CHAPTER 11

CORPORATE PERFORMANCE, GOVERNANCE, AND

BUSINESS ETHICS
STAKEHOLDERS AND
CORPORATE
Stakeholders: Individuals or groups
PERFORMANCE
with an interest, claim, or stake in the
company
Internal stakeholders: Stockholders and
employees, including executive officers,
other managers, and board members
External stakeholders: All other
individuals and groups that have some claim
on the company

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STAKEHOLDERS AND THE
ENTERPRISE

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RIGHTS OF STAKEHOLDERS
Stakeholders Rights
Timely and accurate information about their
Stockholders investments
Be fully informed about the products and services they
Customers purchase
Safe working conditions
Employees Fair compensation for the work they perform
Just treatment by managers
Suppliers Expect contracts to be respected
Expect that the firm will abide by the rules of
Competitors competition and not violate the basic principles of
antitrust laws
Communities and Expect that a firm will not violate the basic
the general public expectations that society places on enterprises

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STEPS IN STAKEHOLDER
IMPACT ANALYSIS
Identify stakeholders along with their
interests and concerns
Identify the probable claims of
stakeholders on the organization
Identify important stakeholders from
the organizations perspective
Identify the resulting strategic
challenges

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PROFITABILITY, PROFIT
GROWTH, AND STAKEHOLDER
CLAIMS
Stockholders receive a return on
investment from dividend payments and
capital appreciation in the market value of a
share
Ways to grow profits
Participating in a market that is growing
Taking market share from competitors
Consolidating the industry through horizontal
integration through mergers/acquisitions.
Development of new markets through
international expansion, vertical integration, or
diversification
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AGENCY THEORY
Deals with business relationship
problems when decision-making
authority is delegated from one person
to another

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PRINCIPLE-AGENT
RELATIONSHIPS
An agency relationship arises whenever
one party delegates decision making
authority or control over resources to
another.
The principal is the person delegating
authority, and the agent is the person to
whom authority is delegated.
Stockholder - Principal
CEO- Agent
OR CEO (Principal) and functional level
managers (agent).
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AGENCY PROBLEM
Agency Problem: Although agency relationships
often work well, problems may arise if agents
and principals have different goals and if agents
take actions that are not in the best interests of
their principals.
Agents may do this because of information
asymmetry.
Information asymmetry: Agent has more
information about the resources being managed
than the principal which is actually natural.
Laws for monitoring agents:
Codetermination law (Mitbestimmungsgesetz)
Securities and Exchange Commission (SEC)
Generally agreed-upon accounting principles (GAAP)
Detailed accounting statements.

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AGENCY PROBLEM
On-the-job consumption: Describes
the behavior of senior managements
use of company funds to acquire perks
(such as lavish offices, huge pay
increases, jets etc)
Empire building - Buying new
businesses to increase the size of the
company through diversification that
may result in growth without
profitability.
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CHALLENGES FOR PRINCIPALS
Shaping the agents behavior to act in
accordance with the goals set
Reducing the information asymmetry
Developing mechanisms for removing
agents who do not act in accordance
with the goals

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GOVERNANCE MECHANISMS
Used by principals to:
Reduce agency problem and align the
interests of agents with that of the
principals.
Monitor and control agents
Types
Board of directors
Stock-based compensation
Financial statements
Takeover constraint

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 BOARD OF DIRECTORS
The board of directors are directly elected by
the stockholders and they represent the interest of
the stockholders in the company.
Inside directors: Senior employees of the
company
Outside directors: Not full-time employees of the
company.
Responsibilities
Monitor and ensure corporate strategies with stockholder
interest
Sanction management
Hire/fire CEO
Ensure companys public financial statements are truthful

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FINANCIAL STATEMENTS AND
AUDITORS
Quarterly and annual reports of
publicly traded companies are filed
with the SEC
To give accurate information about the
way the agents run the company
SEC requires that the accounts be
audited by an independent and
accredited accounting firm
To make sure managers do not
misrepresent the financial information
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STOCK-BASED COMPENSATION
According to agency theory, one of the best
ways to reduce the scope of the agency
problem is for principals to establish
incentives for agents to behave in the
companys best interest through pay-for-
performance systems.
Senior Manager can be a strong shareholder
of the company.
Motivates managers to adopt strategies that
increase the share price of the company
Aligns management and stockholder interests

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TAKEOVER CONSTRAINT
stockholders still have some residual powerthey can
always sell their shares. If stockholders sell in large numbers,
the price of
the companys shares will decline.
At this point, the company may become an attractive
acquisition target and runs the risk of being purchased by
another enterprise, against the wishes of the target
companys management.
Take over constraint: Risk of being acquired by another
company
Corporate raiders - Purchase large blocks of shares in
companies that appear to be pursuing strategies inconsistent
with maximizing stockholder wealth
Greenmail: Pushing companies to either change their strategy to
benefit stockholders, or charging a premium for the stocks when the
company wants to buy them back
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TAKEOVER CONSTRAINT
Corporate raiders - Purchase large blocks
of shares in companies that appear to be
pursuing strategies inconsistent with
maximizing stockholder wealth
Greenmail: Pushing companies to either
change their strategy to benefit
stockholders, or charging a premium for
the stocks when the company wants to
buy them back

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GOVERNANCE MECHANISMS
INSIDE A COMPANY
Strategic control systems - Formal
target-setting, measurement, and
feedback systems
Establish standards and targets against
which performance can be measured
Create systems for measuring and
monitoring performance on a regular basis
Compare actual performance against the
established targets
Evaluate results and take corrective action if
necessary
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GOVERNANCE MECHANISMS
INSIDE A COMPANY
Employee incentives - Motivate
employees to work toward goals
central to maximizing long-term
profitability
ESOPs
Stock-option grants
Bonus pay

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ETHICS AND STRATEGY

Ethics

Accepted principles of right or wrong that govern the

conduct of a person, the members of a profession, or
the actions of an organization

Business ethics

Accepted principles of right or wrong governing the

conduct of businesspeople

Ethical dilemmas

Situations where there is no agreement over exactly

what the accepted principles of right and wrong are

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ETHICAL ISSUES IN STRATEGY
Due to potential conflict between:
Goals of the enterprise. (Discuss triple
bottom line approach)
Goals of individual managers (discuss about
how managers can leverage the hard work
of sub-ordinates to get promoted)
Fundamental rights of important
stakeholders. (discuss rights of customers,
suppliers, and employees).

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UNETHICAL BEHAVIOR ARISING FROM
AGENCY PROBLEMS
Self-dealing
consists of taking advantage of his position in a transaction and
acting for his own interests rather than for the interests of the
beneficiaries
Information manipulation
Managers use their control over corporate data to distort or hide
information (financial scandals, example of tobacco companies).
To enhance their own financial situation or the competitive
position of the firm
Anticompetitive behavior
Aimed at harming actual or potential competitors, most often by
using monopoly power to enhance the long-run prospects of the
firm. Example of Microsoft and their monopoly power.
Opportunistic exploitation
Managers rewriting the terms of a contract (with suppliers, buyers
or complement providers) to make it favorable to the firm
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EXAMPLES:
Self Dealing Example 1: Using your position in
the company to get your son a job.
Self Dealing Example 2: Using your position in
the company to secure a contract for a
particular business you own.
Example of information manipulation 1:
Tobacco harms human health was not
disclosed before.
Example of information manipulation 2: Enron
executives hid billions of dollars in debt from
failed deals and projects from their
shareholders.
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EXAMPLES:
Anti-Competitive Behavior Example: in the 1990s, the Justice
Department claimed that Microsoft used its monopoly in operating
systems to force PC makers to bundle Microsofts Web browser,
Internet Explorer, with the Windows operating system, and to display
the Internet Explorer logo prominently on the computer desktop.
Microsoft reportedly told PC makers that it would not supply them with
Windows unless they did this. Because the PC makers needed Windows
to sell their machines, this was a powerful threat. The alleged aim of
the action, which exemplifies tie-in saleswhich are illegal under
antitrust lawswas to drive a competing browser maker, Netscape, out
of business. The courts ruled that Microsoft was indeed abusing its
monopoly power in this case, and under a 2001 consent decree, the
company was forced to cease this practice.

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EXAMPLES:
Boeing entered into a $2 billion contract with Titanium Metals
Corporation to purchase certain amounts of titanium annually for 10
years. In 2000, after Titanium Metals had already spent $100 million
to expand its production capacity to fulfill the contract, Boeing
demanded that the contract be renegotiated, asking for lower prices
and an end to minimum purchase agreements. As a major
purchaser of titanium, managers at Boeing probably thought they
had the power to push this contract revision through, and Titaniums
investment meant that it would be unlikely that the company walk
away from the deal. Titanium promptly sued Boeing for breach of
contract. The dispute was settled out of court, and under a revised
agreement, Boeing agreed to pay monetary damages to Titanium
Metals (reported to be in the $60 million range) and entered into an
amended contract to purchase titanium. This action was arguably
unethical because it violated the suppliers rights to have buyers do
business in a fair and open way, regardless of any legality.

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UNETHICAL BEHAVIOR ARISING
FROM AGENCY PROBLEMS
Substandard working conditions
Managers underinvest in working conditions or pay employees
below-market rates
To reduce their production costs

Environmental degradation
Occurs when a companys actions directly or indirectly result in
pollution or other forms of environmental harm

Corruption
Can arise when managers pay bribes to gain access to lucrative
business contracts
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ROOTS OF UNETHICAL
BEHAVIOR
Personal ethics: Generally accepted
principles of right and wrong governing
the conduct of individuals
Failing to ask oneself if a decision is ethical
Some organizational cultures de-emphasize
business ethics and focuses on financial
bottom line.
Pressure to meet unrealistic performance
goals that leads employees to ethical
behavior.
Unethical leadership
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BEHAVING ETHICALLY
Favor hiring people who have a strong
sense of ethics.
Ethical standards should be a component
to evaluate promotion within a company.
Build an organizational culture that
places a high value on ethical behavior.
Code of ethics: Formal statement of the
ethical priorities to which a business adheres.
Ensure that leaders practice and preach
ethical behavior

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UNILEVERS CODE OF ETHICS
Unilevers code of ethics includes the following
points:
We will not use any form of forced, compulsory
or child labor and No employee may
offer, give or receive any gift or payment which
is, or may be construed as being, a bribe. Any
demand for, or offer of, a bribe must be rejected
immediately and reported to management.
Unilevers principles send a very clear message
to managers and employees within the
organization.

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BEHAVING ETHICALLY
Ensure people consider the ethical
dimension of business decisions:
employees should have a strong moral
compass in their decision making.
Use ethics officers: they are officers who
audit decisions and also make employees
aware of business ethics.
Put strong governance processes in place:
with a board of directors holding senior
managers accountable for ethical behavior.
Act with moral courage
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UNILEVERS CODE OF ETHICS
FOCUSES ON MORAL COURAGE
Any breaches of the Code must be reported in
accordance with the procedures specified by the
Joint Secretaries. The Board of Unilever will not
criticize management for any loss of business
resulting from adherence to these principles and
other mandatory policies and instructions. The
Board of Unilever expects employees to bring to
their attention, or to that of senior management,
any breach or suspected breach of these principles.
Provision has been made for employees to be able
to report in confidence and no employee will suffer
as a consequence of doing so

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