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Chapter 2 Corporate Governance: I. Role of The Board of Directors

The document discusses the roles and responsibilities of boards of directors and top management in corporate governance. It covers topics such as the board's oversight duties, strategic planning responsibilities, composition of boards, trends towards more independent boards, and the role of top managers in strategic leadership and vision. The Sarbanes-Oxley Act aimed to improve oversight and transparency through measures like whistleblower protections and improved financial disclosures.

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Mirna Bachir Al Khatib
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95 views

Chapter 2 Corporate Governance: I. Role of The Board of Directors

The document discusses the roles and responsibilities of boards of directors and top management in corporate governance. It covers topics such as the board's oversight duties, strategic planning responsibilities, composition of boards, trends towards more independent boards, and the role of top managers in strategic leadership and vision. The Sarbanes-Oxley Act aimed to improve oversight and transparency through measures like whistleblower protections and improved financial disclosures.

Uploaded by

Mirna Bachir Al Khatib
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Chapter 2 Corporate Governance

I. Role of the Board of Directors

Corporation
a mechanism established to allow different parties to contribute capital, expertise and labor for their
mutual benefit
The corporation is governed by the board of directors that oversees top management with the
concurrence of the shareholders.

Corporate governance
refers to the relationship among the board of directors, top management and shareholders in determining
the direction and performance of the corporation

A. Responsibilities of the Board


An article by Spencer Stuart written by an international team of contributors suggested the following
five board of director responsibilities:

1. Effective board leadership including the processes, makeup and output of the board
2. Strategy of the organization
3. Risk vs. initiative and the overall risk profile of the organization
4. Succession planning for the board and top management team
5. Sustainability

Due care
In a legal sense, the board is required to direct the affairs of the corporation but not to manage them. It is
charged by law to act with due care. If a director or the board as a whole fails to act with due care and,
as a result, the corporation is in some way harmed, the careless director or directors can be held
personally liable for the harm done.

Role of the Board in Strategic Management

The role of the board of directors in strategic management is to carry out three basic tasks:
 Monitor developments inside and outside the corporation
 Evaluate and Influence management proposals, decisions and actions
 Initiate and Determine the corporation’s mission and strategies

Board of directors’ continuum


Boards can range from phantom boards with no real involvement to catalyst boards with a very high
degree of involvement.
B. Members of a Board of Directors
 Inside directors typically officers or executives employed by the corporation, called
management directors
 Outside directors may be executives of other firms but are not employees of the
board’s corporation, called non management directors.

 Agency theory

People who have favor a high proportion of outsiders state that outsiders directors are less biased and
more likely to evaluate management performance objectively than are inside directors.

The theory states that problems arise in corporations because the agents (top management) are not
willing to bear responsibility for their decisions unless they own a substantial amount of stock in the
corporation.
The theory suggests that a majority of a board needs to be from outside the firm so that top management
is prevented from acting selfishly to the detriment of shareholders.

 Stewardship theory

Proposes that, because of their long tenure with the corporation, insiders (senior executives) tend to
identify with the corporation and its success.
1. Affiliated directors :not employed by the corporation, handle legal or insurance work
2. Retired executive directors: used to work for the corporation, partly responsible for past
decisions affecting current strategy
3. Family directors :descendants of the founder and own significant blocks of stock

Codetermination: Should Employees Serve on Boards?

Codetermination
the inclusion of a corporation’s workers on its board, began only recently in the United States
Although the movement to place employees on the boards of directors of U.S. companies shows little
likelihood of increasing, the European experience reveals an increasing acceptance of worker
participation on corporate boards.

Interlocking Directorates

Direct interlocking directorate


when two firms share a director or when an executive of one firm sits on the board of a second
Indirect interlocking directorate
when two corporations have directors who serve on the board of a third firm
Interlocking Directorates
Interlocking directorates
useful for gaining both inside information about an uncertain environment and objective expertise about
potential strategies and tactics
Nomination and Election of
Board Members
97% of U.S. boards use nominating committees to identify potential board members
Staggered boards
only a portion of board members stand for re-election when directors serve more than one year terms
C. Nomination and Election of Board Members

Criteria for a good director include:


 Willingness to challenge management when necessary
 Special expertise that is important to the company
 Available for outside meetings to advise management
 Expertise on global issues
 Understands the firm’s key technologies and processes

D. Organization of the Board

The size of a board in the United States is determined by the corporation’s charter and its by- laws, in
compliance with state laws.
Although some states require a minimum number of board members, most corporations have quite a bit
of discretion in determining board size.

The average large, publicly held U.S. firm has 10 directors on its board
The average small, privately-held company has four to five members.

Lead director
consulted by the Chair/CEO regarding board affairs and coordinates the annual evaluation of the CEO
96% of U.S. companies that combine the Chairman and CEO positions had a lead director.
Organization of the Board
The most effective boards accomplish much of their work through committees.
Although they do not usually have legal duties, most committees are granted full power to act with the
authority of the board between board meetings.
Impact of the Sarbanes–Oxley Act on U.S. Corporate Governance
Sarbanes–Oxley Act
designed to protect shareholders from excesses and failed oversight of boards of directors
whistleblower procedures
improved corporate financial statements
Evaluating Governance
S&P Corporate Governance Scoring System
Ownership Structure and Influence
Financial Stakeholder Rights and Relations
Financial Transparency and Information Disclosure
Board Structure and Processes

E. Trends in Corporate Governance


Boards shaping company strategy
Institutional investors active on boards
Shareholder demands that directors and top management own significant stock
More involvement of non-affiliated outside directors
Increased representation of women and minorities
Trends in Corporate Governance
Boards evaluating individual directors
Smaller boards
Splitting the Chairman and CEO positions
Shareholders may begin to nominate board members
Society expects boards to balance profitability with social needs of society
II. The Role of Top Management
Top management responsibilities
involve getting things accomplished through and with others in order to meet the corporate objectives.
are multidimensional and are oriented toward the welfare of the total organization
A. Executive Leadership and Strategic Vision

Executive leadership
the directing of activities toward the accomplishment of corporate objectives, sets the tone for the entire
corporation

Strategic vision
description of what the company is capable of becoming

Transformational leaders
provide change and movement in an organization by providing a vision for that change

Many transformational leaders have been able to command respect and execute effective strategy
formulation and implementation because they have exhibited three key characteristics:
Characteristics of effective CEOs include:
1. The CEO articulates a strategic vision for the corporation.
2. The CEO presents a role for others to identify with and to follow.
3. The CEO communicates high performance standards and also show confidence in the followers’
abilities to meet these standards.

B. Managing the Strategic Planning Process

Strategic planning staff


charged with supporting both top management and the business units in the strategic planning process
Managing the
Strategic Planning Process

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