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CHAPTER 2

Corporate
Governance

STRATEGIC MANAGEMENT & BUSINESS POLICY


10TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

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Corporate Governance

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Corporate Governance

The relationship among the board of


directors, top management, and
shareholders – determining the direction
and performance of the corporation

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Corporate Governance

Role of Board

–Monitor

–Evaluate and influence

–Initiate and determine

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Board of Directors Continuum

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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

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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

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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.

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Board of Directors

When Outsiders can be considered Insiders

–Affiliated Directors
–Retired Directors
–Family Directors

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Board of Directors

Codetermination

–The inclusion of a corporation’s employees on its


board of directors

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Board of Directors

Interlocking Directorates

–Direct Interlocking

–Indirect Interlocking

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Board of Directors

Nominations & Elections

–Traditional Approach
•CEO invitation to membership
•Shareholders approval in annual proxy statement
•All nominees usually elected

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Board of Directors

Nominations & Elections

–Staggered Board Approach


•Staggered terms of service/election

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Board of Directors

Sarbanes-Oxley

–Code of Ethics

–Audit, Nominating, and Compensation


Committees all outside directors

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Board of Directors

Organization of the Board

–Size

•Charter & Bylaws Determination

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Board of Directors

Corporate Governance

–Review & shaping of strategy


–Pressure for corporate performance
–Demand for executive stock ownership
–Outside directors increasing
–Impact of Sarbanes-Oxley

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Board of Directors

Transformational leaders

–Change agents through vision for change

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Board of Directors

Successful CEO’s

–Strategic vision
–Passion for the company
–Strong communication
–charisma

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Board of Directors

Executive Leadership

–Strategic vision
–Role model

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Board of Directors

Executive Leadership

–Communication of performance standards


–Demonstrates confidence in abilities of followers

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Strategic Management Process

Strategic Planning Staff

–Supports top management & business units in


the strategic planning process

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Strategic Management Process

Strategic Planning Staff

–Identify & analyze company-wide strategic issues


–Generate strategic alternatives

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Strategic Management Process

Strategic Planning Staff

–Facilitate business units in coordinating activities


related to strategic planning process

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