YSEALI Regional Workshop on Good Governance and Civil Society

သည် YSEALI Regional Workshop ကတော့ “Good Governance & Civic Engagement နဲ့
ပတ်သက်တဲ့ ခေါင်းစဉ်တွေဖြစ်တဲ့ open data tools, activism and engagement, public policy, role
of media, role of civil society စတဲ့ အကြောင်းအရာတွေနဲ့ ပတ်သက်ပြီး မလေးရှ ားနို င်ငံ ရဲ့ မြို့တော်ဖြစ်
တဲ့ Kuala Lumpur မြို့မှ ာ (၅) ရက်တာ ပြုလု ပ်သွားမှ ာ ဖြစ်ပါတယ်။ အာဆီယံ နို င်ငံ နဲ့ Timor Leste ကလူ ငယ်
အယောက် (၁၀၀) ကို ရွေးချယ်သွားမှ ာဖြစ်ပါတယ်။ ပျှမ်းမျှအားဖြင့် တစ်နို င်ငံ ကို ၉ ယောက်ဝန်းကျင် ရွေးချယ်မှ ာ
ဖြစ်တဲ့ အတွက် ရွေးချယ်ခံ ရဖို့ % များပါတယ်။ သေချာ အချိန်ပေး ကြိုးစား ပြီး လျှောက်ကို လျှောက်စေချင်ပါ
တယ်။
💠 ပြုလု ပ်မည့်အချိန် : October 19-23, 2020
💠 ပြုလု ပ်မယ့်နေရာ : ကွာလာလမ်ပူ မြို့၊ မလေးရှ ားနို င်ငံ ။
💠 ပညာသင်ဆု အမျ ိုးအစား : 100% ရက်တို ပညာသင်ဆု (မြန်မာနို င်ငံ ကနေ မလေးရှ ားသွားဖို့ ကု န်ကျမယ့်
လေယာဉ်စရိတ်၊ နေထို င်စားသောက်စရိတ် အစရှိတာတွေကို ကင်းလွတ်ခွင့် ရရှိမှ ာ ဖြစ်ပါတယ် )
💠 လျှောက်ထားနို င်သူ များ
▪️အသက် ၂၁-၃၅ ဖြစ်ရပါမယ်။
▪️အာဆီယံ နို င်ငံ သားဖြစ်ရပါမယ်။
▪️အာဆီယံ နို င်ံငံ မှ ာ နေထို င်နေတဲ့ သူ ဖြစ်ရပါမယ်။
▪️Volunteer (သို့) အလု ပ်သင် (Internship) (သို့) အလု ပ် ▪️လု ပ်သက် တစ်နှ စ် အနည်းဆုံ းရှိရပါမယ်။
▪️Good Governance နဲ့ပတ်သက်ပြီး စိတ်ဝင်စားသူ ဖြစ်ရပါမယ်။
💠 ဘာတွေလို အပ်လဲ။
▪️Essay (3) ပု ဒ် နဲ့ တစ်မိနစ်စာ Video (1) ပု ဒ်ရို က်ပြီး Form ဖြည့်ရပါမယ်။
💠 ဘာ Essay တွေရေးရမှ ာလဲ?
Question 1: Describe your professional experience working in areas of good governance
and civic engagement (work/volunteer/internships/coursework); including how many years
you’ve been working on these issues. (250 words)
Question 2: In what ways do you think your participation in this Workshop will help advance
your role as a leader in your community? (250 words)
Question 3: How will you share and implement what you’ve gained from the Workshop, and
contribute to a positive change and impact, upon return to your country and community?
(250 words)
💠 ဘာVideo ရို က်ရမလဲ?
One minute video: What drives your passion for issues related to pursuing, building and
improving governance and civil society?
💠 ဘယ်လို လျှောက်ရမလဲ။
Essay (၃) ပု ဒ် နဲ့ Video (1) ပု ဒ်ရို က်ပြီးသွားတဲ့ အခါမှ ာ အောက်က Link ထဲကို ဝင်ပြီး ကို ယ်ရေးကို ယ်တာ
အချက်အလက်တချ ို့နဲ့ ဖောင်ဖြည့်လို က်ရုံ ပါပဲခင်ဗျ။
https://www.ysealigovernance.org/application
💠 နောက်ဆုံ းဖောင်ဖြည့်ရမည့်ရက် (Deadline) - 15 May 2020 (11:59 pm) UTC + 8
Official Link : https://www.ysealigovernance.org/application
သည် Workshop နဲ့ ပတ်သက်ပြီး မေးစရာတွေ မေးခွန်းတွေ ရှိရင် Comment မှ ာ မေးထားလို့ရပါတယ်😊
(မေးခွန်းမမေးခင် Information တွေကို အသေးစိတ် အရင်ဖတ်ပေးပါအုံ းနော် )
လျှောက်မယ့်သူ များအားလုံ း Good Luck ပါခင်ဗျ❤️

Introduction to Internal Governance

 Governance is a topic that explains how an organization comes to have a system of
checks and balances; that ensures it is acting reasonably, ethically, and within the
law. 
 These checks and balances come from within the firm (internal governance), from
areas such as: accounting, legal and human resources departments. They also
come from without the firm (external governance), from places such as:
stakeholders, labor, the community, government, the market, the press and the
public.
 There is no one, clear and universally accepted definition.
 Each time you pick up an article or a book on the topic, you will find some variation in
the lists of purposes that governance is intended to accomplish, or what its role is in
an organization. 
 The most widely accepted definition of governance was formulated by the
Organization for Economic Cooperation and Development (OECD). It says:
'Governance involves a set of relationships between an organization’s
management, its board, its shareholders and other stakeholders'.
Organizational governance involves the structure through which the
objectives of the organization are set, the means of attaining those objectives
and the monitoring of performance.
 The baseline obligations of organizations in this regard was perhaps best
described by Milton Friedman back in 1970, when he wrote: “…there is one and only
one social responsibility of business – to use its resources and engage in
activities designed to increase its profits, so long as it stays within the rules of the
game, which is to say, engages in open and free competition without deception or
fraud." 
 Organizations have also taken on – in varying degrees – a commitment to corporate
social responsibility. It is a business approach that contributes to society in general by
delivering economic, social and environmental benefits for all stakeholders. 
 The definition of internal governance is the establishment of policies and the
continuous monitoring of their implementation by the members of the governing body
of an organization to ensure fairness, accountability and transparency in everything
the organization does.
 It includes the mechanisms required to balance the powers of the members and to
ensure that they carry out their duties.
How to adapt Internal Governance in the organization
  Internal governance refers to how policies are established and operations are monitored to
ensure that employees and management alike act reasonably, ethically, and within the law
while achieving the organizational mission.
 The three key governance objectives are fairness, accountability and transparency.
 Responsibility of Internal Governance: Internal mechanisms include oversight of and by
management, independent internal audits, structuring of the board of directors into levels of
responsibility, and the separation of control and policy development.
 Organizational Structure: How governance is established in an organization depends on
its size and how it is organized. In a small business like a sole proprietorship, governance
is the responsibility of the owner; and in a partnership, of the collective owners of the firm –
because in these firms the owners and the managers of the firms are likely to be one and the
same. The same is true of limited liability companies. This is the case because the
ownership and the management of the firm are not separated in any of these organizations.
 Organization Type: In larger firms, typically corporations, the ownership of the firm is
separate from the management of the firm, and here, the responsibility for the governance of
the organization rests with the owners of the firm. In corporations, the owners are
represented by a board of directors who assume this responsibility. In not-for-profits, boards
of directors assume similar responsibilities in keeping these organizations focused on their
missions. B-Corporations are something of a hybrid of typical C-corporations and not-for
profits, in that they intend to make a profit, but incorporate social or environmental causes
into their mission statements. For B corporations, governance responsibilities are similar to
those of C-corporations.
The Goal of Good Governance
 Duties: First, the duties of fairness, accountability and transparency are owed to a
company’s stakeholders – a group that includes: suppliers, customers, financiers,
management, employees, the government, and the community. The duty of fairness is owed
to the public at large, as is, to some extent, transparency.  
 Good Governance: Good governance is important to any organization. First, it can help to
prevent fraud, which is a sufficient reason on its own. But by doing this, it also keeps the
organization from incurring civil and criminal penalties and the public scandal that can
accompany this. Good governance promotes trust and dependability among stakeholders
and can enhance an organization’s image to potential investors and potential customers.
Good governance promotes a positive relationship with the community and the press.
 Goals: The goal of governance is to align the practices of an organization with its mission; to
make certain that it is focused on what it is there to do. Done well, it will make
the organization effective at carrying out its mission and efficient as well. Importantly, it will
make the organization accountable for what it does and how it does its job. This works
whether the organization is large or small, whether its mission is for-profit, not-for profit, or
any blend of the two.

Establishing Governance
Processes & Procedures
Method
 Internal governance is established in organizations in three ways:

1. Through the drafting, publishing and enforcing of policies and procedures.

2. Through the establishment of an organizational culture that supports fairness,

accountability and transparency.
3. Through oversight and control procedures established by owners or their board of
representatives and worked through management and employees.

Policies & Procedures

 Policies and procedures set patterns of activity in an organization. However, the word
"policy" is not a tightly defined term. It is something that needs to be interpreted within
the context in which it is applied. 

 It can be interpreted as a guide for decision making, or it can itself be seen as a specific
decision. It can even involve conditions on how and when decisions are to be made and
implemented. In short, it can mean anything from a very high-level direction to a very specific
set of decisions. 

 In spite of the wide scope that policies can cover and at which level they are made, there is a
common thread to their purpose. Policies are a coherent set of decisions with a common
purpose, pertinent within a given context.

 The definition of a procedure is far simpler. It is a particular way of behaving or

accomplishing something. It may be described as a set of instructions, or known generally as
the traditional or established way of doing things, but it is a method of acting in order to
accomplish something.
Policies A
 Governance policies pertain to all levels of an organization, from shareholder participation,
through to the roles of the board, chief executive, management and staff.

 Every organization should have written and published governance policies and procedures
along with a code of ethics that applies to all employees and to the directors of an
organization, together with provisions for their enforcement. 

 These policies should set a template for responsible business practices for the industry, in
which the organization operates, with guidelines for the responsible conduct of business.

Policies B

 Policies are used to initiate or change the way things are being done in an organization
and can be classified in a number of ways:

A. TIME: They may be short or long term, or triggered by specific events or time periods. 
B. ACTIVITY: Policies can be in place to monitor things and reports; they can be made on
observations, or they may initiate reactions. For example, when “A” happens, then we
respond with “B”.
C. MODE: Policies can be a restraint or an empowerment, i.e. an obligation, permission or a
prohibition.
D. SPACE: There may be geographical or systems boundaries to policies. For example,
things those pertain to: a building, computer system, Internet usage or office location.
E. FUNCTION: Various departments have policies that are relevant only to themselves. For
example, sales, service, research and development, security, purchasing, and so forth,
may have specific policies attached to particular job functions.
F. TARGET: The policy may have a specific target. For example, all employees who are in
contact with customers; or for the use of certain types of equipment like trucks or shared
printers. Targets may be grouped by function as well.
 Responsibilities and Scopes
Scopes
 Policies may also be determined by the scope of their effect. Things to consider are:

A. Are they organization-wide or limited to a functional area? 

B. Do they have corporate or high-level implications, are they task-oriented, or are they
pertinent only to a particular department? 

C. Are they low level, e.g. deal only with a method of operation?

Responsibilities
Because policies and procedures are intended to set a direction or outline a pattern of activity rather
than a specific and unique task, they are generally made at a higher level in the organizational
hierarchy, than are routine operating decisions. 

The responsibility for the sign-off on a policy rests with the person who is responsible for all of the
people who are affected by the policy. For example, an organization may have a policy that only the
public relations department may contact or respond to an inquiry from the press. The functional area
that is most affected by this policy is the public relations department. The policy concerns all
employees. However, the responsibility for the policy rests with the CEO. 

In another case, an organization may have a policy that states that IT system updates must happen
between midnight and three AM. While the policy is there to ensure that all employees will not
have their work interrupted mid-day, the responsibility for implementing the policy applies to the
people doing the updates (IT staff). However, the responsibility for setting and enforcing the policy,
in this case, rests with the Chief Information Officer.

Low level policies may involve, for example, use of a particular printer, the structure of passwords, or
the way in which phone calls are to be answered. 

Board Members
The Council on Institutional Investors publishes corporate governance policies on its website and
these are instructive for both public and private organizations.

For the Board to be effective at governance, several conditions are necessary:

• Board elections should be as inclusive of all shareholders as is practicable.

• Two thirds of the board should be independent, i.e. people who do not have a material or pecuniary
relationship with the company or related persons (except their sitting fees).

• The board chair should be an independent director.

• The board should have audit, nominating and compensation committees, all of which should be
chaired by independent directors. 

Direction
The Board is responsible for the strategic direction of the firm. Its role in governance is to adopt by-
laws that ensure good business practices are maintained; to review the financial performance of the
firm and its compliance with applicable laws, including those focused on human resources; to assess
and oversee the risks the organization is taking on; and to assess and approve all charitable and
political contributions.

Pay Policies
Executive Pays

According to the Center on Executive Compensation, "Executive pay arrangements typically consist

of six distinct compensation components: salary, annual incentives, long-term incentives, benefits,
perquisites and severance/change-in-control agreements." 

How these are balanced depends on a number of factors. The Society for Human Resource
Management lists a number of factors that contribute to this calculation: 

• Business philosophy, mission and vision.

• Business plan or strategy.
• Life cycle, organizational structure and business processes.
• Workforce composition and demographics.
• Tax and accounting regulations.
• Industry and competition.

Trend
Generally, the goal in organizations is to closely align the executive compensation package with the
mission and long term health of the organization. So, considerations of whether a business has a
short versus a long term horizon, or whether its mission is a strictly financial one or encompasses
other priorities (as would a B corporation), factor into the design of the compensation plan.

Executive compensation depends on a number of factors, but perhaps foremost among them are
trends among comparable organizations. Click on the following tab to view some of the latest trends
in executive compensation policy, according to a study by Washington University of St. Louis (2016).

NOTE: The U.S. Securities and Exchange Commission (SEC) issued a rule requiring U.S.-based
publicly traded companies, to disclose how median employee pay compares with CEO
compensation.

Pay Policies

• A higher percentage of executive pay is now linked to performance, based on measures such as
income, profit and cash flow.

• Pay incentives are more focused on long-term results. 2013 marked the first time long-term
incentives became the single heaviest component in CEO pay packages, according to Hay Group.
Long-term incentives like stock options now make up about 61 percent of total direct compensation.

• Companies have cut back on prerequisites for executives, especially the types most likely to raise
shareholder ire, such as cushy severance packages, tax gross-ups on golden parachutes,
spousal travel, cars and security. Personal jets remain the most popular perk though and haven't lost
any ground, according to Hay Group.
Workplace Culture and Policies
Workplace
A workplace policy is a statement that describes management’s expectation of employee behavior
and performance. In doing so, it communicates the organization’s values. 

Ideally, workplace policies restate what are already standard operating procedures, but by
writing them down and communicating them to all employees, management reinforces their
importance, drawing a line between acceptable and unacceptable behaviors and setting out
the consequences of noncompliance.

A well-written policy statement will begin with a statement of purpose and follow with
guidelines that shape how that purpose is to be attained. Workplace policies can cover a broad
range of issues, but can never hope to address every single thing that happens in an
organization. Common sense is a good supplement to the rules that are published. Some examples
of workplace policies commonly found in organizations are listed on the following tab.

Examples of workplace policies commonly found in organizations:

• Code of conduct
• Recruitment policy
• Internet and email policy
• Mobile phone policy
• Smoking / non-smoking policy
• Drug and alcohol policy
• Health and safety policy
• Anti-discrimination and harassment policy
• Grievance handling policy
• Discipline and termination policy
• Social media usage policy

Culture

A company's culture has a profound effect on the ethical behavior of its employees. A positive

corporate culture encourages employees to behave in responsible, ethical ways, resulting
in, hopefully, a happier workplace, team collaboration and employee empowerment . 

Corporate culture is defined as the beliefs and behaviors that determine how a company's
employees and management interact and handle business transactions. 

Often, corporate culture is implied, not expressly defined, and develops organically over time from
the cumulative traits of the people the company hires. A report by the Chartered Institute of
Personnel and Development in the United Kingdom had this to say: “Organization culture is one of
the hardest attributes of an organization to articulate and measure, but also one of the most
important and valuable."

Effect
Positive and aligned corporate cultures can motivate employees to perform and engage with
their work, align behaviors to common values and purpose, share knowledge and insights, be
more productive and responsive, and build trust. 
However, when toxic, culture can cause significant issues for the business and its employees,
leading to low performance and morale, high levels of staff turnover, and in some
circumstances significant harm to the organization and to the well-being of employees. 

In times of challenge and opportunity, a healthy corporate culture can make or break success of the
business and of the people working for it. Many business leaders have talked about the central
importance of culture to the success of the enterprise, often reminding themselves of the quote
attributed to Peter Drucker about how "...culture could eat strategy for breakfast. It follows then that
leaders of organizations must have a handle on the people-aspects of corporate culture.”

In short, corporate culture refers to the willingness of staff to cooperate with an organization's
policies and procedures and to adopt the spirit of those policies into their work and behavior. This
process begins with the organization's leadership and filters down throughout the
organization.

Owners and Managers

Types of Organization

UBIQUITOUS: Most often, we hear about the role of the Board in corporate governance. However,
all types of organizations: sole proprietors, partnerships, limited liability companies, B-
Corporations, C-Corporations, Not-For-Profit Organizations etc., all have a responsibility for
formulating and implementing a governance strategy.

SOLE PROPRIETOR: Sole proprietorships are firms that are owned by one person - usually the
individual, who has day-to-day responsibilities for running the business.

Sole proprietors own all the assets of the business and the profits generated by it; they also
assume complete responsibility for any of its liabilities or debts. 

The owner is personally responsible for everything that happens in this business and so the
responsibility for the governance of the firm rests with the owner.

PARTNERSHPS: Partnerships are similar to sole proprietorships, in that they are managed by

their owners. However, this term refers to where two or more people share ownership of a
business.

The owners will have a partnership agreement that says: how decisions will be made; how
profits will be shared; how disputes will be resolved; how future partners will be admitted to
the partnership; how partners can be bought out, and what steps will be taken to dissolve the
partnership if necessary. 

As with the sole proprietorship, the owners are responsible for what happens in the business,
and thus all share responsibility for governance.

Organizational Structure

Limited partnerships: are partnerships in which some of the partners are investors in the
business and do not participate in the day-to-day management of the business. Their liability
is limited to the extent of their investment. 

Governance rests with the general partners who are responsible for the day to day
operations of the business and is generally not the responsibility of the investor partners.
Limited Liability: Limited Liability Companies are entities that have the limited liability features of a
corporation but retain the tax pass-through features of sole proprietorships or partnerships. 

Limited Liability Companies cannot have more than two of the four characteristics that define
corporations: Limited liability to the extent of assets; continuity of life; centralization of
management; and free transferability of ownership interests. 

That said, Limited Liability Companies are managed by their owners, who retain the
responsibility for governance of the firm.

Corporations: are considered by law to be unique entities, separate and apart from those who
own them. A corporation can be taxed and sued and can enter into contractual agreements.
The owners of a corporation are its shareholders. The corporation has a life of its own and does
not dissolve when ownership changes.

The purpose of a “C” corporation is to engage in an activity or activities that will result in
profit. A “B” (for-benefit) corporation is a type of entity that includes positive impacts
on society, workers, the community and the environment, in addition to generating profit, as
its legally defined goals. 

In both “B” and “C” corporate firms, the shareholders elect a board of directors to oversee major
policies and decisions. The responsibility for governance of these organizations rests with the
Board of Directors and with management. In general, the responsibility for the governance of a
firm rests with the owners who are involved in the management of the organization, as well as with
the employed managers of the firm.

Other Staff in Organizations

Managers: Here we have to return to the definition of governance set by the Organization for
Economic Cooperation and Development: “Governance involves a set of relationships between
an organization’s management, its board, its shareholders and other stakeholders.
Organizational governance provides the structure through which the objectives of the organization
are set, the means of attaining those objectives and monitoring its performance.”

Managers are responsible for balancing stakeholders’ interests. Managers are agents of the
corporation, and are constrained by the demands for satisfactory benefits for the stakeholders. 

While they are primarily responsible to the owners of the organization, they must also accommodate
the interests of customers, suppliers, workers, the government and the community, in order to create
a sustainable business. 

Executives: The CEO and senior executives are responsible for running the day-to-day operations
of the corporation and keeping the board informed of the status of these operations. 

The primary duties of the CEO and senior management include:

• Performing strategic planning, including developing and implementing annual operating plans and
budgets.
• Selecting qualified management; establishing an effective organizational structure and positive
organizational culture.
 • Identifying and managing corporate risks.
• Reporting corporate finances accurately and transparently and making timely disclosures.

Employees: Management’s role is to provide a structure within which company objectives can be
attained. Corporate governance is the system of rules, policies, practices and processes by which a
company is directed and controlled. 

While many of the policies and practices can be established by the Board, the volume and detail of
the functioning of an organization demands that much of the common interfaces of employees with
people, both inside and outside the organization, be guided and governed by management. Of
course, given that there are policies, rules, practices and processes, the employees of the
organization are the people who actually carry them out.

So, management also has a role in the governance of the organization. The Board or owners will set
an overall strategy and direction for the business and provide oversight on its operations, its financial
statements and its risk policy. But to run an organization requires that management create a
structure in which these policies can be affected; interpreted through detailed instruction and applied
in the various aspects of work to which people must attend. 

 Module 1 Summary
 Governance involves a set of relationships between an organization’s management, its
board, its shareholders and other stakeholders. 
 Organizational governance provides the structure through which the objectives of an
organization are set, the means of attaining those objectives and the monitoring of
performance.
 Internal governance refers to how policies are established and operations are monitored to
ensure that employees and management act reasonably, ethically and within the law, while
achieving the organization's mission. 
 The three key governance objectives are: fairness, accountability and transparency.

Internal governance is established in organizations in three ways:

• Through the drafting, publishing and enforcing of policies and procedures.

• Through the establishment of an organizational culture that supports fairness, accountability and
transparency.

• Through oversight and control procedures from the Owners, or their Board representatives, via
management and employees.

 The most common way of establishing and documenting the set of norms and behaviors
expected of all participants in an organization, is by codifying them into policies and
procedures.
  Codes of conduct, policies and procedures are generally written to cover several important
topics:

• The functions and processes conceived by the owners of the company (sometimes through the
board of directors), as to its duties in the financial, risk and human resources management of
the company.
• Executive compensation – to align the reward system of the chief executive, with the carrying out
and effective execution of the mission of the firm.
• To set standards of behavior for all employees in dealing with the stakeholders of the firm.

 As important as a set of policies and procedures may be, an equally important aspect of
establishing good governance within an organization is the establishment of a corporate
culture that supports it. 

 Corporate culture is defined as the beliefs and behaviors that determine how a company's
employees and management interact and handle business transactions. 

 Often, corporate culture is implied and not expressly defined and can develop organically
over time, from the cumulative traits of the people working in the company.

 Corporate culture refers to the willingness of people to cooperate with the policies and
procedures; to adopt the spirit of these policies into their own belief systems and to
incorporate them into their behaviors. 

 Corporate culture begins with the leadership of the organization and filters down through it.

 The Board of Directors is in an oversight position. Its responsibilities include the development
of policies governing the organization. It is specifically responsible for oversight of the
audit of the organization and its financial reporting; oversight of human resources policies;
compliance with regulations and the management of corporate risk.

 Management has a role in the governance of an organization. Running an organization

requires that management create a structure in which oversight policies can be
implemented.  Policies and procedures are mandated through detailed instruction and
applied in the various aspects of work to which employees attend. 

 Management brings reasonableness to the organization and establishes a culture in which

transparency, accountability and responsiveness are the norms.  
Modules (2): Introduction to External Governance
View of Stakeholders

We began this course with a definition of governance that was drafted by the Organization for
Economic Cooperation and Development, namely that: Governance involves a set of
relationships between an organization’s management, its board, its shareholders and other
stakeholders.

The essence of this definition is in the word “relationship.” In this context, it means the way in
which two or more people, groups or organizations are connected. It implies that the people, groups
or organizations communicate with each other and are responsive to each other.

The second word in this definition, that requires some elaboration, is “stakeholders.” The word
stakeholder, which was coined in an internal memorandum at the Stanford Research Institute in
1963, refers to "those groups without whose support the organization would cease to exist."
As more thought went into this concept, two views of this term developed – one narrower, the other
more expansive. 
Narrow View

The narrower view of 'stakeholder' means any identifiable group or individual on which the
organization is dependent for its continued survival. This includes employees, customer
segments, suppliers, government agencies, stockholders (other than Board representatives)
and retained financial institutions. 

In the more expansive view, it means any identifiable group or individual who can affect the
achievement of an organization's objectives, or who is affected by the achievement of an
organization's objectives. This includes all of the groups that are included in the narrower view,
plus public interest groups, protest groups, other government agencies, trade associations,
competitors and unions.

We will discuss these two views separately, because they differ in their level of responsiveness
and communications. 

Broad View

Groups like employees, customers and suppliers are in constant and hopefully meaningful
communication with the management of the firm. Groups like competitors, trade associations,
and some government agencies may have less frequent and often more formal types
of communications, often focused on a single issue, with management. 

In this section, we are going to cover the narrow view of stakeholders, whom we will call “close
stakeholders” meaning those that are in close communication with the firm. In the next section
we are going to refer to the broader range of stakeholders as the “market” and discuss their
potential impact on a firm's behavior.

Form of External Governance

Entities & Goals

External governance mechanisms are those controlled by people, groups or organizations
besides the owners or managers of an organization and serve the objectives of those groups or
entities.
They include employees, suppliers, buyers, regulators that focus on the industry in which the
firm participates, retained financial institutions and investor-stockholders.  

The objectives of these entities are specific. Of course, there are places where objectives may
overlap; for example, the goals of employees may be supported by favorable labor regulations or
some of the goals of buyers may be helped by consumer protection legislation, but it is safe to say
that each entity has its own agenda. 

The objectives of close stakeholders are usually imposed by contract in the case of
employees, investors, buyers and suppliers, and by law or regulation for government entities.
This is distinguished from other types of more remote stakeholders such as industry
associations, who may suggest guidelines for best practices, leaving businesses with the discretion
to follow these guidelines or ignore them. 
For government agencies and investors, companies report the status of their operations and the
compliance with regulations to these groups. We will begin with the most pervasive of external
regulators – government agencies, and then we will discuss the other close stakeholders
influencing a firm's behavior.
Government
While the primary responsibility for the governance of a firm rests with its owners, other
stakeholders also act to ensure that an organization acts reasonably, ethically, and within the
law.
The objective of government regulators is to promote and protect the public interest. But let us
look more closely at why and how this is done. 

The rationale for regulation is generally phrased in terms of some form of failure of the free
market to balance the interests of producers and consumers. Free markets tend to bring prices to
cost plus a reasonable profit. And so, what market conditions can be characterized as a
“failure”? First, don’t think of a “failure” as the market falling apart. The term is used in any case
where a fairly competitive environment among producers does not happen naturally.

The second reason for regulation is a non-economic one. Regulations are sometimes made in
the pursuit of furthering social causes, protecting human rights or ensuring health and
safety. We will come back to this in a few moments.

Monopolies
There are times when having a single firm supplying goods or services to a market makes sense, as
is the case with power supplies. 

A monopoly exists because it is less expensive to run one set of power lines and regulate
prices than to have multiple power lines running down a street and serving alternate houses. 

What keeps the power company from charging the most that anyone would be willing to pay is price
regulation. Similar circumstances exist where, for extraordinary reasons, companies can make
windfall profits on their products. 

External Governance Influence

Environment
Externalities, or spillovers, occur when for example, a company can make a product cheaply, but
in doing so dumps some poisons into the atmosphere or local waters.  

The price for cleaning up the poisons is borne or suffered by the public. Most forms of environmental
regulations would be included in this category.

Information
Information asymmetry happens when a supplier knows the faults of a product that the
consumer may be unaware of and the consumer assumes the product to be usable for the purpose
for which he or she is purchasing it. 

Much of consumer protection regulation is based on this – it is the impetus behind warning labels
and ingredient list disclosures, not to mention calorie counts.

Regulations
Some services need to be in place at all times. Suppose, for example, a power company chose to
run its operation only when demand for power was sufficient to ensure that the operation is
profitable. 

During the late evening, the power company can choose to shut down operations, even though, for
example, hospitals and other energy-dependent businesses may need it. 
Regulation is needed to adjust prices so that the power company can afford to stay open during
peak as well as slow times of the day.

Public Interest
There are also non-economic reasons for regulation. Social causes, such as non-discrimination
in hiring, ensuring safe workplaces or inspecting restaurants for compliance with a health code aren’t
necessarily the result of free market failures. These are regulations made in the pursuit of
furthering social causes, protecting human rights or ensuring public health and safety.

Regulatory Functions
Cooperation
In the introduction to The Regulatory Craft, Malcolm Sparrow describes the distinctive nature of
regulation this way: “The important features that distinguish regulatory and enforcement agencies
from the rest of government are precisely the important features that they share. The core of their
mission involves the imposition of duties. They deliver obligations rather
than services.” Regulators set and enforce standards, and federal regulations can be found in
the “Code of Federal Regulations.”

In one important way, though, the enforcement of regulations differs from the enforcement of
laws. Laws are sets of rules enforced through a system of penalties for non-compliance.
While regulations can be constructed and enforced in this way, there are other options. 

Depending on how willing organizations are to cooperate in creating a solution to a problem, there
can be participation in figuring out how to solve a problem and with monitoring and development as
things progress. The problem can be seen as an objective thing rather than as the fault of a
culpable party. For example, there is too much of a certain kind of pollutant being released into the
atmosphere and the solution arrived at by creative problem solving. 

Fairness
Businesses complain that the regulatory environment in the US is a burden, as businesses do in
many other countries. Regulations can be many, complex, costly, inflexible, outdated and may
not consistently provide demonstrable results.

On the other hand, businesses find it useful that a centimeter or an inch is a standard size, that the
rules of shipping are consistent, or that funds can pass around the world through a standardized
banking system. We all feel safer eating in restaurants knowing that they are subject to inspection by
local health departments. These things can only exist in regulated environments. 

What makes regulation worthwhile sounds simple. It has to be firmly supported by law and
enabling legislation. There has to be a clear mandate based on a clear need. There has to
be accountability; fair, accessible, open procedures and the process has to be as efficient as
possible. 

Interpretation
The regulators themselves should have expertise in the areas they are being asked to govern. A
caution here: Depending on whether your politics are liberal or conservative, your definition (and my
definition) of these terms: fairness, accountability, efficiency, will vary. 

Is fairness a function of opportunity or result? Who, exactly, is the public that the government is
intending to serve? And what of competing interests? For example, full employment versus the
cost of environmental regulation? 

It is difficult to gain a consensus on what, exactly, is in the public’s best interest. And especially for
those regulations that are constructed for social causes, it is hard to separate the force of ideas
from the role of economic interests. It is a fluid situation, fueled by a changing political
environment and by the influence of interest groups.

Government Regulations
Environmental Concerns
Regulation affects many of the products and services we come across and it would be impossible to
address all of them. 

In this topic we will highlight four areas that have garnered attention in recent times: Environmental
regulation, online business, consumer protection and labor or human resources.

At the federal level, in the US, the Environmental Protection Agency (EPA) has the primary
responsibility for enforcing regulations concerning industry and the natural environment.

The two foundational pieces of legislation dealing with environmental protection are the Clean Air
Acts of 1970 and 1990, and the Clean Water Act. Other pieces of legislation cover topics such as
hazardous waste sites, conservation and energy production.

Clean Air and Water Legislation

Protection
Under the Clean Air Act, in the US, the Environmental Protection Agency (EPA) sets limits on the
type, extent and levels of permitted air pollutants. These are called ambient standards. Other
nations and governments such as the European Union (EU) have similar laws. 

The Clean Air Act also gives the EPA the authority to limit emissions coming from sources like
chemical plants, utilities, steel mills and automobiles.

Individual states in the US may have different air pollution laws - stronger or weaker than those
set by the EPA. The EPA works with companies to figure out the best way to produce and contain
pollutants.

Water
The Clean Water Act is a US federal law that regulates the discharge of pollutants into the nation's
surface waters, including lakes, rivers, streams, wetlands, and coastal areas. 

This is supplemented by the Safe Water Drinking Act which focuses on all waters that are actually
or potentially designated for drinking use, whether from above ground or underground
sources.

Legislation
Other significant pieces of legislation are the Comprehensive Environmental Response,
Compensation and Liability Act, also known as the “superfund”, which enables the federal
government to clean up any uncontrolled or abandoned hazardous waste sites, as well as accidents,
spills and any other emergency releases of pollutants or contaminants into the environment. 

The Endangered Species Act provides a program for the conservation of threatened and

endangered plants and animals in the habitat in which they are found. The Energy Policy
Act addresses energy production in the US.
There are also international treaties covering atmospheric regulation (climate change), freshwater
resources, hazardous materials, the marine environment, marine living resources, nature
conservation, noise pollution and nuclear safety. The US is party to some, but not all of these
treaties.

Workers and Consumers

Online
Online business regulation primarily focuses on privacy, security, copyright and taxation. 

In the United States, the Federal Trade Commission is the primary federal agency covering this
sector. The Federal Trade Commission’s online advertising and marketing guide provides an
overview of e-commerce rules and regulations. 

Note that overseas, especially in Europe, privacy laws can be stricter than they are in the United
States.

Consumers
Consumer protection is also within the jurisdiction of the Federal Trade Commission in the US,
whose mission it is to stop unfair, deceptive and fraudulent business practices by collecting
complaints, conducting investigations, suing companies that break the law, developing rules to
maintain a fair marketplace and educating consumers and businesses about their rights and
responsibilities.

Employment
Employment law in the United States is overseen by the Department of Labor. There are more than
180 federal laws governing employment and more at the state level. 

The key statutes cover wages and hours, workplace safety, workers’ compensation, employee
benefits security, union membership, employee whistleblower protection, and the family and
medical leave act. 

Unlike most other industrialized countries, the US does not mandate paid time off for full time
employees or paid maternity leave, and it does not require organizations to offer health benefits or
retirement savings accounts.

Close Stakeholders
The Role of Close Stakeholders
Definition
The close stakeholders of any firm are specific to that firm. The people, groups or organizations
that fill this role are defined in part by the industry in which the firm is operating and its physical
location. 

For most firms, close stakeholders include: the firm’s employees, customer segments, suppliers,
stockholders (other than Board representatives) or limited partners and retained financial institutions,
Employees
Employees provide a source of organizational governance in a number of ways. Firstly, most
employees have ethical standards. Within a supportive organizational culture, with structures and 
mechanisms to enable them to act reasonably, ethically and within the law, they will usually do so. 

While it would be unwise to expect every employee that is hired to hold to all standards, it would
be unfair to expect that every employee would abandon standards at the first unmonitored
opportunity. 

In a well-managed environment with adequate controls, ill-behaved employees should be the

exception rather than the rule. The interview and screening process should aid in vetting out
applicants who are unlikely to hold to the ethical standards of the firm. 

Standards
Second, some employees will have a professional designation. Some will be attorneys,
accountants, scientists, electricians, plumbers, medical workers or one of a number of other
professions. 

They will have licensing standards and professional associations that, in theory, hold them to
high standards of behavior.

Third, employee compensation systems can be designed to reward ethical behavior. For example,
sales obtained using unethical means can be denied bonuses. 

Fourth, employees can serve as whistle-blowers. Given the safeguards of whistle-blower legislation
in the US, alerting senior management to fraudulent activity within a firm (see something, say
something) is generally encouraged. 

Customer Influence
Consumer-driven
In consumer markets, the first and strongest feedback that organizations receive about their
products or services is their sales volume. That said, other factors come into play. 

Organizations engage in market research to help shape and refine their products and in this
process learn the nuances of customer preferences. In grocery food products, for example,
some customers may prefer to have products that are organic or gluten free. Companies like Higher
Ground Roasters, Grumpy Mule, Rise Up Coffee Roasters and Larry’s Beans among others carry
“fair trade” coffee only. 

Fair trade coffee is coffee that is certified as having been produced to fair trade standards. Fair
trade organizations create trading partnerships that are based on dialogue and transparency and
prohibit child or forced labor. Companies like Walmart, Aetna, TJ Maxx, Target, Starbucks, Ikea, the
Gap and many more, have focused on paying their employees living wages and are making
progress toward these goals.

While consumer concerns about issues like fair trade or living wage may not be the primary drivers
of these markets, even minor variations in sales based on consumer preferences should and will get
management’s attention.

Feedback
In business-to-business sales, sellers and purchasers can have more engaged relationships than
typically happens when organizations sell products or services to consumer markets. Feedback to
businesses concerning their business practices happens in several ways.

DIRECT FEEDBACK:
• An organization can influence other organizations through its procurement and purchasing
decisions. An insistence on purchasing only “fair trade” items is an example.
• Manufacturers typically distribute their products through wholesalers and/or retailers and so may
receive feedback on products from end users.  
• Consumers who purchase defective products or services may request refunds or replacements for
products. 
• If an injury occurs from the use of a product, the consumer may also have a legal cause of action
against the manufacturer. 
• Having policies and procedures that stress safety standards mitigates risk and responds to
demand.

Responsive
A manufacturer may produce a product that is so significantly defective that a government agency
(e.g., the Consumer Protection Agency) mandates that the manufacturer recall, repair or replace
the product. 

Announcements of these recalls damage the reputation of the manufacturer. Manufacturers

who anticipate a recall directive and voluntarily recall products rather than being compelled to do so
can mitigate this damage, even if they do not completely dispel it.

From the standpoint of corporate image, companies can use their practices to improve the firm’s
identity and reputation in the market. As mentioned previously, firms that support fair trade or
living wage efforts do so partly with the expectation that these practices will enhance their image
and promote their brands.

Other Close Stakeholders

Supplier Power
The influence of a supplier of products or services to the market depends in large part on whether
the product or service is rare, difficult to imitate, valuable, or irreplaceable. If the product or
service has these four attributes, then the supplier effectively has a monopoly. 

Historically, monopolist power has generally been antithetical to good governance

practices. Monopolies have long been held by governments to be suspect, largely because of the
discretion they have in pricing. Examples of monopolistic behavior include: price fixing, where
parties collude to sell the same product or service at the same price; restrictions on resale, where
the seller creates a single-user license, forbidding distribution and predatory pricing, where the
producer sells a product at a very low price with the intent of driving competitors out of the market.

On the other hand, supplier power can be used to inspire good governance practices. Suppliers
have the ability to restrict the channels in which their products are sold, so that the products
are only sold by licensed dealers who have the ability to repair, service and maintain the products .
Similarly, sales can be restricted to outlets where employees have been trained or
received certification important to the creation, delivery, installation or servicing of a product.

Investor Power
As we have seen, Board members are very actively involved in the governance of firms. But to what
extent do stockholders and limited partners have a role in this?
Investors, as owners of the firm, may contact their Board representatives with questions or
comments. They may attend annual meetings and speak directly with the CEO. They may sue the
Board if they believe its actions have violated a law or fiduciary duty.
 
All investors in stock corporations are invited to participate in an annual meeting at which they have
the right to voice concerns and comments and ask questions about the management of the firm. In
meetings of the larger firms, serious dissention may attract the attention of the press. 

Although the board of directors of a corporation wields considerable authority over corporate affairs,
shareholders are a corporation's ultimate authority. Shares represent ownership stakes in a
corporation and when corporate directors undertake actions that harm the corporation, they harm the
value of shares. 

Executive Duties
U.S. law authorizes shareholders to sue corporate directors for wrongful acts that harm the
corporation and the value of its shares. Stockholders may sue the Board (or members of it) if one
or more of them violate their fiduciary duties of care and loyalty. 

The duty of care requires a director to exercise due care when managing corporate assets. The
duty of loyalty requires a director to avoid undisclosed conflicts of interest. Generally, he or she may
not engage in self-dealing by profiting from acts undertaken on behalf of the corporation, other than
to receive any compensation authorized by the corporation. 

A board may also generally not take advantage of any business opportunities received as a result of
its relationship to the corporation. Fiduciary duties can be used to define many different types of
wrongful acts that may or may not be explicitly prohibited by statute, but generally fiduciary duty
means that the board member must put the interests of the corporation before his or her individual
interests.

Business Judgment Rule

The "business judgment rule" insulates a director from liability for making bad decisions. As
long as they can establish that they have acted in good faith, did not engage in self-dealing, and
kept themselves reasonably well-informed, they are likely to be protected by the rule. 

The purpose of the business judgment rule is to allow directors room to exercise independent
judgment, without having to fear a lawsuit by someone who disagrees with their decision, or
who is disgruntled by its outcome.

Financial Stakeholders
Stock Holders
If a stock issuing organization participates in illegal or fraudulent activity, investors may file
a securities class action, or securities fraud class action. 

This is a lawsuit filed by investors who bought or sold a company's securities within a specific
period of time (known as a “class period”) and who have suffered economic injury as a result of
violations of the securities laws.

Silent Partners
If a silent partner in a limited partnership starts to get involved in the general management of the
partnership, they are at risk of losing their status as a “silent partner” and can assume general
partner liability. 
 This puts the silent partner in a precarious position. If they suspect there is fraudulent activity
going on in the partnership, getting involved may increase their liability for the actions of the
partnership. 

Silent partners are liable only to the extent of their investment in the business. General
partners may have their personal assets attached to the liabilities of the partnership. The best
course for silent partners is to contact the authorities if there is good reason to suspect
misdeeds.
Lenders
When an organization borrows funds from a financial institution, the financial institution typically asks
for a full set of financial statements from the organization. 

It may ask it to sign agreements that limit the amount of additional funds it can borrow. It may also
ask it to retain a baseline amount of liquid assets (cash, demand deposits or money market funds),
to make certain that key financial ratios, usually liquidity benchmarks, are retained. 

If the covenants are broken, the debt may become due immediately and the organization may risk
foreclosure. In this way, the lending financial institution becomes something of a watchdog over the
financial health and stability of the organization with a focus on the amount of financial risk it
is willing to assume.
 Module 2 Summary


There are two views of how the term 'stakeholders' can be defined. One is narrow and the other is
more expansive. 

The narrow view of stakeholder is any identifiable group or individual on which the organization is
dependent for its continued survival. 

In the expansive view, stakeholders are any identifiable group or individual who can affect the
achievement of an organization's objectives or who is affected by the achievement of
an organization's objectives. 

We refer to the narrow groups of stakeholders as “close” stakeholders. All stakeholders try to
influence the behavior of the firm. This is generally imposed by contract, by law or by regulation and
is something that can be interpreted as positive or negative depending on its impact. 

Close stakeholder groups include: employees, investors, customers and suppliers. 

Regulation is generally called for when there is market failure – when a competitive environment
amongst producers does not occur through natural market forces. Examples of market failure
include: monopolies, externalities, information asymmetries, and failure to provide necessary
services such as power and water. 

Regulation may be imposed to promote civil rights and to ensure public health and safety.
Laws are sets of rules enforced through a system of penalties for non-compliance. By contrast,
regulations involve problems to be solved; methods of enforcement can range from cooperative
to coercive.

Businesses often express frustration with regulations, for many reasons. Regulations can be
complex, costly, inflexible, outdated; do not consistently provide demonstrable positive results.

“Good” regulations are made in response to true market failures; to promote civil rights; protect
public health and safety.

Regulations must be supported by law and enabling legislation; made in response to a clear
mandate based on a clear need; be developed with accountability; be fair, accessible and open
procedures; made through an efficient process. The regulators should have expertise in the topic
they are tasked to regulate.

There are abundant examples of regulation. Some notable examples of regulation concern: the
environment, online businesses, consumer protection and labor.

In the US, the foundational legislation for environmental regulation includes: the Clean Air Act which
sets limits on the amount of certain pollutants that can be released into the atmosphere and the
Clean Water Act which regulates the discharge of certain pollutants into the nation's surface waters,
including lakes, rivers, streams, wetlands, and coastal areas. 

Other significant environmental legislation in the US includes: the Comprehensive Environmental

Response; Compensation and Liability Act; The Endangered Species Act; The Energy Policy Act. 

Environment regulation can also be based on international treaties.

The regulation of online business focuses on privacy, security, copyright and taxation and is
managed by the Federal Trade Commission, an agency that also handles consumer protection.

Consumer protection prohibits unfair, deceptive and fraudulent business practices.

Employment law in the US covers topics such as: wages and hours; workplace safety; workers’
compensation; employee benefits security; union membership; employee whistleblower protection;
the Family and Medical Leave Act. 

In the US, employment law and regulations are managed by the Department of Labor.

Close stakeholders include: employees, customer segments, suppliers, stockholders (other than
Board representatives) and financial institutions.

Employees are a source of governance for organizations. Screened and vetted employees generally
act reasonably, given a supportive environment and a compensation system that rewards
ethical behavior. 

Professionals, may be members of professional organizations that have standards of practice for
licensed or certified membership. This contributes to governance.

Consumers generally prefer to deal with scandal-free, reputable firms, that practice corporate social
responsibility. 
Business customers influence firms through their procurement and purchasing decisions and by
giving firms direct and indirect feedback about their products and services.

The influence of suppliers varies according to the value, scarcity and uniqueness of the supply -
something that can be positive or negative. This can affect things like price and service standards.

Institutional investors may be involved in the governance of a firm. They can contact board
representatives; voice concerns at annual meetings; garner press attention; sue board members for
breach of duty.

Some financial institutions may require firms to file financial statements or agree to covenants, to
maintain financial benchmarks, especially liquidity ratios. This helps to ensure limits on the risks a
firm takes.
Modules (3): Market Forces

Organization Resembles
Isomorphic Influences
Isomorphism
Government regulators are not the only source of external regulation for organizations, even if they
are the most pervasive. 

There is a natural tendency for organizations to become similar in their structures and approaches to
handling their operations. However, this is not an absolute. Some people and organizations will
intentionally try to be different to their competitors. But there are some reasons why firms tend
toward similarity. 

The term we use here comes from Biology, where different organisms tend to respond to their
environments in similar ways. It is called Isomorphism, from ISO - meaning one and MORPH -
meaning change. Combining the two words, in a business context, it means the tendency for
organizations to become similar in their structures and functions due to natural market forces. There
are three main types of organizational isomorphism: normative, coercive and mimetic.

Professionals
Normative isomorphic change is driven by pressures brought about by professions, as is the
case with, for example, accountants, doctors, plumbers and electricians. 

The professions are licensed and create standards of practice that span across all
organizations. It is, in part, due to the educational requirements and licensing of people within the
professions. 

The risk for any individual of not complying with the requirements of the trade association or other
licensing agency is, of course, the loss of a license which, to professionals, may be more important
than the loss of a particular job. Within the organization, professionals such as accountants are
guided by the rules of the profession more so than by the preferences of management. 

Standards
There are, in the United States for example, Financial Accounting Standards Board guidelines and
rules. The Securities and Exchange Commission and the Internal Revenue Service have long lists of
requirements for filing the forms that they require. 
All organizations must have accounting systems - software that enables them to perform financial
and tax accounting, payroll, and disclosures required by the SEC. Some industries, for example
Banking, have additional requirements. Electricians are guided by construction codes and industry
best practice, as are plumbers and similar professionals. Lawyers maintain membership in their state
Bar Association, which requires them to have ongoing education.  

This enforces disciplines in organizations. Even not-for-profit organizations have to file tax
forms, although they do not have to pay any income tax. 
Bringing organizations into standards of professional practice is effectively a form
of governance.

Driving Forces
Coercive Coercive isomorphic change involves pressures from outside factors, that
organizations are dependent on: close stakeholders; regulations; expectations from society. 

If an organization is doing business with a supplier and too many defective parts are showing up
from that supplier, the purchaser will put pressure on the supplier to take corrective action. Society
has expectations as well. Does a legitimate firm have to have a website and a customer service
department? Depending on the product, is customer service available 24/7? These sorts of forces
have an impact on a firm.

If a manufacturer urges its retailers to have specially-trained or certified staff, then compliance by the
retailer would be a normative form of isomorphism. If having specially-trained, certified or
professional staff is required by contract between two companies, this would be considered coercive
isomorphism. It may not be forced or done against the will of the retailer, but the fact that it
is required and not just advised, gives it the “coercive” label.

Market-LED
Customers have expectations of the organizations with which they do business. Suppose that you
are thinking about purchasing a car and you’d like to compare several options. You may
reasonably expect the manufacturers to have websites with pictures of the vehicles and lists of their
features.. 

You have expectations about how you will be able to use the vehicle – e.g., fit a given number of
people and haul a certain load of sports equipment. You could check consumer report websites to
see if reviews have met those expectations. 

Once you’ve narrowed your list, you may expect there to be a dealership with a show room so you
can take a test drive of the car. Your expectations and requirements help to shape the organization
(car manufacturer). They build a website, purchase showrooms and include features in the car that
you want. In this way, they are forced by consumer expectations to have certain products and
services. The market coerces them. 

Mimetic
Mimetic isomorphism in organization theory refers to the tendency of an organization to imitate
the organizational structures of other organizations that are in the same market.  

Unlike the coercive form of imitation, this form occurs when an organization's goals or means of
achieving their goals is under-developed or unclear. New entrants in a market, for example, may
start their organizational model as a crude copy of other organizations in the market.

Suppose you are interested in starting a restaurant. There will be health and safety regulations that
will factor into the type and amount of equipment you purchase; the number of sinks you install, the
adequacy of your fire suppression system etc. Also important is the look and feel of the restaurant.
What will make it look like a legitimate restaurant – decor, furniture, music, uniforms?

Professional and Trade Organization

What Trade Association Do

Trade A
Trade associations are organizations funded by and formed for the benefit of businesses
operating within a specific industry. They tend to focus on public relations issues, advertising,
public education, lobbying, publishing and other types of advocacy. 

These are non-profit organizations that focus on issues where all of the firms within an industry
may benefit by some collaboration. In the US, there are hundreds of trade associations. Some of
these associations have characteristics of both trade and professional organizations.

Examples of US trade associations include the National Association of Broadcasters, the Academy
of Motion Picture Arts and Sciences, the Art Dealers of America, the National Association of
Home Builders, and the American Apparel and Footwear Association, among many others. By
promoting common causes, trade associations create rallying points for members, promote industry
and help to align public thinking.

Trade B.
Trade associations may sponsor one or more of the following kinds of activities:

PUBLICATIONS: A trade association may publish a periodical, magazine or newsletter that keeps
its members up-to-date on issues affecting the industry, as well as on movements between and
among firms in the industry. Associations also have websites that target members and the public,
with information on news and events.
EXPOSITIONS: A trade organization may sponsor an event at which new products can be shown
and demonstrated.
PROMOTIONAL EVENTS: The Academy of Motion Picture Arts and Sciences hosts the infamous
Academy Awards, also known as the Oscars. 
LOBBYING: Some trade associations form political action committees, especially when industry
regulation is a factor. The National Rifle Association, in the US, is perhaps the most well-
known example.
ADVERTISING: The American Petroleum Institute has advertising and public relations campaigns
each year, that promote the use of petroleum products. In one television ad, for example, they
demonstrated that natural gas can be used for cooking dinner, igniting a hot air balloon, helping to
coat a mountain bike with paint, fueling a delivery drone and aiding in underwater exploration.

Professional Associations
Professional A.
Unlike a trade association, which focuses on a particular industry, a professional association is a
body of persons engaged in the same profession, formed usually to control entry into
the profession, maintain standards, and represent the profession in discussions with other bodies.  
Members of a profession - people like lawyers and accountants, can be found within many
industries. Their commonality lies in the functional role they perform within organizations, rather than
in the nature of the industry itself.
Examples of professional organizations include: the American Bar Association, the American
Marketing Association, the American Association of School Administrators, the American Institute
of Certified Public Accountants, the American Society of Civil Engineers, among many others.
Professional B.
Professional associations may be involved in one or more of these kinds of activities:

LICENSING: Attorneys and accountants, among others, must pass a certification test and may have
to meet other practice requirements before admission (to the Bar for attorneys and to earn the
title Certified Public Accountant for accountants). These requirements are in place to assure people
who would use the services that these professionals have attained a certain level of competence
in the profession.
EDUCATION: Many professionals such as health services workers, lawyers and engineers, have
requirements for ongoing training and education, sometimes called Continuing Professional
Development. The purpose is to remain up-to-date in their profession and to maintain their license or
certification.
STANDARDS: Professional associations may create and publish standards of practice for their
membership. The Financial Accounting Standards Board, for example, sets the terms of practice
for accounting. The American Bar Association determines whether certain practices are suitable for
attorneys and can disbar members who do not comply with their standards. 
JOURNALS: Unlike the press associated with trade magazines, journals are more academic in
character. Articles published in them may be subject to peer review, i.e. a review by others in
the profession intended to ensure the quality of the publication.
RESEARCH: Professional associations may sponsor research, hold conferences, monitor
regulations in their field and, perhaps less frequently than for industry or trade associations,
advertise, provide public relations and lobby for their collective membership.

Professional C.
The primary role of a professional association is to set and enforce standards of professional
practice. It is based on the premise that knowledge of subjects, such as accounting and law, are
so specialized that only people with a certain education, training and experience are in a position to
set standards and to judge the practice of others in the profession.

The codes of knowledge and conduct that these organizations provide, bring a form of external
governance to organizations. Financial statements across industries are quite uniform and
reliable because of standards, as are codes of practice in engineering, medical services and law.

Watchdog Organizations

The purpose of Watchdog organizations

Introduction
Watchdog organizations are usually non-profit groups that view their role as critically monitoring
the activities of governments, industry, or specific organizations and alerting the public when  they
detect actions that go against the public interest.

Some have very definite political orientations while others are more neutral, and while many focus
on government activities, a few of these organizations closely watch businesses. 
Some government agencies also take on a “watchdog” role with respect to the industries within
their charter, and have the capacity to take legal action, in the form of fines or injunctions.

Monitoring
Watchdog organizations and individuals generally act as observers, paying close attention to a
particular organization or groups of organizations.  
Their stated goals can be, for example, to ensure that the organizations don’t cause personal or
environmental harm or conflict with the public interest, and so, they perform a brand of investigative
journalism. 

When they do find a conflict, they generally become external whistle-blowers, attracting attention to
questionable practices with the goal of raising a public outcry. Alternately, some watchdog
organizations may take action by filing lawsuits or bringing the questionable activities to the
attention of regulators.

Organizations
Examples of Watchdog Organizations include: Corporate Watch, Students and Scholars Against
Corporate Misbehavior and the Corporate Accountability Project, which publicize the activities
of multinational corporations. 
Students and Scholars Against Corporate Misbehavior (SACOM) is a nonprofit organization founded
in Hong Kong in June 2005, that monitors corporate behavior and advocates for workers’ rights. 
Corporate Watch is a not-for-profit co-operative that publicizes information on the social and
environmental impacts of corporations. The Corporate Accountability Project does research targeting
four principal areas: corruption, labour, human rights and the environment. 

Government
In addition to non-profit organizations, a number of US government agencies also perform a
watchdog function in monitoring businesses. These include the:
• Commodity Futures Trading Commission • Consumer Product Safety Commission • Consumer
Protection Agency • Environmental Protection Agency • Federal Communications Commission •
Federal Deposit Insurance Corp. • Federal Labor Relations Authority • Federal Trade Commission •
National Credit Union Administration • National Labor Relations Board • National Transportation
Safety Board • Occupational Safety and Health Review Commission • Pension Benefit Guaranty
Corp. • Securities and Exchange Commission • International Trade Commission
The oversight tasks of these agencies pertain to the specific industries they are chartered to
regulate. But for most consumer products, the Consumer Protection Agency is the one with the
broadest reach.

Influencing Options

Responsible
Watchdog organizations tend to focus on industries or organizations and examine their
activities. The Press – journalists and investigative reporters - are very similar, but there is
a difference in their focus. 

The press tends to be slightly more focused on events, than on the longer term behavioral aspects
of organizations. However, any topic that can attract consumer interest is something the press will
pursue.

The book: Corporate Behavior and Sustainability: Doing Well by Being Good (2016), edited by
Güler Aras and Coral Ingley begins with these words:
“Companies can no longer expect to engage in dubious or unethical corporate behavior without
risking their reputation and damaging, perhaps irrevocably, their market position.
Irresponsible corporate behavior not only deprives shareholders of long-term returns but also
ultimately imposes a cost on society as a whole. Sustainable business is about ensuring that entities
contribute toward positive social, environmental, and economic outcomes. Bad business behavior is
costly for stakeholders, for markets, for society, and the economy."
Reputation
Negative press can have damaging and lasting effects on a business and on the brand an
organization has created. 

After taking Europe by storm in the 1980s, Red Bull became the subject of 
controversial press, linked to banned chemical substances and several deaths. When Ford and
Firestone faced a brand crisis in 2000, they spent most of their energy trying to blame each
other rather than manage the perception that both their brands were less than trustworthy. 

Even worse, there can be a spillover effect onto similar brands. If your organization has a brand with
similar characteristics to one that is the subject of negative publicity, consumers will also find your
brand suspect.

Publicity
Oddly, some firms experience a temporary increase in sales as the result of adverse publicity.
However, this is the exception rather than the rule and applies mostly to firms that were largely
unknown before the incident. 

A study done by Weinberger, Romeo and Piracha (Business Horizons, 1991) on six incidents of bad

publicity in the automobile industry showed that (1) a credible source reporting the incident has a
negative and severe impact on sales and (2) prolonged media attention on a negative incident is
extremely harmful to long term sales. Both of these effects vary with the intensity of the media
coverage.

Staff
When a product or service-related incident generates negative press, both the value of the brand
and the effect on sales are negative. But what happens when negative press affects
the company itself, rather than one of its products or services? 

Depending on the nature of the negative event, a scandal involving an organization or any of its key
managers or staff, may result in a loss of trust in that organization. 

This becomes especially pertinent when the negative press is prolonged (as is sometimes the case
when legal action is involved) or there is a negative public outcry (as, for example, when there is a
boycott of a company’s products or services in general). 

In cases involving the credibility of an organization and its staff, it often only takes one lie or misdeed
for a company to lose their entire credibility. Credibility is slow to build and quick to dissipate.

Public Relation
Error Handling
In general, the best approach is to do nothing that will garner negative press. But if it does happen,
several things can be done to mitigate the effects:

• Advanced preparation
• Act in the public’s best interest
• Respond to criticism
• Admit errors and make reforms

Public Relations
In the event of a crisis, the best approach is to have one person be the media contact for the event.
This will help to ensure consistency in the message that the organization would like to relay to the
press. 

Have this person designated beforehand, and have all information concerning the event directed to
that person. Make certain that all staff know that they are not to communicate with the press or with
any of their social media contacts on the topic. 

A posting on Facebook can have an even more disastrous effect than a news story. If it is spread
from person to person, it suggests that the source is an insider who is relaying unfiltered news. 

Facts
While it is important to respond quickly to negative press, it is more important that the response
is informed and correct. A mis-statement can be an embarrassment. News reporters may focus on
the error and have it form the basis of a story (“ABC company is now retracting its earlier
statement…”)

The better course of action, if something is unknown, is to simply state that the facts are not fully
known and that the question will be answered as soon as the facts are available.

Reaction
In 1982, a person laced Tylenol capsules with potassium cyanide, in an attempt to murder a person
and make it look like a random killing. Seven people died in the incident, which inspired copycat
crimes. 

No Tylenol employees were involved in the crimes. However the company was effected. Tylenol
produced a sealed lid - the type of pull-off lid now seen on all sorts of bottles containing vitamins and
other products. 

This was not an admission of guilt or negligence on the part of Tylenol, but it does show Tylenol was
effected and took action to protect its customers and its reputation. This was a positive response to
an unforeseen threat that changed the firm's operating procedures.

Public Scrutiny
Introduction
The reaction of the public, along with the regulatory agencies who are supposed to be operating
on the public's behalf, serves as a litmus test for how deeply an organization either enforces or
breaches good governance practices. 

Reactions from the stock market, regulators and the public are often intertwined, as will be seen in
the case studies presented in this topic.

Cheating
In September 2015, the Environmental Protection Agency (EPA) found that many VW cars sold in
America had a "defeat device" - software in diesel engines that could detect when they were being
tested for emissions and automatically altered the engine's performance to improve the emission test
results. 
The Volkswagen company admitted cheating and recalled millions of cars. They set aside
€6.7bn to cover the cost of dealing with this scandal. This resulted in the company posting its first
quarterly loss (€2.5bn) for 15 years, in October of that year. 
The EPA has the power to fine a company up to $37,500 for each vehicle that breaches standards
and a maximum total fine of approximately $18bn. 
In a statement from the company (VW), a spokesperson said: “The costs of possible legal action
by car owners and shareholders cannot be estimated at the present time". 
Sandals and Publicity
Fraud
Enron Corporation was an American energy, commodities, and services company based in Houston,
Texas. Before its bankruptcy in 2001, Enron employed approximately 20,000 staff and was one of
the world's major electricity, natural gas, communications and pulp and paper companies, with
claimed revenues of nearly $101 billion during 2000. Fortune named Enron "America's Most
Innovative Company" for six consecutive years.

At the end of 2001, it was revealed that Enron’s reported financial condition was sustained by
institutionalized, systematic, and creatively planned accounting fraud, known since as the  Enron
scandal. Enron has since become a well-known example of willful corporate fraud and corruption.
The scandal also brought into question the accounting practices and activities of many corporations
in the United States and was a factor in the enactment of the Sarbanes–Oxley Act of 2002. The
scandal also affected the greater business world by causing the dissolution of the Arthur Andersen
accounting firm.

CEO behaviors
David Larcker and Brian Tayan did a study of 38 incidents of CEO misbehavior, which they
published in the Harvard Business Review. The incidents they investigated were not as severe as
the VW or Enron scandals, but they were newsworthy nonetheless. 

About a third of the incidents involved a CEO lying to the board about personal matters such as an
undisclosed criminal record, a falsification of credentials or a drunken driving offense. Less often
reported offenses included inappropriate relations with a subordinate, questionable use of corporate
funds, abusive language, and making offensive statements to customers or social groups. The
findings included:

• On average the incidents were cited in approximately 250 news stories with references to the
actions made for an average of 4.9 years after the incident.
• Shareholders reacted negatively to the news of misconduct, with share prices declining an average
of 3.1% around the three day period following the initial news story.
• Approximately one third of the companies investigated faced the loss of a major client, a federal
investigation, a shareholder or federal lawsuit, or shareholder actions such as a proxy battle.

Relevance
The extent to which consumers react to a scandal depends on the nature of the scandal. For
example, a study by four professors at California State University showed that when Martha Stewart
was convicted of a securities violation, consumers of the Marta Stewart line of products were not
affected by the scandal. 
On the other hand, when a scandal involves a product itself, consumer reaction can be quite
remarkable. In the Volkswagen example discussed previously, the VW brand recorded a 20 per cent
decline in registrations in the UK, in November of 2015 (one month after the scandal broke)
compared with the same month in 2014, according to figures from the Society of Motor
Manufacturers and Traders. Registrations at Seat and Skoda, two of VW’s other mass-market
brands, fell 24 per cent and 11 per cent respectively, while Audi declined 4 per cent.
 In sum, consumers make intelligent choices about their products and distinguish between scandals
that are personal in nature versus those that attach to the integrity of the product or service being
sold.
 Module 3 Summary
 There is a tendency for organizations to become similar in their structures and functions as a
result of the influence of market forces. This similarity appears in three forms:
 Normative Isomorphism: Changes driven by employees enforcing standards of
professional practice, e.g. lawyers and accountants.

Coercive Isomorphism: Pressures from "close" stakeholders: regulators or in response to

consumer expectations of service and product quality.

Mimetic Isomorphism: A tendency to have similar structures and functions as other firms in the
same industry, simply out of a desire to look as good as one’s competitors.

Trade associations are formed and funded by and for the benefit of businesses operating within a
specific industry. Their activities include: publications, trade shows or expositions,
industry promotional events, lobbying, advertising and public relations.

Professional associations are bodies of persons engaged in the same profession, formed usually to
control entry into the profession, maintain standards, and represent the profession in
discussions with other bodies. Their activities include: licensing requirements, educational programs,
standards of practice, journal publications and research.

Trade and professional associations have the effect of unifying members of their respective
industries or professions and directing the development of their standards and practices. 

Watchdog organizations are usually non-profit groups or government agencies, whose purpose is to
alert the public about the misdeeds or positive actions of organizations, in terms of the
public interest. 

Regulators may prosecute companies who breach the required standards and guidelines.

The press (publicity) has a governing effect on organizations. However, journalistic reporting tends
to be more focused on (newsworthy) topics that attract consumer interest. 

Negative press can have a damaging and lasting impact on products, brands, companies,
employees, corporate image and sales. This effect can spill over to similar organizations in the
same industry.

As part of an emergency response plan, organizations need to be prepared (staff, budgets etc.) to
deal with unexpected events and potential negative press. 
Companies should have a single point of contact - a PR spokesperson, in place, to whom
information is routed and from whom it is communicated to the Press, Public and Stakeholders.
Public relations information should be truthful, limited to what is actually known, and responsive to
observers.

Legal help should be brought in, if there is any hint there may have been criminal activity or injury to
people or property during an incident.

Research studies have demonstrated the impact on firms of product or service scandals, as well as
scandals involving the misbehavior of senior executives.

In general, consumer reactions depend on the nature of the scandal. If it is something that taints the
product image, the sales of the product and the brand are likely to be affected. If the decline in sales
is significant, stock value is likely to decline. 

If an incident displays the misdeeds of senior management, it may affect sales and the share price of
the company, even if the products and services are not directly involved in the incident. 

Negative press has an extraordinarily long shelf-life. One survey demonstrated that references to
scandals can linger in the press for an average of five years after an incident.