Prentice Hall, Inc. 20062-*STRATEGIC MANAGEMENT & BUSINESS POLICY 10TH EDITIONTHOMAS L. WHEELEN J. DAVID HUNGERCHAPTER 2 Corporate Governance
Prentice Hall, Inc. 20062-*Corporate Governance
CorporationA mechanism established to allow different parties to contribute expertise and labor for their mutual benefit
Corporate GovernanceThe relationship among the board of directors, top management, and shareholders determining the direction and performance of the corporation
Prentice Hall, Inc. 20062-*Corporate Governance
Tyco International Ltd.Operates in 100 countries, Revenues of $36 BDennis Kozlowski (1975 2002)CEO 1995 Credited with rapid worldwide expansionCompensation1996$8.8MM1999$136.1MMCompany Loans for $$MMTreated Company as his ownWife B-Day Party$2.1 MMShower Curtain$6 KDog Umbrella Stand$15KApartment $16.8MMBoard of DirectorsMembers granted large loansMany conflicts of interestMany former company executivesRegularly bypassed in the decision process
Prentice Hall, Inc. 20062-*Corporate Governance
BOD Responsibilities (200 Directors from 8 countries)Setting strategy and overall direction, mission or visionHiring firing CEO and top managementControlling, monitoring or supervising top managementReviewing and approving use of resourcesCaring for Shareholder interests
(CEOs surveyed)Corporate performanceCEO SuccessionStrategic planningCorporate governancePrentice Hall, Inc. 20062-*Corporate Governance
Prentice Hall, Inc. 20062-*Corporate GovernanceRole of Board in Strategic Management
Monitor
Evaluate and influence
Initiate and determine
Prentice Hall, Inc. 20062-*Board of Directors ContinuumSmall EntrepreneurLarge Public
Prentice Hall, Inc. 20062-*Board of DirectorsMembers --
Inside directorsmanagement directorsOfficers or execs employed by the firm
Outside directorsnon-management directorsExecs of other firms not employed by the boards corporation80% of members in large publicly held firms19% in privately held firms
Prentice Hall, Inc. 20062-*Agency TheoryAgency Problem Objectives of owners & agents in conflictDifficult for owners to verify agent performance
Risk Sharing Problem Owners & agents risk assessment in conflict
Prentice Hall, Inc. 20062-*Stewardship TheoryStewardship TheoryExecutives more motivated to act in best interest of the corporation than their own self-interests. Theory that over time, senior executives tend to view corporation as extension of selves.
Prentice Hall, Inc. 20062-*Agency Theory versus Stewardship TheoryAgency TheoryStewardship
Prentice Hall, Inc. 20062-*Board of DirectorsWhen Outsiders can be considered Insiders
Affiliated DirectorsConflict of interestsRetired DirectorsFormer CEOs- Objectivity?Family DirectorsDescendents with significant blocks of stock
Prentice Hall, Inc. 20062-*Board of DirectorsCodetermination
The inclusion of a corporations employees on its board of directorsMore popular in EuropeWith or without ownership
Prentice Hall, Inc. 20062-*Board of DirectorsInterlocking Directorates
Direct InterlockingShared director or exchanged seats
Indirect InterlockingTwo corporations have directors that serve on the board of a 3rd firm
Prentice Hall, Inc. 20062-*Board of DirectorsNominations & Elections
Traditional ApproachCEO invitation to membershipShareholders approval in annual proxy statementAll nominees usually elected
Staggered Board ApproachStaggered terms of service/election
Annual ElectionsOpportunity for hostile takeoverIncreased shareholder control
Criteria for a good DirectorWilling to challenge managementHas special expertiseAvailable outside of meetingsExpertise on global business issuesUnderstands key firms technologiesBrings valuable external contactsKnowledge of firms industryHigh visibility in their fieldAccomplished in representing the firm to stakeholdersPrentice Hall, Inc. 20062-*Board of Directors
Prentice Hall, Inc. 20062-*Board of DirectorsSarbanes-Oxley
Key elementsAll audit committee members must be outside directors and receive no additional feeBoard no longer grants loans to officersFormal procedures for whistle blowersCEO and CFO must certify all financial info.Internal and external auditors may not be from the same firmMust identify if there is a member of the audit committee with financial expertise
Code of Ethics for CEO and CFO must be disclosed
Members of the Audit, Nominating, and Compensation Committees must all be outside directors
Prentice Hall, Inc. 20062-*Board of DirectorsOrganization of the Board
SizeCharter & Bylaws DeterminationStates may set minimumsLarge Publicly held 11SME Privately held 7 or 8Family owned - 4
Prentice Hall, Inc. 20062-*Board of DirectorsCorporate Governance Trends
Review & shaping of strategy active participationPressure for corporate performance from shareholders and institutional investorsDemand for executive/director stock ownership with performance based incentivesOutside directors increasingImpact of Sarbanes-OxleySmaller boardsSeparate CEO/COB and/or Lead DirectorMembers with Intl experienceShareholder nominationsSocial responsibility on the rise
CEO ResponsibilitiesProvide executive leadership and effective strategic managementManage the strategic planning processPrentice Hall, Inc. 20062-*Board of Directors
Prentice Hall, Inc. 20062-*Board of DirectorsTransformational leaders
Articulate a strategic vision
Presents a role for others to identify with and to follow
Communicates high standards of performance and confidence in followers ability
Prentice Hall, Inc. 20062-*Strategic Management ProcessStrategic Planning Staff
Supports top management & business units in the strategic planning processIdentify & analyze company-wide strategic issuesGenerate strategic alternativesFacilitate business units in coordinating activities related to strategic planning process
Prentice Hall, Inc. 20062-*Strategic Management ProcessBoard of Directors Role in Succession Planning
Set criteria for selection based on strategic needs of the companyExecutive typeDynamic industry expert - growthAnalytical portfolio manager - diversificationCautions profit planner - stabilityTurnaround specialist weak company/active marketProfessional liquidator company cant be savedSet realistic performance expectationsDevelop a deep understanding of the organization and conduct thoughtful annual reviews of the CEO
Prentice Hall, Inc. 20062-*STRATEGIC MANAGEMENT & BUSINESS POLICY 10TH EDITIONTHOMAS L. WHEELEN J. DAVID HUNGERCHAPTER 2 Corporate Governance
Criteria for a good DirectorWilling to challenge managementHas special expertiseAvailable outside of meetingsExpertise on global business issuesUnderstands key firms technologiesBrings valuable external contactsKnowledge of firms industryHigh visibility in their fieldAccomplished in representing the firm to stakeholdersPrentice Hall, Inc. 20062-*Board of Directors
BOD Responsibilities (200 Directors from 8 countries)Setting strategy and overall direction, mission or visionHiring firing CEO and top managementControlling, monitoring or supervising top managementReviewing and approving use of resourcesCaring for Shareholder interests
(CEOs surveyed)Corporate performanceCEO SuccessionStrategic planningCorporate governancePrentice Hall, Inc. 20062-*Corporate Governance
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