Chapter 10: Leading an Ethical Organization:
Corporate Governance, Corporate Ethics, and
Chapter 10: Leading an Ethical Organization: Corporate Governance, Corporate Ethics, and Social Responsibility
10.1 Leading an Ethical Organization: Corporate Governance, Corporate Ethics, and Social Responsibility
10.2 Boards of Directors
10.3 Corporate Ethics and Social Responsibility
10.4 Understanding Thought Patterns: A Key to Corporate Leadership?
10.1 Leading an Ethical Organization: Corporate
Governance, Corporate Ethics, and Social Responsibility
After reading this chapter, you should be able to understand and articulate answers to the following
1. What are the key elements of effective corporate governance?
2. How do individuals and firms gauge ethical behavior?
3. What influences and biases might impact and impede decision making?
TOMS Shoes: Doing Business with Soul
Under the business model used by TOMS Shoes, a pair of their signature alpargata footwear is
donated for every pair sold.
Parke Ladd – Quinn’s new Tom’s – CC BY 2.0.
In 2002, Blake Mycoskie competed with his sister Paige on The Amazing Race—a reality show where
groups of two people with existing relationships engage in a global race to win valuable prizes, with the
winner receiving a coveted grand prize. Although Blake’s team finished third in the second season of
the show, the experience afforded him the opportunity to visit Argentina, where he returned in 2006 and
developed the idea to build a company around the alpargata—a popular style of shoe in that region.
The premise of the company Blake started was a unique one. For every shoe sold, a pair will be given to
someone in need. This simple business model was the basis for TOMS Shoes, which has now given away
more than one million pairs of shoes to those in need in more than twenty countries worldwide (Oloffson,
The rise of TOMS Shoes has inspired other companies that have adopted the “buy-one-give-one”
philosophy. For example, the Good Little Company donates a meal for every package purchased (Nicolas,
2011). This business model has also been successfully applied to selling (and donating) other items such
as glasses and books.
The social initiatives that drive TOMS Shoes stand in stark contrast to the criticisms that plagued Nike
Corporation, where claims of human rights violations, ranging from the use of sweatshops and child labor
to lack of compliance with minimum wage laws, were rampant in the 1990s (McCall, 1998). While Nike
struggled to win back confidence in buyers that were concerned with their business practices, TOMS social
initiatives are a source of excellent publicity in pride in those who purchase their products. As further
338 • MASTERING STRATEGIC MANAGEMENT
testament to their popularity, TOMS has engaged in partnerships with Nordstrom, Disney, and Element
Although the idea of social entrepreneurship and the birth of firms such as TOMS Shoes are relatively
new, a push toward social initiatives has been the source of debate for executives for decades. Issues that
have sparked particularly fierce debate include CEO pay and the role of today’s modern corporation. More
than a quarter of a century ago, famed economist Milton Friedman argued, “The social responsibility of
business is to increase its profits.” This notion is now being challenged by firms such as TOMS and their
entrepreneurial CEO, who argue that serving other stakeholders beyond the owners and shareholders can
be a powerful, inspiring, and successful motivation for growing business.
This chapter discusses some of the key issues and decisions relevant to understanding corporate and
business ethics. Issues include how to govern large corporations in an effective and ethical manner, what
behaviors are considered best practices in regard to corporate social performance, and how different
generational perspectives and biases may hold a powerful influence on important decisions. Understanding
these issues may provide knowledge that can encourage effective organizational leadership like that of
TOMS Shoes and discourage the criticisms of many firms associated with the corporate scandals of the
late 1990s and early 2000s.
McCall, W. 1998. Nike battles backlash from overseas sweatshops. Marketing News, 9, 14.
Nicolas, S. 2011, February. The great giveaway. Director, 64, 37–39.
Oloffson, K. 2010, September 29. In Toms’ Shoes: Start-up copy “one-for-one” model. Wall Street
Journal. Retrieved from http://online.wsj.com/article/SB1000142405274870411
10.1 LEADING AN ETHICAL ORGANIZATION: CORPORATE GOVERNANCE, CORPORATE ETHICS, AND SOCIAL
RESPONSIBILITY • 339
10.2 Boards of Directors
1. Understand the key roles played by boards of directors.
2. Know how CEO pay and perks impact the landscape of corporate governance.
3. Explain different terms associated with corporate takeovers.
The Many Roles of Boards of Directors
“You’re fired!” is a commonly used phrase most closely associated with Donald Trump as he dismisses candidates
on his reality show, The Apprentice. But who would have the power to utter these words to today’s CEOs, whose
paychecks are on par with many of the top celebrities and athletes in the world? This honor belongs to the board
of directors—a group of individuals that oversees the activities of an organization or corporation.
Potentially firing or hiring a CEO is one of many roles played by the board of directors in their charge to provide
effective corporate governance for the firm. An effective board plays many roles, ranging from the approval
of financial objectives, advising on strategic issues, making the firm aware of relevant laws, and representing
stakeholders who have an interest in the long-term performance of the firm (Table 10.1 “Board Roles”). Effective
boards may help bring prestige and important resources to the organization. For example, General Electric’s board
often has included the CEOs of other firms as well as former senators and prestigious academics. Blake Mycoskie
of TOMS Shoes was touted as an ideal candidate for an “all-star” board of directors because of his ability to fulfill
his company’s mission “to show how together we can create a better tomorrow by taking compassionate action
today (Bunting, 2011).”
The key stakeholder of most corporations is generally agreed to be the shareholders of the company’s stock.
Most large, publicly traded firms in the United States are made up of thousands of shareholders. While 5
percent ownership in many ventures may seem modest, this amount is considerable in publicly traded companies
where such ownership is generally limited to other companies, and ownership in this amount could result in
representation on the board of directors.
The possibility of conflicts of interest is considerable
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