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ChapterCase
Uber: Most Ethically Challenged Tech Company?
12.1 The Shared Value Creation Framework (LO 12-1)
CONNECT INTEGRATON
Video Case: Shared Value Creation
12.2 Corporate Governance (LO 12-2, LO 12-3, LO 12-4, LO 12-5)
CONNECT INTEGRATON
Interactive Labeling: Corporate Governance
12.3 Strategy and Business Ethics (LO 12-6)
CONNECT INTEGRATON
Video Case: Strategy and Ethics in South Africa
12.4 Implications for the Strategist
Strategy Term Project
CONNECT INTEGRATON
HP Running Case: Module 12
my
Strategy
Chapter 12
Corporate Governance and Business Ethics
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POWERPOINT SLIDES 1–4
This chapter discusses the importance of corporate governance and business ethics. First, the chapter discusses the
relationship between strategic management and society. Not only do firms need to make a profit, but they also need to do so
by doing good. Then, a discussion of the key factors of governance structures, such as agency theory, board of directors, and
other governance mechanisms, such as CEO compensation. The third section addresses the role of business ethics in strategy
implementation. An important implication for students to derive from the chapter is that governance and ethics are closely
intertwined in an intersection of setting the right values and then ensuring compliance.
Learning Objectives
LO 12–1 Describe the shared value creation framework and its relationship to competitive
advantage.
LO 12–2 Explain the role of corporate governance.
LO 12–3 Apply agency theory to explain why and how companies use governance
mechanisms to align interests of principals and agents.
LO 12–4 Evaluate the board of directors as the central governance mechanism for public
stock companies.
LO 12–5 Evaluate other governance mechanisms.
LO 12–6 Explain the relationship between strategy and business ethics.
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ChapterCase
POWERPOINT SLIDES 46–47
Consider using this humorous video to open the discussion of Uber’s business practices.
CONSIDER THIS DISCUSSION QUESTIONS
AACSB 2015 Standard 9 Leading in organizational situations and Ethical reasoning (able to identify ethical issues and
address the issues in a socially responsible manner)
Have you used a ride-hailing service such as Uber or Lyft? How was your experience?
College students are part of the target demographic for these services, so if you are in a market served by these firms,
Explain Uber’s business model and deduce its strategic intent.
Uber definitely has a cost leadership strategy that depends on capturing rents through the use of contract owner-drivers to
whom it offers minimal compensation. It relies heavily upon software that matches customer and driver locations. Uber
Do you agree with Peter Thiel’s assessment that Uber is the “most ethically challenged company in Silicon Valley”?
Why or why not? Explain.
The case certainly does not offer any information to enable you to determine whether or not Uber has the worst ethical values,
Several lawsuits are under way to determine if Uber drivers are independent contractors or employees. The drivers
bringing those lawsuits argue that they are employees and should be treated like employees, which would include
being reimbursed for expenses such as gas and car maintenance that they currently pay out of pocket. How do you
view the so-called sharing economy with companies such as Uber, Airbnb (hospitality), TaskRabbit (house cleaning
and odd jobs)? What are the benefits and downsides of being an employee versus an independent contractor? Do you
think drivers for Uber (and other ride-hailing services such as Lyft) are independent contractors or are employees? If
the ruling of California’s labor commissioner should stand that Uber drivers are employees, and this view would
prevail in the United States and other countries, what would this do to Uber’s business model? Explain.
Many of the people offering these services look at them as an excellent way to use spare resources—their time, their house,
or their car—to increase their income. The flexible work arrangements allow them to avoid making any long-term
commitments and to work when and how they want. The downside is that they lack the protections of employment law. If
DISCUSSION TOPIC
EXPERIENCED FACULTY: In “How everyone gets the ‘sharing’ economy wrong” C Mims 5/26/15 The Wall Street Journal,
Uber’s business model is described as a “rent-extraction,” creating low-wage jobs. Ask students to analyze the five forces for
this industry. How does this model illustrate the economic opportunity for the industry captured by Uber’s business model?
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Ask students whether they believe that a business model that is legitimately and legally designed based on low wages would
be inherently unethical.
You can expand this case beyond ethical issues to tie back to concepts learned in Chapters 10 and 11. In an interview with
The Wall Street Journal, excerpted in “Travis Kalanick Says Uber Runs on Passion and Resilience” (10/27/15) and video,
Uber CEO Kalanick discusses the firm’s efforts to compete in China and the role of passion and resilience in its culture.
END OF CHAPTER SMALL GROUP EXERCISE 1
POWERPOINT SLIDE 49
While Uber is a highly valued “unicorn,” with a seemingly high disregard for regulations and other external factors
that would slow its growth, other competing firms are taking a somewhat different route to the ride-hailing
marketplace. For example, Lyft was also started in San Francisco, and since 2012 it has been growing across the
country and the globe. Lyft started out as a ride-sharing service (Zimride) targeting college students heading home for
the holidays. The firm continues to focus on building a trusting community of drivers and riders. A community that is
both social and cost-effective. In fall 2015 Lyft also announced a partnership with China’s primary ride-hailing
service. Another Uber competitor is Sidecar LLC. Sidecar has a ride–hailing app as well as a carpooling app and an
app-enabled delivery service. In your groups, do some Internet research about Uber competitors (www.lyft.com and
www.side.cr will get your started). What similarities and differences do you find in the way these firms have
implemented sometimes similar ideas? Discuss why traditional taxi companies, such as Yellow Cabs and those needing
medallions (such as in New York City), are choosing to attempt to prohibit these app-enabled, ride-hailing services
rather than aggressively implementing their own app-calling systems.
Traditional taxi companies are licensed and regulated in many areas, but particularly in their fares. This means that they have
no ability to do surge pricing. Many cities around the world have mini-cabs or gypsy cabs that are unregulated and work by
12.1 The Shared Value Creation Framework
LO 12–1
POWERPOINT SLIDES 5–12
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDES 8 AND 55
In this brief video Milton Friedman shares his views on greed and capitalism.
EXAMPLES
POWERPOINT SLIDE 11
For every shoe Toms shoes sells in retail, they donate a pair of shoes to kids in underserved areas around the globe.
POWERPOINT SLIDE 11
Patagonia has a strong corporate social responsibility perspective. Their website also has a video that does a good job of
describing the challenges firms face to control their supply chains to ensure that they meet the firm’s social and
environmental standards.
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POWERPOINT SLIDE 11
“Doing well by doing good: A leader’s guide” (McKinsey Insights September 2013) describes an alliance of businesses,
nonprofit organizations, and civic leadership, known as the Itasca project, that is focused on improving the economic and
social health of the Minneapolis-St. Paul region.
STRATEGY SMART VIDEO EXAMPLES
POWERPOINT SLIDES 9–11, AND 56
In the brief video in slide 56 Patagonia’s founder, Chouinard, discusses Walmart’s program to lead a sustainability program
among its suppliers.
POWERPOINT SLIDE 57
NEWER FACULTY: The video in slide 57 describes the efforts of a network of firms, 1 percent to the planet, that contribute 1
percent of their earnings to causes that protect the environment.
DISCUSSION TOPICS
POWERPOINT SLIDE 11
NEWER FACULTY: Instructors can discuss the importance of public companies and their influence on our daily lives.
Students need to understand the interdependent relationships between these organizations and the average citizen. For
publicly held firms, in particular, it is important for management to keep in mind that it is acting as stewards for other
people’s money and has public responsibilities. Then, discuss the importance of the public companies’ stakeholders and why
companies need to take good care of them. The answer is, “It is an interdependent relationship.” Only by taking care of the
stakeholders can they create a win–win, with mutually beneficial results to both companies and to society.
POWERPOINT SLIDE 11
“Why philanthropy is R&D for business” (McKinsey Insights September 2013) is a commentary by Don Conant, previous
CEO of Campbell Soup Company. He espouses the view that philanthropy can be “incubators for promising ideas and a
mechanism for understanding both community and corporate needs.” One of the examples he gives is IBM’s Smarter Cities
Challenge that assigns teams of IBM employees to address community needs. Mr. Conant highlights the leadership
development benefits this program confers on the firm in concert with the benefit for the communities. Ask students whether
their firms have similar programs. If not, do they think it would be beneficial to the firm to start such a program? How might
they take a catalyst role in starting such a program?
STRATEGY SMART VIDEO DISCUSSION
POWERPOINT SLIDES 10–12 AND 58
Show the Ted talk by Michael E. Porter “Why business can be good at solving social problems” (or due to its 16-minute
length, assign students to watch it before class). Then discuss these questions: In what ways can business leaders’ experience
with business models and profit management add value to governments and nonprofit organizations in solving social
problems? How can spending corporate money for philanthropic purposes benefit shareholders? Do you prefer to direct your
own philanthropic donations or would you like the firms you invest in to do it for you? How can firms make a bigger societal
impact than individual philanthropy? How can the Shared Value Framework change how society views business? How can it
change how business views itself?
END OF CHAPTER DISCUSSION QUESTION 3
POWERPOINT SLIDE 12
The Shared Value creation framework provides help in making connections between economic needs and social needs
in a way that transforms into a business opportunity. Taking the role of consultant to Nike Inc., discuss how Nike
might move beyond selling high-quality footwear and apparel and utilize its expertise to serve a social need. Give Nike
some advice on actions the company could take in different geographic markets that would connect economic and
social needs.
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Students should start by reviewing Nike’s current social responsibility efforts. The linked site describes Nike’s efforts to
reduce impacts on society and the environment through product design, supply chain management, and community efforts to
INTEGRATION
Video Case: Shared Value Creation
This video case analysis lets students add an ecological perspective to the shared value framework from the textbook.
This video is four minutes long and has four embedded questions contained in it. Difficulty: Medium Blooms: Analyze
AACSB: Analytic
Video Case Tips: We suggest setting the “attempts” policy to “revise the previous attempt” for video cases. This enables
students to watch parts of the video and edit their answers without needing to watch the entire video again for each
attempt at the questions.
Follow-Up Activity: The instructor can expand on the concepts in this video case by discussing how Porter and Friedman
would likely respond to this video. Also, discussion question 3 in the end of chapter material brings up Nike as a further
example of looking at shared value creation. In graduate courses, a further discussion of global attitudes might be
enlightening in view of the ecological arguments brought out in this video clip. Which countries might take this message
more seriously than others?
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12.2 Corporate Governance LO 12–2
POWERPOINT SLIDES 13–14
Discussion Topics
NEWER FACULTY: Discuss the contrasting perspectives of “shareholder versus stakeholder” governance. What benefits
and drawbacks can you find in each view?
Developments after the global financial crisis moved the U.S. away from being one of the most free-market economies in
the world toward an economy with much more active and stronger government involvement (e.g., the “Patient Protection
and Affordable Care Act,” commonly known as “Obama–care,” requires employers to spend more on health care,
including smaller firms). What implications does this shift in the political and economic environment in the United States
have for large firms (such as GE or IBM) versus small firms (mom-and-pop entrepreneurs and technology start-ups)?
How does this change the competitive landscape and affect a firm’s strategy formulation and implementation? Larger
government roles (if they continue) may favor large organizations over smaller ones. This is common in some European
and Asian countries with significant government controls in the economy. It could change the competitive landscape by
making it harder for startup firms to get capital or gain market share if the government focuses on using large-firm
of influence needed to create fundamental change (see “Activists hit block on German boards” E Henning 10/27/15 The
Wall Street Journal). Ask students to discuss the impact that this barrier to change may have on the global
competitiveness of German industry and its ability to attract capital. The article has some good illustrations and graphics
EXPERIENCED FACULTY: If you have international students in your classroom, you could set up a debate on the role of
NEWER FACULTY: Ask students to go online to find two sets of examples: (a) firms in the U.S. or Britain saving jobs by
offering reduced hours to workers rather than having layoffs, and (b) large firms in Germany or Japan laying off
must also realize that national and cultural differences play a role when designing the governance structure. German firms
are more debt-financed than equity-financed; thus, large national banks are a major stakeholder and encourage
Expanded Theory
Corporate Governance Outside the U.S.
The role of corporate governance varies from country to country. When competing around the world, managers need to be
mindful of the differences in corporate governance in the countries in which they do business. Many international
companies have stumbled by not managing corporate-governance relationships appropriately within the given
institutional context.
Examples
NEWER FACULTY:
GERMANY. Given national differences, corporate governance also differs around the world. The EU’s largest economy,
Germany, has, since World War II, developed stakeholder capitalism. In this model of governance, workers’
representatives typically occupy half the seats on a company’s board of directors (supervisory board). Companies are
required to act on behalf of all stakeholders, and not just those owning shares in the firm. Shareholder activism is quite
restrained in Germany compared with the United States or Britain, and German investors have more-limited power. As a
cutting costs by laying off workers. Many German firms instituted Kurzarbeit—voluntary reduction of work hours by
employees, to keep them on the payroll—subsidized by the federal government. This contrast can be seen in the results of
perhaps even more direct government involvement in company ownership and in determining strategic directions of state–
owned companies. For example, the French government threatened both carmaker Renault and nuclear-energy company
Japan), uses state-directed capitalism to organize economic activity. China began implementing economic reforms in the
1980s. Its move toward a more market-oriented system has accelerated since 2001, when it joined the World Trade
and so on) are seen as equally important or more important than profitability. On the downside, principal–agent problems
are rampant in SOEs: Managers have no incentive to run the enterprises effectively. Nonetheless, China is putting the
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12.2 Corporate Governance LO 12–3
POWERPOINT SLIDES 15–17
EXAMPLES
POWERPOINT SLIDE 12
NEWER FACULTY: Agency theory, illustrated in Exhibit 12.3, is the theoretical backbone of corporate governance, which
illustrates the so-called “principal–agent” problems and relationships.
POWERPOINT SLIDE 17
Insider trading is an example of information asymmetry. In October 2011, Mr. Raj Rajaratnam, a co-founder of the Galleon
END OF CHAPTER DISCUSSION QUESTION 1
POWERPOINT SLIDE 16
How can a top management team lower the chances that key managers will pursue their own self-interests at the
expense of stockholders? At the expense of the employees? At the expense of other key stakeholders?
12.2 Corporate Governance LO 12–4
POWERPOINT SLIDES 18–20
DISCUSSION TOPICS
POWERPOINT SLIDE 19
Research by McKinsey & Company (“Improving board governance: McKinsey global survey results” August 2013) has
found that boards of directors are devoting more time to reviewing firm strategy and have been more effective in that than in
other areas. They also found that boards have limited understanding of their firm’s risks and have been less effective in risk
management than other areas. Ask students what areas they feel merit the most emphasis by boards.
POWERPOINT SLIDE 19
When Facebook acquired Instagram, the CEO, Mark Zuckerberg, did not even inform the board about the deal until it was
done (see “In Facebook deal, board was all but out of picture,” 4/18/12 The Wall Street Journal). Working on his own was
undoubtedly faster than engaging the board and seeking their advice and approval and speed may have made the difference in
gaining the target; on the other hand, how well were the shareholders served in the absence of board oversight of the
negotiations process? Ask students to debate the pros and cons of Mr. Zuckerberg’s actions.
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END OF CHAPTER DISCUSSION QUESTION 2
POWERPOINT SLIDE 18
The Business Roundtable has recommended that the CEO should not also serve as the chairman of the board. Discuss
the disadvantages for building a sustainable competitive advantage if the two positions are held by one person. What
are the disadvantages for stakeholder management? Are there situations where it would be advantageous to have one
person in both positions?
The functions of the two roles are different. A board of directors broadly oversees a company’s business activities. The
company’s chief executive officer (CEO) reports to the board of directors and acts as a liaison between the company and the
board. The CEO has high-level responsibilities over all the management activities of a company while the functions of the
EXERCISES
POWERPOINT SLIDE 19
EXPERIENCED FACULTY: One of the board of directors’ most important responsibilities is to plan for CEO succession. The
Wall Street Journal article, “A new game of thrones at GM” (10/2/13), describes the GM Board’s efforts to identify and
develop four potential future CEO candidates. Begin by asking students to identify the pros and cons of the process of setting
up a competition among several internal candidates. Then ask students to focus on the bios of each candidate, put themselves
in the position of a board member, and to use their critical reasoning skills and their knowledge of the major competitive
challenges in the global auto industry to recommend the person they think would be the best CEO choice. If time permits a
third phase of the exercise could ask students to identify some specific leadership development experiences that would help
their preferred candidate to be better prepared to succeed as CEO.
Research Update
Krause, R. and Semadeni, M. (2013), Last dance or second chance? Firm performance, CEO career horizon, and the separation of
board leadership roles.
Strat. Mgmt. J.,
doi: 10.1002/smj.2139
EXPERIENCED FACULTY: This research looks at the three forms of splitting the CEO/Chairman roles: apprentice,
departure, and demotion. They look at several determinants of the type of split. They find that poor firm performance is
more likely to result in a demotion split. The strength of this relationship increases when the board is more independent.
The career horizon of the executive is also a determinant. Apprentice shifts involve executives with the shortest career
horizons, while demotion shifts are associated with executives with longer career horizons. When performance is poor
and boards are independent the strength of the relationship with career horizon is magnified.
Krause, R., Priem, R., and Love, L. (2015), Who’s in charge here? Co-CEOs, power gaps, and firm performance.
Strat. Mgmt. J.,
36: 2099–2110. doi: 10.1002/smj.2325
In addition to splitting the CEO and Chairman roles, another trend is to split the CEO role into co-CEOs. In this research
based on a study of 71 co-CEO pairs, unity of command is more positively associated with firm performance than shared
command.