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CHAPTER 2 Corporate Governance
Prentice Hall 2006
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Corporate Governance The relationship among the board of directors, top management, and shareholders – determining the direction and performance of the corporation Prentice Hall 2006
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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
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Board of Directors Continuum
Prentice Hall 2006
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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
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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
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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
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When Outsiders can be considered Insiders
Board of Directors When Outsiders can be considered Insiders Affiliated Directors Retired Directors Family Directors Prentice Hall 2006
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Board of Directors Codetermination The inclusion of a corporation’s employees on its board of directors Prentice Hall 2006
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Interlocking Directorates
Board of Directors Interlocking Directorates Direct Interlocking Indirect Interlocking Prentice Hall 2006
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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
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Sarbanes-Oxley Code of Ethics
Board of Directors Sarbanes-Oxley Code of Ethics Audit, Nominating, and Compensation Committees all outside directors Prentice Hall 2006
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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
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Transformational leaders
Board of Directors Transformational leaders Change agents through vision for change Prentice Hall 2006
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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
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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
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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
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