Dr,Jerry L,Huxell
Business Policies and Strategies
Corporate Governance and Social
Responsibility
Dr,Jerry L,Huxell
Corporation
? A mechanism established to allow different
parties to contribute capital,expertise,and
labor for their mutual benefit
? Corporate governance refers to the
relationship among these groups in
determining the direction and performance
of the corporation
Dr,Jerry L,Huxell
Social Responsibility
? A private corporation has responsibilities to
society that extend beyond making a profit
? Carroll’s Four Responsibilities
– Economic – must do
– Legal – have to do
– Ethical – should do
– Discretionary – might do
Dr,Jerry L,Huxell
Milton Friedman
?,There is one and only one social
responsibility of business – to use its
resources and engage in activities designed
to increase its profits so long as it stays
within the rules of the game,which is to say,
engages in open and free competition
without deception or fraud.”
Dr,Jerry L,Huxell
Parties Involved in Governance
? Board of Directors
? CEO and CFO
? Managers and employees
? Auditing agencies
? Standard setting bodies
? Institutional investors
? Banks
? Individual investors
Dr,Jerry L,Huxell
Control and Accountability
Investors
Board
Of
Directors
Corporation
Managers
Institutional Investors
Banks
Individuals
Committees
Auditors
Regulations
Elect
Appoint
Money
Dr,Jerry L,Huxell
Responsibilities of Board
? Approve (set) strategy and overall direction
? Hire and fire the CEO and top management
? Control,monitor or supervise top
management
? Review and approve the use of resources
? Care for shareholder interests
? Ensure adherence to laws and regulations
Dr,Jerry L,Huxell
Agency Theory
? Problems arise in corporations because the
agents (top management) are not willing to
bear responsibility for their decisions unless
they own a substantial amount of stock in
the corporation
Dr,Jerry L,Huxell
Stewardship Theory
? Executives tend to be more motivated to act
in the best interests of the corporation than
their own self-interests.
? The theory focuses on the higher order
needs,such as achievement and self-
actualization
Dr,Jerry L,Huxell
Members of Board
? Inside directors – CEO,COO,and
presidents or vice-presidents
? Outside directors – active or retired CEOs,
major shareholders,attorneys
? Average of 11 in large U.S,firms,of whom
two are insiders
? Typically earn an average of $33000
Dr,Jerry L,Huxell
Nomination to Board
? Traditionally,the CEO decided and asked
the shareholders for approval
? Result was CEO-friendly,passive boards
? Approximately 73% of large corporations
now use nominating committees
? Normally stagger elections
Dr,Jerry L,Huxell
Criteria for Selection
? Willingness to challenge management
? Having special expertise
? Availability for advice and meetings
? Understanding of key technologies
? Having valuable external contacts
? Having detailed knowledge of industry
Dr,Jerry L,Huxell
Types of Committees
? Executive
? Audit
? Ethics and environment
? Remuneration or compensation
? Nomination
? Corporate Governance
Dr,Jerry L,Huxell
Outside Auditors
? Persons who examine the information used
by managers to prepare the financial
statements and attests to the credibility of
those statements
? Issue an opinion based on their audit and
included in the annual report
Dr,Jerry L,Huxell
Generally Accepted Accounting
Principles (GAAP)
? Term that applies to the broad concepts or
guidelines and detailed practices in
accounting,including all the conventions,
rules,and procedures that make up accepted
accounting practice at a given time
? May be better to call them conventions
instead of principles
Dr,Jerry L,Huxell
International Accounting
Standards Committee (IASC)
? An organization representing over one
hundred accountancy boards from over
eighty countries that is developing a
common set of accounting standards to be
used throughout the world.
Dr,Jerry L,Huxell
Pressures on Management
? Competition
? Economic conditions
? Regulations
? Credit rating agencies
? Stock market price
? High pay and stock options
? Leads to earnings management
Dr,Jerry L,Huxell
Causes of Corporate Fraud
? Rising stock prices
? Stock options to executives
? Pressure of institutional investors
? Influence of dot.coms
? Greed of directors,CEOs and top managers
? Weak corporate boards
? Willing compliance of shareholders
? Poor auditing
Dr,Jerry L,Huxell
Market Share Prices
? Dow Jones Nasdaq
– 1972 1000 1971 100
– 1987 2000 1980 200
– 1991 3000 1986 400
– 1995 5000 1991 500
– 1996 6000 1995 1000
– 1997 8000 1998 2000
– 1998 9000 1999 4000
– 1999 11000 2000 5000
– 2005 10200 2005 2050
Dr,Jerry L,Huxell
Stock Options
? Rights granted to executives to purchase a specific
number of shares of a corporation’s capital stock
at a specific price for a specific time period.
? Excellent incentive to motivate the executives to
increase market price and to increase their
compensation
? Corporations did not have to expense the stock
options at time of grant – just a footnote
Dr,Jerry L,Huxell
Earnings per Share (EPS)
EPS = Net income
Average number of common share outstanding
Most popular and must appear on the face of the
Income Statement of publicly held corporations
Dr,Jerry L,Huxell
Price-Earnings (P-E) Ratio
P-E Ratio = Market price per share of common stock
Earnings per share of common stock
Sometimes called the earnings multiple
The P-E ratio is determined by the marketplace
Ratio for S&P 500 has fluctuated around 16
Ratio was 45 at peak in 2000; now in low 20s
Dr,Jerry L,Huxell
Current Trends
? Institutional investors are becoming more
active on boards
? More international directors on boards
? Shareholders are demanding that directors
own and continue to own substantial stock
? Increase in number of outside directors
? Separate positions of Chairman and CEO
Dr,Jerry L,Huxell
Necessary Reforms
? Treat stock options as an expense
? Separate positions of Chairman and CEO
? Board needs to meet regularly without CEO
? Board members should only be paid in
stock and not be allowed to sell
? Require truly independent committee
members
Dr,Jerry L,Huxell
Necessary Reforms (cont’d)
? Pay CEO and top managers in restricted stock
? Separate auditing and consulting firms
? Require changing of auditors every five years
? Auditors should state the aggressiveness of the
accounting methods
? Establish professional standards for analysts
? Require CEO and CFO to sign and be held
criminally liable for their accounts
Dr,Jerry L,Huxell
Ethical Behavior
? Behavior that is consistent with the
principles,norms and standards of business
practice that have been agreed upon by
society.
? Managers,business leaders,employees and
society in general are very interested in the
ethical behavior of a company.
Dr,Jerry L,Huxell
Ethical Questions
? Utility – does it optimize the satisfactions of
all stakeholders?
? Rights – does it respect the rights of the
individuals involved?
? Justice – is it consistent with the canons of
justice?
Dr,Jerry L,Huxell
Ethical Behavior Problem #1
? You are driving to a nearby country from your job
as a manager of a foreign subsidiary,In your car
are a number of rather expensive gifts for the
family and friends in the country you are visiting,
When you cross the border,the customs official
tells you the duty will be $200,Then he smiles,
hands you back your passport and quietly suggests
that you put a smaller sum,say $20,in the
passport and hand it back to him,What would
you do?
Dr,Jerry L,Huxell
Ethical Problem #2
One of your managers in a Middle Eastern
country has been kidnapped by a terrorist
group that has demanded a ransom of $2
million,plus food assistance for refugees in
a specified camp,If the ransom is not paid,
they threaten to kill him,What would you
do?
Business Policies and Strategies
Corporate Governance and Social
Responsibility
Dr,Jerry L,Huxell
Corporation
? A mechanism established to allow different
parties to contribute capital,expertise,and
labor for their mutual benefit
? Corporate governance refers to the
relationship among these groups in
determining the direction and performance
of the corporation
Dr,Jerry L,Huxell
Social Responsibility
? A private corporation has responsibilities to
society that extend beyond making a profit
? Carroll’s Four Responsibilities
– Economic – must do
– Legal – have to do
– Ethical – should do
– Discretionary – might do
Dr,Jerry L,Huxell
Milton Friedman
?,There is one and only one social
responsibility of business – to use its
resources and engage in activities designed
to increase its profits so long as it stays
within the rules of the game,which is to say,
engages in open and free competition
without deception or fraud.”
Dr,Jerry L,Huxell
Parties Involved in Governance
? Board of Directors
? CEO and CFO
? Managers and employees
? Auditing agencies
? Standard setting bodies
? Institutional investors
? Banks
? Individual investors
Dr,Jerry L,Huxell
Control and Accountability
Investors
Board
Of
Directors
Corporation
Managers
Institutional Investors
Banks
Individuals
Committees
Auditors
Regulations
Elect
Appoint
Money
Dr,Jerry L,Huxell
Responsibilities of Board
? Approve (set) strategy and overall direction
? Hire and fire the CEO and top management
? Control,monitor or supervise top
management
? Review and approve the use of resources
? Care for shareholder interests
? Ensure adherence to laws and regulations
Dr,Jerry L,Huxell
Agency Theory
? Problems arise in corporations because the
agents (top management) are not willing to
bear responsibility for their decisions unless
they own a substantial amount of stock in
the corporation
Dr,Jerry L,Huxell
Stewardship Theory
? Executives tend to be more motivated to act
in the best interests of the corporation than
their own self-interests.
? The theory focuses on the higher order
needs,such as achievement and self-
actualization
Dr,Jerry L,Huxell
Members of Board
? Inside directors – CEO,COO,and
presidents or vice-presidents
? Outside directors – active or retired CEOs,
major shareholders,attorneys
? Average of 11 in large U.S,firms,of whom
two are insiders
? Typically earn an average of $33000
Dr,Jerry L,Huxell
Nomination to Board
? Traditionally,the CEO decided and asked
the shareholders for approval
? Result was CEO-friendly,passive boards
? Approximately 73% of large corporations
now use nominating committees
? Normally stagger elections
Dr,Jerry L,Huxell
Criteria for Selection
? Willingness to challenge management
? Having special expertise
? Availability for advice and meetings
? Understanding of key technologies
? Having valuable external contacts
? Having detailed knowledge of industry
Dr,Jerry L,Huxell
Types of Committees
? Executive
? Audit
? Ethics and environment
? Remuneration or compensation
? Nomination
? Corporate Governance
Dr,Jerry L,Huxell
Outside Auditors
? Persons who examine the information used
by managers to prepare the financial
statements and attests to the credibility of
those statements
? Issue an opinion based on their audit and
included in the annual report
Dr,Jerry L,Huxell
Generally Accepted Accounting
Principles (GAAP)
? Term that applies to the broad concepts or
guidelines and detailed practices in
accounting,including all the conventions,
rules,and procedures that make up accepted
accounting practice at a given time
? May be better to call them conventions
instead of principles
Dr,Jerry L,Huxell
International Accounting
Standards Committee (IASC)
? An organization representing over one
hundred accountancy boards from over
eighty countries that is developing a
common set of accounting standards to be
used throughout the world.
Dr,Jerry L,Huxell
Pressures on Management
? Competition
? Economic conditions
? Regulations
? Credit rating agencies
? Stock market price
? High pay and stock options
? Leads to earnings management
Dr,Jerry L,Huxell
Causes of Corporate Fraud
? Rising stock prices
? Stock options to executives
? Pressure of institutional investors
? Influence of dot.coms
? Greed of directors,CEOs and top managers
? Weak corporate boards
? Willing compliance of shareholders
? Poor auditing
Dr,Jerry L,Huxell
Market Share Prices
? Dow Jones Nasdaq
– 1972 1000 1971 100
– 1987 2000 1980 200
– 1991 3000 1986 400
– 1995 5000 1991 500
– 1996 6000 1995 1000
– 1997 8000 1998 2000
– 1998 9000 1999 4000
– 1999 11000 2000 5000
– 2005 10200 2005 2050
Dr,Jerry L,Huxell
Stock Options
? Rights granted to executives to purchase a specific
number of shares of a corporation’s capital stock
at a specific price for a specific time period.
? Excellent incentive to motivate the executives to
increase market price and to increase their
compensation
? Corporations did not have to expense the stock
options at time of grant – just a footnote
Dr,Jerry L,Huxell
Earnings per Share (EPS)
EPS = Net income
Average number of common share outstanding
Most popular and must appear on the face of the
Income Statement of publicly held corporations
Dr,Jerry L,Huxell
Price-Earnings (P-E) Ratio
P-E Ratio = Market price per share of common stock
Earnings per share of common stock
Sometimes called the earnings multiple
The P-E ratio is determined by the marketplace
Ratio for S&P 500 has fluctuated around 16
Ratio was 45 at peak in 2000; now in low 20s
Dr,Jerry L,Huxell
Current Trends
? Institutional investors are becoming more
active on boards
? More international directors on boards
? Shareholders are demanding that directors
own and continue to own substantial stock
? Increase in number of outside directors
? Separate positions of Chairman and CEO
Dr,Jerry L,Huxell
Necessary Reforms
? Treat stock options as an expense
? Separate positions of Chairman and CEO
? Board needs to meet regularly without CEO
? Board members should only be paid in
stock and not be allowed to sell
? Require truly independent committee
members
Dr,Jerry L,Huxell
Necessary Reforms (cont’d)
? Pay CEO and top managers in restricted stock
? Separate auditing and consulting firms
? Require changing of auditors every five years
? Auditors should state the aggressiveness of the
accounting methods
? Establish professional standards for analysts
? Require CEO and CFO to sign and be held
criminally liable for their accounts
Dr,Jerry L,Huxell
Ethical Behavior
? Behavior that is consistent with the
principles,norms and standards of business
practice that have been agreed upon by
society.
? Managers,business leaders,employees and
society in general are very interested in the
ethical behavior of a company.
Dr,Jerry L,Huxell
Ethical Questions
? Utility – does it optimize the satisfactions of
all stakeholders?
? Rights – does it respect the rights of the
individuals involved?
? Justice – is it consistent with the canons of
justice?
Dr,Jerry L,Huxell
Ethical Behavior Problem #1
? You are driving to a nearby country from your job
as a manager of a foreign subsidiary,In your car
are a number of rather expensive gifts for the
family and friends in the country you are visiting,
When you cross the border,the customs official
tells you the duty will be $200,Then he smiles,
hands you back your passport and quietly suggests
that you put a smaller sum,say $20,in the
passport and hand it back to him,What would
you do?
Dr,Jerry L,Huxell
Ethical Problem #2
One of your managers in a Middle Eastern
country has been kidnapped by a terrorist
group that has demanded a ransom of $2
million,plus food assistance for refugees in
a specified camp,If the ransom is not paid,
they threaten to kill him,What would you
do?
