CORPORATE GOVERNANCE ■ Monitor: By acting through its committees, a board can keep

abreast of developments inside and outside the corporation,

LEARNING OBJECTIVES
bringing to management’s attention developments it might have
 Describe the role and responsibilities of the board of overlooked.
directors in corporate governance
■ Evaluate and influence: A board can examine management’s
 Explain how the composition of a board can affect its
proposals, decisions, and actions; agree or disagree with them;
operation
 Describe the impact of the Sarbanes– Oxley Act on give advice and offer suggestions; and outline alternatives.
corporate governance in the United States
■ Initiate and determine: A board can delineate a corporation’s
 Discuss the trends in corporate governance
mission and specify strategic options to its management
 Explain how executive leadership is an important part of
strategic management BOARD OF MEMBERS CONTINUUM
ROLE OF BOARD OF DIRECTORS

A corporation is a mechanism established to allow different

parties to contribute capital, expertise, and labor for their mutual
benefit.

The term corporate governance refers to the relationship among

these three groups in determining the direction and performance
of the corporation.
BOARD OF DIRECTORS COMPOSITION
RESPONSIBILITIES OF THE BOARD
Inside directors (sometimes called management directors) are
1. Effective board leadership including the processes, makeup,
typically officers or executives employed by the corporation.
and output of the board
Outside directors (sometimes called non-management directors)
2. Strategy of the organization
may be executives of other firms but are not employees of the
3. Risk vs. initiative and the overall risk profile of the board’s corporation.
organization
This view is in agreement with agency theory, which states that
4. Succession planning for the board and top management team problems arise in corporations because the agents (top
management) are not willing to bear responsibility for their
5. Sustainability decisions unless they own a substantial amount of stock in the
corporation.

ROLE OF THE BOARD IN STRATEGIC MANAGEMENT

Stewardship theory proposes that, because of their long tenure
with the corporation, insiders (senior executives) tend to identify
with the corporation and its success.
NOMINATION AND ELECTION OF BOARD OF
DIRECTORS
Traditionally, the CEO of a corporation decided whom to invite
to board membership and merely asked the shareholders for
approval in the annual proxy statement. All nominees were
usually elected.
This is especially likely given that only 7% of surveyed directors
indicated that their company had term limits for board
members. Nevertheless, 60% of U.S. boards and 58% of
European boards have a mandatory retirement age—typically
around 70.
Many corporations whose directors serve terms of more than
one year divide the board into classes and stagger elections so
that only a portion of the board stands for election each year.
This is called a staggered board
ORGANIZATION OF THE BOARD
The CEO is supposed to concentrate on strategy, planning,
external relations, and responsibility to the board.
The Chairman’s responsibility is to ensure that the board and its
committees perform their functions as stated in the board’s
charter.
Many of those who prefer that the Chairman and CEO positions
be combined agree that the outside directors should elect a lead
director.
The most effective boards accomplish much of their work
through committees. Typical standing committees (in order of
prevalence) are the audit (100%), compensation (99%),
nominating (97%), corporate governance (94%), stock options
(84%), director compensation (52%), and executive (43%)
committees.
IMPACT OF SARBANES-OXLEY ON US CORPORATE
GOVERNANCE
In response to the many corporate scandals uncovered since
2000, the U.S. Congress passed the Sarbanes–Oxley Act in June
2002.
This act was designed to protect shareholders from the excesses
and failed oversight that characterized criminal activities at
Enron, Tyco, WorldCom, Adelphia Communications, Qwest,
and Global Crossing, among other prominent firms.
IMPROVING GOVERNANCE - In implementing the
Sarbanes–Oxley Act, the U.S. Securities and Exchange
Commission (SEC) required in 2003 that a company disclose
whether it has adopted a code of ethics that applies to the CEO
and to the company’s principal financial officer.
EVALUATING GOVERNANCE - To help investors evaluate a
firm’s corporate governance, a number of independent rating
services, such as Standard & Poor’s (S&P), Moody’s,
Morningstar, The Corporate Library, Institutional Shareholder
Services (ISS), and Governance Metrics International (GMI),
have established criteria for good governance.
 Ownership Structure and Influence
 Financial Stakeholder Rights and Relations
 Financial Transparency and Information Disclosure
 Board Structure and Processes
AVOIDING GOVERNANCE IMPROVEMENTS - A number
of corporations are concerned that various requirements to
improve corporate governance will constrain top management’s
ability to effectively manage the company.
TRENDS IN CORPORATE GOVERNANCE
(1) good governance leads to better performance over time,
(2) good governance reduces the risk of the company getting into
trouble, and
1. The CEO articulates a strategic vision for the corporation: The
CEO envisions the company not as it currently is but as it can
become.
2. The CEO presents a role for others to identify with and to
follow: The leader empathizes with followers and sets an
example in terms of behavior, dress, and actions.
3. The CEO communicates high-performance standards and also
shows confidence in the followers’ abilities to meet these
standards: The leader empowers followers by raising their
beliefs in their own capabilities.

(3) governance is a major strategic issue.

ROLE OF TOP MANAGEMENT
RESPONSIBILITIES OF TOP MANAGEMENT - Top
management responsibilities, especially those of the CEO,
involve getting things accomplished through and with others in
order to meet the corporate objectives.
Managing the Strategic Planning Process - As business
corporations adopt more of the characteristics of a learning
organization, strategic planning initiatives can come from any
part of an organization. A survey of 156 large corporations
throughout the world revealed that, in two-thirds of the firms,
strategies were first proposed in the business units and sent to
headquarters for approval.

 Executive leadership is the directing of activities toward

the accomplishment of corporate objectives.
 A strategic vision is a description of what the company is
capable of becoming.
 They have many of the characteristics of transformational
leaders—that is, leaders who provide change and
movement in an organization by providing a vision for
that change.

These transformational leaders have been able to command

respect and execute effective strategy formulation and
implementation because they have exhibited three key
characteristics: