BUS 100 - Chapter 13

Sarbanes-Oxley Act of 2002

-CEOs and CFOs have to certify that their quarterly and annual reports accurately reflect performance and comply with requirements of SEC

What are the two types of investors?

-Individual shareholders (people who directly own shares of stock issued by companies; purchased through a stockbroker and held in brokerage accounts) -Institutions (pensions, mutual funds, insurance companies, and university endowments buy stock on behalf of their investors or members)

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

-protects consumers from overly complex financial instruments -established w consumer financial protection bureau (CFPB) -a "say-on-pay" mándate was enwacted which requires shareholders to vote on their company's compensation policies -"compensation committee independence" board members in charge of compensation are independent from the company's management

What are some key features of effective boards?

-select outside directors to fill most positions (outside members should be truly independent and have no connection to the corporation) -hold open elections for members of the board -hold elections for all directors annually (classified means that board elections are staggered where only some directors stand for election; declassification believes that directors should stand for election every year) -appoint an independent lead director (separate the duties of the chief executive and board chairman -diversify board membership (diversity on the basis of gender, ethnicity, age, nationality, and other dimensions)

How are directors selected?

-shareholders elect board members at annual meeting -nominating committee develops a list of possible candidates and presents these to the board for consideration -final selection is made and the names of these individuals are placed on the proxy ballot

Why do individuals and institutions own corporate stock?

-to make money (when price of stock rises and dividends are received) -to achieve social or ethical objectives -to take control of a company in a hostile takeover bid

Shareholder's rights

-to share in the profits of the enterprise if directors declare dividends -receive annual reports of company earnings and company activities and to inspect the corporate books -elect members of the board of directors -hold the directors and officers of the corporation responsible for their actions -vote on merges, some acquisitions, and changes in the charter and bylaws -sell their stock

Board of directors

An elected group of individuals who have a legal duty to establish corporate objectives, develop broad policies, and select top-level personnel to carry out these objectives and policies -reviews management's performance to be sure the company is well run, and all stakeholders' interests are protected -meet in full session 6 times a year -have between 9 and 11 members -most are outside members (not managers of the company) -average tenure is 8 to 10 years -compensation is composed of a mix of retainer fees, meeting fees, grants of stock and stock options, pensions, and various perks

Executive compensation

An important mechanism for aligning the interests of the corporation and its shareholders with those of its top managers -a way to look at executive compensation is to compare the pay of top managers with that of average employees

Fiduciaries

Persons placed in positions of trust who use due care and loyalty in acting on behalf of the best interests of the organization -there is a duty of care -there is a duty of loyalty

Compensation committee

administers and approves salaries and other benefits of high-level managers in the company

Proxy

an absentee ballot that shareholders can use if they don't attend the meeting

Annual shareholders' meeting

directors and managers present an annual report and shareholders have an opportunity to vote by absentee ballot

What economic benefit will investors receive from the ownership of stock?

dividends and capital gains

Nominating committee

is responsible for finding and recommending candidates for officers and directors -develops a list of possible candidates and presents these to the board for consideration

Bear market

market falls

Bull market

market rises

Proxy access

provides shareholders with the opportunity to nominate their own candidates for the board of directors

Audit committee

reviews the company's financial reports, recommends the appointment of outside auditors (accountants) and oversees the integrity of internal financial controls -composed entirely of outside directors and are "financial literate"

Corporate Governance

the formal system of oversight, accountability, and control for organizational decisions and resources -oversight (relates to a system of checks and balances that limit employees and managers to deviate from policies and codes of conduct) -accountability (relates to how well workplace decisions are aligned with a irm's states strategic direction) -control (involves the process of auding and improving organizational decisions and actions) -ensures accountability to regulatory authorities -provides oversight to uncover and address mistakes, risks, and ethic and legal misconduct

Pay-for-performance

the idea that executives will work hard to improve the company's results -this will increase stock price and value of compensation ARGUMENT AGAINST -executives may become so fixated on their performance pay that they will do anything to increase the stock price, even if this involves unethical accounting practices or actions that would hurt employees, customers, or other stakeholders.

Shareholders

the legal owners of business corporations (also called stockholders or investors) -are increasingly becoming active

Executive committee

works closely with top managers on important business matters

Stock options

used to compensate a company's senior executives -used to align executives' interests with those of shareholders