Prentice Hall, Inc. 20062-*STRATEGIC MANAGEMENT & BUSINESS POLICY 10TH EDITIONTHOMAS L. WHEELEN J. DAVID HUNGERCHAPTER 2 Corporate Governance

Prentice Hall, Inc. 20062-*Corporate Governance

CorporationA mechanism established to allow different parties to contribute expertise and labor for their mutual benefit

Corporate GovernanceThe relationship among the board of directors, top management, and shareholders determining the direction and performance of the corporation

Prentice Hall, Inc. 20062-*Corporate Governance

Tyco International Ltd.Operates in 100 countries, Revenues of $36 BDennis Kozlowski (1975 2002)CEO 1995 Credited with rapid worldwide expansionCompensation1996$8.8MM1999$136.1MMCompany Loans for $$MMTreated Company as his ownWife B-Day Party$2.1 MMShower Curtain$6 KDog Umbrella Stand$15KApartment $16.8MMBoard of DirectorsMembers granted large loansMany conflicts of interestMany former company executivesRegularly bypassed in the decision process

Prentice Hall, Inc. 20062-*Corporate Governance

BOD Responsibilities (200 Directors from 8 countries)Setting strategy and overall direction, mission or visionHiring firing CEO and top managementControlling, monitoring or supervising top managementReviewing and approving use of resourcesCaring for Shareholder interests

(CEOs surveyed)Corporate performanceCEO SuccessionStrategic planningCorporate governancePrentice Hall, Inc. 20062-*Corporate Governance

Prentice Hall, Inc. 20062-*Corporate GovernanceRole of Board in Strategic Management

Monitor

Evaluate and influence

Initiate and determine

Prentice Hall, Inc. 20062-*Board of Directors ContinuumSmall EntrepreneurLarge Public

Prentice Hall, Inc. 20062-*Board of DirectorsMembers --

Inside directorsmanagement directorsOfficers or execs employed by the firm

Outside directorsnon-management directorsExecs of other firms not employed by the boards corporation80% of members in large publicly held firms19% in privately held firms

Prentice Hall, Inc. 20062-*Agency TheoryAgency Problem Objectives of owners & agents in conflictDifficult for owners to verify agent performance

Risk Sharing Problem Owners & agents risk assessment in conflict

Prentice Hall, Inc. 20062-*Stewardship TheoryStewardship TheoryExecutives 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.

Prentice Hall, Inc. 20062-*Agency Theory versus Stewardship TheoryAgency TheoryStewardship

Prentice Hall, Inc. 20062-*Board of DirectorsWhen Outsiders can be considered Insiders

Affiliated DirectorsConflict of interestsRetired DirectorsFormer CEOs- Objectivity?Family DirectorsDescendents with significant blocks of stock

Prentice Hall, Inc. 20062-*Board of DirectorsCodetermination

The inclusion of a corporations employees on its board of directorsMore popular in EuropeWith or without ownership

Prentice Hall, Inc. 20062-*Board of DirectorsInterlocking Directorates

Direct InterlockingShared director or exchanged seats

Indirect InterlockingTwo corporations have directors that serve on the board of a 3rd firm

Prentice Hall, Inc. 20062-*Board of DirectorsNominations & Elections

Traditional ApproachCEO invitation to membershipShareholders approval in annual proxy statementAll nominees usually elected

Staggered Board ApproachStaggered terms of service/election

Annual ElectionsOpportunity for hostile takeoverIncreased shareholder control

Criteria for a good DirectorWilling to challenge managementHas special expertiseAvailable outside of meetingsExpertise on global business issuesUnderstands key firms technologiesBrings valuable external contactsKnowledge of firms industryHigh visibility in their fieldAccomplished in representing the firm to stakeholdersPrentice Hall, Inc. 20062-*Board of Directors

Prentice Hall, Inc. 20062-*Board of DirectorsSarbanes-Oxley

Key elementsAll audit committee members must be outside directors and receive no additional feeBoard no longer grants loans to officersFormal procedures for whistle blowersCEO and CFO must certify all financial info.Internal and external auditors may not be from the same firmMust 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

Prentice Hall, Inc. 20062-*Board of DirectorsOrganization of the Board

SizeCharter & Bylaws DeterminationStates may set minimumsLarge Publicly held 11SME Privately held 7 or 8Family owned - 4

Prentice Hall, Inc. 20062-*Board of DirectorsCorporate Governance Trends

Review & shaping of strategy active participationPressure for corporate performance from shareholders and institutional investorsDemand for executive/director stock ownership with performance based incentivesOutside directors increasingImpact of Sarbanes-OxleySmaller boardsSeparate CEO/COB and/or Lead DirectorMembers with Intl experienceShareholder nominationsSocial responsibility on the rise

CEO ResponsibilitiesProvide executive leadership and effective strategic managementManage the strategic planning processPrentice Hall, Inc. 20062-*Board of Directors

Prentice Hall, Inc. 20062-*Board of DirectorsTransformational 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

Prentice Hall, Inc. 20062-*Strategic Management ProcessStrategic Planning Staff

Supports top management & business units in the strategic planning processIdentify & analyze company-wide strategic issuesGenerate strategic alternativesFacilitate business units in coordinating activities related to strategic planning process

Prentice Hall, Inc. 20062-*Strategic Management ProcessBoard of Directors Role in Succession Planning

Set criteria for selection based on strategic needs of the companyExecutive typeDynamic industry expert - growthAnalytical portfolio manager - diversificationCautions profit planner - stabilityTurnaround specialist weak company/active marketProfessional liquidator company cant be savedSet realistic performance expectationsDevelop a deep understanding of the organization and conduct thoughtful annual reviews of the CEO

Prentice Hall, Inc. 20062-*STRATEGIC MANAGEMENT & BUSINESS POLICY 10TH EDITIONTHOMAS L. WHEELEN J. DAVID HUNGERCHAPTER 2 Corporate Governance

Criteria for a good DirectorWilling to challenge managementHas special expertiseAvailable outside of meetingsExpertise on global business issuesUnderstands key firms technologiesBrings valuable external contactsKnowledge of firms industryHigh visibility in their fieldAccomplished in representing the firm to stakeholdersPrentice Hall, Inc. 20062-*Board of Directors

BOD Responsibilities (200 Directors from 8 countries)Setting strategy and overall direction, mission or visionHiring firing CEO and top managementControlling, monitoring or supervising top managementReviewing and approving use of resourcesCaring for Shareholder interests

(CEOs surveyed)Corporate performanceCEO SuccessionStrategic planningCorporate governancePrentice Hall, Inc. 20062-*Corporate Governance

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