Miles A. Zachary
MGT 4380
 Corporate governance involves:
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Making meta-managerial decisions
Approving financial objectives
Advising on strategic issues
Making TMT members aware of laws and regulations
Representing stakeholders (namely shareholders)
 Corporate governance is the responsibility of the board of
directors—a group of individuals, either elected or
appointed, that oversees the activities of an organization or
corporation
 Effective board members bring resources and capabilities
to an organization; sometimes celebrity
 Board composition is a critical factor in the dynamics
of board decision-making
 Board insiders: members of the board that are employed
in the firm
 Board outsiders: members of the board external to the
firm
 Institutional investors such as hedge funds, retirement funds,
or banks often request a number of outside board members
 CEO duality: when the CEO is also the chairman of the
board of directors
 Can be controversial since it gives a large amount of power to
one person; can create divisions and conflict in the board
 CEO compensation is a balance between competitive
pressures and the value of the day-to-day functions of
a CEO
 “Salary commensurate with experience”—firms must
pay for the limited number of quality talent
 Market pressures help to dictate the high price firms pay
for a CEO
 However, the salary is balanced by industry norms and
investor pressure
 Agency Problems
 The interests of firm management (e.g., the CEO) and
the owner(s) (e.g., the board, shareholders) are not
always equal
 The solution: better alignment
 Often done through high CEO compensation and stock
options/ownership opportunities
 What are some other ways firms can achieve better
interest alignment?
 CEO compensation often includes:
 Guaranteed salary
 Cash/option bonuses
 Stock options
 Perks
 Perks are often the “unsung” benefits of being a CEO
 When a firm is doing poorly, sometimes they are
poised for a takeover
 Leveraged buyout (LBO): a company that is purchased
through significant debt then removed from the stock
market
 Reduction in workforce and streamline/cost savings ensue
 Hostile takeover: an attempt to buy a company that is
resisted by the target firm
 Sometimes the target firm may be saved by a “white knight”; a
firm that is a more favorable buyer
 Corporate Raider: an individual or a firm that purchases
stock in another firm with the intentions of eventually
taking it over
 E.g., Richard Gere’s character in Pretty Woman is a corporate
raider
 Shark Repellant: activities conducted by a board to deter
or defend the firm from a takeover
 Greenmail-buy back large blocks of shares at a premium to
retain % ownership
 Poison pill-sell considerable amounts of stock to dilute the
number of shares a purchaser needs to own the company
 Golden parachute-a cash bonus given to executives who help
a takeover transition
 In response to several notable corporate scandals at
Enron, WorldCom, and Tyco, congress legislated the
Sarbanes-Oxley Act of 2002
 The law set new or increased standards for the boards
of public US companies and accounting firms
 Businesses should be careful to not only follow the
letter of the law, but the spirit of the law
 Corporate social performance is the degree to which a
firm’s actions honor ethical values that respect
individuals, communities, and the environment
 Can be measured by the impact a firm has on:
 The community
 Product quality/safety
 Diversity
 Employee relations
 Environmental
 Ethical corporate governance
 Sometimes businesses are created or create new
aspects of their business in the name of social good
 Social entrepreneurship is the entrepreneurial actions
where both economic and social value are created
 E.g., Tom’s shoes—buy one, give one
 While CSR has emerged as an important priority for
businesses, it has been less than effectively
implemented (Porter & Kramer, 2006)
 It has pitted firms against society when they are clearly
interdependent
 Has been discussed generally as opposed to specifically
how it can improve a firm’s strategy and performance
 How are businesses and societies interdependent?
 Firms need societies
 Education, health care, and equal opportunity create productive
workforce
 Good laws protect firm interests and property
 Efficient utilization of land, water, energy, and other resources is
essential
 Societies need firms
 Creates jobs
 Innovation improves the quality of living
 Corporate taxes help fund government operations
 Important to mind the “principle of shared value” where in
a temporary gain in one will hurt the long-term prosperity
of both
 Three (3) categories of social issues
 Generic social issues are important to society, but do not
significantly affect the organizations operations or longterm competitiveness
 Value chain social impacts are those things that are
significantly affected by a firm’s activities in the course
of ordinary business
 Social dimensions of competitive context are factors in
the external environment that affect the underlying
drivers of competitiveness in a companies operations
 Each of these affect different companies in different
industries differently
 The most important thing a firm can do for society is
contribute to a prosperous economy
 When firms are punished unnecessarily for being
productive, it hurts the society it operates in
 Firms must, however, avoid seeking short-term profits
through deception
 Rather, firms should build long-term success by
focusing on shared value and using CSR strategically to
improve their organization and the world