Why should a financial institution enable the transfer of money to terrorist groups?

CHAPTER 13

Corporate Governance and Ethics

CORPORATE GOVERNANCE

• Gubernare—a Latin word meaning to steer

• 3 questions:• Where to steer?• Who steers?• How to steer?

WHERE TO STEER? THE PURPOSES OF THE

CORPORATION

Shareholder Primacy model• The residual claimant, at risk• Legal owners• Financial capital the critical resource• A single objective to maximize

WHERE TO STEER? THE PURPOSES OF THE

CORPORATION• The Stakeholder primacy model• Stakeholders have rights to voice• Describes what managers actually do• Stakeholders can assist in creating

competitive advantage

WHO STEERS?THE AGENCY PROBLEM

Modern corporations• Owned by principles• Managed by agents

• Interests may differ, hurting principles

• How to solve?– Monitor the agents– Align incentives

THE AGENCY PROBLEM

Shareholders:Return on Investment

Suppliers:Reliable partner

Customers:Reliable Products

Employees:Stable Jobs

Government:Good Citizen

Natural Environment:Sustainable Practices

Managers:Maximize Utility

?

ONE SOLUTION: THE BOARD OF DIRECTORS

• Appointed by principles• Two fiduciary duties

– Loyalty– Care

• Inside directors bring expertise• Outside directors bring expertise and

objectivity

ANOTHER SOLUTION: INCENTIVES

• Agents will act like principles if they have the same interests

• Pay for performance, compensation at risk– Bonuses– Stock Options– Stock Grants

HOW TO STEER?FOUR ETHICAL VIEWS

• Utilitarianism (John Stuart Mill)– Greatest good for the greatest number

• Rights (Immanuel Kant)– Treat everyone as an end, never a means

• Liberty (Robert Nozick)– Freedom of expression

• Ethic of Care (Carol Gilligan)– Relationships matter most

4 ETHICAL CONCERNS

• Avoiding harm to individuals

• Fairness and honesty

• Recognition of sacred/ transcendent

• Liberty and overcoming oppression

ETHICS ALONG THE VALUE CHAIN

Value Chain element Ethical Challenges Moral Dimension Example

Firm Infrastructure Honest accounting and record keeping

Fairness/cheating Financial fraud at Enron, and World Com (2001)

Human Resources Whistle blower policies Liberty/ Oppression Brad Birkenfeld reporting tax fraud at UBS (2005)

Technology Development Electronic monitoring, information security

Liberty/oppression Cisco selling routers to China (2011)

Procurement Working conditions at subcontractors

Fairness/ Avoiding harm Nike and working conditions in Vietnam (1996)

Logistics Transportation safety Sanctity/degradation Exxon Valdez oil spill (1989)

Operations Working hours and housing Fairness/ Avoiding harm Worker housing at Foxconn (Apple) (2012)

Marketing/sales Truth in advertising Fairness/cheating Horse meat in hamburgers at Burger King (2013)

After Sales Service Product recalls Avoiding Harm Toyota recall for braking systems (2009)