Page 157 - Business Principles and Management

Unit 2

Focus On...

Corporate Ethics–Trouble in the Boardroom

Experts agree that top management greatly influences the extent
to which ethics are practiced in corporations by CEOs and boards of
directors. Shareholders assume that their elected directors are ethical,
but are they?
The relationships among shareholders, boards, and CEOs should
be as harmonious as possible. In practice, however, CEOs sometimes
manipulate boards. As a result, employees, retirees, customers, and
shareholders often suffer.
For example, CEOs know that the boards who hire them can also
fire them. As a result, CEOs want to build relationships with board
members. CEOs in firms that are not doing well are often motivated
to take defensive action. One such defense is to get elected chairper-
son of the board. In this way, CEOs set meeting agendas and thereby
control topics that are discussed. CEOs can also recommend friends as
nominees to the board for stockholders to elect via proxy statements.
Through such actions, CEOs build loyal followers.
On the other hand, directors who are elected by stockholders and
who are loyal to CEOs may be disloyal to the stockholders they repre-
sent. A condition like this creates problems.
For example, CEO salaries may be raised despite poor performance.
A CEO’s plans may be approved without adequate review. During tough
competitive periods when a firm has difficulty making a profit, everyone
is hurt. That’s when employees get fired and stockholders lose money.
Employees get hurt in another way when employee pension funds
are invested in corporations by the fund managers. Pension funds are
pools of money set aside for employee retirement benefits. When cor-
porations do poorly, managers of large pension funds try to see that
changes are made within these companies. Changes made in recent
years as the result of action taken by pension fund managers include
these examples. First, boards now select more directors from outside
firms who are more critical of poor CEO leadership. Second, more
boards take greater care in selecting, evaluating, and paying CEOs.
Ethics in boardrooms have been improving gradually. Now good
boards listen to stockholders and no longer permit CEOs to control
them. Rather, good boards control CEOs. And good CEOs encourage
frank discussions with their boards and stockholders.

Think Critically

1. What defensive actions have CEOs taken that might cause
boards of directors to perform their jobs improperly?
2. What happens when boards and CEOs do not adequately
represent stockholders?
3. Do you believe the ethics of corporations differ much from
the ethics in nonprofit organizations, such as between the
superintendent of a school system and the board of education?
Explain your answer.
4. Using a library or the Internet, find a recent report that deals
with a CEO being fired by a board. Determine the causes for
dismissal.

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