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The German Jordanian University

(GJU)
Summer Semester 2011
MGT 316
Instructor: Montaser Tawalbeh


Business Ethics
School of Managerial and Logistic Sciences
Part 1. Defining Business Ethics
Business Ethics A Real World Approach
Andrew W. Ghillyer
2
nd
Edition


New York, NY
ISBN 9780071100656
Part 2. The Practice of Business
Ethics
Chapter 5. Corporate Governance

- Corporate Governance
- What does corporate governance look like?
- In pursuit of corporate governance
- Two governance methodologies: comply or
explain or comply or else.
- In the know or in the dark
Part 2. The Practice of Business
Ethics
Chapter 5. Corporate Governance

- The chairman and the CEO
- Effective corporate governance
- Twenty-two questions for diagnosing your board
- The dangers of a corporate governance checklist
- A fiduciary responsibility
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
Frontline Focus

Incrimination Evidence (p.107)

Q1, 2, and 3. (p.107)
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
Corporate Governance
Is the process or system by which business corporations are
directed and controlled.
The business world has seen an increasing number of scandals in
recent years, and numerous organisations have been exposed for
poor management practices and fraudulent financial reporting.
Before, the development of large corporations, which are
separate legal entities, managers and owners started to hire
professional managers to run the business on their behalf.
The development of a separate entity allowed organisations to
raise funds from individual shareholders to grow their
operations.
The involvement of these individual shareholders diluted the
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
Corporate Governance
Ownership of the original owners and also brought in a new group to
which the managers of the business would now be accountable. As the
corporations grew in size, and pension funds and other institutional
investors purchased larger blocks of shares, the potential impact of the
individual shareholder was greatly diminished, and the managers were
presented with a far more powerful owner to whom they were now
accountable.
Corporate governance is concerned with how well organisations meet
their obligations to all these people.
Corporate governance is about the way in which boards oversee the
running of a company by its managers, and how board members are in
turn accountable to shareholders and the company.
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
What does corporate governance look like?
The owners of the corporation supply equity or risk capital to the
company by purchasing shares in the corporation.
The board of directors:
Is elected by the owners to represent their interests in the
effective running of the corporation. They are a group of
individuals hired to oversee governance of an organisation.
Elected by vote of the shareholders at the annual general
meeting (AGM), the true power of the board can vary from
institution to another from a powerful unit that closely monitors
the management of the organisation, to a body that merely
rubber-stamps the decisions of the chief executive officer (CEO)
and executive team.
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
The Audit committee:
An operating committee staffed by members of the board of
directors plus independent or outside directors. The committee is
responsible for monitoring the financial policies and procedures
of the organisation-specifically the accounting policies, internal
controls, and the hiring of external auditors.
Compensation committee:
An operating committee staffed by members of the board of
directors plus independent or outside directors. The committee is
responsible for setting the compensation for the CEO and other
senior executives. Typically, this compensation will consist of a
base salary, performance bonus, stock options, and other perks.
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
The Corporate Governance Committee
The corporate governance committee represents a more public
demonstration of the organisations commitment to ethical
business practices. The committee monitors the ethical
performance of the corporation and oversees compliance with
the companys internal code of ethics as well as any federal and
state regulations on corporate conduct.

See Figure 5.1 Governance of the Modern Corporation (p. 110)

Customers, Vendor
partners, state & local
entities, community
partners.
Financial Institutions
Bondholders
Corporate
Governance
Committee
Audit
Committee
Compensation
Committee
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Progress Check Questions
Q1, Q2, Q3, and Q4. (p.110).
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
In Pursuit of Corporate Governance

While the issue of corporate governance has reached new
heights of media attention in the wake of recent corporate
scandals, the topic itself has been receiving increasing attention
for over a decade.

Successful governance in the world in the 21
st
century requires
companies to adopt an inclusive approach. The company must
be open to institutional activism and there must be greater
emphasis on the sustainable or non-financial aspects of its
performance.
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
In Pursuit of Corporate Governance

Boards must apply the test of fairness, accountability,
responsibility and transparency to all acts or omissions and be
accountable to the company but also responsive and responsible
towards the companys identified stakeholders. The correct
balance between conformance with governance principles and
performance in an entrepreneurial market economy must be
found, but this will be specific to each company.
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
Two governance methodologies: Comply or Explain or Comply
or Else

Comply or Explain: A set of guidelines that require companies to
abide by a set of operating standards or explain why they choose
not to.

Comply or Else: A set of guidelines that require companies to
abide by a set of operating standards or face stiff financial
penalties.
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Progress Check Questions
Q5, Q6, Q7, and Q8. (p.112).
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
In the know or In the dark

With the exception, perhaps, of corporate governance
committees, each of the corporations that have faced charges
for corporate misconduct in recent years used the governance
model shown in Figure 5.1. When questioned, the boards of
these corporations all shared similar stories of being
ambushed or kept in the dark about the massive frauds the
senior executives of their corporations allegedly carried out.
What about employees and investors seeking to put their
retirement funds in dependable companies?

Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Ethical Dilemma (ps. 113, 114, 115)
Case 5.1, A Tale of two boards
Q1, Q2, Q3, & Q4.
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
Effective corporate governance

Effectively governed organizations have mechanisms to
oversee the long-term strategy of the company and the
appointment of the personnel who are held responsible of
delivering the strategy.
The appointment of those personnel includes selection,
ongoing evaluation and compensation.
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
Effective corporate governance

Six steps for the board to be effective:
1. Create climate of trust and condor
2. Foster a culture of open decent
3. Mix up roles
4. Ensure individuals accountability
5. Let the board assess leadership talent
6. Evaluate the board performance
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
Twenty two questions for diagnosing your board

Walter Salmon recommended a checklist of 22 questions to
assess the quality of the companys board to mention some:
1. Are there three or more outside directors for every insider?
2. Are the insiders limited to the CEO, the COO, and the CFO?
3. Do your directors routinely speak to senior managers who
are not represented on the board?
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Ethical Dilemma (p.118)
Case 5.2 Richard Grasso and the NYSE
Q1, Q2, Q3, & Q4.
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Corporate Governance
A Fiduciary Responsibility

Corporate governance is about managers fulfilling a fiduciary
responsibility to the owners of their companies
A company pays to promote good corporate governance
Corporate governance do not defend against fraud or
incompetence, it just tests how far such aberrations (abnormal)
can be discouraged and how quickly they can be brought to
light.

Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Progress Check Questions
Q13, Q14, Q15, and Q16. (p.121).



Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Life Skills (p.65)
Governing Your Career
Part 2. The practice of Business Ethics
Chapter 5. Corporate Governance

Frontline Focus
Incriminating Evidence Marco Makes a Decision (p.
123)
- Answer Q1, Q2, and Q3.