Discussion-One page due in 10 hours
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Chapter 10
Leading an Ethical Organization: Corporate
Governance, Corporate Ethics, and Social
Responsibility
LEARNING OBJECTIVES
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What are the key elements of effective corporate governance?
2. How do individuals and firms gauge ethical behavior?
3. What influences and biases might impact and impede decision making?
TOMS Shoes: Doing Business with Soul
Under the business model used by TOMS Shoes, a pair of their signature alpargata footwear is
donated for every pair sold.
Image courtesy of Parke Ladd,http://www.flickr.com/photos/parke-ladd/5389801209 .
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In 2002, Blake Mycoskie competed with his sister Paige on The Amazing Race—a reality show where
groups of two people with existing relationships engage in a global race to win valuable prizes, with the
winner receiving a coveted grand prize. Although Blak e’s team finished third in the second season of the
show, the experience afforded him the opportunity to visit Argentina, where he returned in 2006 and
developed the idea to build a company around the alpargata—a popular style of shoe in that region.
The premise of the company Blake started was a unique one. For every shoe sold, a pair will be given to
someone in need. This simple business model was th e basis for TOMS Shoes, which has now given away
more than one million pairs of shoes to those in need in more than twenty countries worldwide. [1]
The rise of TOMS Shoes has inspired other companies that have adopted the “buy-one-give-one”
philosophy. For example, the Good Little Company donates a meal for every package purchased. [2]This
business model has also been successfully applied to selling (and donating) other items such as glasses
and books.
The social initiatives that drive TOMS Shoes stand in stark contrast to the criticisms that plagued Nike
Corporation, where claims of human rights violations, ranging from the use of sweatshops and child labor
to lack of compliance with minimum wage laws, were rampant in the 1990s. [3]While Nike struggled to
win back confidence in buyers that were concerned with their business practices, TOMS social initiatives
are a source of excellent publicity in pride in those who purchase their products. As further testament to
their popularity, TOMS has engaged in partnerships with Nordstrom, Disney, and Element Skateboards.
Although the idea of social entrepreneurship and the birth of firms such as TOMS Shoes are relatively
new, a push toward social initiatives has been the source of debate for executives for decades. Issues that
have sparked particularly fierce debate include CEO pay and the role of today’s modern corporation. More
than a quarter of a century ago, famed economist Milton Friedman argued, “The social responsibility of
business is to increase its profits.” This notion is now being challenged by firms such as TOMS and their
entrepreneurial CEO, who argue that serving other stakeholders beyond the owners and shareholders can
be a powerful, inspiring, and successful motivation for growing business. Saylor URL: http://www.saylor.org/books Saylor.org
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This chapter discusses some of the key issues and decisions relevant to understanding corporate and
business ethics. Issues include how to govern large co rporations in an effective and ethical manner, what
behaviors are considered best practices in regard to corporate social performance, and how different
generational perspectives and biases may hold a powerful influence on important decisions.
Understanding these issues may provide knowledge that can encourage effective organizational leadership
like that of TOMS Shoes and discourage the criticisms of many firms associated with the corporate
scandals of the late 1990s and early 2000s.
[1] Oloffson, K. 2010, September 29. In Toms’ Shoes: Start-up copy “one-for-one” model.Wall Street Journal.
Retrieved from http://online.wsj.com/article/SB1000142405274870411 6004575522251507063936.html
[2] Nicolas, S. 2011, February. The great giveaway. Director, 64 , 37–39.
[3] McCall, W. 1998. Nike battles backlash from overseas sweatshops. Marketing News, 9 , 14.
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10.1 Boards of Directors
LEARNING OBJECTIVES
1. Understand the key roles played by boards of directors.
2. Know how CEO pay and perks impact the landscape of corporate governance.
3. Explain different terms associated with corporate takeovers.
The Many Roles of Boards of Directors
“You’re fired!” is a commonly used phrase most closely associated with Donald Trump as he dismisses
candidates on his reality show, The Apprentice. But who would have the power to utter these words to
today’s CEOs, whose paychecks are on par with many of the top celebrities and athletes in the world? This
honor belongs to the board of directors—a group of individuals that oversees the activities of an
organization or corporation.
Potentially firing or hiring a CEO is one of many roles played by the board of directors in their charge to
provide effective corporate governance for the firm. An effective board plays many roles, ranging from the
approval of financial objectives, advising on strategic issues, making the firm aware of relevant laws, and
representing stakeholders who have an interest in the long-term performance of the firm.
Effective boards may help bring prestige and important resources to the organization. For
example, General Electric’s board of ten has included the CEOs of other firms as well as former senators
and prestigious academics. Blake Mycoskie of TOMS Shoes was touted as an ideal candidate for an “all-
star” board of directors because of his ability to fulfill his company’s mission “to show how together we
can create a better tomorrow by taking compassionate action today.” [1]
The key stakeholder of most corporations is generally agreed to be the shareholders of the company’s
stock. Most large, publicly traded firms in the Unit ed States are made up of thousands of shareholders.
While 5 percent ownership in many ventures may seem modest, this amount is considerable in publicly
traded companies where such ownership is generally limited to other companies, and ownership in this
amount could result in representation on the board of directors. Saylor URL: http://www.saylor.org/books Saylor.org
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The possibility of conflicts of interest is considerable in public corporations. On the one hand, CEOs favor
large salaries and job stability, and these desires are often accompanied by a tendency to make decisions
that would benefit the firm (and their salaries) in the short term at the expense of decisions considered
over a longer time horizon. In contrast, shareholders prefer decisions that will grow the value of their
stock in the long term. This separation of interest creates an agency problem wherein the interests of the
individuals that manage the company (agents such as the CEO) may not align with the interest of the
owners (such as stockholders).
The composition of the board is critical because the dynamics of the board play an important part in
resolving the agency problem. However, who exactly should be on the board is an issue that has been
subject to fierce debate. CEOs often favor the use of board insiders who often have intimate knowledge of
the firm’s business affairs. In contrast, many inst itutional investors such as mutual funds and pension
funds that hold large blocks of stock in the firm often prefer significant representation
by board outsiders that provide a fresh, nonbiased perspective concerning a firm’s actions.
One particularly controversial issue in regard to board composition is the potential for CEO duality, a
situation in which the CEO is also the chairman of the board of directors. This has also been known to
create a bitter divide within a corporation.
For example, during the 1990s, The Walt Disney Company was often listed in BusinessWeek’s rankings
for having one of the worst boards of directors. [2]In 2005, Disney’s board forced the separation of then
CEO (and chairman of the board) Michael Eisner’s dual roles. Eisner retained the role of CEO but later
stepped down from Disney entirely. Disney’s story refl ects a changing reality that boards are acting with
considerably more influence than in previous decades when they were viewed largely as rubber stamps
that generally folded to the whims of the CEO.
Managing CEO Compensation
One of the most visible roles of boards of directors is setting CEO pay. The valuation of the human capital
associated with the rare talent possessed by some CEOs can be illustrated in a story of an encounter one
tourist had with the legendary artist Pablo Picasso. As the story goes, Picasso was once spotted by a Saylor URL: http://www.saylor.org/books Saylor.org
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woman sketching. Overwhelmed with excitement at the serendipitous meeting, th e tourist offered Picasso
fair market value if he would render a quick sketch of her image. After completing his commission, she
was shocked when he asked for five thousand francs, responding, “But it only took you a few minutes.”
Undeterred, Picasso retorted, “No, it took me all my life.” [3]
Picasso’s Garçon á la pipewas one of the most expensive works ever sold at more than $100 million.
Image courtesy of Wikipedia,http://en.wikipedia.org/wiki/File:Gar%C3%A7on_%C3%A0_la_pipe.jpg .
This story illustrates the complexity associated with managing CEO compensation. On the one hand, large
corporations must pay competitive wages for the scarce talent that is needed to manage billion-dollar
corporations. In addition, like celebrities and sport stars, CEO pay is much more than a function of a day’s
work for a day’s pay. CEO compensation is a function of the competitive wages that other corporations
would offer for a potential CEO’s services.
On the other hand, boards will face considerable scrutiny from investors if CEO pay is out of line with
industry norms. From the year 1980 to 2000, the gap between CEO pay and worker pay grew from 42 to 1 Saylor URL: http://www.saylor.org/books Saylor.org
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to 475 to 1. [4]Although efforts to close this gap have been made, as recently as 2008 reports indicate the
ratio continues to be as high as 344 to 1, much higher than other countries, where an 80 to 1 ratio is
common, or in Japan where the gap is just 16 to 1. [5]Meanwhile, shareholders need to be aware that
research studies have found that CEO pay is positive ly correlated with the size of firms—the bigger the
firm, the higher the CEO’s compensation. [6]Consequently, when a CEO tries to grow a company, such as
by acquiring a rival firm, shareholders should question whether such growth is in the company’s best
interest or whether it is simply an effort by the CEO to get a pay raise.
In most publicly traded firms, CEO compensation generally includes guaranteed salary, cash bonus, and
stock options. But perks provide another valuable source of CEO compensation. In addition to the
controversy surrounding CEO pay, such perks associated with holding the position of CEO have
also come under considerable scrutiny. The termperks, derived from perquisite,
refers to special privileges, or rights, as a function of one’s position. CEO perks have ranged in magnitude
from the sweet benefit of ice cream for life given to former Ben & Jerry’s CEO Robert Holland, to much
more extreme benefits that raise the ears of investors while outraging employees. One such perk was
provided to John Thain, who, as former head of NYSE Euronext, received more than $1 million to
renovate his office. While such perks may provide pow erful incentives to stay with a company, they may
result in considerable negative press and serve only to motivate vigilant investors wary of the value of
such investments to shop elsewhere.
The Market for Corporate Governance
An old investment cliché encourages individuals to buy low and sell high. When a publicly traded firm
loses value, often due to lack of vigilance on the part of the CEO and/or board, a company may become a
target of a takeover wherein another firm or set of individuals purchases the company. Generally, the top
management team is charged with revitalizing the firm and maximizing its assets.
In some cases, the takeover is in the form of a leveraged buyout (LBO) in which a publicly traded company
is purchased and then taken off the stock market. One of the most famous LBOs was of RJR Nabisco,
which inspired the book (and later film)Barbarians at the Gate. LBOs historically are associated with
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generally bring a more entrepreneurial mind-set to the firm with the hopes of creating a turnaround from
the same fate that made the company an attrac tive takeover target (recent poor performance). [7]
Many takeover attempts increase shareholder value. However, because most takeovers are associated with
the dismissal of previous management, the terminology associated with change of ownership has a
decidedly negative slant against the acquiring firm’s management team. For example, individuals or firms
that hope to conduct a takeover are often referred to as corporate raiders. An unsolicited takeover attempt
is often dubbed a hostile takeover, with shark repellent as the potential defenses against such attempts.
Although the poor management of a targeted firm is often the reason such businesses are potential
takeover targets, when another firm that may be more favorable to existing management enters the
picture as an alternative buyer, a white knight is said to have entered the picture.
The negative tone of takeover terminology also extends to the potential target firm. CEOs as well as board
members are likely to lose their positions after a successful takeover occurs, and a number of antitakeover
tactics have been used by boards to deter a corporate raid. For example, many firms are said to
pay greenmail by repurchasing large blocks of stock at a premium to avoid a potential takeover. Firms
may threaten to take a poison pill where additional stock is sold to existing shareholders, increasing the
shares needed for a viable takeover. Even if the takeover is successful and the previous CEO is dismissed,
a golden parachute that includes a lucrative financial settl ement is likely to provide a soft landing for the
ousted executive.
KEY TAKEAWAY
xFirms can benefit from superior corporate governance mechanisms such as an active board that monitors
CEO actions, provides strategic advice, and helps to network to other useful resources. When such
mechanisms are not in place, CEO excess may go unc hecked, resulting in negative publicity, poor firm
performance, and potential takeover by other firms.
EXERCISES
1. Divide the class into teams and see who can find the most egregious CEO perk in the last year. Saylor URL: http://www.saylor.org/books Saylor.org
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2. Find a listing of members of a board of directors for a Fortune 500 firm. Does the board seem to be
composed of individuals who are likely to fulfill all the board roles effectively?
3. Research a hostile takeover in the past five years and examine the long-term impact on the firm’s stock
market performance. Was the takeover beneficial or harmful for shareholders?
4. Examine the AFL-CIO Executive Paywatch website ( http://www.aflcio.org/corporatewatch/paywatch) and
select a company of interest to see how many years you would need to work to earn a year’s pay enjoyed
by the firm’s CEO.
[1] Bunting, C. 2011, February 23. Board of dreams: Fantasy board of directors. Business News Daily. Retrieved
from http://www.businessnewsdaily.com/681-board-of-directors-fantasy-picks-small-business.html
[2] Lavelle, L. 2002, October 7. The best and worst boards: How corporate scandals are sparking a revolution in
governance. BusinessWeek , 104.
[3] Kay, I. 1999. Don’t devalue human capital. Wall Street Journal—Eastern Edition , 233, A18.
[4] Blumenthal, R. G. 2000, September 4. The pay ga p between workers and chiefs looks like a chasm. Barron’s, 10.
[5] Feltman, P. 2009. Experts examine pay dispar ity, other executive compensation issues.SEC Filings Insight, 15 , 1–
6.
[6] Tosi, H. L., Werner, S., Katz., J. P., & Gomez-Mejia, L. R. 2000. How much does performance matter? A meta-
analysis of CEO pay studies. Journal of Management, 26 , 301–339.
[7] Wright, M., Hoskisson, R. E., & Busenitz, L. W. 2001. Firm rebirth: Buyouts as facilitators of strategic growth and
entrepreneurship. Academy of Management Executive ,15 , 111–125.
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10.2 Corporate Ethics and Social Responsibility
LEARNING OBJECTIVES
1. Know the three levels and six stages of moral development suggested by Kohlberg.
2. Describe famous corporate scandals.
3. Understand how the Sarbanes-Oxley Act of 2002 provides a check on corporate ethical behavior in the
United States.
4. Know the dimensions of corporate social performance tracked by KLD.
Stages of Moral Development
How do ethics evolve over time? Psychologist Lawrence Kohlberg suggests that there are six distinct
stages of moral development and that some indi viduals move further along these stages than
others. [1]Kohlberg’s six stages were grouped into three levels: (1) preconventional, (2) conventional, and
(3) postconventional.
The preconventional level of moral reasoning is very egocentric in nature, and moral reasoning is tied to
personal concerns. In stage 1, individuals focus on the direct consequences that their actions will have—
for example, worry about punishment or getting caught. In stage 2, right or wrong is defined by the
reward stage, where a “what’s in it for me” mentality is seen.
In the conventional level of moral reasoning, morality is judged by comparing individuals’ actions with
the expectations of society. In stage 3, individuals ar e conformity driven and act with the goal of fulfilling
social roles. Parents that encourage their children to be good boys and girls use this form of moral
guidance. In stage 4, the importance of obeying laws, so cial conventions, or other forms of authority to aid
in maintaining a functional society is encouraged. You might witness encouragement under this stage
when using a cell phone in a restaurant or when someone is chatting too loudly in a library.
The postconventional level, or principled level, occurs when morality is more than simply following social
rules or norms. Stage 5 considers different values and opinions. Thus laws are viewed as social contracts
that promote the greatest good for the greatest number of people. Following democratic principles or Saylor URL: http://www.saylor.org/books Saylor.org
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voting to determine an outcome is common when this stage of reasoning is invoked. In stage 6, moral
reasoning is based on universal ethical principles. For example, the golden rule that you should do unto
others as you would have them do unto you illustrates one such ethical principle. At this stage, laws are
grounded in the idea of right and wrong. Thus individuals follow laws because they are just and not
because they will be punished if caught or shunned by society. Consequently, with this stage there is an
idea of civil disobedience that individuals have a duty to disobey unjust laws.
Corporate Scandals and Sarbanes-Oxley
In the 1990s and early 2000s, several corporate scandals were revealed in the United States that showed a
lack of board vigilance. Perhaps the most famous involves Enron, whose executive antics were
documented in the filmThe Smartest Guys in the Room . Enron used accounting loopholes to hide billions
of dollars in failed deals. When their scandal was discovered, top management cashed out millions in
stock options while preventing lower-level employees from selling their stock. The collective acts of Enron
led many employees to lose all their retirement holdings, and many Enron execs were sentenced to prison.
In response to notable corporate scandals at Enron, WorldCom, Tyco, and other firms, Congress passed
sweeping new legislation with the hopes of restorin g investor confidence while preventing future scandals.
Signed into law by President George W. Bush in 2002, Sarbanes-Oxley contained eleven aspects
that represented some of the most far-reaching reforms since the presidency of Franklin Roosevelt.
These reforms create improved standards that affect all publicly traded firms in the United States.
The key elements of each aspect of the act are summarized as follows:
1. Because accounting firms were implicated in corporate scandal, an oversight board was created to
oversee auditing activities.
2. Standards now exist to ensure auditors are truly inde pendent and not subject to conflicts of interest in
regard to the companies they represent.
3. Enron executives claimed that they had no idea what was going on in their company, but Sarbanes-
Oxley requires senior executives to take personal responsibility for the accuracy of financial
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4. Enhanced reporting is now required to create mo re transparency in regard to a firm’s financial
condition.
5. Securities analysts must disclose potential conflicts of interest.
6. To prevent CEOs from claiming tax fraud is present at their firms, CEOs must personally sign the
firm’s tax return.
7. The Securities and Exchange Commission (SEC) now has expanded authority to censor or bar
securities analysts from acting as brokers, advisers, or dealers.
8. Reports from the comptroller general are required to monitor any consolidations among public
accounting firms, the role of credit agencies in securities market operations, securities violations, and
enforcement actions.
9. Criminal penalties now exist for altering or destroying financial records.
10. Significant criminal penalties now exist for white-collar crimes.
11. The SEC can freeze unusually large transactions if fraud is suspected.
The changes that encouraged the creation of Sarbanes -Oxley were so sweeping that comedian Jon Stewart
quipped, “Did Wall Street have any rules before this? Can you just shoot a guy for looking at you wrong?”
Despite the considerable merits of Sarbanes-Oxley, no legislation can provide a cure-all for corporate
scandal. As evidence, the scandal by Bernard Madoff that broke in 2008 represented the largest
investor fraud ever committed by an individual. But in contrast to some previous scandals that
resulted in relatively minor punishments for their perpetrators, Madoff was sentenced to 150 years
in prison.
Measuring Corporate Social Performance
TOMS Shoes’ commitment to donating a pair of shoes for every shoe sold illustrates the concept
of social entrepreneurship, in which a business is created with a goal of bettering both business and
society. [2]Firms such as TOMS exemplify a desire to improve corporate social performance (CSP)in which
a commitment to individuals, communities, and the natur al environment is valued alongside the goal of
creating economic value. Although determining the level of a firm’s social responsibility is subjective, this
challenge has been addressed in detail by Kinder, Lydenberg and Domini & Co. (KLD), a Boston-based Saylor URL: http://www.saylor.org/books Saylor.org
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firm that rates firms on a number of stakeholder-related issues with the goal of measuring CSP. KLD
conducts ongoing research on social, governance, and environmental performance metrics of publicly
traded firms and reports such statistics to institutional investors. The KLD database provides ratings on
numerous “strengths” and “concerns” for each firm along a number of dimensions associated with
corporate social performance. The results of their assessment are used to develop the Domini
social investments fund, which has performed at levels roughly equivalent to the S&P 500.
Assessing the community dimension of CSP is accomplished by assessing community strengths, such as
charitable or innovative giving that supports housing, education, or relations with indigenous peoples, as
well as charitable efforts worldwide, such as volunteer efforts or in-kind giving. A firm’s CSP rating is
lowered when a firm is involved in tax controversies or other negative actions that affect the community,
such as plant closings that can negatively affect property values.
Chick-fil-A encourages education through their program that has provided more than $25 million in financial aid to
more than twenty-five thousand employees since 1973.
Image courtesy of SanFranAnnie,http://www.flickr.com/photos/sanfranannie/2472244829 .
CSP diversity strengths are scored positively when the company is known for promoting women and
minorities, especially for board membership and the CEO position. Employment of the disabled and the Saylor URL: http://www.saylor.org/books Saylor.org
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presence of family benefits such as child or elder care would also result in a positive score by KLD.
Diversity concerns include fines or civil penalties in conjunction with an affirmative action or other
diversity-related controversy. Lack of repres entation by women on top management positions—
suggesting that a glass ceiling is present at a comp any—would also negatively impact scoring on this
dimension.
The employee relations dimension of CSP gauges potential strengths such as notable union relations,
profit sharing and employee stock-option plans, favorable retirement benefits, and positive health and
safety programs noted by the US Occupational Health and Safety Administration. Employee relations
concerns would be evident in poor union relations, as well as fines paid due to violations of health and
safety standards. Substantial workforce reductions as well as concerns about adequate funding of pension
plans also warrant concern for this dimension.
The environmental dimension records strengths by examining engagement in recycling, preventing
pollution, or using alternative energies. KLD would also score a firm positively if profits derived from
environmental products or services were a part of the company’s business. Environmental concerns such
as penalties for hazardous waste, air, water, or other violations or actions such as the production of goods
or services that could negatively impact the environment would reduce a firm’s CSP score.
Product quality/safety strengths exist when a firm has an established and/or recognized quality program;
product quality safety concerns are evident when fines related to product quality and/or safety have been
discovered or when a firm has been engaged in questionable marketing practices or paid fines related to
antitrust practices or price fixing.
Corporate governance strengths are evident when lower levels of compensation for top management and
board members exist, or when the firm owns considera ble interest in another company rated favorably by
KLD; corporate governance concerns arise when executive compensation is high or when controversies
related to accounting, transparency, or political accountability exist.
Strategy at the Movies
Thank You for Smoking Saylor URL: http://www.saylor.org/books Saylor.org
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Does smoking cigarettes cause lung cancer? Not necessarily, according to a fictitious lobbying group
called the Academy of Tobacco Studies (ATS) depicted in Thank You for Smoking(2005). The ATS’s
ability to rebuff the critics of smoking was provid ed by a three-headed monster of disinformation:
scientist Erhardt Von Grupten Mundt who had been able to delay finding conclusive evidence of the
harms of tobacco for thirty years, lawyers drafted from Ivy League institutions to fight against tobacco
legislation, and a spin control division led by the smooth-talking Nick Naylor.
The ATS was a promotional powerhouse. In just one week, the ATS and its spin doctor Naylor distracted
the American public by proposing a $50 million campaign against teen smoking, brokered a deal with a
major motion picture producer to feature actors an d actresses smoking after sex, and bribed a cancer-
stricken advertising spokesman to keep quiet. But after the ATS’s transgressions were revealed and
cigarette companies were forced to settle a long-standing class-action lawsuit for $246 billion, the ATS
was shut down. Although few organizations promote a product as harmful as cigarettes, the lessons
offered inThank You for Smoking have wide application. In particular, the film highlights that choosing
between ethical and unethical business practices is not only a moral issue, but it can also determine
whether an organization prospers or dies.
KEY TAKEAWAY
xThe work of Lawrence Kohlberg examines how individuals can progress in their stages of moral
development. Lack of such development by many CEOs led to a number of scandals, as well as legislation
such as the Sarbanes-Oxley Act of 2002 that was enacte d with the hope of deterring scandalous behavior
in the future. Firms such as KLD provide objective measures of both positive and negative actions related
to corporate social performance.
EXERCISES
1. How would your college or university fare if rated on the dimensions used by KLD?
2. Do you believe that executives will become more ethical based on legislation such as Sarbanes-Oxley?
[1] Kohlberg, L. 1981. Essays in moral development: Vol. 1. The philosophy of moral development . New York, NY:
Harper & Row. Saylor URL: http://www.saylor.org/books Saylor.org
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[2] Schectman, J. 2010. Good business. Newsweek, 156, 50.
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10.3 Understanding Thought Patterns: A Key to Corporate
Leadership?
LEARNING OBJECTIVES
1. Know the three major generational influences that make up the majority of the current workforce and
their different perspectives and influences.
2. Understand how decision biases may impede effective decision making.
Generational Influences on Work Behavior
Psychologist Kurt Lewin, known as the “founder of social psychology,” created a well-known formula B =
ƒ(P,E) that states behavior is a function of the person and their environment. One powerful
environmental influence that can be seen in organizations today is based on generational differences.
Currently, four generations of workers (traditionalists, baby boomers, Generation X, Generation Y)
coexist in many organizations. The different backgrounds and behaviors create challenges for leading
these individuals that often have similar shared experiences within their generation but different sets of
values, motivations, and preferences in contrast to other generations. Effective management of these four
different generations involves a realization of their differences and preferred communication styles.[1]
The generation born between 1925 and 1946 that fought in World War II and lived through the Great
Depression are referred to as traditionalists. The pers everance of this generation has led journalist Tom
Brokaw to dub this group “The Greatest Generation.” As a reflection of a generation that was molded by
contributions to World War II, members of this generation value personal communication, loyalty,
hierarchy, and are resistant to change. This group now makes up roughly 5 percent of the workforce. Saylor URL: http://www.saylor.org/books Saylor.org
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Photographer Dorothea Lange’s photo Migrant Mother , taken in 1936, embodied the struggles of the
traditionalist generation that lived during the Great Depression.
Image courtesy of Dorothea Lange, http://en.wikipedia.org/wiki/File:Lange-
MigrantMother02.jpg.
The generation known as baby boomers was born between 1946 and 1964, corresponding with a
population “boom” following the end of World War II. This group witnessed Beatlemania, Vietnam, and
the Watergate scandal. College graduates should be aware that this group makes up the majority of the
workforce and that boomer managers often view face time as an important contribution to a successful
work environment. [2]In addition, a realization that this generation wants to be included in office activities
and values recognition is important to achieving cohesiveness between generations. Saylor URL: http://www.saylor.org/books Saylor.org
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Generation X,born between 1965 and 1980, is marked by an X symbolizing their unknown nature. In
contrast to the baby boomer’s value on office face ti me, Gen X members prize flexibility in their jobs and
dislike the feeling that they are being micromanaged. [3]Because of the desire for independence as well as
adaptability associated with this generation, you should try to answer the “What’s in it for me?” question
to avoid the risk of Gen X members moving on to other employment opportunities.
The generation that followed Generation X is known as Generation Y or millennials. This generation is
highlighted by positive attributes such as the ability to embrace technology. More than previous
generations, this group prizes job and life satisfaction highly, so making the workplace an enjoyable
environment is key to managing Generation Y.
Wise members of this generation will also be aware of the negative attributes surrounding them. For
example, millennials are associated with their “helicopter” parents who are often too comfortably involved
in the lives of their children. For example, such parents have been known to show up to their children’s
job orientations, often attempting to interfere with other workplace experiences such as pay and
promotion discussions that may be unwelcome by older generations. In addition, this generation is
viewed as needing more feedback than previous groups. Finally, the trend toward discouraging some
competitive activities among individuals in this age group has led millennials to be dubbed “Trophy Kids”
by more cynical writers.
Rational Decision Making
Understanding generational differences can provide valu able insight into the perspectives that shape the
behaviors of individuals born at different periods of time. But such knowledge does not answer a more
fundamental question of interest to students of strategic management, namely, why do CEOs make bad,
unethical, or other questionable decisions with the potential to lead their firms to poor performance or
firm failure? Part of the answer lies in the method by which CEOs and other individuals make decisions.
Ideally, individuals would make rational decisions for important choices such as buying a car or house, or
choosing a career or place to live. The process of rational decision making involves problem identification,
establishment and weighing of decision criteria, generati on and evaluation of alternatives, selection of the
best alternative, decision implementation, and decision evaluation. Saylor URL: http://www.saylor.org/books Saylor.org
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Rational Decision-Making Model
Reproduced with permission
While this model provides valuable insights by providing an ideal approach by which to make decisions,
there are several problems with this model when applied to many complex decisions. First, many strategic
decisions are not presented in obvious ways, and many CEOs may not be aware their firms are having
problems until it’s too late to create a viable solution. Second, rational decision making assumes that
options are clear and that a single best solution exists. Third, rational decision making assumes no time or
cost constraints. Fourth, rational decision making assumes accurate information is available. Because of
these challenges, some have joked that marriage is one of the least rational decisions a person can make
because no one can seek out and pursue every possible alternative—even with all the online dating and
social networking services in the world. Saylor URL: http://www.saylor.org/books Saylor.org
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Decision Biases
In reality, decision making is not rational because there are limits on our ability to collect and process
information. Because of these limitations, Nobel Prize-winner Herbert Simon argued that we can learn
more by examining scenarios where individuals deviate from the ideal. These decision biases provide
clues to why individuals such as CEOs make decisions that in retrospect often seem very illogical—
especially when they lead to actions that damage the firm and its performance. A number of the most
common biases with the potential to affect business decision making are discussed next.
Anchoring and adjustment bias occurs when individuals react to arbitrary or irrelevant numbers when
setting financial or other numerical targets. For example, it is tempting for college graduates to compare
their starting salaries at their first career job to the wages earned at jobs used to fund school. Comparisons
to siblings, friends, parents, and others with different majors are also very tempting while being generally
irrelevant. Instead, research the average starting salary for your background, experience, and other
relevant characteristics to get a true gauge. This bias could undermine firm performance if executives
make decisions about the potential value of a merger or acquisition by making comparisons to previous
deals rather than based on a realistic and careful study of a move’s profit potential.
The availability bias occurs when more readily available information is incorrectly assessed to also be
more likely. For example, research shows that most people think that auto accidents cause more deaths
than stomach cancer because auto accidents are reported more in the media than deaths by stomach
cancer at a rate of more than 100 to 1. This bias could cause trouble for executives if they focus on readily
available information such as their own firm’s performance figures but fail to collect meaningful data on
their competitors or industry trends that suggest the need for a potential change in strategic direction.
The idea of “throwing good money after bad” illustrates the bias of escalation of commitment, when
individuals continue on a failing course of action even after it becomes clear that this may be a poor path
to follow. This can be regularly seen at Vegas casinos when individuals think the next coin must be more
likely to hit the jackpot at the slots. The concept of escalation of commitment was chronicled in the 1990
bookBarbarians at the Gate: The Rise and Fall of RJR Nabisco . The book follows the buyout of RJR Saylor URL: http://www.saylor.org/books Saylor.org
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Nabisco and the bidding war that took place between then CEO of RJR Nabisco F. Ross Johnson and
leverage buyout pioneers Henry Kravis and George Roberts. The result of the bidding war was an
extremely high sales price of the company that re sulted in significant debt for the new owners.
Providing an excellent suggestion to avoid a nonrational escalation of commitment, old school
comedian W. C. Fields once advised, “If at first you don’t succeed, try, try again. Then quit. There’s
no point being a damn fool about it.”
Image courtesy of Bain News Service,
http://wikimediafoundation.org/wiki/File:Wcfields36682u_cropped.jpg
Fundamental attribution error occurs when good outcomes are attributed to personal characteristics but
undesirable outcomes are attributed to external circumstances. Many professors lament a common
scenario that, when a student does well on a test, it ’s attributed to intelligence. But when a student
performs poorly, the result is attributed to an unfair test or lack of adequate teaching based on the
professor. In a similar vein, some CEOs are quick to take credit when their firm performs well, but often
attribute poor performance to external factors such as the state of the economy.
Hindsight bias occurs when mistakes seem obvious after they have already occurred. This bias is often
seen when second-guessing failed plays on the football field and is so closely associated with watching Saylor URL: http://www.saylor.org/books Saylor.org
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National Football League games on Sunday that the phrase Monday morning quarterback is a part of our
business and sports vernacular. The decline of firms such as Kodak as victims to the increasing popularity
of digital cameras may seem obvious in retrospect. It is easy to overlook the poor quality of early digital
technology and to dismiss any notion that Kodak executives had good reason not to view this new
technology as a significant competitive threat when digital cameras were first introduced to the market.
Judgments about correlation and causality can lead to problems when individuals make inaccurate
attributions about the causes of events. Three thin gs are necessary to determine cause—or why one
element affects another. For example, understanding how marketing spending affects firm performance
involves (1) correlation (do sales increase when marke ting increases), (2) temporal order (does marketing
spending occur before sales increase), and (3) ruling out other potential causes (is something else causing
sales to increase: better products, more employees, a recession, a competitor went bankrupt, etc.). The
first two items can be tracked easily, but the third is almost impossible to isolate because there are always
so many changing factors. In economics, the expression ceteris paribus(all things being equal or
constant) is the basis of many economic models; unfort unately, the only constant in reality is change. Of
course, just because determining causality is difficult and often inconclusive does not mean that firms
should be slow to take strategic action. As the old business saying goes, “We know we always waste half of
our marketing budget, we just don’t know which half.”
Misunderstandings about sampling may occur when individuals draw broad conclusions from small sets
of observations instead of more reliable sources of information derived from large, randomly drawn
samples. Many CEOs have been known to make major financial decisions based on their own instincts
rather than on careful number crunching.
Overconfidence bias occurs when individuals are more confident in their abilities to predict an event than
logic suggests is actually possible. For example, two-thirds of lawyers in civil cases believe their side will
emerge victorious. But as the famed Yankees player/manager Yogi Berra once noted, “It’s hard to make
predictions, especially about the future.” Such overconfidence is common in CEOs that have had success
in the past and who often rely on their own intuition rather than on hard data and market research. Saylor URL: http://www.saylor.org/books Saylor.org
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Representativeness bias occurs when managers use stereotypes of similar occurrences when making
judgments or decisions. In some cases, managers may draw from previous experiences to make good
decisions when changes in the en vironment occur. In other cases, representativeness can lead to
discriminatory behaviors that may be both unethical and illegal.
Framing bias occurs when the way information is presented alters the decision an individual will make.
Poor framing frequently occurs in companies because employees are often reluctant to bring bad news to
CEOs. To avoid an unpleasant message, they might be tempted to frame information in a more positive
light than reality, knowing that individuals react differently to news that a glass is half empty versus half
full.
Satisficing occurs when individuals settle for the first acceptable alternative instead of seeking the best
possible (optimal) decision. While this bias might actually be desirable when others are waiting behind
you at a vending machine, research shows that CEOs commonly satisfice with major decisions such as
mergers and takeovers.
KEY TAKEAWAY
xGenerational differences provide powerful influences on the mind-set of employees that should be
carefully considered to effectively manage a diverse workforce. Wise managers will also be aware of the
numerous decision biases that could impede effective decision making.
EXERCISES
1. Explain how a specific decision bias mentioned in this chapter led to poor decision making by a firm.
2. Are there negative generational tendencies in your age group that you have worked to overcome?
[1] Rathman, V. 2011. Four generations at work. Oil & Gas, 109 , 10.
[2] Fogg, P. 2008, July 18. When generations collide: Colleges tr y to prevent age-old culture clashes as four distinct
groups meet in the workplace. Education Digest, 25–30.
[3] Burk, B., Olsen, H., & Messerli, E. 2011, May. Navig ating the generation gap in the workplace from the
perspective of Generation Y. Parks & Recreation, 35–36.
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10.4 Conclusion
This chapter explains the role of boards of directors in the corporate governance of organizations
such as large, publicly traded corporations. Wise boards work to manage the agency problem that
creates a conflict of interest between top managers such as CEO and other groups with a stake in the
firm. When boards fail to do their duties, numerous scandals may ensue. Corporate scandals became
so widespread that new legislation such as the Sarbanes-Oxley Act of 2002 has been developed with
the hope of impeding future actions by executives associated with unethical or illegal behavior.
Finally, firms should be aware of generational influences as well as other biases that may lead to poor
decisions.
EXERCISES
1. Divide your class into four or eight groups, depending on the size of the class. Each group should select a
different industry. Find positive and negative examples of corporate social performance based on the
dimensions used by KLD.
2. This chapter discussed Blake Mycoskie and TOMS Shoes. What other opportunities exist to create new
organizations that serve both social and financial goals?
