JESSA Q.

BELOY
MSA 202
MANAGERIAL ECONOMICS

Case Study 2.1: Corporate Governance PAGE 68

1. What is the problem of the CEO being chairman of the board, as is

common in the United States?

Being the CEO or Chief Executive Officer, its function is to

manage the corporation in behalf of the Board. The positives of

separating the chairman and CEO roles are appealing. The board is

directly responsible for the hiring and firing of the CEO, and is charged

with general oversight of the corporation’s affairs and its management.

As a result, installing the CEO — the one person directly responsible for

that management — as Chairman could indicate a conflict of interest.

This is further complicated by the fact that the CEO is hired and fired by

the board. An independent Chairman of the Board can create an

independent source of authority with tangible authority to address the

concerns of the board. This independent perspective creates an

opportunity for the board to more effectively address any abuses that

may occur, and to address any concerns about the performance of the

CEO. But when an independent Chairman of the Board lacks

information, authority or respect of the management, any perceived

value in independence for independence’s sake diminishes. An

independent chairman may have less access to the facts and insufficient

industry knowledge or institutional respect because of his lack of day-to-

day involvement in running the corporation, thus impinging on the ability

advantages of an independent CEO and Chairman of the Board appear

obvious, the advantages of the unified position are just as obvious when

considering the day-to-day operations of a corporation. The CEO, as

the manager of the corporation, has a superior knowledge of the

operations of the business. When that role is unified with his role as

Chairman of the Board, one person occupying both roles may better be

able to lead the corporation and to identify any problems that may arise.

This can provide superior knowledge to the board and increase the

information available to it. This unified leadership structure creates

efficiency by allowing the unified executive to operate in both capacities

at once. The other board members can have confidence that their

Chairman/CEO is fully aware of the corporation’s strengths and

weaknesses, along with what issues need to be addressed moving

forward. On the other hand, the potential conflicts of interest described

above can create opportunities for abuse, as the Chairman in his CEO

role may abuse his position and conceal from the board potential

problems and any issues created by his management. Whether a

corporation chooses to unify or separate the Chairman and CEO roles,

it remains essential to have an independent, engaged and inquisitive

board that actively involves itself in the business to safeguard

shareholder interests.

2. What is the role of non-executive or independent directors?

Non-executive directors, also known as external directors,

independent directors or outside directors are members of a company's

director typically does not engage in the day-to-day management of the

organization, but is involved in policy making and planning exercises. In

addition, non-executive directors' responsibilities include the monitoring

of the executive directors and acting in the interest of the company

stakeholders.

3. What are the problems of having a more active board?

Historically, corporate boards have been described as either

active or passive. Some corporate CEOs relished having what they

thought were "rubber stamp" boards of directors who would approve

virtually any actions they chose to pursue. Sarbanes-Oxley has

dramatically changed that dynamic. Corporate directors must now be

much more independent, and their legal liability to shareholders has

increased significantly. One example in which a traditionally "quiet"

board stepped up and became more active occurred with the Walt

Disney Company. For years, Michael Eisner ruled the Disney empire

with an allegedly brutal iron fist. After Roy E. Disney, Walt Disney's

nephew, led a shareholder revolt of sorts and complained that investor

votes were being ignored or circumvented, the Walt Disney Company

board of directors finally decided to step in. In early 2004, the board took

the chairmanship away from Eisner after more than 45 percent of votes

cast at company's annual meeting opposed his board re-election. It was

a resounding vote of no confidence. But the board then chose an Eisner

ally, former U.S. Senator George Mitchell, as chairman, over the

objections of several larger shareholders. Ironically, a year later, Eisner

withholding their support for him. Boards can take simpler steps to

ensure they are not passive without voting out the CEO. They can

establish a non-executive chairman, a chairperson who is separate from

the CEO. The board can also staff all board committees with

independent outside directors, except the president and CEO.

4. What is the purpose of having executive sessions without the CEO being

present?

The purpose of having Executive Sessions is to reduce the

dangers of unawareness of the board with company’s affairs. This helps

board to get an insight of company’s internal management affairs. It is

also expected to help in exposing and reduce fraudulent threats.

5. What could be the role of the institutional investors in changing corporate

governance?

The institutional investors are most powerful catalyst for changing

corporate governance as it’s their duty to protect their investors. These

institutions are busily blaming boards for recent wrongs. The big

institutions knew who the cheats were. But life was good, and they

nodded and winked and chose to go along with it. In many ways, they

now have nobody to blame but themselves.

6. Why has corporate governance not become an issue in France and

Italy?

The In such countries as France and Italy, corporate governance

has not yet become an issue, as many of the big public companies in

these countries have large family shareholding and representation in

five on the boards of public companies is truly independent.

Therefore, this structure helps to resolve the conflict between

owners and managers. But it limits the role of the board as a check on

management.

7. Could the burning of an executive’s desk and chair in front of the factory

be described as a spiteful act? What other motivation might there be for

such an act?

It is an extremely malicious act. If an executive was

underperforming, he should have forced to resign, with some

settlements offered by the company. For underperforming, it is

tyrannical. There can be personal or professional envy or any other

reason which has nothing to do with underperforming.

References:

http://www.corporatecomplianceinsights.com/split-decisions-the-

pros-and-cons-of-separating-ceo-and-chairman-roles/

https://www.investopedia.com/terms/n/non-executive-

director.asp

http://www.referenceforbusiness.com/management/Comp-

De/Corporate-Governance.html