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CHATER 2 (CORPORATE GOVERNANCE) • Outside directors (sometimes called non-

management directors) may be executives

Role of the Board of Directors of other firms but are not employees of the
board’s corporation.
- has an obligation to approve all decisions
that might affect the long-run performance of the Those who question the value of having more
corporation. outside board members point out that the term
- means that the corporation is outsider is too simplistic because some outsiders
fundamentally governed by the board of directors are not truly objective and should be considered
overseeing top management, with the concurrence more as insiders than as outsiders.
of the shareholder.
For example, there can be:
Corporate Governance
-refers to the relationship among these three 1. Affiliated directors, who, though not really
groups in determining the direction and employed by the corporation, handle the legal or
performance of the corporation. insurance work for the company or are important
suppliers (thus dependent on the current
Responsibilities of the Board management for a key part of their business).
Laws and standards defining the responsibilities of
2. Retired executive directors, who used to work
boards of directors vary from country to country.
for the company, such as the past CEO who is partly
Specific requirements of directors vary, depending
responsible for much of the corporation’s current
on the state in which the corporate charter is
strategy and who probably groomed the current
CEO as his or her replacement.
Five board of director responsibilities
3. Family directors, who are descendants of the
1. Setting corporate strategy, overall direction, founder and own significant blocks of stock (with
mission, or vision personal agendas based on a family relationship
2. Hiring and firing the CEO and top management with the current CEO).
3. Controlling, monitoring, or supervising top
4. Reviewing and approving the use of
5. Caring for shareholder interests  Agency theory is concerned with analyzing
and resolving two problems that occur in
Four most important issues boards should relationships between principals
address are: (owners/shareholders) and their agents (top
 Corporate performance management):
 CEO succession
 Strategic planning 1. The agency problem that arises when (a) the
 Corporate governance desires or objectives of the owners and the
agents conflict or (b) it is difficult or
expensive for the owners to verify what the
Role of the Board in Strategic Management
agent is actually doing.
 Monitor
2. The risk-sharing problem that arises when
By acting through its committees, a board can keep the owners and agents have different
abreast of developments inside and outside the attitudes toward risk.
corporation, bringing to management’s attention
developments it might have overlooked.
 Stewardship Theory. In contrast,
stewardship theory suggests that executives
• Evaluate and influence tend to be more motivated to act in the
-A board can examine management’s proposals, best interests of the corporation than in
decisions, and actions; agree or disagree with their own self-interests.
them; give advice and offer suggestions; and
outline alternatives.
Interlocking Directorates
• Initiate and determine
-A board can delineate a corporation’s mission and
• Direct interlocking directorate occurs when
specify strategic options to its management.
two firms share a director or when an
executive of one firm sits on the board of a
second firm.
• Inside directors (sometimes called • Indirect interlock occurs when two
management directors) are typically officers corporations have directors who also serve
or executives employed by the corporation. on the board of a third firm, such as a bank.
NOMINATION AND ELECTION OF BOARD - Specific top management tasks vary from firm to
MEMBERS firm and are developed from an analysis of the
• All nominees were usually elected. mission, objectives, strategies, and key activities of
• The CEO might select only board members the corporation. Tasks are typically divided among
who, in the CEO’s opinion, will not disturb the members of the top management team.
the company’s policies and functioning. - In addition, highly diverse teams with some
• Many corporations whose directors serve international experience tend to emphasize
terms of more than one year divides the international growth strategies and strategic
board into classes and staggers elections so innovation, especially in uncertain environments,
that only a portion of the board stands for to boost financial performance.
election each year. This is called a staggered
board. Two primary responsibilities that are crucial to the
• When nominating people for election to a effective strategic management of the
board of directors, it is important that corporation:
nominees have previous experience dealing (1) provide executive leadership and a
with corporate issues. For example, strategic vision
research reveals that a firm makes better (2) manage the strategic planning process
acquisition decisions when the firm’s
outside directors have had experience with Executive Leadership and Strategic Vision
such decisions
 Executive leadership is the directing of
activities toward the accomplishment of
corporate objectives.
The average small, privately held company has
 Strategic vision is a description of what the
four to five members.
company is capable of becoming. It is often
communicated in the company’s mission
- Outside directors should elect a lead
and vision statements. People in an
organization want to have a sense of
- The Chairman schedules board meetings
mission, but only top management is in the
and presides over the annual shareholders’
position to specify and communicate this
strategic vision to the general workforce.
- Critics of having one person in the two
offices ask how the board can properly oversee top
Transformational Leaders
management if the Chairman is also a part of top
management. - Leaders who provide change and movement in an
- Research indicates that an increase in board organization by providing a vision for that change.
independence often results in higher levels of CEO
ingratiation behavior aimed at persuading directors These transformational leaders have been able to
to support CEO proposals. command respect and to influence strategy
- Long-tenured directors who support the formulation and implementation because they tend
CEO may use social pressure to persuade a new to have three key characteristics:
board member to conform to the group.
- Directors are more likely to be 1. The CEO articulates a strategic vision for the
recommended for membership on other boards if corporation
they “don’t rock the boat” and engage in low levels 2. The CEO presents a role for others to identify
of monitoring and control behavior. with and to follow
- Even in those situations when the board has 3. The CEO communicates high performance
a nominating committee composed only of standards and also shows confidence in the
outsiders the committee often obtains the CEO’s followers’ abilities to meet these standards
approval for each new board candidate.
Managing the Strategic Planning Process
The Role of Top Management
The top management function is usually  Strategic planning initiatives can come from
conducted by the CEO of the corporation in any part of an organization.
coordination with the COO (Chief Operating  However, unless top management
Officer) or president, executive vice president, and encourages and supports the planning
vice presidents of divisions and functional areas. process, strategic management is not likely
to result.
RESPONSIBILITIES OF TOP MANAGEMENT  If a company is not organized into business
units, top managers may work together as a
team to do strategic planning.
- especially those of the CEO, involve getting things
accomplished through and with others in order to
meet the corporate objectives.
Strategic planning staff  Home Depot’s shareholders are not the
-charged with supporting both top only ones who are concerned with
management and the business units in the strategic questionable
planning process. top managers and weak boards of directors. A
-This staff may prepare the background record 1,169 shareholder resolutions
materials used in senior management’s off-site were proposed in the U.S. during 2007.
strategy workshop.

The staff’s major responsibilities are to:

1. Identify and analyze companywide strategic
issues, and suggest corporate strategic
alternatives to top management.
2. Work as facilitators with business units to
guide them through the strategic planning
On paper, Robert Nardelli, seemed to be doing
everything right. Selected
personally by the founders, Arthur Blank, Kenneth
Langone, and Bernard Marcus,
the board of directors felt that the company was
lucky to have hired Nardelli from
General Electric to be CEO of Home Depot in
December 2000.

 According to Nardelli, the company

had the strongest balance sheet in the industry and
tremendous potential for future
growth. The board loved Nardelli and had been
happy to support his decisions.

 The stockholders, however, were not as

satisfied with Nardelli’s performance.
 Stockholders were unhappy with Nardelli’s
tendency to manipulate negative
 Since Nardelli saw little growth opportunity
in the company’s retail stores, he pushed to
make the stores run more efficiently. Importing
ideas, people, and management concepts from
the military was one way to reshape an increasingly
unwieldy Home Depot into a more centralized and
efficient organization.
 Former Home Depot executives reported
that a “culture of fear” had caused
customer service to decline. The once-
heavy ranks of full-time store employees
had been replaced with part timers to
reduce labor costs.
 The University of Michigan’s American
Customer Satisfaction Index, compiled in
2005, revealed that Home Depot, with a score of
67, had slipped to last place among major U.S.
 Nardelli did not react well to criticism.
 Pushed by the shareholders to reduce the
CEO’s large compensation package, the
board of directors finally asked Nardelli to accept
future stock awards being tied to increases
in the company’s stock price. Nardelli flatly refused
and instead quit the company in January 2007—
taking with him a $210 million retirement package.