Chapter 3-5 Flashcards
Degree of involvement in strategic management
Phantom: doesnt know what to do
Rubber Stamp: officers make all the decision
Minimal review: formally reviews selected issues that officers bring forward
Nominal Participation: performance review, key indicators, and programs
Active Participation: strategy and policies, constant approval, active board committees
Catalysts: leading role in making change, policies and strategy committees
Board of Directors
- the centrepiece of corporate governance: overcoming the principal-agent problem
- elected by the shareholders
- acts in owners’ interest
- not an extension of management
What is the dual mandate?
the responsibilities of directors are separate and distinct from management
Monitor:
hire, evaluate and compensate the C-suite
approve major operating proposal
Approve major financial decision
ensure firm;s activities and financial condition are accurately reported
Advise
offer expert advice on strategy, new product, M&A
Chairman
- leadership of the board and principal between the CEO and management
- agenda and work plan
- meeting of boards, and effectiveness of boards
- good corporate governance and procedures in place
- ensure directors are properly briefed
Advantage of CEO being the same as the chairman?
- clear separation of responsibilities
- clear authority to one director
-give CEO time to focus on strategy - good when company has new CEO
The disadvantage of CEO and Chairman is the same
- artificial separation
- make recruit of CEO difficult
- create duplication of leadership
- inefficient decision making
Solution ?
Lead Independent Director
- sometimes communicates with shareholders
- important during a crisis
- consults regarding board affairs and annual evaluation
Board Structure - Committees
- Audit Committee
- Compensation Committee
- Nomination Committee
Audit Committee
- financial reporting and disclosure
- monitoring accounting policies and principle
- hiring, performance, independent of external auditor
- regulatory compliance, ethics, and whistleblower
Compensation committee
compensation of the CEO
- setting performance metrics, measuring targets, and monitoring CEO behaviour
- setting board compensation
Nominating Committee
- nominating people to serve the board
- selecting nominees to be put before a shareholder vote at the annual meeting
- Director recruitment process and hiring consultants
- determines governance standards
- CEO evaluation process
Shareholder model
shareholders’ interest should be the number one priority
- courts suggest it is important to take non-shareholders interest into consideration as long as shareholder interest is not compromised
Stakeholder model
the company owes a responsibility to a wider group of stakeholders such as employees, vendors, customers, society
Dual Class Director Voting
different classes of shares, each having a different number of votes 20% of Canadian companies have dual-class shares
Majority class voting
WITHHELD or Vote for directors from shareholders. The director needs 50% of withheld votes to stay
Cumulative Director Voting
each shareholder gets a number of votes equal to the number of shares they own –> shareholder allocate votes in the way they see best
Hostile takeover
hostile bidder makes offer for the company which includes proposing to a new directors board
activist investor
an investor unhappy with the company performance attempts to change the board in order to support their plan
Director Liability
directors are protected from liability by the company 2 general forms
indemnification agreements: entered into between the company and director
D&O insurance: purchased by the company from an insurance company for the benefit of directors and management
Fiduciary Duty
the interest of the client you are representing should have a higher priority than your personal interest
owed at all times to the corporation
falls in to three main category
duty of care
duty of loyalty
duty of candour
CBCA has two principles for directors also according to Bill C-97
- fiduciary duty
- duty of care
Board sizes
large firms publicly traded –> 10
small firms privately traded –> 4-5
Advantages of large boards
- more resources and oversight
- allow for greater specialization through diversity and experience
negative of large boards
- slow decision making
- less candid decision
- diffusion of responsibility
- risk aversion and free riding
- lower firm value only in non-complex firms
Staggered board
grouped in to three classes and only a portion of the board is re-elected
- can lead to less accountability but safety guard for hostile takeover
Annual election
all directors are elected annually
Co-determination
inclusion of the corporation’s employees on its board. very population in Europe
Inside Directors
officers and employees elected by the corporation
Outside Directors
maybe executives of other firms but are not employees of the board of a corporation
Affiliated Directors
legal and insurance work
used to work for the corporation and responsible partially for current strategy
descendants of the founder and own significant blocks of stock
Direct Interlocking directorate
when two firms share a director or one executive sits on multiple boards
indirect interlocking directorate
when two corporations have directors who serve on the board of a third firm
additional perspective + diverse background
worst case–> based on relationship rather than qualifications
Business judgement rule
protects companies from frivolous lawsuits by assuming that managers are acting in the best interest of the company unless proved otherwise
assumes
managers will not make optimal decisions all the time
unless it is made evident that directors have acted outside of their responsibility the court will not question their decision
Board Independence
the degree to which directors are free from conflict of interest that might compromise their ability to act in the interest of the firm
Independence Good vs Bad
Large number of outsiders can create problem
- ineffective decision making, limited day-today contact
- information asymtery
- bad for fast moving industries
