Chapter 19 Prepared by Deborah Baker Texas Christian

Chapter 19 Prepared by Deborah Baker Texas Christian University Chapter 19 -1 § OWNER STAKEHOLDERS and CORPORATE GOVERNANCE BUSINESS & SOCIETY Ethics and Stakeholder Management Carroll & Buchholtz 6 e Business and Society: Ethics and Stakeholder Management, 6 e • Carroll & Buchholtz Copyright © 2006 by South-Western, a division of Thomson Learning. All rights reserved

Chapter 19 Outcomes 1. Link the issue of legitimacy to corporate governance. 2. Identify the best practices that boards of directors can follow. 3. Identify the major changes in boards of directors that have been employed to improve corporate governance. 4. Discuss the principle ways shareholder activism is exerting pressure on corporate management groups to improve governance. Chapter 19 -2

Chapter 19 Outcomes (continued) 5. Summarize the issues surrounding compensation of the CEO. 6. Discuss the problems that have led to the recent spate of corporate scandals and the efforts that are currently underway to keep them from happening again. Chapter 19 -3

Chapter 19 Outline § § § Chapter 19 -4 Legitimacy and Corporate Governance Improving Corporate Governance Summary

Components of Corporate Governance State Charter Shareholders Board of Directors Management Employees Chapter 19 -5

Improving Corporate Governance Sarbanes-Oxley Act of 2002 § § Limits the nonauditing services an auditor can provide § Makes it unlawful for accounting firms to provide services where conflicts of interests exist Requires auditing firms to rotate the auditors working with specific companies Chapter 19 -6

Improving Corporate Governance Sarbanes-Oxley Act of 2002 (continued) § Enhances financial disclosure with requirements, such as: § reporting off-balance sheet transactions § prohibiting personal loans to executives and directors § requiring auditors to assess and report upon internal controls § § Audit committees must have at least one financial expert § § Whistle-blowers are afforded protection CEOs and CFOs certify and are held responsible for financial representations Code of ethics disclosure Chapter 19 -7

Improving Boards and Board Members Building a Better Board § § § Define the role the board intends to undertake Be explicit about their financial goals Widen the talent pool for directors Encourage constructive dissent Divide and delegate work to promote deeper analysis Being a Better Board Member § § § Chapter 19 -8 Be willing to change management Be willing to do lots of homework Control the flow of information Meet outside of the CEO’s sphere Don’t sacrifice performance for collegiality

Selected Key Terms § Accounting Reform and Investor Protection Act of 2002 § § § agency problems § corporate governance Chapter 19 -9 audit committee board of directors charter compensation committee § § § § § employees full disclosure golden parachutes inside directors insider trading legitimacy legitimation management nominating committee

Selected Key Terms (continued) § § § § ordinary business decisions outside directors personal liability poison pill Private Securities Litigation Reform Act of 1995 proxy process public issues committee Chapter 19 -10 § § § § public policy committee risk arbitrage Sarbanes-Oxley Act shareholder activism shareholder lawsuits shareholder resolutions shareholders transparency