Hello and welcome to this module on Stakeholders and Corporate Governance. This is a topic that's of great significance in today's sociopolitical environment, where fundamental questions are being asked about how companies and their managers behave, and the role that companies should play in economics, politics, and society at large. In this module, we begin with a brief introduction to the topic and then focus on three core areas: the public firm, corporate social responsibility, and the various mechanisms of governance that one sees in modern corporations. The lectures on these core areas will be led by Professor Joe Mahoney, who has great expertise on these topics. I will then return to provide an outline of interesting current developments and conclude the module. I want to begin by noting that companies have always operated within a nexus of different stakeholders. These include external stakeholders such as customers and suppliers, the government and community. But they also include internal stakeholders such as shareholders and bondholders, employees and board managers. The success of companies has always depended on how they manage the interests of these different shareholders and balance them against each other. However, over the last few decades, managers and companies have increasingly operated in what one might call an age of shareholder primacy. During this period, and especially in developed western, and particularly, English-speaking economies, the interest of one set of stakeholders, the shareholders, has gotten elevated above all else and often to the detriment of other stakeholders. So for example, in both management, education, and practice, we often use the shorthand that the goal of managers is to maximize returns for shareholders. Now, under certain conditions, the problem of management can be reduced to the shorthand. But a quick thought experiment will reveal to you that this might not be universally true. If, as a company, I could pollute the groundwater around my facility without being detected for many years, and even pay off local governments to turn a blind eye, should I do it? Very likely it will actually increase shareholder returns, but I hope you see that this would not be good management practice. Why then have shareholders and shareholder returns become a driving force in modern management? For one thing, it reflects the reality that public corporations take money from equity investors who are the claimants of last resort, the residual claimants of value created by the company, and so perhaps their interests need extraordinary protection. But it is also true that the shareholder-centric worldview has been driven by an intellectual movement in economics and finance that emphasizes a market-centric neoliberal worldview. Last but not least, it has been strongly reinforced by the fact that modern financial markets are a very powerful force. Any CEO who's not careful about shareholder returns is liable to get immediately punished in the stock market and to receive pressure from the company's board. So with that background, let me hand you over to the capable hands of Professor Mahoney, who will explain the core topics of the publicly-traded corporation, corporate social responsibility, and mechanisms of governance. In particular, we'll look at the publicly traded corporation, or sometimes referred to as a public stock company, which is the backbone of our economy. What are the characteristics of a public firm? Well, four key ones are first, that there's limited liability for investors. Many people would define that as a key to a publicly traded corporation. The second, the technical term is transferability of investor interest, but what that essentially means is that the owners of stock can buy and sell stock. The third one is called legal personality, and it's sometimes in the news. There's a lot of discussion of the idea of the corporation as a person. The legal advantage of this idea of a single entity of a person is that the Board of Directors, then, it is responsible for that person to use that analogy or metaphor. That is, the Board of Directors is responsible for all of the stakeholders in the corporation, what's in the best interest of the corporation itself. Finally, the last aspect that's a fact about most publicly traded companies is that there's a separation of ownership and control. In particular, if we think of ownership, it's who gets the extra income beyond paying off all the other stakeholders with that residual income or the residual claim in this call to shareholder. So in terms of income, the ownership is with the stockholders. But there's another meaning of ownership, and that is who has control? Typically, the managers have control. Now that means with a separation of ownership and control, there's the question of will the managers act in the best interest of the shareholders? Sometimes at the Harvard Business School, they call that OPM or other people's money. There's actually a movie of that title also, that's connected to these problems of separation of ownership and control. It has Danny Devito in it, as I recall. The next is this a picture of within many textbooks about the hierarchical nature of a publicly traded company. So at the top you have the rules of the game of the state. Different states have different rules of the game and some are more well-defined than others. So the State of Delaware, for example, is one of the oldest states in the United States, has many incorporated entities within that state. So they have the most well-defined property rights of all the States to the United States. Therefore, a lot of companies like to incorporate in the State of Delaware because they have less ambiguity about the rules of the game when they incorporate in Delaware. Once you get beyond the state's rules of the game, you also have the rules of the game of the corporation itself in the corporate charter of the company. There it is, a pecking order. In most textbooks, it's as it is on the screen. Here, it's the shareholders who then vote for the board of directors. The board of directors have the responsibility for the management and the management has responsibility for the employees. I will point out a nuance point though, is that you may have noticed a moment ago, I said, the board of directors is in charge of the legal personality of the corporation itself which includes all stakeholders. So in some pictures, we actually would switch. If you have a stakeholder view of management which I do. This is a stockholder view of management. If you have a stakeholder view, you would actually put the pecking order a little bit differently. You'd put the board of directors actually above the shareholders. That is, the board of directors is not only responsible for the shareholders. The board of directors is responsible to all stakeholders of the company. That's the meaning of the legal personality. That's the fiduciary duty of the board of directors. Next, we have the discussion of, there's many problems in all types of organization, including our focus on capitalists organizations. The final point I'll make about this slide on the public stock company is the state charter of all 50 states in the United States are different and have different corporate governance rules. As we talk about different countries like Germany, France, China, Japan, they each also have their own corporate laws within each of those countries. So in the same way that we have variation within a country like the United States here, later on, we'll also talk about variation in corporate governance across countries as well. Some of them have to do with the separation of ownership and control and agency problems. So managers acting in their own self-interest and some get very high profile like Enron Corporation, WorldCom, and Tyco. Enron did all type of things. Their accounting, for example. The simplistic version of what they were doing is, suppose you buy someone's house and you have someone buy your house and then you put it down as revenue for both of you, and then you barter your houses back. So essentially, they don't do anything, but the books make it look like they're collecting lots of revenue and trying to move up their stock price and get more bonuses and things like that. The second is, of course, the global financial crisis and the real estate bubble burst. That also was, real estate folks got a lot of money when they made these deals. Often they would make deals with people that they really had no ability to pay back. As you have more and more houses like that on the market, eventually there was a collapse in the pricing. That's what occurred in the United States for the real estate bubble. What these examples then show is that managerial actions affect the economy. For example, the Enron one, they also were in California, they deliberately manipulated the energy and deliberately had shortages, and then you had blackouts in the State of California, you had the rescinding of the Governor in California, and in his place came Arnold Schwarzenegger onto the scene. I mean all that came about largely because of the actions of Enron and their manipulations in the State of California. So these ethical business procedures when they're in place, have positive impacts, so when they're not in place, they can have very negative impacts and destroy value in the economy. So the bottom line is that stakeholder management is quite important and needed. So your question for discussion is, consider the case of a pharmaceutical company that discovers a drug that can cure a disease that's prevalent in Africa. Suppose this drug is projected to provide very low economic returns if the pharmaceutical company distributes the drug in Africa. But this is a real question for many pharmaceutical companies, should the pharmaceutical company go ahead with the distribution of the drug, and on what basis do you defend your decision? Please reflect on this question and post your response in the discussions for this video. Thank you. We've been discussing the idea of stakeholder analysis, and here would be the step-by-step procedures or routines for doing a stakeholder impact analysis. The first question is to ask who are the stakeholders? We might consider the employees, the customers, the suppliers, the community. So whoever can be affected or affect the corporation are typically included as stakeholders. The next thing is, what are the stakeholders' interests and claims? You just had a discussion about the pharmaceutical industries and the giving away of drugs. So for example, those patients in Africa are definitely going to be for giving away the drug. Perhaps the shareholders might be against giving away the drug, the employees might be varied if they're the scientists in the company, they don't know the meaning of NPV or not that interested in the shareholder wealth unless their company has a lot of scientists, have stock options, which is not always the case. So they may be much more focused on scientific problems, and they are in the company to have an impact positively on the world in terms of the drugs they are providing. So they might actually be for the distribution of the drug. Then as a manager, you have to think about you got pressures from the shareholders saying, "Don't do it," you got pressures from your employees saying, "Do it." If the scientist are the key employees of the company and they're going to walk if you don't do it, then the shareholder wealth can be affected there as well because they have a lot of the value of the companies and the employees. So managers in many companies, whether they want to or not, cannot simply have a simplified version of just maximize the share price because that's actually very much intertwined with the decisions of the stakeholders. So the next step in the process, then is what are all the opportunities and threats do all these stakeholders present, and that lead to a systematic analysis of all the stakeholder groups and what are their interests? Really what you're trying to get is a decision that keeps the coalition together, that you don't have the employees walk, you don't have the shareholders in mass, sell off the stock. So a manager, you can think of just trying to balance, and some ways in a positive sense of the word politician, we don't use that term always in a positive way, but in a positive sense of a politician of the polity of keeping the organization together and making sure that might affect the most important stakeholder you don't want exiting or your customers. The next step then is to think about what economic, legal, ethical, and philanthropic responsibilities do we have as the stakeholder? So those are all different levels of analysis. In our next video, we'll actually discuss what's called the corporate social responsibility pyramid. Finally, the last step is, what should we do to effectively address the stakeholder concerns? So the stakeholder impact analysis is really looking at what impacts corporate performance, and it's looking at issues of corporate governance, which we'll get to in more detail in the next two videos, it also looks at business ethics, and then it also looks at issues of social responsibility. So that's it for this time, and I look forward to seeing you for the next video. Thank you.
