2. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-1 Chapter 19 Owner Stakeholders and Corporate Governance 1 Owner Stakeholders and Corporate Governance Search the Web AFL-CIO sponsors PayWatch. A web site that tracks CEO pay and perks. For more information see: http://www.aflcio.org/paywatch

3. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-2 Chapter 19 Owner Stakeholders and Corporate Governance 2 Chapter Nineteen Objectives Link the issue of legitimacy to corporate governance Identify the best practices of boards of directors Identify the problems with greenmail, golden parachutes, and insider trading Identify the major board changes that improve corporate governance Discuss the principle ways shareholder activism is exerting pressure to improve governance Summarize the issues surrounding compensation of the board members and the CEO

4. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-3 Chapter 19 Owner Stakeholders and Corporate Governance Chapter Nineteen Outline Legitimacy and the Corporate Governance Problem Improving Corporate Governance Summary

5. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-4 Chapter 19 Owner Stakeholders and Corporate Governance Introduction to Chapter Nineteen The chapter focuses on the management problems and solutions associated with the separation of ownership and control of the firm.

6. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-5 Chapter 19 Owner Stakeholders and Corporate Governance Legitimacy and Corporate Governance Legitimacy is a condition wherein there is a congruence between an organization’s activities and society’s expectations. Legitimatization is a dynamic process to perpetuate acceptance.

7. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-6 Chapter 19 Owner Stakeholders and Corporate Governance Legitimacy and Corporate Governance Micro Level of Legitimacy Adapt operational methods to perceived societal expectations Attempt to change societal expectations or norms to conform to conform to firm’s practices Seek to enhance the its legitimacy by identifying itself others that have a powerful legitimate base in society

8. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-7 Chapter 19 Owner Stakeholders and Corporate Governance Legitimacy and Corporate Governance Macro Level of Legitimacy Focus is on business system as a whole Subject to ratification –No inherent right to exist

9. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-8 Chapter 19 Owner Stakeholders and Corporate Governance Legitimacy and Corporate Governance Issue of corporate governance Components of corporate governance –Shareholders –Board of directors – Managers –Employees

10. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-9 Chapter 19 Owner Stakeholders and Corporate Governance Legitimacy and Corporate Governance 1 2 3 4 The Four Groups

11. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-10 Chapter 19 Owner Stakeholders and Corporate Governance Legitimacy and Corporate Governance Separation of Ownership From Control Intended roles Actual roles

12. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-11 Chapter 19 Owner Stakeholders and Corporate Governance Legitimacy and Corporate Governance

13. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-12 Chapter 19 Owner Stakeholders and Corporate Governance Legitimacy and Corporate Governance Ineffective boards –Rubber stamp boards –CEO dominated boards –Conflict of interest boards Effective boards –Address issues listed above –Use outside directors

14. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-13 Chapter 19 Owner Stakeholders and Corporate Governance Legitimacy and Corporate Governance Criticism of CEO self-interest still continues after executive earnings became an issue in the ’80s and ’90s and companies still try to link pay to such performance measures as the stock market. Recent research, however, shows that attempts to tightly control CEOs can have dysfunctional consequences. Some corporations, such as Disney, that are dominated by its CEOs, have been highly profitable while having relatively weak boards of directors. The CEO: Pay vs. Performance

15. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-14 Chapter 19 Owner Stakeholders and Corporate Governance Legitimacy and Corporate Governance Consequences of Mergers, Takeovers and Acquisitions Greenmail Poison pill Golden parachutes Insider trading scandals Board member liability

16. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-15 Chapter 19 Owner Stakeholders and Corporate Governance Improving Corporate Governance Changes in boards of directors –Appointing “outside” directors who will monitor management more carefully than “inside” directors. Use of stronger board committees – Establish audit, nominating, compensation, and public issues committees. Board should “get tough” with the CEO – demand accountability

17. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-16 Chapter 19 Owner Stakeholders and Corporate Governance Improving Corporate Governance Increased Role for Shareholders Type of shareholders –Financial performance –Social activists Shareholder initiatives –Rise of shareholder activists Filing of shareholder resolutions –Shareholder lawsuits –SEC regulations –Private Securities Litigation Reform Act of 1995 –Securities Litigation Uniform Standards Act of 1998

18. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-17 Chapter 19 Owner Stakeholders and Corporate Governance Improving Corporate Governance Corporate Initiatives Full disclosure issue Corporate takeover issue

19. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-18 Chapter 19 Owner Stakeholders and Corporate Governance Audit committee Board of directors Charter Compensation committee Corporate governance Corporate raiders Employees Full disclosure Golden parachutes Greenmail Inside directors Insider trading Legitimacy Legitimation Management Nominating committee Selected Key Terms

20. Business and Society: Ethics and Stakeholder Management, 5E Carroll & Buchholtz Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 19-19 Chapter 19 Owner Stakeholders and Corporate Governance Selected Key Terms (continued) Ordinary business decisions Outside directors Personal liability Poison pill Private Securities Litigation Reform Act Proxy process Public issues committee Public policy committee Risk arbitrage Shareholder activism Shareholder lawsuits Shareholder resolutions Shareholders