Chapter 4 corporate governance foundational issues bus and soc
Banning Classified or Staggered Boards
Electing members in staggered terms means that it might take 3 or more years to replace a board.
macro level of legitimacy
Focus is on the corporate system, the totality of business enterprises. Business has a fragile mandate, subject to ratification. Business exists solely because society has given it that right.
The boards relationship with ceo
-Boards are responsible for monitoring CEO performance and dismissing poorly performing CEOs -If a CEO also serves as chairman of the board, this duality can affect their independence, it is best to separate these roles -Boards are also responsible for determining executive compensation
Roles of four major groups
-Shareholders: Own stock in the firm, giving them ultimate control (the shareholder-primacy model). -Board of Directors: Govern and oversee management of the business -Managers: The individuals hired by the Board to manage the business on a daily basis -Employees: Hired to perform actual operational work
Red flag signaling board problems
1. Company had to restate earnings. Poor employee morale, adverse sarbanes oxley 404 opinion, poor customer satisfaction track record, management misses strategic performance goals, company is target of employee lawsuits, stock price declines,
CEO pay controversy
1. Shareholder push to link pay to performance 2. Increasing use of "clawback" provisions where executives must return pay under some conditions
Steps to Take for Board Repair
1. Spread risk oversight among multiple committees 2. Seek outside help in identifying potential risks 3. Deepen involvement in corporate strategy 4. Align board size and skill mix with strategy 5. Revamp executive compensation 6. Pick compensation committee members who will question the status quo 7. Use independent compensation consultants 8. Evaluate CEO on grooming potential successors 9. Know what matters to your investors
Legislative Efforts( sarabands oxley acts of 2002)
Amends securities laws to protect investors in public companies Enhances public disclosure to require reporting of off balance sheet transactions and personal loans to executives Makes in unlawful for accounting firms to provide services where conflict of interest exist
Issues surrounding compensation
CEO pay firm performance relationship, excessive ceo pay, executive retirement plans and exit packages, outside director compensation, transparency
Changes in boards of directors
More board diversity, greater ratio of outside board members to inside, use board of committees too; ensure that financials are not misleading, sensitive that internal controls are adequate
Excessive CEO Pay
Present day- 216 to 1. say on pay-evolved from concerns over excessive consecutive conversation
Executive retirement plans and exit packages
Have come under scrutiny, many workers today do not have a retirement plan, most have a contribution plan,
inside directors
Have some time to the firm
shareholder activism
History of shareholder activism, shareholder reductions, shareholder lawsuits
Role of Secretary of State
Responsible for protecting investors interests, critics argue they are more focused on business than investors
An alternative model of corporate governance
Shareholder primacy Director primacy Director primacy
The Corporation's Hierarchy of Authority
State charter, shareholders, board of directors, management, employees
Firm performance relationship
Stock options- allows the recipient to purchase stock in the future at the price it is today (motivates a ceo to perform well in order to get stock price up) Backdating- allows the recipient to purchase stock at yesterday's price, wealth increase Spring loading- granting of a stock option at today's price but with the inside knowledge that stocks value is improving Bullet dodging- delaying of a stock option grant until right after bad news
Shareholder Democracy Movement
arises from the fact that although they are owners, shareholders may find that their votes are not counted
Clawback Provisions
compensation recovery mechanisms that enable a company to recoup compensation funds, typically in the event of a financial restatement or executive's misbehavior
Legitimation
dynamic process by which business seeks to perpetuate its acceptance
outside directors
independent from the firm and its top managers
Corporate Governance
refers to the method by which a firm is being governed, directed, administered, or controlled and to the goals for which it is being governed
Business Judgment Rule (BJR)
rule that allows management immunity from liability for corporate acts where there is a reasonable indication that the acts were made in good faith with due care
majority vote
the requirement that board members be elected by a majority of votes cast
Legitimacy
A condition that prevails when there is a congruence between and organizations activists and societies expectations
Investor relations and shareholder engagement
A majority of corporate board now communicate with their major investors, public corporations have obligations to current and potential shareholders, including full disclosure, and the duty to provide info that might affect investment decisions, management is responsible for communicating with shareholders, CEO Warren Buffet calls his annual shareholder meeting a Woodstock weekend for capitalists
micro level of legitimacy
Adapt operational methods to perceived societal expectations Attempt to change societal expectations or norms to conform to firm's practices Seek to enhance its legitimacy by identifying itself with others that have a powerful legitimate base in society
Transparency
Exec compensation packages may include deferred pay severance, benefits, and other perks Sec rules require disclosure of executive compensation, laws and the sec come in and enforce rules upon these businesses
mergers and acquisitions
Expectation is that the threat of a possible takeover will motivate top managers to pursue shareholder rather than self interest,
insider trading
The practice of buying or selling security by someone who had access to material info that us bit available to the public Material info- info that a reasonable investor might want to use and is likely to affect the price of the firms stock Executives and others who work for a firm may have inside info
Proxy Access
Would provide shareholders with the opportunity to propose nominees for the board of directors.
Outside Director Compensation
• Paying board members is a recent idea. • From 2003-2015, their median pay rose about a third, from $175,800 to $258,000.