Chapter 3-5 Flashcards

Question

Fiduciary Duty (two/three)

Answer 1

Duty of Care and Loyalty (Candor sometimes) * The Supreme Court of Canada has ruled that the fiduciary duty is owed at all times to the corporation. * The Court has also stated that acting in the best interests of the corporation is not synonymous with acting in the best interests of shareholders.

Answer 2

* Stipulates that when acting in the best interests of the corporation, directors and officers may consider, but are not limited to the interests of shareholders and certain other stakeholders. * The Canadian government now expressly recognizes stakeholder interests, and in having done so, moved Canada in the direction of stakeholder versus shareholder primacy.

Answer 3

responsibility that members of a company's board of directors and senior executives have to act with diligence, prudence, and in the best interests of the company and its shareholders. This duty is a fundamental component of the broader fiduciary duties that corporate officers and directors owe to the organization and its stakeholders. making sure they are well informed and understand the situation and taking the time to make it so they can make the best decisions in the future.

Answer 4

This duty requires them to act in the best interests of the corporation, putting the interests of the company and its shareholders ahead of their personal interests or any conflicting interests.

Answer 5

This duty requires directors, officers, and executives to provide accurate and complete information to shareholders, regulators, and other stakeholders, ensuring transparency and honesty in corporate affairs.

Answer 6

* The size of a board is determined by the corporation’s charter and its by- laws. * Most corporations have quite a bit of discretion in determining board size. * The average large, publicly held firm has 10 directors on its board * The average small, privately-held company has four to five members.

Answer 7

Large boards have more resources to dedicate to both oversight and advisory functions. They allow for greater specialization to the board through diversity of director experience and through functional committees * Large boards suffer from slow decision making, less candid discussion, diffusion of responsibility, risk aversion and free riding. * Large boards are associated with lower firm value * But in complex firm this is not the case

Answer 8

only a portion of board members stand for re-election when directors serve more than one year terms directors typically are grouped into three classes, each of which is elected to a three-year term. Only one class of directors stands for reelection in a given year. - purpose is for anti-takeover but can say directors are less accountable to shareholders

Answer 9

Insiders * CEO * CFO * Other executives / employees Outsiders * Investors * Suppliers * Independent

Answer 10

the inclusion of a corporation’s workers on its board, began only recently in the United States - europe is doing this more than the US

Answer 11

* Willingness to challenge management when necessary * Special expertise that is important to the company * Available for outside meetings to advise management * Understands the firm’s key technologies and processes * Works well with others, provides valuable input * Is alert and inquisitive * Exercises judgment in best interests of company * Prepares adequately for meetings, regular attendance

Answer 12

Inside directors * typically officers or executives employed by the corporation Outside directors * may be executives of other firms but are not employees of the board’s corporation Affiliated directors * not employed by the corporation, handle legal or insurance work * used to work for the corporation, partly responsible for past decisions affecting current strategy * descendants of the founder and own significant blocks of stock

Answer 13

Direct interlocking directorate * when two firms share a director or when an executive of one firm sits on the board of a second Indirect interlocking directorate * when two corporations have directors who serve on the board of a third firm

Answer 14

the degree to which a director is free from conflicts of interest that might compromise his or her ability to act solely in the interest of the firm

Answer 15

* Large number of outsiders can create problems * Limited contact with the firm’s day-to-day operations and incomplete information about managers * results in ineffective assessments of managerial decisions and initiatives. * emphasizes financial, as opposed to strategic, controls to gather performance information to evaluate performance of managers & business units, which could reduce R&D investments, increase diversification, and pursue higher compensation to offset their employment risk * In fast-moving industries requiring significant R&D (e.g., IT), outside directors are found to have a negative impact on firm performance

Answer 16

* Boards not only monitor, but also advise the board. Tough monitoring is not always good. * Survey evidence that CEO-director friendship ties improve communication. * Evidence that director independence worsens performance in some firms. * CEOs are fired too often for reasons outside their control.

Answer 17

Yes, relative to the industry, - most need 10-20 years of business experience in a leadership role

Answer 18

* More companies adopt guidelines prohibiting outside directorships for their current CEOs. Are active-CEO directors better than average director? * Yes – 21%; No – 79% Are retired-CEO directors better than active-CEO directors? * Yes – 55%; No – 45% Are retired-CEO directors better than average director? * Yes – 47%; No – 54% How many years before CEO experience is outdated? * < 5 years – 26% * 5-10 years – 20% * >10 years – 16% * Never - 38%

Answer 19

On the negative side * 87% believe that active CEOs are too busy with their own companies to be effective * Unable to serve on time-consuming committees or participate in meetings on short notice *Active CEOs are too bossy, poor collaborators, and not good listeners On the positive side * Strategic and managerial expertise, current knowledge of business issues * Experience dealing with crisis or failure * Extensive personal and professional networks * Can build trust with CEO, prioritize challenges

Answer 20

Although retired CEOs might have similar strategic and leadership experience as current CEOs without time demands of the current CEOs, as we saw in the Lehman Brothers case, there might be a time after which executive experience becomes so far outdated that it is no longer relevant.

Answer 21

* Research finds no evidence that the appointment of an outside CEO positively contributes to future operating performance, decision making, or the monitoring of management by the board. * At the same time, research suggests that the appointment of an active CEOs as directors might lead to increased CEO compensation.

Answer 22

* International Experience * Diversity (ethic and women) * Bankers * Politically connected – (Al Gore in Apple) * No direct evidence of benefits * Specialized expertise -High tech -Turnaround and restructuring -Regulations and law * Employee representation

Answer 23

* Professional directors serve on boards as their primary career. (+) Considerable experience; have witnessed multiple successes and failures. (+) More time to dedicate to boardroom responsibilities. (+) Extensive personal and professional networks. (-) Might be too “busy” if they serve on many boards concurrently. (-) Might not be effective monitors if they view directorship as a form of “active retirement.”

Answer 24

On the positive side * The CEO may only know what he/she has been presented * A good CEO learns why he missed the flaws and does not drop the ball twice * As long as their integrity is not compromised, experience can be valuable/add a new perspective * Assuming the board member was not involved in the irregularities, he/sheshould have learned a valuable lesson * Board members can be misled by the management and learning to be skeptical from such experience can make a better board member On the negative side * Ethical problems are not caused by a lack of knowledge, they are caused by character flaws (and character doesn’t change) * Even if they learned valuable lessons the reputational risks are too high and their credibility is a problem * As the CEO, he or she clearly must have had some lapse in leadership and oversight for there to be a substantial accounting or ethical issue in his/her tenure * Tone at the top is a key driver of corporate culture, and the CEO is the most influential person in setting tone. Accounting and ethical issues are usually the result of problems with CEO performance * At the end of the day it is the board that shareholders place trust in, and they must have and show understanding of the company’s accounts * If it happens on their watch, you have to question how engaged they are in good governance

Answer 25

shareholders have become increasingly more demanding of directors and, as a result, directors have been working longer hours, taking more stock ownership in the firm to ensure a vested interest, challenging CEO more often, and taking their duties more seriously. 60% of nominated directors are turning down appointments. * Nonetheless, directorships remain quite lucrative and prestigious.

Answer 26

* Compensation must be sufficient to attract, retain, and motivate qualified directors. * Compensation covers time directly spent on board matters, cost to keeping schedule flexible to address urgent issues, and financial and reputational risk from corporate scandal or lawsuit. * Companies also pay fees for serving on committees.

Answer 27

* Evaluations can address a variety of topics, including: – Composition – Accountability – Information – Meetings – Relations

Answer 28

* There are a variety of reasons why a director might leave a corporate board. – (+) Director wishes to retire. – (+) Director reaches mandatory retirement age. – (–) Director has irresolvable disagreement with other directors or management. – (+) Company requires new skills and capabilities on the board. – (+) Company wants to “refresh” the board. – (–) Company feels director is negligent or performing below expectations. * Shareholders often do not know the real reason a director leaves the board.

Answer 29

* The process for removing a director is complicated. * The board does not have the power to remove a fellow board member. It must either: – Encourage him/her to resign – Wait to replace the director at the annual meeting. * Shareholders, too, have limited rights to remove directors. – Pass special resolution, if they can demonstrate cause. – Vote for removal, if election is by majority voting. * In fact, directors are rarely unwillingly removed from office.

Answer 30

Time commitment - spend more time than before - even those hours are not productive - they have other loyalties CEOs pick directors - Directors hold only token stakes in their companies - Most directors receive more compensation as directors than gain as stockholders. Share ownership is increasing, but they receive shares from the firm (rather than buy them). Directors lack the expertise (and the willingness) to ask the necessary tough questions.. * Robert’s Rules of Order? In most boards, the CEO continues to be the chair. Not surprisingly, the CEO sets the agenda, chairs the meeting and controls the information provided to directors. ̈ * Be a team player? The search for consensus overwhelms any attempts at confrontation. ̈ * The CEO as authority figure: Studies of social psychology have noted that loyalty is hardwired into human behavior. While this loyalty is an important tool in building up organizations, it can also lead people to suppress internal ethical standards if they conflict with loyalty to an authority figure. In a board meeting, the CEO generally becomes the authority figure. Access to pertinent information: * There are two ways to keep the board in the dark: provide very little information or overwhelm with irrelevant information

Answer 31

* Poor business performance – hence the wrath of shareholders; * Lack of Board leadership; * Inadequate or inappropriate involvement in management; * Entrenchment (high % of members remaining in the Board too long); * Internal political or personal conflicts; * Ineffective Board organization and process; and * Conspiring in or tolerating legal violations.

Answer 32

- continually vigilant - poor board does not = poor management - good counselling * Clearly defined roles and authorities * Board is well structured * Creation of a “lead director” role that has strong agenda-setting and oversight powers * Appropriate work and mix of skills * Balanced composition of executive and non-executive directors * Non-executive directors should be of sufficient caliber * Increased diversity in board members’ backgrounds. * Appropriate Board procedures * Sufficient notice for board meetings * Freedom to include items on agenda * Regular meetings and active participation * Director compensation in line with best practice

Answer 33

* Do I believe I have all the information? * Have I the necessary skills to make this decision? * Do I have any conflict in this matter? * Objectively, is this a rational business decision? * Can I explain this in a transparent manner? * Is it a responsible discharge of my duties?

Answer 34

* Institutional investors active on boards * Shareholder demands that directors and top management own significant stock * Directors are increasingly compensated with stock and options in the company, instead of cash. * There are fewer insiders on the board. * More directors are identified and selected by a nominating committee rather than being chosen by the CEO of the firm. * Boards have become smaller over time. * Splitting the Chairman and CEO positions * Increased representation of women and minorities * Society expects boards to balance profitability with social needs of society

Answer 35

* Sudden deaths of some directors affect stock prices. * Directors of firms that experience proxy contests find it difficult to obtain additional board appointments. * In China, the hiring of directors with foreign experience improves their firms’ performance.

Answer 36

Low Phantom - never knows what to do, no involvement Rubber Stamp - permits officers to make all decisions, votes on what they rec Minimal Review - formally reviews selected issues Normal Participation - involved to a limited degree in perf review/key decisions/mgmt programs Active Participation - approves/questions and makes final decisions on mission/strategy/policies/objectives, active board committees and audits Catalyst - takes the leading role in establishing and modifying the mission/obj/strat/policies, very active in strategy