CSR, Class 5, Corporate Governance : Foundational Issues

Role of Shareholders

- A majority Vote - Banning classified or Staggered Boards - Proxy Access

3) Executive Retirement Plans & Exit Packages

- Retirement packages

5) Transparency; SEC Rules

- Executive compensation packages may include deferred pay, severance, pension benefits and other perks over $10,000. - SEC Rules require disclosure of executive compensation - Such disclosures may have a moderating impact prior to implementation

Red Flags Signaling Board Problems

1) Company has to restate earnings 2) Poor employee morale 3) Adverse Sarbanes-Oxley 404 opinion 4) Poor customer satisfaction track record 5) Management misses strategic performance goals 6) Company is target of employee lawsuits 7) Stock price declines 8) Quarterly financial results miss analysts' expectations 9) Low corporate governance quotient rating

2) Excessive CEO Pay

- Say on Pay - evolved from concerns over excessive executive compensation - Claw-back provisions - compensation recovery mechanisms that enable a company to recoup CEO pay, typically in the event of a financial restatement or executive's misbehavior

1) CEO Pay-Firm Performance Relationship

- Stock Options - purchase stock - Backdating - stock at yesterday's price - Spring-loading - knowledge that stock's value is improving - Bullet Dodging

Issues Surrounding Compensation

1) CEO Pay-firm performance relationship 2) Excessive CEO pay 3) Executive retirement plans/exit packages 4) Outside director compensation 5) Transparency, SEC rules

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

Corporate Governance

Method by which a firm is being governed, directed, administered, or controlled and to the goals for which it is being governed

Legitimacy

A condition that prevails when there is a congruence between an organization's activities and society's expectations

Legitimation

A dynamic process by which a business seeks to perpetuate its acceptance.