Beruflich Dokumente
Kultur Dokumente
Chapter 18
Corporate Governance
This chapter:
What is Corporate
Governance?
The rules of corporate governance
define how power is distributed
among shareholders, boards of
directors, and managers and how
disputes are settled.
The nature of corporate governance
has changed dramatically over time.
Boards of directors evolved to
perform the critical role of monitoring
hired managers for the
shareholders.
Corporate
Governance
The exercise of
authority over
the members of
a corporate
community
based on formal
structures, rules,
and processes.
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Federal Regulation
of Governance
Corporate governance laws have been primarily
the province of states, however, the Supreme
Court has said that the Constitution empowers
Congress to regulate corporations if it chooses.
Federal intervention generally comes in reaction to
conspicuous failures of governance and imposes
mandatory rules and restrictions.
Extensive intervention into corporate governance
came in the 1930s, the 1960s, and in 2003.
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Boards of Directors
The average corporate board had 11 members
although there is no set number.
Directors in large corporations are chosen after
being nominated by the board and approved by a
majority vote of shareholders.
Directors who are employees of the company are
called inside directors; those who are not employed
by the company are outside directors.
Boards are divided into committees.
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Duties of Directors
Laws impose two lofty duties on directors:
Represent the interests of stockholders
Exercise due diligence in the oversight of
corporate activity
Directors do not make day-to-day
decisions.
Boards exercise a very broad oversight.
Compensation varies substantially among
industries.
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Duties of Directors
(continued)
Some specific board functions:
Review and approve the corporations goals and
strategies.
Select the CEO, evaluate his or her performance,
and remove the CEO if necessary
Give advice and counsel to management.
Create governance policies for the firm, including
compensation policies
Nominate candidates to be presented to the
stockholders for election as directors
Exercise oversight of ethics and compliance
programs.
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Institutional Investors
and Governance
The growth of pension and mutual fund assets has
given institutional investors new power in corporate
governance.
Jesse Unruh formed the Council of Institutional
Investors (CII).
The CII endorsed a Shareholders Bill of Rights
demanding a voice in fundamental decisions
which could affect corporate performance and
growth.
Since then, institutional investors have been more
active in corporate governance issues.
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Shareholder Resolutions
Shareholder resolutions cover a wide range of topics
and their focus has changed over time.
In the 1970s and 1980s they focused on corporate
social responsibilities such as automobile safety
and doing business in apartheid South Africa.
In recent years they focused on corporate
governance issues, especially the methods for the
election of directors and limits on executive
compensation.
Resolutions are voted on by all shareholders at the
annual meeting, by mail, or by Internet.
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Executive Compensation
A compensation committee of the board of
directors sets the pay and benefits of top
executives.
Elements of compensation include a combination of
the following.
Base salary
Annual cash incentives
Long-term stock-based incentives
Stock options
Performance shares
Restricted stock
Retirement plans
Perquisites
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Criticisms of CEO
Compensation
The size of extraordinary payouts
The compensation packages given to some newly hired
CEOs
The golden handshakes received by some CEOs when they
leave under fire.
An alleged bias in favor of boosting CEO compensation due
to the composition of the compensation committees.
Nonconformance with the interests of shareholders.
The number and misuse of stock option grants
The spread between executive pay and that of the average
worker.
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Suggested Compensation
Reforms
Suggestions for compensation reform
include:
The SEC should require more data on
compensation in reports to shareholders.
Pay and performance relationship should
be revealed.
Bonuses should be tied to long-term
performance.
Shareholders should be able to vote on
executive compensation.
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Concluding Observations
Despite well-defined legal bonds between share
owners, boards of directors, and management,
there are many tensions between them.
Scandals revealed lax oversight of financial
strategies and reporting by many boards.
Many shareholders believe that boards have
allowed management compensation to exceed
reason.
The outlook is for more pressures and regulations
that tighten board oversight.
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