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STRATEGIC MANAGEMENT & BUSINESS POLICY 10 TH EDITION

CHAPTER 2 Corporate Governance. STRATEGIC MANAGEMENT & BUSINESS POLICY 10 TH EDITION. THOMAS L. WHEELEN J. DAVID HUNGER. Corporate Governance. Corporate Governance. Corporation

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STRATEGIC MANAGEMENT & BUSINESS POLICY 10 TH EDITION

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  1. CHAPTER 2 Corporate Governance STRATEGIC MANAGEMENT & BUSINESS POLICY10TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER

  2. Corporate Governance

  3. Corporate Governance Corporation A mechanism established to allow different parties to contribute expertise and labor for their mutual benefit Corporate Governance The relationship among the board of directors, top management, and shareholders – determining the direction and performance of the corporation

  4. Corporate Governance Tyco International Ltd. • Operates in 100 countries, Revenues of $36 B • Dennis Kozlowski (1975 – 2002) • CEO 1995 – Credited with rapid worldwide expansion • Compensation • 1996 $8.8MM • 1999 $136.1MM • Company Loans for $$MM • Treated Company as his own • Wife B-Day Party $2.1 MM • Shower Curtain $6 K • Dog Umbrella Stand $15K • Apartment $16.8MM • Board of Directors • Members granted large loans • Many conflicts of interest • Many former company executives • Regularly bypassed in the decision process

  5. Corporate Governance BOD Responsibilities (200 Directors from 8 countries) • Setting strategy and overall direction, mission or vision • Hiring firing CEO and top management • Controlling, monitoring or supervising top management • Reviewing and approving use of resources • Caring for Shareholder interests (CEO’s surveyed) • Corporate performance • CEO Succession • Strategic planning • Corporate governance

  6. Corporate Governance • Role of Board in Strategic Management • Monitor • Evaluate and influence • Initiate and determine

  7. Board of Directors Continuum Small Entrepreneur Large Public

  8. Board of Directors • Members -- • Inside directors • “management directors” • Officers or execs employed by the firm • Outside directors • “non-management directors” • Execs of other firms not employed by the board’s corporation • 80% of members in large publicly held firms • 19% in privately held firms

  9. Agency Theory • Agency Problem – • Objectives of owners & agents in conflict • Difficult for owners to verify agent performance • Risk Sharing Problem – • Owners & agents risk assessment in conflict

  10. Stewardship Theory Stewardship Theory Executives more motivated to act in best interest of the corporation than their own self-interests. Theory that over time, senior executives tend to view corporation as extension of selves.

  11. Agency Theory versus Stewardship Theory Stewardship Agency Theory

  12. Board of Directors • When Outsiders can be considered Insiders • Affiliated Directors • Conflict of interests • Retired Directors • Former CEO’s- Objectivity? • Family Directors • Descendents with significant blocks of stock

  13. Board of Directors • Codetermination • The inclusion of a corporation’s employees on its board of directors • More popular in Europe • With or without ownership

  14. Board of Directors • Interlocking Directorates • Direct Interlocking • Shared director or exchanged seats • Indirect Interlocking • Two corporations have directors that serve on the board of a 3rd firm

  15. Board of Directors • Nominations & Elections • Traditional Approach • CEO invitation to membership • Shareholders approval in annual proxy statement • All nominees usually elected • Staggered Board Approach • Staggered terms of service/election • Annual Elections • Opportunity for hostile takeover • Increased shareholder control

  16. Board of Directors Criteria for a good Director • Willing to challenge management • Has special expertise • Available outside of meetings • Expertise on global business issues • Understands key firm’s technologies • Brings valuable external contacts • Knowledge of firm’s industry • High visibility in their field • Accomplished in representing the firm to stakeholders

  17. Board of Directors • Sarbanes-Oxley • Key elements • All audit committee members must be outside directors and receive no additional fee • Board no longer grants loans to officers • Formal procedures for “whistle blowers” • CEO and CFO must certify all financial info. • Internal and external auditors may not be from the same firm • Must identify if there is a member of the audit committee with financial expertise • Code of Ethics for CEO and CFO must be disclosed • Members of the Audit, Nominating, and Compensation Committees must all be outside directors

  18. Board of Directors • Organization of the Board • Size • Charter & Bylaws Determination • States may set minimums • Large Publicly held – 11 • SME Privately held – 7 or 8 • Family owned - 4

  19. Board of Directors • Corporate Governance Trends • Review & shaping of strategy – active participation • Pressure for corporate performance from shareholders and institutional investors • Demand for executive/director stock ownership with performance based incentives • Outside directors increasing • Impact of Sarbanes-Oxley • Smaller boards • Separate CEO/COB and/or Lead Director • Members with Int’l experience • Shareholder nominations • Social responsibility on the rise

  20. Board of Directors CEO Responsibilities • Provide executive leadership and effective strategic management • Manage the strategic planning process

  21. Board of Directors • Transformational leaders • Articulate a strategic vision • Presents a role for others to identify with and to follow • Communicates high standards of performance and confidence in followers ability

  22. Strategic Management Process • Strategic Planning Staff • Supports top management & business units in the strategic planning process • Identify & analyze company-wide strategic issues • Generate strategic alternatives • Facilitate business units in coordinating activities related to strategic planning process

  23. Strategic Management Process • Board of Directors Role in Succession Planning • Set criteria for selection based on strategic needs of the company • Executive type • Dynamic industry expert - growth • Analytical portfolio manager - diversification • Cautions profit planner - stability • Turnaround specialist – weak company/active market • Professional liquidator – company can’t be saved • Set realistic performance expectations • Develop a deep understanding of the organization and conduct thoughtful annual reviews of the CEO

  24. CHAPTER 2 Corporate Governance STRATEGIC MANAGEMENT & BUSINESS POLICY10TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER

  25. Board of Directors Criteria for a good Director • Willing to challenge management • Has special expertise • Available outside of meetings • Expertise on global business issues • Understands key firm’s technologies • Brings valuable external contacts • Knowledge of firm’s industry • High visibility in their field • Accomplished in representing the firm to stakeholders

  26. Corporate Governance BOD Responsibilities (200 Directors from 8 countries) • Setting strategy and overall direction, mission or vision • Hiring firing CEO and top management • Controlling, monitoring or supervising top management • Reviewing and approving use of resources • Caring for Shareholder interests (CEO’s surveyed) • Corporate performance • CEO Succession • Strategic planning • Corporate governance

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