INTEGRITY AND CORPORATE GOVERNANCE: CONTROLLING MANAGERS AND MEETING CORPORATE SOCIAL RESPONSIBILITIES 1

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1 INTEGRITY AND CORPORATE GOVERNANCE: CONTROLLING MANAGERS AND MEETING CORPORATE SOCIAL RESPONSIBILITIES 1 Olivier Furrer Radboud University Nijmegen Managers integrity refers to a manager s behavior that is consistent with his/her espoused value and that he/she is honest and trustworthy (Barry & Stephens 1998; Yukl & Van Fleet 1992). As a social notion, integrity also refers to the degree to which people (e.g., managers) satisfy the legitimate expectations of the world around them (Kaptein 1999); this is, their stakeholders. Corporate governance refers to those administrative monitoring and incentive mechanisms that are intended to reduce conflicts among organizational actors due to differences in incentives (Lubatkin et al. 2007, p. 43). In other words, governance concerns the structure of rights and responsibilities among the firm s stakeholders (Aguilera & Jackson 2003; Usunier, Furrer & Furrer-Perrinjaquet 2011). In this chapter, we focus those corporate governance issues that pertain to managers integrity. This is, corporate governance requires controlling the risk of opportunism by managers as well as ensuring their integrity. Positive corporate governance theory (e.g., Daily, Dalton & Cannella 2007) is strongly embedded in neo-classical economic theory (e.g., Jensen & Meckling 1976; Williamson 1975). The managerial relevance of the assumptions of which has scarcely been questioned (Furrer 2011; Hill 1990). In this chapter, we argue that some of these assumptions, such as managerial opportunism and shareholder value maximization, might have some negative side effects on managers integrity and, as such, might need to be relaxed or replaced. Thus, in the following sections, we start by presenting corporate governance systems based on an agency theory perspective and draw implications from its main assumptions. Then we start relaxing some of those assumptions. First, we mitigate the idea that every manager is opportunistic and present stewardship theory, which stipulates managers, left on their own, will act as responsible stewards of the assets they control (Davis, Schoorman & Donaldson 1997). Second, consistent with Rawls (1999) argument that a just society is constructed only when people, acting rationally, realize that their self-interests are inextricably intertwined with those of others, we relax the assumption that managers sole responsibility is the maximization of shareholder value and offer stakeholder theory as an alternative perspective. Third, we discuss how to expand firms corporate responsibilities from making a profit and creating shareholder value to encompass broader economic, social, and environmental responsibilities. Finally, we conclude with a discussion of the implications of corporate governance systems on managers integrity and societal responsibilities. CORPORATE GOVERNANCE: AN AGENCY THEORY PERSPECTIVE Modern corporations, characterized as they are by the separation of ownership and managerial control, use managers as decision-making specialists (or agents) who act on behalf of the firm s owners (i.e., stockholders) (Berle & Means 1932; Fama & Jensen 1983). As management specialists, managers have some latitude (i.e., discretionary power) to make strategic choices in the best interest of the firm s owners (Jensen & Meckling 1976). Managers are also the primarily people responsible for the performance and sustainability of 1 Some of the ideas presented in this chapter have been outlined in Furrer (2011). 1.

2 the firm (Barnard 1938). However, self-interested managers might act opportunistically and make decisions that maximize their personal power and welfare and minimize their personal risk rather than maximizing shareholder value, creating a conflict of interest between managers and shareholders (Jensen & Meckling 1976). Breaches of integrity occur where conflicting interests are incorrectly weighed against each other, so that managers infringe the legitimate interests of the company that him or her and its shareholders (Kaptein, 1999). Thus, conflicts of interests raise the issue of the integrity of managers and how to control them to minimize the costs for shareholders associated with their opportunism. Accordingly, corporate governance is the administrative monitoring and incentive mechanisms implemented to reduce managerial opportunism (Shleifer & Vishny 1997). Agency theory provides the dominant theoretical framework on corporate governance systems, and pertains to the conflict of interest between shareholders and managers (Berle & Means 1932). Agency theory argues that the separation between shareholders and managers creates an agency relationship, in which shareholders delegate decision-making responsibility to managers. Such an agency relationship can be problematic because shareholders and managers often have different interests and goals. Whereas, shareholders are mostly interested by the distribution of dividends and the growth of the firm s market value, managers are interested be the diversification of their personal risk to protect their job and to increase their revenues and personal power. There are several potential areas of conflict of interest between shareholders and managers including the election of directors, the supervision of CEO pay, and the firm s overall structure and strategy (Fama & Jensen 1983). For example, diversification is one such strategic decision. Diversification can enhance a firm s value, which would serve the interests of both shareholders and top managers. But diversification also might result in benefits to managers that shareholders do not share, such that managers may prefer more diversification than do shareholders (Hoskisson & Hitt 1990; Montgomery 1994). Specifically, diversification likely increases the size of the firm, and size often relates positively to top managers compensation. Moreover, diversification increases the complexity associated with managing the firm and its portfolio, such that managers might demand increased pay to deal with this complexity. Because increased diversification gives managers a means to increase their compensation, they may be motivated to engage in ever more diversification. Another example of a potential agency problem pertains to the firm s free cash flows, over which managers have control. Firms, especially those that are active in mature industries, often have free cash flow, or cash flow in excess of that needed to fund all projects with a positive net present value. Free cash flow should be returned to shareholders, because reinvestment in the firm would harm its value, but managers may be reluctant to surrender it, which would reduce the resources they control and the power they wield. Instead, they prefer to spend free cash flow on non-profitable projects. In contrast to managers, shareholders likely prefer that free cash flows be distributed to them as dividends, which would enable them to control how the cash gets invested (Brush, Bromiley & Hendrickx 2000). In general, shareholders tend to prefer riskier strategies, because they can reduce their risks in other ways, such as holding a diversified portfolio of equity investments. In contrast, managers cannot diversify their employment risk by working for a diverse portfolio of firms (Fama 1980), which should cause them to prefer a higher level of diversification that increases their compensation and reduces their employment risk. Thus, agency relationships between shareholders and managers could lead to managerial opportunism, which is the seeking of self-interest with guile (i.e., cunning or deceit) (Williamson 1975). In turn, managerial opportunism is likely to trigger the implementation of governance mechanisms to curb this opportunism and reduce its costs for shareholders. However, opportunism is both a set of behaviors (i.e., specific acts of selfinterest) and an attitude (e.g., an inclination) (Ghoshal & Moran 1996). Thus, it is not possible for shareholders to know beforehand which manager will or will not act opportunistically. The reputations of managers are imperfect predictor of their integrity, and opportunistic behavior 2.

3 cannot be observed before it has occurred. Thus, according to agency theory then, shareholders must control the work of top managers to avoid self-serving opportunistic behaviors, which would be detrimental to their interests. Shareholders must establish these mechanisms even though they are costly and only a small proportion of managers are likely to do so (Wathne & Heide 2000). Most common corporate governance mechanisms are: ownership concentration, as represented by the types of shareholders and their different incentives to monitor managers, independent board of directors, and executive compensation, such as stock options to align managers interest with those of shareholders. However, in some cases, such as Enron and WorldCom, these mechanisms were proven relatively inefficient. In 2001, for instance Enron collapsed after it came to light that it s profits were artificially enlarged by means of a complex network of partnerships. Just before the collapse, managers cashed stocks worth millions of dollars at the expense of the firm s other stakeholders (Kaptein 2003). These limits to internal corporate governance system triggered governments to develop more restrictive legislations to control managerial opportunism. In the United States, one of the laws intended to exert such control is the Sarbanes- Oxley Act. The Sarbanes-Oxley Act was signed by President George W. Bush on July 30, Among other important clauses, the Act states that a firm s CEO and CFO must certify every report that contains financial statements. The certification acknowledges that both top managers have reviewed the report, which means they attest that the information does not include untrue statements or omit pertinent information. Furthermore, because it reflects these officers knowledge, the report should be a reliable source regarding the firm s financial condition and operations for the period represented. The certification thus makes the officers responsible for establishing and maintaining internal controls, and therefore, they must be aware of any material information relating to the firm. The officers also must evaluate the effectiveness of internal controls within 90 days of the release of the report and present their conclusions. They have to disclose any fraudulent material, deficiencies in the reporting, or problems with the internal controls to the firm s auditors and auditing committee. Finally, these officers are responsible to communicate any changes to the firm s internal controls or factors that could affect them. Strict penalties punish violations of the Sarbanes-Oxley Act. If a firm must restate its financial statements due to noncompliance, the CEO and CFO must relinquish any bonus or incentive-based compensation or realized profits they earned from the sale of securities during the subsequent 12-month period. Other forms of securities fraud, such as destruction or falsification of records, can result in fines and prison sentences of up to 25 years. These governance mechanisms and governmental regulations can limit managers opportunistic tendencies to some extent, but also have unintended negative side effects. Indeed, assuming managerial opportunism is likely to become a self-fulfilling prophecy (Ghoshal & Moran 1996). As demonstrated by Davis et al. (1997), the assumption of opportunism by shareholder trigger the development of control mechanisms, which implementation is likely to frustrate managers who are likely to feel betrayed and to start behaving opportunistically in retaliation. This problem occurs because the agency theory argument relies on a key, but also controversial, assumption that is, managerial opportunism (Ghoshal 2006; Hill 1990). For example, neo-classical economists (e.g., Jensen & Meckling 1976; Williamson 1975) assume that managers are opportunistic and only motivated by self-interest, but this assumption has been subject to frequent challenges. For example, Davis et al. (1997) hold that most managers actually are highly responsible stewards of the assets they control and do not behave opportunistically, but with integrity. With this alternative view of managers motives, they propose stewardship theory, according to which shareholders should install more flexible corporate governance systems to avoid frustrating their benevolent and trustworthy managers with unnecessary bureaucratic controls. 3.

4 Moreover, by focusing on the relationship between shareholders and managers, agency theory also takes a narrow view of corporate governance and the responsibilities and integrity of top managers. Stakeholder theory broadens this view by arguing that managers are responsible not only to shareholders but to the larger group of stakeholders. Freeman (1984, p. 46) defines stakeholders as any group or individual who can affect or is affected by the achievement of the organization s objectives. When multiple stakeholders interests represent ends to be pursued, managers must make strategic decisions that balance these multiple goals rather than just maximize shareholder value. Stakeholder theory in turn proposes that managers goals should be developed in collaboration with a diverse group of internal and external stakeholders, even if they support potentially conflicting claims (Mitchell, Agle & Wood 1997). Furthermore, with regard to corporate governance, the stakeholder perspective asserts that managers should be controlled not just by shareholders but by other stakeholders as well. Within the stakeholder perspective, managers integrity is essentially moral courage and the will and willingness to do what one knows one ought to do (Solomon 1992). Again, according to agency theory, managers are solely responsible to shareholders, so their actions must aim to maximize shareholder value: They are accountable only for making a profit (Friedman 1970). According to this view, as Daily, Dalton and Cannella (2003) outline it, corporate governance identifies ways to ensure effective strategic decisions, regardless of potential agency problems. However, if the number of stakeholders to whom managers are accountable increases, the scope of a firm s corporate responsibilities also increases. Carroll (1979) therefore argues that not one but four types of corporate social responsibilities exist: economic, legal, ethical, and discretionary (or philanthropic). These four responsibilities also can be classified into two broad types: social (discretionary, ethical, and legal) and economic (Furrer et al. 2010). Managers strategic choices therefore must reflect a compromise between various considerations of which shareholder value is just one (McWilliams & Siegel 2001). Accordingly, managers integrity should a concern for the law with an emphasis on managerial responsibilities for ethical behavior (Paine 1994). STEWARDSHIP THEORY: RELAXING THE OPPORTUNISM ASSUMPTION Agency theory assumes that managers, left on their own, will behave opportunistically and reduce the wealth of their shareholders. However, most firms are profitable because managers are responsible stewards of firm resources, and their strategic actions generally contribute to the firm s success (Wiersema 2002). Thus, it is overly pessimistic to assume that managers usually act in their own self-interest rather than their firm s interest (Ghoshal 2006). Managers also may be held in check by concerns about their reputation. If a positive reputation of integrity facilitates power, a poor reputation likely reduces it. Accordingly, the assumption that managers need disciplining may not be entirely correct, and sometimes governance may create consequences that are worse than those resulting from reduced control (Davis et al. 1997). For example, excessive governance may cause a firm s managers to be overly cautious and risk averse (Berger et al. 1997). An alternative view assumes that most managers are highly responsible stewards of the assets they control (Davis et al. 1997). This alternative view is referred to as stewardship theory (Donaldson & Davis 1991). Stewardship theory derives from psychology and sociology rather than neo-classical economics and suggests that when a manager has the choice between self-serving and pro-organizational behavior, this steward s behavior will not depart from the interests of the firm. Because most managers act as stewards, they seek to improve their firm s performance, satisfy most stakeholder groups, and adopt proorganizational motives that serve shareholders in the longer term (Davis et al. 1997). According to Davis et al. (1997), who developed stewardship theory, the rational steward s behavior is ordered such that pro-organizational behaviors offer greater utility than 4.

5 do self-serving behaviors. The behavior of the steward is collective and seeks to attain the objectives of the whole corporation rather than just the objectives of the managers or even just of their shareholders. Furthermore, the potential multiplicity of stakeholders objectives, which could be conflicting, means a steward s behavior is organizationally centered, focused on the long-term survival of the firm rather than the short-term profitability preferred by managers and shareholders. On several other dimensions, agency theory assumptions differ from those of stewardship theory, especially in terms of psychological factors and situational factors (Davis et al. 1997). The fundamental difference between agency and stewardship theories with respect to psychological factors derives from to the different model of man they describe. The two models self-serving versus collective-serving produce divergent assumptions about managers motivation, identification, and use of power. In terms of personal motivation, stewards are more likely to be motivated by higher-order needs (i.e., achievement and selfactualization) and intrinsic factors, whereas agents are motivated by lower-order needs (i.e., physiologic, security, and economic) and extrinsic factors. Stewards also tend to identify with the organization and its owners; agents are more likely to identify with other managers. In hierarchical relationships, stewards use personal sources of power, such as referent and expert power, and agents rely on institutional sources of power, such as legitimate, coercive, or reward-based power. Among the situational factors that differentiate agency and stewardship theories, differences in management philosophies are particularly important. Agency theory better describes situations in which managers take a control perspective (i.e., require control mechanisms to reduce risks, have a short-term perspective, or focus on cost control objectives); stewardship theory corresponds better to situations that require managers to be involved (i.e., use trust to control risks, have a long-term perspective, and focus on performance enhancements). Because the integrity of managers is not the only one that matters and that the integrity of the firm s owners also plays a critical role in an agency relationship, stewardship relationships are often unstable. The choice between agency and stewardship relationships is similar to the decision in a prisoner s dilemma (Davis et al. 1997; Hill 1990): Based on their psychological characteristics and the situational factors, both managers and owners influence the nature of the relationship. The owners make assumptions about managers behaviors as agents or stewards, and managers decide to behave as agents or stewards based on their assumptions about the owners behavior. The nature of this dilemma is represented in Figure 1. When both the principal and the manager choose an agency relationship, the result is a true principal agency relationship that is likely to achieve the expectations of both parties. The agency relationship minimizes potential losses to each party. The manager uses his or her discretion to act opportunistically and must be controlled by the owners, so the presence of controls ensures minimal agency costs. Both parties have similar (mistrustful) expectations of the relationship. When both the principal and the manager choose a stewardship relationship, the result is a true principal steward relationship that maximizes the performance of the relationship. In this situation, the manager works to fulfill the purposes and objectives of the organization. Likewise, the principal chooses to create a stewardship situation that is involvement oriented and empowering. Controls are not necessary and minimal, and the mutual gains are high. The dilemma occurs due to the possibility of a divergent choice by either party. If the principal chooses an agency relationship but the manager selects a steward relationship, the result is a very frustrated manager who feels betrayed by the principal. When stewards are controlled as if they were agents, even though they are acting as stewards, they cannot enjoy the internal rewards they desire, which may prompt them to engage in anti-organizational behaviors. In contrast, if the principal chooses a steward relationship and the manager chooses an agency relationship, the manager acts opportunistically and takes advantage of the principal. The principal then 5.

6 feels betrayed and angry and likely increases controls radically, withdraws from the situation, or attempts to remove the manager. Because the dilemma involves high levels of risk for both parties (Hill 1990), a true stewardship relationship, the most beneficial form, often gets replaced by a suboptimal agency relationship, which is less risky for both parties (Davis et al. 1997). The highest joint utility derives from the principal steward relationship, in which both parties choose the steward relationship, but the least risk of betrayal is in the principal agent relationship. FIGURE 1 SHOULD APPEAR ABOUT HERE The instability of the true stewardship relationship is problematic, and managerial opportunism is still often assumed. Relaxing this assumption has often proven to be challenging and, as argued by Ghoshal and Moran (1996), assuming managerial opportunism is likely to become a self-fulfilling prophecy. From an integrity perspective, in order to counter this vicious cycle, it would be important to develop governance mechanisms and control systems that are flexible enough to foster trust rather than opportunism. Without trust, it would be impossible to relax the assumption of opportunism. STAKEHOLDER THEORY: RELAXING THE SHAREHOLDER VALUE MAXIMIZATION ASSUMPTION As a social notion, integrity also refers to the degree to which people (e.g., managers) satisfy the legitimate expectations of the firm s stakeholders (Kaptein 1999). In addition to shareholders, managers should also be responsible to the other stakeholders (Freeman 1984). The stakeholder approach emerged in the mid-1980s to challenge the assumption that maximizing shareholder value should be the sole goal of managers (Freeman & McVea 2001). The stakeholder approach contends that in developing the firm s strategy, managers must recognize the legitimate rights of all the firm s claimants, including not only shareholders but also other parties affected by the firm s actions, such as employees, customers, suppliers, governments, unions, competitors, local communities, and the general public. See Figure 2 for a representation of a firm s stakeholders. Each of these interest groups or stakeholders has justifiable reasons to expect the firm to satisfy its claims in a responsible manner. Arguing in favor of this stakeholder approach, Freeman (1984) also broadened the scope of corporate governance beyond its traditional economic roots by defining stakeholders, as any group of individuals who can affect or is affected by the achievement of a firm s objectives. This definition offers an extremely wide range of possibilities regarding who or what are really stakeholders. Despite the use of different definitions by various authors (e.g., Mitchell et al. 1997), there are no fundamental disagreements about the kind of entity that constitutes stakeholders, such that a stakeholder can refer to persons, groups, neighborhoods, firms, institutions, societies, or even the natural environment (Mitchell et al. 1997). FIGURE 2 SHOULD APPEAR ABOUT HERE The idea of the stakeholder approach suggests that managers must formulate and implement strategies that satisfy all, but only, those groups that have a stake in the firm s activities (Freeman & McVea 2001). The central task in this strategic process is to manage and integrate the various relationships and interests of shareholders, employees, customers, suppliers, governments, unions, competitors, local communities, the general public, and the 6.

7 like. In doing so, stakeholder theory strongly challenges the assumption that the only goal of managers in developing and implementing the firm s strategy is to maximize shareholder value. However, the main issue then becomes that the claims of the different stakeholders often come into conflict. Shareholders require appropriate returns on their investment; employees seek broadly defined job satisfaction; customers want value in what they pay for; suppliers seek dependable buyers; governments demand adherence to legislation; unions seek benefits for their members; competitors require fair competition; local communities want the firm to be a responsible citizen; and the general public expects the firm to improve, or at least not harm, the overall quality of life. In such a situation, it is not possible any more for manager with integrity to maximize value for one single stakeholder group, especially not shareholder value. Therefore, managers with integrity must set up strategies that, at least, satisfy the claims of all stakeholders, even if they cannot maximize value for any of them. It is rarely possible for firms to accommodate all stakeholder groups interests (Kaptein 2003). Resource constraints and incompatibilities between stakeholders claims force firms to develop priorities, which is often done according to the expectations of the most salient stakeholder groups (Porter & Kramer 2006). The salience of stakeholder groups depends on their power, legitimacy, and urgency in terms of influencing managers decisions and actions (Mitchell et al. 1997). However, as noted by Mitchell et al. (1997), the perceived salience of stakeholder groups is also socially constructed and based on the perceptions and views of managers and their integrity. However, this prioritization of some stakeholders against others might create a moral dilemma. This does not imply that managers should not prioritize the claims of the most salient stakeholders over those of others, but that the maximization of the value of one particular stakeholder, for example shareholders, must be made under the constraint that the other stakeholders are at least satisfied. In this sense, the assumption of neo-classical economic theory of shareholder value maximization is relaxed and replaced by a stakeholder value satisfization. A manager of integrity should do things right, but also the right thing (Kaptein 2003). CORPORATE RESPONSABILITIES: ECONOMIC, SOCIAL, ETHICAL, AND PHILANTHROPIC Kaptein (2003) argues that a manager with integrity should not only create economic value, but also ecological value and social value. This triple bottom line (Elkington 1997) broadens managers responsibility. Thus, another implicit assumption that should be challenged concerns managers and corporate responsibilities: Are they limited to the sole firm s stakeholders or should they be broadened even more to include society at large and the planet? Today, it seems that managers are starting to realize that such broader responsibilities is important from an integrity and moral standpoint. In the neo-classical economic tradition, the only corporate responsibility is to make a profit (Friedman 1970). However, it is important to recognize that more than ever before, stakeholders including customers, employees, investors, and local communities expect firms to play a role in contributing to the resolution of social and environmental issues, such as climate change, energy shortages, diversity, and health. These stakeholders expectations create social responsibilities for the firms managers (Freeman & McVea 2001; Kaptein, 2003; Maak 2008). The concept of corporate social responsibility has a long and diverse history in management literature (see Carroll 1999 and Furrer et al. 2010), prompting several varied definitions and conceptualizations (Carroll 1999). Following McWilliams and Siegel (2001), corporate social responsibility is the firms actions that attempt to further some social good, beyond the interest of the firm and the requirements of the law. Carroll s (1979, 1999) distinguishes four types of corporate social responsibilities: economic, legal, ethical, and discretionary (or philanthropic). Economic responsibilities refer to the business s financial 7.

8 performance and the provision of goods and services. Legal responsibilities involve compliance with societal laws and regulations. Ethical responsibilities relate to adherence to societal moral codes of conduct. Discretionary responsibilities require voluntary involvement in and support of wider societal entities (see Figure 3). FIGURE 3 SHOULD APPEAR ABOUT HERE Even if the broader stakeholder perspective establishes these different corporate responsibilities as important, most of the time, they are not perceived as equally important by managers (Furrer et al 2010). Carroll s (1979, p. 499) pyramidal representation of the four types of corporate responsibilities suggests a weighting of for economic, legal, ethical, and philanthropic responsibilities, respectively (Figure 3). Aupperle, Caroll and Hattfield (1985) empirically measured the relative importance of the four corporate responsibilities among a sample of U.S. CEOs and confirm Carroll s ranking; their respondents clearly place the most emphasis on economic responsibilities. However, when these authors regrouped the four responsibilities into broader social (discretionary, ethical, and legal) and economic dimensions, the non-economic responsibilities in combination took much greater weight than the singular economic responsibilities. Pinkston and Carroll (1994) replicated Aupperle et al. s (1985) study and found similar rankings of the four corporate responsibilities across countries During the ten-year span separating these two studies, the different corporate responsibilities appear to have retained the same priority, but the gap between economic and legal responsibilities appears to have become smaller (Pinkston and Carroll 1996). Although Carroll (1979) also identified the environment as a social issue for businesses, stakeholder theory (Freeman 1984, Mitchell et al. 1997) considers environmental corporate responsibility a different dimension that pertains demands firms engage in ecologically sustainable relationships with both biophysical and societal environments and that should be added to firms corporate responsibilities (Shrivastava 1996). Overall then, the perceived importance of social (i.e., non-economic) responsibilities has been increasing, or else the importance of economic responsibilities has been decreasing. Despite this evolution, there is still the perception of a trade-off between corporate social and economic responsibilities in the mind of many managers (Usunier et al. 2011). However, this should not be necessary the case. Indeed, from an instrumental perspective, firms might invest in corporate responsibility practices as a strategic means to increase their financial performance and corporate reputation (Gardberg & Fombrun 2006). This instrumental perspective views corporate social responsibilities activities primarily as means to improve a firm s financial performance (Godfre et al. 2009; McWilliams & Siegel 2001). Even so, studies investigating the relationship between corporate social responsibility practices and firms performance demonstrated mixed results, recent meta-analyses found a small, but positive relationship between corporate social responsibility and performance (Margolis & Walsh 2003; Orlitzky et al. 2003). Taken together, these studies indicate that perspectives on the relative importance of the different types of corporate responsibilities appear to evolve over time. The perceived importance of non-economic (social and environmental) responsibilities is increasing, while the importance of economic responsibilities is decreasing. However, meeting its corporate social responsibilities requires managers and firms implementing a range of practices, including engagement in community activities, reducing environmental impact, and transparent corporate governance practices. Each of these practices may respond to different stakeholder groups expectations and thus their implementation may have a separately identifiable impact upon firm performance (Brammer and Pavelin, 2006). For instance, Orlitzky et al. s (2003) meta-analysis found that corporate environmental responsibility activities have a weaker relationship with firm performance than do all other dimensions of corporate social responsibility. Never the less, firms and their managers are 8.

9 entering in a new era where their integrity plays a larger role and their responsibility covers a larger spectrum. CONCLUSION Corporate governance pertains to the structure of rights and responsibilities among the parties with a stake (i.e., stakeholders) in a firm (Aguilera & Jackson 2003; Usunier et al 2011). In this chapter, we have argued that beyond shareholders, managers are responsible toward various stakeholders and society at large (Carroll 2001; Freeman 1984). A just society is constructed only when people, acting rationally, realize that their self-interests are inextricably intertwined with those of others (Rawls 1999), therefore, the assumption that managers sole responsibility is the maximization of shareholder value should be relaxed (Furrer 2011). Moreover, corporate governance must entail controls of the risk of opportunism by managers but also assurances that the firm will meet its corporate social responsibilities. Managers of integrity must make strategic decisions based on a compromise across a variety of considerations; shareholder value is just one of them. However, integrating integrity within firms corporate governance systems requires managers and shareholders to change their view about corporate responsibilities and several assumptions in management theory to be relaxed. In changing managers view and relaxing these theoretical assumptions, the role of scholars and business schools are primordial (Usunier et al 2011). As argued by Sumantra Ghoshal (2006) in a seminal article, bad management theories are destroying good management practices. Integrity should start in the classroom. REFERENCES Aguilera, RV & Jackson, G 2003, The cross-national diversity of corporate governance: Dimensions and determinants, Academy of Management Review, vol. 28, no. 3, pp Aupperle, KE, Carroll, AB & Hatfield, JD 1985, An empirical examination of the relationship between corporate social responsibility and profitability, Academic of Management Journal, vol. 28, no. 2, pp Barnard, CI 1938, The functions of the executive, Harvard University Press, Cambridge, MA. Barry, B & Stephens, CU 1998, Objections to an objectivist approach to integrity, Academy of Management Review, vol. 23, no. 1, pp Baysinger, B & Hoskisson, RE 1990, The composition of boards of directors and strategic control: Effects on corporate strategy, Academy of Management Review, vol. 15, no. 1, pp Berger, PG, Ofek, E & Yermack, DL 1997, Managerial entrenchment and capital structure decisions, Journal of Finance, vol. 52, no. 4, pp Berle, AA & Means, GC 1932, The modern corporation and private property, Commerce Clearing House, New York. Brammer SJ & Pavelin S. 2006, Corporate reputation and social performance: The importance of fit, Journal of Management Studies, vol. 43, no. 3, pp Brush, TH, Bromiley, P & Hendrickx, M 2000, The free cash flow hypothesis for sales growth and firm performance, Strategic Management Journal, vol. 21, no. 4, pp Carroll, AB 1979, A three-dimensional conceptual model of corporate performance, Academy of Management Review, vol. 4, no. 4, pp

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