Part 9 Corporate Governance Chapter Nineteen Corporate Governance

Chapter Nineteen Learning Objectives Understand what a corporation is and how it is created. Understand the distinction between corporate governance and corporate management. Understand the legal line of power in the corporate form. Understand how Boards of Directors are constituted and structured to function. Learn the duties of the Board and its members. Examine criticisms of Boards of Directors.

CORPORATION Defined and Explained According to Encarta 95, a corporation is an organization recognized and created by law that allows people to associate together for a common purpose under a common name. Because they are created by law, corporations must receive a CHARTER from a government before they can be organized. In the U.S. this power is exercised mainly by the States. Most corporations are private; they are owned through shares held by private individuals. These shares can be bought, sold or exchanged in organized markets such as the New York Stock Exchange, the American Stock Exchange or the NASDAQ system.

CORPORATION defined and explained In business, corporation organization has a number of advantages: a corporation exists independently of its owners in U.S. law, the corporation is recognized as a legal person with many legal rights the corporation is an enormously successful device for raising vast amounts of capital the owners of the corporation (stockholders) are not liable for the corporation’s debts beyond their investment

Corporate Governance CORPORATE GOVERNANCE is the overall control of activities in a corporation. It is concerned with the formulation of long-term objectives and plans and the proper management structure to achieve them. It entails making sure that the structure functions to maintain the corporation’s integrity, reputation and responsibility to its various constituencies.

Corporate Management CORPORATE MANAGEMENT is a hands-on operational activity. Concerned with day-to-day action. Concerned with the prudent use of scarce resources to achieve desirable aims.

The Legal Line of Power in a Corporate Charter THE STATE SHAREHOLDERS DIRECTORS MANAGERS

The Corporate Board of Directors (more) INSIDE DIRECTORS: Members of management who also sit on the Board. OUTSIDE DIRECTORS: Members of the Board who have no role in managing the corporation. BOARD MEMBERSHIP: Manufacturing companies average 10 members on their boards. Financial organizations average 12. In recent years, outside directors outnumber inside directors.

The Corporate Board of Directors (continued) BOARD COMMITTEES: Virtually all companies have AUDIT committees to review, for the Board, the company’s financial affairs. Most boards have COMPENSATION committees that make recommendations to the full board regarding pay and bonuses for top executives. Most boards have an EXECUTIVE committee, authorized by the Board, to decide on its behalf matters needing attention between board meetings.

The Corporate Board of Directors Other possible committees include: PUBLIC AFFAIRS CORPORATE ETHICS EMPLOYEE PENSIONS AND BENEFITS HUMAN RESOURCES ENVIRONMENT SCIENCE AND TECHNOLOGY CORPORATE CONTRIBUTIONS LEGAL AFFAIRS SOCIAL RESPONSIBILITY In other countries, the make-up of the Board and its functions are quite different. HJ Taft & LE Taft 2001

Duties of the Directors The Board of Directors clearly is the ultimate corporate authority except for those matters that require the approval of the shareholders. Election of the Board itself Change in Capitalization Overall, according to the Business Roundtable, the principal responsibility is to exercise governance so as to ensure the long-term successful performance of their corporation.

Specific Responsibilities of the Directors Select, regularly evaluate and, if necessary, replace the Chief Executive Officer. Determine management compensation. Review succession planning. Review and, where appropriate, approve the financial objectives, major strategies and plans of the corporation. Provide advice and counsel to top management. Select and recommend to shareholders for election an appropriate slate of candidates for the Board of Directors; evaluate board processes and performance. Review the adequacy of systems to comply with all applicable laws/regulations.

Criticisms of Boards of Directors (more) Board performance is inadequate in enhancing equity investment. Other stakeholders are not given the attention they deserve in decision making. Boards do not properly evaluate the performance of managers.

Criticisms of Boards of Directors (continued) Boards permit all sorts of unethical practices to go on in their companies. Board members do not spend enough time on company business and are “rubber stamps” of the Chief Executive Officer. Board members are egregiously overpaid. Boards lack sufficient diversity.