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
controlled - Concern with how of an organization
well organizations meet their • Elected by owners at the
obligations to all stakeholders annual shareholders’
meetings
• Have a certain period of
time
Owners vs Managers

 In small businesses: Owners and managers

are usually the same people
 Large corporations: Owners hire
professional managers
 Managers accountable to:
 Owners
 Public interest or stakeholders
Owners vs Managers

 Large corporations:

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: The way in which boards oversee the running of a

company by its managers, and how board members are accountable to

shareholders and the company.

• Good corporate governance: underpin the integrity and efficiency of

financial markets.

• Poor corporate governance: weaken a company’s potential and even fraud.

• 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)
 TEAMWORK
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 different roles on multiple

corporate boards. Discuss any consequences of this phenomenon.
Effective Corporate Governance
1. Create a climate of trust and candor
2. Foster a culture of open dissent
3. Mix up roles
4. Ensure individual accountability
5. Let the Board assess leadership talent
6. Evaluate the Board’s performance