Zeynep Gürhan-Canlı
Corporate Governance
Chapter 3
February 24, 2010
Corporate Governance
 Corporate governance is the formal system
of accountability and control for organizational
decisions and resources.
 Major issues:
 Shareholder rights
 Executive compensation
 Mergers and acquisitions
 Board composition and structure
 Auditing, control and risk management
 CEO selection and executive succession plans
Corporate Governance Framework
 Most businesses operate under the belief that the
purpose of business is to maximize profits for
shareholders.
 The stakeholder model places the board of directors in
a position to balance the interests and conflicts of
various constituencies.
Models of
Corporate Governance
 Shareholder model
 Maximizes of wealth for investors and owners.
 Develops and improves the formal system of performance.
accountability between management and the firm’s
shareholders.
 Makes decisions based on what is best for investors.
 Stakeholder model
 Considers the interests of employees,
suppliers, government agencies, communities,
and other groups which with the firm interacts.
 Assumes a collaborative and relational
approach to business.
Issues in
Corporate Governance Systems
 Boards of directors
 Independence
 Quality and experience
 Performance
 Shareholders and investors
 Activism
 Social investing
 Investor confidence
Boards of Directors
 Assume legal responsibility for firm’s
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resources and decisions.
Appoint top executive officers.
Maintain a fiduciary duty.
Monitor decisions made by managers on behalf of the
company.
Growing interest in hiring ‘outside directors’ to bring
in more independent thought and action.
Shareholders and Investors
 Shareholders are concerned with ownership
investment in publicly traded firms.
 Greater input on company strategy and decisions
 Investor is a general term for any individual or
organization that provides capital to another firm.
 Financial
 Human
 Intellectual
General Issues in Social Investing
 Environmental
 Workplace equity and safety
 Product safety and testing
 Global operations
 Human rights
 Avoidance of certain companies or countries
 Increase/decrease holdings of certain companies or
countries
Internal Control
and Risk Management
 Controls are used to safeguard corporate assets and
resources, protect the reliability of organizational
information, and ensure compliance with regulations,
laws and contracts.
 Limit employee and management opportunism.
 Ensure that board members have access to timely and
quality information.
 Anticipate and remedy organizational risks.
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Minimize negative situations.
Uncertainty needs to be hedged.
Executive Compensation
 The average executive makes 600 times the average
worker’s salary.
 Up from 40 times the average salary in the ’60s.
 Two contrasting perspectives
 Executives assume a great deal of risk and therefore
deserve great rewards.
 No executive is worth millions of dollars regardless of
investor return.
 Plans that base achievement
on several performance goals
are growing in popularity.
 OECD Principles of Corporate Governance
Future of
Corporate Governance
 Boards will be held responsible for
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developing company purpose statements
that cover stakeholder interests.
Annual reports will include more
nonfinancial information.
Boards will be required to perform
self-assessments.
Board member selection process will become
increasingly formalized.
Boards will need to work more as teams.
Future of
Corporate Governance (cont.)
 Board membership will require more time.
 Focus will move from a shareholder model to a
stakeholder model.
 Systems will ensure greater organizational-level
accountability and control.
 General support for corporate governance
will rise.
 Governments will play a more significant role.