1. Chapter 10: Corporate Governance
Key Points:
Chapter 10: Corporate Governance
Understand why corporate governance is needed
Understand the strengths and weaknesses of various governance mechanisms
Understand how managers may counter governance mechanisms
Composition of the board of directors
Inside and outside directors
Experience and expertise of directors

2. Corporate Governance
Corporate governance: the relationship among stakeholders that is used to determine and control the strategic direction and performance of the organization
Interests of management and stockholders often are not aligned (there is an agency problem)
Separation of ownership (risk) and managerial control (decision-making)
Governance mechanisms are used to prevent agents (managers) from acting opportunistically
Examples of managerial opportunism: overdiversification, spending on management perks

3. Governance Mechanisms
Internal Governance Mechanisms
Ownership concentration: number of large-block shareholders and percent of shares they own
Executive compensation
Multidivisional structure (M-form)
Board of directors
External Governance Mechanism
Market for corporate control: threat of takeover if firm is undervalued

4. Actions to Counter Governance Mechanisms
Golden parachute and golden goodbye: guaranteed pay after job loss
Greenmail: money is used to repurchase stock from a corporate raider to avoid a takeover
Poison pill: prevents a takeover even when a majority of shareholders favor the takeover

5. Board Responsibilities
Caring for shareholder interests
Setting corporate strategy
Succession (hiring & firing CEO & top management)
Controlling and monitoring top management
Reviewing and approving use of resources

6. Directors (Board Members)
Insiders: active top-level managers from the firm
Related Outsiders: not current employees of the firm, but have some relationship with the firm
Independent Outsiders: not current employees of the firms and do not have close relationship to the firm or its managers

7. Insiders Outsiders
Advantages
Disadvantages