Stakeholders, the Mission, Governance, and Business Ethics
Stakeholders, the Mission, Governance, and Business EthicsChapter 2 2012 South-Western, a part of Cengage LearningWho Are Stakeholders?StakeholdersIndividuals or groups with an interest, claim, or stake in the company and how well it performsAnyone in an exchange relationship with the company
2012 South-Western, a part of Cengage Learning2Strategy and StakeholdersSuccessful strategies consider their key constituencies that impact the functioning and ultimate survival of the company.Corporate GovernanceMechanisms to monitor managers making sure they pursue strategies in the interest of shareholders
2012 South-Western, a part of Cengage Learning3Internal StakeholdersInternalStockholders EmployeesManagersSenior ExecutivesBoard members 2012 South-Western, a part of Cengage Learning4External StakeholdersAll other individuals and groups with some claim on the company such as:Customers and suppliersCreditorsGovernmentsUnionsLocal communitiesGeneral public 2012 South-Western, a part of Cengage Learning5External StakeholdersCustomersSuppliersCreditorsGovernmentsUnionsLocal CommunitiesGeneral publiccontributionThe CompanyInternal Stakeholders:StockholdersEmployeesManagersSenior ExecutivesBoard memberscontributioninducementinducement 2012 South-Western, a part of Cengage LearningWhy Consider Stakeholders?Stakeholders are key to the success of companyIf their claims are not considered, stakeholders withdraw supportStakeholders are in an exchange relationship with the company, therefore the company would not function as well if they lost the support
2012 South-Western, a part of Cengage Learning7Impact AnalysisThe impact analysis helps companies decide what stakeholders are most critical to survival.Steps of an Impact Analysis:Identify stakeholdersIdentify their interests and concernsIdentify what claims they are likely to makeIdentify most important stakeholdersIdentify the resulting strategic challengesMost companies find that customers, employees, and stockholders are most important stakeholders 2012 South-Western, a part of Cengage Learning8The Mission StatementPurpose: To establish the guiding principles for strategic decision makingIncludes 4 main elements:The MissionThe VisionValuesGoal of the CorporationThe mission statement is a key indicator of how an organization views the claims of stakeholders.
2012 South-Western, a part of Cengage Learning9It answers the following questions:What is our business?Who is being satisfied (what customer groups)What is being satisfied (what customer needs)How customer needs are being satisfied(what skill, knowledge, or competencies)
The Mission Statement 2012 South-Western, a part of Cengage LearningThe MissionDescribes what the company doesCan be product oriented:Focus on the product the company producesCan be customer oriented:Focus on satisfying customers needsExample: Kodak focuses on providing imaging solutions to customers, instead of focusing on the products that the company produces
2012 South-Western, a part of Cengage Learning11Figure 2.2- defining the business
12 2012 South-Western, a part of Cengage LearningThe VisionIt is the desired future state of a company.Tells what the company would like to achieve Intended to stretch a company by articulating its ambitions. Meant to be an attainable goal that will motivate employees 2012 South-Western, a part of Cengage Learning13ValuesTell how managers and employees should conduct themselves. How they should do business.Establishes the basis of the organizational cultureOrganizational culture is the set of values, norms, and standards that control how employees work to achieve an organizations mission and goalsOrganizational culture is an important source of competitive advantage 2012 South-Western, a part of Cengage Learning14Major GoalsMost companies operate with goals of profitability and profit growth. Problems arise when managers overemphasize profit growth. Some companies tend to cut costs to increase short term profits, but the cuts can be detrimental to the company in the long run. 2012 South-Western, a part of Cengage Learning15Characteristics of Well Constructed GoalsPrecise and MeasurableAddress Crucial IssuesChallenging but RealisticSpecify a Time Period
2012 South-Western, a part of Cengage Learning16Corporate Governance and StrategyStockholders are the provider of Risk capitalRisk capital- stockholder equity with no guarantee of profit or even recoverAgency relationship- whenever one party delegates decision-making authority or control over resources to another personStockholders delegate control to agentsStockholders Agents = ManagersPrincipal- the person delegating authorityAgent- person to whom authority is delegated
2012 South-Western, a part of Cengage Learning17 The Agency ProblemIt offers a way of understanding why managers do not always act in the best interest of stakeholders.As agents for stockholders, managers should pursue strategies that maximize long run return for stockholdersManagers sometimes pursue strategies that are not in the interest of stockholdersAgency Theory offers an explanation for this behaviorInformation asymmetry exists between the agent and the principal, because the agents almost always have more information
2012 South-Western, a part of Cengage Learning18Poor Business EthicsEarly 2000s:Scandals swept the corporate worldFrom 2001-2004 accounting scandals unfolded at a number of major corporations, including Enron, World Com, Tyco, Computer Associates, Health South, Adelphia Communications, Dynergy, Royal Dutch Shell, and the major Italian food company, Parmalat.
2012 South-Western, a part of Cengage Learning19Ethical Issues (2000s contd)Self-interest seeking by senior executives- The accounting fraud masked massive debts and overcompensated top management.Failure of corporate governance mechanisms- Fraudulent activities were not exposed internally
2012 South-Western, a part of Cengage LearningEthics in StrategyEthical Issues:Self DealingInformation ManipulationAnti-Competitive BehaviorOpportunistic ExploitationEnvironmental DegradationCorruption 2012 South-Western, a part of Cengage Learning21Accepted principles of right and wrong that are govern the conduct of a person, the behavior of members of a profession or the actions of an organizationEthicsAccepted principles of right or wrong governing the conduct of business peopleBusiness EthicsSituations where there is no agreement over exactly what the accepted principles of right and wrong are, or where none of the available alternatives seems ethically acceptableEthical DilemmasOccurs when managers find a way to feather their own nests with corporate duesSelf-Dealing22Ethics and Strategy 2012 South-Western, a part of Cengage LearningRoot of Unethical BehaviorA lack of separation between ones business ethics and personal ethicsFailure to ask relevant questionsPurely economical organizational culturePressure from top managersUnethical behavior by company leadersIt is not what leaders preach that matters most, rather the example they set by their actions 2012 South-Western, a part of Cengage Learning23Monitoring ManagersGovernance MechanismPurpose is to monitor agents, evaluate their performance, and take corrective action to reduce the scope and frequency of agency problemsGoal is to align stockholder and management interests 2012 South-Western, a part of Cengage Learning24Governance MechanismsFour Main Types:Board of Directors- members elected by shareholders to make sure business decisions are in the shareholders best interestStock-based Compensation- Pay-for-performance systems to reward ethical managers
2012 South-Western, a part of Cengage Learning25Governance Mechanisms (Types contd)Financial Statements- reports that give consistent, detailed, and accurate information about how efficiently and effectively the company is run The Takeover Constraint- The risk of being taken over by another company
2012 South-Western, a part of Cengage LearningEthical ConsiderationHiring and Promotions The act of hiring employees whose ethical principles are in line with the companys ethics.Organizational CultureThe culture within the business that should explicitly articulate ethical values and place a strong emphasis on ethical behavior. 2012 South-Western, a part of Cengage Learning27Ethical Consideration (contd)Organizational LeadershipOnce these values are explicated, it is important that leaders give life and meaning to these words by acting upon them.Ethical OfficersIndividuals responsible for making sure employees are trained to be ethically aware and that ethical considerations enter the business decision making process. 2012 South-Western, a part of Cengage Learning28Ethical Consideration (contd)Strong Corporate GovernanceRules that are established to make sure that managers adhere to ethical norms, and in particular, to make sure that senior managers do not engage in self-dealing or information manipulation.Moral CourageCourage that enables managers to walk away from a decision that is profitable, but unethical.
2012 South-Western, a part of Cengage Learning
