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Chapter 2 Study

Chapter 2 in the series of cornerstone exam study guides in the textbook. This will help you in a bind.

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sheiji_ro
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110 views

Chapter 2 Study

Chapter 2 in the series of cornerstone exam study guides in the textbook. This will help you in a bind.

Uploaded by

sheiji_ro
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 2:

Describe the role and responsibilities of the board of directors in


corporate governance
A corporation is a mechanism established to allow different parties to contribute
capital, expertise, and labor for their mutual benefit.
Management runs the company without being responsible for personally providing
the funds.
The board of directors has an obligation to approve all decisions that might affect
the long-term performance of the corporation.

The corporation is fundamentally governed by the board of directors


overseeing top management, with the concurrence of the shareholder.
Corporate governance refers to the relationship among these three groups in
determining the direction and performance of the corporation.
Responsibilities of the board:
o Effective board leadership including the processes, makeup and output
of the board
o Strategy of the Organization
o Risk vs. initiative and the overall risk profile of the organization
o Succession planning for the board and top management team
o Sustainability
The role of the board of directors in strategic management is to carry out
three basic tasks:
o Monitor
o Evaluate and influence
o Initiate and determine

Understand how the composition of a board can affect its operation


The boards of most publicly owned corporations are composed of both inside and
outside directors.
Inside directors are typically officers or executives employed by the corporation.
Outside directors may be executives of other firms but are not employees of the
boards corporation.
The size of a board in the US is determined by the corporations charter and its
bylaws, in compliance with state laws.
Describe the impact of the Sarbanes-Oxley Act on corporate governance in
the United States
This act was designed to protect shareholders from the excesses and failed
oversight that characterized criminal activities.

The act requires that all directors serving on the audit committee be independent of
the firm and receive no fees other than for services of the director.
In addition, boards may no longer grant loans to corporate officers. The act has also
established formal procedures for whistleblowers.
Before its passing, more U.S public corporations have gone private.
Discuss trends in corporate governance
Boards are getting more involved not only in reviewing and evaluating company
strategy but also in shaping it. Institutional investors, such as pension funds,
mutual funds, and insurance companies, are becoming active on boards and are
putting increasing pressure on top management to improve corporate performance.
This trend is supported by a U. S. SEC requirement that a mutual fund must publicly
disclose the proxy votes cast at company board meetings in its portfolio. This
reduces the tendency for mutual funds to rubber- stamp management proposals. 83
Shareholders are demanding that directors and top managers own more than
token amounts of stock in the corporation. Research indicates that boards with
equity owner-ship use quantifiable, verifiable criteria ( instead of vague, qualitative
criteria) to evaluate the CEO. 84 When compensation committee members are
significant shareholders, they tend to offer the CEO less salary but with a higher
incentive component than do compen-sation committee members who own little to
no stock. 85 Non- affiliated outside ( non- management) directors are increasing
their numbers and power in publicly held corporations as CEOs loosen their grip on
boards. Outside mem-bers are taking charge of annual CEO evaluations. Women
and minorities are being increasingly represented on boards. Boards are
establishing mandatory retirement ages for board members typically around age
70.
Boards are evaluating not only their own overall performance, but also that of
individual directors. Boards are getting smaller partially because of the reduction
in the number of insiders but also because boards desire new directors to have
specialized knowledge and expertise instead of general experience. Boards
continue to take more control of board functions by either splitting the combined
Chair/ CEO into two separate positions or establishing a lead outside director
position. Boards are eliminating 1970s anti- takeover defenses that served to
entrench current management. In just one year, for example, 66 boards repealed
their staggered boards and 25 eliminated poison pills. 86 As corporations become
more global, they are increasingly looking for board members with international
experience. Instead of merely being able to vote for or against directors nominated
by the boards nominating committee, shareholders may eventually be allowed to
nominate board mem-bers. This was originally proposed by the U. S. Securities and
Exchange Commission in 2004, but was not implemented. Supported by the AFLCIO, a more open nominat-ing process would enable shareholders to vote out
directors who ignore shareholder interests. 87 Society, in the form of special
interest groups, increasingly expects boards of directors to balance the economic
goal of profitability with the social needs of society. Issues dealing with workforce
diversity and environmental sustainability are now reaching the board level.

Explain how executive leadership is an important part of strategic


management

Executive leadership is important because it sets the tone for the entire
corporation.
A strategic vision is a description of what the company is capable of
becoming.
o The CEO articulates a strategic vision for the corporation
o The CEO presents a role for others to identify with and to follow
o The CEO communicates high performance standards and also shows
confidence in the followers abilities to meet these standards.

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