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CHAPTER 2 Corporate Governance

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1 CHAPTER 2 Corporate Governance
Prentice Hall 2006

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

3 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

4 Board of Directors Continuum
Prentice Hall 2006

5 Members -- Inside directors Outside directors “management directors”
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 Prentice Hall 2006

6 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

7 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

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

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

10 Interlocking Directorates
Board of Directors Interlocking Directorates Direct Interlocking Indirect Interlocking Prentice Hall 2006

11 Nominations & Elections
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 Prentice Hall 2006

12 Sarbanes-Oxley Code of Ethics
Board of Directors Sarbanes-Oxley Code of Ethics Audit, Nominating, and Compensation Committees all outside directors Prentice Hall 2006

13 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 Impact of Sarbanes-Oxley Prentice Hall 2006

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

15 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

16 Executive Leadership Strategic vision Role model
Board of Directors Executive Leadership Strategic vision Role model Communication of performance standards Demonstrates confidence in abilities of followers Prentice Hall 2006

17 Strategic Planning Staff
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 Prentice Hall 2006


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