Lecture 2: Corporate Governance and Social Responsibility

1. Lecture 2: Corporate Governance and Social Responsibility Moses Acquaah, Ph.D. 377 Bryan Building Phone: (336) 334-5305 Email: acquaah@uncg.edu

2. Lecture Objectives • By the end of this lecture, students should be able to: • Discuss the responsibilities and role of the board of directors in the strategic management (SM) process • Explain the composition and recent trends in board of directorships • Discuss the responsibilities & role of the top management in the SM process • Explain the role of other strategic managers and employees in the SM process • Discuss how corporate social responsibility affects the SM process

3. Strategic Management Responsibility: Corporate Governance Issues • The corporation is a mechanism established to allow different parties to contribute capital, expertise and labor for their mutual benefit. • Investors/Shareholders – capital providers • Management – expertise & labor providers for running of company • Board of directors (BOD) elected by shareholders to protect their interest. • Corporate governance – relationship among BOD, management, and shareholders

4. The Role of Board of Directors • BOD Typical Responsibilities • Setting corporate strategy, overall direction , mission and/or vision • Succession: Hiring, compensating and firing the CEO and top management • Control: monitoring, evaluating, and/or supervising top management • Reviewing and approving the use of organizational resources • Caring for stockholders’ interest • In legal terms, BOD’s are required to direct the affairs of the corporation but not to manage them (act with due care).

5. The Role of Board of Directors • Role of BOD in the strategic management process • Monitor: • Keep abreast of developments both outside & inside the company • Bring to management’s attention developments it might have overlooked. • Evaluate and influence: • Examine mgt’s proposals, decisions, & actions. • Agree or disagree with them; give advice, offer suggestions & outline alternatives (if any). • Initiate and determine: • Delineate a company’s mission & vision; and specify strategic options to management.

6. The Role of Board of Directors • Degree of involvement is dependent on extent to which it perform the three tasks: • Monitoring (LOW LEVEL OF INVOLVEMENT) • Evaluating and influencing (MEDIUM LEVEL OF INVOLVEMENT) • Initiating and determining (HIGH LEVEL OF INVOLVEMENT)– e.g., GM, Mead Corp. • BOD involvement is a continuum

7. The Role of Board of Directors • The BOD Continuum Low Degree of involvement High • Evaluate & Influence (30%) • Involved in review of selected key decisions, indicators or programs of management • Approve, question & makes final decisions on mission, objectives strategy & policies. • Perform fiscal & mgt audits. • Initiate & Determine (30%) • Take leading role in establishing & modifying mission, objectives, strategy & policies. • Has very active strategic committees • Monitor (40%) • Permit officers to make all decisions. • Formally reviews selected issues • Votes as officers recommend on actions.

8. Composition of Board of Directors • Most publicly-owned corporations are composed of • Inside directors (management directors) • Officers & executives employed by the firm • About 20%/60% in large/small US firms • Outside directors • Executives of other firms but not employees of board’s firm • Can be affiliated to firm – legal or insurance client, retired executive of firm, family, etc. • About 80%/40% in large/small us firms

9. Composition of Board of Directors • Organization of Boards • Size determined by firm’s charter & bylaws • Average size is 11/7 for large/small firms • Dual designation of CEO and Chairman of Board held by 68% top executives in US • Outside director as lead director or chairman of board to top oversee & evaluate management • Research shows firms that separate two positions perform better than those that combine two positions.

10. Recent Trends in Board of Directors • Increasing numbers of institutional investors (pension funds, etc) and other outsiders on the board • Larger stock ownership by directors and executives; and • A greater willingness of the board to balance the economic goal of profitability with the social needs of society

11. The Role of Top Management • Top management function is usually performed by CEO in coordination with • Chief Operating Officer (COO) or President • Chief Financial Officer (CFO) • Chief Information Officer (CIO) • Executive Vice Presidents (VP’s) and VP’s of divisions & functional areas

12. The Role of Top Management • Top management is primarily responsible for the strategic management of the firm • Responsible for every decision & action of every organizational employee • Responsible for providing effective strategic leadership • Strategic leadership is the ability to anticipate, envision, maintain flexibility, think strategically, and work with others in an organization to initiate changes that will create a viable and valuable future for the organization

13. The Role of Top Management • The CEO, must perform two functions crucial to the SM of corporations: • Provide executive leadership • Articulate a strategic vision for the firm • Present a role for other to identify with and follow (e.g., behavior, attitude, values, etc) • Communicate high performance standards & show confidence in followers’ abilities to meet these standards • Manage the strategic planning process • Evaluate division/units to make sure they fit together into an overall corporate plan

14. The Role of Top Management • The whole top management’s strategic leadership responsibilities involves • Determining the firm’s mission, vision, and objectives • Exploiting & maintaining the firm’s resources, core competencies & capabilities • Creating & sustaining a strong organizational culture • Emphasizing ethical decision & practices • Establishing appropriately balance organizational control

15. The Role of Other Strategic Managers and Organizational Employees • Strategic Planners • Identify & analyze company-wide strategic issues & suggest corporate strategic initiatives to top management • Work as facilitators with divisions/units to guide then through the strategic planning process

16. The Role of Other Strategic Managers and Organizational Employees • Strategic Managers (Middle- & Lower-level managers) & Supervisors • Direct their workers in the strategy implementation process (i.e., putting the strategies into action at various functional areas) • Strategy evaluation • Other Employees • Strategy evaluation through open book management • Sharing of firm’s books or F/S with employees to see implications of their work

17. Corporate Social Responsibility • The concept of social responsibility • Proposes that a private firm has responsibilities to society that extend beyond making a profit • Obligation of firm decision makers to make decisions & act in ways that recognize the interrelatedness of business & society. • It recognizes the existence of various stakeholders and firms deal with them

18. Corporate Social Responsibility • Two Views of “who” are firms responsible to? (1) Traditional View (Milton Friedman) • “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” (M. Friedman, “The Social Responsibility of Business is to Increase Profits”, New York Times, (September 13, 1970: pp. 126-127)

19. Two Views of “Who” Firms are Responsible to • Traditional View (continued): • By taking on the burden of social cost, the business becomes less efficient: • Prices go up to pay for increased costs; or • Investment in new activities & research is postponed • Firms are responsible to only their shareholders • Purely economic reasoning

20. Two Views of “Who” Firms are Responsible to • (2) Modern View (Archie Carroll) Social Responsibilities Economic (Must Do) Discretionary (Might Do) Legal (Have to Do) Ethical (Should Do)

21. Two Views of “Who” Firms are Responsible to (2)Modern View (Archie Carroll) • Business firms have four responsibilities (a) Economic • Produce goods & services of value to society so that the firm may repay its creditors and stockholders (b) Legal • Defined by governments in laws that management is expected to obey

22. Two Views of “Who” Firms are Responsible to • Modern View (Continued) (c) Ethical • Follow generally held beliefs about how one should act in society • Work with employees & community in planning for layoffs, though no laws requiring this • Many people expect firms to do these things (d) Discretionary • Purely voluntary obligations a firm assumes • Philanthropic contributions, training hard-core unemployed, providing day-care centers, etc. • Many people do not expect firms to do these things

23. Who are the Stakeholders of Firms? • Stakeholders are individuals, groups or institutions who have a stake in or are significantly influenced by an organization’s decisions and actions • Shareholders • Governments • Political & social action groups • Employees • Customers • Communities • Suppliers • Trade Associations