1. MGMT 452 Corporate Social Responsibility
Zeynep Gürhan-Canlı
Corporate Governance
Chapter 3
February 24, 2010

2. Corporate Governance
Corporate governance is the formal system of accountability and control for organizational decisions and resources.
Major issues:
Shareholder rights
Executive compensation
Mergers and acquisitions
Board composition and structure
Auditing, control and risk management
CEO selection and executive succession plans

3. Corporate Governance Framework
Most businesses operate under the belief that the purpose of business is to maximize profits for shareholders.
The stakeholder model places the board of directors in a position to balance the interests and conflicts of various constituencies.

4. Models of Corporate Governance
Shareholder model
Maximizes of wealth for investors and owners.
Develops and improves the formal system of performance. accountability between management and the firm’s shareholders.
Makes decisions based on what is best for investors.
Stakeholder model
Considers the interests of employees, suppliers, government agencies, communities, and other groups which with the firm interacts.
Assumes a collaborative and relational approach to business.

5. Issues in Corporate Governance Systems
Boards of directors
Independence
Quality and experience
Performance
Shareholders and investors
Activism
Social investing
Investor confidence

6. Boards of Directors
Assume legal responsibility for firm’s resources and decisions.
Appoint top executive officers.
Maintain a fiduciary duty.
Monitor decisions made by managers on behalf of the company.
Growing interest in hiring ‘outside directors’ to bring in more independent thought and action.

7. Shareholders and Investors
Shareholders are concerned with ownership investment in publicly traded firms.
Greater input on company strategy and decisions
Investor is a general term for any individual or organization that provides capital to another firm.
Financial
Human
Intellectual

8. General Issues in Social Investing
Environmental
Workplace equity and safety
Product safety and testing
Global operations
Human rights
Avoidance of certain companies or countries
Increase/decrease holdings of certain companies or countries

9. Internal Control and Risk Management
Controls are used to safeguard corporate assets and resources, protect the reliability of organizational information, and ensure compliance with regulations, laws and contracts.
Limit employee and management opportunism.
Ensure that board members have access to timely and quality information.
Anticipate and remedy organizational risks.
Minimize negative situations.
Uncertainty needs to be hedged.

10. Executive Compensation
The average executive makes 600 times the average worker’s salary.
Up from 40 times the average salary in the ’60s.
Two contrasting perspectives
Executives assume a great deal of risk and therefore deserve great rewards.
No executive is worth millions of dollars regardless of investor return.
Plans that base achievement on several performance goals are growing in popularity.
OECD Principles of Corporate Governance

11. Future of Corporate Governance
Boards will be held responsible for developing company purpose statements that cover stakeholder interests.
Annual reports will include more nonfinancial information.
Boards will be required to perform self-assessments.
Board member selection process will become increasingly formalized.
Boards will need to work more as teams.

12. Future of Corporate Governance (cont.)
Board membership will require more time.
Focus will move from a shareholder model to a stakeholder model.
Systems will ensure greater organizational-level accountability and control.
General support for corporate governance will rise.
Governments will play a more significant role.