CHAPTER 2 Corporate Governance 1 Corporate Governance The

CHAPTER 2 Corporate Governance 1

Corporate Governance The relationship among the board of directors, top management, and shareholders – determining the direction and performance of the corporation 2

Corporate Governance Role of Board –Monitor –Evaluate and influence –Initiate and determine 3

Board of Directors Continuum 4

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 5

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 6

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. 7

Board of Directors When Outsiders can be considered Insiders –Affiliated Directors –Retired Directors –Family Directors 8

Board of Directors Codetermination –The inclusion of a corporation’s employees on its board of directors 9

Board of Directors Interlocking Directorates –Direct Interlocking –Indirect Interlocking 10

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 11

Board of Directors Sarbanes-Oxley –Code of Ethics –Audit, Nominating, and Compensation Committees all outside directors 12

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 13

Board of Directors Transformational leaders –Change agents through vision for change 14

Board of Directors Successful CEO’s –Strategic vision –Passion for the company –Strong communication –charisma 15

Board of Directors Executive Leadership –Strategic vision –Role model –Communication of performance standards –Demonstrates confidence in abilities of followers 16

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 17