Corporate Leadership and Change Management - Essay Example

Corporate Leadership and Change Management Introduction Media reports about violations by corporate executives of certain federal or state laws and regulations may make one wonder whether organizations in our society have failed. Some level accusations at the incompetence of organizational or corporate leaders or their lack of high ethical standards. Business ethics are moral principles concerning acceptable and unacceptable behavior by business people and corporate leaders and executives are supposed to maintain a high sense of values and conduct honest and fair practices with the public. At the bottom of these defiance and disregard of proper ethical rules of conduct is the question whether these organizations have a reason to exist at all, and for what purposes do they exist and operate in the society in which we live No matter what one may think, organizations, and particularly corporations, will always be with us as they have been with us for generations. This is because they serve a vital purpose in getting what we want and in enhancing our lives. Instead of feeling aggrieved, what one should do is to help seek ways to improve them to make them more effective tools in serving human needs. Corporations, for one, exist because they enable us to accomplish things that individually we would not be able to do at all; they provide a continuity of learning and knowledge; and they serve as important sources of careers, income, and investments. Corporate businesses have objectives to attain, and they do often accomplish more efficiently and economically what would be difficult or impossible for individuals to achieve. At the same time, they create knowledge and knowhow which can preserved for use of future generations of workers and leaders, or for building upon for greater efficiency in achieving social ends. Finally, they provide workers and employees with a source of livelihood, as well as fulfilling a hierarchy of needs that make us full human persons. Despite the neglect or violation of some corporate people in failing to serve their ethical responsibilities to society, businesses as a group are important and essential in the fulfillment of human needs. Corporate Constituencies A business entity does not operate in a vacuum. In addition to attempting to accomplish the goals of its owners, the stockholders, they have a responsibility to a host of interest groups. Collectively known as stakeholders, they attempt to influence the policies and actions of corporate leaders in a way that would satisfy their demands either fully or partially as a result of compromise. It is true that the corporation operates in an environment where it has to work towards achieving the best return possible on the stockholders’ investment. At the same time, it also has to accept the reality that its freedom to achieve this is constrained by the diverse claims of different stakeholders and interest groups that can either help or hinder the achievement of increased shareholder wealth. These stakeholders and interest groups, consisting of individuals affected by the operations of the business and who possess certain rights, can be aggregated into three classes: Stakeholders of the capital market, stakeholders of the product markets, and stakeholders within the organization. (Hitt, Ireland & Hoskisson 1999) The first group, the capital market, consists of stockholders and providers of capital and loans represented by the financial intermediaries such as banks. The returns expected by this group is related directly to the degree of risk their investments and loans are exposed to, so that they expect that higher returns for higher risks. Poor profitability can cause stockholders to exert pressure on management to change policies and/or strategies, or even to replace top management people. If the lenders are not satisfied with the performance of the business, they may impose stricter conditions on future loans, such as increased interest rates or lower credit limits or shorter terms, and such change can have an adverse impact on the future operational effectiveness and profitability of the corporation On the other hand, the interest groups of product markets consist of the major customers, suppliers, the community in which the business is headquartered, and the labor unions. It is when the company is competitively aggressive that this group is most relevant. Market competition causes prices to be lower for customers and prices to be higher for suppliers to ensure stable supply of goods and services. The communities where the company operates also desire that businesses are long-term contributors to public welfare through the taxes paid without demanding too much from the state in terms of public services and assistance. The labor unions desire stable and remunerative employment for its workers. This group wants the least returns that stockholders and lenders can accept. Often, it is the interests and benefits of the customers that predominate from the viewpoint of top management. Customer satisfaction, to some observers, seems to be the key to achieving all other objectives of interest groups and stakeholders of the organization, most particularly for increasing the returns on investments for shareholders both in the short run and in the long run. The employees, the last group of stakeholders, desire that the company offers a working environment that is dynamic, stimulating, and fulfilling. They would like a company that develops their capabilities as workers and team members and that complies with international employment standards as well as creating a company that can survive robustly and compete effectively in the market to ensure employment stability. In addition, the government, both as dispenser of public goods and as regulators, have a stake in the survival and success of the corporation. It makes sure that the public interest is served at the same time that the business endeavors to obtain optimal returns for its owners. It is clear, then, that there are various stakeholders and interest groups with different objectives and claims that a company’s management must deal with in a balanced manner. In addition, the firm must also deal with external factors such as laws and government rules and regulations. All these are interrelated and therefore a systems approach is essential. A systems approach recognizes the importance of every element in the system; a dysfunction in one or more of these elements can adversely affect the functionality and effectiveness of the organization as a whole. Corporate Decision Making and the Use of Power Authority and power are granted by law to corporations in order to operate and achieve their goals and objectives. Corporate officers work equipped with certain legal and legitimate powers and freedoms allowed by its charter and bylaws as approved by the Securities and Exchange Commission, and by the Constitution and relevant corporate and business laws, in order that it can pursue without undue hindrance its mission, which from the viewpoint of society is a complex hierarchy of goals designed to fulfill the expectations of its stakeholders and publics. They also have to work under certain constraints that limit their power in order to safeguard, protect, and enhance the public interest. As demonstrated by numerous cases adjudicated in our courts, some corporate officers have disregarded certain laws and certain unwritten ethical rules – often to unduly gain direct or indirect personal advantage and to the detriment of the organization’s reputation. Some writers believe that it is inherent in the nature of power to corrupt its holder. As Lord Acton pontificated, “Power corrupts and absolute power corrupts absolutely.” This writer would like to elaborate on this point. As defined by a philosophy dictionary, in its social dimension the power of an individual or institution is the ability to achieve something, whether by right or by control or influence. Power is the ability to mobilize economic, social, or political forces in order to achieve a result. It can be measured by the probability of that result being achieved in the face of various kinds of obstacle or opposition. There is a dark side to the acquisition and exercise of power. Like fire, it can be used for beneficial as well as for harmful purposes. Fire can be used for heating, cooking, energy generating, but it can also be used for destructive arson and death. In the same manner, power can be employed by their possessors to assist others or to achieve ethical objectives, or for selfish ends to benefit themselves or their own interests. It is commonly observed that people who obtain power become so fascinated with its use and the effects they produce that they desire even more. Also their judgments tend to become defective, and consequently they use power unwisely and in ways that can harm others. The intoxication and pleasure of power engenders an addiction and desire for even more power. Empirical studies done by Kipnis (1976) have shown that people thrust into power are unwilling to let go of it and often seek more opportunities to obtain more. Because it is pleasurable and addictive it becomes an end in itself, regardless of how it is exercised, unrelated to any worthwhile goals of improved policy or organizational efficiency, or towards a more humane workplace. For these people, power preempts and sidelines ethical concerns, learning and intellectual development, love of others, and drive for efficient functioning. Cloudy judgment that results causes these people to tread on the grey areas of the law or of commonly accepted ethical standards. Often it is not the remunerative aspects of power that prevails but the ability to hurt their enemies, such as using their influence on government departments to persecute individuals they have grudges against. Power holders do not relish negative information and they tend to be surrounded by flatterers and yes-men, a situation which they like and foster. Negative feedback would interfere with their power intoxication and pleasure. Since they do not receive negative information, even constructive criticism which they misinterpret as a challenge to their authority, they come to believe that everything is alright within themselves and within their organization and consequently their decisions become unrealistic and prone to errors. Thus a corporate executive can become so egomaniacal that his judgment about his company’s competitiveness can suffer, or he can decide to carry out shortcuts that flaunt the law, to the discredit and detriment of his company. People intoxicated with power also tend to claim credit for the success of an enterprise effort attributable to subordinates, and to wash their hands on efforts that fail. Kipnis’s research on the use and abuse of power has led him to arrive at the following transformational effects on the power holders: 1 The use of power is intoxicating and pleasurable. 2 The power holder puts efforts into achieving more power. 3 The judgment of the powerful person becomes cloudy due to a preoccupation with gaining influence and control. 4 The powerholder uses the resources for self-benefit. 5 Negative feedback is no longer available from subordinates, and instead the powerholder is the beneficiary of flatter. 6 The powerholder develops a lofty view of his or her own self-worth 7 The worth of subordinates is devalued by the powerholder. 8 The power holder takes to much credit for the accomplishments of subordinates. Effective leaders know intuitively that Lord Acton was right, and strive to manage and check the intoxication that power brings. They know that in order to achieve organization goals, there is a need for correct, and often negative, information to be included in the deliberation and decision making process. This can be done by asking people to object and to develop alternative or worst-case scenarios of proposed policies or to play the role of a devil’s advocate. Provided subordinates can trust the process and not fear that they will be undermined career-wise for assuming such roles, the organization can make positive improvement in its ability to deal with competition and to advance its profitability in the long run. In short, power must be used in a responsible way, and its intoxicating effects controlled and sublimated to serve the overarching interests of the corporation. This requires that executives be warned of the unfavorable psychological effects of power, that the abuse of power can be dysfunctional in the pursuit of organizational goals.. This is particularly true when the executive makes a decision that will have negative repercussions on his company’s image before its constituencies and publics. There is no area in the corporate leadership that needs more clearheaded thinking than in the attitudes and policies of the management with regard to its environment. First of all, the business environment is classified into task environment, societal environment, and internal environment. The task environment includes the stockholders, employees, labor unions, suppliers, financiers, consumers, the community, and governments. The societal environment encompasses the economic, socio-cultural, technological, geographic, and even the global environment. The internal environment pertains to the firm itself, its resources and capabilities (strengths and weaknesses). While the firm tends to focus on the threats and opportunities in its environment in relation to its capabilities and resources to deal with them, it is the more immediate task environment that the executive is more concerned about - the stockholders, the suppliers, the consumers, the workers and labor unions, the governments, and the community and society in which it operates. This is so because the survival and long-term profitability of the business depends on how management adjusts dynamically to continual changes, and makes proactive decisions, in the landscape of its task environment. A critical aspect of the task environment is the community and society in which the firm operates. The firm does not only provide employment and some degree of job security to workers but also it must be a good customer to its suppliers, a good provider of goods and services to its customers, a reliable customer to its suppliers, and manifest concern to its stockholders through its performance in its market. It must also a good corporate citizen and beneficial member of the community and society, a conscientious taxpayer, and obeys federal and state laws and regulations. In order words, it must be able to demonstrate its corporate social responsibility. The Concept of Corporate Social Responsibility There are many definitions of corporate social responsibility, but in general, according to Buchholz (1992), the concept means that a private corporation has responsibilities to society that go beyond the production and sale of goods and services at a profit – that the corporation has a broader constituency than the stockholders alone. Further, the corporation relates to society through more than just the marketplace and serves a wider range of human values than the traditional economic values that are dominant in the marketplace. The concept means that corporations are more than just economic institutions and have a responsibility to help society solve some of its most pressing social problems, many of which corporations helped to cause, by devoting some of their resources to the solution of these problems. The concept of social responsibility emerged in the 1960s when society was beginning to change its perception of the role of business, a departure from the old social contract based on Adam Smiths theory of the invisible hand whereby it was believed that the needs of society were best met when businesses looked after their own interests in seeking profits -- a social contract based on the view that the pursuit of wealth in a free enterprise system was the source of all economic and social progress. The purpose of businesses was to produce and sell goods and services at a profit, making their maximum contribution to society in this manner as their interpretation of being socially responsible. The new contract to which society wanted businesses to agree was based on the view that in pursuing economic gains, businesses produced some detrimental side effects that resulted in social costs to some segments of society or the society as a whole. Social progress did not always or automatically result from the operations of businesses, but in some cases they produced negative externalities – such as environmental pollution and degradation, exposure of workers and consumers and nearby residents to toxic substances, unsafe workplaces, discrimination against certain classes of community members, and others. Society wanted to impress upon businesses that it was their duty to minimize or reduce these harmful effects, that in addition to pursuing profits, it was their obligation to be conscious of the economic and social impacts of their activities and consequently to act in a responsible fashion. The concept of social responsibility is based on ethical concepts and principles. It was believed that businesses had a duty not only to obtain good returns for their owners but also to deal with social problems and to contribute to human welfare and the quality of life in the communities where they serve. Arguments for Corporate Social Responsibility Because there has been a change in society’s perception and expectation about the role of businesses, it is incumbent upon the latter to adjust to such change. Businesses owe their existence and continued viability to the society and the government that gave them the right and license to operate in the interest of the holders of capital. Because the business sector would be powerless to change the tide of perceptions and attitudes, it has no choice but to accommodate themselves to this transformation in the social environment. Businesses have to work congruently with the new expectations of society. Another argument in favor of corporate social responsibility is that while short-term expenditures addressed to alleviate social problems may affect short term profitability, it is in the enlightened self-interest of business to take the long-term view. By creating an environment that serves the interest and welfare of society, it would thus produce environmental conditions that would be favorable for business survival and continued profitability over the long run. The consequences of neglect to deal with social problems would be the deterioration of the environment and difficulty in gaining access to resources that businesses need. In short, the corporation can only have greater opportunities to grow where it operates in a society that is healthy, thriving, and prosperous. In his defense of corporate social responsibility, philosopher Almeder (1988) stated quite emphatically that by addressing social concerns directly, businesses would be able to avoid government regulation. Social issues and expectations go through a certain sequential process wherein if a business fails or refuses to respond to social expectations, the expectations will be taken up by the political system and find their way into the legislative agenda, which can progress into law or government regulation to force their compliance and the exaction of penalties for violators. In this scenario, the restrictions and constraints imposed on them would be possibly more severe and restrictive than if they had promptly and directly addressed the relevant social issues. The best strategy for businesses would therefore be to preempt the process and respond early enough to meet such social expectations and thus obviate the promulgation of government laws, rules, and regulations. A better public image would also be engendered if a company is responsive to social issues. This would mean more customers, more sales and revenues, better employees, better valuation of the company’s shares in the stock market, and better, unhindered access to the capital markets when intending to raise funds for expansion. Thus a company with a good social image gains a competitive advantage over rivals who are not socially responsible. A concept which is common in corporate environment is the balancing of power and responsibility. Where more power than responsibility dwells in an individual or entity, the situation is likely to lead to the irresponsible use of power. If a business avoids its social responsibilities, such power can be curtailed or taken away by other groups and institutions such as the government. An argument anchored on the strengths possessed by corporate entities is the presence of resources and pool of talent and technology that a business possesses and which can be utilized for the purpose of helping solve social problems. A culture of innovation and efficiency obtains in many corporate organizations. If these resources and capabilities can be tapped directly to help address real social problems, society can benefit tremendously and more efficiently than the government can. If businesses can look into areas of poverty and deprivation and address the issue of social exclusion in some geographical areas or urban segments and locate their businesses there, they would be able to address both private objectives of profit making and social problem solving at the same time. For example businesses can locate in areas where there is much unemployment or juvenile delinquency or they could utilize waste materials as opportunities to create products than can be processed and sold for profit. There is no doubt that businesses create or leave negative impacts through their operations. Therefore, it is their moral duty to solve those problems that they have created, such air and water pollution, unsafe workplaces and working conditions that affect the health and safety of workers, discrimination against certain individuals through their hiring and promotion practices, and so on. These problems cannot be left to the communities or the government alone to solve. Arguments against Corporate Social Responsibility A fundamental objection to the concept of Corporate Social Responsibility is the lack of precise definition that is acceptable to all. There is a great deal of confusion and fuzziness about what it means and what it consists in. The market mechanism does not help in determining corporate social responsibility because it has no relevance to the provision of public goods and services, nor does it help the corporate manager in determining what social problems to address because there is no money to be made from solving pollution problems or applying affirmative action, and others. Hence there is nothing to regulate or guide the decision making process for managers, who must then act on their own There is no accountability for decision taken to address and solve social problems because the market mechanism is not applicable, and the private decision makers are not publicly accountable, not being elected officials. According to the economist Milton Friedman (1988), the manager is responsible to the owners of the business, namely, the stockholders, and their decisions and action should be guided by the principle that their principal mission is to maximize returns for the equity investors. By acting on their own, decision makers, in spending the resources of the corporation to address social problems, would be compelled to raise their prices in the market and thus lose their competitiveness. According to Friedman, the manager is just a salaried employee of the owners and is legally bound to earn the highest return for the stockholders while staying within the rules of the game. Managers also do not have the expertise to solve social problems and cannot be as effective as other institutions which have more experience in dealing with those kinds of problems. Another objection is the concept is a fundamentally moral one, and corporations are not moral agents that can act for moral reasons. The implication of managerial involvement in social problem solving is that the free enterprise system would be compromised or undermined. It would also mean that the consumers, minorities, environmentalists would have to be represented in the boards of the corporations and the decision making would become political, no longer economic in nature. Power, Leadership, and Corporate Decision Making Earlier in this paper we discussed the psychological effect of the acquisition and possession of power, its tendency to corrupt its holders. We also mentioned that a leader can be distinguished from the power-addicted individual by his willingness to welcome opposite views, objections, and alternatives, and the role of a devil’s advocate. It is for the long-term interest of an organization to allow a diversity of ideas and opinions in the consideration of problems and issues, the willingness to brainstorm alternatives solutions to problems. The corporation also needs to have a diversity of views at the highest levels in making decisions concerning operational and corporate strategy. There is a clamor for more independent board members, and many corporations attempt to have more independent members in their boards. The board which is thus represented would be able, it is believed, to protect and safeguard the long-term interests of the organization. Such a board would serve to countercheck on the possible abuse of power of the management team and executives, misdirected policy actions, and guide the long-term strategic direction of the enterprise. Janis and Mann (1977) advanced their views on Groupthink and how decision makers can avoid it and its deleterious consequences. The fiasco of the Bay of Pigs invasion by the late President Kennedy and even the decision of President George W. Bush to invade Iraq are cited as illustrative case examples of the distortion that can affect group decision making. The Small Business Encyclopedia describes Groupthink as follows: “Groupthink occurs when the pressure to conform within a group interferes with that group’s analysis of a problem and causes poor group decision making. Individual creativity, uniqueness, and independent thinking are lost in the pursuit of group cohesiveness, as are the advantages that can sometimes be obtained by making a decision as a group—bringing different sources of ideas, knowledge, and experience together to solve a problem. Psychologist Irving Janis defines groupthink as: “a mode of thinking people engage in when they are deeply involved in a cohesive in-group, when the members’ striving for unanimity override their motivation to realistically appraise alternative courses of action. Groupthink refers to a deterioration of mental efficiency, reality testing, and moral judgment that results from in-group pressures.” It can also refer to the. ." It can also refer to the tendency of groups to agree with powerful, intimidating bosses.” To avoid Groupthink, Janis (1977) suggests the use of good meeting procedures including the formulation of an agenda, allow the presentation of competing views, a list of options and preliminary recommendations which will have to be reviewed for logic and correctness. In addition, the leader must act as a statesman, clearheaded and temperate and foster work through others instead of favoring a certain view and using or projecting an aura of intimidation to subordinates. More procedural details are contained in his book which cannot, for space constraint, be included in this paper. Conclusions While the free enterprise system that Milton Friedman and his ilk support advocates the principle that serving the shareholders’ interest is the way to serve the larger society, enlightened self-interest dictates that the shareholders’ interest is best served by serving the larger society. The concept of corporate social responsibility posits the view that it is by serving the larger society directly that the larger society is best served. It is perhaps the middle view, enlightened self-interest, that corporate leaders are more inclined to accept as representing what they do when attempting to deal with social issues. However, the distinction between this and that of corporate of social responsibility as described above is not often made. It is important for a corporation to be clearheaded when grappling with the issue of whether its corporate mission is being served by an overall strategy that involves supporting programs under the rubric of corporate social responsibility. If managerial decision making is not tainted with dominance and intimidation by a power-addicted executive, and if group decision making is not distorted by Groupthink and its associated harmful consequences, it is possible for a corporation to chart its course prudently and dynamically in the direction that serves both the interest of society and the goals of the corporation in a balanced, optimal manner. It is possible that the accomplishment of social goals will have a supportive influence in the achievement of the goals that the stockholders consider of primary importance. While a considerable amount of controversy have emerged from the concept of corporate social responsibility, and some studies have been inconclusive about the impact of such programs on the corporate viability and profitability, still there is some evidence that serving social goals would not necessarily be negative; they may in fact be necessary for the sustenance of the corporate mission that serves all the stakeholders, particular its investors, in an optimal way. On the other hand, the non-responsiveness of companies to their ethical responsibilities towards society can have considerable long-run negative repercussions. Consider the following cases narrated in Jennings (1997): Case 1. When the Tylenol capsules were found to have been tainted with a deadly poison, its manufacturer, a subsidiary of Johnson & Johnson, recalled all 31 million bottles of Tylenol in the market worth $100 million, a decision that was then considered a disastrous mistake. After the replacement of the drug with a non-capsule tablet, Tylenol regained its majority share of the market. The decision enhanced the company’s reputation and served to create a bond between the product and its customers, based largely on the trust and respect for the integrity of the company and of the product. Case 2: In 1992 Sears experienced a reduction in earnings when official complaints of overcharging of repairs elicited an investigation by the California Consumer Affairs Dept. While Sears took restorative action and ran full-page ads assuring customers that situation was now different and that customers could continue to trust Sears, still the reputation of Sears suffered long-lasting damage and its income fell. While there are other examples, these two serve to demonstrate the importance of ethical practices of businesses, and that corporate social responsibility spring from ethical principles that they practice. In a survey made by the Ethics Resource Center in Washington, D.C. of 21 companies that had written codes of ethics, it was discovered that an investment of $30,000 would have become $1.02 million after 30 years. A comparison with a Dow Jones composite company showed that the latter’s value would have been a minuscule $134 thousand today. Adherence to good business ethics, a basic premise of corporate social responsibility, makes extremely good business sense. It is important, therefore, that the corporation demonstrate through its explicit policies as well as through its actions that it is socially responsible and that it practices good corporate citizenship. 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