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Week 3

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BA 385 - Business Environment. Week 3. Chapter 3. Corporate ... Rarely, if ever perform management function. 1-9. BA 385 ... Best Practices for ... – PowerPoint PPT presentation

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Title: Week 3


1
Week 3
  • Chapter 3
  • Corporate Governance

2
Corporate Governance
  • Corporate governance is the formal system of
    oversight, control and accountability for
    organizational decisions and resources.
  • Oversight checks balances
  • Accountability decisions aligned with strategy
  • Control ability to measure improve

3
Framework
  • Most businesses operate under the belief that the
    purpose of business is to maximize profits for
    shareholders.
  • The stakeholder model places the board of
    directors in a position to balance the interests
    and conflicts of various constituencies.

4
History of Corporate Governance
  • Late 1800s - early 1900s Captains of
    Industry
  • Mid 1900s - Separation of ownership and control
  • Hard to align the interests of principals and
    agents.
  • Fostered short-term view
  • Birth of shareholder activism 1932
  • U.S. Securities Exchange Commission (SEC)
    formed.
  • Required shareholder resolutions to be brought to
    a vote of all shareholders. Short-term view.

5
History of Corporate Governance (cont.)
  • Mid-1990sBoards of directors
  • Play a greater role in strategy formulation, and
    there is movement toward governance committees.
  • 2002Sarbanes-Oxley Act
  • Response to lack of effective control and
    accountability mechanisms

6
Models ofCorporate Governance
  • Shareholder model
  • vs.
  • Stakeholder model

7
Major issues in Corporate Governance
  • From Table 6.1
  • Shareholder rights
  • Executive compensation
  • Corporate culture
  • Board composition and structure
  • Disclosure and transparency
  • CEO selection and executive succession

8
Boards of Directors Role
  • Assume legal responsibility for firms resources
    and strategic decisions.
  • Maintain a fiduciary duty.
  • Appoint top executive officers.
  • Monitor decisions made by managers on behalf of
    the company.
  • Rarely, if ever perform management function.

9
Major Issues - Detail
  • Boards of directors
  • Independence (outside directors)
  • Quality and experience (not spread too thin)
  • Focus (short vs. long term performance)
  • Shareholders and investors
  • Activism (resolutions, lawsuits)
  • Social investing (75)
  • Investor confidence (increases stock value)

10
Investors vs. Shareholders
  • Shareholders are concerned with ownership
    investment in publicly traded firms.
  • Greater input on company strategy and decisions
  • Investor is a general term for any individual or
    organization that provides capital to another
    firm.
  • Financial
  • Human
  • Intellectual

11
Social Analysis Criteria
  • Governance
  • Environmental
  • Workplace equity and safety
  • Product safety
  • Global operations
  • Indigenous rights
  • Community
  • Ethical
  • www.greenmoney.com
  • www.goodfunds.com
  • www.calvertfoundation.org
  • www.socialinvest.org
  • www.responsibleinvesting.org
  • Or not
  • www.vicefund.com

12
Corporate Governanceas an Investment Criterion
13
Internal Control and Risk Management
  • Goal vs. Actual Performance
  • Controls - safeguard corporate assets, protect
    the reliability of organizational information,
    and ensure compliance
  • Limit employee and management opportunism.
  • Ensure that board members have access to timely
    and quality information.
  • Risk Management - to anticipate and shield from
    unnecessary circumstances.
  • Minimize negative situations.
  • Uncertainty needs to be hedged.

14
Executive Compensation
  • The average executive makes 429 times the average
    worker
  • 11,800,000 vs. 27,460.
  • Up from 281 in 1970.
  • Two contrasting perspectives
  • Executives assume a great deal of risk and
    therefore deserve great rewards.
  • No executive is worth millions of dollars
    regardless of investor return.
  • Plans that base achievement on long-term
    performance are growing in popularity.

15
Best Practices for Corporations
  • Ensure the rights of shareholders to vote and
    influence corporate strategy.
  • Recruit greater number of skilled, independent
    members on boards of directors.
  • Eliminate techniques that protect failing
    management and strategy.
  • Promote wider use of international accounting
    standards.
  • Promote better disclosure of executive pay and
    other forms of compenstation.

Source Organization for Economic Cooperation and
Development (OECD)
16
Future of Corporate Governance
  • Boards will be held responsible for developing
    company purpose statements that cover stakeholder
    interests (Sarbanes-Oxley).
  • Annual reports will include more nonfinancial
    information.
  • Boards will be required to perform
    self-assessments.
  • Board member selection process will become
    increasingly formalized (less networking).
  • Boards will need to work more as teams.

17
Future of Corporate Governance (cont.)
  • Board membership will require more time.
  • Focus will move from a shareholder model to a
    stakeholder model.
  • Systems will ensure greater organizational-level
    accountability and control.
  • General support for corporate governance will
    rise.
  • Governments will play a more significant role.
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