CHAPTER 2 Corporate Governance Prentice Hall 2006

Corporate Governance The relationship among the board of directors, top management, and shareholders – determining the direction and performance of the corporation Prentice Hall 2006

Role of Board Monitor Evaluate and influence Initiate and determine Corporate Governance Role of Board Monitor Evaluate and influence Initiate and determine Prentice Hall 2006

Board of Directors Continuum Prentice Hall 2006

Members -- Inside directors Outside directors “management directors” Board of Directors Members -- Inside directors “management directors” Officers or execs employed by the firm Outside directors “non-management directors” Execs of other firms not employed by the board’s corporation Prentice Hall 2006

Agency Problem – Risk Sharing Problem – Agency Theory Agency Problem – Objectives of owners & agents in conflict Difficult for owners to verify agent performance Risk Sharing Problem – Owners & agents risk assessment in conflict Prentice Hall 2006

Stewardship Theory Executives more motivated to act in best interest of the corporation than their own self-interests. Theory that over time, senior executives tend to view corporation as extension of selves. Prentice Hall 2006

When Outsiders can be considered Insiders Board of Directors When Outsiders can be considered Insiders Affiliated Directors Retired Directors Family Directors Prentice Hall 2006

Board of Directors Codetermination The inclusion of a corporation’s employees on its board of directors Prentice Hall 2006

Interlocking Directorates Board of Directors Interlocking Directorates Direct Interlocking Indirect Interlocking Prentice Hall 2006

Nominations & Elections Board of Directors Nominations & Elections Traditional Approach CEO invitation to membership Shareholders approval in annual proxy statement All nominees usually elected Staggered Board Approach Staggered terms of service/election Prentice Hall 2006

Sarbanes-Oxley Code of Ethics Board of Directors Sarbanes-Oxley Code of Ethics Audit, Nominating, and Compensation Committees all outside directors Prentice Hall 2006

Corporate Governance Review & shaping of strategy Board of Directors Corporate Governance Review & shaping of strategy Pressure for corporate performance Demand for executive stock ownership Outside directors increasing Impact of Sarbanes-Oxley Prentice Hall 2006

Transformational leaders Board of Directors Transformational leaders Change agents through vision for change Prentice Hall 2006

Successful CEO’s Strategic vision Passion for the company Board of Directors Successful CEO’s Strategic vision Passion for the company Strong communication charisma Prentice Hall 2006

Executive Leadership Strategic vision Role model Board of Directors Executive Leadership Strategic vision Role model Communication of performance standards Demonstrates confidence in abilities of followers Prentice Hall 2006

Strategic Planning Staff Strategic Management Process Strategic Planning Staff Supports top management & business units in the strategic planning process Identify & analyze company-wide strategic issues Generate strategic alternatives Facilitate business units in coordinating activities related to strategic planning process Prentice Hall 2006