Chapter 2: Corporate Governance
Corporate Governance: Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation.

Corporate Governance: Role of the Board in strategic management:
Monitor what is happening inside and outside the corporation
Evaluate & review management proposals, decisions and actions
Vote decisions with long-term consequences
Establish/Approve strategy, mission, vision
Does good governance practice lead to better performance?
Looking toward long term- always looking 1 year to next
We haven’t done enough research
Eliminated risk and increase stability

Recent Trends in Corporate Governance:
Boards more involved in reviewing, evaluating, and shaping strategy
Institutional investors active on boards; pressure on CEO for firm performance
Shareholders demand directors own more than token amounts of the firm’s stock
More non-affiliated outside directors

Global Corporate Governance:
Global- with increasing FDI and need for capital, greater attention to governance issues, diffusion of best practices
Convergence of governance practice globally?
Culture is a powerful force so we will probably not see a convergence “best practice”
We have moved toward developing good governance practices- strong systems
Countries looking for foreign trade investment, becoming a part of the WTO

Corporate Governance in US: External Influences
Legal/Regulatory (U.S. Publicly Traded Co.):
1. Federal Law (ex. SOX)
- Federal and Security Exchange Regulations
- SRO’s: N.Y. Stock Exchange, NASDAQ Rules
2. State Law
3. Corporate Charter
Global Influences
1. Legal Regimes and Administrative Heritage
2. National Culture
3. Business/Economic Systems (Stage)
4. Predominate Ownership Structure
5. Market Forces and Exchanges
6. Role of Other /Stakeholders (Unions, Banks)

Board of Directors- Size:
Determined by charter and bylaws
Average for publicly-held, large firm is 11 directors
Average for small/medium private firms is 7-8 directors

Board of Directors- Members:
Inside directors: Officers or executives employed by the board’s corporation
“Management directors”- CEO, CFO, etc.
Usually 3 inside directors
Outside directors: Individuals or Executives from other firms who are not employees of board’s corporation
“Outsider” overly simplistic term -- Some outsiders are not truly objective and could be considered insiders. (Independence)
Example:
Affiliated Directors: Handle the legal or insurance work for the company or are important suppliers (thus dependent on current management for a key part of their business.)
Retired executive directors: Used to work for the company, such as the past CEO who is partly responsible for much of the corporation’s current strategy and who probably groomed the current CEO as his or her replacement.

Codetermination: The inclusion of a corporation’s workers on its board of directors.
Very few companies do this because of the conflicts of interest: Can a member of the board, who is privy to confidential managerial information, function, as a union leader whose primary duty is to fight for the best benefits for his or her members?
Common in Europe: Two-Tier Boards-
1. A supervisory board elected by shareholders and employees to approve or decide corporate strategy and policy
2. A management board (composed primarily of top management) appointed by the supervisory board to manage the company’s activities.
Legally required in some countries (Germany)

Interlocking Directorate: Useful for gaining both inside information about an uncertain environment and objective expertise about potential strategies and tactics.
Direct: When two firms share a director or when an executive of one firm sits on the board of the second firm.
Indirect: Occurs when two corporations have directors who also serve on the board of a third firm, such as a bank.

Board of