Global Business Strategy Class Notes
Global Business Strategy Class Notes BUS 311 10
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This 7 page Class Notes was uploaded by Stephanie Scott on Wednesday September 28, 2016. The Class Notes belongs to BUS 311 10 at Washington College taught by Dr. Drischler in Fall 2016. Since its upload, it has received 15 views. For similar materials see Global Business Strategy in Business at Washington College.
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Date Created: 09/28/16
Global Business Strategy Class Notes 9/22/2016 Ethics and Social Responsibility Corporate Governing Social Responsibility, Ethics Overview 1. What are the three main forms of business organization? 2. How do you define a corporation? 3. What is limited liability? 4. What are the four key components of a corporation? 5. How does one define corporate and social responsibility? 6. What is corporate governance? 7. Why should firms be socially responsible? 8. Where do firms’ social responsibilities stop? 9. What are ethics? 10. What is the difference between social responsibility and ethics? What is a Corporation? - An entity or person created by law - A legal entity with all the powers and responsibilities of a person o Can acquire property o Sue/be sued o Be party to contracts - Corporations are beneficial for raising capital - Being in a corporation results in limited liability because it spreads out the risk o Limited liability= keeps all of an investor’s assets from being put at risk, investors are only responsible for the amount of money they contribute People are more likely to invest Started by railroad companies in the united states to expand holdings o Unlimited life= a corporation has no end date. The document for the company lives on and ownership is transferred (by selling shares) Double Taxation: - The biggest disadvantage to corporations is that they are ‘taxed twice’ for income o Once at the corporate level and again when dividends are issued to shareholders (shareholders have to pay income tax on them) Other Forms of Organization - Sole proprietorship - Partnership o Two or more owners combine to do business o Disadvantage is unlimited liability Each partner legally liable for ALL debts Law firms are a common example of partnerships Partnerships and Proprietorships - Problems: o Unlimited liability o Difficult to transfer ownership o Limited life of business o Hard to cash out for investors if company is failing Corporate Governance Corporate governance= distribution of rights, rules, practices and processes by which a company is directed and controlled - involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community o main 4 stakeholders are: shareholders, board, management, and employees - no substitute for a successful business plan or capable management o good corporate governance can’t fix a lousy business o bad corporate governance can wreck an otherwise good business - Agency Problem o Central to corporate governance - Shareholders are owners o Lack information and time to make decisions, too many to all govern together o Shareholders delegate responsibilities to managers hired by the board o Question becomes how to align managers with the interests of shareholders - Managers may shirk/ pursue their own interests o Might pursue company size over excellence o Could avoid risk or take too much risk o Could maximize status or personal gain/perks like expensive artwork in the office - Keep managers straight by using a board of shareholders to oversee Agency Theory - Goals of principals/overseers in any conflict o Difficult and expensive for principal to verify what agency is doing Hard for board to oversee - Two primary means of monitoring o Committed board Critical participants and director independence, need a succession plan if a CEO needs to be replaced Include outsiders in meetings to provide fresh view Evaluate managers against high standards o Shareholder activism o sell stock, vote proxy sue for damages, get information from company, exercise residual rights after liquidation Example: people saw Apple hoarding funds, so they bought shares and got onto the board, pressured Apple to distribute the stockpile money Importance - Good corporate governance: o Board structure supervision is strong and independent of management o Transparency and disclosure of procedures o Executive incentives for good work More effective structure shareholder confidencehigher share price o Improves investor confidence and earnings quality Creates value for shareholders Governing Codes - Major companies have governance codes with ideal standards and practices o Shareholder rights o Board/manager accountability o Accurate and frequent financial reports Boards - Shareholder representatives o Oversee management o Set strategy and general policy o Work through committee structure such as audits and compensation - Need a board to not micromanage because they aren’t close to day-to- day activity and its inefficient - Insiders work for the firm (under management) outsiders don’t - Independence is a key issue o Management theory= board full of outsiders is good (they’re independent) Problem with this theory is insiders are better informed on company operations Need a balance of both, outsiders overseeing audits and compensation so managers don’t set their own salary - Oversee relationship between shareholders and managers - Safeguard against fraud Problems - Boards are supposed to represent shareholders and act as a check against management - BUT CEOS ARE PICKED BY DIRECTORS (on the board) o Kon-Ferry 74% of firms follow CEO recommendations when selecting a board of directors, so the management ends up picking the people that are supposed to appoint them… - CEO’s pack boards with their cronies, and board members who ask hard questions get kicked off - Board members are still part time, they don’t have the knowledge or incentive to effectively monitor/supervise CEO’s, often just go with CEO suggestions because of this o But greater force on board managers from shareholders and a stricter board means best people available for board positions will avoid it because of increased liability/responsibility o Need to get right people and give them the right tools to keep CEOs in check Social Responsibility CSR= (corporate social responsibility) balance between benefitting shareholders and corporate good citizenship - LUK and Ladysmith, Wisconsin o An office furniture company in a tiny town making no money, LUK tried to sell it but couldn’t. they didn’t want to close it because it was a major employer for the town. LUK invested in the town so the employees could transition to new jobs, it was more than LUK needed to do but it was socially responsible - Show concern for employees, local communities. Environment, and society at large Areas of Concern - CSR issues: o Environment product safety, privacy and data security, workplace conditions and human rights o All issues that corporations face Growth Industry - NGOs, think tanks, consultanciesgetting more requirements for corporations o UN Global Impact - Climate change is the main driver “externalities impact everyone” o NGO’s will destroy companies publically if they are bad about this Stakeholders Stakeholder= shareholders, BUT ALSO employees, customers, suppliers, creditors, government, community - Corporation needs to keep good working conditions, quality goods, fair treatment for suppliers, yet still get return on interest, ay bills and taxes, not pollute, and treat community well o Some corporations think they’re above the law Social Responsibility - Difficult to strike right balance between US Robber Barons of the past and Soviet State Farms (somewhere between sole focus on profit and sole focus on welfare) o Carnegie and Rockefeller are considered robber barons - private management responsibility, must sometimes do the right thing even if costly - Moral Case: o Right thing to do o Implied social contract Society allows a business to operate and sell for profit In return firm agrees to act as a responsible citizen and promote general welfare Business Case - Bottom Line: o Same direction as moral case o Better relationship with community attracts best employees, positive environment increases productivity o Reduces risk of damaging reputation, less likely to have costly legal action (BP) o Brings investment from socially conscious investors, and mutual funds, attracts good managers o Access to more, better capital How To Accomplish This? - Support charities, promote community service within workforce and better quality of life o Results in great press coverage o Example: LUK donated money for lights all over a city so people could play soccer - Protect environment and enhance it - Enhance employee well-being and promote workplace diversity Shareholder View - Owners get paid last - Reasonable focus on equity returns over time encompasses social responsibility o economic responsibilities o Obey law behave ethically - In the best interest for everyone Ethics: - Recent scandals have put the public perception of US corporations at a new low - Ethics= individual moral code - Beyond obeying the law - US law doesn’t carry over to other countries with low employee protection BUT a company would be destroyed publically if they took advantage of sweat-shop conditions Business Ethics: - Not an oxymoron - Obeying the law is required - Business ethics go beyond law to apply general ethic principles of right and wrong to company decisions and personnel o Honesty a standard held to all stakeholders Ethics= accepted principles of right and wrong that govern the conduct of a person or organization Business ethics= accepted principles of right and wrong to business, not separate from individual ethics - A separate code would result in companies cutting corners Enlightened Self-Interest - Similar to CSR, it’s the right/smart thing to do - Ethical shortcuts lead to illegal actions, ruins reputation o Firm future relies on reputation Example: Wells Fargo scandal, setting up accounts without customer authority, now at the bottom as a company for reputation when they used to be ta the top Still strong financially but unlikely to regain reputation Differences from Ethics - Ethics is for individuals, CSR is for corporations o Individuals drive companies which is why they generally align The Gray Area Activities - Comes from o Faculty oversight of lower level, not stopped by board or management o Heavy pressure on management and employees to beat performance goals Pressuring lower levels to meet numbers o Company stressing profits over ethics, reinforcing a ‘win at all costs’ culture - Manage ethics by: o Hiring ethical people to provide an example o Build an organization with high value on ethics, ethics considered in all areas of business o Hard to do in practice Recap 1. Individual proprietorship, partnership, corporation 2. Artificial person with normal rights and responsibilities, limited liability, individuals cannot be held responsible, can sue or be sued 3. Only lose the amount you invested in shares, can’t be held responsible for anything else 4. Shareholders, managers, board, employees 5. Duty= make money for shareholders, must balance with duty to all stakeholders (anyone impacted by corporation) 6. Rights and responsibilities and how they’re shared in a corporation 7. Varying opinions on the importance of social responsibility, moral case is that it’s the right thing because society has given you a license to conduct business (implied social contract) a. Bottom line case: productivity will be higher because you will attract better employees and they will have a better work environment. b. Being more socially responsible means better reputation, also less risk from cutting corners c. Some investors only invest in ethical companies 8. Firms balance responsibility to society and to shareholders by staying at the line where they are doing all these good things but also continuing to make a profit 9. Ethics are codes of moral behavior, basic principles we all recognize, though they are harder to implement into firms 10. The two are closely related, social responsibility is what corporations do, ethics is for individuals. They tend to match up closely because individuals develop company ethics
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