Strategic Management and
Business Policy 15e
Chapter 2
Corporate
Governance
15e
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Learning Objectives
2-1 Describe the role and responsibilities of the board of
directors in corporate governance
2-2 Explain how the composition of a board can affect
its operation
2-3 Describe the impact of the Sarbanes–Oxley Act on
corporate governance in the United States
2-4 Discuss trends in corporate governance
2-5 Explain how executive leadership is an important
part of strategic management
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2-2
Role of the Board of Directors (1 of 2)
• Corporation
– a mechanism established to allow different
parties to contribute capital, expertise and labor
for their mutual benefit
• The corporation is fundamentally governed by the
board of directors overseeing top management,
with the concurrence of the shareholders.
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2-3
Role of the Board of Directors (2 of 2)
• Corporate governance
– refers to the relationship among the board of
directors, top management, and shareholders
in determining the direction and performance of
the corporation
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2-4
Responsibilities of the Board (1 of 2)
1. Effective board leadership including the
processes, makeup, and output of the board
2. Strategy of the organization
3. Risk vs. initiative and the overall risk profile of
the organization
4. Succession planning for the board and top
management team
5. Sustainability
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2-5
Responsibilities of the Board (2 of 2)
• Due care
– the board is required to direct the affairs of the
corporation but not to manage them
• If a director or the board as a whole fails to act
with due care and, as a result, the corporation is in
some way harmed, the careless director or
directors can be held personally liable for the
harm done.
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2-6
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 specify strategic options
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2-7
Figure 2-1: Board of Directors’ Continuum
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2-8
Board of Directors Composition
(1 of 4)
• Inside Directors
– typically officers or executives employed by the
corporation
• Outside Directors
– may be executives of other firms but are not
employees of the board’s corporation
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2-9
Board of Directors Composition
(2 of 4)
• Agency theory
– states that problems arise in corporations
because the agents (top management) are not
willing to bear responsibility for their decisions
unless they own a substantial amount of stock
in the corporation
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2-10
Board of Directors Composition
(3 of 4)
• Stewardship theory
– proposes that, because of their long tenure
with the corporation, insiders (senior
executives) tend to identify with the corporation
and its success
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2-11
Board of Directors Composition
(4 of 4)
• 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
– descendants of the founder and own significant blocks
of stock
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2-12
Codetermination: Should Employees
Serve on Boards? (1 of 3)
• Codetermination
– the inclusion of a corporation’s workers on its
board
– began only recently in the United States
• Although the movement to place employees on
the boards of directors of U.S. companies shows
little likelihood of increasing, the European
experience reveals an increasing acceptance of
worker participation on corporate boards.
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2-13
Codetermination: Should Employees
Serve on Boards? (2 of 3)
• 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
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2-14
Codetermination: Should Employees
Serve on Boards? (3 of 3)
• Interlocking directorates
– useful for gaining both inside information about
an uncertain environment and objective
expertise about potential strategies and tactics
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2-15
Nomination and Election of Board
Members (1 of 2)
• 97% of large U.S. corporations use nominating
committees to identify potential board members
• Staggered boards
– only a portion of board members stand for reelection when directors serve more than oneyear terms
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2-16
Nomination and Election of Board
Members (2 of 2)
Main reasons individuals serve on a board:
• Interested in the business—79%
• Make a difference—65%
• Stay active in business community—50%
• Recruited by friend on the board—25%
• Compensation—14%
• Networking opportunities—11%
• Notoriety/prestige—9%
• Recruited by friend, not on the board—4%
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2-17
Organization of the Board (1 of 4)
• The size of a board in the United States is
determined by the corporation’s charter and its bylaws, in compliance with state laws.
• Although some states require a minimum number
of board members, most corporations have quite a
bit of discretion in determining board size.
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2-18
Organization of the Board (2 of 4)
• The average large, publicly held U.S. firm has ten
directors on its board.
• The average small, privately-held company has
four to five members.
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2-19
Organization of the Board (3 of 4)
• Lead director
– 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.
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2-20
Organization of the Board (4 of 4)
• The most effective boards accomplish much of
their work through committees.
• Although they do not usually have legal duties,
most committees are granted full power to act with
the authority of the board between board
meetings.
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2-21
Impact of the Sarbanes-Oxley Act on
U.S. Corporate Governance
• Sarbanes Oxley Act
– designed to protect shareholders from
excesses and failed oversight of boards of
directors
– whistleblower procedures
– improved corporate financial statements
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2-22
Evaluating Governance
S&P Corporate Governance Scoring System
researches four major issues:
1. Ownership structure and influence
2. Financial stakeholder rights and relations
3. Financial transparency and information
disclosure
4. Board structure and processes
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2-23
Avoiding Governance Improvements
• Multiple classes of stock
• Public to private ownership
• Controlled companies
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2-24
Trends in Corporate Governance
(1 of 2)
• Boards shaping company strategy
• Institutional investors active on boards
• Shareholder demands that directors and top
management own significant stock
• More involvement of non-affiliated outside
directors
• Increased representation of women and minorities
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2-25
Trends in Corporate Governance
(2 of 2)
• Boards evaluating individual directors
• Smaller boards
• Splitting the Chairman and CEO positions
• Shareholders may begin to nominate board
members
• Society expects boards to balance profitability with
social needs of society
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2-26
The Role of Top Management
• Top management responsibilities
– getting things accomplished through and with
others in order to meet the corporate objectives
– multidimensional and oriented toward the
welfare of the total organization
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2-27
Executive Leadership and
Strategic Vision (1 of 3)
• Executive leadership
– directs 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
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2-28
Executive Leadership and
Strategic Vision (2 of 3)
• Transformational leaders
– leaders who provide change and movement in
an organization by providing a vision for that
change
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2-29
Executive Leadership and
Strategic Vision (3 of 3)
Three key characteristics of effective
CEOs:
1. Articulate a strategic vision for the corporation.
2. Present a role for others to identify with and
follow.
3. Communicate high-performance standards and
also show confidence in the followers’ abilities to
meet these standards.
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2-30
Managing the Strategic Planning
Process (1 of 2)
• Strategic planning staff
– charged with supporting both top management
and the business units in the strategic planning
process
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2-31
Managing the Strategic Planning
Process (2 of 2)
Strategic planning staff responsibilities
include:
1. Identify and analyze company-wide strategic
issues, and suggest corporate strategic
alternatives to top management
2. Work as facilitators with business units to guide
them through the strategic planning process
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2-32
Strategic Management and
Business Policy 15e
Chapter 3
Social Responsibility
and Ethics in
Strategic
Management
Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved.
Learning Objectives
3-1 Discuss the relationship between social
responsibility and corporate performance
3-2 Explain the concept of sustainability
3-3 Conduct a stakeholder analysis
3-4 Explain why people may act unethically
3-5 Describe different views of ethics according to
the utilitarian, individual rights, and justice
approaches
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3-2
Social Responsibilities of Strategic
Decision Makers
• Social responsibility
– proposes that a private corporation has
responsibilities to society that extend beyond
making a profit
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3-3
Friedman’s Traditional View of
Business Responsibility
• Argues against the concept of social responsibility.
• Primary goal of business is profit maximization not
spending shareholder money for the general
social interests.
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3-4
Carroll’s Four Responsibilities
of Business (1 of 2)
1. Economic responsibilities
– produce goods and services of value to society
so that the firm may repay its creditors and
increase the wealth of its shareholders
2. Legal responsibilities
– defined by governments in laws that
management is expected to obey
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3-5
Carroll’s Four Responsibilities
of Business (2 of 2)
3. Ethical responsibilities
– follow the generally held beliefs about behavior
in a society
4. Discretionary responsibilities
– purely voluntary obligations a corporation
assumes
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3-6
Figure 3-1: Responsibilities of Business
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3-7
Responsibilities of a Business Firm
• Social capital
– the goodwill of key stakeholders, that can be
used for competitive advantage
– opens doors in local communities
– enhances reputation with consumers
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3-8
Benefits of Being Socially
Responsible
• May enable firm to charge premium prices and
gain brand loyalty
• May help generate enduring relationships with
suppliers and distributors
• Can attract outstanding employees
• More likely to be welcomed into a foreign country
• Can utilize the goodwill of public officials for
support in difficult times
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3-9
Characteristics of Sustainability
• Environmental
• Economic
• Social
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3-10
Corporate Stakeholders
• Stakeholders
– have an interest in the business and affect or
are affected by the achievement of the firm’s
objectives
• Enterprise strategy
– an overarching strategy explicitly articulating
the firm’s ethical relationship with its
stakeholders
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3-11
Stakeholder Analysis (1 of 4)
• Stakeholder analysis
– the identification and evaluation of corporate
stakeholders
– usually done in a three-step process
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3-12
Stakeholder Analysis (2 of 4)
• The first step in stakeholder analysis is to identify
primary stakeholders.
• Primary stakeholders
– those who have a direct connection with the
corporation and who have sufficient bargaining
power to directly affect corporate activities
– include customers, employees, suppliers,
shareholders, and creditors
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3-13
Stakeholder Analysis (3 of 4)
• The second step in stakeholder analysis is to
identify the secondary stakeholders.
• Secondary stakeholders
– have an indirect stake in the corporation but
are also affected by corporate activities
– includes NGOs, activists, local communities,
trade associations, competitors, and
governments
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3-14
Stakeholder Analysis (4 of 4)
• The third step in stakeholder analysis is to
estimate the effect on each stakeholder group
from any particular strategic decision.
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3-15
Stakeholder Input
• Once stakeholder impacts have been identified,
managers should decide whether stakeholder
input should be invited into the discussion of the
strategic alternatives.
• A group is more likely to accept or even help
implement a decision if it has some input into
which alternative is chosen and how it is to be
implemented.
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3-16
Reasons for Unethical Behavior
• Unaware that behavior is questionable
• Lack of standards of conduct
• Different cultural norms and values
• Behavior-based or relationship-based governance
systems
• Different values between business people and
stakeholders
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3-17
Moral Relativism (1 of 3)
• Moral relativism
– claims that morality is about some personal,
social, or cultural standard and that there is no
method for deciding whether one decision is
better than another
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3-18
Moral Relativism (2 of 3)
• Naïve relativism
– based on the belief that all moral decisions are
deeply personal and that individuals have the
right to run their lives
• Role relativism
– based on the belief that social roles carry with
them certain obligations to that role
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3-19
Moral Relativism (3 of 3)
• Social group relativism
– based on a belief that morality is simply a
matter of following the norms of an individual’s
peer group
• Cultural relativism
– based on the belief that morality is relative to a
particular culture, society, or community
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3-20
Kohlberg’s Levels of Moral
Development
1. Preconventional level
– concern for one’s self
2. Conventional level
– considerations for society’s laws and norms
3. Principled level
– guided by an internal moral code
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3-21
Encouraging Ethical Behavior (1 of 3)
• Code of Ethics
– specifies how an organization expects its
employees to behave while on the job
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3-22
Encouraging Ethical Behavior (2 of 3)
A code of ethics:
1. Clarifies company expectations of employee
conduct in various situations
2. Makes clear the company expects its people to
recognize the ethical dimensions in decisions
and action
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3-23
Encouraging Ethical Behavior (3 of 3)
• Whistleblowers
– employees who report illegal or unethical
behavior on the part of others
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3-24
Views on Ethical Behavior (1 of 5)
• Ethics
– the consensually accepted standards of behavior
for an occupation, trade, or profession
• Morality
– one’s rules of personal behavior based on religious
or philosophical grounds
• Law
– the formal codes that permit or forbid certain
behaviors and may or may not enforce ethics or
morality
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3-25
Views on Ethical Behavior (2 of 5)
• Utilitarian approach
– proposes actions and plans should be judged
by their consequences
• Individual rights approach
– proposes human beings have certain
fundamental rights that should be respected in
all decisions
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3-26
Views on Ethical Behavior (3 of 5)
• Justice approach
– decisions must be equitable, fair, and impartial
in the distribution of costs and benefits to
individuals or groups
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3-27
Views on Ethical Behavior (4 of 5)
Cavanagh’s questions to solve ethical problems:
1. Utility: Does it optimize the satisfactions of the
stakeholders?
2. Rights: Does it respect the rights of the
individuals involved?
3. Justice: Is it consistent with the canons of
justice?
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3-28
Views on Ethical Behavior (5 of 5)
Kant’s categorical imperatives
1. Actions are ethical only if the person is willing for
the same action to be taken by everyone who is
in a similar situation.
2. Never treat another person simply as a means
but always as an end.
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3-29
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