Assignment 3 Ethics and Governance PDF

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RESEARCH REPORTAssessment Task 3 – Governance Research EssayLecturer: Phuc DG Ethics and Governance – BUSM Group 1 (9 A. Saturday)Le Ngoc Anh – sTable of ContentsI. Introduction..............................................................................................................................

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RESEARCH REPORT Assessment Task 3 – Governance Research Essay

Lecturer: Phuc DG Ethics and Governance – BUSM4403 Group 1 (9.00 A.M. Saturday) Le Ngoc Anh – s3762228

Table of Contents I.

Introduction............................................................................................................................2

II. Literature Review..................................................................................................................2 1.

Corporate Social Responsibility (CSR)...........................................................................2

2.

Corporate Governance (CG)............................................................................................3

3.

Innovation and Sustainability...........................................................................................4

III.

Methodology.......................................................................................................................5

IV.

Discussion...........................................................................................................................5

1.

The existing corporate governance model of Meta Inc..................................................5 

Ownership Structure.....................................................................................................6



Board of Directors (BOD).............................................................................................7



Board Committees.........................................................................................................9



Remuneration...............................................................................................................10

2.

Innovation and sustainability perspective.....................................................................12 

Implications of CG model...........................................................................................13

V. Recommendation.....................................................................................................................14 VI. Conclusion..............................................................................................................................16 VII. Reference..............................................................................................................................16

I.

Introduction

In the technology-driven economy, a large number of firms operate as platforms as the adaption of the advanced technologies and the fast-moving consumer demand in this hyper-competitive global market. This has put increasing pressure for all established firms to undergo this transformation. However, the traditional corporate governance as the product of the hierarchy corporate structure highlighting the primacy of shareholders is failing the platforms and making less sense in the innovation-driven economy. Thus, there is a disconnection between the requirements for being successful in the age of platforms and the current regulatory framework, which raises the demand for platform governance. The purpose of this research report is to analyze the current corporate governance model of Meta Inc, examine and suggest the model in the way that facilitates innovation and sustainability. This paper comprises 3 main parts: literature review, analysis and recommendation. II.

Literature Review

1. Corporate Social Responsibility (CSR) In today's business environment, CSR is gaining more significance and plays an important role in defining organizational ethics and responsibility for their impacts on environment and society (Gyorgy et al. 2008, European Commission 2019). CSR practice is applied popularly in many companies as a way to communicate to their stakeholders about the social performance, which help firms build its positive organizational image (Douglas et al. 2004) and become policies that go beyond the stakeholders’ concerns and the financial performance (Glavas & Aguinis 2017). Supported by William & Seigal (2010), CSR is used as the strategy for enhancing the companies’ reputation, resulting in consumer loyalty and increased profitability. Although CSR is not compulsory by which firms can contribute voluntarily to better environment and society (European Communities Commission n.d.), CSR is argued to go beyond voluntary action and is an aspect of the interface between society and organization, thus requiring regulations for improving firm performance through CSR (Brammer et al. 2012). More importantly, there have been different hypotheses of various scholars to CSR including the skeptical view toward CSR and those adopting that theory to firm’s social responsibilities in a broader scope. Particularly, Milton Friedman’s theory viewed CSR as an improper use of company resources resulting in

unreasonable expenditure for the general societal interest (Thomas 1993, Edafe 2021). As according to his perspective, the ultimate goal of the business is merely maximizing the profit, thus CSR is referred as window dressing for businesses (Mauricio et al. 2019). Some have agreed with Friedman that the underlying objective of companies that drives everything they do is to maximize the interest of shareholders (Edafe 2021). By contrast, a large number of scholars disagree with Friedman’s perspective as more and more corporations shifted their focus towards activities that primarily create value to the society. Notably, the theory of Carroll emphasizes that a corporation needs to have 4 main responsibilities including economic, legal, ethical, philanthropic responsibilities to be socially responsible in a balanced way (Carroll 1979). Also, Freeman’s theory or the stakeholder theory as the most famous one has argued for Friedman that the companies have to include their stakeholders in the corporate activities as an effective and constructive way for them to meet the expectations of society (Edafe 2021, Freeman & Dmytriyev 2017). In his view, the stakeholders are the owners of the corporation as they can affect and be affected by the achievement of the organization’s purpose (Freeman & Dmytriyev 2017). Conversely, shareholders are not the owners as there is only the contractual liability between them and the corporate based on the nature of law. Therefore, conflicting with Friedman’s theory, the stakeholder theory highlights the stakeholders’ engagement in the CSR performance rather than the shareholders. However, a weakness from Freeman’s theory is that it takes into account the large number of stakeholders with the limited resources of corporations, which is not realistic and practical in real life. The research of Mitchell, Agle & Wood 1997 solved that gap and supported Freeman by helping identify the stakeholders of corporations by 3 attributes including Power, Legitimacy, and Urgency. The more attributes they have, the more priority the company should put for this party. 2. Corporate Governance (CG) The necessity of CG emerges in modern corporations due to the separation of ownership and control issue as one of the corporate characteristics (Humera 2011). CG, in particular, is a mechanism resolving the principal-agent problem as the conflict of interest between stakeholders who own the business and directors and managers who run the business (OECD 1999). As there is no single CG definition, it could be viewed from different perspectives. Therefore, different theories were developed regarding CG to improve its model. Firstly, the Agency theory is

concerned with the relationships between principals as shareholders and agents as the management team (McColgan 2001). From that theory, the interests of shareholders must be served and protected by the agents; also, due to the information asymmetries, the agents or managers always have the opportunistic attitude which could lead to behaviors if not control them (Jensen & Meckling 1976, McColgan 2001). Thus, the board must be designed to be a strong independent one with more outsiders or independent non-executives, and a separate role of CEO and Board chairman (Porta, Silanes & Shliefer 2002). However, the stewardship theory claims that companies need to give managers more power and motivation rather than controlling, monitoring them (Glinkowska & Kaczmarek 2015). As that theory considers managers as the stewards or guardians of the company who help firms overcome the crisis or scandal and not just work for the profits but for achievements or anything else. In that view, the board is designed in a way that has more managers than outsiders and also the role duality (Oliver 1995). Moreover, the Agency theory above is argued by the stakeholder theory that the interest of the whole stakeholders must be included and cared for as they are genuine owners rather than only serving for the interest of small groups as shareholders (Oliver 1995). Therefore, the board is designed in the same way with the agency theory’s implication; however, the members of the board are almost all stakeholders to reflect their interest in the board. 3. Innovation and Sustainability In the digital era and technology-driven economy, the rapid technological growth and the fastmoving demand of consumers have exerted strong pressure for all companies operating in the highly competitive global marketplace to innovate, and the proliferation of platforms was seen as the adaptation of this new environment (Fenwick et al. 2019). In the world of platform, all companies must undergo this transformation, innovate and reinvent as platforms, specifically upgrade capacity for disruptive innovation, which helps achieve sustainable development and ensure to remain relevant in the long-term; otherwise, those firms are destroyed by the current platforms which would continue scaling up into new industries and markets (Fenwick et al. 2019).

III.

Methodology

This paper uses different theories related to the topic of CSR and CG including the theory of Friedman, Stakeholders, Agency and those of the internal means of CG. Also, a range of reliable academic resources has been collected to further analyse and prove those theories of various scholars. Furthermore, Analytical and Qualitative Research techniques are used in that paper for better understanding the aspect of innovation and sustainability, its impact on the CG model, evaluating and analyzing the current CG model of Meta Inc. Those approaches are proper and well-served for deeply analyzing, evaluating the model of CG and suggesting recommendations as the primary goal of the research report.

IV.

Discussion

1. The existing corporate governance model of Meta Inc. The company is implied to follow the Agency theory to design its CG model. As its established governance mechanism focuses much on controlling, monitoring the Management team, it sets clear legal sanctions of violating the rules while giving them incentives to buy their loyalty. Also, with the total of about 23 board members constituted by a large number of independent nonexecutive, this strong and independent board as having more outsiders to control is similar to the implication of the Agency theory. However, the company did not follow the second implication of the theories as still having the role duality when the position of CEO and chairman is held by Mark Zuckerberg only. Based on the theory highlighting the oversight for the Management team, the chairman would not control the CEO as being the same person, thus the CEO has full power to control the business and he would operate free from restraint. The risk of role duality could happen when the extremely powerful CEO having a strong influence on the board could abuse the power, produce unethical behaviors and negatively affect the company. Generally, closely applying Agency theory would help the company increase its CG’s effectiveness in controlling and monitoring the Management team, preventing their opportunistic behaviors and the possible conflict of interest, solving the issue of information asymmetries, improving their performance and maximizing the benefits of the shareholders (Livia & Sardar 2005). However, following strictly to that theory would render the firm just focus on maximizing the profits and ignoring the negative impact to the customers and employees, which could result in unethical behaviors. The

scandal of Enron as having unethical misconduct has been proved for the limitation of strictly following that theory (Brian 2005). 

Ownership Structure

From the identified theory that Meta follows in designing, its existing CG model would be then analyzed deeply with the internal means. Firstly, the company is recognized to have the concentrated ownership structure. It can be seen from the data below that 2 stockholders of Meta holding 7.30% and 5.12% respectively, are defined as the blockholders according to the law and CG theories as holding more than 5% of share (CNN Business n.d.). With this concentrated ownership structure, it helps the company reduce the principal-agent problem. The case study conducted in 927 listed firms having that type of ownership has found that abusing the rights and interest of shareholders or the opportunistic behaviors that could be done by the managers rarely happen in almost all companies (Zhang 2004), as the blockholders who having large portion of shares would try to control the company for their own interest and they do not let the agents or managers run the business themselves. Like the case of Tesla, as the blockholder, Elon Musk not just sits on the board to control the directors but he also becomes the senior manager to run the business by himself. By trying to have a strong influence on the business, the issue of free rider or agency problems could be eliminated, and prevent the managers from having opportunistic behaviors. Also, the strong commitment of shareholders, high-level of their loyalty are found in this type of ownership, and the long-term strategies are developed due to the alignment of interest, as the blockholders would try their best to care for and protect the business (Zhang 2004). On the other hand, the issue of principal-principal or the conflict between small shareholders and blockholders could be arised, as the big shareholders would try to maximize their own interest when running the business and making the decisions. Therefore, small shareholders who are affected much by the big shareholders' decisions would be extremely risky as they would lose their interest and benefits.

Figure 1: Top 10 Owners of Meta Platforms Inc. 

Board of Directors (BOD)

That big tech company as the public one has a large number of board members at around 23-24 people, the size would be periodically reviewed to increase or decrease and fixed by the board's resolution (Meta 2020, Crunchbase n.d.). Particularly, that board is constituted by the majority of the independent non-executive directors who are the group of experts in various fields, neither run the business nor have any connections to the firm’s performance and the minority of executive directors (Ethics & Board 2021). The model demonstrating the relationships between key players of CG is presented below.

Figure 2: Corporate Governance Model

While the circle represents the board as its members are in the same level and have the equal rights to vote, the Management team is defined by the triangle as implying the hierarchy structure or levels of managers. From the model, the small intersection part is a place for the minority of executive directors being both members of the board and the top managers running the business. Also, the largest part of the circle represents non-executive directors, specifically the independent ones in the Meta's case with the annually appointed Lead Independent Director. Different levels of managers not sitting in the board are in the rest of the triangle.

With the outsider-dominated board, that structure plays a key role in the oversight of the management team, making and reviewing the important decisions, helping the firm balance free speech. As its members are specialists from various cultures, professional backgrounds, which would bring out different ideologies, perspectives and have a holistic view that significantly reflects the diverse group of people (Meta n.d.). Also, it would make independent judgement and recommendations in specific areas in the way of fairness. Overall, designing the board in the way that maximizes outsiders reflects the modern corporation, which helps eliminate the issues that always arise between people inside. However, the negative relationship between board independence and firm performance is the limitation of that board type, which is reported to happen in Australia (Grace et al. 1995), America (Baysinger & Butler 1985, Bhagat & Black 2002), and in the emerging market like Bangladesh (Afzalur 2018).

Furthermore, Meta is identified to have the Unitary or one-tier board structure as only having a traditional board that comprise executive and independent non-executive directors rather than stakeholders. The Unitary board allows to fasten the decision-making process, as exchanging,

discussing information would be much easier, flexible and directly. The efficient information flow enables monitoring and counseling, decisions would be made together when both types of directors sit in the same table rather than the long decision-making process of 2 separated boards in the dual structure that could lose several opportunities in the market. Moreover, when the nonexecutive directors sit together with the Management team, they would understand deeply about the current business situations, and that type also requires less administrative burden and could save that cost. On the other hand, the top manager or CEO holding the chairman position could mix the role of monitoring and running the business. The ineffective control CEO causes a common issue in the U.S. that the CEO abuses the power and obscures unethical behaviors of the management team. Also there could be a potential risk of forming a coalition between CEO and outside directors that resist takeovers (David & Guler 2010).

As BOD is the mechanism of CG helping shareholders control directors and managers, facilitate their interests. However, with the Unitary type of board, the issue of abusing the power and producing unethical misconducts caused by top managers happens more frequently compared to the Dual structure. Thus the solution of designing the committees inside the board is mainly driven by that model which could facilitate the role of non-executives directors who find struggle as not running the business to easily monitor the management team. This solution from many scholars and practices were later regulated by the government due to its effectiveness; therefore, several committees including Audit, Remuneration, and Nomination are requirements for the public company’s board to effectively control the management team. 

Board Committees

In the case of Meta, the board currently has 3 standing committees namely Audit & Risk Oversight Committee (A&ROC); Compensation, Nominating & Governance Committee (CN&GC); Privacy Committee (Meta 2020). All these 3 committees are composed of only independent non-executive director type to comply with the applicable legal, regulatory and requirements of stock exchange. From the committees’ members, the role of independent nonexecutive directors is implied to be extremely significant in the CG model of the modern corporation; as not having any connections with the firm, allocating them in almost all

committees could assist the board to perform the responsibilities of oversight and controlling the managers in different functions with transparency. Specifically, A&R...