CORPORATE MANAGEMENT in ACTION Sessions 5 & 6. Corporate Governance CORPORATE MANAGEMENT IN ACTION - CMA 1

Chapter Objectives Sessions 5 & 6. Corporate Governance Define Corporate Governance Explain the role of Board of Directors (BOD) Describe the members of BOD Identify the relation of BOD with other stakeholders CORPORATE MANAGEMENT IN ACTION - CMA 2

Corporate Governance Definition the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. Role of Corporate Governance Manage stakeholders’ interests Determine and control the strategic direction and performance of the organization Varying roles Argumentative position? CORPORATE MANAGEMENT IN ACTION - CMA 3

Corporate Governance Mechanisms  Ownership and professional management  Board of Directors  Executive compensation  External authorities (ex: SEC: Securities and Exchange Commission – USA, SEBI: Securities and exchange board of India)  No mechanism remains unchanged over a period of time CORPORATE MANAGEMENT IN ACTION - CMA 4

Corporate Governance Ownership Influence  Ownership and control: separation likely in large public corporations  Varying degrees of control by family members  Optimum level of ownership and professional management  Growing importance of institutional investors  Agency relationships and avoiding conflict  Inherent interest in diversification CORPORATE MANAGEMENT IN ACTION - CMA 5

Corporate Governance Role of External Agencies i. Pros  Governance by legal bodies  Investor confidence  Growing stock markets ii. Cons  “Hindrance to diversification and risky strategies”  Reduce shareholder wealth CORPORATE MANAGEMENT IN ACTION - CMA 6

Board of Directors (BOD) Nature of BOD BOD acts as a representative of the stake holders or shareholders “Oversees” the actions and plans of the corporation Corporate governance describes the relationship between the management, shareholders and the Board of Directors CORPORATE MANAGEMENT IN ACTION - CMA 7 Role of BOD Monitoring Evaluating and Influencing Initiating

Board of Directors (BOD) Involvement of BOD Phantom Rubber Stamp Minimal Review Nominal Participation Active Participation Catalyst CORPORATE MANAGEMENT IN ACTION - CMA 8 ACTIVITYACTIVITY

Board of Directors (BOD) Responsibilities Setting corporate strategy, overall direction, mission or vision Succession and appointment of new CEOs Controlling, monitoring and supervising top management Reviewing and approving resources Caring for stockholder interests Differs from country to country, and depends on a country’s laws World wide consensus on responsibilities. Legally, BOD must act with due care to direct the affairs of the corporation, but not to manage them CORPORATE MANAGEMENT IN ACTION - CMA 9

Board of Directors (BOD) Members Inside directors (CEO, COO, CFO, …) Outside directors Independents Women Directors, Minorities Affiliates Non-executive Directors Lead Director Interlocking (multi-task) CORPORATE MANAGEMENT IN ACTION - CMA 10

Board of Directors (BOD) Chief Executive Officer - CEO Executes BOD decisions Monitors strategic planning and implementation Represents BOD and acts on its behalf CEO pay and compensation tied to the fundamental governance process? Long term incentive plans Limitations in international operations Role: Complex and contentious CORPORATE MANAGEMENT IN ACTION - CMA 11

Corporate Control… Undervalued companies are threatened with takeovers Strategic diversification or corporate control? Hostile take overs: Kraft/Cadbury’s “Cadbury’s Fears: Cadbury’s shareholders had a number of valid reasons to be extremely weary of Kraft’s persistent interest in the company. In fact, it was not just the shareholders themselves whom expressed opposition to the bid. Employees, the unions and even British MP’s had all also exerted their deep concerns on the issue over fears of factory closures, job losses and loss of organization culture and values. “ acquisition-unfinished/ CORPORATE MANAGEMENT IN ACTION - CMA 12