ZCAS UNIVERSITY

Paired Group Assignment

MEF251/MBF122 - CORPORATE
GOVERNANCE/CORPORATE GOVERNANCE &
BUSINESS ETHICS

STUDENT NAMES & ZCAS STUDENT NOs:

FAVOUR MUSONDA (202101370), KLEIN
SITWALA (202101484)

MODE OF STUDY: DISTANCE EDUCATION,

PART TIME

SUBMISSION DATE: 18TH OCT, 2021

SUPERVISOR: DR. AUSTIN MWANGE

CHAPTER TWO - FAVOUR MUSONDA

2.0 STAKEHOLDER RELATIONSHIPS, SOCIAL RESPONSIBILITY AND

CORPORATE GOVERNANCE

2.1 STAKEHOLDERS DEFINE ETHICAL ISSUES IN BUSINESS

An organization is made up of relationships.

These relationships interact in order to bring to accomplishment various objectives based on

different sets of relations.

In order to ensure that the organization through these relations stays focused on its objectives in
an ethical, legal and socially responsible manner, a governing body is usually put in place to
called a board of directors.

In order to categorize these relationships, a stakeholder framework is used to the internal

stakeholders (employees, boards of directors, and managers), and the external stakeholders
(customers, special interest groups, regulators, and others) who agree, collaborate, and engage in
confrontations on ethical issues.

This framework allows an organization to identify, monitor, and respond to the needs, values,
and expectations of different stakeholder groups.

This formal system for controlling and accounting for ethical and socially responsible behavior is
called corporate governance.

Let us take a look at stakeholders in order to understand relations further and how ethics arise.
There are three approaches to stakeholder theory: normative, descriptive, and instrumental
approaches. The normative approach identifies ethical guidelines that dictate how firms should
treat stakeholders. Principles and values provide direction for normative decisions. The
descriptive approach focuses on the actual behavior of the firm and usually addresses how
decisions and strategies are made for stakeholder relationships.

Understanding the relationship an organization has with its stakeholders is important because the
survival and performance of any organization is a function of its ability to create value for all
primary stakeholders, attempt to do this by not favoring one group over the others and maintain
their trust and confidence.

Therefore, to maintain the trust and confidence of its stakeholders, CEOs and other top managers
are expected to act in a transparent and responsible manner. Providing untruthful or deceptive
information to stakeholders is, if not illegal, certainly unethical, and can result in a loss of trust.

Ethical misconduct and decisions that damage stakeholders generally impacts the company’s
reputation. This is in terms of both investor and consumer confidence.

2.1.1 Identifying Stakeholders

Primary stakeholders are those whose continued association is absolutely necessary for a firm’s
survival. These include employees, customers, investors, and shareholders, as well as the
governments and communities that provide necessary infrastructure.

Secondary stakeholders do not typically engage in transactions with a company and are therefore
not essential to its survival like the media.

Both primary and secondary stakeholders embrace specific values and standards that dictate
acceptable and unacceptable corporate behaviors.

The degree to which a firm understands and addresses stakeholder demands can be referred to as
a stakeholder orientation.

2.2 SOCIAL RESPONSIBILITY AND ETHICS

Social responsibility as an organization’s obligation to maximize its positive impact on

stakeholders while minimizing its negative impact.

There are four levels of social responsibility—economic, legal, ethical, and philanthropic

Philanthropic: “giving back” to society

Ethical: following standards of acceptable behavior as judged by stakeholders

Economic: maximizing stakeholder wealth and/or value

Legal: abiding by all laws and government regulations

The term corporate citizenship is often used to express the extent to which businesses
strategically meet the economic, legal, ethical, and philanthropic responsibilities placed on them
by various stakeholders.

Reputation is one of an organization’s greatest intangible assets with tangible value.

The value of a positive reputation is difficult to quantify, but it is important. A single negative
incident can influence perceptions of a corporation’s image and reputation instantly and for years
afterward.

2.3 ISSUES IN SOCIAL RESPONSIBILITY

Social responsibility rests on a stakeholder orientation.

A broader view of social responsibility looks beyond pragmatic and firm-centric interests and
considers the long-term welfare of society. Each stakeholder is given due consideration. There
needs to be a movement away from self-serving “co-optation” and a narrow focus on profit
maximization.

Social issues are associated with the common good. In other words, social issues deal with
concerns affecting large segments of society and the welfare of the entire society.

Social issues may encompass events such as jobs lost through outsourcing, abortion, gun rights,
and poverty though indirectly related.

Issues that directly relate to business include obesity, smoking, and exploiting vulnerable or
impoverished populations, as well as a number of other issues.

Another major social issue gaining prominence involves Internet tracking and privacy for
marketing purposes.

The second major issue is consumer protection, which often occurs in the form of laws passed to
protect consumers from unfair and deceptive business practices.

Major areas of concern include advertising, disclosure, financial practices, and product safety.

The third major issue is sustainability. We define sustainability as the potential for the long-term
well-being of the natural environment, including all biological entities, as well as the mutually
beneficial interactions among nature and individuals, organizations, and business strategies.
Corporate governance is the fourth major issue of corporate social responsibility. Corporate
governance involves the development of formal systems of accountability, oversight, and
control. Strong corporate governance mechanisms remove the opportunity for employees to
make unethical decisions.

2.4 CORPORATE GOVERNANCE PROVIDES FORMALIZED RESPONSIBILITY TO

STAKEHOLDERS

The failure to balance stakeholder interests can result in a failure to maximize shareholders’
wealth.

2.4.1 Views of Corporate Governance

The shareholder model of corporate governance is founded in classic economic precepts,

including the goal of maximizing wealth for investors and owners.

The stakeholder model of corporate governance adopts a broader view of the purpose of
business.

2.4.2 The Role of Boards of Directors

For public corporations, boards of directors hold the ultimate responsibility for their firms’
success or failure, as well as the ethics of their actions.

Boards of directors primarily concern themselves with monitoring the decisions made by
executives on behalf of the company. This function includes choosing top executives, assessing
their performance, helping to set strategic direction, and ensuring oversight, control, and
accountability mechanisms are in place. Thus, board members assume ultimate authority for their
organization’s effectiveness and subsequent performance.

2.5 IMPLEMENTING A STAKEHOLDER PERSPECTIVE

Step 1: Assessing the Corporate Culture

Step 2: Identifying Stakeholder Groups

Step 3: Identifying Stakeholder Issues

Step 4: Assessing Organizational Commitment to Social Responsibility

Step 5: Identifying Resources and Determining Urgency

Step 6: Gaining Stakeholder Feedback

SESSION TWO AND CASE STUDY – KLEIN SITWALA
ROLES AND RESPONSIBILITIES OF BOARDS AND SENIOR MANAGEMENT
Introduction
• The 1992 Cadbury report entitled ‘Financial Aspects of Corporate Governance’,
identified the role of the board as one of the most important aspects of corporate
governance.
• For context, this report arose due to a lot of British companies displaying inconsistent
financial results in the early 90s, thus a luminary by the name of Sir Adrian Cadbury led a
committee to develop a code for corporate governance that is still widely used to this day.
Unitary and Two-Tier Board Structures
• Unitary boards are the most common kind of board, they are a single layer of governing
individuals that can either be non-executive or executive directors- predominantly
associated with the anglo-american governance.
• Two-tier board structures have two layers; a management board at the lower layer, and a
supervisory board at the top layer- more associated with continental European
governance.
• In the two-tier approach, the management board is comprised entirely of executive
directors whose focus is on operational issues. Management boards are generally headed
by the chief executive.
• Supervisory boards deal with strategic decisions and oversee the management board.
They are comprised of non-executive directors only, headed by a non-executive board
chairman.
• The supervisory board allows for more inclusivity as it may also include other
stakeholders such as employee representatives or consultants. The success of the two-
tiered structure relies considerably on the relationship between the chief executive and
chairman.
Splitting the role of chairman and chief executive
• The Cadbury report emphasised checks and balances, balance of power, and avoiding
concentrating decision making control in one person.
• In light of this, it was stated that the chief executive and chairman roles must be held by
separate people.
• The role of the chairman is to lead the board, and set the agenda.
The role of non-executive directors
• The presence of non-executive (and independent) directors on the board is intended to
reduce conflict of interest, especially between shareholders and management.
• The Cadbury report recommended 3 non-executive directors should be on every board.
By 2003, the Higgs report stated that at least half of a board of directors should be
independent, non-executive directors.
• They provide advice, direction and strategic guidance.
• They monitor company management in relation to strategy
• They monitor ethics and legal performance.
• They monitor financial information given to shareholders and investors
• They appoint, evaluate and remove senior management
• They undertake succession planning for top management positions
• Some counter arguments to the presence of non-executive members suggest that they
decrease entrepreneurship and board unity.
Executive Remuneration
• A key problem in executive remuneration comes from the need to align shareholder and
management interests.
• One proposed solution is to pay executives the same way as shareholders, through
dividends and shares- thus tying executive wealth to company value, which is the
shareholder concern.
• Banks and other large companies are in constant scrutiny with regards to how they pay
top management.
• One way to mitigate unacceptable levels of remuneration is through remuneration
committees of non-executive directors. Such committees deal with pension rights and
reasonable compensation.
• Some past failures, like the 2008 financial crisis, highlight the importance of paying
executives directly according to performance.
• Many companies allow shareholders to vote on executive pay in an advisory rather than
dictatorial capacity.
Boardroom Diversity and Effectiveness
The ‘Women on Boards’ report states that there are four key business reasons for ensuring
gender diversity within a board. These are:
• Improving performance
• Accessing the widest talent pool
• Being more responsive to the market
• Achieving better corporate governance
CASE STUDY
• Yahoo! was a major shareholder of Alibaba, a company founded by Jack Ma in 1999.
From 2005 to 2012, Yahoo! held 43% Alibaba shares, SoftBank- a Japanese firm- owned
29% Alibaba shares, the remaining 28% Alibaba shares were held by Jack Ma and his
team.
• The Alibaba board comprised of four people: Jack Ma- CEO of Alibaba and Chairman of
the Board, one Yahoo! representative, one representative of SoftBank, and one seat for a
member of the Alibaba management team.
• Yahoo! had the right to appoint one more representative and have 2 overall
representatives on the board, but chose not to.
• The internet boom led to huge profits and allowed Yahoo! to bypass some foreign
investment protocols.
• In 2010, a new regulation required that all online payment systems to be wholly owned
by Chinese companies to remain licensed.
• To deal with this, Alibaba arranged for Alipay, the Alibaba payment system, to be
transferred to a new company, Zhejiang Alibaba – which was owned 80% by Jack Ma
and 20% by the co-founder of Alibaba.
• In May 2011, Yahoo! claimed it did not know about the ownership transfer. They also
claimed the board did not approve the decision.
• As a result of board ineffectiveness, Jack Ma claims he took a unilateral decision to
bypass the board to prevent the collapse of Alipay.
• By June 29, 2011. Alibaba, SoftBank and Yahoo! announced they had reached an
agreement in relation to the transfer of Alipay, by then Yahoo! shares had fallen by
29.4%.
CASE STUDY ANSWERS
1. Is the board structure in Alibaba appropriate? Are the shareholders adequately
represented on the board based on their ownership?
• The first inappropriate thing about the Alibaba board is that Jack Ma, the chief executive
of Alibaba, was also the chairman of the board.
• Second, the board seems to lack non-executive, independent board members. Each
member of the 4-person board was a representative of one of the shareholding or
founding entities, i.e. Alibaba, SoftBank, and Yahoo!
• The shareholders are fairly represented, given the above observation. However, given that
Yahoo! elected to have only one board representative when they had the right to assign
two, they particularly may feel underrepresented especially given the effects of their lack
of information.
2. What problems do you perceive might exist in Alibaba’s board in terms of decision-
making processes, with particular reference to the Aliplay case?
• Based on the notes above, too much decision making control was concentrated in Jack
Ma as executive and chairman of the board, to the extent that he explicitly disregards
them in the case study and unilaterally decides to transfer Alipay ownership.
• Another problem, as noticeable from the notes, is the advantage of the two-tier board
structure. If this had been in effect, Jack Ma would have been in the management board,
and would have been overseen by a supervisory non-executive board, to whom he would
be held accountable.
3. Have Yahoo’s executives fulfilled their duties as directors on Alibaba’s board? If
not, what could be some of the possible reasons?
• One of the duties of the Yahoo! executives would have been to safeguard the interests of
Yahoo! in their resolutions and deliberations in the Alibaba board. However, the
director(s) present failed to inform the Yahoo! board of the plans to transfer Alipay to a
wholly owned Chinese shareholder-ship. Furthermore, there is no demonstrated
fulfilment of duty on their part. It can be said that if the duty of executives to
shareholders is the growth in share value, the Yahoo! executives failed critically, given
that Yahoo! shares fell by 29.4% over a nearly 3 month period.
• The first possible reason as to the failure could be a conflict between shareholder interest
and executive interest. If for example, there would be a tie-up of costs and resources in
Yahoo!’s participation of in the transfer of Alipay, an executive may ignore that in favour
of paying more attention to Yahoo! core operations, and yet, there remains a risk- which
came true- of the ignored information affecting company value.