Ronaldo Parente Chapter 2Wheelen & Hunger – 10 ed

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Chapter 2

Corporate Governance

Wheelen & Hunger – 10th ed.

Ronaldo Parente Chapter 2Wheelen & Hunger – 10 ed

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Corporate Governance

Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation

Ronaldo Parente Chapter 2Wheelen & Hunger – 10 ed

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TMT Problems associated with Corporate Governance

•On-the-job consumption– Elaborate and expensive perks for TMT

•Excessive pay not linked to performance– Down markets & upward spirals of executive

pay•Empire building

– Buying additional businesses that increase the size of the company without increasing shareholder wealth.

Ronaldo Parente Chapter 2Wheelen & Hunger – 10 ed

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Corporate Governance Mechanisms

1) Stock-based compensation

2) Corporate takeovers

3) Leveraged buyouts

4) Board of Directors4) Board of Directors – Responsibilities:

• Setting Corporate Strategy, overall direction, and mission/vision

• Hiring & Firing CEO and TMT• Controlling, Monitoring, and Supervising TMT• Reviewing & Approving the use of Resources• Caring for Shareholder Interests

Ronaldo Parente Chapter 2Wheelen & Hunger – 10 ed

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Board Functions & Responsibilities

•Setting corporate strategy, overall direction, mission or vision

•Hiring and firing the CEO and top management

•Controlling, monitoring, or supervisingtop management

•Reviewing and approving the use of resources

•Caring for shareholder interests

Board of DirectorsFunctions

Ronaldo Parente Chapter 2Wheelen & Hunger – 10 ed

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Role of the Board in Strategic Management

Based on the degree of involvement:1) Monitoring – Monitor developments inside and

outside the corporation

2) Evaluate & Influence -- Review proposals, advise, provide suggestions and alternatives

3) Initiate & Determine -- Delineate corporation’s mission and specify strategic options

Ronaldo Parente Chapter 2Wheelen & Hunger – 10 ed

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Board of Directors Continuum

Ronaldo Parente Chapter 2Wheelen & Hunger – 10 ed

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Board of Directors: Type of Members

Inside directors– “Management directors”– Officers or executives employed by

corporation

Outside directors– “Non-management directors”– May be executives of other firms but not

employed by board’s corporation

Ronaldo Parente Chapter 2Wheelen & Hunger – 10 ed

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Board of Directors Characteristics

Codetermination– The inclusion of a corporation’s workers on its

board of directors

Interlocking Directorates

Direct Interlocking –– When two firms share a director or when an

executive of one firm sits on the board of a second firm

Indirect Interlockingd –– When two corporations have directors who also

serve on the board of a third firm

Ronaldo Parente Chapter 2Wheelen & Hunger – 10 ed

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Corporate Governance Trends

• Boards are more involved in review and shaping strategy

• Institutional investors are more active in pressuring for corporate performance

• Shareholders demand that directors and executives own more than token amounts of stock

• Number of nonaffiliated outside directors are increasing

• Boards are getting smaller

Ronaldo Parente Chapter 2Wheelen & Hunger – 10 ed

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Criteria for Selection of Board Directors

Board of Director

Membership

•Willing to challenge management (95%)•Special expertise (67%)•Availability for advice and meetings (57%)•Expertise on global issues (41%)•Understands key technologies (39%)•External contacts valuable to the firm (33%)•Detailed knowledge of industry (31%)•High visibility in field (31%)•Accomplished in representing firm to stakeholders (18%)