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BUS 116 Chap027 corporate governance

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BUS 116 Chap027 corporate governance

  1. 1. Corporate Governance Chapter 27
  2. 2. Learning Objectives 1. Explain the central dilemma of corporate governance. 2. Describe the functions of directors, officers, and shareholders. 3. List the five theories of corporate governance. 4. Describe cumulative voting and proxy solicitation. 5. Explain shareholder proposals. 2
  3. 3. Learning Objectives (cont.) 6. Distinguish between voting trusts and pooling agreements. 7. Contrast shareholder direct suits with shareholder derivative suits. 8. Contrast the business judgment rule with the fairness rule. 9. List the rights that belong to shareholders. 10. Explain the management of a limited liability company. 3
  4. 4. Directors of the Corporation • Board of directors – manages the business affairs of a corporation – elected by the shareholders. 4
  5. 5. Time Commitment of Directors • The basic time commitment for a director is approximately 30 days per year, but depending upon need, availability, and interest, it can be 40, 60, 80, or even more days. 5
  6. 6. Officers of the Corporation • Officers have the authority of general agents for the operation of the normal business of the corporation. – President, vice-presidents, a secretary, and treasurer 6
  7. 7. Shareholders of the Corporation • The shareholders are the owners of the corporation. • The more shares that a shareholder owns, the more voting power that shareholder has in the running of the corporation. 7
  8. 8. Theories of Corporate Governance • • • • • Special interest group control Governmental control Independent director control Managerial control Shareholder democracy 8
  9. 9. Theories of Corporate Governance • Special interest group control – based on the idea that corporate decision making affects more individuals and groups than just the shareholders and the managers of the corporation. 9
  10. 10. Theories of Corporate Governance • Governmental control – based on the belief that because corporate decision making influences more individuals and groups than just the shareholders and the managers, corporate decisions should be made by an impartial group of corporate outsiders. 10
  11. 11. Theories of Corporate Governance • Independent Director Control – most effective way to ensure that corporate decisions are made in the best interests of those affected is to make certain that the decision makers themselves are not affected by those decisions. 11
  12. 12. Independent Director Control • Independent directors – directors who have no family members employed by the corporation, or who are not themselves employed by the corporation, • Controlled company – one that has more than half its voting power concentrated in one person, or a small group of persons, who always vote together 12
  13. 13. Theories of Corporate Governance • Managerial control – the officers and the directors of a corporation are in the best position for judging not only the needs of the corporation but also the needs of the community and the needs of society at large. 13
  14. 14. Theories of Corporate Governance • Shareholder democracy – shareholders have the right to run the corporation, because without their money, the corporation would not be able to survive. – also known as corporate democracy 14
  15. 15. Shareholder Control 15
  16. 16. Shareholder Voting Control • Cumulative voting – system allows shareholders to multiply the number of their voting shares by the number of directors to be elected. – allows minority shareholders an opportunity to be represented on the board of directors. 16
  17. 17. Proxy Voting • Proxy solicitation – the process by which one shareholder asks another for his or her voting right • Proxy contest • Proxy statement • Proxy card 17
  18. 18. Shareholder Proposals • Shareholder proposal – a suggestion about a broad company policy or procedure that is submitted by a shareholder. – must concern something that affects all shareholders. 18
  19. 19. Voting Trusts • Voting trust – an agreement among shareholders to transfer their voting rights to a trustee • Trustee – a person who is entrusted with the management and control of another’s property or the rights associated with that property. 19
  20. 20. Pooling Agreements • Pooling Agreements – shareholders join together in a temporary arrangement and agree to vote the same way on a particular issue – shareholders retain control of their own votes 20
  21. 21. Shareholder Lawsuits • Direct suit – brought by shareholders who have been deprived of a right that belongs to them as shareholders 21
  22. 22. Shareholder Lawsuits • Derivative suit – allows shareholders to sue corporate management on behalf of the corporation. • Rule of contemporary ownership – a shareholder must own stock at the time of the injury and at the time of the suit to bring a derivative suit 22
  23. 23. Management Responsibilities 23
  24. 24. Governance Responsibilities • Business judgment rule – results from the commonsense belief that, based on their education, experience, and knowledge, managers are in the best position to run the corporation 24
  25. 25. The Business Judgment Rule Duty of due diligence says that when acting on behalf of the corporation, a manager must act: 1. in good faith, 2. using the same level of care that an ordinarily prudent individual would use in a comparable situation, 3. in the reasonable belief that the best interests of the company are being met. 25
  26. 26. The Fairness Rule • Fairness rule – requires managers to be fair to the corporation when they personally benefit from their business decisions 26
  27. 27. The Insider Trading Rule • Insider trading rule – when managers possess important inside information, they are obligated to reveal that information before trading on it themselves. – when inside information is revealed, the managers must use that information when trading with the corporation or with those outside the corporation. 27
  28. 28. The Corporate Opportunity Doctrine • Corporate opportunity doctrine – states that corporate managers cannot take a corporate business opportunity for themselves if they know that the corporation would be interested in that opportunity as well. 28
  29. 29. The Actual Authority Rule • Actual authority rule – states that a manager may be held liable if he or she exceeds his or her authority and the corporation is harmed as a result. 29
  30. 30. Efforts to Limit Liability • Voluntary protective measures, • Automatic protective measures • Protective measures that limit the amount of damages that can be recovered against directors 30
  31. 31. Efforts to Increase Responsibility • Sarbanes-Oxley Act – places an affirmative duty on the directors of publicly traded corporations to monitor whether their corporation is conforming to all legal requirements. 31
  32. 32. Efforts to Increase Responsibility • United States Sentencing Commission – issued a set of rules that control the discretion of the federal courts in issuing fines against corporations found guilty of criminal activities 32
  33. 33. Shareholder Rights • • • • Right to Examine Corporate Records Right to Share in Dividends Right to Transfer Shares of Stock Preemptive Rights 33
  34. 34. Preemptive Rights • Preemptive right – Shareholders right to purchase a proportionate share of every new offering of stock by the corporation unless the right is denied or limited by the corporate charter or by state law 34
  35. 35. Governance of a Limited Liability Company • Member-Managed LLCs • Manager-Managed LLCs • Fiduciary Duties 35
  36. 36. Question? Which law places a duty on the directors of corporations to monitor whether their corporation is conforming to all legal requirements? A. Taft-Hartley Act B. Sarbanes-Oxley Act C. United States Sentencing D. McCain-Clinton Act 36
  37. 37. Question? Which rule states that a manager may be held liable if he exceeds his authority and the corporation is harmed as a result? A. Insider Trading Rule B. Corporate Opportunity Rule C. Actual Authority Rule D. Fairness Rule 37
  38. 38. Question? What is the shareholders right to purchase a proportionate share of every new offering of stock? A. Pro-emptive right B. Preemptive strike C. Preemptive right D. Defensive right 38
  39. 39. Question? The ___________ are (is) the owners of the corporation. A. Managers B. Executive committee C. Shareholders D. Board of directors 39
  40. 40. Question? What is the process by which one shareholder asks another for his or her voting right? A. Proxy solicitation B. Proxy contest C. Proxy card D. Proxy statement 40
  41. 41. Question? A (n) ____________ manages the business affairs of a corporation. A. Managing committee B. Operations group C. Board of directors D. Board of executives 41

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