Corporate Governance

Lecture 6

State Corporation Laws

• Select corporate officers

• Nominating directors for election to the board

• Determining when to propose amendments to the certicate of incorporation

• Issuing stock

State Corporation Laws

• Consider merger proposals and making recommendations to stockholders with respect to such transactions

• Determining distributions to stockholders

• Initiating changes in corporate capital structures

Board Responsibilities

• Select, regularly evaluate, replace CEO

• Review and, where appropriate approve financial/accounting policies and objectives, major strategies, and plans

• Approve management compensation

• Counsel top management

Director Duties and Liability Protection

• Duty of Loyalty-Act in the best interest of the corporation

• Duty of Care-Be informed, exercise due diligence, and make reasonable decisions

• Duty of Good Faith-Make effort to over see the company, act with honesty of purpose, and react to potential known risks

• “Business Judgement” Rule-Non-conflicted, informed business decisions

Director Duties and Liability Protection

• Directors may be found be liable for material misstatements or omissions in registration statements

Brehm vs. Eisner

“This Court strongly encourages directors and officers to employ best practices, as those practices are understood at the time a corporate decision is taken.”

Court of ChanceryDelaware

Where Directors Want to Spend Time

• Strategic Planning

• Succession Planning

• Meeting Key Managers

• Visiting Worksites

• Discussing the Competition

• Risk Management

Recent Significant Changes

• Audit, Compensation, and Governance and Nominating Committee

• Financial Expert on the Audit Committee• Audit partner rotation• Committee members should be independent• Executive Sessions without CEO• Committees appoint their own advisors• Appointment of Lead Director• Annual Board and Committee Review

Top Mega Settlementsin the Post-Reform Era

• Enron---$7.160B

• Worldcom---$6.128B

• Cendent---$3.528B

• AOL Time Warner--$2.5B

• McKesson HBOC---$969M

• Lucent Technologies--$673.4M

• Raytheon---$490M

Key Data Points for Assessing Company and Executive Performance

• Quantitative measures– Accounting measures (EPS, ROE, Capital,

Assets, Debt, Revenues, Net income, Profit Margins, Free Cash Flow)

– Long term stock market performance (TSR)

– Compensation measures (tied to goals and metrics)

Key Data Points for Assessing Company and Executive Performance

• Qualitative measures– Creating an environment for performance

with integrity– Achievement of corporate strategy– Leadership development and team building– Product or service development initiatives– Quality of product and services– Relationship with stakeholders