Professional Documents
Culture Documents
Chapter
4
1
Chapter 4 Outcomes
1. Link the issue of legitimacy to corporate
governance.
Chapter 4 Outline
Legitimacy and Corporate Governance
Introduction to Chapter 4
Explore corporate governance and the ways in which
it has evolved.
Explain the concept of legitimacy and the part that corporate governance plays in establishing the legitimacy of business Explore how good corporate governance can mitigate problems created by separation of ownership
Legitimacy
A condition wherein there is a congruence between an organizations activities and societys expectations.
Legitimation
Management
Employees
8
Owners (ownership)
Managers (control)
Board of Directors
Management (control)
Inside Directors
Outside Directors
10
11
12
Backdating
Spring-Loading
13
Clawback Provisions
Compensation recovery mechanisms that enable a company to recoup executive compensation funds
14
Poison pill
Golden parachutes
15
Insider Trading
Insider Trading
The practice of obtaining critical information from inside a company and using that information for ones own personal financial gain
16
Figure 4-3
2. To ensure that internal controls are adequate. 3. To follow up on allegations of material, financial, ethical,
and legal irregularities.
19
20
21
Majority Vote
Classified Boards
Provides shareholders with the opportunity to propose nominees for the board of directors.
22
Shareholder Activism
Shareholder activism
Shareholder resolutions
Shareholder lawsuits
23
Investor Relations
Information filed at regular and frequent intervals that contains information that might affect investment decisions
Full Disclosure
24
Backdating Spring-loading Bullet-dodging Clawback provisions Tax gross-up Poison pill Golden parachute Insider trading Risk arbitrage Accounting Reform and Investor Protection Act of 2002 Sarbanes-Oxley Act Audit committee Nominating committee
25
Ordinary business
decisions Shareholder activism Corporate gadflies Shareholder resolutions Shareholder lawsuit Public Securities Litigation Reform Act of 1995 Full disclosure Transparency
26
After interviews with board members failed to elicit the source of the leaks,
then board chairman Patricia Dunn engaged an outside licensed investigative firm to determine who had provided confidential information to the media. This firm used pretexting (conscious misrepresentation to obtain information) as one of their techniques for collecting the information. Investigators pretented to be the board members whose calls were being investigated. The source of the leaks was found; however, uproar ensued over the investigation. 1. Who should be responsible for taking action when a board member engages in problematic behavior? If the chairman is responsible, when should he or she involve the whole board? What are the costs of early full board involvement?
27
2. One complaint lodged was that HP provided board members home phone numbers to investigators. Was this out of line? Do board members have a responsibility to provide certain basic information, or was their privacy breached when their home phone numbers were given? A board member whose phone records proved he was not involved in any leaks still resigned the board in protest that his privacy was invaded by the pretexting. Was he right?
3. The law regarding pretexting is unclear. While it is illegal when used to obtain financial records, the use of pretexting in other situations-such as the phone records in this example-was not necessary against the law. Should it be?
4. How might things have evolved differently if the ethically rather than the legality of the practice had been the issue? Are the two synonymous or is there a difference?
28