 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 41 Discussion • Identify examples of ethical and unethical business practices. – – 17 ، تموز31 Ethical Business Practices: Examples: Donating a percentage of profits to charity and community causes (Ben & Jerry’s donates 7-1/2% of pre-tax profits, and Levi Strauss donates 2.4% of pre-tax profits to a variety of causes), encouraging employees to engage in volunteer work using paid work-release time (Walt Disney’s VoluntEARS program), recycling (McDonald’s has a far-reaching environmental protection program). Unethical Business Practices: Examples: Forwarding “marketing research” results to sales people, excessive violence in video games, and of course all forms of illegal behavior (e.g. deliberately selling cigarettes to minors). Developed by Prof. Dr. Majed ElFarra 42 Assessing Ethical Behavior Approaches to Ethical Behavior – Utility: Does a particular act optimize the benefits to those who are affected by it? Do all relevant parties receive “fair” benefits? – Individual Rights: Does the act respect the rights of all individuals involved? – Justice: Is the act consistent with what’s fair? E.g., level of salary, working hours. – Caring: Is the act consistent with people’s responsibilities to each other? © 2009 Pearson Education, Inc. 43 Social Responsibility Approaches to Ethical Behavior • 17 ، تموز31 Categorical imperatives\crucial “golden rules” Not restrict others behavior Developed by Prof. Dr. Majed ElFarra 44 Responsibility Toward the Environment • Encompasses three main areas: 1. Air pollution 2. Water pollution 3. Land pollution – Toxic\deadly waste – Recycling 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 45 Responsibility Toward Customers Consumer Rights Unfair Pricing 17 ، تموز31 Ethics in Advertising Developed by Prof. Dr. Majed ElFarra 46 Responsibility Toward Employees • Legal and social commitments: Legally, companies are required to refrain from discrimination against any worker based on race, gender, religion, nationality or other irrelevant factors. Ethically, many people feel that companies should ensure that the workplace is physically and socially safe. • How far should companies extend themselves to help employees who are Developed by Prof. Dr. Majed El47 17 ،تموز 31 laid off? Farra Responsibility Toward Investors • • • Improper financial management: Offenses are typically unethical, rather than illegal. Examples include excessive salaries, and lavish\plentiful or frivolous perks\bonus (e.g. regular corporate “retreats” to exotic\interesting island resorts). Check kiting: • Responsibility towards investors has several components: • Illegal practice of writing checks against money that has not yet arrived at the bank on which it is drawn. Insider trading: Illegal practice of using confidential information to gain from the purchase or sale of stocks. Misrepresentation of finances: Typically, this takes the form of overly optimistic projections of earnings. • • • • 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 48 Review • What are the Carroll’s four social Responsibilities of companies? Is there a consensus on the concept of social responsibilities? What is the relationship between social responsibility and ethics? Try to be practical in your answer. 17 ، تموز31 Developed by Prof. Dr. Majed ElFarra 49 Discussion • Should all CEOs be transformation leaders? Would you like to work for a transformational leader? • According to the text, top management must successfully handle two responsibilities that are crucial to the effective strategic management of the corporation: (1) provide executive leadership and a strategic vision and (2) manage the strategic planning process. The successful CEOs often provide this executive leadership by taking on many of the characteristics of the transformation leader by communicating a clear strategic vision, demonstrating a strong passion for the company, and communicating clear directions to others. Such transformational leaders, like Bill Gates at Microsoft, Steve Jobs at Apple, and Anita Roddick at The Body Shop, are able to command respect and their employees. Developed by Prof. Dr. Majed El17 ،تموزenergize 31 Farra 50
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