Professional Documents
Culture Documents
Corporate
Governance
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Learning Outcomes
• Explain the term corporate governance.
• Understand the responsibilities of the board of directors and
the major governance committees.
• Explain the significance of the “King One” and “King Two”
reports.
• Explain the differences between the following two
governance methodologies: “comply or explain” and “comply
or else.”
• Identify an appropriate corporate governance model for an
organization.
Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Corporate Governance
System by which business corporations are directed and
controlled.
• Good corporate governance: Plays a vital role in underpinning the integrity
and efficiency of financial markets.
• Poor corporate governance: Weakens a company’s potential and can lead
to financial difficulties and fraud.
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What Does Corporate Governance Look Like?
Owners: Supply equity or risk capital to the company by
purchasing shares in the corporation.
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Audit and Compensation Committees
Operating committees staffed by members of the board of
directors plus independent or outside directors.
• Audit committees are responsible for monitoring the financial policies and
procedures of the organization.
• Compensation committees are responsible for setting the compensation
for the chief executive officer (CEO) and other senior executives.
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Corporate Governance Committee
• Monitors the ethical performance of the corporation.
• Oversees compliance with the company’s internal code of
ethics as well as any federal and state regulations on
corporate conduct.
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Figure 5.1: Governance of the Modern
Corporation
Source: Adapted from Fred R. Kaen, A Blueprint for Corporate Governance (New York: AMACOM, 2003).
Access the text alternative for slide images.
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In Pursuit of Corporate Governance
King One report was recognized as advocating the highest
standards for corporate governance.
• Took a more integrated approach to the topic of corporate governance.
• By recognizing the involvement of all the corporation’s stakeholders in the
efficient and appropriate operation of the organization.
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King Two Report 1
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King Two Report 2
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Two Governance Methodologies
Comply or explain.
• Guidelines that require companies to abide by a set of operating standards
or explain why they choose not to.
Comply or else.
• Guidelines that require companies to abide by a set of operating standards
or face stiff financial penalties.
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The Chairman and the CEO 1
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The Chairman and the CEO 2
Advantages of merging.
• Potential for conflict is minimized.
• Board is given the benefit of leadership from someone who is in touch
with the inner workings of the organization rather than an outsider.
Disadvantages of merging.
• Governance of the corporation is with one person, which eliminates the
checks and balances process that the board was created for in the first
place.
• Independence of the board is compromised, and the power of the
stockholders is minimized.
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Effective Corporate Governance 1
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Effective Corporate Governance 2
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Dangers of a Corporate Governance Checklist
Effective corporate governance is more than just maintaining a
checklist of items to be monitored on a regular basis.
• Having mechanisms in place will not guarantee good governance.
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A Fiduciary Responsibility
Corporate governance is about managers fulfilling a fiduciary
responsibility to the owners of their companies.
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Key Safeguards for Corporate Governance
• Properly constituted boards.
• Separation of the functions of chairperson and CEO.
• Audit committees.
• Vigilant shareholders.
• Financial reporting and auditing systems that provide full and
timely disclosure.
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