Topic 3

• CORPORATE GOVERNANCE

  • The system of rules, practices, & processes by which a firm is directed & controlled.

  • A company's board of directors is the primary force influencing corporate governance.

  • Bad corporate governance can cast doubt on a company's reliability, integrity, & transparency, which can impact its financial health.

  • Provides the framework for attaining a company's objectives, it encompasses every sphere of management, from action plans & internal controls to performance measurement & corporate disclosure.
• STAKEHOLDERS:

  • Shareholders
  • Senior Management Executives
  • Customers
  • Suppliers
  • Financiers
  • Government
  • Community
• Board of Directors

  They are an example of governance, they’re pivotal in governance, and it can have major ramifications for equity valuation.
• Corporate Governance

  • Governance is the set of rules, controls, policies, & resolutions put in place to dictate corporate behavior.

  • Communicating a firm's corporate governance is a key component of community and investor relations.

  • For shareholders, companies shouldn’t just be profitable, it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behavior, & sound corporate governance practices.
• Corporate Governance

  • Corporate governance is important to investors since it shows a company's direction and business integrity.

  • Good corporate governance helps companies build trust with investors and the community
  • Results to promotion of financial viability by creating a long-term investment opportunity for market participants
• Key Corporate Actors:

  • The Board of Directors

  • Management

  • Shareholders
• KEY CORPORATE ACTORS

  • Effective corporate governance requires a clear understanding of the respective roles of the board, management & shareholders; their relationships with each other; & their relationships with other corporate SH.
• KEY CORPORATE ACTORS: The Board of Directors

  • Has the vital role of overseeing the company’s management and business strategies to achieve long-term value creation.
• KEY CORPORATE ACTORS: The Board of Directors

  • Some important functions

  • Selecting a well-qualified Chief Executive Officer (CEO)
  • Monitoring & evaluating the CEO’s performance
  • Overseeing the CEO succession planning
• KEY CORPORATE ACTORS: The Board of Directors

  • Effective directors are diligent monitors, but not managers, of business operations.

  • They exercise vigorous and diligent oversight of a company’s affairs, including areas like strategy & risk, but they don’t manage or micromanage.
• KEY CORPORATE ACTORS: Management

  • Led by the CEO

  • Responsibilities include strategic planning, risk management and financial reporting.
• KEY CORPORATE ACTORS: Management

  • Responsible for setting, managing & executing the strategies of the company

  • Including but not limited to running the operations of the company under the oversight of the board and keeping the board informed of the status of the company’s operations.
• KEY CORPORATE ACTORS: Shareholders

  • Invest in a corporation by buying its stock and receive economic benefits in return.

  • They should not expect to use the public companies they invest as platforms for the advancement of their personal agendas/for the promotion of general political/social causes.
• KEY CORPORATE ACTORS: Shareholders

  Not involved in the day to-day management of business operations.

  • But they have the right to elect representatives (directors) and to receive information material to investment and voting decisions.
• BOARD OF DIRECTORS

  • Corp’s business is managed under the board’s oversight.

  • Has direct responsibility for certain key matters:

  • Relationship with outside auditor
  • Executive compensation
• CEO & MANAGEMENT

  • Under the CEO’s direction

  • Responsible for the development of the comp’s long-term strategic plans & the effective execution of the comp’s business in accordance with those strategic plans.
• CEO & MANAGEMENT

  • They run the company’s business under the board’s oversight, with a view toward building long-term value.
• MANAGEMENT

  • Identifies the company’s major business and operational risks:
  • Natural Disasters
  • Leadership Goals
  • Physical Security
  • Cyber Security
  • Regulatory Changes (etc.)
• DUTIES OF CEO & MANAGEMENT:

  • Capital Allocation
  • Business Operations
  • Business Resiliency
  • Strategic Planning
  • Annual Operating Plans & Budgets
  • Identifying, Evaluations & Managing Risks
  • Accurate & Transparent Financial Reporting & Disclosures
  • Selecting Qualified Mgmt. Establishing an Effective Organizational Structure & Ensuring Effective Succession Planning
• DUTIES OF CEO & MANAGEMENT: Business Operations

  • CEO and mgmt. run the comp’s business under the board’s oversight, with a view toward building long-term value.
• DUTIES OF CEO & MANAGEMENT: Strategic Planning

  • CEO & senior mgmt. take the lead in articulating a vision for the comp’s future & in developing strategic plans to create long-term value, with input from the board.
• DUTIES OF CEO & MANAGEMENT: Capital Allocation

  • CEO & senior mgmt. are responsible for providing recommendations to the board related to capital allocation of the comp’s resources.
• DUTIES OF CEO & MANAGEMENT: Identifying, Evaluating & Managing Risks

  • Mgmt. identifies, evaluates & manages the risks that the company undertakes in implementing its strategic plans & conducting its business.

  • Mgmt. evaluates whether these risks, & related risk mgmt. efforts, are consistent with the comp’s risk appetite.

  • Senior mgmt. keeps the board & relevant committees informed about the comp’s significant risks & its risk mgmt. processes.
• DUTIES OF CEO & MANAGEMENT: Annual Operating Plans & Budgets

  • Senior mgmt. develops annual operating plans and budgets for the company and presents them to the board.
• DUTIES OF CEO & MANAGEMENT: Selecting Qualified Mgmt. Establishing an Effective Organizational Structure & Ensuring Effective Succession Planning

  • Senior mgmt. selects qualified mgmt., implements an org structure, & develops & executes thoughtful career devt. & succession planning strategies appropriate for the company.
• DUTIES OF CEO & MANAGEMENT: Accurate & Transparent Financial Reporting & Disclosures

  • Mgmt. is responsible for the integrity of the company’s financial reporting system
  • The accurate and timely preparation of the company’s financial statements and related disclosures
• DUTIES OF CEO & MANAGEMENT: Accurate & Transparent Financial Reporting & Disclosures

  • It’s mgmt’s responsibility— under the direction of the CEO & the comp’s principal financial officer — to establish, maintain & periodically evaluate the company’s internal controls over financial reporting &-
  • -the company’s disclosure controls & procedures, including the ability of such controls & procedures to detect & deter fraudulent activity.
• DUTIES OF CEO & MANAGEMENT: Business Resiliency

  • Mgmt. develops, implements & periodically reviews plans for business resiliency providing the most critical protection in light of the company’s operations.
• Duties of CEO & MGMT/Business Resiliency: Risk Identification

  • Management identifies the company’s major business and operational risks

  • Relating to natural disasters, leadership gaps, physical security, cyber security, regulatory changes etc.
• Duties of CEO & MGMT/Business Resiliency: Crisis Preparedness

  • Mgmt. develops & implements crisis preparedness & response plans & works with the board to identify situations in which the board may need to assume a more active response role.

  • E.g. crisis involving senior mgmt.
• BUSINESS ROUNDTABLE

  • Supports the following (8) core guiding principles.
• Guiding Principles of Corporate Governance: 1

  • The board approves corporate strategies intended to build sustainable LTV

  • Selects a chief executive officer (CEO)

  • Oversees the CEO & senior mgmt. in operating the comp’s business, including allocating capital for long-term growth & assessing & managing risks

  • Set the “tone at the top” for ethical conduct
• Guiding Principles of Corporate Governance: 2

  • Mgmt. develops & implements corporate strategy
  • Mgmt. operates the company’s business under the board’s oversight
  • With the goal of producing sustainable LTV creation
• Guiding Principles of Corporate Governance: 3

  • Mgmt. under the oversight of the board & its audit committee, produces financial statements that fairly present the comp’s financial condition & results of operations

  • Mgmt. makes the timely disclosures investors need to assess the financial and business soundness and risks of the company
• Guiding Principles of Corporate Governance: 4

  • Audit committee (AC) of the board retains & manages the relationship with the outside auditor

  • AC oversees the comp’s annual financial statement audit & internal controls over financial reporting

  • AC oversees the company’s risk mgmt. & compliance programs
• Guiding Principles of Corporate Governance: 5

  • Nominating/corporate governance committee (N/CGC) of the board plays a leadership role in shaping the corporate governance of the company

  • N/CGC strives to build an engaged & diverse board whose composition is appropriate in light of the company’s needs & strategy

  • N/CGC actively conducts succession planning for the board.
• Guiding Principles of Corporate Governance: 6

  • Compensation committee (CC) of the board develops an executive compensation philosophy

  • CC adopts & oversees the implementation of compensation policies that fit its philosophy

  • CC designs compensation packages for the CEO & senior mgmt. to incentivize the creation of LTV

  • CC develops meaningful goals for performance-based compensation that support the company’s LTV creation strategy.
• Guiding Principles of Corporate Governance: 7

  • Board and management (B&M) should engage with long-term shareholders on issues & concerns that are of widespread interest to them & that affect the company’s LTV creation
• Guiding Principles of Corporate Governance: 7

  • Shareholders (SH) that engage with the board & mgmt. in a manner that may affect corpo decision making/strats are encouraged to disclose appropriate identifying info & to assume some accountability for the long-term interests of the comp & its SH as a whole.
  • SH should recognize that the board must continually weigh both short-term & long-term uses of capital when determining how to allocate it that is most beneficial to SH and to building LTV.
• Guiding Principles of Corporate Governance: 8

  • In making decisions, the board may consider the interests of all of the company’s constituencies, including stakeholders such as:
  • Employees
  • Customers
  • Suppliers
  • Community in which the company does business
  • When doing so contributes in a direct & meaningful way to building LTV creation.