5-10 Page Executive Summary (ESSAY) on Lecture Slides

Chapter 10: Learning Objectives
Understand the key roles played by boards of directors.
Explain different terms associated with corporate takeovers.
Know the three levels and six stages of moral development suggested by Kohlberg.
Describe famous corporate scandals.
Know the dimensions of corporate social performance tracked by KLD.
Know the three major generational influences that make up the majority of the current workforce and their different perspectives and influences.
Understand how decision biases may impede effective decision making.

Learning Objectives, continued
Know the dimensions of corporate social performance tracked by KLD.
Know the three major generational influences that make up the majority of the current workforce and their different perspectives and influences.
Understand how decision biases may impede effective decision making.

© 2015 by Flat World Education, Inc.

Boards of Directors
Board of directors: A group of individuals, either elected or appointed, that oversees the activities of an organization or corporation
Corporate governance: The processes, policies, and laws that govern an organization (often corporations) to establish accountability and try and eliminate conflicts of interest associated with the principle-agent problems
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Boards of Directors

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Boards of Directors
Stakeholders: Individuals and groups that have an interest so as to stake a claim in an organization
The key stakeholder of most corporations is generally agreed to be the shareholders of the company’s stock
Most large, publicly traded firms in the United States are made up of thousands of shareholders
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Boards of Directors
Agency problem: Exists when the interest of the individuals that act as agents to manage the company, that may not align with the interest of the firm’s stockholders
The composition of the board is critical because the dynamics of the board play an important part in resolving the agency problem
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Boards of Directors
Board insiders: Members of the board of directors that are generally employed inside of the organization
Board outsiders: Members of the board of directors that are generally employed outside of the organization
CEO duality: Occurs when the chief executive officer is also the chairman of the board of directors
Has been known to create bitter divide within a corporation

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Boards of Directors
One of the most visible roles of boards of directors is the setting of CEO pay
Large corporations must pay competitive wages for the scarce talent that is needed to manage billion dollar corporations
CEO compensation is a function of the competitive wages that other corporations would offer for a potential CEO’s services
Boards will face considerable scrutiny from investors if CEO pay is out of line with industry norms
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CEO Compensation

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Corporate
Takeovers
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Stages of Moral Development
Psychologist rence Kohlberg suggests that there are six distinct stages of moral development
Kohlberg’s six stages were grouped into three levels:
Pre-conventional
Conventional
Post-conventional
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This theory holds that moral reasoning, the basis for ethical behavior, has six identifiable developmental stages, each more adequate at responding to moral dilemmas than its predecessor.
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Stages of Moral Development

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Heinz Dilemma

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Corporate Ethics and Social Responsibility

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Corporate Ethics and Social Responsibility
Sarbanes-Oxley Act of 2002: that set new or increased standards for the boards of public United States companies and accounting firms
Signed by President Bush in 2002
In response to corporate scandals at Enron, WorldCom, and Tyco
11 aspects that represented some of the most far-reaching reforms since the presidency of Franklin Roosevelt
For example, senior executive responsibility for financial statement accuracy, independent auditors, criminal penalties for destroying financial records, etc.
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Cost of Corruption

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http://www.pbs.org/frontlineworld/stories/bribe/2009/02/spotlight-the-victims-of-corruption.html

According to a 2004 study by the World Bank Institute, $1 trillion is paid every year in bribes worldwide. Many agree that the victims of bribery are often those living in poverty in the developing world, in countries rich in resources but dominated by corrupt governments. While the vast majority of these citizens remain very poor, often living on $1 a day, their elected officials accumulate enormous personal wealth, taking millions in bribes from corporations looking to secure lucrative contracts. Research by Transparency International shows that bribery not only stymies development, it also impacts health services, literacy rates and the environment. In the above video clip, experts talk about some of the countries hardest hit by a culture of corruption.
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Corporate Ethics and Social Responsibility
Social entrepreneurship: Entrepreneurial actions where both economic and social value creation occur

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Corporate Ethics and Social Responsibility
Corporate social performance (CSP): The degree to which a firm’s actions honor ethical values that respect individuals, communities, and the natural environment
Kinder, Lydenberg and Domini & Co. (KLD), a Boston-based firm that rates firms on a number of stakeholder-related issues with the goal of measuring CSP

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Corporate Ethics and Social Responsibility

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Understanding Thought Patterns
Kurt Lewin, known as the founder of social psychology, created the well know formula: B = f (P,E)

In other words, individual behavior is a function of characteristics of the person and characteristics of the environment
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Generational Factors
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Rational Decision Making
The process of rational decision-making involves problem identification, establishment and weighing of decision criteria, generation and evaluation of alternatives, selection of the best alternative, decision implementation, and decision evaluation.
There are several problems with this model when applied to many complex decisions.
Many strategic decisions are not presented in obvious ways and many CEOs may not be aware their firms are having problems until it’s too late to create a viable solution.
Rational decision-making assumes that options are clear and that a single best solution exists.
Rational decision-making assumes no time or cost constraints.
Rational decision-making assumes accurate information is available.
© 2015 by Flat World Education, Inc.

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Decision Biases
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Decision Biases
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Chapter 10: Key Takeaways
This chapter explains the role of boards of directors in the corporate governance of organizations such as large, publicly traded corporations.
Wise boards work to manage the agency problem that creates a conflict of interest between top managers such as CEO and other groups with a stake in the firm.
When boards fail to do their duties, numerous scandals may ensue.
Corporate scandals became so widespread that new legislation such as the Sarbanes-Oxley Act of 2002 has been developed with the hope of impeding future actions by executives associated with unethical or illegal behavior.
Firms should be aware of generational influences as well as other biases that may lead to poor decisions.
© 2015 by Flat World Education, Inc.

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