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Corporate Governance Dilemmas Watchdog vs. Co-Pilot Lecture 2
Role of the Board Watchdog –Observe, and act only if something is amiss –Replace the CEO if necessary Oversees compliance Co-Pilot –Engaged in the discussions and decisions about strategy and execution –Add value based expertise and experience
Minimum Duties of the Board Hire and fire the CEO –Approve Executive Compensation Approve the Strategic Plan –Acquisitions, Divestitures, Capital Structure Oversight for Compliance –SEC reporting requirements –NYSE/NASDAQ listing requirements –Special requirements (e.g., environmental)
Dilemma: Watchdog vs. Co-Pilot Pros Cons
Boards Respond to Circumstances Monitoring, advising, and deciding will be affected by –The company’s financial condition –Size of the business –Business complexity and industry turbulence –Relationship with CEO and top management –Relationship with shareholders Shareholder expectations (e.g., resolutions) Philosophy of the shareholder base –Board dynamics (make-up and culture)
Best Board-Management Combinations Best Companies exhibit –Clearly-stated, focused strategy –Flawless operational execution –Performance-oriented culture –Fast, Flexible, Flat organization
Best Board-Management Combinations At least 2 of the 4 attributes: –Talent: Hold on to talented employees –Leadership: Keep CEO and board members on value-creation –Innovation:Make innovations that are industry transforming –Partnerships: Make growth happen organically and with mergers and partnerships
Corporate Purpose WHAT is the purpose of the enterprise? WHY is the purpose worth achieving? HOW will the purpose be achieved? WHAT are the objectives?
Intel’s Mission Statement Delight our customers, employees, and shareholders by relentlessly delivering the platform and technology advancements that become essential to the way we work and live.
Intel’s Core Values Customer orientation Results orientation Risk taking Great place to work Quality Discipline
Intel’s Objectives Extend our silicon technology and manufacturing leadership Deliver unrivaled microprocessors and platforms Grow profitability worldwide Excel in customer orientation
Johnson Controls’ Mission Statement Continually exceed our customers’ increasing expectations
Johnson Controls’ Values Statement Integrity Customer Satisfaction Diversity and engagement of employees Improvement and Innovation Safety and Environment
Johnson Controls’ Objectives Customer Satisfaction -will exceed customer expectation Technology -apply world class technology Growth -build upon existing businesses Market Leadership -operate where are or have the opportunity to recognized leader Shareholder Value -exceed after tax median return on equity (ROE) of the S&P Industrials
More Governance Dilemmas Stakeholder Perspective –For whose benefit does the enterprise exist? –To what extent are the expectations of all stakeholders being met? –What is the priority among the stakeholders? –Which stakeholder is number #1?
Board Dilemmas-Ken Lay Who should appoint members to the Board? to the Board committees? What should the CEO’s role be in the process? What is meant by independence? What factors drive the size of the board?
Board Dilemmas-Alan Greenspan Is the CEO conflicted in representing the interests of shareholders? When? Who should appoint the outside auditors? Can brokerage firms be both securities underwriters and objective securities evaluators? How do shareholders want to be paid?
Board Dilemmas-Alan Greenspan What is the right balance between short- term earnings focus and long-term earnings focus? What factors affect an auditors decision on how to handle an accounting transaction? Should stock options be expensed? Why? And Why not?
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