Topic 6B Corporate Governance and Social Responsibility

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Topic 6B Corporate Governance and
SocialResponsibility
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Corporate Governance

• Relationship Among
• Board of directors
• Top Managment
• Shareholders
• Shareholders elect board, board appoints top
  management.
• A companys strategic management team is the
  board and top management.

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Board Responsibilities

• Set corporate strategy, direction, mission or
  vision
• Hire and fire the CEO and top management
• Control, monitor, supervise top management
• Review and approve use of resources
• Care for shareholders interests

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Factors that the board should monitor

• Board monitors and oversees
• SEC 10K REPORTS(financial reports sent to
  government)
• IRS REPORTS
• Internal and External ACCOUNTING AUDITS and
  MANAGEMENT AUDITS
• OSHA, EPA, ANTI-TRUST, SOCIAL RESPONSIBILITY
  OBLIGATIONS
• COMPENSATION OF MANAGEMENT

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Role of the Board in Strategic Management

• Monitor
• Evaluate and influence quality of firm
• Initiate and determine strategic direction
• -Enron 770M given to 144 managers in 2001
• -WorldCom reported 3.5B of expenses as assets

Top Management have increased their salaries in
excess of 220 times lowest salaried workers.
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Information about boards

• large companies have 80 outside directors
• S.C. Vances studies indicate that internal
  directors are better than external directors
• Internal directors are CEOS, CF0S, VPS
• small companies have 40 outside directors
• in the future many hope to see boards monitoring
  social responsibility issues, employee relations,
  environmental issues, etc.

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Characteristics of an optimally run board

• Nominating committee representing all interests
• cumulative voting
• avoid interlocking directorates
• Its normal to find CEOS AND CFOS and various
  vice presidents on boards.

• Active or Catalysts
• 80 outside directors
• allow some codetermination
• have committees in functional areas as part of
  boards

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Agency Theory

• Problems arise in corporations because the
  agents (top management) are not willing to bear
  responsibility for their decisions unless they
  own substantial stock in the corporation.
• Giving managers too much ownershipstock options
  and such hasnt worked. ENRON is an example of
  corporate greed.

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Codetermination

• Inclusion of a corporations workers on its
  board is codetermination.

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Interlocking Directorate

• Director(s) serves on the board of two or more
  firms in direct competition. They are in a
  position to meaningfully affect competition in
  their industry.

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Responsibilities of Top Management in Strategic
Management
Articulate a transcendent goal Act as a role
model Communicate high standards and show
confidence in employees abilities

• Provide executive leadership
• Help Manage strategic planning process

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Styles of Corporate Governance
High
Degree of Involvement By Top Management
Low
High
Low
Degree of Involvement By Board of Directors