Chapter 2
Corporate Governance and Social Responsibility
PowerPoint Slides [Link] Kumar Skyline College
Corporate Governance
Refers
to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation.
Responsibilities of the Board of Directors
Setting corporate strategy, overall direction, mission or vision Hiring and firing the CEO and top management Controlling, monitoring, or supervising top management Reviewing and approving the use of resources Caring for shareholder interests
Board of Directors
Role of the Board in strategic management
Monitor
Developments inside and outside the corporation
Evaluate & Influence
Review proposals, advise, provide suggestions and alternatives
Initiate & Determine
Delineate corporations mission and specify strategic options
Board of Directors Continuum
DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT Low (Passive) Phantom Rubber Stamp Permits officers to make all decisions. It votes as the officers recommend on action issues. Minimal Review Formally reviews selected issues that officers bring to its Nominal Participation Involved to a limited degree in the performance or review of selected key decisions, indicators, or programs of management. Active Participation Approves, questions, and makes final decisions on mission, strategy, policies, and objectives. Has active board committees. Performs fiscal and management audits. Catalyst Takes the leading role in establishing and modifying the mission, objectives, strategy, and policies. It has a very active strategy committee.
High (Active)
Never knows what to do, if anything; no degree of involvement.
Board of Directors
Members:
Inside directors
Management directors Officers or executives employed by corporation
Outside directors
Non-management directors May be executives of other firms but not employed by boards corporation
Agency Theory
Problems arise in corporations because the agents (top management) are not willing to bear responsibility for their decisions unless they own a substantial amount of stock in the corporation.
Stewardship Theory
Executives tend to be more motivated to act in the best interest of the corporation than their own self-interests. Theory argues that over time, senior executives tend to view the corporation as an extension of themselves.
Board of Directors
Outsider overly simplistic term -Some outsiders are not truly objective and could be considered insiders. Examples:
Affiliated Directors Retired Directors Family Directors
Board of Directors
Codetermination
The
inclusion of a corporations workers on its board of directors.
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Board of Directors
Interlocking Directorates
Direct Interlocking Directorate
When
two firms share a director or when an executive of one firm sits on the board of a second firm. two corporations have directors who also serve on the board of a third firm.
Indirect Interlocking Directorate
When
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Board of Directors
Nominations & Elections
Staggered Board Approach
Corporations whose directors serve terms of more than one year, divide the board into classes, and stagger elections so that only a portion of the board stands for election each year.
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Board of Directors
Nominations & Elections
Traditional Approach:
CEO
invites members to serve Shareholders approve in annual proxy statement All nominees are usually elected
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Board of Directors Nominations & Elections Criteria for Selection
Wiling to challenge management Special expertise Availability for advice and meetings Expertise on global issues Understands key technologies External contacts valuable to the firm Detailed knowledge of industry High visibility in field Accomplished in representing firm to stakeholders
Board of Director Membership
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Board of Directors
Organization of the Board
Size
Determined by charter and bylaws Average for publicly-held, large firm is 11 directors Average for small/medium private firms is 7 to 8 directors
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Board of Directors
Lead Director
This person is consulted by the Chair/CEO regarding board affairs and coordinates the annual evaluation of CEO.
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Board of Directors
Trends in Corporate Governance
Boards more involved in reviewing, evaluating, and shaping strategy Institutional investors active on boards; pressure on CEO for firm performance Shareholders demand directors own more than token amounts of the firms stock Non-affiliated outside directors increasing
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Board of Directors
Trends in Corporate Governance
Boards becoming smaller Boards taking more control of board functions Corporations becoming more global; international experience needed Societal expectations that boards balance profitability and social responsibility Diversity of board members
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Top Management
Primary Responsibilities of Top Management
1. Provide executive leadership and a strategic vision 2. Manage the strategic planning process
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Top Management
Executive Leadership
The directing of activities toward the accomplishment of corporate objectives. Sets the tone for the entire corporation.
Strategic Vision
A description of what the company is capable of becoming. Often communicated in the mission statement.
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Top Management
CEO and Clear Strategic Vision
Common Characteristics CEO articulates a strategic vision CEO presents a role for others CEO communicates high performance standards and shows confidence in followers
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Managing the Strategic Planning Process
Strategic Planning Staff Supports top management and business units in the strategic planning process.
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Strategic Management Process
Strategic Planning Staff Responsibilities
1.
Identify and analyze company-wide strategic issues, suggest corporate strategic alternatives
2. Work as facilitators with business units to guide them through the strategic planning process
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