ch 12 corporate governance

michael porter recommends that managers focus on three things within the shared value creation framework

1. expand the customer base to bring in nonconsumers 2. expand traditional internal firm value chains to include more nontraditional partners 3. focus on creating new regional clusters

the public stock company enjoys four characteristics that make it attractive

1. limited liability for investors 2. transferability of investor ownership 3. legal personality 4. separation of legal ownership and management control

inside directors

board members who are generally part of the company's senior management team -appointed by shareholders -provide the board with necessary info pertaining to the company's internal workings and performance

outside directors

board members who are not employees of the firm, but who are frequently senior execs from other firms

poison pill

defensive provisions to deter hostile takeovers by making the target firm less attractive

shared value creation framework

a model proposing that managers have a dual focus on shareholder value creation and value creation for society

leveraged buyout (LBO)

a single investor or group of investors buys with the help of borrowed money the outstanding shares of a public company in order to make it private

moral hazard

a situation in which information asymmetry increases the incentive of one party to take undue risks or shrink other responsibilities because the costs incur to the other party

adverse selection

a situation that occurs when information asymmetry increases the likelihood of selecting inferior alternatives

corporate governance

a system of mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally

agency theory

a theory that views the firm as a nexus of legal contracts

business ethics

an agreed-upon code of conduct in business, based on societal norms

stock options

an incentive mechanism to align the interests of shareholders and managers, by giving the recipient the right to buy a company's stock at a predetermined price in the future

board independence

incentive to ensure that a shareholder's interests are pursued

fiduciary responsibility

legal duty to act solely in another party's interests

shareholder capitalism

shareholders have the most legitimate claim on profits

CEO/chairperson duality

situation where the CEO is also a chairperson on the board of directors

board of directors

the centerpiece of corporate governance, composed of inside and outside directors who are elected by the shareholders