Governance & the International Firm 325325 UniMelb 1 Governance & the International Firm Week 10:...

Governance & the International Firm 325325 UniMelb

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Governance & the Governance & the International FirmInternational Firm

Week 10:Week 10: Leadership Leadership


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Learning Objectives Learning Objectives

Who are the Leaders of organizations?Who are the Leaders of organizations? What are the Board & Management What are the Board & Management

functions?functions? How can leaders solve conflicts of How can leaders solve conflicts of

interest?interest?


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LeadersLeaders


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The leader’s visionThe leader’s vision

inspiresinspires and and articulatesarticulates the organization’s the organization’s mission; mission;

provides the basis for the organization’s provides the basis for the organization’s objectivesobjectives and and goalsgoals; ;

communicates the beliefs and valuescommunicates the beliefs and values that that influence and shape the organization’s culture influence and shape the organization’s culture and behavioral norms;and behavioral norms;

And lays the And lays the foundationfoundation for organizational for organizational strategies, policies and proceduresstrategies, policies and procedures


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Who are the leaders in an Who are the leaders in an organization?organization?

BoardBoard Directors/Board Commissioners = Directors/Board Commissioners = Chairman and his/her Chairman and his/her Directors/CommissionersDirectors/Commissioners

ManagementManagement = CEO + COO + CFO + … = CEO + COO + CFO + … All All middle managersmiddle managers = those in an = those in an

organizational position to make a organizational position to make a differencedifference


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Chairman (Board) Chairman (Board)

& &

CEO/COO CEO/COO (Management)(Management)


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Chairing an organizationChairing an organization

SeparatingSeparating Chairman from CEO Chairman from CEO or notor not??

ChairmanChairman represents the represents the shareholders (& shareholders (& stakeholders)stakeholders) and and governsgoverns strategies & policies strategies & policies

whereas whereas CEOCEO = the = the management management executing executing these strategies and policiesthese strategies and policies


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Leadership functionLeadership function

ChairmanChairman: Responsibility for : Responsibility for organization’s strategies and policiesorganization’s strategies and policies

= long term vision= long term vision

= responsible for the board (3 committees)= responsible for the board (3 committees) CEOCEO: Responsibility for : Responsibility for putting these into putting these into

effecteffect = ability to make the right thing = ability to make the right thing happening happening

= executive authority= executive authority


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Chairman & GCGChairman & GCG

The chairman is responsible for The chairman is responsible for securing GCGsecuring GCG

= = governinggoverning the organization: the organization: instilling instilling (Risk) Strategies(Risk) Strategies Securing Securing Succession and RemunerationSuccession and Remuneration

Policies of ManagementPolicies of Management Assuring transparency and accountability Assuring transparency and accountability

through (internal & external) auditing = through (internal & external) auditing = Supervisory roleSupervisory role


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Board structureBoard structure

Board Structure:Board Structure:– A sound organizational structure does not A sound organizational structure does not

guarantee commercial success, guarantee commercial success, – but an organization without checks and but an organization without checks and

balances does increase the risk (of disaster)balances does increase the risk (of disaster)


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GCG & SRGCG & SR

GCGGCG: the design of institutions that : the design of institutions that induce or force management to induce or force management to internalize the welfare of stakeholdersinternalize the welfare of stakeholders

Socially Responsible companiesSocially Responsible companies (1 in 8 (1 in 8 NYSE) do have more NYSE) do have more efficient boardsefficient boards, , which which maymay lead to lead to improved performance improved performance (though not conclusive)(though not conclusive)


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Empirical facts on Boards & Empirical facts on Boards & GCGGCG

Efficient and Effective Boards Efficient and Effective Boards of of SR SR companiescompanies::– Board with more Board with more outside independent outside independent

directorsdirectors (“Agent problem”) and (“Agent problem”) and womenwomen,,– smaller boardsmaller board (unless for banks where (unless for banks where

diversified and bigger boards proved to be diversified and bigger boards proved to be more effective)more effective)

– Founding familyFounding family is is not not delivering delivering CEOCEO


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Empirical facts on Boards & Empirical facts on Boards & GCGGCG

A company’s commitment to A company’s commitment to social social responsibilityresponsibility and monitoring on behalf of and monitoring on behalf of stakeholders are becoming issues in stakeholders are becoming issues in investment decisionsinvestment decisions


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Chairman & CEOChairman & CEO

There is no clear evidence that separating There is no clear evidence that separating the position of chairman and CEO leads to the position of chairman and CEO leads to higher performance (as result of split higher performance (as result of split responsibilities) but the risks of too much responsibilities) but the risks of too much power in the hands of one person remains power in the hands of one person remains very realvery real

Institutional investors push to separate both Institutional investors push to separate both positions to increase check and balancespositions to increase check and balances


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Empirical facts on Board Empirical facts on Board StructureStructure

In 1989: more than 50% combined the position In 1989: more than 50% combined the position of Chairman & CEO in UK – the % is even higher of Chairman & CEO in UK – the % is even higher in the USAin the USA

In 1994: <25% combined the 2 positionsIn 1994: <25% combined the 2 positions Smaller companies – founded by the chairman - Smaller companies – founded by the chairman -

may prefer to keep both positions combined:may prefer to keep both positions combined:

Conclusion: a Conclusion: a trend to splittrend to split the two functions of the two functions of leadership into Chairman separated from CEO, leadership into Chairman separated from CEO, unless for smaller companiesunless for smaller companies


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Leadership function of Leadership function of BoardBoard

Independent director to guarantee some Independent director to guarantee some impartialityimpartiality for all stakeholdersfor all stakeholders

Importance to show Importance to show unity in leadershipunity in leadership externally and internallyexternally and internally

Finding a crucial Finding a crucial balancebalance between between individuality and collegiality + between individuality and collegiality + between continuity and change continuity and change

Minimizing the Minimizing the conflicts of interestsconflicts of interests (or (or moral hazard)moral hazard)

Issue of Issue of successionsuccession (Cfr ITT’s Harold (Cfr ITT’s Harold Geneen)Geneen)


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Leadership functionLeadership function

NOWNOW: “The major test of every move in business, as in : “The major test of every move in business, as in all games of strategy, are all games of strategy, are legality and profitslegality and profits”. A ”. A man who intends to be a winner in the business game man who intends to be a winner in the business game must have a game player’s attitude.must have a game player’s attitude.

FUTUREFUTURE: concern for broader : concern for broader issues beyond legal issues beyond legal profitabilityprofitability (Stakeholders) will distinguish normal (Stakeholders) will distinguish normal companies from superior performers because of their companies from superior performers because of their superior corporate reputationsuperior corporate reputation– Compliance to the letter of the lawCompliance to the letter of the law– Compliance to the spirit of the (external & internal) lawCompliance to the spirit of the (external & internal) law– IntegrityIntegrity


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Conflicts of Conflicts of Interest:Interest:

1.Moral Dilemmas1.Moral Dilemmas

2.“Quiet Leaders”2.“Quiet Leaders”

3. Reputation3. Reputation


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1.Moral Dilemmas1.Moral Dilemmas


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Conflicts of Interest &Conflicts of Interest &Moral DilemmasMoral Dilemmas

Potential conflicts of interest Potential conflicts of interest

= 1 / ethics programs= 1 / ethics programs

Potential conflicts of interestPotential conflicts of interest

= 1 / Board’s involvement in = 1 / Board’s involvement in the the oversight of the ethics oversight of the ethics programprogram


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Moral DilemmasMoral Dilemmas

Business dilemmas concern the process of Business dilemmas concern the process of making an ethical decision at 3 different making an ethical decision at 3 different levels:levels:

The The personalpersonal level level The The organizationalorganizational level level The level in which The level in which societysociety surrounds the surrounds the

corporationcorporation


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Objectives Dilemma trainingObjectives Dilemma training

Some questions I might like to ask myself when Some questions I might like to ask myself when dealing with a dilemma:dealing with a dilemma:

Is it Is it legal?legal? Is it according to the law, rules & Is it according to the law, rules & procedures?procedures?

Would I like to be treated like ‘that’ in that Would I like to be treated like ‘that’ in that situation? Can I situation? Can I explain to my familyexplain to my family why I why I made that decision? made that decision?

How would I feel if the information came out How would I feel if the information came out in the local paper in the morning? = in the local paper in the morning? = Sleeping Sleeping testtest


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How Ethical Dilemmas DevelopHow Ethical Dilemmas Develop

Unethical

Friendliness

Flattery

Small Gifts

Lunches

Dinners

Sports Events

Clubs

Mixing Business& Pleasure

Family“Favours”

Larger Gifts

Cash

Swiss BankAccount

Ethical if under right circumstances


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2. “Quiet leaders”2. “Quiet leaders”


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““Quiet Leaders” Quiet Leaders” (J. BADARRACCO, (J. BADARRACCO, HBS)HBS)

Focus on what is Focus on what is reasonably attainablereasonably attainable rather than what is idealrather than what is ideal

Quiet leaders are Quiet leaders are flexibleflexible, , highly highly pragmaticpragmatic, and often , and often opportunisticopportunistic

The 3 Virtues of “Quiet Leaders”The 3 Virtues of “Quiet Leaders”– RestraintRestraint– ModestyModesty– TenacityTenacity


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Leaders: defining Leaders: defining momentsmoments

Though ethics is related to values in a Though ethics is related to values in a certain company and culture, it will be an certain company and culture, it will be an individual manager (with his own personal individual manager (with his own personal values) who (in possible consensus with his values) who (in possible consensus with his colleagues) will have to take a decision for colleagues) will have to take a decision for the company. Ethics becomes the company. Ethics becomes ‘personal’….a possible “‘personal’….a possible “defining defining momentmoment” in one’s life (BADARACCO).” in one’s life (BADARACCO).


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Leaders: defining Leaders: defining momentsmoments

Quiet Leaders Quiet Leaders sometimes need sometimes need to to take extremely take extremely tough decisionstough decisions

a defining momenta defining moment = = IntegrityIntegrity

Corporate Corporate ReputationReputation


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3. Reputation & 3. Reputation & IntegrityIntegrity


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Integrity beyond Integrity beyond compliancecompliance

The The lawlaw does does notnot generally seek to generally seek to inspireinspire human excellence or distinction. human excellence or distinction.It is no guide for exemplary behavior – or even good It is no guide for exemplary behavior – or even good practice. “Those managers who define ethics as a legal practice. “Those managers who define ethics as a legal compliance are implicitly endorsing a code of moral compliance are implicitly endorsing a code of moral mediocrity for their organizations.” (L.S. PAINE, HBS)mediocrity for their organizations.” (L.S. PAINE, HBS)

Integrity > Compliance Integrity > Compliance (to law)(to law)


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Temple of ReputationTemple of Reputation

Source: FOMBRUN,

Reputation

Honesty, Credibility, Reliability, Responsibility

Emotional Appeal

Products & Services

Financial Performance

Vision &Leadership

Work Environment

SCR


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Board ensuring Good Board ensuring Good ReputationReputation

))

Employees Community

Investor Customer

Governance & the International Firm 325325 UniMelb 1 Governance & the International Firm Week 10:...

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