Gregory G. Dess
G. T. Lumpkin
Marilyn L. Taylor
Role of Corporate Governance
•
Corporate governance
•
Relationship among
n The
shareholders
n The
management (led by the Chief Executive Officer)
n The
board of directors
•
Issue is
•
How corporation s can succeed (or fail)
in aligning managerial motives with
n the
interests of the shareholders
n The
interests of the board of directors
Separation of Owners (Shareholders) and Management
•
Shareholders (investors)
•
Limited liability
•
Participate in the profits of the
enterprise
•
Limited involvement in the company’s
affairs
•
Management
•
Run the company
•
Does not personally have to provide the funds
•
Board of directors
•
Elected by shareholders
•
Fiduciary obligation to protect
shareholder interests
Agency Theory: Two Problems
•
Goals of principals and agents may
conflict
•
Difficulty or expensive for the
principal to verify what the agent is actually doing
n Hard
for board of directors to confirm that managers are actually acting in
shareholders interests
n Managers
may opportunistically pursue their own interests
•
Principal and agent may have different
attitudes and preferences toward risk
Governance Mechanisms: Aligning the Interests of
Owners and Managers
•
Two primary means of monitoring behavior
of managers
•
Committed and involved board of
directors
n Active,
critical participants in setting strategies
n Evaluate
managers against high performance standards
n Take
control of succession process
n Director
independence
•
Shareholder activism
n Right
to sell stock
n Right
to vote the proxy
n Right
to sue for damages if directors or managers fail to meet their obligations
n Right
to information from the company
n Residual
rights following company’s liquidation
•
Managerial incentives (contract-based
outcomes)
•
Reward and compensation agreements (from
TIAA-CREF)
n Align
rewards of all employees (including rank and file as well as executives) to the
long-term performance of the corporation
n Allow
creation of executive wealth that is reasonable in view of the creation of
shareholder wealth
n Measurable
and predictable outcomes that are directly linked to the company’s performance
n Market
oriented
n Easy
to understand by investors and employees
n Fully
disclosed to investing public and approved by shareholders
External Governance Control Mechanisms
•
Market for corporate control
•
Auditors
•
Banks and analysts
•
Regulatory bodies (Sarbanes-Oxley Act in
2002)
•
Media and public activists
Major Provisions of Sarbanes-Oxley Act
•
Auditors
•
Barred from certain types of nonaudit
work
•
Not allowed to destroy records for five
years
•
Lead partners auditing a firm should be
changed at least every five years
•
CEOs and CFOs
•
Must fully reveal off-balance sheet
finances
•
Vouch for the accuracy of information
revealed
•
Executives
•
Must promptly reveal the sale of shares
in firms they manage
•
Are not allowed to sell shares when
other employees cannot
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