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Week 5 Chapter 6 Corporate Governance Corporate Governance Corporate governance is the formal system of control and accountability for organizational decisions and resource management. Accountability: relates to how well decisions are aligned with a firm’s stated strategic direction

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Week 5 l.jpg

Week 5

Chapter 6

Corporate Governance


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Corporate Governance

  • Corporate governance is the formal system of control and accountability for organizational decisions and resource management.

    • Accountability: relates to how well decisions are aligned with a firm’s stated strategic direction

    • Control: involves the process of auditing and improving organiztional decisions and actions.


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Major issues

  • From Table 6.1:

    • Shareholder rights

    • Executive compensation

    • Corporate culture

    • Board composition and structure

    • Disclosure and transparency

    • CEO selection and executive succession


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Models of Corporate Governance

  • Shareholder model

    • Maximizes of wealth for investors and owners.

    • Develops and improves the formal system of performance.

    • Agency problems - need to balance interests between management and investors.

    • Criticized for its singularity of purpose.


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Models of Corporate Governance (cont.)

  • Stakeholder model

    • Broader purspose for business

    • Assumes a collaborative and relationalapproach to business.

    • Considers stakeholder welfare in tandem with coporate needs.

    • Promotes long term relationships with primary stakeholders


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History of Corporate Governance

  • Late 1800’s - early 1900’s: “Captains of Industry”

  • Mid 1900’s - Separation of ownership and control

    • Hard to align the interests of principals and agents.

    • Fostered short-term view

    • Birth of shareholder activism; 1932

    • U.S. Securities & Exchange Commission (SEC) formed.

      • Required shareholder resolutions to be brought to a vote of all shareholders. Short-term view.


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History of Corporate Governance (cont.)

  • Mid-1990’s—Boards of directors

    • Play a greater role in strategy formulation, and there is movement toward corporate governance committees.

  • 2002—Sarbanes-Oxley Act

    • Response to lack of effective control and accountability mechanisms


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Boards of Directors

  • Assume legal responsibility for firm’s resources and strategic decisions.

  • Maintain a fiduciary duty.

  • Appoint top executive officers.

  • Monitor decisions made by managers on behalf of the company.

  • Rarely, if ever perform management function.


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Cartoon


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Issues in Corporate Governance Systems

  • Boards of directors

    • Independence (“outside directors”)

    • Quality and experience (not spread too thin)

    • Focus on long term performance

  • Shareholders and investors

    • Activism (resolutions, lawsuits)

    • Social investing (75%)

    • Investor confidence increases stock value


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Environmental

Workplace equity and safety

Product safety and testing

Global operations

Human rights

www.greenmoney.com

www.goodfunds.com

www.calvertfoundation.org

www.socialinvest.org

Social Investing Selection Criteria


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Internal Control and Risk Management

  • Allow for comparison between goals and actual performance

    • Controls - help to safeguard corporate assets and resources, protect the reliability of organizational information, and ensure compliance with regulations, laws and contracts.

      • Limit employee and management opportunism.

      • Ensure that board members have access to timely and quality information.

    • Risk Management - to anticipate and shield from unnecessary or overwhelming circumstances.

      • Minimize negative situations.

      • Uncertainty needs to be hedged.


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Executive Compensation

  • The average executive makes 600 times the average worker’s salary.

    • Up from 40 times the average salary in the ’60s.

  • Two contrasting perspectives

    • Executives assume a great deal of risk and therefore deserve great rewards.

    • No executive is worth millions of dollars regardless of investor return.

  • Plans that base achievement on several performance goals and long-term performance are growing in popularity.


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OECD Best Practices

  • Ensure the rights of shareholders to vote and influence corporate strategy.

  • Recruit greater number of skilled, independent members on boards of directors.

  • Eliminate techniques that protect failing management and strategy.

  • Promote wider use of international accounting standards.

  • Promote better disclosure of executive pay and remuneration.


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Future of Corporate Governance

  • Boards will be held responsible for developing company purpose statements that cover stakeholder interests.

  • Annual reports will include more nonfinancial information.

  • Boards will be required to perform self-assessments.

  • Board member selection process will become increasingly formalized (less networking).

  • Boards will need to work more as teams.


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Future of Corporate Governance (cont.)

  • Board membership will require more time.

  • Focus will move from a shareholder model to a stakeholder model.

  • Systems will ensure greater organizational-level accountability and control.

  • General support for corporate governance will rise.

  • Governments will play a more significant role.


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