1. WK17.1 Agenda Daily good deed, exam next Monday September 27, 2010. NY Mosque ethical dilemma Thai-Muslim southern problems Ethical presentation second chance (3rd Group) CG lecture Mind map Ethical dilemma 1 MIB, BBA 2010
2. Corporate Governance The relationship among the board of directors, top management, and shareholders – determining the direction and performance of the corporation. The process by which a company is controlled or governed. Analogy: government of a nation MIB, BBA 2010 2
3. Board of Directors Responsibilities: Setting strategy, overall direction, mission, and vision. Hiring and firing top management. Controlling, monitoring top management. Reviewing and approving the use of resources. Caring for shareholder interests. Role in strategic management Monitor Evaluate and influence Initiate and determine MIB, BBA 2010 3
5. Shareholders Legal Rights of stockholders To receive dividends To vote on Member of board of directors Major M&A Charter and bylaw changes Proposals by stockholders To receive annual reports To bring shareholder suits against the company and officers To sell their own shares of stock to others Individual stockholders: Main Street investors, people who directly own shares of stock Institutions: pensions, mutual funds, and insurance companies Objective of stock ownership Capital appreciation: stock price rise Dividend: company’s earnings Social investment MIB, BBA 2010 5
6. Management Top management responsibilities Provide executive leadership and strategic vision. The CEO articulates a strategic vision for the corporation. The CEO present a role for others to identify with and to follow. The CEO communicateshigh performance standards and also shows confidence in the followers’ abilities to meet these standards. 2. Manage the strategic planning process. MIB, BBA 2010 6
7. Flow of Authority in CG Theory Law&Regulation Reality Law&Regulaiton MIB, BBA 2010 7 Shareholders
8. Theories in CG Agency theory: top managers are hired hands (more interested in their personal welfare than that of the shareholders) Agency problem: -The desires or objectives of the owners and agents conflict M&A for more power and benefit, diversify to reduce risk and less effort on core product linereduction in stock price or dividend -Difficult of expensive to verify what the agent is actually doing. -Risk sharing problem (different attitude toward risk) Executives may not choose risky strategies because fear of losing their jobs. Stewardship theory: Executives tend to be more motivated to act in the best interest of the corporation than in their own self interests. Focus on higher need such as achievement and self actualization. Overtime CEO view the corporation as an extension of themselves. CEOs focus on the company long term success not the short term oriented shareholders MIB, BBA 2010 8
9. Sarbanes-Oxley Act of 2002 A federal statute designed to prevent financial fraud. It enacted new regulations on auditing, financial reporting, and legal compliance such as Outside directors could not accept consulting fees when audit the book of the company. Protect whistle blowers. CEO and CFO must sign the financial statement. Prohibits CEO from receiving loans unavailable to outsiders. Establishes heavy penalty (25 years in jail). Allow the SEC to bar individual offenders from serving as directors or officers of the company. What about Thai SET rule? MIB, BBA 2010 9
10. Principle of Good Governance Select outside directors to fill most positions. Hold open elections for members of the board. Appoint an independent lead director (chairman of the board) and hold regular meetings without the CEO present(Separate the duties of CEO and chairman. Align director compensation with corporate performance. Evaluate the board’s own performance on a regular basis. MIB, BBA 2010 10
11. Board Members Inside directors: directors who are employees of the company. Outside directors: directors who are not employees of the company. Outsiders as insiders: Affiliate directors: suppliers, lawyer or insurer Retired directors Family directors Independent directors: outside directors who do not have business dealings with a corporation that would impair their impartiality. MIB, BBA 2010 11
13. Compensation Criticism Too much compensation Golden parachute Misuse of options: back dating, spring loading Widening gap between CEO compensation and average workers Suggestion Transparent information of total pay and benefits of top officers. Reveal pay and performance relationship (difficult but doable) Tied bonus to long term performance. Shareholders should be able to vote on executive compensation. MIB, BBA 2010 13
14. Global CG Germanytwo tiered system A supervisor board elected by the shareholders and employees to approve or decide on strategy and policy. Management board, appointed by the supervisory board, to manage the company activities. Japan: shareholders have less control on the management team because most firms raise money through their major banks. Banks as the owners and creditors of the companies have good relationship with CEOs. Banks would control the management as well as give financial suggestions. France and UK increase the number of outside directors (50%). MIB, BBA 2010 14
