Corporate Governance

1. In a Corporation: Investors share in profits without operating responsibilities Management operates company without providing the funds Board of directors approves decisions that will affect long run performance. Corporate Governance: relationship between these three parties. Corporate Governance

2. Corporate Governance Responsibilities of Top Management: CEO • articulates the vision, acts as a role model, sets performance standards • needs to lead the strategic planning process. Chairman • Ensures the board and its committees perform functions

3. Board of Directors Responsibilities: Setting corporate strategy, overall direction, mission, or vision Hiring and firing senior management Controlling, monitoring, or supervising top management Reviewing and approving the use of resources Caring for shareholder interests. Corporate Governance

4. Corporate Governance Board of Directors • Role in Strategic Management: • Monitor important developments • Evaluate management’s decisions • Determine mission, offer strategic options.

5. Corporate Governance Board of Directors Inside Directors - employees of firm Outside Directors - not employees of firm Question of Greater Objectivity(for Outside) versus Greater Competence (for Inside)

6. Corporate Governance Board of Directors Some studies show that greater proportion of board made up by Outside Directors does not impact the “objectivity” Reason: Board members are chosen and compensated by management. For Example: Boards dominated by Outside Directors neither improved social performance nor result in fewer legal violations.

7. Corporate Governance

8. Corporate Governance Interlocking Directorates • Direct: Two firms share a director or executive of one firm sits on board of another firm. • Indirect: Directors from different firms sit on board of third firm. • Benefits: Knowledge about external (competitive, regulatory) trends.

9. Corporate Governance Trends in Boards of Directors 1. Increasing number of institutional investors • 54% of Motorola, 47% of Ford, is owned by institutional investors • Only 1 (Fidelity) owns more than 5% of Motorola, No institutional investor owns more than 5% of Ford • Motorola has 246, Ford has 283, institutional investors.

10. Corporate Governance Trends in Boards of Directors 2. Larger stock ownership by executives and board members • Close to 60% of directors’ compensation is delivered in stock, 3 times the level in 1994. • Recruitment pressures force competitive salary packages, to include significant stock options. • Some companies require executives to own percentage of company.

11. Corporate Governance 3. Greater attention to social needs of society • growing recognition of sustainable development practices • entire life cycle • zero waste • take-back

12. Corporate Governance • Best and Worst Boards • Worst: • Lucent – too few • Xerox – too busy and lack of authority • United Airlines – too many factions • Dillard’s – lack of new “blood”/ideas • Veritas – no true independence

13. Corporate Governance • Best and Worst Boards • Best • Verizon – strong and diversified, ethnically and gender-diverse • Texas Instruments – able to make bold decisions • 3M – clearly communicates corporate policy and actions • General Motors – clearly communicates financial results • New York Times – maintains integrity of product from board influence

14. Corporate Governance Corporate Governance issues: Corporate Governance website

15. Corporate Governance Discussion Questions: • Does a modern corporation really need a board of directors? • What recommendations would you give to improve today’s board of directors?