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1. Corporate Governance And Social Responsibility Chapter 3 EULOGIO “AMANG” RODRIGUEZ INSTITUTE OF SCIENCE AND TECHNOLOGY College of Business and Public Administration

2. Corporations are established to maximize long-term returns for shareholders by pooling capital, expertise, and labor. While shareholders benefit from profits, their involvement is limited, with their primary role being the election of directors.

3. Role of the Board of Directors -The board is tasked with safeguarding shareholder interests by setting policies and approving decisions that influence the corporation’s long-term performance. This framework, known as corporate governance, defines the interaction among shareholders, management, and the board of directors.

4. Challenges in Corporate Governance -High-profile corporate scandals, such as those at Enron, WorldCom, and Tyco, exposed serious weaknesses in board oversight. Some directors placed personal interests above their responsibilities or failed to effectively monitor management.

5. Public Response and Reforms -Public criticism and government pressure have driven significant changes. Boards are increasingly expected to move beyond passive approval and take on more active, accountable, and professional roles in corporate governance. The evolution of corporate governance highlights the growing importance of strong, engaged boards of directors to ensure transparency, protect shareholder interests, and support sustainable corporate success.

6. Social Responsibilities of the Board Responsibilities -Setting corporate strategy, overall direction, mission, or vision. -Hiring and firing the CEO and top management. -Controlling, monitoring, or supervising top management. -Reviewing and approving the use of resources. -Caring for shareholders’ interests.

7. Social Responsibilities of the Board Legal Obligations -The board is legally required to direct the affairs of the corporation but not to manage them. -Directors must act with due care; failure to do so can result in personal liability if the corporation suffers harm. -A survey of outside directors revealed that over 40% had been named in lawsuits against corporations, highlighting the seriousness of these responsibilities.

8. Role of the Board in Strategic Management Basic Tasks -Monitor -Keep track of internal and external developments through committees. -Alert management to issues it may have overlooked. -Minimum responsibility expected of all boards. -Evaluate and Influence -Review management’s proposals, decisions, and actions. -Agree or disagree, provide advice, suggest alternatives. \ -Active boards typically perform this role. -Initiate and Determine -Define the corporation’s mission. -Specify strategic options for management. -Taken on only by the most active boards in addition to monitoring and evaluating.

9. The Board of Directors Continuum shows the varying levels of involvement boards can have in strategic management, ranging from passive to highly active.

10. -Phantom and Rubber-Stamp Boards (low involvement) rarely engage in strategy, often controlled by CEOs who dominate decision-making. -Active Participation and Catalyst Boards (high involvement) take strategy seriously by monitoring, evaluating, influencing, and even initiating corporate direction—practices linked to stronger financial performance.

11. Smaller or founder-led companies often have less active boards since owners and managers are the same. However, when outside investors buy stock, boards are expected to become more active to protect shareholder interests. If they remain dominated by founders or insiders, boards risk acting only as rubber stamps, neglecting broader shareholder needs.

12. Members of the Board of Directors -Inside Directors -Executives or officers employed by the corporation. -Outside Directors -Not employed by the company; may be executives of other firms. -Increasing trend to include more outsiders on boards. -Criticism: often less effective due to limited time, interest, or expertise. Types of Outside Directors Affiliated Directors – Provide legal, insurance, or supplier services; face conflicts of interest. Retired Directors – Former CEOs or executives; may struggle with objectivity regarding current performance. Family Directors – Descendants of founders with significant stock ownership; may pursue personal or family agendas.

13. Trends in Corporate Governance -Boards are becoming more active in reviewing, evaluating, and shaping company strategy. -Institutional investors (pension funds, mutual funds, insurance firms) are pressuring management to improve performance. -Shareholders demand directors and top managers hold meaningful stock ownership; stock is now part of director compensation. Nonaffiliated outside directors are increasing in number and power, leading CEO evaluations.

14. Trends in Corporate Governance -Boards are getting smaller, with emphasis on specialized knowledge and expertise over general experience. -Leadership roles are shifting by splitting Chair/CEO positions or appointing a lead outside director. -Global corporations seek board members with international experience. -Boards are expected to address social issues, including workforce diversity and environmental responsibility, alongside profitability.

15. Corporate Governance: The Role of Top Management -The top management function is primarily carried out by the CEO, in coordination with the COO/President, Executive Vice President, and Vice Presidents of divisions and functional areas. -While strategic management involves the entire organization, top management holds the primary responsibility for leading and executing the strategic management of the firm under the oversight of the board of directors.

16. RESPONSIBILITIES OF TOP MANAGEMENT Top management, particularly the CEO, plays a vital role in meeting corporate objectives by guiding and working with others. Their responsibilities are broad and centered on ensuring the overall success of the organization. Although specific duties may differ depending on the company’s mission, goals, strategies, and key activities, they are often shared among team members with varied expertise, contributing to stronger market share and profitability. Together with the management team, the CEO carries two main responsibilities: offering executive leadership with a clear strategic vision and overseeing the strategic planning process.

17. Provide Executive Leadership and Strategic Vision Executive leadership involves guiding organizational activities toward achieving objectives and setting the overall tone of the company. A crucial aspect of this leadership is providing a strategic vision, which defines what the company can become and motivates employees to align with its mission. Dynamic CEOs such as Bill Gates, Steve Jobs, and Ted Turner exemplify this by energizing their corporations with passion and vision, inspiring both performance and commitment across their organizations. Effective CEOs share three main traits:

18. Provide Executive Leadership and Strategic Vision -Articulates a clear vision that connects individual roles to the company’s purpose. -Serves as a role model, demonstrating values and building trust. -Sets high performance standards, empowers employees, and provides coaching.

19. Manage the Strategic Planning Process The board relies on management to review and align unit plans into a unified corporate strategy. To assist in this, many large organizations employ a strategic planning staff—typically headed by a senior executive—tasked with responsibilities such as: -Identifying and analyzing companywide strategic issues and suggesting alternatives. -Facilitating and guiding business units through the planning process.

20. Social Responsibilities of Strategic Decision Makers Strategic decision makers must consider whether their responsibility lies only with shareholders or with society as a whole. The idea of social responsibility suggests that corporations are not just profit-driven organizations; they also have obligations to people and communities affected by their actions. Business decisions often create consequences beyond company profits.

21. Social Responsibilities of Strategic Decision Makers For example, shutting down plants or discontinuing product lines may improve financial standing but can also lead to job losses, weaken local communities, and limit customer choices. These outcomes show that corporate strategies affect more than just the company itself. Because of this, managers are expected to handle conflicting interests in a fair and ethical way. To succeed in the long run, a company’s strategic plan must balance profitability with its responsibility to employees, customers, and society at large.

22. Responsibilities of a Business Firm Business firms play a vital role in society, but their responsibilities have been debated. Two major perspectives dominate: Milton Friedman’s traditional view and Archie Carroll’s Four Responsibilities of Business.

23. Responsibilities of a Business Firm Friedman’s View Business = make profit, follow the law, compete fairly. Social responsibility (like reducing pollution, hiring disadvantaged groups) = extra cost. Extra costs make the business less efficient and harm society in the long run. - Quote: “The only responsibility of business is to increase profits within the rules.” Carroll’s Four Responsibilities Economic – Make a profit, provide value. Legal – Follow the law. Ethical – Do what society expects (fair treatment, honesty,care for employees). Discretionary – Voluntary actions (donations, training programs, community service).

24. Responsibilities of a Business Firm The role of business in society is still debated. Friedman believed that a company’s only real duty is to make profits while playing by the rules, arguing that social responsibility only weakens efficiency. In contrast, Carroll offered a wider perspective, pointing out that businesses also have legal, ethical, and even voluntary responsibilities beyond just making money. Although research shows mixed results, many studies reveal that being socially responsible can actually give companies an edge—building a good reputation, attracting loyal employees, earning public trust, and gaining investor support.

25. Responsibilities of a Business Firm In the end, the most successful businesses are those that balance profit with responsibility, ensuring both long-term growth and positive impact on society.

26. Corporate stakeholders Corporate stakeholders are groups affected by or affecting a company’s actions. The challenge of social responsibility lies in deciding to whom a business is responsible, since stakeholder interests often conflict. For example: Eco-friendly practices may please environmentalists but reduce shareholder profits. Surveys show the public feels companies prioritize profits over quality and safety. Because every decision impacts different groups in different ways, strategic managers must weigh these effects carefully what seems most profitable in the short term could lead to negative long-term consequences for the corporation.

27. ET HICAL DECISION MAKING Some people joke that there is no such thing as "business ethics". They call it an oxymoron, a concept that combines opposite or contradictory ideas.

28. Some Reasons For Unethical Behavior Why are many business people perceived to be acting unethically? It may be that the involved people are not even aware that they are taking questionable actions. There is no worldwide standard of conduct for business people. Cultural norms and values vary between countries and even between different geographic regions and ethnic groups within a country. For example, what is considered in one country to be a bribe to expedite service is sometimes considered in another country to be normal business practice.

29. Moral Relativism Some people justify their seemingly unethical positions by arguing that there is no one absolute code of ethics and that morality is relative. Simply put, moral relativism claims that morality is relative to some personal, social or cultural standard and that there is no method for deciding whether a decision is better than another.

30. Kholberg's Level of Moral Development Another reason some business people might be seen as unethical is that they may have no well-developed personal sense of ethics. A person's ethical behavior is affected by his or her level of moral development, certain personality variables, and such situational factors as the job itself, the supervisor, and the organizational culture. Kholberg proposed that a person progresses through three levels of moral development. Similar in some ways to Maslow's hierarchy of needs. Kholberg's levels of moral development have the individual move from total self-centeredness to a concern for universal values.

31. ENCOURAGING ETHICAL BEHAVIOR According to Carroll's work, if business people do not act ethically, government will be forced to pass laws regulating their actions - and usualiy increasing their costs. For self-interest, if for no other reason, managers should be more ethical in their decision making.One way to do that is by encouraging codes of ethics. Another is by providing guidelines for ethical behavior.

32. Code of Ethics Code of ethics specify how an organization’ expects its employees to behave while on the job. Developing code of ethics can be a useful way to promote ethical behavior, especially for. people who 'are operating at Kohlberg's conventional level of moral development. Such codes are currently being used by about half of U.S. business corporations . According to a report by the Business Roundtable, anassociation of CEOs'from 200 major U.S. corporations, the importance of a code of ethics is that it (1) clarifies company expectations of employee conduct in various situations. and (2)makes clear that the company expects its people to recognize the ethical dimensions in decisions and actions.

33. Guidelines for Ethical Behavior Ethics is defined as the consensually accepted standards of behavior an occupation, a trade, or a profession. Morality, in contrast, is the precepts of personal behavior that are based on religious or philosophical grounds. refers to formal codes that permit or forbid certain behavior and may or not enforce ethics or morality.

34. Guidelines for Ethical Behavior Ethics is defined as the consensually accepted standards of behavior an occupation, a trade, or a profession. Morality, in contrast, is the precepts of personal behavior that are based on religious or philosophical grounds. refers to formal codes that permit or forbid certain behavior and may or not enforce ethics or morality. Given these definition, how do we arrive a comprehensive statement of ethics to use in making decisions in a specific occupation, trade, or profession.

35. Guidelines for Ethical Behavior A starting point for such a code of ethics is to consider the three basic approaches to ethical behavior. 1. Utility: Does is optimize the satisfaction of all stakeholders? 2. Rights: Does it respect the rights of the individuals involved? 3. Justice: Is it consistent with the canons of justice? Another approach to resolving ethical dilemmas is by applying the logic of the philosopher Immanuel Kant presents two principles (called categorical imperatives) to guide our actions.

36. A person's action is ethical only if that person is willing for that same action to be taken by everyone who is 'in a similar situation. This is the same as the Golden Rule: Treat others as you would like them to treat you. For example, padding an expense account would be considered ethical if the person were also willing for everyone to do the same if he or she were the boss. Because it is very doubtful that any manager would be pleased with expense account padding, the action must be considered unethical.

37. A person should never treat another human being simply as a means, but always as an end. This means that an action is morally, wrong for a person if that person uses others merely as means for advancing his or her own interests. To be moral, the act should not restrict other people's actions so that they are left disadvantaged in some way.

38. Corporate Governance Challenges 1. Cybersquatting Cybersquatting is a major issue in online governance, where individuals purchase domain names that are identical or similar to valuable corporate brands and later sell them at inflated prices. 2. Fraud and Identity Theft The Internet is both a rich source of information and a tool for fraud. Criminals exploit personal details shared online to steal identities, use credit card data, and transfer funds illegally.

39. Corporate Governance Challenges 3. Taxation Issues Traditional trade distinguishes between goods (taxed with tariffs) and services (often exempt). 4. Public Interest Governments often protect citizens from fraudulent investments, unsafe medical treatments, and harmful products. On the Internet, however, regulating such activities is complex.

40. Thank you EULOGIO “AMANG” RODRIGUEZ INSTITUTE OF SCIENCE AND TECHNOLOGY College of Business and Public Administration