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Corporate Governance & Ethics

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Sébastien Fournier

on 5 October 2012

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Transcript of Corporate Governance & Ethics

Corporate Governance & Ethics Sébastien Fournier - 11135254 Carlo Marchesini - 11167443 Valentina Pozzi - 11167446 José Tomás Poblete - 11165848 Definitions Corporate Governance: 'Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means through which those objectives and monitoring performance are attained.' OECD, 1999 'Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth.' OECD, 2004 Corporate Governance Definitions Agenda I. Corporate Governance Through Recent History Example of Unilever II. Corporate Social Responsibility Carroll's Theory and CSR Applied to Businesses Example of Starbucks Stakeholders' theory by Freeman Mitchell's model Example of Antamina Mining Company Conclusion Scandals, Changes and Best Practices I. Corporate Governance Through Recent History II. Corporate Social Responsibility Scandals, Changes and Best Practices Antamina Case Study Mining Company, Peru Scenario You are the chief manager in charge of the new mining project.
Knowing the different criteria explained below, what option would you opt for? Uneducated villagers who love their area live on the future site of the mine The National Park is protected by the UNESCO Villagers from San Marco want to profit from the opening of the mine (new jobs) Huarmey's fishermen do not want the fishes to disappear (pollution related to the mine) Waiting for the World Bank loan to be accepted if relocating conditions to inhabitants are based on long term considerations Choose the best option that will maximize the interest of the shareholders Option A - Rebuilding the central road going through the National Park - cost US$ 70 million Option B: Building a new road avoiding the park by the South - cost US $140 million Option C: Building a pipeline to transport the mineral from the mining site to the port
cost: US $158 million plus the cost of the highway for the access route to the mine. NGOs have an important power and they could soiled the company image Reality? Building of a US $158 million mineral pipeline Reality Until 2000, usual to think top managers as faithful to the organization, pursuing shareholders objectives and taking into account also stakeholders’ expectations. Corporate Level Strategy, McGraw&Hill, 2012 Many cases of CG failures because top managers tend to adopt opportunistic behaviors, focusing only on their interests and going against the long term vision of the whole company. The division between owners and managers lead to Agency problems, because the related goals are slightly divergent. But real life is not always like that... Example of excessive behaviors: Maximization of dimensions (“Empire building”) rather than profitability Risk diversification against core business focus Entrenchment: the act of being considered unique and essential for the company Personal enrichment: benefits, wages, economic interests… There is a need of conditions and mechanisms to share the power equally, respecting both shareholders and stakeholders vision Scandals, Changes and Best Practices To counterbalance the increasingly power of CEOs a Board of Directors should have some specific characteristics: Presence of a President Majority of “non-executive” and “independent” members, with high skills and time to give the right contribute to the firm; Members well informed and conscious about the ongoing situation of the company Meeting presence mandatory Audit, Nomination and Remuneration Committees composed by independent members The Top Management Team structures the company strategies and the Board of Directors has to approve them Examples of scandals: -USA (Enron, WorldCom, Tyco) -UK (Maxwell) -Germany (Berliner Bank) -France (Vivendi and Crédit Lyonnais) -Switzerland (Swissair) (Demirag, 2005) The Unilever example Reducing risks in having independent boards members. Boards members which come from different group of interests. Carroll's Theory and CSR Applied to Businesses Carroll's theory Expectations Obligations Example of Starbucks Mitchell's model, stakeholder's theory Power Legitimacy Urgency The stakeholder has the power to impose its will through coercive, utilitarian or normative means. The stakeholder’s demands are considered adequate, desirable and appropriate in the context of a given society’s socially accepted and expected structures and behaviors. The stakeholder’s demands call for immediate attention because they are both time sensitive and important to him/her. BSR, a consulting firm, works within a global network of nearly 300 companies to build a just and sustainable world. It develops sustainable business strategies and solutions through consulting, research, and cross-sector collaboration. The Challenge: Starbucks needed to learn more about the social and environmental impacts of the cocoa cultivation. Lacking in relationships with suppliers, Starbucks asked BSR to be connected with global stakeholders. Starbucks The Strategy: BSR helped Starbucks identifying a list of key stakeholders. BSR yielded suggestions such as investing in rural and community development, or providing rewards for adopting eco-friendly farming practices and raising awareness of hazards of child labour. Impact: Redaction of "Cocoa Code of Conduct“: a guideline for the cultivation and processing of cocoa in an sustainable and socially responsible manner that promotes equitable relationships with farmers, workers and communities. Starbucks sourced 11 out of 15 million pounds of cocoa beans (in 2009) with full price transparency throughout the supply chain and provided US$400,000 in loans to three cocoa farming cooperatives. Stakeholders' theory by Freeman Formulated in 1984 by Edward Freeman. Theory based on the coming together of persons and groups who have interests in/relationship with the activities of the company. This theory is not opposed to Carroll’s one, it’s just less conceptual and more participatory. The main is goal is to arrive at an integration of different interests and relationships. Freeman: "the company is the central hub of converging interests and that is why managers have to become more aware of/responsible for the impacts of policies and practices on each group of interest". But why? Was it the best option? Mitchell's theory But is corporate governance just about that? Questions? Conclusion CSR is about how companies manage the business processes to produce an overall positive impact on society. "Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large" Lord Holme and Richard Watts, The World Business Council for Sustainable Development Many studies demonstrate how good businesses are rewarded by the markets: A study on hundreds of firms listed on the LSE (London Stock Exchange) determine the stock price reaction around listing/trading days related to CSR actions. Companies enjoyed an average stock price increase of 3,81% during a period of 20 days for firms embracing good governance. Results: The findings represent one of the first studies providing consistent evidence of how good corporate governance is recognized and rewarded by the markets. We can only hope that genuine evidence of good governance being rewarded by the markets will persuade more boards and corporations to implement improved practices of their own volition. (IMD institute) Traditionally in the United States, CSR has been defined much more in terms of a philanthropic model. Companies make profits, unhindered except by fulfilling their duty to pay taxes. Then they donate a certain share of the profits to charitable causes. It is seen as tainting the act for the company to receive any benefit from the giving.

The European model is much more focused on operating the core business in a socially responsible way, complemented by investment in communities for solid business case reasons."
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