Corporate Governance & Board of Directors

Question 1

What is corporate governance?

Answer 1

• Solid, authoritative structure needed to engender ethical leadership
• Ethical leader relies on corporate governance to maintain organizational mission
• Facets of organization complement each other to serve shareholder interests

Question 2

What are the 3 tiers of governance?

Answer 2

- Shareholders
        Provide the stake
        Not connected directly to organization
- Board of directors
        Appointed by shareholders
        Charged with overseeing stake
- Management
        Chosen by board
        Headed by CEO (always appointed by board)

Question 3

What is the agency theory of governance?

Answer 3

• Proxies are appointed to represent interests
• Shareholders pass authority down to board (hiring of management, distribution of profits, authorization of initiatives, verification of figures)
• Board bestows authority on management for operation of organization (conception and execution of plans, responsibility over personnel, delivery of periodic progress reports)
• Management is agent of both board and shareholders

Question 4

What is the Fiduciary Theory of Governance?

Answer 4

• Interests of stakeholders always paramount
• Reference back to fiduciary principle (see previous lesson)
• Key concepts
  Conflicts of interest
  Due diligence
  Good faith
  Loyalty

Question 5

What are some thoughts on the board?

Answer 5

• Membership necessitates additional accountability.
• Management membership on the board is counterintuitive.
• Benefit of input does not translate into right to have a vote.
• Supervision of management is board’s chief duty.
• Rating CEO and underlings’ performance/outcomes is job one.
• Board’s evaluative function cannot include those being evaluated.

Question 6

What are some elements of the board?

Answer 6

• Employees may sit on the board.
  CEO and/or CFO are most likely candidates.
• Unconnected “outside” people may sit as independent consultants.
• Neutral perspectives, different backgrounds, and alternate viewpoints can be valuable.
• Board is appointed by shareholders.
  One vote per share

Question 7

What are some Further Functions of the Board

Answer 7

• Keeps close tabs on financial reports
  = Subcommittee will appoint outside accountant
• Administers leadership compensation program
  = Subcommittee grades CEO and fixes compensation accordingly
  = Outside evaluation often enlisted
  = Shareholder returns generally determine CEO pay
  = Discrepancy between management and shareholder pay can easily lead to conflict