CHAPTER

12

Corporate Governance,
Business Ethics, and
Strategic Leadership

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Part 3 Strategy Implementation

122

LO 12-1 Describe and evaluate the relationship between

strategic management and the role of business in
society.
LO 12-2 Conduct a stakeholder impact analysis.
LO 12-3 Critically evaluate the relationship between corporate
social performance (CSR) and competitive advantage.
LO 12-4 Describe the role of corporate governance and
evaluate
different governance mechanisms.
LO 12-5 Describe and evaluate the relationship between business
strategy and ethics.
LO 12-6 Describe the different roles that strategic leaders play
and how to become a strategic leader.
123

ChapterCase 12 HPs CEO Mark Hurd Resigns

amid Ethics Scandal

Mark Hurd
CEO of HP after Carly Fiorina
Low profile, no-nonsense, strategy execution forte

Highly successful
Increasing market shares for computers and printers
Stock rose 110% (well above that of NASDAQ)

2010 sexual harassment scandal

Forced to resign

With $45 million severance package

Hired by Oracle
124

Strategic Management and the

Role of Business in Society
The public stock company is the backbone
of our economy.
Four characteristics of public firms:
Limited liability for investors
Transferability of investor interest
Legal personality
Separation of ownership and control

125

EXHIBIT 12.1

The Public Stock Company: Hierarchy of

Authority

126

Strategic Management and the

Role of Business in Society
21st century already two financial crises
Accounting scandals: Enron, WorldCom, Tyco
Global financial crisis: real estate bubble burst

Lessons
Managerial actions affect economy

Ethical business produces wealth but unethical practices destroy it

Stakeholder management is needed

127

EXHIBIT 12.2

Honesty and Ethics Ranking of Different

Professions

On

5%
1
ly

es
v
i
t
cu
e
x
e
h
g
hi
of

How would you rate the honesty and ethical standards

of people in different fields?
128

EXHIBIT 12.3

Stakeholder Impact Analysis

129

EXHIBIT 12.4

The Pyramid of Corporate Social

Responsibility

1210

LO 12-1 Describe and evaluate the relationship between strategic

management and the role of business in society.
LO 12-2 Conduct a stakeholder impact analysis.
LO 12-3 Critically evaluate the relationship between corporate social
performance (CSR) and competitive advantage.
LO 12-4 Describe the role of corporate governance and evaluate
different governance mechanisms.
LO 12-5 Describe and evaluate the relationship between business strategy
and ethics.
LO 12-6 Describe the different roles that strategic leaders play and how to
become a strategic leader.

1211

Corporate Social Responsibility

Milton Friedman circa 1962:
the only social responsibility of business is

to increase profits so long as it stays within

the rules of the game

Todays businesses tend to do more than just

making profits
But does CSR help build competitive advantage?
The answer might depend on where you do

business
UAE,

Japan, and India are less interested in CSR

China,

Brazil, and Germany are more interested in CSR

1212

EXHIBIT 12.5

Global Survey of Attitudes toward

Business

At least somewhat agree that

the social responsibility of business is increasing profits
1213

Corporate Social Responsibility

Shared value-creation framework
Expand customer base and bring in non-consumers
Expand internal firm value chains by including more

non-traditional partners such as NGOs

Focus on creating new regional clusters

GE recognizes a convergence between

shareholders and stakeholders

Empirical evidence supports that

firms can do well ($) by doing good (CSR)
1214

Corporate Governance
Corporate governance represents the
relationship among stakeholders that is used to
determine and control the strategic direction and
performance of organizations.

Agency costs are the sum of incentive costs,

monitoring costs, enforcement costs, and
individual financial losses incurred by principals
because it is impossible to use governance
mechanisms to guarantee total compliance by
the agent.
1215

Corporate Governance
Corporate governance
Mechanisms to direct and control a firm
Ensure the pursuit of strategic goal
Address the principalagent problem

When corporate governance failed

Accounting scandal
Global financial crisis
Bernard Madoff Ponzi scheme

Information asymmetry
Insider information ImClone and Galleon Group
1216

Corporate Governance
Agency theory
Views a firm as a nexus of legal contracts
Relationships among shareholders, managers, and hierarchies
Firms need to design work tasks

Adverse selection
Misrepresentation of a job

Beyond his/her ability to do things

Moral hazard
Difficulty to ascertain whether the

agent gives his/her best

1217

Agency Problems
Berle and Means in The Modern Corporation
inquired whether we have any justification
assuming that those in control of a modern
corporation will also choose to operate it in the
interests of the stockholders? (1932: p. 121)

for

What are the institutions of capitalism which

lessen the problem of the separation of (shareholder) ownership (the risk-bearing principals)
from control (managerial decision-making
agents)?
1218

Agency Problems
What are the institutions of capitalism that lessen the
problem of the separation of ownership from control?
1.
2.
3.
4.
5.

Takeovers (the market for corporate control);

Recruitment of executives from outside the firm;
Monitoring by boards of directors;
Compensation heavily weighted toward stock options;
Monitoring by institutional investors;
6. Debt (minimize free cash flow; e.g., LBOs);
7. Separate Chairperson and CEO; and
8. Internal control of Multidivisional
--- miniature capital market

Board of Directors
Centerpiece of corporate governance
Inside and outside directors
General strategic oversight and guidance

Selecting, evaluating, and compensating the CEO

Overseeing CEO succession plan

Recently problematic at both HP and Apple

Providing guidance on executives and their compensation

Reviewing, monitoring, and approving strategic initiatives

Conducting a risk assessment and mitigation

Ensuring a firms audited financial statements

Ensuring a firms compliance with laws and regulations

1220

STRATEGY
STRATEGY HIGHLIGHT
HIGHLIGHT 12.1
12.1

GEs Board of
Directors

Diversity of GEs board of directors (17 members)

Business, academia, politicians

4 women, 2 ethnic minorities

15 board members are independent outside directors

Less likely to fall victim to groupthink

Organized into committees to function

The separation of CEO/Board Chair duality

Due to recent global financial crisis

121

Other Governance Mechanisms

Executive compensation
Stock options
Performance-oriented compensation in recent years

The market for corporate control

External governance mechanism
Hostile takeover
Corporate raiders and hedge funds

Auditors, government regulators, and industry

analysts
Wall Street Journal, Bloomberg Businessweek, Forbes
Credit rating agencies
CEO Compensation
Dan Ariely Video

1222

Corporate Governance Around the World

Difference in national institutions and culture
Free market economies?
State-directed capitalism (less freedom). Ex: China
Free market capitalism (more freedom). Ex: U.S.

Germany
Stakeholder capitalism
Kurzarbeit

France
Stakeholder capitalism

China
State-owned enterprises
1223

LO 12-1 Describe and evaluate the relationship between strategic

management and the role of business in society.
LO 12-2 Conduct a stakeholder impact analysis.
LO 12-3 Critically evaluate the relationship between corporate social
performance (CSR) and competitive advantage.
LO 12-4 Describe the role of corporate governance and evaluate
different governance mechanisms.
LO 12-5 Describe and evaluate the relationship between business
strategy and ethics.
LO 12-6 Describe the different roles that strategic leaders play and
how to become a strategic leader.

1224

EXHIBIT 12.7

Roles that Strategic Leaders

Play

1225

EXHIBIT 12.8

Strategic Leaders: The Level 5

Pyramid

1226