Stakeholders, Managers

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Stakeholders, Managers Ethics

• Chapter 2

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• Before we choose a structure and culture, what
  do we need to think about?

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Stakeholders

• What is a stakeholder?
• SH motivated to support organization when
  inducements gt contributions
• SH use the organization to achieve their goals
• Organizations exist because they create value for
  SH

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Stakeholders

• Inside
• Shareholders
• Managers
• Workforce
• What are their contributions inducements?

• Outside
• Customers
• Suppliers
• Government
• Unions
• Community
• Public

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Management of Competing Stakeholder Goals

• Must keep all stakeholders happy
• U.S. is capitalistic country? managers priority
  is to ___________.
• Shareholders have 1st claim on value created
• Problem? managers shareholders often have
  conflicting goals
• Short vs. long term
• Control vs. ownership
• Conflict over allocation of rewards
• Profits dividends vs. reinvestment

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Authority

• Which SH group has authority over the use of the
  organizations resources?
• Who is authority delegated to?
• Who monitors performance of managers?
• Who has the most authority in the organization?
  Most power?
• Conflict of interest if CEOChair of BOD
• Inside vs. outside directors
• Advantage?
• Disadvantage?

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Chain of Command

• Shareholders
• Board of directors
• Chair of board of directors
• CEO
• COO
• Executive VP (oversee staff vs. line roles)
• Senior VP VP
• Divisional managers
• Functional managers
• Top-mgmt team

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Agency Theory

• An agency relation occurs when one person
  (principal) delegates decision-making authority
  or control over resources to another (agent).
• Shareholders are principles
• Top managers are agents
• Agency problem? shareholders have difficulty
  holding managers accountable for their actions.
  Why?
• Agent has more knowledge hard to evaluate
  performance
• Agent has incentive to pursue personal interests
  (conflicting goals)

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Corporate Governance Mechanisms

• To align interests (goals) of principal
  agent overcome agency relation problem
• 1. Board of Directors (monitor managers)
• 2. Separate role of CEO Chair of BOD
• 3. Code of ethics
• 4. Make managers rewards contingent on
  organizational performance. How?
• Stock based compensation linked to performance?
  managers become shareholders!
• Career paths (hire within)
• Promotion linked to performance
• BOD controls top mgmt

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Sources of Ethical Values
Society laws customs unwritten norms values Professional rules enforced by the profession Trade associations Code of Ethics Individual personal values
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Why are Ethical Rules Important?

• Prevent individuals from pursuing self-interest
  at expense of organizational goals
• Prevent conflict
• Reduce transaction costs. Why?
• Maintain ethical reputation
• Satisfy customers investors
• Personal satisfaction of good conscience.

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Reasons for Unethical Behavior

• Personal the way you were raised
• Self-interest protect your career
• Outside pressure- desire to increase performance
  to receive rewards
• Poor role models

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How to Create an Ethical Organization

• Maintain ethical top-management team
• Create an ethical culture
• How do we do that?
• Design an organizational structure that reduces
  incentive to act unethically
• Follow governmental standards
• Use mission statement/code of ethics to guide
  employees
• Ethics officers/ departments
• Follow the interests of the shareholders.