Chapter 2

Corporate Governance and Social Responsibility

PowerPoint Slides Dr.Vijaya Kumar Skyline College

Corporate Governance

Refers

to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation.

Responsibilities of the Board of Directors

Setting corporate strategy, overall direction, mission or vision Hiring and firing the CEO and top management Controlling, monitoring, or supervising top management Reviewing and approving the use of resources Caring for shareholder interests

Board of Directors

Role of the Board in strategic management

Monitor

Developments inside and outside the corporation

Evaluate & Influence

Review proposals, advise, provide suggestions and alternatives

Initiate & Determine

Delineate corporations mission and specify strategic options

Board of Directors Continuum

DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT Low (Passive) Phantom Rubber Stamp Permits officers to make all decisions. It votes as the officers recommend on action issues. Minimal Review Formally reviews selected issues that officers bring to its Nominal Participation Involved to a limited degree in the performance or review of selected key decisions, indicators, or programs of management. Active Participation Approves, questions, and makes final decisions on mission, strategy, policies, and objectives. Has active board committees. Performs fiscal and management audits. Catalyst Takes the leading role in establishing and modifying the mission, objectives, strategy, and policies. It has a very active strategy committee.

High (Active)

Never knows what to do, if anything; no degree of involvement.

Board of Directors
Members:
Inside directors

Management directors Officers or executives employed by corporation

Outside directors

Non-management directors May be executives of other firms but not employed by boards corporation

Agency Theory

Problems arise in corporations because the agents (top management) are not willing to bear responsibility for their decisions unless they own a substantial amount of stock in the corporation.

Stewardship Theory

Executives tend to be more motivated to act in the best interest of the corporation than their own self-interests. Theory argues that over time, senior executives tend to view the corporation as an extension of themselves.

Board of Directors
Outsider overly simplistic term -Some outsiders are not truly objective and could be considered insiders. Examples:

Affiliated Directors Retired Directors Family Directors

Board of Directors

Codetermination
The

inclusion of a corporations workers on its board of directors.

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Board of Directors

Interlocking Directorates
Direct Interlocking Directorate
When

two firms share a director or when an executive of one firm sits on the board of a second firm. two corporations have directors who also serve on the board of a third firm.

Indirect Interlocking Directorate

When

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Board of Directors

Nominations & Elections

Staggered Board Approach

Corporations whose directors serve terms of more than one year, divide the board into classes, and stagger elections so that only a portion of the board stands for election each year.

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Board of Directors

Nominations & Elections

Traditional Approach:
CEO

invites members to serve Shareholders approve in annual proxy statement All nominees are usually elected

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Board of Directors Nominations & Elections Criteria for Selection

Wiling to challenge management Special expertise Availability for advice and meetings Expertise on global issues Understands key technologies External contacts valuable to the firm Detailed knowledge of industry High visibility in field Accomplished in representing firm to stakeholders

Board of Director Membership

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Board of Directors
Organization of the Board

Size

Determined by charter and bylaws Average for publicly-held, large firm is 11 directors Average for small/medium private firms is 7 to 8 directors

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Board of Directors

Lead Director

This person is consulted by the Chair/CEO regarding board affairs and coordinates the annual evaluation of CEO.

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Board of Directors
Trends in Corporate Governance

Boards more involved in reviewing, evaluating, and shaping strategy Institutional investors active on boards; pressure on CEO for firm performance Shareholders demand directors own more than token amounts of the firms stock Non-affiliated outside directors increasing

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Board of Directors

Trends in Corporate Governance

Boards becoming smaller Boards taking more control of board functions Corporations becoming more global; international experience needed Societal expectations that boards balance profitability and social responsibility Diversity of board members

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Top Management

Primary Responsibilities of Top Management

1. Provide executive leadership and a strategic vision 2. Manage the strategic planning process

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Top Management

Executive Leadership

The directing of activities toward the accomplishment of corporate objectives. Sets the tone for the entire corporation.

Strategic Vision

A description of what the company is capable of becoming. Often communicated in the mission statement.

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Top Management

CEO and Clear Strategic Vision

Common Characteristics CEO articulates a strategic vision CEO presents a role for others CEO communicates high performance standards and shows confidence in followers
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Managing the Strategic Planning Process

Strategic Planning Staff Supports top management and business units in the strategic planning process.

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Strategic Management Process

Strategic Planning Staff Responsibilities

1.

Identify and analyze company-wide strategic issues, suggest corporate strategic alternatives

2. Work as facilitators with business units to guide them through the strategic planning process
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