discussion

Chapter 7. Ethical Issues in the Global Arena

Chapter 8. Business Ethics and Technology: The Digital Enterprise

Chapter 9. Corporate Governance: Foundational Issues

Initial Postings: Read and reflect on the assigned readings for the week. Then post what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding in each assigned textbook chapter.Your initial post should be based upon the assigned reading for the week, so the textbook should be a source listed in your reference section and cited within the body of the text. Other sources are not required but feel free to use them if they aid in your discussion.

Also, provide a graduate-level response to each of the following questions:

Do you think genetically modified organisms (GMOs) raise a legitimate safety hazard? Should government agencies such as the FDA and USDA take more action to require safety testing? Do you think labeling unfairly stigmatizes GMOs and makes consumers question their safety?

As an MNC seeks to balance and honor the ethical standards of both the home and host countries, conflicts inevitably will arise. What criteria do you think managers should consider as they try to decide whether to use home or host country ethical standards? Does the use of hypernorms help? Explain.

Business & Society: Ethics,
Sustainability, and
Stakeholder Management,
11e
Chapter 7: Ethical Issues in the
Global Arena
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1
Icebreaker: Bribery – Fiction and Reality
Divided in small groups, discuss what you know about bribery and corruption from
popular media and movies.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Chapter Objectives (1 of 2)
By the end of this chapter, you should be able to:
1. Describe the ethical and social challenges faced by multinational corporations (MNCs)
operating in the global business environment.
2. Summarize the key implications for managers of the following ethical issues: infant
formula controversy, Bhopal tragedy, factory collapses, sweatshops, and human rights
abuses.
3. Define corruption and differentiate between bribes and grease payments and outline
the major features of the Foreign Corrupt Practices Act.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
3
Chapter Objectives (2 of 2)
4. What are the major global business ethics codes created by international
organizations? Which two seem most important and why?
5. Identify and discuss strategies companies may employ for improving global business
ethics.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4
Unit 7.1
Challenges in the Global Environment
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
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5
Ethical Issues in the Global Business Environment
• The growth of global business as a critical element in the world economy is one of the
most important developments of the past half century.
• Characterized by a rapid growth of foreign direct investment in developing nations like
China, India, and Russia.
• In less-developed countries (LDCs), because there are no government regulations, the
temptation is to lower or reject standards.
• The expanded marketplace has been called the transnational economy.
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6
Business Challenges in a Global Environment
• A multinational corporation (MNC) or multinational enterprise (MNE) seeks to be
accepted into an unfamiliar society.
• Two major challenges:
• Achieving corporate legitimacy in an unfamiliar society.
• Differing philosophies between MNCs and host countries.
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7
The Dilemma of the Multinational Corporation
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8
Discussion Activity 7.1.1
Break into small groups and discuss: What do you think are the main challenges for
multinational operations in the global environment today?
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9
Unit 7.2
Ethical Issues in the Global Business Environment
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
10
Ethical Issues in the Global Business Environment
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11
Questionable Marketing and Plant Safety Practices
• The Infant Formula Controversy
• Nestle mass-marketed infant formula to poor mothers in tropical LDCs, knowing the health
risks.
• As a result, there was a dramatic increase in infant malnourishment and sickness.
• Plant Safety and the Bhopal Tragedy
• Union Carbide’s plant safety practices led to the “worst industrial accident in history,” killing
more than 2,000 people, and injuring 200,000 others.
• The lack of regulation in LDCs is a temptation to lower or reject standards used in the firm’s
home country.
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
12
Human Rights, Sweatshops, and Labor Abuses (1 of
4)
• MNCs’ use of women and children to cheaply staff factories.
• Many major corporations and many countries have been involved.
Sweatshops
• Characterized by child labor, low pay, poor working conditions, worker exploitation, and
health and safety violations.
• Increased scrutiny of sweatshop practices in recent years.
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
13
Human Rights, Sweatshops, and Labor Abuses (2 of
4)
Fair Labor Association (FLA)
• mission “to combine the efforts of business, civil society organizations, and colleges and
universities to promote and protect workers’ rights and to improve working conditions
globally through adherence to international standards.”
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
14
Human Rights, Sweatshops, and Labor Abuses (3 of
4)
Social Accountability 8000 (SA8000)
• An effort to improve sweatshop
conditions created by Social
Accountability International (SAI):
• Child Labor
• Forced Labor
• Health and Safety
• Freedom of Association & Collective
Bargaining
• Discrimination
• Discipline
• Working Hours
• Remuneration
• Management Systems
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
15
Human Rights, Sweatshops, and Labor Abuses (4 of
4)
Individual Company Initiatives
• Many businesses have developed global outsourcing guidelines.
• Despite best efforts, suppliers have learned how to conceal abuses.
• Keeping double books.
• Tutoring managers and employees on what to say when questioned about hours, pay, and safety
practices.
• Hidden production – secretly shifting work to subcontractors that violate pay and safety standards.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
16
Alien Tort Claims Act and Human Rights Violations
Alien Tort Claims Act (ATCA) –
• Efforts to sue transnational companies for violations of international law in countries
outside the U.S.
• Efforts by foreign individuals to sue U.S. firms in U.S. courts for the actions of their
companies abroad.
• In 2013, the U.S. Supreme Court held that the law cannot be applied to actions that
take place overseas, but only to actions which take place in the United States.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
17
Discussion Activity 7.2.1
Drawing on the notions of moral, amoral, and immoral management introduced in
Chapter 5, categorize your impressions of (a) Nestle, in the infant formula controversy
and (b) Union Carbide, in the Bhopal tragedy; and (c) Google, in moving its search engine
out of China.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
18
Corruption, Bribery, and Questionable Payments
• Corruption – attempts to influence the outcomes of decisions wherein the nature and
extent of the influence are not made public.
• Bribery – the practice of offering something (usually money) in order to gain an illicit
advantage.
• Questionable payments – those not easily categorized; they may be “grease” payments
(allowed), or bribes (not permitted).
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
19
Bribes or Grease Payments?
Grease Payments
Bribes
Relatively small sums of money given to
minor officials for the purpose of getting
them to:
• Relatively large amounts of money given
for the purpose of influencing officials to
make decisions or take actions that they
otherwise might not.
• Do what they are supposed to be doing
• Do what they are supposed to be doing
faster
• Do what they are supposed to be doing
better
• Money given, often to high-ranking
officials, to get them to purchase goods
or services.
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
20
Corruption
Instances of corruption –
• Free junkets for government officials
• Bribery of government officials
• Secret price-fixing agreements
• Giving of questionable political
contributions
• Insider dealing, and more
• Misuse of company assets for political
favors
• Kickbacks and protection money for
police
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
21
Arguments for and against Bribery
For Bribery
Against Bribery
Necessary for profits
Wrong and illegal in most developed nations
Common practice
Compromises personal beliefs
Accepted practice
Managers should not deal with corrupt governments
Form of commission, tax, or compensation
Once started, it never stops
One should take a stand for honesty, morality, and ethics
Creates a dependence on corruption
Deceives stockholders and costs customers
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
22
Discussion Activity 7.2.2
Differentiate between a bribe and a grease payment. Give an example of each. Discuss.
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23
Initiatives Against Bribery
Foreign Corrupt Practices Act
Transparency International
Corruption Perception Index
OECD Antibribery Initiatives
UN Convention Against Corruption
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
24
Discussion Activity 7.2.3
Conduct research, for purposes of updating the latest rankings of Transparency
International and the activities of the OECD, UNCAC, and individual country initiatives.
Discuss, how could countries, such as China, India, and Russia, most effectively improve
their TI rankings?
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
25
Unit 7.3
Improving Global Business Ethics
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
26
Improving Global Business Ethics
• Business ethics is much more complex at the global level than at the domestic level.
• Complexity arises from the fact that a wide variety of value systems, stakeholders,
cultures, forms of government and socio-economic conditions and standards of ethical
behavior exist throughout the world.
• Because the U.S. and European MNCs have played such a leadership role, these firms
have a heavy responsibility.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
27
Balancing & Reconciling the Ethics Traditions of
Home & Host Countries:
The Challenge of the Multinational Corporation
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
28
Ethical Choices in Home versus Host Country
Situations
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
29
Discussion Activity 7.3.1
As an MNC seeks to balance and honor the ethical standards of both the home and host
countries, conflicts inevitably will arise. What criteria do you think managers should
consider as they try to decide whether to use home or host country ethical standards?
Does the use of hypernorms help? Explain.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
30
Strategies for Improving Global Business Ethics
Four major strategies that could help MNCs conduct global business while maintaining
ethics:
• Create global codes of conduct.
• Link ethics with global strategy.
• Suspension of business activities in certain countries.
• Create ethical impact statements and audits.
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
31
Corporate Action Against Corruption
Five vital steps for an anticorruption program:
• High-level commitment by top management
• Detailed statements of policies and operating procedures
• Training and discussion of policies and procedures
• Hotlines and help lines for all organizational members
• Investigative follow-up, reporting, and disclosure
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
32
Discussion Activity 7.3.2
What are the major strategies companies might employ in improving global business
ethics? What are the key steps research has shown are important to successful company
anticorruption efforts?
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
33
Summary (1 of 2)
• Describe the ethical and social challenges faced by multinational corporations (MNCs)
operating in the global business environment.
• Summarize the key implications for managers of the following ethical issues: infant
formula controversy, Bhopal tragedy, factory collapses, sweatshops, and human rights
abuses.
• Define corruption and differentiate between bribes and grease payments and outline
the major features of the Foreign Corrupt Practices Act.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
34
Summary (2 of 2)
• Explain what the major global business ethics codes created by international
organizations are and detail which seem most important and why.
• Identify and discuss strategies companies may employ for improving global business
ethics.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
35
Business & Society: Ethics,
Sustainability, and
Stakeholder Management,
11e
Chapter 8: Business Ethics and
Technology: The Digital Enterprise
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1
Icebreaker: Technology – What is the Point?
Divided in small groups, discuss what you think is the main purpose of technology for
businesses.
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Chapter Objectives (1 of 2)
By the end of this chapter you should be able to:
1. Identify and describe what the new world of Big Data and artificial intelligence is all
about and the implications it holds for businesses.
2. What makes an organization a digital enterprise? How does this relate to business
ethics?
3. Explain how social media have changed the world of business and technology.
4. Discuss how surveillance is a new dimension to being a consumer and an employee
and what its implications are for stakeholders.
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3
Chapter Objectives (2 of 2)
5. Articulate an understanding of technology and the technological environment.
6. Identify the characteristics of technology to include their benefits, side effects, and
challenges in business.
7. Comment on the relationship between technology and ethics.
8. Define information technology and discuss the issues relating to e-commerce in
business.
9. Define biotechnology. Identify the ethical issues involved in genetic engineering and
genetically modified organisms (GMOs).
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4
Unit 8.1
The New World of Big Data and Artificial Intelligence
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5
Business Ethics & Technology
• We live in an age dominated by advancing technology. Each new generation
experiences technological advances that were not seen by previous generations.
• The new generation of young people is called the iGeneration. Technology is part of
their DNA, and they have no “off-switch.”
• Technology is at the core of most businesses, but it is a two-edged sword.
• Despite many positive advances, there are new problems and challenges.
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6
The New World of Big Data and Artificial Intelligence
(1 of 2)
Big Data:
• The tons of information that are out there and how businesses are striving to put it to
work.
• More information from more sources than ever before.
• Businesses can access it as quickly as it’s generated.
• Advantages of Big Data accompanied by new issues: data security, privacy, cybercrime.
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7
The New World of Big Data and Artificial Intelligence
(2 of 2)
Big Data/AI ethics issues:
• Private customer data and identity should remain private.
• Shared private information should be treated confidentially.
• Customers should have a transparent view as to how their data are being used or sold.
• Big data should not interfere with human will, employing inferences and predictions
belying who we are as persons.
• Big Data should not institutionalize unfair biases such as racism or sexism.
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8
Discussion Activity 8.1.1
Is society intoxicated with technology? Does this pose special problems for business with
respect to the ethics of technology? Will such intoxication blind people to ethical
considerations in business?
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
9
Unit 8.2
Technology and the Technological Environment
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10
Technology and the Technological Environment
Technology –
• The totality of the means employed to provide objects necessary for human sustenance
and comfort.
• A scientific method used to achieve a practical purpose.
Technological environment • The total set of technology-based advancements or progress taking place in the society.
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11
Unit 8.3
Benefits and Costs of Technology
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12
Benefits of Technology
• Increased production of goods and services
• Reduced amount of labor needed to produce goods and services
• Made labor easier and safer
• Results in a higher standard of living
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13
Costs of Technology
Technology has some unanticipated side effects:
• Environmental pollution
• Depletion of natural resources
• Technological unemployment
• Creation of unsatisfying jobs
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14
Discussion Activity 8.3.1
Are there any benefits or negative side effects of technology in business that have not
been mentioned in this chapter? Identify and discuss.
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15
Unit 8.4
Technology and Ethics
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16
Technology and Ethics
• Our perspective is to raise ethical questions that may be related to business
development, and the use of technology.
• Two Key Issues –
• Technological determinism • The idea that what can be developed will be developed.
• Ethical Lag • Occurs when the speed of technological change far exceeds that of ethical development.
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17
Discussion Activity 8.4.1
Break into small groups and discuss: Do you think business is abusing its power with
respect to invasion of privacy of consumers? Is surveillance of consumers in the
marketplace a fair and justified practice? Which particular practice do you think is the
most questionable?
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18
Unit 8.5
Information Technology
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19
Information Technology
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20
Social Media
• Cutting edge of business communication based on technology.
• Has a dark side where social and ethical issues arise.
• Unfair reviews and how they respond to them are a constant challenge.
• Places more emphasis on instantaneous rather than accurate information.
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21
Cybersecurity
Costs of cybercrime are driving the need for cybersecurity:
• damage and destruction of data
• stolen money,
• lost productivity
• theft of intellectual property, theft of personal and corporate data
• embezzlement, fraud, post-attack
• disruptions to the normal course of business
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22
E-Commerce (1 of 2)
• Also called e-commerce, e-business, or Web-based marketing.
• The Internet has reshaped the way business is conducted.
Online Scams –
• con artists are using the Internet to scam the unwary; including fake check scams, free
gifts, phishing, Nigerian money offers, credit card fraud, travel scams, pyramid
schemes, and investment opportunities.
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
23
E-Commerce (2 of 2)
Ongoing Issues in E-Commerce Ethics
• Access
• Intellectual property
• Privacy and informed consent
• Protection of children
• Security of information
• Trust
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24
Phishing
• attempt to obtain financial or other confidential, personal information from Internet
users.
• botnet scams: hackers get access to personal and corporate information, are exploding
in numbers.
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25
Government’s Involvement in Consumer Privacy
Protection
• Privacy by Design: Companies should “build in” privacy at every stage of product
development.
• Simplified Choice for Consumers and Businesses: Consumers should be given the
ability to make decisions about their data at a relevant time and context, including a Do
Not Track mechanism, while reducing the burden on businesses of providing
unnecessary choices.
• Greater Transparency: Make information collection and use practices transparent.
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26
Examples of Threats to Consumers’ Privacy Posed by
the Internet
Threats to Privacy
Description
Social networks
Social networks allow individuals to establish connections and store information remotely. Default privacy settings
provide too much personal information online. This information creates a field day for identity thieves, hackers,
scammers, debt collectors, employers, marketers, data miners, and governments.
Hackers
Organized cybercriminals known as hactivists participate in phishing, online shopping fraud, banking fraud, and other
deceptions.
Behavioral advertising
Behavioral advertising is a technique used by advertisers to present targeted ads to consumers by collecting information
about their browsing behavior. These techniques create a behavioral profile of you that is then used for exploitation.
Data stealing
Done through rogue applications on social networking sites—computers that harbor botnets (Coreflood) and smartphone
malware (DroidDream) are a couple that may be after you.
Facial-recognition
technology
Once used for security and surveillance. Facebook deployed facial-recognition software that allows Facebook to gather
data or recognize your face. Then people can be searched for using a picture.
GEO-Tags
Used when photos or videos are taken with a GPS-equipped device (e.g., smartphone). Photos are embedded with a geotag revealing the exact location of where taken. Revelation of geo-locational data on social networking sites creates
danger of social surveillance and stalking.
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27
Business Initiatives to Protect Consumer Privacy
• Ethical Leadership
• Privacy Policies
• Chief Privacy Officers
• Data Security
• Data security and cybercrime are among the biggest threats companies face today.
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28
Questionable Business Practices
Illegal Downloading –
• The Recording Industry Association of America (RIAA): university campuses to be
hotbeds of file-sharing activity.
Monitoring Technology –
• Consumer behavior, movements, social relationships, and interests are often recorded,
evaluated, and analyzed in real-time.
• Companies exploiting personal information has become a multi-billion-dollar
industry.
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29
The Workplace and Computer Technology
• Automation and Robotics – use of industrial robots could double by 2018. People
worry they will lose their jobs to robotics technology.
• Artificial Intelligence – embraces software technologies that make a computer or robot
perform equal to or better than normal human ability in accuracy, capacity, and speed.
• Cell Phones and Texting – use of company phones, or using phones for business while
driving is a business ethics topic.
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30
The Workplace and Computer Technology: Unethical
Actions by Employees
• Created potentially dangerous situations by using new technology while driving
• Wrongly blamed an error the employee made on a technological glitch
• Copied the company’s software for home use
• Used office equipment to shop on the Internet for personal reasons
• Used office equipment to network/search for another job
• Accessed private computer files without permission
• Used new technologies to intrude on coworkers’ privacy
• Visited porn websites using office equipment Company
• Actions – management should clearly define guidelines for ethical computer use by employees.
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31
Discussion Activity 8.5.1
Do you think business is abusing its power with respect to invasion of privacy of
consumers? Is surveillance of consumers in the marketplace a fair and justified practice?
Which particular practice do you think is the most questionable?
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32
Discussion Activity 8.5.2
Is it an exaggeration to question the ethical implications for business of cell phone and
text-messaging use? Discuss both sides of this issue.
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33
Unit 8.6
Biotechnology
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34
Biotechnology
Biotechnology –
• Involves using biology to discover, develop, manufacture, market, and sell products and
services. Biotechnology is striving to heal, fuel, and feed the world.
Bioethics –
• A field that deals with the ethical issues embedded in the commercial use of
biotechnology.
• Proceduralism is the primary tool for bioethicists. It is using protocols to ensure that
classical safeguards are not violated.
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35
Realms of Biotechnology
Genetic Engineering
Genetically Modified Organisms
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Genetic Engineering
Cloning
Cloning Animals for Food
Stem cell research
Genetic testing and profiling
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Genetically Modified Organisms (GMOs)
• Also referred to as genetically engineered foods (GMFs).
• Fear over health and environmental effects; critics call them “Frankenfoods.”
• Many U.S. crops are genetically modified:
• Sugar beets (95%)
• Soybeans (91%)
• Cotton (88%)
• Corn (85%)
• Most Americans consume genetically modified organisms every day.
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Labelling of GMOs
• Safety of GMOs is not in question, according to scientific research.
• But one of the most frequently discussed issues with GMOs is labeling.
• FDA does not mandate GMO labeling in the U.S.
• The Non-GMO Project believes that people have the right to make informed choices
about whether they consume GMO products.
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39
Discussion Activity 8.6.1
Do you think genetically modified organisms (GMOs) raise a legitimate safety hazard?
Should government agencies such as the FDA take more action to require safety testing?
Do you think labeling unfairly stigmatizes GMOs and make consumers question their
safety?
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40
Summary (1 of 2)
• Identify and describe what the new world of Big Data and artificial intelligence is all
about and the implications it holds for businesses.
• Explain what makes an organization a digital enterprise and how this relates to business
ethics.
• Explain how social media have changed the world of business and technology.
• Discuss how surveillance is a new dimension to being a consumer and an employee and
what its implications are for stakeholders.
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41
Summary (2 of 2)
• Articulate an understanding of technology and the technological environment.
• Identify the characteristics of technology to include their benefits, side effects, and
challenges in business.
• Comment on the relationship between technology and ethics.
• Define information technology and discuss the issues relating to e-commerce in
business.
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42
Business & Society: Ethics,
Sustainability, and
Stakeholder Management,
11e
Chapter 9: Corporate Governance:
Foundational Issues
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1
Icebreaker: What are the Powers of Shareholders?
Divide in small groups and discuss: Are shareholder companies democratic? Can all
shareholders participate in the governance of the company? How do shareholders
exercise power?
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2
Chapter Objectives (1 of 2)
By the end of this chapter, you should be able to:
1.
Link the issue of legitimacy to corporate governance.
2.
Discuss the problems that have led to the recent spate of corporate scandals and problems in
corporate governance.
3.
Discuss the principal ways in which companies can improve corporate governance.
4.
Discuss the role of shareholders and the idea of strengthening shareholder voice. What are some of
the mechanisms that enable this?
5.
Discuss the role of the Securities and Exchange Commission (SEC) in protecting investors.
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3
Chapter Objectives (2 of 2)
6. Identify and discuss the principal ways in which shareholder activists exert pressure on
corporate management to improve governance.
7. Why are investor relations and shareholder engagement important? Discuss.
8. Compare and contrast the shareholder-primacy, director- primacy, and stakeholder
governance models of corporate governance. What are their respective strengths and
weaknesses? Which do you prefer and why?
9. In the realm of corporate governance, what should companies do to ensure effective
corporate social responsibility (CSR), sustainability, and business ethics?
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4
Unit 9.1
Legitimacy and Corporate Governance
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5
Legitimacy and Corporate Governance
Legitimacy –
• A condition that prevails when there is a congruence between an organization’s
activities and society’s expectations.
Legitimation –
• A dynamic process by which a business seeks to perpetuate its acceptance.
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6
Legitimacy
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7
Corporate Governance
Corporate Governance
Refers to the method by which a firm is being governed, directed, administered, or
controlled, and to the goals for which it is being governed.
Is concerned with the relative roles, rights, and accountability of such stakeholder groups
as owners, boards of directors, managers, employees, and other stakeholders.
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8
Roles of Four Major Groups
• Shareholders – Own stock in the firm, giving them ultimate control (the shareholderprimacy model).
• Board of Directors – Govern and oversee management of the business.
• Managers – The individuals hired by the Board to manage the business on a daily basis.
• Employees – Hired to perform actual operational work.
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9
The Corporation’s Hierarchy of Authority
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10
Precorporate versus Corporate Ownership and
Control
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Discussion Activity 9.1.1
What are the major criticisms of Boards of Directors? Which single criticism do you find
to be the most important? Why?
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Unit 9.2
Problems in Corporate Governance
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The Importance of Board Independence:
Outside directors –
• Are independent from the firm.
Inside directors –
• Have some tie to the firm.
• Board independence from management is crucial to good governance.
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14
Issues Surrounding Compensation
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15
CEO Pay–Firm Performance Relationship
• Stock Options – Allows the recipient to purchase stock in the future at the price it is
today.
• Backdating – Allows the recipient to purchase stock at yesterday’s price, resulting in
immediate wealth increase.
• Spring-loading – Granting of a stock option at today’s price, but with the inside
knowledge that stock’s value is improving.
• Bullet Dodging – Delaying of a stock option grant until right after bad news.
• Board independence from management is crucial to good governance.
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16
Excessive CEO Pay
The ratio of CEO pay to that of the average worker –
• 1950, 20 to 1
• 2014, 216 to 1
Say on Pay –
• Evolved from concerns over excessive executive compensation.
Clawback provisions –
• Compensation recovery mechanisms that enable a company to recoup CEO pay, typically in the
event of a financial restatement or executive’s misbehavior.
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17
CEO Pay Controversy
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Executive Retirement Plans and Exit Packages
Retirement packages
• Have come under scrutiny.
• George Hager Jr., retired and was given a $5.2 million “retention payment by Genesis
Healthcare at the height of the pandemic.
• In contrast, many of today’s workers do not have a retirement plan.
• Those who do generally have a defined contribution plan, rather than a defined benefit
plan.
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Outside Directors Compensation
• Paying board members is a recent idea.
• Today, outside board members are paid.
• From 2003-2015, their median pay rose about a third, from $175,800 to $258,000.
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Transparency
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21
Governance Impact of the Market for Corporate
Control
Mergers and acquisitions –
• Expectation are that the threat of a possible takeover will motivate top managers to
pursue shareholder, rather than self-interest.
• But many corporate CEOs and boards go to great lengths to protect themselves from
takeovers, using:
• Poison pills (discourages a hostile takeover by making the firm difficult to take on).
• Golden parachutes (firm agrees to pay key officers in the event of a change in
control of the corporation).
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Insider Trading
• The practice of buying or selling a security by someone who has access to material
information that is not available to the public.
• “Material Information” is information that a reasonable investor might want to use,
and is likely to affect the price of the firm’s stock.
• A “tipper” provides that information.
• A “tippee” receives the information.
• Executives and others who work for a firm may have inside information.
• Also those in relationships that include a duty of confidentiality may have inside
information, including spouses, parents, children, friends.
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Discussion Activity 9.2.1
Explain the evolution of corporate governance. What problems developed? What are the
current trends?
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24
Unit 9.3
Improving Corporate Governance
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Improving Corporate Governance (1 of 2)
Legislative Initiatives: Sarbanes–Oxley Act of 2002 (aka SOX or Sarbox)
• Limiting the nonauditing services an auditor can provide.
• Requiring auditing firms to rotate the auditors.
• Enhancing financial disclosure.
• Requiring that audit committees have at least one financial expert.
• CEOs/ CFOs be held responsible for financial representations of the company.
• Requiring that corporations adopt a code of ethics.
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26
Improving Corporate Governance (2 of 2)
Legislative Initiatives: The Dodd–Frank Wall Street Reform and Consumer Protection
Act
• Covers 16 major areas of reform affecting:
• Banks
• Credit card companies
• Credit rating agencies
• Insurance companies
• Hedge funds
• Futures trading
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The Role of the SEC
• The SEC is responsible for protecting investor interests.
• Critics argue that the SEC is more focused on the needs of businesses than on that of
investors.
• The SEC failed to stop the Bernard Madoff Ponzi scheme before investors lost billions,
although they had been warned of the scheme a decade earlier.
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28
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.
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29
Red Flags That Signal Board Problems and Steps to
Take for Board Repair
Red Flags
Steps to Take for Board Repair
1. Company has to restate earnings
1. Spread risk oversight among multiple committees
2. Poor employee morale
2. Seek outside help in identifying potential risks
3. Adverse Sarbanes-Oxley 404 or Dodd-Frank opinion
3. Deepen involvement in corporate strategy
4. Poor customer satisfaction track record
4. Align board size and skill mix with strategy
5. Management misses strategic performance goals
5. Revamp executive compensation
6. Company is target of employee lawsuits
6. Pick compensation committee members who will question the status quo
7. Stock price declines
7. Use independent compensation consultants
8. Quarterly financial results miss analysts’ expectations
8. Evaluate CEO on grooming potential successors
9. Low corporate governance quotient rating
9. Know what matters to your investors
Sources: “What Directors Think 2015,” SpencerStuart (February 2015), https://www.spencerstuart.com/research-and-insight/what-directors-think-2015, accessed March 7, 2021. Joanne S. Lublin, “Corporate Directors Give Repair Plan to Boards,” The Wall Street
Journal (March 24, 2009), B4; “What Directors Think 2015,” SpencerStuart (February 2015), https://www.spencerstuart.com/research-and-insight/what-directors-think-2015, accessed March 7, 2021; Joanne S. Lublin, “Corporate Directors Give Repair Plan to Boards,”
The Wall Street Journal (March 24, 2009), B4.
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30
The Board’s Relationship with the CEO
• Boards are responsible for monitoring CEO performance and dismissing poorly
performing CEO.
• Formerly, CEOs were protected; no more; firings of CEOs are up significantly.
• If CEO also serves as Chairman of the Board, this duality can offer some protection.
• Activists have moved to separate CEO and Board functions.
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31
Board Member Liability
• The Business Judgment Rule protects board members if:
• They act in good faith.
• Making informed decisions.
• That reflect the company’s best interests, and not their own interests.
• Good faith is central to the defense.
• The argument in favor of the Business Judgment Rule is that board members need to
be free to take risks without fear of liability.
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32
Discussion Activity 9.3.1
How do companies lose legitimacy? Explain how governance failures could happen? How
might they be avoided?
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33
Discussion Activity 9.3.2
Outline the major suggestions that have been set forth for improving corporate
governance. In your opinion, which suggestions are the most important? Why?
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34
Unit 9.4
The Role of Shareholders
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35
The Role of Shareholders
• The Shareholder Democracy Movement arises from the fact that although they are owners,
shareholders may find that their votes are not counted.
• They seek:
• A Majority Vote: The requirement that board members be elected by a majority of votes
cast, rather than by a plurality.
• Banning Classified or Staggered Boards: Electing members in staggered terms means that
it might take 3 or more years to replace a board.
• Proxy Access: Would provide shareholders with the opportunity to propose nominees for
the board of directors.
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Shareholder Activism
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Discussion Activity 9.4.1
How does shareholder activism change the practices of business and corporate
governance?
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Unit 9.5
Investor Relations and Shareholder Engagement
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Investor Relations and Shareholder Engagement
• A majority of corporate boards now communicate with their major investors.
• Public corporations have obligations to current and potential shareholders, including
full disclosure (Transparency), and the duty to provide information that might affect
investment decisions.
• Management is also responsible for communicating with shareholders.
• CEO Warren Buffett calls his annual shareholder meeting a “Woodstock weekend for
capitalists.”
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Holding Corporations Accountable
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41
Unit 9.6
Alternative Models of Corporate Governance
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
42
An Alternative Model of Corporate Governance
• The Anglo-American model of corporate governance is one of shareholder primacy.
• A emerging perspective is a director-primacy model of corporate governance.
• A director-primacy model is based on the concept of a corporation that is not owned,
but is an independent legal entity that owns itself.
• Boards are mediating hierarchs, responsible for balancing competing interests of
stakeholders.
• Boards have a duty to shareholders, but boards are the ultimate decision-makers,
whose duty is to the corporation.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
43
Discussion Activity 9.6.1
Discuss the pros and cons of the shareholder-primacy and director-primacy, and
shareholder governance models of corporate governance. Which do you prefer and why?
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
44
Summary (1 of 2)
• Link the issue of legitimacy to corporate governance.
• Discuss the problems that have led to the recent spate of corporate scandals and
problems in corporate governance.
• Discuss the principal ways in which companies can improve corporate governance.
• Discuss the role of shareholders and the idea of strengthening shareholder voice.
• Discuss the role of the Securities and Exchange Commission (SEC) in protecting
investors.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
45
Summary (2 of 2)
• Identify and discuss the principal ways in which shareholder activists exert pressure on
corporate management to improve governance.
• Explain why investor relations and shareholder engagement are important.
• Compare and contrast the shareholder-primacy, director- primacy, and stakeholder
governance models of corporate governance.
• Know what companies should do to ensure effective corporate social responsibility
(CSR), sustainability, and business ethics.
Carroll/Brown, Business & Society: Ethics, Sustainability & Stakeholder Management; 11th Edition. © 2023 Cengage. All Rights Reserved. May not be
scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
46