2. Topic 6B Corporate Governance and Social Responsibility

3. Corporate Governance Relationship Among Board of directors Top Managment Shareholders Shareholders elect board, board appoints top management. A company’s strategic management team is the board and top management.

4. Board Responsibilities Set corporate strategy, direction, mission or vision Hire and fire the CEO and top management Control, monitor, supervise top management Review and approve use of resources Care for shareholders interests

5. Factors that the board should monitor Board monitors and oversees SEC 10K REPORTS (financial reports sent to government) IRS REPORTS Internal and External ACCOUNTING AUDITS and MANAGEMENT AUDITS OSHA, EPA, ANTI-TRUST, SOCIAL RESPONSIBILITY OBLIGATIONS COMPENSATION OF MANAGEMENT

6. Role of the Board in Strategic Management Monitor Evaluate and influence quality of firm Initiate and determine strategic direction -Enron 770M given to 144 managers in 2001 -WorldCom reported 3.5B of expenses as assets Top Management have increased their salaries in excess of 220 times lowest salaried workers.

7. Information about boards large companies have 80% outside directors S.C. Vance’s studies indicate that internal directors are better than external directors Internal directors are CEO’S, CF0’S, VP’S small companies have 40% outside directors in the future many hope to see boards monitoring social responsibility issues, employee relations, environmental issues, etc.

8. Characteristics of an optimally run board Active or Catalysts 80% outside directors allow some codetermination have committees in functional areas as part of boards Nominating committee representing all interests cumulative voting avoid interlocking directorates Its normal to find CEO’S AND CFO’S and various vice presidents on boards.

9. Agency Theory Problems arise in corporations because the agents (top management) are not willing to bear responsibility for their decisions unless they own substantial stock in the corporation. Giving managers too much ownership—stock options and such hasn’t worked. ENRON is an example of corporate greed.

10. Codetermination Inclusion of a corporation’s workers on its board is codetermination.

11. Interlocking Directorate Director(s) serves on the board of two or more firms in direct competition. They are in a position to meaningfully affect competition in their industry.

12. Responsibilities of Top Management in Strategic Management Provide executive leadership Help Manage strategic planning process Articulate a transcendent goal Act as a role model Communicate high standards and show confidence in employees’ abilities

13. Styles of Corporate Governance Entrepreneurship management Partnership management Chaos management Marionette management Degree of Involvement By Top Management Degree of Involvement By Board of Directors High Low High