CORPORATE GOVERNANCE

Corporate Governance Concepts

Corporate Governance Concepts Worksheet

Concept

Reference to Concept in Reading

Shift in corporate power from the CEO to other stakeholders -

Board impact on corporate governance

“An active and independent board of directors working for shareholders clearly benefits the corporation by reducing the “agency problem” that arises from the separation of ownership from control in the modern corporation. It does so by acting as agent for owners in controlling a management whose principal motive is not to maximize value but rather to enhance its own position. Any resulting change in management's behavior, no matter how limited, should increase returns to the owners as residual claimants” (Chew & Gillan, 2005, p. 180).

“To serve as effective monitors, directors must be independent of the management they monitor. Directors who are members of management, or are otherwise closely linked to management, have the same interest as management in perpetuating corporate performance measured in terms of growth for its own sake”(Chew & Gillan, 2005, p. 180).

The roles of management in corporate governance - Tracking stock

- Setting stretch goals

- Bonus plans

“ The tracking stock also provides for investors a pure play opportunity in a focused business with managers, through stock options, being rewarded for the value they add to the business they oversee”(Chew & Gillan, 2005, p. 250).

“The company's leaders should emphasize that merely achieving the incentive target is not the goal. Instead, we are aiming higher: to achieve not just acceptable returns for our investors, but consistently outstanding performance. Further, to accomplish this, we must outperform the EVA incentive goal. And if we can do it, then the bonuses for associates will also be outstanding” (Chew & Gillan, 2005, p. 252).

“Any individual manager will wish to stand out from his peers by demonstrating superior performance in his business. Such achievements attract rewards over and above those held out by any bonus plan—in the form of promotions, special attention from superiors, and so forth. The solution, therefore, must also come from outside the bonus plan” (Chew & Gillan, 2005, p. 253).

Compliance controls

“Corporate governance is at the heart of the issues facing both corporate America and mutual fund America. As James Madison said about our Constitution, If men were angels, no government would be necessary. Similarly, if business executives were angels, no corporate governance would be necessary” (Gandossy & Sonnenfeld, 2004, p. 123).

“When most owners either don't, won't, or can't stand ...