Transcript Owner Stakeholders and Corporate Governance

Owner
Stakeholders and
Corporate
Governance
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© 2005 by Nelson, a division of Thomson Canada Limited.
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Chapter Eighteen Objectives
• Link the issue of legitimacy to corporate governance
• Discuss the components of corporate governance and
the challenges to “good governance”
• Describe the general obstacles to achieving properly
functioning boards of directors
• Identify controversies associated with CEOs and boards
of directors
• Explain major changes in boards of directors required
to improve corporate governance
• Discuss the principal ways in which shareholder
activism exerts pressure on corporate management
© 2005 by Nelson, a division of Thomson Canada Limited.
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Chapter Eighteen Outline
• Legitimacy and Corporate Governance
• Improving Corporate Governance
• Summary
© 2005 by Nelson, a division of Thomson Canada Limited.
Introduction to Chapter Eighteen
The chapter focuses corporate governance
and the way it has evolved, by examining the
concept of legitimacy and the part that
corporate governance plays in establishing
the legitimacy of the firm.
© 2005 by Nelson, a division of Thomson Canada Limited.
Legitimacy and Corporate
Governance
• Legitimacy is a condition wherein there is a
congruence between an organization’s
activities and society’s expectations.
• Legitimation is a dynamic process to
perpetuate acceptance.
© 2005 by Nelson, a division of Thomson Canada Limited.
Legitimacy and Corporate
Governance
Micro Level of Legitimacy
• Adapt operational methods to societal
expectations
• Attempt to change these expectations or
norms to a firm’s practices
• Seek to enhance its legitimacy by having a
powerful legitimate base in society
© 2005 by Nelson, a division of Thomson Canada Limited.
Legitimacy and Corporate
Governance
Macro Level of Legitimacy
• Focus is on business as a whole
• Subject to ratification
– No inherent right to exist
© 2005 by Nelson, a division of Thomson Canada Limited.
Legitimacy and Corporate
Governance
• Issue of corporate governance
• Components of corporate governance
– Roles of Four Major Groups
– Separation of Ownership from Control
© 2005 by Nelson, a division of Thomson Canada Limited.
Legitimacy and Corporate
Governance
The Four Groups
State Charter
1
Shareholders
2
Board of Directors
3
Management
4
Employees
© 2005 by Nelson, a division of Thomson Canada Limited.
Legitimacy and Corporate
Governance
Separation of Ownership From
Control
• Intended roles
• Actual roles
© 2005 by Nelson, a division of Thomson Canada Limited.
Legitimacy and Corporate
Governance
• Ineffective boards
– Rubber stamp boards
– CEO dominated boards
– Conflict of interest boards
• Effective boards
– Address issues listed above
– Use outside directors
© 2005 by Nelson, a division of Thomson Canada Limited.
Legitimacy and Corporate
Governance
The CEO: Pay vs.
Performance
Criticism
of CEO self-interest still continues after
executive earnings became an issue in the ’80s
and ’90s and companies still try to link pay to
such performance measures as the stock
market .
Recent research, however, shows that attempts to tightly
control CEOs can have dysfunctional consequences.
Some corporations, such as Disney, that are dominated by
its CEOs, have been highly profitable while having
relatively weak boards of directors.
© 2005 by Nelson, a division of Thomson Canada Limited.
Legitimacy and Corporate
Governance
Consequences of Mergers, Takeovers
and Acquisitions
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Greenmail
Poison pill
Golden parachutes
Insider trading scandals
© 2005 by Nelson, a division of Thomson Canada Limited.
Improving Corporate Governance
• Changes in boards of directors
– Appointing “outside” directors that monitor
management more carefully.
• Use of stronger board committees
– Establish audit, nominating, compensation, and
public issues committees.
• Board should “get tough” with the CEO
– demand accountability
© 2005 by Nelson, a division of Thomson Canada Limited.
Improving Corporate
Governance
Increased Role for Shareholders
• Shareholder initiatives
– Rise of shareholder activists
– Filing of shareholder resolutions
• Shareholder lawsuits
• Canada Business Corporations Act (CBCA)
• Increased activism at corporate annual meetings
© 2005 by Nelson, a division of Thomson Canada Limited.
Improving Corporate
Governance
Corporate Initiatives
• Full disclosure issue
• Corporate takeover issue
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Candour in public statements on the offer made
Full disclosure of all information
Absence of undue pressure
Sufficient time for shareholders to make considered
decisions
© 2005 by Nelson, a division of Thomson Canada Limited.
Selected Key Terms
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Agency problems
Audit committee
Board of Directors
Charter
Compensation
committee
• Corporate governance
• Employees
• Full disclosure
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© 2005 by Nelson, a division of Thomson Canada Limited.
Golden parachutes
Greenmail
Inside directors
Insider trading
Legitimacy
Management
Nominating committee
Selected Key Terms (cont’d)
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Outside directors
Poison pill
Proxy process
Public issues
committee
• Public policy
committee
• Separation of ownership
from control
• Shareholder activism
• Shareholder resolutions
• Shareholders
© 2005 by Nelson, a division of Thomson Canada Limited.