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пятница, 16 февраля 2024 г.

Mastering Strategic Management. Chapter 10. Leading an Ethical Organization: Corporate Governance, Corporate Ethics, and Social Responsibility

 


LEARNING OBJECTIVES

After reading this chapter, you should be able to understand and articulate answers to the following questions:

  1. What are the key elements of effective corporate governance?
  2. How do individuals and firms gauge ethical behavior?
  3. What influences and biases might impact and impede decision making?

TOMS Shoes: Doing Business with Soul

Under the business model used by TOMS Shoes, a pair of their signature alpargata footwear is donated for every pair sold.

In 2002, Blake Mycoskie competed with his sister Paige on The Amazing Race—a reality show where groups of two people with existing relationships engage in a global race to win valuable prizes, with the winner receiving a coveted grand prize. Although Blake’s team finished third in the second season of the show, the experience afforded him the opportunity to visit Argentina, where he returned in 2006 and developed the idea to build a company around the alpargata—a popular style of shoe in that region.

The premise of the company Blake started was a unique one. For every shoe sold, a pair will be given to someone in need. This simple business model was the basis for TOMS Shoes, which has now given away more than one million pairs of shoes to those in need in more than twenty countries worldwide.Oloffson, K. 2010, September 29. In Toms’ Shoes: Start-up copy “one-for-one” model. Wall Street Journal. Retrieved from http://online.wsj.com/article/SB1000142405274870411 6004575522251507063936.html

The rise of TOMS Shoes has inspired other companies that have adopted the “buy-one-give-one” philosophy. For example, the Good Little Company donates a meal for every package purchased.Nicolas, S. 2011, February. The great giveaway. Director64, 37–39. This business model has also been successfully applied to selling (and donating) other items such as glasses and books.

The social initiatives that drive TOMS Shoes stand in stark contrast to the criticisms that plagued Nike Corporation, where claims of human rights violations, ranging from the use of sweatshops and child labor to lack of compliance with minimum wage laws, were rampant in the 1990s.McCall, W. 1998. Nike battles backlash from overseas sweatshops. Marketing News9, 14. While Nike struggled to win back confidence in buyers that were concerned with their business practices, TOMS social initiatives are a source of excellent publicity in pride in those who purchase their products. As further testament to their popularity, TOMS has engaged in partnerships with Nordstrom, Disney, and Element Skateboards.

Although the idea of social entrepreneurship and the birth of firms such as TOMS Shoes are relatively new, a push toward social initiatives has been the source of debate for executives for decades. Issues that have sparked particularly fierce debate include CEO pay and the role of today’s modern corporation. More than a quarter of a century ago, famed economist Milton Friedman argued, “The social responsibility of business is to increase its profits.” This notion is now being challenged by firms such as TOMS and their entrepreneurial CEO, who argue that serving other stakeholders beyond the owners and shareholders can be a powerful, inspiring, and successful motivation for growing business.

This chapter discusses some of the key issues and decisions relevant to understanding corporate and business ethics. Issues include how to govern large corporations in an effective and ethical manner, what behaviors are considered best practices in regard to corporate social performance, and how different generational perspectives and biases may hold a powerful influence on important decisions. Understanding these issues may provide knowledge that can encourage effective organizational leadership like that of TOMS Shoes and discourage the criticisms of many firms associated with the corporate scandals of the late 1990s and early 2000s.

10.1 Boards of Directors

LEARNING OBJECTIVES

  1. Understand the key roles played by boards of directors.
  2. Know how CEO pay and perks impact the landscape of corporate governance.
  3. Explain different terms associated with corporate takeovers.

The Many Roles of Boards of Directors

“You’re fired!” is a commonly used phrase most closely associated with Donald Trump as he dismisses candidates on his reality show, The Apprentice. But who would have the power to utter these words to today’s CEOs, whose paychecks are on par with many of the top celebrities and athletes in the world? This honor belongs to the board of directors—a group of individuals that oversees the activities of an organization or corporation.

Potentially firing or hiring a CEO is one of many roles played by the board of directors in their charge to provide effective corporate governance for the firm. An effective board plays many roles, ranging from the approval of financial objectives, advising on strategic issues, making the firm aware of relevant laws, and representing stakeholders who have an interest in the long-term performance of the firm (Figure 10.1 "Board Roles"). Effective boards may help bring prestige and important resources to the organization. For example, General Electric’s board often has included the CEOs of other firms as well as former senators and prestigious academics. Blake Mycoskie of TOMS Shoes was touted as an ideal candidate for an “all-star” board of directors because of his ability to fulfill his company’s mission “to show how together we can create a better tomorrow by taking compassionate action today.”Bunting, C. 2011, February 23. Board of dreams: Fantasy board of directors. Business News Daily. Retrieved from http://www.businessnewsdaily.com/681-board-of-directors-fantasy-picks-small-business.html

The key stakeholder of most corporations is generally agreed to be the shareholders of the company’s stock. Most large, publicly traded firms in the United States are made up of thousands of shareholders. While 5 percent ownership in many ventures may seem modest, this amount is considerable in publicly traded companies where such ownership is generally limited to other companies, and ownership in this amount could result in representation on the board of directors.

The possibility of conflicts of interest is considerable in public corporations. On the one hand, CEOs favor large salaries and job stability, and these desires are often accompanied by a tendency to make decisions that would benefit the firm (and their salaries) in the short term at the expense of decisions considered over a longer time horizon. In contrast, shareholders prefer decisions that will grow the value of their stock in the long term. This separation of interest creates an agency problem wherein the interests of the individuals that manage the company (agents such as the CEO) may not align with the interest of the owners (such as stockholders).

The composition of the board is critical because the dynamics of the board play an important part in resolving the agency problem. However, who exactly should be on the board is an issue that has been subject to fierce debate. CEOs often favor the use of board insiders who often have intimate knowledge of the firm’s business affairs. In contrast, many institutional investors such as mutual funds and pension funds that hold large blocks of stock in the firm often prefer significant representation by board outsiders that provide a fresh, nonbiased perspective concerning a firm’s actions.

One particularly controversial issue in regard to board composition is the potential for CEO duality, a situation in which the CEO is also the chairman of the board of directors. This has also been known to create a bitter divide within a corporation.

For example, during the 1990s, The Walt Disney Company was often listed in BusinessWeek’s rankings for having one of the worst boards of directors.Lavelle, L. 2002, October 7. The best and worst boards: How corporate scandals are sparking a revolution in governance. BusinessWeek, 104. In 2005, Disney’s board forced the separation of then CEO (and chairman of the board) Michael Eisner’s dual roles. Eisner retained the role of CEO but later stepped down from Disney entirely. Disney’s story reflects a changing reality that boards are acting with considerably more influence than in previous decades when they were viewed largely as rubber stamps that generally folded to the whims of the CEO.

Managing CEO Compensation

One of the most visible roles of boards of directors is setting CEO pay. The valuation of the human capital associated with the rare talent possessed by some CEOs can be illustrated in a story of an encounter one tourist had with the legendary artist Pablo Picasso. As the story goes, Picasso was once spotted by a woman sketching. Overwhelmed with excitement at the serendipitous meeting, the tourist offered Picasso fair market value if he would render a quick sketch of her image. After completing his commission, she was shocked when he asked for five thousand francs, responding, “But it only took you a few minutes.” Undeterred, Picasso retorted, “No, it took me all my life.”Kay, I. 1999. Don’t devalue human capital. Wall Street Journal—Eastern Edition, 233, A18.

Picasso’s Garçon á la pipe was one of the most expensive works ever sold at more than $100 million.

Chick-fil-A encourages education through their program that has provided more than $25 million in financial aid to more than twenty-five thousand employees since 1973.


Photographer Dorothea Lange’s photo Migrant Mother, taken in 1936, embodied the struggles of the traditionalist generation that lived during the Great Depression.


Rational Decision-Making Model


Providing an excellent suggestion to avoid a nonrational escalation of commitment, old school comedian W. C. Fields once advised, “If at first you don’t succeed, try, try again. Then quit. There’s no point being a damn fool about it.”


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