Business Ethics and Corporate Governance

Business Ethics and Corporate Governance

Outline

• The Corporation

• Ethics

• Corporate Boards: A Multi-Dimensional Ethics Approach

• The Future

The Corporation

Defining the Corporation

• A corporation:

– Is a legal entity that produces and/or distributes goods and services

– Issues stock (shares of ownership)– Provides owners limited liability for corporate

actions– Is designed to create wealth

Private and Public Corporations

• Private Corporation– Ownership is usually

held by a few and shares are not traded on the open market.

– Owners decide to whom they sell shares in the company, and for what price

• Public Corporation– Ownership (shares)

traded on the open market, such as Korean Stock Market and the New York Stock exchange

– The company does not control trading or price

Focus on Pubic Companies

Corporate Structure (US Model)

• Management– CEO, President, CFO,

COO, and senior management team determine and implement strategy

• Board of Directors– Chair, Board Members

are or represent owners• Auditing Committee• Compensation Committee• Other Committees

– For example, Microsoft has an Ethics Committee

– Ensure that Management is using owner money well

Corporate Structure (US Model): A New Business Function

• Management– CEO, President, CFO,

COO, and senior management team determine and implement strategy

• Corporate Ethics Program– Reports to:

• VPs• Board of Directors

• Board of Directors– Chair, Board Members

are or represent owners• Auditing Committee• Compensation Committee• Other Committees

– For example, Microsoft has an Ethics Committee

– Ensure that Management is using owner money well

Stakeholders

• Stakeholders are individuals or groups that influence or are affected by corporate activities.– Board of Directors, management, owners– Business partners– Current and retired employees, and their families– Suppliers– Lenders– Customers– Government – Communities where business operates and sells

• Regions, Nations, Cities• The Globe (Some environmental issues are global)

Who Should Boards Represent?

• Owners, of course: the traditional view • Should they also represent:

– Former and Current employees, and their families?– Business Partners– Suppliers?– Lenders?– Customers?– Government? – Communities where business operates and sells?– The environment?

• Ethics helps us answer these questions

Ethics

Defining Ethics

• Ethics is the study and practice of – How to live a good life– How to build good families and communities

• But what is good life, and what is good relationship, family, and community?

• We can start with – The individual or – The family/community

An Ethic Based on Individuals

• Individuals:– Have equal political rights– Deserve to be treated fairly– Have the right to live as they want, as long as they do

not harm the rights of others• This includes the right to live badly

• A good society is one that treats individuals fairly and protects their rights. This requires:– Efficient, non-corrupt government and business– A clean, non-toxic environment

An Ethic Based on Relationships, Family and Community

• Relationships, Families, and Communities require– Loyalty– Honor– Friendship– Humility– Self-sacrifice– A clean, non-toxic environment

• A good individual has the qualities that promote stable, long-lasting relationships, families, and communities.

Different Countries

• What is the ethical base of

– The United States?

– Korea?

– Other countries?

Two Hypotheses

1. Countries that focus too much on one ethic will get in trouble

– Focus on individualism alone will encourage people to get as much for themselves as they can, harming other people’s rights and the environment.• Recent corporate scandals in U.S.

– Focus on family/community will encourage people to follow traditions that do not work in changing times, harming families and communities• “Lifetime employment” practices in some cultures

2. A healthy, sustainable culture needs to integrate the two ethics Use the strengths of each to oppose the weaknesses of each

A Multi-Dimensional Ethic

• A Multi-Dimensional Ethic will:– Protect individuals and encourage individual

development– Promote strong families and friendships– Build a politically and economically strong country

(region, globe?)– Be fair and just– Protect the environment . . . And create wealth

• A Multi-Dimensional Ethic is the only path to long-term sustainable wealth creation

Ethical Corporate Boards

Multi-Dimensional Ethics

Ethical Responsibilities of Corporate Boards

• Traditional U.S. view– The owners have property

rights in the company.– Boards are ethically

responsible to make sure the owners property rights are protected.

– Other stakeholders should be considered only if they affect the property rights of owners

• Owner Based Multi-Dimensional View– The board has a special

role to represent owners– The board has general

duties not to harm other stakeholders, and when possible to promote their interests.

• Balanced Multi-Dimensional view– The board should

represent all stakeholders equally

The Future

A New Stakeholder Environment

• Non-Owner Stakeholders are getting more power– Civil Society Organizations (CSOs)

• Green Peace, and environmental group• Educate 4 Justice, a labor rights group

– Governments and Inter-Governmental Organizations

– Business Industry Groups– UN Global Compact

• A Network of CSOs, governments, businesses, and academics

Winning in the New Stakeholder Environment

• Traditional US view creates hostility in stakeholders and hinders wealth creation

• Balanced Multi-Dimensional view will hinder wealth creation

• Owner Based Multi-Dimensional view is the most sustainable alternative.

Trends in Corporate Boards

• The U.S. is moving toward an Owner Based Multi-Dimensional View– Individual based

• Europe has an Owner based Multi-Dimensional view– Individual and Group based

• Asia has an Owner Based Multi-Dimensional view– Relationship and group based

• Globalization will push each toward the others.

Globalization and Corporate Boards: A Prediction

• The quality of corporate boards is important when evaluating risks of investment, contracts, joint ventures, and other corporate activities

• The world business and financial community will put pressures on corporations to standardize Board structure and oversight

• Cultural differences will make the Owner Based Multi-Dimensional approach the best sustainable alternative.