Corporate Governance Prentice Hall 2006

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

Corporate Governance Board of Directors A body of appointed persons who jointly oversee the activities of a company or organization A board's activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. These matters are typically detailed in the organization's bylaws. Bylaws commonly specify the number of members of the board, how they are to be chosen, and when they are to meet. Prentice Hall 2006

Role of Board Monitor Evaluate and influence Initiate and determine Corporate Governance Role of Board Monitor Evaluate and influence Initiate and determine Prentice Hall 2006

Board of Directors Continuum Prentice Hall 2006

Members -- Inside directors Outside directors “Management directors” Board of Directors Members -- Inside directors “Management directors” Officers or executives employed by the firm Outside directors “Non-management directors” Executives of other firms not employed by the board’s corporation Prentice Hall 2006

Agency Problem – Risk Sharing Problem – 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 Prentice Hall 2006

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 2006

When Outsiders can be considered Insiders Board of Directors When Outsiders can be considered Insiders Affiliated Directors Retired Directors Family Directors Prentice Hall 2006

Board of Directors Codetermination The inclusion of a corporation’s employees on its board of directors Prentice Hall 2006

Nominations & Elections Board of Directors Nominations & Elections Traditional Approach CEO invitation to membership Shareholders approval in annual proxy statement All nominees usually elected Prentice Hall 2006

Corporate Governance Review & shaping of strategy Board of Directors Corporate Governance Review & shaping of strategy Pressure for corporate performance Demand for executive stock ownership Outside directors increasing Prentice Hall 2006

Transformational leaders Board of Directors Transformational leaders Change agents through vision for change Prentice Hall 2006

Successful CEO’s Strategic vision Passion for the company Board of Directors Successful CEO’s Strategic vision Passion for the company Strong communication Charisma Prentice Hall 2006

Executive Leadership Strategic vision Role model Board of Directors Prentice Hall 2006

Executive Leadership Communication of performance standards Board of Directors Executive Leadership Communication of performance standards Demonstrates confidence in abilities of followers Prentice Hall 2006