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Corporate Governance. Knowledge Objectives. 1. Define corporate governance and explain why it is used to monitor and control managers’ strategic decisions. 2. Explain why ownership has been largely separated from managerial control in the modern corporation.
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Corporate Governance www.assignmentpoint.com
Knowledge Objectives 1. Define corporate governance and explain why it is used to monitor and control managers’ strategic decisions. 2. Explain why ownership has been largely separated from managerial control in the modern corporation. 3. Define an agency relationship and managerial opportunism and describe their strategic implications. 4. Explain how three internal governance mechanisms—ownership concentration, the board of directors, and executive compensation—are used to monitor and control managerial decisions. www.assignmentpoint.com
Knowledge Objectives 5. Discuss the types of compensation executives receive and their effects on strategic decisions. 6. Describe how the external corporate governance mechanism—the market for corporate control— acts as a restraint on top-level managers’ strategic decisions. 7. Discuss the use of corporate governance in international settings. 8. Describe how corporate governance fosters ethical strategic decisions and the importance of such behaviours on the part of top-level executives. www.assignmentpoint.com
Sentenced for Poor Corporate Governance Conrad Black: Beginning to End www.assignmentpoint.com
Corporate Governance The set of mechanisms used to manage the relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations. www.assignmentpoint.com
Separation of Ownership and Managerial Control in Larger Firms www.assignmentpoint.com
Larger Firms: Shareholders www.assignmentpoint.com The separation of ownership and managerial control allows shareholders to purchase stock, which entitles them to income (residual returns) from the firm’s operations after paying expenses.
Separation of Ownership and Managerial Control in Smaller Firms www.assignmentpoint.com
Figure 11.1 An Agency Relationship www.assignmentpoint.com
Figure 11.2 Manager and Shareholder Risk and Diversification www.assignmentpoint.com
Agency Costs and Governance Mechanisms Firms incurs costs when it uses one or more governance mechanisms. Agency costs are the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals because governance mechanisms cannot guarantee total compliance by the agent. www.assignmentpoint.com
Board of Directors Is a group of elected individuals whose primary responsibility is to act in the owners’ interests by formally monitoring and controlling the corporation’s top-level executives. www.assignmentpoint.com
Table 11.1 Classifications of Board of Directors Members www.assignmentpoint.com
Enhancing the Effectiveness of the Board of Directors www.assignmentpoint.com
Executive Compensation A governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentive compensation, such as stock awards and options. www.assignmentpoint.com
Table 11.2 Highest Paid Canadian CEOs, 2006 www.assignmentpoint.com
Market for Corporate Control www.assignmentpoint.com
Knowledge Objectives • Define corporate governance and explain why it is used to monitor and control managers’ strategic decisions. • Explain why ownership has been largely separated from managerial control in the modern corporation. • Define an agency relationship and managerial opportunism and describe their strategic implications. • Explain how three internal governance mechanisms—ownership concentration, the board of directors, and executive compensation—are used to monitor and control managerial decisions. www.assignmentpoint.com
Knowledge Objectives • Discuss the types of compensation executives receive and their effects on strategic decisions. • Describe how the external corporate governance mechanism—the market for corporate control— acts as a restraint on top-level managers’ strategic decisions. • Discuss the use of corporate governance in international settings. • Describe how corporate governance fosters ethical strategic decisions and the importance of such behaviours on the part of top-level executives. www.assignmentpoint.com
Review Questions What is corporate governance? What factors account for the considerable amount of attention corporate governance receives from several parties, including shareholder activists, business press writers, and academic scholars? Why is governance necessary to control managers’ decisions? What does it mean to say that ownership is separated from this separation exist? What is an agency relationship? What is managerial opportunism? What assumptions do owners of modern corporations make about managers as agents? www.assignmentpoint.com
Review Questions 4. How is each of the three internal governance mechanisms— ownership concentration, boards of directors, and executive compensation—used to align the interests of managerial agents with those of the firm’s owners? 5. What trends exist regarding executive compensation? What is the effect of the increased use of long-term incentives on executives’ strategic decisions? 6. What is the market for corporate control? What conditions generally cause this external governance mechanism to become active? How does the mechanism constrain top executives’ decisions and actions? 7. How can corporate governance foster ethical strategic decisions and behaviours on the part of managers as agents? www.assignmentpoint.com
Social Responsibility Review 1. How and when do owners and managers exert their relative preferences? Do you believe that boards are vigilant in exercising oversight? What is the fiduciary responsibility of boards to owners, customers, suppliers, communities, employees? www.assignmentpoint.com
