CHAPTER 5

WHAT DO WE NEED TO KNOW?

1. Explain the term corporate governance
2. Understand the responsibilities of the
board of directors and the major
governance committees
3. Explain the differences between the
following two governance
methodologies: “comply or explain” and
“comply or else.
4. Identify an appropriate corporate
governance model for an organization.
 Corporate Governance Board of Directors

The system by which business • A group of individuals

corporations are directed and who oversee governance of
controlled - Concern with how an organization
well organizations meet their • Elected by owners at the
obligations to all stakeholders annual shareholders’
meetings
• Have a certain period of
time
 In small business: Owners and managers are
usually the same people
 Large corporations: Owners hire professional
managers
1. Could the managers be trusted to run the
businesses in the best interests of the owners?
2. How would they be held accountable for their
actions?
3. How would absentee owners keep control over
these managers?
 THE ROLE OF CORPORATE GOVERNANCE

Corporate governance is about the way in which boards oversee the running
of a company by its managers, and how board members are, in turn,
accountable to shareholders and the company. This has implications for
company behavior toward employees, shareholders, customers, and banks.
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 at worst can pave the way for financial difficulties
and even fraud. If companies are well governed, they will usually outperform
other companies and will be able to attract investors whose support can
finance further growth.
• Members of the board of
directors and
independent directors.
• Oversee the financial
reporting process
• Monitor internal
controls, accounting
policies and procedures,
oversee the hiring and
performance of external
auditors in producing the
company’s financial
statements
 COMPENSATION
COMMITTEE

 Members of BOD and

independent directors
 Oversee compensation
packages for the senior
executives (salaries,
bonuses, stock options,
and other benefits)
 TAKE-HOME ASSIGNMENT

1. Why do corporations need a board of directors?

2. What is the value of adding “outside directors” to your board?

3. Distinguish “Comply or Explain” and “Comply or Else”

4. Many senior business executives serve on multiple corporate

boards. Is this good?