Management 475: Corporate Governance
Board of Directors
- Board members are directly elected by stock holders and represent stock holder interests. - Board legally accountable for the company's actions. - Board can vote against management nominations or submit its own nominees. - Board hires, fires, and compensates the CEO and other top managers. - Inside directors are senior employees of the company, such as the CEO. - Outside directors may be executives of other firms, retired CEOs, or professional directors.
Board Problems
- Critics of the existing governance system claim inside directors often dominate the outsiders on the board via company-specific information. - Board becomes a captive of insiders and merely rubber-stamp management decisions instead of guarding stockholder interests. - More exposure to litigation. - Inadequate liability insurance. - Increase workload.
Executive Pay
- Executive pay frequently is not linked to corporate performance. - In 1950, when BusinessWeek started its annual survey of CEO pay, the highest-paid executive was General - -- Motor CEO Charles Wilson, whose $652,156 pay packet translates into $4.5 million in inflation-adjusted dollars in 2003. - In 1980, the average CEO in BusinessWeek's survey earned FORTY TWO TIMES what the average blue collar-worker earned. - In 1990, it increased to eight-five times. - Today, the average CEO is more than 200 the pay of the average blue-collar worker.
Executive Leadership: The CEO
- Historically the owner/entrepreneur provided leadership to the corporation. In the 1930s the modern corporation became characterized by a SEPARATION of ownership and control. Professional managers were hired to provide leadership leading to questions of agency/stewardship. Ownership of many corporations is now concentrated with institutional investors. - Sarbanes-Oxley Act requires personal certification of financial reports by CEOs and CFOs. Passed the Senate with a vote of 99 to 0. - CEO turnover has increased 53% since 1995 - The average tenure of a US Fortune 500 CEO dropped from 9.5 years in 1995 to 7.3 years in 2002 - McKinsey & Co. surveyed 500 large U.S. companies and found that 70% of respondents said a CEO should not run the board
Qualities of the New CEO
- Honeymoon period of incompetence: must figure out in a hurry how the place works. - Needs to listen and learn not impose a in-depth action plan immediately. - Should have superior reasoning, problem-solving, and people skills. - Should have the ability to accomplish tasks, work with and through others, and evaluate oneself. - The capacity to distinguish between primary and secondary goals, anticipate probable outcomes, and recognize the underlying agendas of others.
Criteria for a Good Director Survey Results
- Is willing to challenge management when necessary (95%) - Has special expertise important to the company (67%) - Is available outside meeting to advise management (57%) - Has expertise on global business issues (41%) - Understands the firm's key technologies and processes (39%) - Bring external contacts that are potentially valuable to firm (33%) - Has detailed knowledge of the firm's industry (31%) - Has high visibility in his or her field (31%) - Is accomplished at representing the firm to stakeholders (18%)
Interlocking Directorates
- Occurs when two organizations SHARE A DIRECTOR or when an executive of one firm sits on the board of another firm. - "Although the Clayton and the Banking Act of 1933 prohibit interlocking directorates by US companies competing in the same industry, interlocking continues to occur in almost all corporations, especially large ones." - Interlocks may provide valuable information, however they are increasingly frowned upon because of the possibility of collusion.
Degree of Involvement in Strategic Management (Active Participation)
Approves, questions, and makes final decisions on mission, strategy, policies, and objectives. Has active board committees. Performs fiscal and management audits.
Corporate Governance
Board of Directors Top Management: CEO
Should Employees serve on Boards?
Codetermination: inclusion of an organization's workers on its board. GERMANY pioneered codetermination during the 1950s. Chrysler, United Airlines, Northwest Airlines have added employee representatives on the board.
Degree of Involvement in Strategic Management (Phantom)
Never knows what to do, if anything; no degree of involvement.
Degree of Involvement in Strategic Management (Rubber Stamp)
Permits OFFICERS to make ALL decisions. It votes as the officers recommend on action issues
Degree of Involvement in Strategic Management (Catalyst)
Takes the leading role in establishing and modifying the mission, objectives, strategy, and policies. It has a very active strategy committee.
Codetermination:
inclusion of an organization's workers on its board.
Degree of Involvement in Strategic Management (Minimal Review)
Formally reviews selected issues that officers bring to its attention.
Characteristics of the Board of Directors
- A US Fortune 1000 corporation has an average of 11 directors; TWO of which are INSIDERS - Outsiders account for slightly over 80% of the board members in large US corporations but, only about 42% in small US companies - A director's average total compensation in a Fortune 500 company approached $500,000 in 2005 up 14% from 2004 - 79% of the top executives of US publicly held corporations hold a dual designation of chairman and CEO. Only 5% of the firms in the UK have a combined CEO and chairman - Term limits: 60% of the U.S. boards have a mandatory retirement at age 70
Recent Facts and Trends (boards of directors)
- Sarbanes-Oxley Act (2002) tightened rules governing corporate governance, reporting and verification. - Institutional investors (pension funds) have been more aggressive exerting their power. - Separating the role of chairman and CEO limits the ability of corporate insiders to exercise control over the board. - Those who prefer that the Chairman and CEO position be combined agree that the outside directors elect a lead director. - Boards are more involved in reviewing, evaluating and shaping corporate strategy.
Recent Facts and Trends (cont.)
- Shareholders demanding that directors own significant amounts of stock in the corporation. - Outside directors are increasing in numbers and power. - Small companies have more inside directors. - Boards are getting smaller due to reduction to insiders. - As corporations become more global, the are seeking board members with international experience. - Shareholders may be allowed to nominate board members.
Degree of Involvement in Strategic Management (Nominal Participation)
Involved to a limited degree in the performance or review of selected key decisions, indicators, or programs of management
Role of the Board of Directors
MONITOR: internal and external corporate environment for developments officers may have overlooked. EVALUATE AND INFLUENCE: Agree or disagree with management's proposals, decisions, and actions; give advice and make recommendations; and outline alternatives. OVERSEE: corporation's mission and specify strategic options to management. Being inquiring CRITICS and overseers. Evaluate the caliber of senior executives' strategy-making and strategy-executing skills. Institute a COMPENSATION PLAN for top executives. Courage to curb inappropriate and unduly risky management actions. See agency theory vs. stewardship theory.
Board of Directors Responsibilities
Represent share holder interests. Obligation to approve all decisions that might affect the long-run performance of the corporation. Setting corporate strategy, overall direction, mission, or vision. Hiring and firing CEO and top management. Controlling, monitoring, or supervising top management. Reviewing and approving the use of resources.