Strategic Leadership I The Corporation and Its Governance

1. Strategic Leadership IThe Corporationand Its Governance Corporation: An ingenious device for obtaining individual profit without individual responsibility -- Ambrose Bierce

2. The Problem in Corporate America Problems at the Top L. Dennis Kozlowski, center, former CEO of Tyco International

3. Today’s Agenda • What is a corporation • Who is supposed to work for whom in a corporation • Who really works for whom in a corporation • What can we do about it?

4. Types of Organizations • Sole Proprietorship • General Partnership • Limited Partnership • Corporation

5. The Corporation as Imaginary Friend

6. Reasons to Have Corporations • Focus Resources • Encourage Risk

7. Corporation: Defined • An association of shareholders (or even a single shareholder) created under laws and regarded as an artificial person by the courts, “having a legal entity entirely separate and distinct from the individuals who compose it, with the capacity of continuous existence or succession, and having the capacity as such legal entity, of taking, holding and conveying property, suing and being sued, and exercising such other powers as may be conferred on it by law, just as a natural person may. -- Barron’s Law Dictionary

8. Corporation: Defined • An association of shareholders (or even a single shareholder) created under laws and regarded as an artificial person by the courts, “having a legal entity entirely separate and distinct from the individuals who compose it, with the capacity of continuous existence or succession, and having the capacity as such legal entity, of taking, holding and conveying property, suing and being sued, and exercising such other powers as may be conferred on it by law, just as a natural person may. -- Barron’s Law Dictionary

9. Corporation: Defined • An association of shareholders (or even a single shareholder)created under laws and regarded as an artificial person by the courts, “having a legal entity entirely separate and distinct from the individuals who compose it, with the capacity of continuous existence or succession, and having the capacity as such legal entity, of taking, holding and conveying property, suing and being sued, and exercising such other powers as may be conferred on it by law, just as a natural person may. -- Barron’s Law Dictionary

10. Corporation: Defined • An association of shareholders (or even a single shareholder) created under laws and regarded as an artificial person by the courts, “having a legal entity entirely separate and distinct from the individuals who compose it, with the capacity of continuous existence or succession, and having the capacity as such legal entity, of taking, holding and conveying property, suing and being sued, and exercising such other powers as may be conferred on it by law, just as a natural person may. -- Barron’s Law Dictionary

11. Corporation: Defined • An association of shareholders (or even a single shareholder) created under laws and regarded as an artificial person by the courts, “having a legal entity entirely separate and distinct from the individuals who compose it, with the capacity of continuous existence or succession, and having the capacity as such legal entity, of taking, holding and conveying property, suing and being sued, and exercising such other powers as may be conferred on it by law, just as a natural person may. -- Barron’s Law Dictionary

12. The Playersin Corporate Governance • Shareholders • Board of Directors • CEO • Top Management Team

13. Power of Shareholders • Election of Directors • Approval of certain extraordinary matters • Right to bring suit to enforce these rights in the name of the corporation • Determine the market value of the firm

14. Role of Directors • Oversee Management • Bring Resources into the Organization

15. Powers of Directors • Determines general corporate policy • Appoints CEO to carry out this policy • Occasionally appoints other members of TMT • Determines CEO and TMT compensation • Legally responsible for the conduct of the firm

16. The CEO • In charge of the day-to-day operations of the organization • Directly answerable to the Board • Usually the one who speaks for the organization

17. The Top Management Team • Other senior managers of the firm • Title is often the C_O or Vice-President • Actual power depends on corporate structure and relationship with CEO • Should have complementary talents

18. Legal Power Structureof a Corporation

19. Actual Power Structureof a Corporation

20. Agency Problem • Problems which arise when one person (the agent) is charged with acting in another person’s (the principal’s) interest. Results from the difficulty ensuring that the agent actually acts in the best interests of the principal and not in his or her own best interest

21. Agency Problem(example) Tickets for Lucy Kaplansky

22. ShareholdersversusThe Board of Directors or Why Shareholders are Powerless

23. Why Shareholders are Powerless • Ownership is diffuse; • Passive investors; • Internal corporate protections against a shareholder’s right to sell out;

24. Why Shareholders are Powerless • Court’s say that corporations do not have to show purchase offers to shareholders; • State legislation against takeovers.

25. Solutions (?) • Enforce Fiduciary Duties of Directors • Flip Side of Agency Problem • Three (3) Duties: • Duty of CARE • Duty of LOYALTY • Duty of OBEDIENCE • BUT sue directors too often and they will not want to serve

26. Solutions (?) • Have More Outside Directors • Inside / Outside / Affiliated • Evaluate and Compensate Directors Based on Firm Performance • Codify How Directors Make Decisions

27. For Next Time: • Finish CEO vs. the Board • A few more articles • Have a good week