1. COPYRIGHT © 2010 South-Western/Cengage Learning.

2. Rights of Directors Directors, not shareholders, have the right to manage the corporate business. – Inside directors -- officers in the corporation, typically control their company’s board. – Outside directors (also called independent directors) -- do not work for the company and typically have less control.

3. COPYRIGHT © 2010 South-Western/Cengage Learning. Rights of Shareholders Shareholders have neither the right nor the obligation to manage the day-to-day business of the enterprise. Right to Information – Under the Model Act, shareholders with a proper purpose have the right to inspect and copy the corporation’s minute book, accounting records, and shareholder lists. Right to Vote – A corporation must have at least one class of stock with voting rights. – Shareholders may vote by proxy (substitute voter).

4. COPYRIGHT © 2010 South-Western/Cengage Learning. Shareholder Proposals Any shareholder who for the past year has owned at least 1 percent of the company or $2,000 of stock can require that one proposal be placed in the company’s proxy statement to be voted on at the shareholder meeting. Only a small percentage of these proposals are passed, but their presence may cause the directors to adopt the proposals’ statements anyway.

5. COPYRIGHT © 2010 South-Western/Cengage Learning. Shareholder Meetings A publicly-traded company must hold an annual meeting of shareholders (required by the NY Stock Exchange, though not required by all states). The board of directors and shareholders owning at least 10 percent of the stock have the right to call special meetings as needed.

6. COPYRIGHT © 2010 South-Western/Cengage Learning. Election & Removal of Directors In theory, shareholders have the right to elect directors and also to remove them from office. In reality, a nominating committee from the board of directors chooses candidates – one candidate for each opening. Shareholders can either approve or refuse to vote. The only way shareholders can nominate their own candidates is through a complex and expensive process of submitting their own slate of candidates to all the shareholders.

7. COPYRIGHT © 2010 South-Western/Cengage Learning. Compensation The board of directors sets the CEO’s salary, which usually includes perks beyond a monthly check. – CEOs often get signing bonuses for extended contracts. – Stock options are often part of the payment. – Even when a CEO has done a poor job, he may receive an exorbitant severance pay. In 2005, the top 100 CEO’s earned over 1000 times as much as the average American worker.

8. COPYRIGHT © 2010 South-Western/Cengage Learning. Fundamental Corporate Changes A corporation must seek shareholder approval before undergoing any of the following fundamental changes: – Mergers – Sales of Assets – Dissolution – Amendments to the Charter – Amendments to the Bylaws

9. COPYRIGHT © 2010 South-Western/Cengage Learning. Right to Dissent If a private corporation decides to undertake a fundamental change, the Model Act and many state laws require the company to buy back the stock of any shareholders who object to this decision.

10. COPYRIGHT © 2010 South-Western/Cengage Learning. Right to Protection Controlling shareholders have a fiduciary duty to the minority shareholders. Minority shareholders have the right to overturn a transaction between the corporation and a controlling shareholder, unless the the transaction is fair to the minority shareholders.

11. COPYRIGHT © 2010 South-Western/Cengage Learning. Right to Protection (cont’d) Controlling shareholders must include minority shareholders in any favorable arrangements that they make for their own stock. Many states prohibit a company from expelling shareholders unless the firm pays a fair price for the minority stock and the expulsion has a legitimate business purpose.

12. COPYRIGHT © 2010 South-Western/Cengage Learning. Sarbanes-Oxley Act In response to corporate scandals, Congress passed the Sarbanes-Oxley Act in 2002. – Requires publicly-traded companies to adopt effective financial controls. – CEOs and CFOs must personally certify their company’s financial statements. – A board’s audit committee must be independent. – No personal loans to directors or officers. – If a company has to restate its earnings, its CEO and CFO must reimburse the company for any bonus or profits they have received from selling company stock in the past year. – Company must disclose if it has an ethics code and, if not, why not. – It is a felony to interfere with a federal fraud investigation. – Whistleblowing employees are protected. – A new Public Accounting Oversight Board has been established to oversee the auditing of public companies.

13. COPYRIGHT © 2010 South-Western/Cengage Learning. NYSE & Nasdaq Reforms In response to corporate scandals, the NYSE and Nasdaq established a new role for independent directors at listed companies: – Independent directors must comprise a majority of the board. – They must meet regularly on their own without inside directors. – Only independent directors can serve on compensation or nominating committees. – Audit committees must have at least three independent directors who are financially literate.

14. COPYRIGHT © 2010 South-Western/Cengage Learning. Enforcing Rights Derivative Lawsuits – Brought by shareholders to remedy a wrong to the corporation. All proceeds of the litigation go to the corporation. Direct Lawsuits – Shareholders are permitted to sue the corporation directly only if their own rights have been harmed.

15. COPYRIGHT © 2010 South-Western/Cengage Learning. “In theory, corporate shareholders are immensely powerful. They own $13 trillion in assets worldwide. But shareholders are carefully constrained in their efforts to exercise this power. Is the balance between shareholders and corporate managers reasonable and fair?”