Key Topics Ch 3 & 4 © 2015 Cengage Learning
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Key Topics Ch 3 4 2015 Cengage Learning 1 Todays class Chapter 3 and 4 Stakeholder Corporate governance First group meeting Group discussion of Ethics in Practice Case Walmart Case Study 2015 Cengage Learning 2 Key Topics
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01
Key TopicsCh 3 & 4 © 2015 Cengage Learning 1<br>
02
Today’s class… Chapter 3 and 4
Stakeholder
Corporate governance
First group meeting
Group discussion of Ethics in Practice Case
Walmart Case Study © 2015 Cengage Learning 2<br>
Stakeholder
Corporate governance
First group meeting
Group discussion of Ethics in Practice Case
Walmart Case Study © 2015 Cengage Learning 2<br>
03
Key Topics Stakeholder
Type of stake and stakeholders
Sustainability as stakeholder
Progress of stakeholder involvement based on three views of the firm
Corporate Engagement
Corporate Governance
Board of directors
Sarbanes-Oxley Act (SOX) of 2002 for improving governance
Alternative Model of Corporate Governance
Walmart Case Study © 2015 Cengage Learning 3<br>
Type of stake and stakeholders
Sustainability as stakeholder
Progress of stakeholder involvement based on three views of the firm
Corporate Engagement
Corporate Governance
Board of directors
Sarbanes-Oxley Act (SOX) of 2002 for improving governance
Alternative Model of Corporate Governance
Walmart Case Study © 2015 Cengage Learning 3<br>
04
Paradigm change of Stakeholder Who own the corporation?
Old paradigm: only shareholders and very few stakeholders
New paradigm: shareholders and various stakeholders
Importance of stakeholder…
Increasing due to CSR
Boundary expanding
E.g., nonhuman stakeholder © 2015 Cengage Learning 4<br>
Old paradigm: only shareholders and very few stakeholders
New paradigm: shareholders and various stakeholders
Importance of stakeholder…
Increasing due to CSR
Boundary expanding
E.g., nonhuman stakeholder © 2015 Cengage Learning 4<br>
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Origins of the Stakeholder Concept Stake - An interest or a share in an undertaking.
Example: Financially, Mr. John Doe holds a 20% stake in the company. Parents have a large stake in their children's education.
Stake can be categorized as: © 2015 Cengage Learning 5 5 5 Legal Right Moral Right<br>
Example: Financially, Mr. John Doe holds a 20% stake in the company. Parents have a large stake in their children's education.
Stake can be categorized as: © 2015 Cengage Learning 5 5 5 Legal Right Moral Right<br>
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An interest When a person or group will be affected by a decision, it has an interest in that decision.
The plant closing will affect people in the community.
This TV commercial demeans women.
A Citizen's interest in a national issue
E.g., US citizens' interest in NAFTA (North American Free Trade Agreement) negotiation: especially, many business people in California is affected © 2015 Cengage Learning 6<br>
The plant closing will affect people in the community.
This TV commercial demeans women.
A Citizen's interest in a national issue
E.g., US citizens' interest in NAFTA (North American Free Trade Agreement) negotiation: especially, many business people in California is affected © 2015 Cengage Learning 6<br>
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A Right A moral right or a legal right
It is fair to share equal amount of work among team members and keep the noise down in the office while working.
Employment Rights Act 1996, as amended, against suffering any harm because of any reasonable actions they take on health and safety grounds.
Consumer rights when you buy goods and services © 2015 Cengage Learning 7<br>
It is fair to share equal amount of work among team members and keep the noise down in the office while working.
Employment Rights Act 1996, as amended, against suffering any harm because of any reasonable actions they take on health and safety grounds.
Consumer rights when you buy goods and services © 2015 Cengage Learning 7<br>
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Ownership When a person or group has a legal title to an asset or a property
This company is almost mine because I have more than 50% of stocks.
I own 1,000 stocks out of 10,000 of this corporation. So, I can claim at least 10% of ownership. © 2015 Cengage Learning 8<br>
This company is almost mine because I have more than 50% of stocks.
I own 1,000 stocks out of 10,000 of this corporation. So, I can claim at least 10% of ownership. © 2015 Cengage Learning 8<br>
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Stakeholders Stakeholder -
Any individual or group who can affect or is affected by the actions, decisions, policies, practices, or goals of the organization.
Introduction of Stakeholder (1:26) © 2015 Cengage Learning 9<br>
Any individual or group who can affect or is affected by the actions, decisions, policies, practices, or goals of the organization.
Introduction of Stakeholder (1:26) © 2015 Cengage Learning 9<br>
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Shareholder vs. Stakeholder ….is any person, company or other institution that owns at least one share of a company’s stock.
Shareholders are stakeholders in a corporation
Shareholders are usually not personally liable for the company's debts and other financial obligations.
Stakeholders are not always shareholders © 2015 Cengage Learning 10<br>
Shareholders are stakeholders in a corporation
Shareholders are usually not personally liable for the company's debts and other financial obligations.
Stakeholders are not always shareholders © 2015 Cengage Learning 10<br>
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Who are Business’s Stakeholders? © 2015 Cengage Learning 11 11<br>
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Getting Important Stakeholders Sustainability, buzz word and one of the key themes
What is Sustainability? (4:00)
Please try below after class
The Journey of Sustainable Business (12:00)
Unusual stakeholders will become usual
Natural environment
Nonhuman species
Mountain ranges (Himalaya, tallest mountain?)
Future generations © 2015 Cengage Learning 12<br>
What is Sustainability? (4:00)
Please try below after class
The Journey of Sustainable Business (12:00)
Unusual stakeholders will become usual
Natural environment
Nonhuman species
Mountain ranges (Himalaya, tallest mountain?)
Future generations © 2015 Cengage Learning 12<br>
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Evolution of stakeholder involvementbased on three views © 2015 Cengage Learning 13 Note: The view has changed as the paradigm changes.<br>
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Production and Managerial Views of the Firm (fig 3-2 slightly different) © 2015 Cengage Learning 14 industrial age in-between industrial age and information age<br>
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Stakeholder View of the Firm © 2015 Cengage Learning 15 information age and beyond Natural Environment Artificial Intelligence<br>
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Type of Stakeholders © 2015 Cengage Learning 16<br>
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Nonsocial Stakeholders © 2015 Cengage Learning 17 Strong (maybe dangerous for some businesses) secondary nonsocial stakeholders
https://www.peta.org/<br>
https://www.peta.org/<br>
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Stakeholders of Ford Motor © 2015 Cengage Learning 18 Primary social stakeholder?
Secondary social stakeholder?
Primary nonsocial stakeholder?
Secondary nonsocial stakeholder?<br>
Secondary social stakeholder?
Primary nonsocial stakeholder?
Secondary nonsocial stakeholder?<br>
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Stakeholder Typology © 2015 Cengage Learning 19<br>
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Latent Stakeholders 1, 2, and 3 from the typology
Dormant, Discretionary, Demanding
One attribute (no overlap)
Low salience
Managers may do nothing about these stakeholders and may not even recognize them as stakeholders. © 2015 Cengage Learning 20<br>
Dormant, Discretionary, Demanding
One attribute (no overlap)
Low salience
Managers may do nothing about these stakeholders and may not even recognize them as stakeholders. © 2015 Cengage Learning 20<br>
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Expectant Stakeholders 4, 5, and 6
Dominant, Dangerous, Dependent
Two attributes
Moderate salience
Active rather passive
Seen by managers as 'expecting something'.
Likely higher-level engagement with these stakeholders © 2015 Cengage Learning 21<br>
Dominant, Dangerous, Dependent
Two attributes
Moderate salience
Active rather passive
Seen by managers as 'expecting something'.
Likely higher-level engagement with these stakeholders © 2015 Cengage Learning 21<br>
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Definitive stakeholders 7: Definitive
All three attributes
High salience
Highly active
Managers (especially, top management) need to give immediate priority to these stakeholders. © 2015 Cengage Learning 22<br>
All three attributes
High salience
Highly active
Managers (especially, top management) need to give immediate priority to these stakeholders. © 2015 Cengage Learning 22<br>
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Stakeholder Engagement An approach by which companies successfully implement the transactional level of strategic management capability.
Stakeholder Engagement (end @ 2:43, 3:07)
Interaction with stakeholders must be integrated into every level of decision-making in the organization.
A ladder of stakeholder engagement depicts a continuum from low engagement to high engagement.
Transparency: working toward the open corporation.
Sustainability is the latest emphasis on engaging stakeholders. © 2015 Cengage Learning 23<br>
Stakeholder Engagement (end @ 2:43, 3:07)
Interaction with stakeholders must be integrated into every level of decision-making in the organization.
A ladder of stakeholder engagement depicts a continuum from low engagement to high engagement.
Transparency: working toward the open corporation.
Sustainability is the latest emphasis on engaging stakeholders. © 2015 Cengage Learning 23<br>
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Key Questions for effective Stakeholder Management Who are our organization’s stakeholders?
What are our stakeholders’ stakes?
What opportunities and challenges do our stakeholders present to the firm?
What responsibilities (economic, legal, ethical, and philanthropic) does the firm have to its stakeholders?
What strategies or actions should the firm take to best address stakeholder challenges and opportunities? © 2015 Cengage Learning 24<br>
What are our stakeholders’ stakes?
What opportunities and challenges do our stakeholders present to the firm?
What responsibilities (economic, legal, ethical, and philanthropic) does the firm have to its stakeholders?
What strategies or actions should the firm take to best address stakeholder challenges and opportunities? © 2015 Cengage Learning 24<br>
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Corporate Governance CG is the system corporations are directly controlled.
What is Corporate Governance? (3:00)
Is concerned with the relative roles, rights, and accountability of such stakeholder groups as owners, boards of directors, managers, employees, and other stakeholders. © 2015 Cengage Learning 25<br>
What is Corporate Governance? (3:00)
Is concerned with the relative roles, rights, and accountability of such stakeholder groups as owners, boards of directors, managers, employees, and other stakeholders. © 2015 Cengage Learning 25<br>
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The Corporation’s Hierarchy of Authority © 2015 Cengage Learning 26 Issued by the state - allow right to exist. So, not a major group in a corporation<br>
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Roles of Four Major Groups - Shareholders -
Own stock in the firm, giving them ultimate control (the shareholder-primacy model).
Board of Directors -
Govern and oversee management of the business.
Managers (especially, top management) -
The individuals hired by the Board to manage the business on a daily basis.
Employees -
Hired to perform actual operational work © 2015 Cengage Learning 27<br>
Own stock in the firm, giving them ultimate control (the shareholder-primacy model).
Board of Directors -
Govern and oversee management of the business.
Managers (especially, top management) -
The individuals hired by the Board to manage the business on a daily basis.
Employees -
Hired to perform actual operational work © 2015 Cengage Learning 27<br>
28
Separation of Ownership from ControlContributes to Governance Problems © 2015 Cengage Learning 28 Pre-corporate Period Owners(ownership, sole
& almost unlimited
responsibility)
Managers(control) Corporate Period<br>
& almost unlimited
responsibility)
Managers(control) Corporate Period<br>
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Matters Surrounding Unreasonably High Compensation © 2015 Cengage Learning 29 Excessive CEO Pay Outside Director Compensation
Why it Pays to Be on a Board of Directors (2:30)<br>
Why it Pays to Be on a Board of Directors (2:30)<br>
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The Need for Board Independence © 2015 Cengage Learning 30 The board is responsible for effective corporate governance.
Outside directors – are independent from the firm
Inside directors – have some tie to the firm
Board independence from management is crucial to good governance. If not, below scandal can happen again
E.g., Enron Scandal (4:48)
world famous scandal and motivation for SOX
Even today, still not easy……..<br>
Outside directors – are independent from the firm
Inside directors – have some tie to the firm
Board independence from management is crucial to good governance. If not, below scandal can happen again
E.g., Enron Scandal (4:48)
world famous scandal and motivation for SOX
Even today, still not easy……..<br>
31
Q & A CEO vs. Chairman
The CEO is ultimately accountable to the board of directors for the company's performance. The chairman of a company is the head of its board of directors.
Can the CEO be a chairmen of the board?
A CEO who may also be chairman of the board as well as other executives of the organization such as its CFO or large shareholders (who may or may not also be employees or officers).
Is a CEO higher than a chairman?
The chairman, as a member of the board of directors, has a higher rank than the president / CEO because the chairman can have a role in hiring and firing the president / CEO, whereas the converse is not the case. © 2015 Cengage Learning 31<br>
The CEO is ultimately accountable to the board of directors for the company's performance. The chairman of a company is the head of its board of directors.
Can the CEO be a chairmen of the board?
A CEO who may also be chairman of the board as well as other executives of the organization such as its CFO or large shareholders (who may or may not also be employees or officers).
Is a CEO higher than a chairman?
The chairman, as a member of the board of directors, has a higher rank than the president / CEO because the chairman can have a role in hiring and firing the president / CEO, whereas the converse is not the case. © 2015 Cengage Learning 31<br>
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Red Flags Signaling Board Problems What if you detect below problems? © 2015 Cengage Learning 32 2. Poor employee morale. 1. Company has to restate earnings. 3. Negative risk assessment from auditor. 4. Poor customer satisfaction track record. 5. Management misses strategic performance goals. 6. Company is target of employee lawsuits. 7. Stock price declines. 8. Quarterly financial results miss analysts’ expectations. 9. Low corporate governance quotient rating.<br>
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Improving Corporate Governance (1 of 2) Sarbanes-Oxley Act (SOX) of 2002 (4:45) – After class especially if your major is Accounting or Finance
Amends securities laws to protect investors in public companies
Enhances public disclosure to require reporting of off-balance sheet transactions, and personal loans to executives
Limits the nonauditing services an auditor can provide to a firm it audits
Makes it unlawful for accounting firms to provide services where conflicts of interests exist
CEOs and CFOs must certify financials, and are held responsible for financial representations © 2015 Cengage Learning 33<br>
Amends securities laws to protect investors in public companies
Enhances public disclosure to require reporting of off-balance sheet transactions, and personal loans to executives
Limits the nonauditing services an auditor can provide to a firm it audits
Makes it unlawful for accounting firms to provide services where conflicts of interests exist
CEOs and CFOs must certify financials, and are held responsible for financial representations © 2015 Cengage Learning 33<br>
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Improving Corporate Governance (2 of 2) May not be effective unless top management is willing to enforce and strongly implement below….
Changes in boards of directors -
More Board diversity
A greater ratio of outside board members to inside board members
Use of board committees to:
Ensure that financials are not misleading
Ensure that internal controls are adequate
Follow-up allegations of irregularities
Ratify the selection of an external auditor © 2015 Cengage Learning 34<br>
Changes in boards of directors -
More Board diversity
A greater ratio of outside board members to inside board members
Use of board committees to:
Ensure that financials are not misleading
Ensure that internal controls are adequate
Follow-up allegations of irregularities
Ratify the selection of an external auditor © 2015 Cengage Learning 34<br>
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Corporate Governance Structure Information from SEC www.sec.gov
Company’s annual report (Form 10-K)
Proxy statement (Form Def 14A).
Review these documents to get you a better understanding of the company’s corporate governance structure.
Good idea to review your company for the sake of your job security © 2015 Cengage Learning 35<br>
Company’s annual report (Form 10-K)
Proxy statement (Form Def 14A).
Review these documents to get you a better understanding of the company’s corporate governance structure.
Good idea to review your company for the sake of your job security © 2015 Cengage Learning 35<br>
36
Walmart Answer questions the textbook
Overview of the Walmart Case: How Powerful (or ethical) Is Walmart? (3:40)
After class,
CSR by Walmart in 2013 (2:36)
Walmart Mexico Scandal (2:27) © 2015 Cengage Learning 36<br>
Overview of the Walmart Case: How Powerful (or ethical) Is Walmart? (3:40)
After class,
CSR by Walmart in 2013 (2:36)
Walmart Mexico Scandal (2:27) © 2015 Cengage Learning 36<br>