Chapter 6: The Corporation and Internal Stakeholders

chapter 6

the corporation And internal stakeholders:

values-based moral leadership, culture, strategy, and self-regulation

lecture outline

6.1Leadership and Stakeholder Management

A stakeholder, values-based approach determines whether the leaders and culture:

are integrated or fragmented.

manage or create and build relationships.

emphasize buffering and protecting the organization or create and generate mutual benefits and opportunities.

develop and sustain short-term or long-term goals and relationships.

encourage idiosyncratic dependent implementation, based on division, function, business structures, and personal interests and styles, or encourage coherent approaches, driven by enterprise, visions, missions, values, and strategies.

A.Defining Purpose, Mission, and Values

1.Leading an organization begins by identifying and enacting purpose and ethical

values that are central to internal alignment, external market effectiveness, and

responsibility toward stakeholders.

2.Purpose is the set of fundamental reasons for a company’s existence beyond just

making money.

3.Ethical companies may also include a “social mission” in their formal mission

and values statements. A social mission is a commitment by the organization to

give back to their community and external stakeholders who make the

organization’s existence possible.

4.Core values are the organization’s essential and enduring tenets—a small set of

general guiding principles; not to be confused with specific cultural or

operational practices; not to be compromised for financial gain or short-term

expediency.

E.Failure of Ethical Leadership

1.Seven symptoms of the failure of ethical leadership provide a practical lens to

examine a leader’s shortsightedness:

  1. Ethical blindness: they do not perceive ethical issues from inattention or inability.
  1. Ethical muteness: they do not have or use ethical language or principles. “Talk the talk” but do not “walk the talk” on values.
  1. Ethical incoherence: they are not able to see inconsistencies among values they say they follow; e.g. they say they value responsibility, but reward performance based only on numbers.
  1. Ethical paralysis: they are unable to act on their values from lack of knowledge or fear of the consequences of their actions.
  2. Ethical hypocrisy: they are not committed to their espoused values. They delegate things they are unwilling to or cannot do themselves.
  1. Ethical schizophrenia: they do not have a set of coherent values; they act at work one way, at home another way.
  1. Ethical complacency: they believe they can do no wrong because of who they are. They believe they are immune to being unethical.

F.Ethical Dimensions of Leadership Styles

1.Every leadership style has an ethical dimension. An organizational leader’s

moral decision-making style can be evaluated in the following ways:

  1. The manipulator leadership style is based on a Machiavellian ethic that views leadership amorally. That is, the end result justifies the means taken to reach it. This is an egotistically and essentially economically motivated moral leadership.
  1. The bureaucratic administrator is a rule-based moral leadership style. The bureaucratic administrator acts on the rational principles embodied in an ideal organizational bureaucracy. The well-intentioned bureaucratic administrator may try to act amorally, but his or her efforts could result in immoral and irresponsible consequences to others.
  1. The professional manager aims at effectiveness and “doing things right.” This style relies on amoral techniques and assumptions for getting work done. An ethical problem with this leadership style lies in the real possibility that the collective corporate culture and dominant governing group may think and act amorally.
  1. The transforming leadership style is grounded on a personal ethic. The transformational leader bases his or her effectiveness on relationships with followers. The transformational leader is involved in the growth and self-actualization of others and views others according to their potential. This leadership style is moral in that “it raises the level of human conduct and aspirations of both leaders and led, and thus has a transforming effect on both.
  1. The encompassing leader learns from the shortcomings of each of the four other leadership styles and uses all of their strengths.

G.How Should CEOs as Leaders be Evaluated and Rewarded?

1.CEO s at major U.S. companies received an average total compensation of

$36.2 million in 2000, up by 60% from 1999. This does not include perks,

which companies are not required to report if the value is below $50,000 a year

or less than 10% of an executive pay.

2.Several issues are at stake:

  1. After the corporate scandals, many investors and the public are more skeptical of CEO pay and performance.
  1. Many CEOs who have been with the same company most of their careers are looking toward retirement and do not need bonuses or perks that they could well afford on their own.
  1. The salary increases, stock options, and perks are offered even when the company’s performance is suboptimal and layoffs are occurring.
  1. The CEO’s pay can be 20, 30, or 50 times higher than the salaries of some first-line managers and supervisors.

3.The board of directors of a company is technically responsible for disciplining

and rewarding the CEO. However, in many instances, it is the CEO who is also

president of the company and chairperson of the board.

4.Two forces influence the popularity of boards of directors evaluating CEOs:

  1. The first is the increased recognition of the critical roles CEOs play and the increased compensation levels received for those roles.
  1. The second influential force is pressure from the investment community, which dates back to the beginning of shareholder awareness in the 1980s, when corporate acquisitions and restructuring activities were questioned with regard to the effectiveness of CEOs and their boards, due diligence, and management practices.

6.2Organizational Culture, Compliance and Stakeholder Management

A.Organizational Culture Defined

1.A corporation’s culture is the shared values and meanings its members hold in

common, which are articulated and practiced by an organization’s leaders.

2.Corporate culture is transmitted through:

  1. The values and leadership styles that the leaders espouse and practice.
  1. The heroes and heroines that the company rewards and holds up as models.
  1. The rites and symbols that organizations value.
  1. The way that organizational executives and members communicate among themselves and with their stakeholders.

3.Heroes and heroines in corporations set the moral tone and direction by their

present or even remembered examples. Rituals in companies help define

corporate culture and its moral nature.

B.Observing Organizational Culture

1.Organizational cultures are both visible and invisible, formal and informal.

They can be studied by observation, by listening to and interacting with people

in the culture, and in the following ways:

  1. Studying the physical setting.
  1. Reading what the company says about its own culture.
  1. Observing and testing how the company greets strangers.
  1. Watching how people spend time.
  1. Understanding career path progressions.
  1. Noting the length of tenure in jobs, especially for middle managers.
  1. Observing anecdotes and stories.

C.Traits and Values of Strong Corporate Cultures

1.Strong corporate cultures:

  1. Have a widely shared philosophy.
  1. Value the importance of people.
  2. Have heroes that symbolize the success of the company.
  1. Celebrate rituals, which provide opportunities for caring and sharing, and for developing a spirit of “oneness” and “we-ness.”

D.High-Ethics Companies

1.Mark Pastin identified four principles to describe “high-ethics, high-profit”

firms that serve as a benchmark for understanding ethically effective

organizations:

  1. Principle 1: High-ethics firms are at ease interacting with diverse internal and external stakeholder groups. The ground rules of these firms make the good of these stakeholder groups part of the firm’s own good.
  1. Principle 2: High-ethics firms are obsessed with fairness. Their ground rules emphasize that the other person’s interests count as much as their own.
  1. Principle 3: In high-ethics firms, responsibility is individual rather than collective; individuals assume responsibility for the firm’s actions. The ground rules mandate that individuals are responsible to themselves.
  1. Principle 4: The high-ethics firm sees its activities as having a purpose, a way of operating that members of the firm value. Purpose ties the firm to its environment.

E.Weak Cultures

1.Signs of cultures in trouble, or weak cultures, include the following:

  1. An inward focus.
  1. A short-term focus.
  1. Morale and motivational problems.
  1. Emotional outbursts.
  1. Fragmentation and inconsistency (in dress, speech, physical settings, or work habits).
  1. Clashes among subcultures.
  2. Ingrown subcultures.
  1. Dominance of subculture values over shared company values.
  1. No clear values or beliefs about how to succeed in business.
  1. Many beliefs, with no priorities about which are important.
  1. Different beliefs throughout the company.
  1. Destructive or disruptive cultural heroes, rather than builders of common understanding about what is important.
  1. Disorganized or disruptive daily rituals.

6.3Leading and Managing Strategy and Structure

Corporate leaders are responsible for orchestrating the development and execution of strategy. An organization’s strategy influences legality, morality, innovation, and competitiveness in the following ways:

Strategy sets the overall direction of business activities.

Strategy reflects what management values and prioritizes.

Strategy sets the tone of business transactions inside the organization

6.5Corporate Self-Regulation and Ethics Programs: Challenges and Issues

B.Ethics Codes

1.Ethics codes are value statements that define an organization. Major purposes

of ethics codes include:

  1. To state corporate leaders’ dominant values and beliefs, which are the foundation of the corporate culture.
  1. To define the moral identity of the company inside and outside the firm.
  1. To set the moral tone of the work environment.
  1. To provide a more stable, permanent set of guidelines for right and wrong actions.
  1. To control erratic and autocratic power or whims of employees.
  1. To serve business interests (because unethical practices invite outside government, law enforcement, and media intervention).
  1. To provide an instructional and motivational basis for training employees regarding ethical guidelines and for integrating ethics into operational policies, procedures, and problems.
  1. To constitute a legitimate source of support for professionals who face improper demands and intrusions on their skills or well being.
  1. To offer a basis for adjudicating disputes among professionals inside the firm and between those inside and outside the firm.
  1. To provide an added means of socializing professionals, not only in specialized knowledge, but also in beliefs and practices the company values or rejects.

C.Codes of Conduct

One survey of U.S. corporate ethics codes found that the most important topics

to include were general statements about ethics and philosophy; conflicts of

interest; compliance with applicable laws; political contributions; payments to

government officials or political parties; inside information; gifts, favors, and

entertainment; false entries in records and books; and customer and supplier

relations.

D.Problems with Ethics and Conduct Codes

  1. Most codes are too vague to be meaningful, i.e., the codes do not inform employees about how to prioritize among conflicting interests of distributors, customers, and the company.
  1. Codes do not prioritize beliefs, values, and norms.
  1. Codes are not enforced in firms.
  1. Not all employees are informed of codes.

F.Is the Organization Ready to Implement a Values-Based Stakeholder Approach?

A Readiness Checklist

1.The following readiness checklist is an example that can be modified and used

as a preliminary questionnaire:

  1. Do the top leaders believe that key stakeholder and stockholder relationship building is important to the company’s financial and bottom-line success?
  1. What percentage of the CEO’s activities is spent in building new and sustaining relationships with key stakeholders?
  1. Can employees identify the organization’s key stakeholders?
  1. What percentage of employee activities is spent in building productive stakeholder relationships?
  1. Do the organization’s vision, mission, and value statements identify stakeholder collaboration and service? If so, do leaders and employees “walk the talk” of these statements?
  1. Does the corporate culture value and support participation and open and shared decision making and collaboration across structures and functions?
  1. Does the corporate culture treat its employees fairly, openly, and with trust and respect? Are policies employee-friendly? Are training programs on diversity, ethics, and professional development available and used by employees?
  1. Is there collaboration and open communication across the organization? Are openness, collaboration, and innovation rewarded?
  1. Is there a defined process for employees to report complaints and illegal or unethical company practices without risking their jobs or facing retribution?
  1. Does the strategy of the company encourage or discourage stakeholder respect and fair treatment? Is the strategy oriented toward the long or short term?
  1. Does the structure of the company facilitate or hinder information sharing and shared problem solving?
  2. Are the systems aligned along a common purpose or are the separate and isolated?
  1. Do senior managers and employees know what customers want and does the organization meet customer needs and expectations?

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