Business Ethics and Corporate Governance

Outline
The Corporation Ethics Corporate Boards: A Multi-Dimensional Ethics Approach The Future

The Corporation

Defining the Corporation

A corporation:
Is a legal entity that produces and/or distributes goods and services Issues stock (shares of ownership) Provides owners limited liability for corporate actions Is designed to create wealth

Private and Public Corporations

Private Corporation
Ownership is usually held by a few and shares are not traded on the open market.
Owners decide to whom they sell shares in the company, and for what price

Public Corporation
Ownership (shares) traded on the open market, such as Korean Stock Market and the New York Stock exchange
The company does not control trading or price

Corporate Structure (US Model)

Management
CEO, President, CFO, COO, and senior management team determine and implement strategy

Board of Directors
Chair, Board Members are or represent owners
Auditing Committee Compensation Committee Other Committees
For example, Microsoft has an Ethics Committee

Ensure that Management is using owner money well

Corporate Structure (US Model): A New Business Function

Management
CEO, President, CFO, COO, and senior management team determine and implement strategy

Board of Directors
Chair, Board Members are or represent owners
Auditing Committee Compensation Committee Other Committees
For example, Microsoft has an Ethics Committee

Corporate Ethics Program

Reports to:
VPs Board of Directors

Ensure that Management is using owner money well

Stakeholders
Stakeholders are individuals or groups that influence or are affected by corporate activities.
Board of Directors, management, owners Business partners Current and retired employees, and their families Suppliers Lenders Customers Government Communities where business operates and sells
Regions, Nations, Cities The Globe (Some environmental issues are global)

Who Should Boards Represent?

Owners, of course: the traditional view Should they also represent:
Former and Current employees, and their families? Business Partners Suppliers? Lenders? Customers? Government? Communities where business operates and sells? The environment?

Ethics helps us answer these questions

Ethics

Defining Ethics
Ethics is the study and practice of
How to live a good life How to build good families and communities

But what is good life, and what is good relationship, family, and community? We can start with
The individual or The family/community

An Ethic Based on Individuals

Individuals:
Have equal political rights Deserve to be treated fairly Have the right to live as they want, as long as they do not harm the rights of others
This includes the right to live badly

A good society is one that treats individuals fairly and protects their rights. This requires:
Efficient, non-corrupt government and business A clean, non-toxic environment

An Ethic Based on Relationships, Family and Community

Relationships, Families, and Communities require
Loyalty Honor Friendship Humility Self-sacrifice A clean, non-toxic environment

A good individual has the qualities that promote stable, long-lasting relationships, families, and communities.

Different Countries
What is the ethical base of
The United States? Korea? Other countries?

Two Hypotheses
1. Countries that focus too much on one ethic will get in trouble
Focus on individualism alone will encourage people to get as much for themselves as they can, harming other peoples rights and the environment.
Recent corporate scandals in U.S.

Focus on family/community will encourage people to follow traditions that do not work in changing times, harming families and communities
Lifetime employment practices in some cultures

2. A healthy, sustainable culture needs to integrate the two ethics

Use the strengths of each to oppose the weaknesses of each

A Multi-Dimensional Ethic
A Multi-Dimensional Ethic will:
Protect individuals and encourage individual development Promote strong families and friendships Build a politically and economically strong country (region, globe?) Be fair and just Protect the environment . . . And create wealth

A Multi-Dimensional Ethic is the only path to long-term sustainable wealth creation

Ethical Corporate Boards

Multi-Dimensional Ethics

Ethical Responsibilities of Corporate Boards

Traditional U.S. view
The owners have property rights in the company. Boards are ethically responsible to make sure the owners property rights are protected. Other stakeholders should be considered only if they affect the property rights of owners

Owner Based MultiDimensional View

The board has a special role to represent owners The board has general duties not to harm other stakeholders, and when possible to promote their interests.

Balanced MultiDimensional view

The board should represent all stakeholders equally

The Future

A New Stakeholder Environment

Non-Owner Stakeholders are getting more power
Civil Society Organizations (CSOs)
Green Peace, and environmental group Educate 4 Justice, a labor rights group

Governments and Inter-Governmental Organizations Business Industry Groups UN Global Compact

A Network of CSOs, governments, businesses, and academics

Winning in the New Stakeholder Environment

Traditional US view creates hostility in stakeholders and hinders wealth creation Balanced Multi-Dimensional view will hinder wealth creation

Owner Based Multi-Dimensional view is the most sustainable alternative.

Trends in Corporate Boards

The U.S. is moving toward an Owner Based Multi-Dimensional View
Individual based

Europe has an Owner based Multi-Dimensional view

Individual and Group based

Asia has an Owner Based Multi-Dimensional view

Relationship and group based

Globalization will push each toward the others.

Globalization and Corporate Boards: A Prediction

The quality of corporate boards is important when evaluating risks of investment, contracts, joint ventures, and other corporate activities The world business and financial community will put pressures on corporations to standardize Board structure and oversight Cultural differences will make the Owner Based Multi-Dimensional approach the best sustainable alternative.