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Governance & the International Firm

Governance & the International Firm. Week 10: Leadership. Learning Objectives . Who are the Leaders of organizations? What are the Board & Management functions? How can leaders solve conflicts of interest?. Leaders. The leader’s vision.

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Governance & the International Firm

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  1. Governance & the International Firm Week 10: Leadership Governance & the International Firm 325325 UniMelb

  2. Learning Objectives • Who are the Leaders of organizations? • What are the Board & Management functions? • How can leaders solve conflicts of interest? Governance & the International Firm 325325 UniMelb

  3. Leaders Governance & the International Firm 325325 UniMelb

  4. The leader’s vision • inspires and articulates the organization’s mission; • provides the basis for the organization’s objectives and goals; • communicates the beliefs and values that influence and shape the organization’s culture and behavioral norms; • And lays the foundation for organizational strategies, policies and procedures Governance & the International Firm 325325 UniMelb

  5. Who are the leaders in an organization? • Board Directors/Board Commissioners = Chairman and his/her Directors/Commissioners • Management = CEO + COO + CFO + … • All middle managers = those in an organizational position to make a difference Governance & the International Firm 325325 UniMelb

  6. Chairman (Board) & CEO/COO (Management) Governance & the International Firm 325325 UniMelb

  7. Chairing an organization • Separating Chairman from CEOor not? • Chairman represents the shareholders (& stakeholders) and governs strategies & policies • whereas CEO = the management executing these strategies and policies Governance & the International Firm 325325 UniMelb

  8. Leadership function • Chairman: Responsibility for organization’s strategies and policies = long term vision = responsible for the board (3 committees) • CEO: Responsibility for putting these into effect = ability to make the right thing happening = executive authority Governance & the International Firm 325325 UniMelb

  9. Chairman & GCG • The chairman is responsible for securing GCG = governing the organization: • instilling (Risk) Strategies • Securing Succession and Remuneration Policies of Management • Assuring transparency and accountability through (internal & external) auditing = Supervisory role Governance & the International Firm 325325 UniMelb

  10. Board structure • Board Structure: • A sound organizational structure does not guarantee commercial success, • but an organization without checks and balances does increase the risk (of disaster) Governance & the International Firm 325325 UniMelb

  11. GCG & SR • GCG: the design of institutions that induce or force management to internalize the welfare of stakeholders • Socially Responsible companies (1 in 8 NYSE) do have more efficient boards, which may lead to improved performance (though not conclusive) Governance & the International Firm 325325 UniMelb

  12. Empirical facts on Boards & GCG • Efficient and Effective Boards of SR companies: • Board with more outside independent directors (“Agent problem”) and women, • smaller board (unless for banks where diversified and bigger boards proved to be more effective) • Founding family is not delivering CEO Governance & the International Firm 325325 UniMelb

  13. Empirical facts on Boards & GCG • A company’s commitment to social responsibility and monitoring on behalf of stakeholders are becoming issues in investment decisions Governance & the International Firm 325325 UniMelb

  14. Chairman & CEO • There is no clear evidence that separating the position of chairman and CEO leads to higher performance (as result of split responsibilities) but the risks of too much power in the hands of one person remains very real • Institutional investors push to separate both positions to increase check and balances Governance & the International Firm 325325 UniMelb

  15. Empirical facts on Board Structure • In 1989: more than 50% combined the position of Chairman & CEO in UK – the % is even higher in the USA • In 1994: <25% combined the 2 positions • Smaller companies – founded by the chairman - may prefer to keep both positions combined: Conclusion: a trend to split the two functions of leadership into Chairman separated from CEO, unless for smaller companies Governance & the International Firm 325325 UniMelb

  16. Leadership function of Board • Independent director to guarantee some impartialityfor all stakeholders • Importance to show unity in leadership externally and internally • Finding a crucial balance between individuality and collegiality + between continuity and change • Minimizing the conflicts of interests (or moral hazard) • Issue of succession (Cfr ITT’s Harold Geneen) Governance & the International Firm 325325 UniMelb

  17. Leadership function • NOW: “The major test of every move in business, as in all games of strategy, are legality and profits”. A man who intends to be a winner in the business game must have a game player’s attitude. • FUTURE: concern for broader issues beyond legal profitability (Stakeholders) will distinguish normal companies from superior performers because of their superior corporate reputation • Compliance to the letter of the law • Compliance to the spirit of the (external & internal) law • Integrity Governance & the International Firm 325325 UniMelb

  18. Governance & the International Firm 325325 UniMelb

  19. Conflicts of Interest: 1.Moral Dilemmas 2.“Quiet Leaders” 3. Reputation Governance & the International Firm 325325 UniMelb

  20. 1.Moral Dilemmas Governance & the International Firm 325325 UniMelb

  21. Conflicts of Interest &Moral Dilemmas Potential conflicts of interest = 1 / ethics programs Potential conflicts of interest = 1 / Board’s involvement in the oversight of the ethics program Governance & the International Firm 325325 UniMelb

  22. Moral Dilemmas Business dilemmas concern the process of making an ethical decision at 3 different levels: • The personal level • The organizational level • The level in which society surrounds the corporation Governance & the International Firm 325325 UniMelb

  23. Objectives Dilemma training Some questions I might like to ask myself when dealing with a dilemma: • Is it legal? Is it according to the law, rules & procedures? • Would I like to be treated like ‘that’ in that situation? Can I explain to my family why I made that decision? • How would I feel if the information came out in the local paper in the morning? = Sleeping test Governance & the International Firm 325325 UniMelb

  24. How Ethical Dilemmas Develop Friendliness Ethical if under right circumstances Flattery Small Gifts Lunches Dinners Sports Events Clubs Mixing Business & Pleasure Unethical Family “Favours” Waluyo Larger Gifts Cash Swiss Bank Account Governance & the International Firm 325325 UniMelb

  25. 2. “Quiet leaders” Governance & the International Firm 325325 UniMelb

  26. “Quiet Leaders” (J. BADARRACCO, HBS) • Focus on what is reasonably attainable rather than what is ideal • Quiet leaders are flexible, highly pragmatic, and often opportunistic • The 3 Virtues of “Quiet Leaders” • Restraint • Modesty • Tenacity Governance & the International Firm 325325 UniMelb

  27. Leaders: defining moments Though ethics is related to values in a certain company and culture, it will be an individual manager (with his own personal values) who (in possible consensus with his colleagues) will have to take a decision for the company. Ethics becomes ‘personal’….a possible “defining moment” in one’s life (BADARACCO). Governance & the International Firm 325325 UniMelb

  28. Leaders: defining moments Quiet Leaders sometimes need to take extremely tough decisions a defining moment = Integrity Corporate Reputation Governance & the International Firm 325325 UniMelb

  29. 3. Reputation & Integrity Governance & the International Firm 325325 UniMelb

  30. Integrity beyond compliance • The law does not generally seek to inspire human excellence or distinction. It is no guide for exemplary behavior – or even good practice. “Those managers who define ethics as a legal compliance are implicitly endorsing a code of moral mediocrity for their organizations.” (L.S. PAINE, HBS) • Integrity > Compliance (to law) Governance & the International Firm 325325 UniMelb

  31. Temple of Reputation Reputation Emotional Appeal Vision & Leadership Products & Services Work Environment Financial Performance SCR Honesty, Credibility, Reliability, Responsibility Source: FOMBRUN, Governance & the International Firm 325325 UniMelb

  32. Board ensuring Good Reputation ) Customer Investor Employees Community Governance & the International Firm 325325 UniMelb

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