Corporate Governance Dilemmas
Watchdog vs. Co-Pilot
Lecture 3
Role of the Board
• Watchdog
– Observe, and act only if something is amiss
– Replace the CEO if necessary
• Oversees compliance
• Co-Pilot
– Engaged in the discussions and decisions
about strategy and execution
– Add value based expertise and experience
Minimum Duties of the Board
• Hire and fire the CEO
– Approve Executive Compensation
• Approve the Strategic Plan
– Acquisitions, Divestitures, Capital Structure
• Oversight for Compliance
– SEC reporting requirements
– NYSE/NASDAQ listing requirements
– Special requirements (e.g., environmental)
Dilemma: Watchdog vs. Co-Pilot
• Pros
• Cons
Boards Respond to Circumstances
Monitoring, advising, and deciding will be
affected by
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The company’s financial condition
Size of the business
Business complexity and industry turbulence
Relationship with CEO and top management
Relationship with shareholders
• Shareholder expectations (e.g., resolutions)
• Philosophy of the shareholder base
– Board dynamics (make-up and culture)
Best Board-Management
Combinations
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Best Companies exhibit
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Clearly-stated, focused strategy
Flawless operational execution
Performance-oriented culture
Fast, Flexible, Flat organization
Best Board-Management
Combinations
• At least 2 of the 4 attributes:
– Talent: Hold on to talented employees
– Leadership: Keep CEO and board members
on value-creation
– Innovation: Make innovations that are
industry transforming
– Partnerships: Make growth happen
organically and with mergers and partnerships
Corporate Purpose
• WHAT is the purpose of the enterprise?
• WHY is the purpose worth achieving?
• HOW will the purpose be achieved?
• WHAT are the objectives?
Intel’s Mission Statement
Delight our customers, employees, and
shareholders by relentlessly delivering the
platform and technology advancements
that become essential to the way we work
and live.
Intel’s Core Values
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Customer orientation
Results orientation
Risk taking
Great place to work
Quality
Discipline
Intel’s Objectives
• Extend our silicon technology and
manufacturing leadership
• Deliver unrivaled microprocessors and
platforms
• Grow profitability worldwide
• Excel in customer orientation
Johnson Controls’
Mission Statement
Continually exceed our customers’
increasing expectations
Johnson Controls’
Values Statement
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Integrity
Customer Satisfaction
Diversity and engagement of employees
Improvement and Innovation
Safety and Environment
Johnson Controls’ Objectives
• Customer Satisfaction -will exceed customer
expectation
• Technology -apply world class technology
• Growth -build upon existing businesses
• Market Leadership -operate where are or have
the opportunity to recognized leader
• Shareholder Value -exceed after tax median
return on equity (ROE) of the S&P Industrials
More Governance Dilemmas
• Stakeholder Perspective
– For whose benefit does the enterprise exist?
– To what extent are the expectations of all
stakeholders being met?
– What is the priority among the stakeholders?
– Which stakeholder is number #1?
Board Dilemmas-Ken Lay
• Who should appoint members to the
Board? to the Board committees?
• What should the CEO’s role be in the
process?
• What is meant by independence?
• What factors drive the size of the board?
Board Dilemmas-Alan Greenspan
• Is the CEO conflicted in representing the
interests of shareholders? When?
• Who should appoint the outside auditors?
• Can brokerage firms be both securities
underwriters and objective securities
evaluators?
• How do shareholders want to be paid?
Board Dilemmas-Alan Greenspan
• What is the right balance between shortterm earnings focus and long-term
earnings focus?
• What factors affect an auditors decision on
how to handle an accounting transaction?
• Should stock options be expensed?
Why? And Why not?