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.