MGT699_week13.pptx

Distinguished Professor Michael Parfett
School of Business
Chapter 12- Corporate Governance and
Business Ethics
You don’t have to be good to play hard
Nothing without joy
Today’s my best day!
School of Business
Stevens Institute of Technology
Hoboken NJ

School of Business
The AFI Strategy Framework

School of Business
Distinguished Professor Michael Parfett 3

“A fast-track risk-
management
transformation to
counter the COVID-19
crisis”
By: Javier Martinez Arroyo

Main Idea
Banks strive to reduce
complications and costs driven by
increased regulations and emerging
risks.
5

What is the problem?
▸ The pandemic has significantly impacted risk management
controls that relied upon in-person interactions
▸ Work-from-home (WFH) for employes also impacted
internal risk management and created challenges to
monitor existing risks and new ones including cybersecurity
▸ Risk management operating costs could increase 10-30
percent
6

Roadblock to improving risk management
▸ Risk managers have to
track threats to remote
environment
▸ Government-directed
moratoriums on loan
collections
▸ All of this cut into top
line revenues
▸ Increased regulations
and enforcement
▸ More digital channels
and tools
▸ Increased reliance on
3rd party tools & cloud
computing
▸ Banks with strongest risk operations have 10-15% less full
time equivalent employees than their less effective
counterparts do.
7

““...to win in the next normal, the risk-
management function must make
itself more efficient and effective---
something high-performing risk
organizations have already done.”
8

How to redefine risk management practices?
▸ redesign underwriting to streamline processes
and add automated ones
▸ enhance monitoring
▸ optimize and automate reporting
▸ improve processes for reporting financial crimes
▸ streamline the market-risk operating model
▸ make other changes by taking a big-picture look
at risk management’s overall organization,
governance, and performance management
9

How to update risk management practices in the
short-term
▸ With a solid implementation
plan, risk managers can
create an infrastructure that
will say how exactly the
work will be done
▸ Regular check ins &
delivery milestones
▸ Track cost reductions
▸ Check organization’s cost
base & workforce to see if
there are processes that are
using too much money &
compare to other institutions
▸ Workshops
▸ Observe employees &
speak to risk managers to
see how efficiently work is
being done
▸ Create implementation plan
10

““Yet risk managers can take
a number of steps that yield
high-impact results in far less
time.”
11

SWOT Analysis
12
STRENGTHS
● More customers
● Raise in customer
satisfaction
● Models = more
efficient
WEAKNESSES
● A year + to
implement
● Large drastic
changes by digitizing
● Bank = high level
of service +
availability
● Benefit from
COVID-19
OPPORTUNITIES
● Customer concerns
● Transferring information
● Process not carried out
THREATS

Porter’s 5 Forces
Threats of
New
Entrants
After time,
changes may
threaten the
model
Threat of
Substitutes
Other models
are not as
efficient as this
new one
Competitive
Rivalry
Those using
the new tactics
will outcompete
others that are
slower
13
B.P. of the
Suppliers
Control of
people’s
market/money
and have
customer loyalty
B.P. of the
Consumers
Multiple options,
can easily
choose another
bank
LOW LOW LOW HIGH HIGH

School of Business
Learning Objectives
1. Describe the shared value creation framework and its
relationship to competitive advantage.
2. Explain the role of corporate governance.
3. Apply agency theory to explain why and how companies
use governance mechanisms to align interests of
principals and agents.
4. Evaluate the board of directors as the central governance
mechanism for public stock companies.
5. Evaluate other governance mechanisms.
6. Explain the relationship between strategy and business
ethics.

The Shared Value Creation Framework
• Provides guidance to managers.
• Helps reconcile gaining and sustaining competitive
advantage with corporate social responsibility.
• Creates a larger “pie” to benefit shareholders and
stakeholders.

School of Business
The Public Stock Company:
Hierarchy of Authority

Hemingway
Today is only one day in all the days
that will ever be. But what will happen
in all the other days that ever come
can depend on what you do today.
quoting Ernest Hemingway’s For Whom the Bell Tolls

School of Business
Milton Friedman’s Philosophy
“The social responsibility of business is to increase
its profits.”
A survey was created:
For the (degreed) top 25% of income earners
To assess various countries
To inquire whether they agree with Milton
Friedman
The results…

School of Business
Global Survey of Attitudes toward Business
Responsibility
 Exhibit 12.2
 Source: Depiction of data from Edelman’s, Trust Barometer, 2011 as included in
“Milton Friedman goes on tour,” The Economist, (2011, Jan. 27).

Creating Shared Value
● Executives shouldn’t concentrate only on
increasing firm profits.
● Rather, they should focus on creating shared
value.
● Economic value (for shareholders).
● Social value (address society’s needs and
challenges).
• Societal progress is important.
• Capitalism helps shape society.

Reconnecting Economic and Societal Needs
1. Expand the customer base to bring in
nonconsumers.
2. Expand traditional internal firm value chains to
include non-traditional partners.
3. Focus on creating new regional clusters (such as
Silicon Valley).

School of Business
Corporate Governance
 The mechanisms to:
 Direct and control an enterprise
 Ensure that it pursues strategic goals successfully and
legally
 Offers checks and balances
 Attempts to address the principal-agent problem

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The Principal-Agent Problem

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Agency Theory
A theory that views the firm as a nexus of legal
contracts
Conflicts that arise should be resolve legally.
The firm needs to design work tasks, incentives,
and employment contracts.
To minimize opportunism by agents

School of Business
Responsibilities of the Board of
Directors
Strategic oversight and guidance
CEO selection, evaluation, compensation
Oversight of CEO succession
Guide executive compensation
Review, monitor, evaluate, and approve strategic
initiatives
Such as large acquisitions
Risk assessment & mitigation

School of Business
Used to align incentives between principals and
agents.
Include:
1.Executive compensation.
2.The market for corporate control.
3.Financial statement auditors, government
regulators, and industry analysts.
Other Mechanisms to Align Incentives
Between Principals & Agents

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Ethics, Corporate Social
Responsibility
37

School of Business
What Is Ethics?
Ethics refers to accepted principles of right or
wrong that govern
 the conduct of a person
 the members of a profession
 the actions of an organization
Business ethics are the accepted principles of right
or wrong governing the conduct of business people
Ethical strategy is a strategy, or course of action,
that does not violate these accepted principles
38

School of Business
When Facing an Ethical Dilemma
Is the action within acceptable norms of
professional behavior?
• As outlined in the organization’s code of conduct.
• As defined by the profession at large.
Would you feel comfortable explaining and
defending the decision in public?
• How would the media react?
• How would the company’s stakeholders feel about it?

School of Business
Bad Apples vs. Bad Barrels
Bad Apples
Individuals who act opportunistically
Bad Barrels
An unethical organizational climate
To set the ethical tone, leaders must:
Set clear ethical expectations
Put structure, culture and control systems in
place
Culture must be aligned
Executive behavior must adhere to values

© McGraw Hill
The MBA Oath
As a business leader I recognize my role in society.
My purpose is to lead people and manage resources
to create value that no single individual can create
alone.
My decisions affect the well-being of individuals inside
and outside my enterprise, today and tomorrow.
Therefore, I promise that:
I will manage my enterprise with loyalty and care, and will not advance
my personal interests at the expense of my enterprise or society.
I will understand and uphold, in letter and spirit, the laws and
contracts governing my conduct and that of my enterprise.
I will refrain from corruption, unfair competition, or business practices
harmful to society.
I will protect the human rights and dignity of all people affected by my
enterprise, and I will oppose discrimination and exploitation.
I will protect the right of future generations to advance their standard
of living and enjoy a healthy planet.
I will report the performance and risks of my enterprise accurately and
honestly.
I will invest in developing myself and others, helping the management
profession continue to advance and create sustainable and inclusive
prosperity.
In exercising my professional duties according to these principles, I
recognize that my behavior must set an example of integrity, eliciting
trust and esteem from those I serve. I will remain accountable to my
peers and to society for my actions and for upholding these standards.
This oath I make freely, and upon my honor.
Exhibit 12.4
Developed by Harvard
Business School students:
• Helps anchor future managers
to professional values.
• A guideline for integrity in
business.
Source: MBA Oath and Max
Anderson.

School of Business
Which Ethical Issues Are Most
Relevant to International Firms?
The most common ethical issues in business involve
1. employment practices
2. human rights
3. environmental regulations
4. corruption
5. the moral obligation of multinational companies
44

School of Business
Environmental Pollution
The Chinese capital of Beijing is considered one of the
worst cities in the world for smog, with residents often
forced to wear masks outdoors.

School of Business
How Are Ethics Relevant to
Moral Obligations?
 Social responsibility refers to the idea that managers should
consider the social consequences of economic actions when
making business decisions, and that there should be a
presumption in favor of decisions that have both good economic
and good social consequences
 it is the right way for a business to behave
 Advocates argue that businesses need to recognize their
noblesse oblige - honorable and benevolent behavior that is the
responsibility of successful companies
 give something back to the societies that have made their success
possible
 But, are multinationals morally required to use their power to
enhance local welfare?
46

School of Business
What Are Ethical Dilemmas?
 Ethical dilemmas are situations in which none of the available
alternatives seems ethically acceptable
 real-world decisions are complex, difficult to frame, and involve
consequences that are difficult to quantify
 The ethical obligations of a multinational corporation toward
employment conditions, human rights, corruption, environmental
pollution, and the use of power are not always clear cut
 The right course of action is not always clear
47

School of Business
When Facing an Ethical
Dilemma
Is the action within acceptable norms of
professional behavior?
As outlined in the organization’s code of conduct
As defined by the profession at large
Would you feel comfortable explaining and
defending the decision in public?
How would the media react?
How would the company’s stakeholders feel
about it?

School of Business
Class Discussion
Suppose a British manager pays a Saudi prince 1% of the contract he
helps negotiate in the Kingdom of Saudi Arabia.
Did the British manager acted ethically? What is your reasoning?
A US law firm has box seats at all the major professional games
(baseball, hockey, basketball) . The partners take their prospective
clients to these games, wine and dine them, and play golf together
at the firm’s expense at posh courses.
In ethical terms, what are the differences in these behaviors?
Do cultural differences influence responses?
49

School of Business
Why Do Managers Behave Unethically?
Determinants of Ethical Behavior
53

School of Business
What are the Straw Men
Approaches to Business Ethics?
 There are four common straw men approaches
1. Friedman doctrine - the only social responsibility of business is to increase
profits, so long as the company stays within the rules of law
2. Cultural relativism - ethics are culturally determined and firms should adopt
the ethics of the cultures in which they operate
 “when in Rome, do as the Romans do”
3. Righteous moralist - a multinational’s home country standards of ethics
should be followed in foreign countries
4. Naïve immoralist - if a manager of a multinational sees that firms from other
nations are not following ethical norms in a host nation, that manager should
not either
 All approaches offer inappropriate guidelines for ethical decision making
54

School of Business
55
A Little Picture
Foudy at Fare and Shear
Foudy is a sales person for Fare and Shear, stockbrokers. He has been
instructed to recommend the bonds of Electric Power Company to his
customers because the brokerage firm is carrying a very heavy
inventory of these bonds. Foudy does not believe the bonds are a
good investment under present circumstances, given his forecast of
rising interest rates, and increasing bankruptcy risk for Electric Power
Company. He is very reluctant to recommend the bonds. The
brokerage firm has increased the sales commissions on the bonds,
making them more attractive for sales persons to sell than any other
product. Foudy decides to follow the company directive and
recommend the bonds.
 What is your opinion of Foudy’s actions?

School of Business
56
Student Reactions to Case
Fare and Shear Case
0 20 40 60 80 1
00
Strongly
Approve
Approve
Undecided
Disapprove
Strongly
Disapprove
N umb er o f R esp o nses

School of Business
64
Will some simple questions
help?
 Always ask: how will my choice impact the larger communities of
which my company is a part?
 Shareholders
 Other stakeholders
 Country
 World society of human beings

School of Business
Distinguished Professor Michael Parfett 66

School of Business
CHAPTER 12
Corporate Governance and
Business Ethics
SUPPLEMENTAL Material

School of Business
Chapter Case 12: Uber (1 of 3)
 The most valuable private start-up ever
 Offers cab-hailing service via an app
 Their unethical, perhaps illegal, activity generated
controversy
 Uber’s beginning
 Started by two tech entrepreneurs
 Record breaking growth:
 Successfully expanded both in the United States and
globally to more than 500 cities in 70 countries
 Revenue growth:
 $400 million in 2014 to $8 billion in 2017

School of Business
 Ethically challenged?
 Uber is pushing the envelope of what is acceptable,
ethical, and even legal with all its stakeholders.
 Regulators, government, drivers, journalists,
competitors
 Primary issues, among others:
 Disregard for laws and regulations
 Dynamic pricing: supply & demand vs. price gouging?
 Competitive tactics: ordering rides from competitors,
then canceling them
 Allegations of harassment and discrimination

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 In 2017 the CEO stepped down
 The company’s reputation was faltering
 Uber was considered it’s worst competitor
 Due to the actions of executives
 Has Uber embraced ethical standards required to operate
as a large company?

School of Business
Chapter Case 12: Consider
This… (1 of 2)
 Will the CEO’s departure help Uber develop a more
ethical and grounded corporate culture?
 Current issues to consider:
 The CEO has already had much influence
 Uber is experiencing issues all over the globe
 Investors may not allow Uber to cut ethical corners
 Uber has had to deal with an exodus of talent
 Is car ownership no longer needed due to Uber?
 Will ride prices go down when Uber uses autonomous
vehicles?

School of Business
Chapter Case 12: Consider
This… (2 of 2)
 Have you used a ride service like Uber? If so, how was
your experience?
 What is Uber’s business model / strategic intent?
 Is Uber “the most ethically challenged company in Silicon
Valley”?
 Some observers had argued that Uber’s greatest problem
was not any of its scandals, but its CEO Travis Kalanick.
Now that Kalanick no longer serves that role, is Uber off?

School of Business
Strategy Highlight 12.1: GE’s
Board of Directors
 Role: to oversee how management serves the interests of
shareholders and stakeholders
 GE’s board consists of:
 Members of companies, academia, and government
 18 members, organized into four committees
 They meet about 12 times annually
 28% of the board are women (more than usual)
 Larger companies should have greater gender diversity.
 Diverse boards are less likely to have groupthink.

School of Business
Strategy Highlight 12.2:
Goldman Sachs
 In 2010, the SEC sued the company and an employee, named
Fabrice Tourre, for fraud
 The response by the Justice Department: mild?
 The bank mislead investors
 Is it only up to clients to assess risk?
 Goldman Sachs ended up paying $550M to settle the lawsuit,
but did not admit wrongdoing.
 Tourre was convicted of fraud
 He was the only member of management charged
 NY Journalist wrote a book
 “Why the Justice Department Fails to Prosecute
Executives.”

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Implications for Strategic
Leaders

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Corporate Governance
Mechanisms
 Intertwined with business ethics
 Can be effective in addressing the principal–agent
problem
 Tend to focus on monitoring, controlling, and providing
incentives
 Must be complemented by:
 A strong code of conduct
 Strategic leaders who act with integrity
 Encourage employees to “walk the talk”

School of Business
The Strategist Must
 Needs to apply a stakeholder perspective
 To ensure long-term survival and success of the firm
 Fairness and transparency are critical
 Ensure management remains professional
 Organizational values
 Codes of conduct
 Lead by an ethical example

School of Business
Exercises

School of Business
My Strategy Exercise: Gen Y
Workforce
 This generation:
 Has received more individual attention (small classes)
 Grew up through an explosion of technology
 May expect higher pay, flexible schedules, promotions
 Seeks frequent feedback & accommodation
 Questions to answer:
 Will this hold a new set of business ethics?
 Does the MBA oath reflect a new approach Gen Y will
take to the business environment?

School of Business
Small Group Exercise #1
 Research competitors of Uber:
 Lyft: targets college students headed home
 Didi Chuxing: ride hailing service in China
 Questions to answer:
 What similarities and differences do you find in the way
these firms have implemented sometimes similar
ideas?
 Why are traditional taxi companies attempting to
prohibit these services vs. implementing their own app-
calling systems?

School of Business
Small Group Exercise #2
 PepsiCo has been contracting directly with small
farmers in impoverished areas
 Farmers in 15 countries provide potatoes, corn,
sunflower oil
 Output is up 160% and farmer incomes have tripled
 This program has reduced the amount of imports
 Group discussion:
 What are the benefits of this program for PepsiCo? What are
its drawbacks?
 What other societal benefits could such a program have in
Mexico?
 If you were a PepsiCo shareholder, would you support this
program? Why or why not?

School of Business
Take Away Concepts (1 of 6)
 LO 12-1 Describe the shared value creation framework and
its relationship to competitive advantage.
• By focusing on financial performance, many
companies have defined value creation too narrowly.
• Companies should instead focus on creating shared
value, a concept that includes value creation for both
shareholders and society.
• The shared value creation framework seeks to identify
connections between economic and social needs, and
then leverage them into competitive advantage.

School of Business
 LO 12-2 Explain the role of corporate governance.
• Corporate governance involves mechanisms used to
direct and control an enterprise in order to ensure that
it pursues its strategic goals successfully and legally.
• Corporate governance attempts to address the
principal–agent problem, which describes any
situation in which an agent performs activities on
behalf of a principal.

School of Business
 LO 12-3 Apply agency theory to explain why and how
companies use governance mechanisms to align interests
of principals and agents.
• Agency theory views the firm as a nexus of legal contracts.
• The principal–agent problem concerns the relationship between owners
(shareholders) and managers and also cascades down the
organizational hierarchy.
• The risk of opportunism on behalf of agents is exacerbated by
information asymmetry: Agents are generally better informed than the
principals.
• Governance mechanisms are used to align incentives between principals
and agents.
• Governance mechanisms need to be designed in such a fashion as to
overcome two specific agency problems: adverse selection and moral
hazard.

School of Business
 LO 12-4 Evaluate the board of directors as the central
governance mechanism for public stock companies.
• The shareholders are the legal owners of a publicly traded company and
appoint a board of directors to represent their interests.
• The day-to-day business operations of a publicly traded stock company
are conducted by its managers and employees, under the direction of the
chief executive officer (CEO) and the oversight of the board of directors.
The board of directors is composed of inside and outside directors, who
are elected by the shareholders.
• Inside directors are generally part of the company’s senior management
team, such as the chief financial officer (CFO) and the chief operating
officer (COO).
• Outside directors are not employees of the firm. They frequently are
senior executives from other firms or full-time professionals who are
appointed to a board and who serve on several boards simultaneously.

School of Business
 LO 12-5 Evaluate other governance mechanisms.
• Other important corporate mechanisms are executive compensation, the market
for corporate control, and financial statement auditors, government regulators, and
industry analysts.
• Executive compensation has attracted significant attention in recent years. Two
issues are at the forefront: (1) the absolute size of the CEO pay package
compared with the pay of the average employee and (2) the relationship between
firm performance and CEO pay.
• The board of directors and executive compensation are internal corporate-
governance mechanisms. The market for corporate control is an important
external corporate-governance mechanism. It consists of activist investors who
seek to gain control of an underperforming corporation by buying shares of its
stock in the open market.
• All public companies listed on the U.S. stock exchanges must file a number of
financial statements with the Securities and Exchange Commission (SEC), a
federal regulatory agency whose task it is to oversee stock trading and enforce
federal securities laws. Auditors and industry analysts study these public financial
statements carefully for clues of a firm’s future valuations, financial irregularities,
and strategy.

School of Business
 LO 12-6 Explain the relationship between strategy and
business ethics.
• The ethical pursuit of competitive advantage lays the foundation
for long-term superior performance.
• Law and ethics are not synonymous; obeying the law is the
minimum that society expects of a corporation and its managers.
• A manager’s actions can be completely legal, but ethically
questionable.
• Some argue that management needs an accepted code of
conduct that holds members to a high professional standard and
imposes consequences for misconduct.

School of Business
Key Terms
 Adverse selection
 Agency theory
 Board of directors
 Business ethics
 CEO/chairperson duality
 Corporate governance
 Inside directors
 Leveraged buyout (LBO)
 Moral hazard
 Outside directors
 Poison pill
 Shared value creation
framework
 Shareholder capitalism
 Stock options

School of Business
Strategy Smart Videos (1 of 7)
 INSEAD
 Turning around Tyco: How Corporate Governance Saved
the Day
 Part 1 Link:
 http://www.youtube.com/watch?v=xUFKEvRvHK0
 10:05 Minutes

School of Business
 INSEAD
 Corporate Governance Comes of Age
 Link:
 http://www.youtube.com/watch?v=jxB81KaDyRw
 7:14 Minutes
 An INSEAD professor discusses the inflation of CEO pay
particularly in the U.S.

School of Business
 Milton Friedman – Greed
 An excerpt from an interview with Phil Donahue in 1979
 Link:
 http://www.youtube.com/watch?v=RWsx1X8PV_A
 2:24 Minutes

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 What Is Corporate Governance?
 Link:
 http://www.investopedia.com/video/play/corporate-
governance/
 1:36 Minutes

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[one percent] of the story – 1% for the Planet film
Network of companies that give 1% of sales to
environmental causes
 Link:
http://www.youtube.com/watch?v=4tsCyh9Uhn0
15:04 Minutes

School of Business
Michael Porter
The case for letting business solve social problems
Link:
http://www.ted.com/talks/michael_porter_why_bu
siness_can_be_good_at_solving_social_problem
s.html
16:28 Minutes

School of Business
Alex Edmans
The social responsibility of business
Link:
https://www.youtube.com/watch?time_continue=
79&v=Z5KZhm19EO0
17:25 Minutes

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