STRATEGIC MANAGEMENT & BUSINESS POLICY

13TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER
 Chapter 2: Corporate Governance
After learning this chapter, students will be able to:
•Describe the role and responsibilities of the board
of directors in corporate governance
•Understand how the composition of a board can
affect its operation
• Discuss trends in corporate governance
•Explain how executive leadership is an important
part of strategic management

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Corporation: a mechanism established to allow different
parties to contribute capital, expertise and labor for
their mutual benefit

Corporation is governed by the board of directors

that oversees top management with the
concurrence/agreement of the shareholders.

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Corporate governance: the relationship among the
board of directors, top management and shareholders in
determining the direction and performance of the
corporation

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Due care: Board of directors are responsible that the
corporation is not harmed by members of the board.
Directors can be held liable

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 Responsibilities of the Board of Directors

1. Sets corporate strategy, overall direction, mission, or

vision
2. Hires and fires the CEO and top management
3. Controls, monitors, or supervises top management
4. Reviews and approves the use of resources
5. Cares for shareholders’ interests
6. Assures that the corporation is managed in accordance
with state laws, security regulations and conflict of
interest situations

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 Role of the Board in Strategic Management

• Monitor developments inside and outside the

corporation
• Evaluate and Influence management proposals,
decisions and actions
• Initiate and Determine the corporation’s mission and
strategies

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 Board of Directors Continuum

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 Members of a Board of Directors

Inside Directors are officers or executives employed by

the board’s corporation

Outside Directors are executives of other firms but are

not employees of the board’s corporation

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 Members of a Board of Directors

Affiliated directors- not employed by the corporation,

handle legal or insurance work

Retired executive directors- used to work for the

corporation, partly responsible for past decisions affecting
current strategy

Family directors- descendents of the founder and own

significant blocks of stock

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 Members of a Board of Directors
Agency theory problems arise in corporations because
top management is not willing to accept responsibility
for their decisions unless they own a substantial amount
of stock in the corporation. (Agent=manager)
• Stewardship theory it suggests that executives tend
to be more motivated to act in the best interests of the
corporation than in their own self-interests. Stewardship
theory focuses on the higher-order needs, such as
achievement and self-actualization.
• The theory argues that senior executives over time tend
to view the corporation as an extension of themselves.

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• Co-determination: Should Employees Serve on
Boards?
• Corporations such as Chrysler, Northwest Airlines,
United Airlines (UAL), and Wheeling-Pittsburgh
Steel added representatives from employee
associations to their boards as part of union
agreements or Employee Stock Ownership Plans
(ESOPs).
• Germany experience for enhancing industrial
peace,
• Not allowed in insurance companies and
commercial banks in Ethiopia
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 A direct interlocking directorate

• Occurs when two firms share a director

or when an executive of one firm sits
on the board of a second firm.
• An indirect interlock occurs when two
corporations have directors who also
serve on the board of a third firm, such as
a bank.

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Interlocking Directorates- useful for gaining both
inside information about an uncertain environment and
objective expertise about potential strategies and tactics

Direct interlocking directorate- when two firms share

a director or when an executive of one firm sits on the
board of a second

Indirect interlocking directorate- when two

corporations have directors who serve on the board of a
third firm

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 Board of Directors

Organization of the Board

• Size
– Determined by charter and bylaws
• The average large, publicly held U.S. firm has 10
directors on its board. The average small,
privately held company has 4-5 members. In
Japan, 14; Non-Japan Asia, 9; Germany, 16;
UK, 10; and France, 11, Ethiopia 7 to 12.

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 Nomination and Election of Board Members

97% of U.S. boards use nominating committees

to identify potential board members,
100% insurance companies and commercial banks
in Ethiopia use nominating committee.

Staggered boards- only a portion of board members

stand for re-election when directors serve more than one
year terms

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 Nomination and Election of Board Members
Criteria for a good director include:
1. Willingness to challenge management when necessary
2. Special expertise that is important to the company
3. Available for outside meetings to advise management
4. Expertise on global issues
5. Understands the firm’s key technologies and processes
6. Brings external contacts that are potentially valuable to
the firm
7. Has detailed knowledge of the firm’s industry
8. Has high visibility in their field
9. Is accomplished at representing the firm to
stakeholders

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Approximately 70% of the top executives of U.S.
publicly held companies hold the dual/double
designation of Chairman and CEO

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Lead Director- is consulted by the Chair/CEO regarding
board affairs and coordinates the annual evaluation of
the CEO

• 96% of U.S. companies that combine the Chairman and

CEO positions had a lead director,

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 Impact of the Sarbanes-Oxley Act on U.S.
Corporate Governance

Sarbanes Oxley Act 2002- designed to protect

shareholders from excesses and failed oversight of
boards of directors
– Whistleblower procedures
– Improved corporate Governance

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 Impact of the Sarbanes-Oxley Act on U.S.
Corporate Governance

• Evaluating Governance
– Rating agencies
– S&P Corporate Governance Scoring System
• Avoiding Governance Improvements
– Multiple classes of stock
– Public to private ownership
– Controlled companies

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 Trends in Corporate Governance
1. Boards shaping company strategy
2. Institutional investors active on boards
3. Shareholder demands that directors and top
management own significant stock
4. More involvement of non-affiliated outside directors
5. Increased representation of women and minorities
6. Boards evaluating individual directors
7. Smaller boards
8. Splitting the Chairman and CEO positions
9. Shareholders may begin to nominate board members
10.Society expects boards to balance profitability with
social needs of society

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 Responsibilities of Top Management

Executive leadership is the directing of activities toward

the accomplishment of corporate objectives. Sets the
tone for the entire corporation

Strategic vision- description of what the company is

capable of becoming

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 Responsibilities of Top Management

Transformational Leaders provide change and

movement in an organization by providing a vision for that
change.

Characteristics include:

• CEO articulates a strategic vision for the corporation

• CEO presents a role for others to identify with and to
follow
• CEO communicates high performance standards and also
show confidence in the followers’ abilities to meet these
standards

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 Managing the Strategic Planning Process
Strategic planning staff- supports both top management
and the business units in the strategic planning process

Major responsibilities include:

• Identifying and analyzing company-wide strategic issues,

and suggesting corporate strategic alternatives to top
management
• Work as facilitators with business units to guide them
through the strategic planning process

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1. When does a corporation need a board of directors?
2. Who should and should not serve on a board of directors?
3. Should a CEO be allowed to serve on another company’s
board of directors?
4. What would be the result if the only insider on a corporation’s
board were the CEO?
5. Should all CEOs be transformational leaders? Would you like
to work for a transformational leader?

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 Styles of Corporate Governance

Entrepreneurship Partnership
High Management Management

Degree of Chaos Marionette

Involvement low Management Management
By top
management
High
Low

Degree of involvement by board of directors

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 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.

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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.

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Styles of Corporate Governance
• Marionette\dummy 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
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 Chapter Three
• Corporate Social Responsibility and
Ethics

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 Objectives
After learning this chapter, students will be able to:
•Compare and contrast Friedman’s traditional view with
Carroll’s contemporary view of social responsibility
•Understand the relationship between social responsibility
and corporate performance
•Explain the concept
•Conduct a stakeholder analysis
•Explain why people may act unethically
•Describe different views of ethics according to the
utilitarian, individual rights, and justice approaches t of
sustainability

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 Corporate Social Responsibility and Ethics

Broader responsibility:

• Private corporation has responsibilities

to society that extend beyond making a
profit.

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 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…”

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 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.
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 Responsibilities of Business

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 Social Responsibility
Benefits
•Environmental concerns may enable
the firm to charge premium prices and
Ben & Jerry’s gain brand loyalty

•Trustworthiness may help generate

enduring relationships with suppliers
Maytag and distributors without spending time
and money policing contracts

•Can attract outstanding employees

Procter &
Gamble who prefer working for a responsible
firm

•More likely to attract capital from

Rubbermaid investors who view reputable
companies as desirable
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 Discussion
• What is the relationship between
corporate governance and social
responsibility?
The board of directors is in a unique
position to view the corporation as a
whole and to evaluate management's
performance in terms of stakeholder
criteria.
 Social Responsibility: Balancing
Commitments to Stakeholders
Stakeholders: Groups, individuals, and organizations that
are directly affected by the practices of an organization

Employees Investors

Customers CORPORATION Suppliers

Local Communities

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 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

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 Reasons for Unethical Behavior

Moral Relativism
Some people justify their seemingly unethical
positions by arguing that there is no one absolute
code of ethics and that morality is relative.
– Moral Relativism claims that 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.

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 Moral Relativism
• Naïve relativism: Based on the belief that all moral
decisions are deeply personal and that individuals have the
right to run their own lives.
• Role relativism: Based on the belief that social roles carry
with them certain obligations to that role, adherents of role
relativism argue that a manager in charge of a work unit
must put aside his or her personal beliefs and do instead
what the role requires—that is, act in the best interests of
the unit.
• Social group relativism: Based on a belief that morality is
simply a matter of following the norms of an individual’s
peer group, social group relativism argues that a decision
is considered legitimate if it is common practice, regardless
of other considerations (“everyone’s doing it”).

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 Moral Relativism
• Cultural relativism: Based on the belief that morality is
relative to a particular culture, society, or community,
adherents of cultural relativism argue that people should
understand the practices of other societies, but not judge
them.

“When in Rome, do as the Romans do”

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 Social Responsibility

Kohlberg’s Levels of Moral Development

Another reason why some business people might be seen
as unethical is that they may have no well-developed
personal sense of ethics
A person’s ethical behavior is affected by his or her level
of moral development, certain personality variables,
and such situational factors as
the job itself, the supervisor, and the organizational
culture.
– Pre-conventional Level
– Concern for self eg. Personal interest
– Conventional\conservative Level
– Consideration of laws and norms
– Principled Level: Adherence to internal moral code
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 Social Responsibility

Code of Ethics:
– Specifies how an organization expects its
employees to behave while on the job.
A code of ethics (1) clarifies company expectations of
employee conduct in various situations and
(2) makes clear that the company expects its people to
recognize the ethical dimensions in
decisions and actions.

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 Sustainability

• The concept of sustainability should be

broadened to include economic and social as
well as environmental concerns.
• It is sometimes impossible to address the
sustainability of the natural environment
without considering the social and economic
aspects of relevant communities and their
activities.

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 Sustainability– Triple bottom line

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 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.

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 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).

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 Assessing Ethical Behavior
Approaches to Ethical Behavior
– Utility: Does a particular act optimize the benefits
to those who are affected by it? Do all relevant
parties receive “fair” benefits?
– Individual Rights: Does the act respect the rights of
all individuals involved?
– Justice: Is the act consistent with what’s fair? E.g.,
level of salary, working hours. Decision makers be
equitable, fair, and impartial in the distribution of
costs and benefits to individuals and groups
– Caring: Is the act consistent with people’s
responsibilities ©to2009each other?
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Assessing Ethical Behavior
Approaches to Ethical Behavior
We solve ethical problems by asking the
following three questions regarding an act or a
decision:
1.Utility: Does it optimize the satisfactions of all
stakeholders?
2.Rights: Does it respect the rights of the
individuals involved?
3. Justice: Is it consistent with the canons
of justice?
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 Social Responsibility

Approaches to Ethical Behavior

• Categorical imperatives\crucial
“golden rules”
Not restrict others behavior

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 Responsibility Toward the
Environment
• Encompasses
three main areas:
1. Air pollution
2. Water pollution
3. Land pollution
– Toxic\deadly
waste
– Recycling

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 Responsibility Toward
Customers
Consumer Rights

Unfair Pricing

Ethics in Advertising
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 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?
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Responsibility Toward Investors

• Improper financial management:

• Offenses are typically unethical, rather than illegal. Examples
include excessive salaries, and lavish\plentiful or frivolous
perks\bonus (e.g. regular corporate “retreats” to exotic\
interesting island resorts).
• 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.

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 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.

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 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
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