BOARD OF DIRECTOR CONTINUUM

CORPORATE MANAGEMENT in ACTION
Sessions 5 & 6. Corporate Governance
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CORPORATE
MANAGEMENT IN
ACTION - CMA
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Sessions 5 & 6.
Corporate Governance
Chapter Objectives
 Define Corporate Governance
 Explain the role of Board of Directors (BOD)
 Describe the members of BOD
 Identify the relation of BOD with other stakeholders
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Corporate Governance
Definition
the system by which business corporations are directed and controlled.
The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as,
the board, managers, shareholders and other stakeholders, and spells out
the rules and procedures for making decisions on corporate affairs.
Role of Corporate Governance
• Manage stakeholders’ interests
• Determine and control the strategic
direction and performance of the
organization
• Varying roles
• Argumentative position?
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Corporate Governance
Mechanisms
 Ownership and professional management
 Board of Directors
 Executive compensation
 External authorities (ex: SEC: Securities and
Exchange Commission – USA, SEBI: Securities
and exchange board of India)
 No mechanism remains unchanged over a
period of time
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Corporate Governance
Ownership Influence
 Ownership and control: separation
likely in large public corporations
 Varying degrees of control by family
members
 Optimum level of ownership and
professional management
 Growing importance of institutional
investors
 Agency relationships and avoiding
conflict
 Inherent interest in diversification
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Corporate Governance
Role of External Agencies
i. Pros
 Governance by legal bodies
 Investor confidence
 Growing stock markets
ii. Cons
 “Hindrance to diversification and risky
strategies”
 Reduce shareholder wealth
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Board of Directors (BOD)
Nature of BOD
• BOD acts as a representative of the stake holders or
shareholders
• “Oversees” the actions and plans of the corporation
• Corporate governance describes the relationship between
the management, shareholders and the Board of
Directors
Role of BOD
• Monitoring
• Evaluating and Influencing
• Initiating
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Board of Directors (BOD)
Involvement of BOD
• Phantom
A
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V
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• Rubber Stamp
• Minimal Review
• Nominal Participation
• Active Participation
• Catalyst
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Board of Directors (BOD)
Responsibilities
•
Setting corporate strategy, overall direction, mission or
vision
•
Succession and appointment of new CEOs
•
Controlling, monitoring and supervising top
management
•
Reviewing and approving resources
•
Caring for stockholder interests
•
Differs from country to country, and depends on a
country’s laws
•
World wide consensus on responsibilities.
•
Legally, BOD must act with due care to direct the
affairs of the corporation, but not to manage them
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Board of Directors (BOD)
Members
• Inside directors (CEO, COO, CFO, …)
• Outside directors
• Independents
• Women Directors, Minorities
• Affiliates
• Non-executive Directors
• Lead Director
• Interlocking (multi-task)
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Board of Directors (BOD)
Chief Executive Officer - CEO
• Executes BOD decisions
• Monitors strategic planning and
implementation
• Represents BOD and acts on its behalf
• CEO pay and compensation tied to the
fundamental governance process?
• Long term incentive plans
• Limitations in international operations
• Role: Complex and contentious
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Corporate Control…
• Undervalued companies are threatened
with takeovers
• Strategic diversification or corporate
control?
• Hostile take overs: Kraft/Cadbury’s
“Cadbury’s Fears:
Cadbury’s shareholders had a number of valid reasons to be
extremely weary of Kraft’s persistent interest in the company.
In fact, it was not just the shareholders themselves whom
expressed opposition to the bid. Employees, the unions and
even British MP’s had all also exerted their deep concerns on
the issue over fears of factory closures, job losses and loss of
organization culture and values. “
http://thelostprofit.wordpress.com/2012/09/24/case-study-the-kraft-cadburysacquisition-unfinished/
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