1. CHAPTER 2 Corporate Governance
STRATEGIC MANAGEMENT & BUSINESS POLICY 10TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER
Prentice Hall, Inc. © 2006
Prentice Hall 2006

2. Corporate Governance
Prentice Hall, Inc. © 2006
Prentice Hall 2006

3. Corporate Governance
The relationship among the board of directors, top management, and shareholders – determining the direction and performance of the corporation
Prentice Hall, Inc. © 2006
Prentice Hall 2006

4. Corporate Governance Elect Appoint Hire Common Shareholders Board
of Directors
Corporate
Officers
Employees of
the Company
Individuals
Companies
Non-profits
Pensions
Mutual Funds
Dividends
Corporate Affairs
Strategic Plans
Select Officers
Finances
Chief Executive
Chief Financial
Chief Operations
Operations
Finance
Marketing
Personnel
Engineering
The term corporate governance can be used in a broad sense to describe all the policies, procedures, relationships, and systems in place to oversee the successful and legal operation of the enterprise; media coverage tends to define governance in a more narrow sense: as the responsibilities and performance of the board of directors specifically.
Shareholders of a corporation can be individuals, other companies, nonprofit organizations, pension funds, and mutual funds. All shareholders who own voting shares are invited to an annual meeting to choose directors, select an independent accountant to audit the company’s financial statements, and attend to other business.
Representing the shareholders, the board of directors is responsible for declaring dividends, guiding corporate affairs, reviewing long-term strategic plans, selecting corporate officers, and overseeing financial performance. Corporate governance has come under close scrutiny in recent years, with critics and regulators claiming that a number of corporate officials in companies such as Enron and WorldCom have failed to uphold their obligations to shareholders.
The center of power in a corporation often lies with the chief executive officer, or CEO. Together with the chief financial officer (CFO) and the chief operating officer (COO), the CEO is responsible for establishing company policies, managing corporate direction, and making the big decisions that will affect the company’s growth and competitive position.
Employees occupy positions is various departments: for example, operations, finance, marketing, personnel, and engineering.
Prentice Hall, Inc. © 2006
Prentice Hall 2006

5. Evaluate and influence Initiate and determine
Corporate Governance
Role of Board
Monitor
Evaluate and influence
Initiate and determine
by ;
Setting strategic direction
Capital allocation
Succession planning
Prentice Hall, Inc. © 2006
Prentice Hall 2006

6. Board of Directors Continuum
Research suggests that active board involvement in strategic management is positively related to a corporation’s financial performance
Prentice Hall, Inc. © 2006
Prentice Hall 2006

7. Members -- Insiders Outsiders Inside directors Outside 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
Insiders Outsiders
US 2 9
UK 5 5
F 3 8 J
Prentice Hall, Inc. © 2006
Prentice Hall 2006

8. Agency Theory – Stewardship Theory
Objectives of owners & agents in conflict
Difficult for owners to verify agent performance
Owners & agents risk assessment in conflict
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, Inc. © 2006
Prentice Hall 2006

9. When Outsiders can be considered Insiders
Board of Directors
When Outsiders can be considered Insiders
Affiliated Directors
Retired Directors
Family Directors
Prentice Hall, Inc. © 2006
Prentice Hall 2006

10. Board of Directors
Codetermination
The inclusion of a corporation’s employees on its board of directors
Prentice Hall, Inc. © 2006
Prentice Hall 2006

11. Interlocking Directorates
Board of Directors
Interlocking Directorates
Direct Interlocking
Indirect Interlocking
(keiretsu)
Although there is a risk of collusion,
well-interlocked corporations are better able to survive in a highly competitive environment
Prentice Hall, Inc. © 2006
Prentice Hall 2006

12. Nominations & Elections of the members of the board
Board of Directors
Nominations & Elections of the members of the board
Traditional Approach
CEO invitation to membership
Shareholders approval in annual proxy statement
All nominees usually elected
(What if CEO select only the members
who do not disturb her/his policies)
Prentice Hall, Inc. © 2006
Prentice Hall 2006

13. Nominations & Elections
Board of Directors
Nominations & Elections
Staggered Board Approach
Term limits
Age limits
Nominating committees
Prentice Hall, Inc. © 2006
Prentice Hall 2006

14. Organization of the Board
Board of Directors
Organization of the Board
Size
Charter(yetkiler) & Bylaws(tüzükler) Determination
Size:
US 11
Japan 14
Asia
Germany 16
UK 10
France 11
Prentice Hall, Inc. © 2006
Prentice Hall 2006

15. Chairman – CEO . Combined or separate Organization of the Board
Board of Directors
Organization of the Board
Chairman – CEO
Combined or separate
Lead directors
Committees
Prentice Hall, Inc. © 2006
Prentice Hall 2006

16. Sarbanes-Oxley Code of Ethics
Board of Directors
Sarbanes-Oxley
Code of Ethics
Audit, Nominating, and Compensation Committees all outside directors
No loans to corporate officers
Protection for “whistle-blowers”
Increasing number of boards are evaluating not only the performance of the CEO but also the performance of the board in total and that of individual directors
Prentice Hall, Inc. © 2006
Prentice Hall 2006

17. Avoiding Governance Improvements
Board of Directors
Avoiding Governance Improvements
Multiple classes of stocks (super stocks)
Controlled company
Prentice Hall, Inc. © 2006
Prentice Hall 2006

18. Trends in Corporate Governance
Board of Directors
Trends in Corporate Governance
Review & shaping of strategy
Pressure for corporate performance
Demand for executive stock ownership
Outside directors increasing
Impact of Sarbanes-Oxley
Social pressures on environmental issues
Prentice Hall, Inc. © 2006
Prentice Hall 2006

19. Board of Directors
CEO:
Getting things done through and with others in order to meet the corporate objectives
1.Provide executive leadership and strategic vision
2.Manage the strategic planning process
Successful CEO’s
Strategic vision
Passion for the company
Strong communication
charisma
Prentice Hall, Inc. © 2006
Prentice Hall 2006

20. Board of Directors
Executive Leadership
Articulates a strategic vision for the corporation
Presents a role for others to identify with and to follow
Communicates high performance standards
Shows confidence in the follower’s abilities to meet these standards (Transformational Leadership)
Prentice Hall, Inc. © 2006
Prentice Hall 2006

21. 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, Inc. © 2006
Prentice Hall 2006