MGMT4P96 – Business & Society

Asma Zafar| Assistant Professor | Goodman School of Business

Governance

Tuesday, February 28, 2023

Agenda
 Discussion on corporate governance
 In-class exercise
 Housekeeping ~ 5 minutes

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Today’s learning objective
 To understand
 What is corporate governance and why is it needed?
 Governance mechanisms

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Corporate Governance

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To get started…
 Take a look at these figures
 $14 Million
 $36.5 Million
 $281 Million
 49%
 Do you find these figures surprising?

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Corporate governance
 Executive compensation is only one aspect of corporate governance
 Marriam-Webster defines governance as the act or process of governing or
overseeing the control or direction of something
 Corporate governance may be understood as the process of assessing or
overseeing how a company is controlled or managed
 The term corporate governance encompasses issues such as executive
compensation, reporting, and external monitoring
 The aim of corporate governance is to minimize contracting (also called
‘agency’) costs

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Understanding the need for governance measures
 Agency theory or the “principal – agent framework” (Jensen & Meckling,
1976)
 Views the firm as a set of contracts between self-interested parties
 The principals – shareholders & society
 The agents – top executives (typically, CEOs)
 Both of these parties have different, often conflicting, interests
 Conflict of interest arises when self-interested agents are hired to promote the
interests of the principals
 Example: Shareholders often want dividend payouts or capital gains, or both,
whereas a CEO might want to invest in seemingly risky projects for long-term
gains, which might affect stock valuation or dividend payout in the short term,
or they may want to maximize executive bonuses
 Therefore, a need to monitor how a firm is managed and run, arises

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Common governance measures

Shareholder &
Organizational
Regulatory measures stakeholder-led
measures
measures
• Operate by • Careful investment • Design of executive
mandating • Activism compensation
reporting • Lawsuits packages
requirements and • Media monitoring • Use of best
developing and reporting practices in the
reporting standards appointment of a
board of governors
• Voluntary
disclosures

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Regulatory measures
 Role of the government in controlling CEO compensation
 Listed companies are required, by law, to issue their financial performance reports
 Including publishing the compensation packages of their top 5 executives
 Dodd-Frank Act in the U.S. requires listed companies to hold shareholder vote on
executive compensation once every three years
 Tax incentives for desirable behavior

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Regulatory measures (continued)
 Reporting regulations
 GAAP – generally accepted accounting principles mandated by Financial Accounting
Standards Board (FASB)  Conservatism has been a desirable financial reporting
practice
 The Canadian Securities Administrators released climate-related disclosure
guidelines in October 2021
 The International Sustainability Standards Board (ISSB) established in 2021 aims to issue its
sustainability standards in the second quarter of 2023  reporting on environmental,
social, and governance (ESG) matters will become mandatory, soon!

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Shareholder activism – another governance mechanism
 Shareholder activism refers to direct actions of shareholders and investors aimed at
protecting their interests

Institutional Social investment Lawsuits

investment • Also known as • Examples, insider
• Holding large socially-responsible trading, corruption or
amounts of capital investment or impact other scandals
• E.g., mutual funds, investment
insurance • Screening
companies, pension • Divestment
funds, trusts, • Resolutions
university
endowment funds

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Organizational measures
 Use of best practices in the appointment of a board of directors
 Board of directors is an elected group of individuals who have a legal
duty to establish corporate objectives, develop broad policies, and select
top-level personnel to carry out these objectives and policies
 Typically between 9 – 11 members
 Outside directors  directors who are not the managers of the company
 Inside directors  directors who are also the managers of the company
 Boards work through sub-committees
 E.g., executive committee; legal-action committee; nominating committee

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Organizational measures (continued)
 Design of executive compensation
 Compensation is a powerful tool to align
executive action with stakeholder
(especially shareholders’ desires)
 Often CEO compensation packages are
dominated by incentive-based pay, e.g.,
performance bonus, stock, and options
 This compensation model is primarily
known as “pay for performance” model of
executive compensation
 Critics say a danger of this approach is
that executives may become so fixated
on their performance pay that they will
do anything to increase the stock price,
even if this involves unethical actions

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Let’s watch a video before getting to our exercise

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In class exercise
 Groups will assume the role of
 The Board
 Shareholders
 And read through the briefs provided in class
 Given the circumstances, a special meeting has been called, where the board
as well as shareholders are present
 Shareholders have concerns about CEO compensation, the board’s structure, and
the company’s reputation
 The board is well-intentioned and wants to make sure that company’s governance
issues are resolved
 By means of discussion between two groups, arrive at a solution to
governance issues in the company

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Executive compensation: is it justified?

 Yes, it is!  No, it is not!


 Inflated executive
Well-paid managers are
compensation may hurt the
simply being rewarded for
firm’s ability to compete with
exceptional performance foreign rivals
 Provide an incentive for  Perceptions of distributive
innovation and risk-taking injustice may prevail in an
 organization
Is a reflection of labor market
supply conditions  Research on the relationship

between CEO pay and
Not many can run the
complex businesses of today company performance has
yielded mixed results

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Key takeaways
 Corporate governance is needed to ensure that executives (agents) act
according to the desires of shareholders and society (principals)
 There are three broad corporate governance measures/mechanisms:
 Regulatory measures
 Shareholder-led measures
 Organizational measures
 Executive compensation is a powerful governance tool

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Next class
 Problem statement presentations
 In class – during regular class time
 Approximately 7 minutes per group
 5 for your presentations 2 for any follow-up questions
 No points for making slides
 Though it is encouraged that you use slides
 If using slides, please bring them on a USB stick – we will upload all presentations to
the class computer before we begin
 Will be graded on
 Selection of a case relevant to the course
 Evidence of critical thinking in articulation of the problem
 Plausibility of the workplan

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Problem statement presentations – reminders
 What to include
 What’s the company you have chosen (some background, when did it start, what
industry, what size)
 What is the issue you will discuss (e.g., is it about their CSR, or about the environment,
etc.)
 What is your workplan (where you will find data, who will do what, project timeline)

 Where to submit (if making a slide deck)

 Brightspace D2L under “assignments”

 When is it due?
 March 02, 2023, anytime prior to the class

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Project groups

Group number Members

1 Aric, Lex, Michael Damaia, Gwen
2 Makayla, Brendon, Curtis, Teodora, Caleb
3 Kaitlin, Jacob, Ryan, Nolan, Alexander
4 Matt, Will, Hussein, Michael DeAngelis, Emily
5 Colin, Cam, Marco, Michael Kazimowicz
6 Godfrey, Shashwat, David, Nick, Michael Macleod

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