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This is a discussion about the social responsibili­ties of business. Do you agree that businesses have social responsibilities? Why or why not? What can be some of the social aspects of businesses?

Here is some background about this debate. The famous Nobel Prize winning economist Milton Friedman argued that the social responsibility of business is to increase its profits—in other words business is for business. However, we increasingly see that the society expects companies to be socially responsible that leads to an increasing focus on corporate social responsibility initiatives. A related new trend is now named Conscious Capitalism (see the link for further information:


Because learning changes everything.®
Chapter 12
Corporate Governance and
Business Ethics
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Learning Objectives
1. Describe the shared value creation framework and its
relationship to competitive advantage.
2. Explain the role of corporate governance.
3. Apply agency theory to explain why and how companies
use governance mechanisms to align interests of
principals and agents.
4. Evaluate the board of directors as the central governance
mechanism for public stock companies.
5. Evaluate other governance mechanisms.
6. Explain the relationship between strategy and business
© McGraw Hill
The Shared Value Creation Framework
Provides guidance to managers.
Helps reconcile gaining and sustaining competitive
advantage with corporate social responsibility.
Creates a larger “pie” to benefit shareholders and
© McGraw Hill
Public Stock Company: Four Benefits
1. Limited liability for investors.
2. Transferability of investor ownership through
3. Legal personality, with rights and obligations.
4. Separation of legal ownership and management
© McGraw Hill
The Public Stock
Company: Hierarchy of
Exhibit 12.1
Access the text alternate for slide image.
© McGraw Hill
Milton Friedman’s Philosophy
“The social responsibility of business is to increase
its profits.”
A survey was created:
• For the (degreed) top 25% of income earners.
• To assess various countries.
• To inquire whether they agree with Friedman.
The results…
© McGraw Hill
Global Survey of Attitudes toward Business
Exhibit 12.2
Source: Depiction of data from Edelman’s, Trust Barometer, 2011 as included in “Milton
Friedman goes on tour,” The Economist, (2011, Jan. 27).
© McGraw Hill
Access the text alternate for slide image.
Creating Shared Value
Executives shouldn’t concentrate only on increasing
firm profits. Rather, they should focus on creating
shared value.
Economic value (for shareholders).
Social value (address society’s needs and
• Societal progress is important.
• Capitalism helps shape society.
© McGraw Hill
Reconnecting Economic and Societal
1. Expand the customer base to bring in
2. Expand traditional internal firm value chains to
include non-traditional partners.
3. Focus on creating new regional clusters (such as
Silicon Valley).
© McGraw Hill
Corporate Governance
The mechanisms to:
• Direct and control an enterprise.
• Ensure that it pursues strategic goals successfully and
Offers checks and balances.
Attempts to address the principal-agent problem.
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The Principal-Agent Problem
Exhibit 12.3
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Access the text alternate for slide image.
Agency Theory
A theory that views the firm as a nexus of legal
• Conflicts that arise should be resolved legally.
• The firm needs to design work tasks, incentives, and
employment contracts…
• To minimize opportunism by agents.
© McGraw Hill
Adverse Selection and Moral Hazard
Both caused by information asymmetry.
Adverse Selection
• An increased likelihood of selecting inferior alternatives.
Moral Hazard
• When one party is incentivized to take undue risks or shirk
• The costs are incurred to the other party.
© McGraw Hill
The Board of Directors
Centerpiece of corporate governance.
• Represent the interests of shareholders.
• Tasked with providing oversight.
Consist of inside and outside directors.
• Inside directors: usually consist of CEO, COO, CFO.
• Outside directors: senior execs from other firms.
Are elected by the shareholders.
• Shareholders vote to determine who is elected.
© McGraw Hill
Responsibilities of the Board of Directors
Strategic oversight and guidance.
CEO selection, evaluation, compensation, succession.
Guide executive compensation.
Review, monitor, evaluate, approve strategic initiatives.
Risk assessment and mitigation.
Ensure financial statements are accurate.
Ensure compliance with laws and regulations.
© McGraw Hill
Other Governance Mechanisms
Used to align incentives between principals and
1. Executive compensation.
2. The market for corporate control.
3. Financial statement auditors, government
regulators, and industry analysts.
© McGraw Hill
1. Executive Compensation
Stock options are often part of compensation.
The average ratio of CEO to employee pay is 300:1.
About 2/3 of CEO pay is linked to firm performance.
Incentives can negatively affect performance.
© McGraw Hill
2. The Market for Corporate Control
An external corporate-governance mechanism.
Activist investors who:
• Seek to gain control of an underperforming
• Buy shares of its stock in the open market through
© McGraw Hill
3. Auditors, Regulators and Industry
External-governance mechanisms.
To avoid misrepresentation of financial results:
• Public financial statements must follow GAAP:
• Generally accepted accounting principles.
• Financial statements must be audited.
Industry analysts often base their buy, hold, or sell
recommendations on:
• Financial statements filed with the SEC.
• Business news (WSJ, Forbes, CNBC, etc.)
© McGraw Hill
Business Ethics
An agreed-upon code of conduct in business
Provides training for:
• Behavior that is consistent with the principles, norms, and
standards of business practice that have been agreed
upon by society.
Can differ in various cultures around the globe.
• Universal norms include fairness, honesty, and reciprocity.
© McGraw Hill
When Facing an Ethical Dilemma
Is the action within acceptable norms of professional
• As outlined in the organization’s code of conduct.
• As defined by the profession at large.
Would you feel comfortable explaining and
defending the decision in public?
• How would the media react?
• How would company’s stakeholders feel about it?
© McGraw Hill
Bad Apples vs. Bad Barrels
Bad Apples.
Individuals who act
Bad Barrels.
An unethical
To set the ethical tone, leaders must:
• Set clear ethical expectations.
• Put structure, culture, and control systems in place.
• Align formal and informal culture must be aligned.
• Adhere to the company vision and values.
© McGraw Hill
The MBA Oath
As a business leader I recognize my role in society.
Therefore, I promise that:
My purpose is to lead people and manage resources
to create value that no single individual can create
I will manage my enterprise with loyalty and care, and will not
advance my personal interests at the expense of my enterprise or
My decisions affect the well-being of individuals inside
and outside my enterprise, today and tomorrow.
I will understand and uphold, in letter and spirit, the laws and
contracts governing my conduct and that of my enterprise.
I will refrain from corruption, unfair competition, or business practices
harmful to society.
Exhibit 12.4
Developed by Harvard
Business School students:
Helps anchor future managers
to professional values.
A guideline for integrity in
Source: MBA Oath and Max
© McGraw Hill
I will protect the human rights and dignity of all people affected by my
enterprise, and I will oppose discrimination and exploitation.
I will protect the right of future generations to advance their standard
of living and enjoy a healthy planet.
I will report the performance and risks of my enterprise accurately and
I will invest in developing myself and others, helping the management
profession continue to advance and create sustainable and inclusive
In exercising my professional duties according to these principles, I
recognize that my behavior must set an example of integrity, eliciting
trust and esteem from those I serve. I will remain accountable to my
peers and to society for my actions and for upholding these standards.
This oath I make freely, and upon my honor.
Because learning changes everything.
© 2019 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

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