2. © 2005 by Nelson, a division of Thomson Canada Limited. 1 Owner Stakeholders and Corporate Governance Search the Web AFL-CIO sponsors PayWatch. A web site that tracks CEO pay and perks. For more information see: http://www.aflcio.org/paywatch

3. © 2005 by Nelson, a division of Thomson Canada Limited. 2 Chapter Eighteen Objectives Link the issue of legitimacy to corporate governance Discuss the components of corporate governance and the challenges to “good governance” Describe the general obstacles to achieving properly functioning boards of directors Identify controversies associated with CEOs and boards of directors Explain major changes in boards of directors required to improve corporate governance Discuss the principal ways in which shareholder activism exerts pressure on corporate management

4. © 2005 by Nelson, a division of Thomson Canada Limited. Chapter Eighteen Outline Legitimacy and Corporate Governance Improving Corporate Governance Summary

5. © 2005 by Nelson, a division of Thomson Canada Limited. Introduction to Chapter Eighteen The chapter focuses corporate governance and the way it has evolved, by examining the concept of legitimacy and the part that corporate governance plays in establishing the legitimacy of the firm.

6. © 2005 by Nelson, a division of Thomson Canada Limited. Legitimacy and Corporate Governance Legitimacy is a condition wherein there is a congruence between an organization’s activities and society’s expectations. Legitimation is a dynamic process to perpetuate acceptance.

7. © 2005 by Nelson, a division of Thomson Canada Limited. Legitimacy and Corporate Governance Micro Level of Legitimacy Adapt operational methods to societal expectations Attempt to change these expectations or norms to a firm’s practices Seek to enhance its legitimacy by having a powerful legitimate base in society

8. © 2005 by Nelson, a division of Thomson Canada Limited. Legitimacy and Corporate Governance Macro Level of Legitimacy Focus is on business as a whole Subject to ratification –No inherent right to exist

9. © 2005 by Nelson, a division of Thomson Canada Limited. Legitimacy and Corporate Governance Issue of corporate governance Components of corporate governance –Roles of Four Major Groups –Separation of Ownership from Control

10. © 2005 by Nelson, a division of Thomson Canada Limited. Legitimacy and Corporate Governance 1 2 3 4 The Four Groups

11. © 2005 by Nelson, a division of Thomson Canada Limited. Legitimacy and Corporate Governance Separation of Ownership From Control Intended roles Actual roles

12. © 2005 by Nelson, a division of Thomson Canada Limited. Legitimacy and Corporate Governance Ineffective boards –Rubber stamp boards –CEO dominated boards –Conflict of interest boards Effective boards –Address issues listed above –Use outside directors

13. © 2005 by Nelson, a division of Thomson Canada Limited. Legitimacy and Corporate Governance Criticism of CEO self-interest still continues after executive earnings became an issue in the ’80s and ’90s and companies still try to link pay to such performance measures as the stock market. Recent research, however, shows that attempts to tightly control CEOs can have dysfunctional consequences. Some corporations, such as Disney, that are dominated by its CEOs, have been highly profitable while having relatively weak boards of directors. The CEO: Pay vs. Performance

14. © 2005 by Nelson, a division of Thomson Canada Limited. Legitimacy and Corporate Governance Consequences of Mergers, Takeovers and Acquisitions Greenmail Poison pill Golden parachutes Insider trading scandals

15. © 2005 by Nelson, a division of Thomson Canada Limited. Improving Corporate Governance Changes in boards of directors –Appointing “outside” directors that monitor management more carefully. Use of stronger board committees – Establish audit, nominating, compensation, and public issues committees. Board should “get tough” with the CEO – demand accountability

16. © 2005 by Nelson, a division of Thomson Canada Limited. Improving Corporate Governance Increased Role for Shareholders Shareholder initiatives –Rise of shareholder activists –Filing of shareholder resolutions Shareholder lawsuits Canada Business Corporations Act (CBCA) Increased activism at corporate annual meetings

17. © 2005 by Nelson, a division of Thomson Canada Limited. Improving Corporate Governance Corporate Initiatives Full disclosure issue Corporate takeover issue –Candour in public statements on the offer made –Full disclosure of all information –Absence of undue pressure –Sufficient time for shareholders to make considered decisions

18. © 2005 by Nelson, a division of Thomson Canada Limited. Agency problems Audit committee Board of Directors Charter Compensation committee Corporate governance Employees Full disclosure Golden parachutes Greenmail Inside directors Insider trading Legitimacy Management Nominating committee Selected Key Terms

19. © 2005 by Nelson, a division of Thomson Canada Limited. Selected Key Terms (cont’d) Outside directors Poison pill Proxy process Public issues committee Public policy committee Separation of ownership from control Shareholder activism Shareholder resolutions Shareholders