CHAPTER 2
Corporate
Governance
STRATEGIC MANAGEMENT & BUSINESS POLICY
10TH EDITION
THOMAS L. WHEELEN
Prentice Hall, Inc. © 2006
J. DAVID HUNGER
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Corporate Governance
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Corporate Governance
Corporation
A mechanism established to allow different parties to
contribute expertise and labor for their mutual
benefit
Corporate Governance
The relationship among the board of directors, top
management, and shareholders – determining the
direction and performance of the corporation
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Corporate Governance
Tyco International Ltd.
– Operates in 100 countries, Revenues of $36 B
– Dennis Kozlowski (1975 – 2002)
• CEO 1995 – Credited with rapid worldwide expansion
• Compensation
– 1996
$8.8MM
– 1999
$136.1MM
– Company Loans for $$MM
• Treated Company as his own
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Wife B-Day Party
Shower Curtain
Dog Umbrella Stand
Apartment
$2.1 MM
$6 K
$15K
$16.8MM
– Board of Directors
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Members granted large loans
Many conflicts of interest
Many former company executives
Regularly bypassed in the decision process
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Corporate Governance
BOD Responsibilities
(200 Directors from 8 countries)
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Setting strategy and overall direction, mission or vision
Hiring firing CEO and top management
Controlling, monitoring or supervising top management
Reviewing and approving use of resources
Caring for Shareholder interests
(CEO’s surveyed)
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Corporate performance
CEO Succession
Strategic planning
Corporate governance
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Corporate Governance
Role of Board in Strategic Management
–Monitor
–Evaluate and influence
–Initiate and determine
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Board of Directors Continuum
Small Entrepreneur
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Large Public
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Board of Directors
Members -–Inside directors
•“management directors”
•Officers or execs employed by the firm
–Outside directors
•“non-management directors”
•Execs of other firms not employed by the
board’s corporation
•80% of members in large publicly held firms
•19% in privately held firms
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Agency Theory
Agency Problem –
–Objectives of owners & agents in conflict
–Difficult for owners to verify agent performance
Risk Sharing Problem –
–Owners & agents risk assessment in conflict
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Stewardship Theory
Stewardship Theory
Executives 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.
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Agency Theory versus Stewardship Theory
Esteem
Stewardship
Self
Actualization
Agency Theory
Socialization
Safety
Physiological
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Board of Directors
When Outsiders can be considered Insiders
–Affiliated Directors
Conflict of interests
–Retired Directors
Former CEO’s- Objectivity?
–Family Directors
Descendents with significant blocks of stock
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Board of Directors
Codetermination
–The inclusion of a corporation’s employees on its
board of directors
–More popular in Europe
–With or without ownership
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Board of Directors
Interlocking Directorates
–Direct Interlocking
Shared director or exchanged seats
–Indirect Interlocking
Two corporations have directors that serve on
the board of a 3rd firm
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Board of Directors
Nominations & Elections
–Traditional Approach
•CEO invitation to membership
•Shareholders approval in annual proxy statement
•All nominees usually elected
–Staggered Board Approach
•Staggered terms of service/election
–Annual Elections
•Opportunity for hostile takeover
•Increased shareholder control
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Board of Directors
Criteria for a good Director
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Willing to challenge management
Has special expertise
Available outside of meetings
Expertise on global business issues
Understands key firm’s technologies
Brings valuable external contacts
Knowledge of firm’s industry
High visibility in their field
Accomplished in representing the firm to
stakeholders
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Board of Directors
Sarbanes-Oxley
–Key elements
–All audit committee members must be outside directors and
receive no additional fee
–Board no longer grants loans to officers
–Formal procedures for “whistle blowers”
–CEO and CFO must certify all financial info.
–Internal and external auditors may not be from the same firm
–Must 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
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Board of Directors
Organization of the Board
–Size
•Charter & Bylaws Determination
•States may set minimums
•Large Publicly held – 11
•SME Privately held – 7 or 8
•Family owned - 4
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Board of Directors
Corporate Governance Trends
–Review & shaping of strategy – active participation
–Pressure for corporate performance from
shareholders and institutional investors
–Demand for executive/director stock ownership with
performance based incentives
–Outside directors increasing
–Impact of Sarbanes-Oxley
–Smaller boards
–Separate CEO/COB and/or Lead Director
–Members with Int’l experience
–Shareholder nominations
–Social responsibility on the rise
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Board of Directors
CEO Responsibilities
– Provide executive leadership and effective
strategic management
– Manage the strategic planning process
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Board of Directors
Transformational 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
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Strategic Management Process
Strategic Planning Staff
–Supports top management & business units in
the strategic planning process
–Identify & analyze company-wide strategic issues
–Generate strategic alternatives
–Facilitate business units in coordinating activities
related to strategic planning process
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Strategic Management Process
Board of Directors Role in Succession
Planning
•Set criteria for selection based on strategic needs of
the company
•Executive type
•Dynamic industry expert - growth
•Analytical portfolio manager - diversification
•Cautions profit planner - stability
•Turnaround specialist – weak company/active market
•Professional liquidator – company can’t be saved
•Set realistic performance expectations
•Develop a deep understanding of the organization
and conduct thoughtful annual reviews of the
CEO
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CHAPTER 2
Corporate
Governance
STRATEGIC MANAGEMENT & BUSINESS POLICY
10TH EDITION
THOMAS L. WHEELEN
Prentice Hall, Inc. © 2006
J. DAVID HUNGER
2-24
Board of Directors
Criteria for a good Director
–
–
–
–
–
–
–
–
–
Willing to challenge management
Has special expertise
Available outside of meetings
Expertise on global business issues
Understands key firm’s technologies
Brings valuable external contacts
Knowledge of firm’s industry
High visibility in their field
Accomplished in representing the firm to
stakeholders
Prentice Hall, Inc. © 2006
2-25
Corporate Governance
BOD Responsibilities
(200 Directors from 8 countries)
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Setting strategy and overall direction, mission or vision
Hiring firing CEO and top management
Controlling, monitoring or supervising top management
Reviewing and approving use of resources
Caring for Shareholder interests
(CEO’s surveyed)
–
–
–
–
Corporate performance
CEO Succession
Strategic planning
Corporate governance
Prentice Hall, Inc. © 2006
2-26