Lecture 2: Corporate Governance and Social Responsibility

Moses Acquaah, Ph.D. 377 Bryan Building Phone: (336) 334-5305 Email: acquaah@uncg.edu

Lecture Objectives

By the end of this lecture, students should be able to:

Discuss the responsibilities and role of the board of directors in the strategic management (SM) process Explain the composition and recent trends in board of directorships Discuss the responsibilities & role of the top management in the SM process Explain the role of other strategic managers and employees in the SM process Discuss how corporate social responsibility affects the SM process

Strategic Management Responsibility: Corporate Governance Issues

The corporation is a mechanism established to allow different parties to contribute capital, expertise and labor for their mutual benefit.

Investors/Shareholders capital providers Management expertise & labor providers for running of company

Board of directors (BOD) elected by shareholders to protect their interest. Corporate governance relationship among BOD, management, and shareholders

The Role of Board of Directors

BOD Typical Responsibilities

Setting corporate strategy, overall direction , mission and/or vision Succession: Hiring, compensating and firing the CEO and top management Control: monitoring, evaluating, and/or supervising top management Reviewing and approving the use of organizational resources Caring for stockholders interest

In legal terms, BODs are required to direct the affairs of the corporation but not to manage them (act with due care).

The Role of Board of Directors

Role of BOD in the strategic management process

Monitor: Keep abreast of developments both outside & inside the company Bring to managements attention developments it might have overlooked. Evaluate and influence: Examine mgts proposals, decisions, & actions. Agree or disagree with them; give advice, offer suggestions & outline alternatives (if any). Initiate and determine: Delineate a companys mission & vision; and specify strategic options to management.

The Role of Board of Directors

Degree of involvement is dependent on extent to which it perform the three tasks:

Monitoring

(LOW LEVEL OF INVOLVEMENT) Evaluating and influencing (MEDIUM LEVEL OF INVOLVEMENT) Initiating and determining (HIGH LEVEL OF INVOLVEMENT) e.g., GM, Mead Corp.

BOD involvement is a continuum

The Role of Board of Directors

The BOD Continuum

Low Degree of involvement Evaluate & Influence (30%)
Involved in review of selected key decisions, indicators or programs of management Approve, question & makes final decisions on mission, objectives strategy & policies. Perform fiscal & mgt audits.

High

Monitor (40%)
Permit officers to make all decisions. Formally reviews selected issues Votes as officers recommend on actions.

Initiate & Determine (30%)

Take leading role in establishing & modifying mission, objectives, strategy & policies. Has very active strategic committees

Composition of Board of Directors

Most publicly-owned corporations are composed of

Inside

directors (management directors)

Officers & executives employed by the firm About 20%/60% in large/small US firms
Outside

directors

Executives of other firms but not employees of boards firm Can be affiliated to firm legal or insurance client, retired executive of firm, family, etc. About 80%/40% in large/small us firms

Composition of Board of Directors

Organization of Boards
Size

determined by firms charter & bylaws

Average size is 11/7 for large/small firms

Dual

designation of CEO and Chairman of Board held by 68% top executives in US

Outside director as lead director or chairman of board to top oversee & evaluate management Research shows firms that separate two positions perform better than those that combine two positions.

Recent Trends in Board of Directors

Increasing numbers of institutional investors (pension funds, etc) and other outsiders on the board Larger stock ownership by directors and executives; and A greater willingness of the board to balance the economic goal of profitability with the social needs of society

The Role of Top Management

Top management function is usually performed by CEO in coordination with

Chief

Operating Officer (COO) or President Chief Financial Officer (CFO) Chief Information Officer (CIO) Executive Vice Presidents (VPs) and VPs of divisions & functional areas

The Role of Top Management

Top management is primarily responsible for the strategic management of the firm
Responsible

for every decision & action of every organizational employee Responsible for providing effective strategic leadership Strategic leadership is the ability to anticipate, envision, maintain flexibility, think strategically, and work with others in an organization to initiate changes that will create a viable and valuable future for the organization

The Role of Top Management

The CEO, must perform two functions crucial to the SM of corporations:

Provide

executive leadership

Articulate a strategic vision for the firm Present a role for other to identify with and follow (e.g., behavior, attitude, values, etc) Communicate high performance standards & show confidence in followers abilities to meet these standards
Manage

the strategic planning process

Evaluate division/units to make sure they fit together into an overall corporate plan

The Role of Top Management

The whole top managements strategic leadership responsibilities involves

Determining

the firms mission, vision, and objectives Exploiting & maintaining the firms resources, core competencies & capabilities Creating & sustaining a strong organizational culture Emphasizing ethical decision & practices Establishing appropriately balance organizational control

The Role of Other Strategic Managers and Organizational Employees

Strategic Planners
Identify

& analyze company-wide strategic issues & suggest corporate strategic initiatives to top management Work as facilitators with divisions/units to guide then through the strategic planning process

The Role of Other Strategic Managers and Organizational Employees

Strategic Managers (Middle- & Lowerlevel managers) & Supervisors

Direct

their workers in the strategy implementation process (i.e., putting the strategies into action at various functional areas) Strategy evaluation

Other Employees
Strategy

evaluation through open book management

Sharing of firms books or F/S with employees to see implications of their work

Corporate Social Responsibility

The concept of social responsibility

Proposes

that a private firm has responsibilities to society that extend beyond making a profit Obligation of firm decision makers to make decisions & act in ways that recognize the interrelatedness of business & society. It recognizes the existence of various stakeholders and firms deal with them

Corporate Social Responsibility

Two Views of who are firms responsible to? (1) Traditional View (Milton Friedman)

There

is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud (M. Friedman, The Social Responsibility of Business is to Increase Profits, New York Times, (September 13, 1970: pp. 126-127)

Two Views of Who Firms are Responsible to

Traditional View (continued): By taking on the burden of social cost, the business becomes less efficient:
Prices

go up to pay for increased costs; or Investment in new activities & research is postponed

Firms are responsible to only their shareholders

Purely

economic reasoning

Two Views of Who Firms are Responsible to

(2) Modern View (Archie Carroll)

Social Responsibilities

Economic (Must Do)

Legal (Have to Do)

Ethical (Should Do)

Discretionary (Might Do)

Two Views of Who Firms are Responsible to

(2)Modern View (Archie Carroll)
Business

firms have four responsibilities

(a) Economic

Produce goods & services of value to society so that the firm may repay its creditors and stockholders Defined by governments in laws that management is expected to obey

(b) Legal

Two Views of Who Firms are Responsible to

Modern View (Continued) (c) Ethical

Follow generally held beliefs about how one should act in society
Work with employees & community in planning for layoffs, though no laws requiring this Many people expect firms to do these things

(d) Discretionary

Purely voluntary obligations a firm assumes

Philanthropic contributions, training hard-core unemployed, providing day-care centers, etc. Many people do not expect firms to do these things

Who are the Stakeholders of Firms?

Stakeholders are individuals, groups or institutions who have a stake in or are significantly influenced by an organizations decisions and actions

Shareholders Governments Political & social action groups Employees Customers Communities Suppliers Trade Associations