p

• The term “corporate governance” came into

popular use in the 1980's to broadly describe
the general principles by which the business
and management of companies are directed
and controlled.
• Corporate governance is the system by which
companies are directed and controlled.
• Boards of directors are responsible for the
governance of their companies.
• The shareholders' role in governance is to
appoint the directors and the auditors and to
satisfy themselves that an appropriate
governance structure is in place.
• “Corporate governance is the relationship between
corporate managers, directors and providers of equity,
and institutions who save and invest their capital to
earn a return. It ensures that the Board of directors is
accountable for the pursuit of corporate objectives and
that the corporation itself conforms to the law and
regulations. ”
(International Chamber of Commerce)
 Corporate Governance
• Is a system by which companies are directed and
controlled .
• Focuses on the responsibilities of directors and
managers for setting strategic aims.
• Establishes financial and other policies and
oversees their implementation.
 Corporate Governance
• Corporate governance is also the mechanism by
which the agency problems of corporation
stakeholders, including the shareholders, creditors,
management, employees, consumers and the public
at large are framed and sought to be resolved.
• Agents
– Managers, as agents for the owners, should pursue
their best interests.
• Agency problem
– Managers may maximize their own self-interests at
the expense of owners.
 Agency Relationship: Owners and Managers

Shareholders
(Principals)
• Firm owners
Managers
• Decision makers (Agents)

• Risk bearing specialist (principal) An Agency

pays compensation to a Relationship
managerial decision-making
specialist (agent)
 Agency Theory Problem
• The agency problem occurs when:
– the desires or goals of the principal and agent conflict and it
is difficult or expensive for the principal to verify that the
agent has behaved inappropriately.
• Solution:
– principals engage in incentive-based performance
contracts
– monitoring mechanisms such as the board of directors
– enforcement mechanisms such as the managerial labor
market to mitigate the agency problem.
• Shareholders
• Board of directors
• Top management/CEO
Typical Corporate Ownership Structure
External
Individual Stakeholders
Board of Directors
Shareholders Outsiders and Influence
Elect
Insiders
Large-block
Shareholders Monitor & Control
Provide Services
Obtain Resources
Top Management

Manage

Manager Manager Manager Manager Manager

Employees Employees Employees

 The Role of the Board

• The Board is the main mechanism for

monitoring, management and developing
strategy.
 The Role of the Board
• Obligation to approve all decisions that might
affect the long-run performance of the
corporation.
• This means that the corporation is fundamentally
governed by the board of directors overseeing top
management, with the consensus of the
shareholder.
 The Role of the Board
• The term corporate governance refers to the
relationship among these three groups in
determining the direction and performance of
the corporation.
 Responsibilities of the Board
1. Setting corporate strategy, overall direction,
mission & vision.
2. Hiring and firing the CEO and top management.
3. Controlling, monitoring, or supervising top
management.
4. Reviewing and approving the use of resources.
5. Caring for shareholder interests.
 Board of Governance Mechanisms
Directors
Insiders Roles of Board in Strategic Management
• The firm’s CEO and other top-
level managers • Monitor
Affiliated Outsiders
• Individuals not involved with • Evaluate & Influence
day-to-day operations, but who
have a relationship with the • Initiate & Determine
company
Independent Outsiders
• Individuals who are independent
of the firm’s day-to-day
operations and other relationships
 Role of Board in Strategic Management
• Monitor: Board can monitor developments inside and
outside the corporation for the best interest of
shareholders.
• Evaluate and influence: A board can examine
management’s proposals, decisions, and actions; agree or
disagree with them; give advice and offer suggestions;
and outline alternatives.
• Initiate and determine: A board can define a
corporation’s mission and specify strategic options to its
management.
 Failures in Corporate Governance
• There are clear examples of the failure of Corporate
Governance in the United States:
– Enron – lack of full disclosure of off-B/S debt
– Global Crossing – hiding its overinvestment in operating
losses.
– Adelphia – management looting of the firm
 SARBANES-OXLEY ACT
• In response to the many corporate scandals uncovered
since 2000, the U.S. passed the Sarbanes-Oxley Act in
June 2002.
• Sarbanes-Oxley were designed to formalize greater board
independence and oversight.
• For example, the act requires that all directors serving on
the audit committee be independent of the firm and
receive no fees other than for services of the director.
 SARBANES-OXLEY ACT
• In addition, boards may no longer grant loans to
corporate officers.
• The act has also established formal procedures for
whistleblowers to report incidents of questionable
accounting or auditing.
• This Act proves helpful in improving governance and
transparency.
 Class Assignment
• How to prepare and Present a case analysis
Page 346-355 David 13th ed
• Group reading and discussion in class
 Trends in Corporate Governance
• Better governance does lead to higher credit ratings and
stock prices.
• Survey reveals that investors are willing to pay 16%
more for a corporation’s stock if it is known to have
good corporate governance.
1. Good governance leads to better performance over
time.
2. Good governance reduces the risk of the company
getting into trouble.
 Trends in Corporate Governance
Some of today’s trends in governance are:
• Boards are getting more involved not only in reviewing
and evaluating company strategy but also in shaping it.
• Boards are evaluating not only their own overall
performance, but also that of individual directors.
• As corporations become more global, they are
increasingly looking for board members with
international experience.
 The Role of Top Management
• The top management function is usually
conducted by the CEO of the corporation in
coordination with the Chief Operating Officer
or president, executive vice president, and vice
presidents of divisions and functional areas.
 Responsibilities of CEO
• CEO handle two responsibilities that are
crucial to the effective strategic management:
1. Provide executive leadership and a strategic
vision
2. Manage the strategic planning process.
• Executive leadership is the directing of
activities toward the accomplishment of
corporate objectives.

• Strategic vision is a description of what the

company is capable of becoming.
 Responsibilities of CEO
Create organizational vision
– Envision what the organization should be like in the
future
– Communicate this vision to followers
– Empower followers to enact the vision
• Establish core values for the organization
• Develop strategies and a management structure
 Responsibilities of CEO
• Foster an environment conducive to
organizational learning and development
– Serve as coach, teacher and facilitator
– Help organizational members question their
assumptions.