Stakeholder theory of corporate governance ppt

CHAPTER 11

Corporate Citizenship

CORPORATE GOVERNANCE

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Chapter Overview

Stakeholder view of the firm
Governance and stakeholder theory
Criticisms
International aspects of corporate citizenship
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Corporate Governance: the Stakeholder Perspective

From the perspective of agency theory, corporate governance is mainly about the incentive systems and monitors designed to protect shareholder interests
From the stakeholder perspective, corporate governance is the mechanism that ensures corporations take responsibility for directing their activities in a manner fair to all stakeholders
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Stakeholder View of the Firm

Stakeholders - people or groups with legitimate interests in various aspects of the company’s activities.
Companies have varying responsibilities to each of their stakeholders.
These relationships between managers and stakeholders are based on a moral or ethical foundation.
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Corporate Social Responsibility

Proponents of the stakeholder view argue that companies have a social obligation to operate in ethically, socially, and environmentally responsible ways
This approach is referred to as “corporate social responsibility” (CSR) or “corporate citizenship”
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Governance and Stakeholder Theory

Aligning managerial incentives with multiple stakeholder groups and measuring overall performance can become a noisy and chaotic process.
There is still no consensus on how to measure and report on changes in stakeholder welfare.
Organizational theory states that the firm will only value CSR goals if the company executive exhibits strong leadership in instilling corporate responsibility within the company’s culture.
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Criticisms

It is difficult to assess the stakeholder view because it is not a well-defined theory.
Even critics of CSR agree that companies should act responsibly and should be seen doing so.
However, critics also argue that deviating too far from the profit-maximizing role of companies would be harmful to society.
When managers involve themselves in stakeholder engagement activities, higher costs and impaired business performance are likely to follow.
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Triple Bottom Line Reporting Guidelines
(from Ernst & Young paper)

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Cascade Engineering

Triple Bottom Line

Scorecard

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Stock market performance of European firms that sustain corporate citizenship to 600 other European firms.

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How Effective are Your Efforts Today to Address the Citizenship Factors that will Assure Your Success Tomorrow?

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Figure 11.3
Leader Leader Leader
Partner Partner Partner
Supporter Supporter Supporter
Data Source: Corporate Citizenship in the New Century: Accountablility, Transparency, and Global Stakeholder Engagement, The Conference Board, Research Report # R-1314-02-RR, July 2002.
U.S.
Europe
Asia-Pacific
0.4
0.36
0.31
0.31
0.53
0.42
0.29
0.11
0.28
Figure 11.4
Extremely effective Extremely effective Extremely effective
Somewhat effective Somewhat effective Somewhat effective
Mixed results Mixed results Mixed results
Not very effective Not very effective Not very effective
Not effective at all Not effective at all Not effective at all
Data Source: Corporate Citizenship in the New Century: Accountablility, Transparency, and Global Stakeholder Engagement, The Conference Board, Research Report # R-1314-02-RR, July 2002.
U.S.
Europe
Asia-Pacific
0.09
0.13
0.03
0.47
0.55
0.13
0.28
0.27
0.23
0.12
0.06
0.55
0.05
0
0.07
Data
U.S. Europe Asia-Pacific
Leader 40% 36% 31%
Partner 31% 53% 42%
Supporter 29% 11% 28%
U.S. Europe Asia-Pacific
Extremely effective 9% 13% 3%
Somewhat effective 47% 55% 13%
Mixed results 28% 27% 23%
Not very effective 12% 6% 55%
Not effective at all 5% 0% 7%
Summary

The stakeholder view of the firm does not focus on the maximization of shareholder wealth, but rather an optimization of the sustainable economic wealth of all stakeholders
The modern evolution of the stakeholder view of the firm advocates that companies have a social obligation
Corporate citizenship may serve as an implicit monitor
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0%

10%

20%

30%

40%

50%

60%

Extremely

effective

Somewhat

effective

Mixed resultsNot very effectiveNot effective at all

U.S.

Europe

Asia-Pacific

Data Source: Corporate Citizenship in the New Century: Accountablility, Transparency, and Global Stakeholder Engagement, The