Second lecture

1. Second lecture Corporate Governance and Social Responsibility Developed by Prof. Dr. Majed El-Farra

2. Corporate Governance Developed by Prof. Dr. Majed El-Farra

3. Corporate Governance Defined: Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation. Developed by Prof. Dr. Majed El-Farra

4. Corporate Governance • Setting corporate strategy, overall direction, • mission or vision • Hiring and firing the CEO and top management • Controlling, monitoring, or supervising • top management • Reviewing and approving the use of resources • Caring for shareholder interests Board of Directors Developed by Prof. Dr. Majed El-Farra

5. Corporate Governance Role of the Board in strategic management • Monitor • Developments inside and outside the corporation • Evaluate & Influence • Review proposals, advise, provide suggestions and alternatives • Initiate & Determine • Delineate\define corporation’s mission and specify strategic options Developed by Prof. Dr. Majed El-Farra

6. Board of Directors Continuum Developed by Prof. Dr. Majed El-Farra

7. Board of Directors Members: Inside directors • “Management directors” • Officers or executives employed by corporation Outside directors • May be executives of other firms but not employed by board’s corporation Developed by Prof. Dr. Majed El-Farra

8. Board of Directors Organization of the Board • Size • Determined by charter and bylaws • Average for publicly-held, large firm is 11 directors • Average for small/medium private firms is 7 to 8 directors Developed by Prof. Dr. Majed El-Farra

9. Board of Directors Corporate Governance • Boards more involved in review and shaping strategy • Institutional investors more active in pressuring for corporate performance • Shareholders demand that directors and executives own more than token amounts of stock • Nonaffiliated outside directors increasing Developed by Prof. Dr. Majed El-Farra

10. Board of Directors • Executive Leadership • Strategic vision • Presents a role of others to identify with and follow • Communicates high performance standards and shows confidence in followers’ abilities Top management responsibilities Top management Responsibilities Developed by Prof. Dr. Majed El-Farra

11. Strategic Management Process Strategic Planning Staff -- • Supports top management and business units in the strategic planning process. Developed by Prof. Dr. Majed El-Farra

12. Strategic Management Process Strategic Planning Staff Responsibilities: • Identify and analyze company-wide strategic issues, suggest corporate strategic alternatives • Work as facilitators with business units to guide them through the strategic planning process Developed by Prof. Dr. Majed El-Farra

13. Styles of Corporate Governance Degree of Involvement By top management Degree of involvement by board of directors Developed by Prof. Dr. Majed El-Farra

14. Styles of Corporate Governance • Chaos Management • When both the board of directors and top management have little involvement in the strategic management process. • The board waits for top management to bring it proposals. • Top management is operationally oriented and continues to carry out strategies, policies, and programs specified by the founding entrepreneur who died years ago. • There is no strategic management being done here. Developed by Prof. Dr. Majed El-Farra

15. Styles of Corporate Governance • Entrepreneurship Management • A corporation with an uninvolved board of directors but a highly involved top management has entrepreneurship management. • The board is willing to be used as a rubber stamp for top management's decisions. • The CEO, operating alone or with a team, dominates the corporation and its strategic decisions. Developed by Prof. Dr. Majed El-Farra

16. Styles of Corporate Governance • Marionette Management • Probably the rarest form of strategic management style, • marionette management occurs when the board of directors is deeply involved in strategic decision making, but top management is primarily concerned with operations. • Such a style evolves when a board is composed of key stockholders who refuse to delegate strategic decision making to the president. • This style also occurs when a board fires a CEO but is slow to find a replacement. • Marionette Management occurred at Winnebago Industries when the company's Board of Directors, chaired by its founder, 72-year-old John K. Hanson, took away Ronald Haugen's title as chief executive officer, but left him as company president. Developed by Prof. Dr. Majed El-Farra

17. Styles of Corporate Governance • Partnership Management • Probably the most effective style of strategic management, • partnership management is epitomized\embodied by a highly involved board and top management. The board and top management team work closely to establish the corporate mission, objectives, strategies, and policies. • Board members are active in committee work and utilize strategic audits to provide feedback to top management on its implementations of agreed-upon strategies and policies. • This appears to be the style emerging in a number of successful corporations such as General Electric Company. Developed by Prof. Dr. Majed El-Farra

18. The business firm should try to get useful information about competitors by: • Careful study of trade journals. • Buying competitors' products and taking them apart. • Hiring management consultants who have worked for competitors. • Rewarding competitors' employees for useful "tips." • Questioning competitors' customers and/or suppliers. • Buying and analyzing competitors' garbage. • Advertising and interviewing for non-existent jobs. • Taking public tours of competitors' facilities. • Releasing false information about the company in order to confuse competitors. • Questioning competitors' technical people at trade shows and conferences. • Hiring key people away from competitors. Developed by Prof. Dr. Majed El-Farra

19. Discussion • What recommendations would you make to improve the effectiveness of today's corporate governance in Gaza private sector? Developed by Prof. Dr. Majed El-Farra

20. UN Governance • Empowering the top management. • Beneficiary participation. • Rotation of top management. • Incentives. • Top management should be from locals. • Periodical review and reporting to board of directors. • Independent local steering committee. • Open channels of communication with public. • Specialized bodies in different services. • Some of the board should be from locals. • System and standards to evaluate top management. • Enriching the strategic staff from outside UN staff. • Power sharing between top and low level management. • Improve the role of CSOs. Developed by Prof. Dr. Majed El-Farra

21. Improving the efficiency of the PNA Governance • Choose the best ministers • Qualified and competence legislators. • Separation between authorities • More controlling and monitoring of legislation. • Abide by law the common of the Palestine. • Using external consultants to the legislation council, • regular meeting. • Regular meeting and follow up. • Awareness campaign to all about their duties. • Improve cooperation and team work. • More role for residences\public. • Clear and agreed accountability techniques. • Form a controlling committee from the council. Developed by Prof. Dr. Majed El-Farra

22. Improving the efficiency of Board of Directors in NGOs • Select qualified persons. • People with enough time. • Periodical reports. • Government role. • Provide incentives. • External and internal control development. • Internal monetary committee. • Periodical meeting. Developed by Prof. Dr. Majed El-Farra

23. Social Responsibility Broader responsibility: • Private corporation has responsibilities to society that extend beyond making a profit. Developed by Prof. Dr. Majed El-Farra

24. Social Responsibility Friedman’s Traditional View “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits…” Developed by Prof. Dr. Majed El-Farra

25. Social Responsibility Carroll’s Four Responsibilities • Economic: produce goods and services of value to society. • Legal: abide by law, avoid discrimination. • Ethical: respect beliefs in society. • Discretionary/flexible :pure voluntary obligations. Developed by Prof. Dr. Majed El-Farra

26. Responsibilities of Business Developed by Prof. Dr. Majed El-Farra

27. Social ResponsibilityBenefits • Environmental concerns may enable the firm to charge premium prices and gain brand loyalty • Trustworthiness may help generate enduring relationships with suppliers and distributors without spending time and money policing contracts • Can attract outstanding employees who prefer working for a responsible firm • More likely to attract capital from investors who view reputable companies as desirable Ben & Jerry’s Maytag Procter & Gamble Rubbermaid Developed by Prof. Dr. Majed El-Farra

28. Employees Investors Customers Suppliers Local Communities Social Responsibility: Balancing Commitments to Stakeholders Stakeholders: Groups, individuals, and organizations that are directly affected by the practices of an organization CORPORATION Developed by Prof. Dr. Majed El-Farra

29. Social Responsibility • It refers to the way in which a business tries to balance its commitments to certain groups and individuals in its social environment. • Customers: Treat customers fairly and honestly (Examples of companies with excellent reputations in this area: L.L. Bean, Nordstrom, Dell Computer Corporation) • Employees: Treat employees fairly, with respect for their dignity and basic human needs (Examples of companies with excellent reputations in this area: 3M, Southwest Airlines) • Investors: Manage financial resources honestly and openly • Suppliers: Seek mutually beneficial partnerships • Local Communities: Minimize damage and maximize contributions to local communities • Discussion: Who are the major stakeholders at your school? How does the school prioritize these stakeholders? What are your thoughts about this prioritization? Developed by Prof. Dr. Majed El-Farra

30. Reasons for Unethical Behavior Moral Relativism • Morality is relative to some personal, social or cultural standard and that there is no method for deciding whether one decision is better than another. Developed by Prof. Dr. Majed El-Farra

31. Social Responsibility Kohlberg’s Levels of Moral Development • Preconventional Level: This level is characterized by a concern for self. Small children and others who have not progressed beyond this stage evaluate behaviors on the basis of personal interest- avoiding punishment or quid pro quo. • Conventional\conservative Level: This level is characterized by consideration of society’s laws and norms. Actions are justified by an external code of conduct. • Principled Level: This level is characterized by a person’s adherence to internal moral code. An individuals at this level look beyond norms or lows to find universal values or principles. • Kholberge places most people in the conventional level with, fewer than 20%of U.S. adults in the principle level of development Developed by Prof. Dr. Majed El-Farra

32. Social Responsibility Code of Ethics: • Specifies how an organization expects its employees to behave while on the job. Developed by Prof. Dr. Majed El-Farra

33. What Is Ethical Behavior? Ethics: Right and wrong, good and bad, in actions that affect others. shaped by personal values and morals Ethical Behavior: Conforming to generally accepted ethical norms. Business ethics: Ethical or unethical behaviors of managers and employers of an organization. Developed by Prof. Dr. Majed El-Farra

34. Discussion • Identify examples of ethical and unethical business practices. • Ethical Business Practices: Examples: Donating a percentage of profits to charity and community causes (Ben & Jerry’s donates 7-1/2% of pre-tax profits, and Levi Strauss donates 2.4% of pre-tax profits to a variety of causes), encouraging employees to engage in volunteer work using paid work-release time (Walt Disney’s VoluntEARS program), recycling (McDonald’s has a far-reaching environmental protection program). • Unethical Business Practices: Examples: Forwarding “marketing research” results to sales people, excessive violence in video games, and of course all forms of illegal behavior (e.g. deliberately selling cigarettes to minors). Developed by Prof. Dr. Majed El-Farra

35. Social Responsibility Approaches to Ethical Behavior • Utilitarian Actions and plans judged by consequences • Individual Rights People have fundamental rights to be respected in all decisions • Justice Distribution of costs and benefits to be equitable, fair, and impartial\objective. Developed by Prof. Dr. Majed El-Farra

36. Approaches to Ethical Behavior Cavanagh proposes that we solve ethical problems by asking the following three questions regarding an act or decision: • Utility: Dose it optimize the satisfactions of all stakeholders? • Rights: Dose it respect the rights of the individuals involved? • Justice: Is it consistent with the canons of justice? Developed by Prof. Dr. Majed El-Farra

37. Social Responsibility Approaches to Ethical Behavior • Categorical imperatives\crucial “golden rules “ Treat others as you would like them to treat you. Not restrict others behavior • A person action is ethical only if that person is willing for that same action to be taken by every one who is in a similar situation. • A person should never treat another human as a means but always as an end Developed by Prof. Dr. Majed El-Farra

38. Responsibility Toward the Environment • Encompasses three main areas: • Air pollution • Water pollution • Land pollution • Toxic\deadly waste • Recycling Developed by Prof. Dr. Majed El-Farra

39. Responsibility Toward Customers Consumer Rights Unfair Pricing Ethics in Advertising Developed by Prof. Dr. Majed El-Farra

40. Responsibility Toward Employees • Legal and social commitments: Legally, companies are required to refrain from discrimination against any worker based on race, gender, religion, nationality or other irrelevant factors. Ethically, many people feel that companies should ensure that the workplace is physically and socially safe. • How far should companies extend themselves to help employees who are laid off? Developed by Prof. Dr. Majed El-Farra

41. Responsibility Toward Investors • Improper financial management: • Offenses are typically unethical, rather than illegal. Examples include excessive salaries, and lavish\plentiful or frivolous perks\bonus. • Check kiting: • Responsibility towards investors has several components: • Illegal practice of writing checks against money that has not yet arrived at the bank on which it is drawn. • Insider trading: • Illegal practice of using confidential information to gain from the purchase or sale of stocks. • Misrepresentation of finances: • Typically, this takes the form of overly optimistic projections of earnings. Developed by Prof. Dr. Majed El-Farra

42. Review • What are the Carroll’s four social Responsibilities of companies? Is there a consensus on the concept of social responsibilities? What is the relationship between social responsibility and ethics? Try to be practical in your answer. Developed by Prof. Dr. Majed El-Farra

43. Discussion • Should all CEOs be transformation leaders? Would you like to work for a transformational leader? •  According to the text, top management must successfully handle two responsibilities that are crucial to the effective strategic management of the corporation: (1) provide executive leadership and a strategic vision and (2) manage the strategic planning process. The successful CEOs often provide this executive leadership by taking on many of the characteristics of the transformation leader by communicating a clear strategic vision, demonstrating a strong passion for the company, and communicating clear directions to others. Such transformational leaders, like Bill Gates at Microsoft, Steve Jobs at Apple, and Anita Roddick at The Body Shop, are able to command respect and energize their employees. They not only articulate a strategic vision, but they also tend to present a role for others in the company to identify with and to follow. Their communication of high performance standards coupled with their confidence in their fellow employees often raises performance to a high level. Nevertheless, such transformation leaders can be very difficult to work for and their overconfidence may even get the firm in trouble. Developed by Prof. Dr. Majed El-Farra