A condition that prevails when there is a congruence between an organization’s activities and society’s expectations.
Legitimation
A dynamic process by which a business seeks to perpetuate its acceptance.
Corporate Governance
Refers to the method by which a firm is being governed, directed, administered, or controlled, and to the goals for which it is being governed.
Is concerned with the relative roles, rights, and accountability of such stakeholder groups as owners, boards of directors, managers, employees, and other stakeholders.
Shareholders
Own stock in the firm, giving them ultimate control (the shareholder-primacy model).
Board of Directors
Govern and oversee management of the business.
Managers
The individuals hired by the Board to manage the business on a daily basis.
Employees
Hired to perform actual operational work
The Corporation’s Hierarchy of Authority
Outside directors
are independent from the firm
Inside directors
have some tie to the firm
•Board independence from management is crucial to good governance.
Issues Surrounding Compensation
Stock Options
Allows the recipient to purchase stock in the future at the price it is today.
Backdating
Allows the recipient to purchase stock at yesterday’s price, resulting in immediate wealth increase.
Spring-Loading
Granting of a stock option at today’s price, but with the inside knowledge that stock’s value is improving.
Bullet Dodging
Delaying of a stock option grant until right after bad news.
Say on Pay
Evolved from concerns over excessive executive compensation.
Clawback provisions
Compensation recovery mechanisms that enable a company to recoup CEO pay, typically in the event of a financial restatement or executive’s misbehavior.
CEO PayControversy
Retirement packages
have come under scrutiny.
$210 million to Robert Nardelli when he was ousted from Home Depot.
$125 million to outgoing Bank of America CEO, Ken Lewis
In contrast, many of today’s workers do not have a retirement plan.
Those who do generally have a defined contribution plan, rather than a defined benefit plan.
Outside Director Compensation
Paying board members is a recent idea.
Today, outside board members are paid.
From 2003-2010, their median pay rose about a third, from $175,800 to $233,800.
Controversy over whether directors should be paid at all, and whether they are paid enough.
Transparency
•Exec compensation packages may include deferred pay, Severance, pension benefits, & other perks over $10,000.
•SEC Rules require disclosure of executive compensation.
•Such disclosures may have a moderating impact prior to implementation.
Mergers and acquisitions
Expectation is that the threat of a possible takeover will motivate top managers to pursue shareholder, rather than self-interest.
But many corporate CEOs and boards go to great lengths to protect themselves from takeovers, using:
poison pills (discourages a hostile takeover by making the firm difficult to take on)
golden parachutes (firm agrees to pay key officers in the event of a change in control of the corporation)
Insider Trading
The practice of buying or selling a security by someone who has access to material information that is not available to the public.
Material Information
is information that a reasonable investor might want to use, and is likely to affect the price of the firm’s stock.
tipper
provides that information
tippee
receives the information
Sarbanes-Oxley Act of 2002 (SOX)
Amends securities laws to protect investors in public companies
Enhances public disclosure to require reporting of off-balance sheet transactions, and personal loans to executives
Limits the nonauditing services an auditor can provide to a firm it audits
Makes it unlawful for accounting firms to provide services where conflicts of interests exist
CEOs and CFOs must certify financials, and are held responsible for financial representations
Changes in boards of directors
More Board diversity
A greater ratio of outside board members to inside board members
Red Flags Signaling BoardProblems
The Board’s Relationship with CEO
Boards are responsible for monitoring CEO performance and dismissing poorly performing CEO
Formerly, CEOs were protected; no more; firings of CEOs are up significantly
If CEO also serves as Chairman of the Board, this duality can offer some protection
Activists have moved to separate CEO and Board functions
The Business Judgment Rule
protects board members if:
they act in good faith,
making informed decisions
that reflect the company’s best interests, and not their own interests.
Good Faith is central to the defense
The argument in favor of the Business Judgment Rule is that Board members need to be free to take risks without fear of liability.
The Shareholder Democracy
Movement rises from the fact that although they are owners, shareholders may find that their votes are not counted. They seek:
Majority Vote
The requirement that board members be elected by a majority of votes cast, rather than by a plurality.
BanningClassified or Staggered Boards
Electing members in staggered terms means that it might take 3 or more years to replace a board.
Proxy Access
Would provide shareholders with the opportunity to propose nominees for the board of directors.
The Role of the SEC
The SEC Is responsible for protecting investor interests.
Critics argue that the SEC is more focused on the needs of businesses than on that of investors.
The SEC failed to stop the Bernard Madoff Ponzi scheme before losing investors billions, although they had been warned of the scheme a decade earlier.
Investor Relations
A majority of corporate boards now communicate with their major investors
Public corporations have obligations to current and potential shareholders, including Full disclosure (Transparency), and the duty to provide information that might affect investment decisions.
Management is also responsible for communicating with shareholders.
CEO Warren Buffet calls his annual shareholder meeting a “Woodstock weekend for capitalists.”
An Alternative Model of Corporate Governance
The Anglo-American model of corporate governance is one of shareholder primacy
A emerging perspective is a director-primacy model of corporate governance
A director-primacy model is based on the concept of a corporation that is not owned, but is an independent legal entity that owns itself.
Boards are mediating hierarchs, responsible for balancing competing interests of stakeholders
Boards have a duty to shareholders, but boards are the ultimate decision-makers, whose duty is to the corporation