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CorporateGovernance
Chapter 2
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Learning Objectives
Describe the role and responsibilities of theboard of directors in corporate governance
Understand how the composition of a board
can aect its operation
Describe the impact of the SarbanesOle!"ct on corporate governance in the UnitedStates
Disc#ss trends in corporate governance
$plain how eec#tive leadership is animportant part of strategic management
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+ole of the ,oard ofDirectors
Corporation a mechanism established to allow
dierent parties to contrib#te capital-epertise and labor for their m#t#albene.t
/he corporation is governed b! theboard of directorsthat oversees topmanagement with the conc#rrenceof the shareholders0
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+ole of the ,oard ofDirectors
Corporate governance refers to the relationship among the
board of directors- top management andshareholders in determining thedirection and performance of thecorporation
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+esponsibilities of the ,oard
Efective Board Leadership
Strategy o the Organization
Risk vs. Initiative
Succession Panning
Sustaina!iity
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+esponsibilities of the ,oard
"ue care the board is re3#ired to direct the aairs
of the corporation b#t not to managethem
4f a director or the board as a whole failsto act with d#e care and- as a res#lt- thecorporation is in some wa! harmed- thecareless director or directors can be heldpersonall! liable for the harm done0
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+ole of the ,oard in
Strategic 6anagement
#onitordevelopments inside ando#tside the corporation
Evauate and In$uencemanagement proposals- decisionsand actions
Initiate and "eter%ine thecorporation7s mission and strategies
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,oard of Directors7Contin##m
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6embers of a ,oard ofDirectors
Inside directors t!picall! o:cers or eec#tives
emplo!ed b! the corporation
Outside directors ma! be eec#tives of other .rms b#t
are not emplo!ees of the board7scorporation
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6embers of a ,oard ofDirectors
&gency theory states that problems arise in
corporations beca#se the agents
in the corporation
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6embers of a ,oard ofDirectors
Ste'ardship theory proposes that- beca#se of their long
ten#re with the corporation- insiders
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6embers of a ,oard ofDirectors
&(iated directors not emplo!ed b! the corporation- handle
legal or ins#rance wor>
Retired e)ecutive directors #sed to wor> for the corporation- partl!
responsible for past decisions aecting
c#rrent strateg!*a%iy directors descendants of the fo#nder and own
signi.cant bloc>s of stoc>
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Codetermination? Sho#ld $mplo!eesServe on ,oards@
Codeter%ination the incl#sion of a corporation7s wor>ers on
its board- began onl! recentl! in the United
States
"ltho#gh the movement to place emplo!eeson the boards of directors of U0S0 companies
shows little li>elihoodof increasing- the$#ropean eperience reveals an increasingacceptanceof wor>er participation oncorporate boards0
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4nterloc>ing Directorates
"irect interocking directorate when two .rms share a director or when
an eec#tive of one .rm sits on theboard of a second
Indirect interocking directorate when two corporations have directors
who serve on the board of a third .rm
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4nterloc>ing Directorates
Interocking directorates #sef#l for gaining both inside
information abo#t an #ncertainenvironment and objective epertiseabo#t potential strategies and tactics
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Aomination and $lection of
,oard 6embers
+,- of U0S0 boards #se nominatingcommittees to identif! potential
board membersStaggered !oards onl! a portion of board members stand
for re*election when directors servemore than one !ear terms
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Aomination and $lection of
,oard 6embers
Criteria for a good director incl#de? Billingness to challenge management
when necessar!
Special epertise that is important to thecompan!
"vailable for o#tside meetings to advisemanagement
$pertise on global iss#es
Understands the .rm7s >e! technologiesand processes
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Organiation of the ,oard
/he sie of a board in the UnitedStates is determined b! thecorporation7s charter and its b!*laws- in compliance with state laws0
"ltho#gh some states re3#ire a
minim#m n#mber of board members-most corporations have 3#ite a bit ofdiscretion in determining board sie0
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Organiation of the ,oard
/he average large- p#blicl! held U0S0.rm has (' directors on its board
/he average small- privatel!*heldcompan! has fo#r to .ve members0
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Organiation of the ,oard
Lead director cons#lted b! the ChairC$O regarding
board aairs and coordinates the ann#aleval#ation of the C$O
;5E of U0S0 companies thatcombine the Chairman and C$Opositions had a lead director0
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Organiation of the ,oard
/he most eective boardsaccomplish m#ch of their wor>
thro#gh committees0"ltho#gh the! do not #s#all! have
legal d#ties- most committees are
granted f#ll powerto act with thea#thorit! of the board betweenboard meetings0
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4mpact of the Sarbanes Ole!
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4mpact of the SarbanesOle!"ct on U0S0 Corporate
GovernanceSar!anesO)ey &ct designed to protect shareholders from
ecesses and failed oversight of boardsof directors
whistleblower proced#res
improved corporate .nancial
statements
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$val#ating Governance
S/P Corporate 0overnanceScoring Syste%
Ownership Str#ct#re and 4nF#ence inancial Sta>eholder +ights and
+elations
inancial /ransparenc! and 4nformation
Disclos#re ,oard Str#ct#re and &rocesses
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"voiding Governance 4mprovements
6#ltiple classes of stoc>
blic to private ownership
Controlled companies
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/rends in CorporateGovernance
,oards shapingcompan! strateg!
4nstit#tional investors active on boards
Shareholder demands that directorsand top management own signi.cantstoc>
6ore involvement of non*a:liated
o#tside directors
4ncreased representation of women andminorities
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/rends in CorporateGovernance
,oards eval#ating individ#al directors
Smaller boards
Splittingthe Chairman and C$Opositions
Shareholders ma! begin to nominateboard members
Societ! epects boards to balancepro.tabilit! with social needs of societ!
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/he +ole of /op6anagement
1op %anage%entresponsi!iities
involve getting things accomplishedthro#gh and with others in order tomeet the corporate objectives0
are m#ltidimensional and are oriented
toward the welfare of the totalorganiation
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$ec#tive Leadership and
Strategic Hision
E)ecutive eadership the directing of activities toward the
accomplishment of corporateobjectives- sets the tone for the entirecorporation
Strategic vision description of what the compan! is
capable of becoming
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$ec#tive Leadership and
Strategic Hision
1ransor%ationa eaders provide change and movement in an
organiation b! providing a vision forthat change
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$ec#tive Leadership and
Strategic Hision
Characteristics o efective CEOsincl#de?
(0/he C$O artic#lates a strategic vision forthe corporation0
20/he C$O presents a role for others toidentif! with and to follow0
10/he C$O comm#nicates high performancestandards and also show con.dence in thefollowers7 abilities to meet these standards0
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6anaging the
Strategic &lanning &rocess
Strategic panning staf charged with s#pporting both top
management and the b#siness #nits inthe strategic planning process
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6anaging the
Strategic &lanning &rocess
Strategic panning stafresponsi!iities incl#de?
(04dentif! and anal!e compan!*widestrategic iss#es- and s#ggestcorporate strategic alternativesto topmanagement
20Bor> as facilitators with b#siness #nitsto g#ide them thro#gh the strategicplanning process
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