Corporate Governance: Responsibilities of Board Directors and Top Management, Summaries of Business Strategy

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Chapter 2 – Corporate Governance – Summary notes. Corporation: a mechanism established to allow different parties to contribute capital, expertise and labor for their mutual benefit Corporation is governed by the: (1) board of directors that oversees. (2) top management with the concurrence of the (3) shareholders.

What are the responsibilities

of the board of directors?

Answer: The five board of

director responsibilities are

setting corporate strategy,

overall

direction, mission or vision;

hiring and firing the CEO and

top management; controlling,

monitoring, or supervising

top management; reviewing

and approving the use of

resources; and

caring for shareholder

interests.

Q- What are the responsibilities of the board of directors? The five board of director responsibilities are setting corporate strategy, overall direction, mission or vision; hiring and firing the CEO and top management; controlling, monitoring, or supervising top management; reviewing and approving the use of resources; and caring for shareholder interests. Corporate governance: the relationship among the board of directors, top management and shareholders in determining the direction and performance of the corporation. Q- What is corporate governance and why is it important? Corporate governance is the structure that distributes the decision-making process in a company. Corporate governance is important because it provides a framework for how a company should be run. It helps to ensure that the company is operated in an efficient and effective manner, and that the interests of all stakeholders are considered. Corporate governance also helps to promote transparency and accountability within a company, which can help to improve public trust in the company. Q- What are some examples of corporate governance? Some examples of corporate governance can be found in the following companies: Apple Inc., Google, and Walmart. Each of these companies has a different way of distributing power within the company in regard to its own corporate governance structure. Each of these structures has its own advantages and disadvantages for the companies. Laws and standards defining responsibilities of board of directors vary from country to country. After the corruption events, now, many countries made laws. Due care: Board of directors are responsible that the corporation is not harmed by members of the board. Directors can be held liable. Responsibilities of the Board of Directors:

• Effective board leadership including the processes, makeup, and output of the board.
• Strategy of the organization

• Risk vs. initiative and the overall risk profile of the organization.
• Succession planning for the board and top management team
• Sustainability Role of the Board in Strategic Management:
• Monitor developments inside and outside the corporation.
• Evaluate and Influence management proposals, decisions, and actions.
• Initiate and determine the corporation’s mission and strategies. Inside Directors are officers or executives employed by the board’s corporation Outside Directors are executives of other firms but are not employees of the board’s corporation Q- Explain the continuum of board involvement. Answer: The board of directors’ continuum reflects the degree of involvement (from high to low) in the strategic management process. Boards can range from phantom boards with no real involvement to catalyst boards with a very high degree of involvement. Passive phantom or rubber stamp boards typically never initiate or determine strategy unless a crisis occurs. Nominal participation reflects a board involved to a limited degree in the performance or review of selected key decisions, indicators, or programs of management. An active board approves, questions, and makes final decisions on mission, strategy, policies, and objectives. It also has active board committees and performances fiscal and management audits. The catalyst board takes the leading role in establishing and modifying the mission, objectives, strategy, and policies. It also has a very active strategy committee. People who favor a high portion of outsiders state that outside directors are less biased and more likely to evaluate management’s performance objectively, People who favor high portion of insiders believe outside directors are less effective than are insiders because the outsiders are likely to have necessary interest, availability. Agency theory problems arise in corporations because top management is not willing to accept responsibility for their decisions unless they own a substantial amount of stock in the Corporation --- favoring outsiders Stewardship theory as the result of long tenure with the corporation, insiders (top management) tend to identify with the corporation and its success. Act in the best interest of the corporation more than self-interest --- favoring insiders. Q- Contrast agency theory and stewardship theory. Answer: Agency theory states that problems arise in corporations because the agents (top management) are not willing to bear responsibility for their decisions unless they own a substantial amount of stock in the corporation. The theory suggests that a majority of a board needs to be from outside the firm so that top management is prevented from acting selfishly to the detriment of the shareholders.

Stewardship theory proposed that, because of their long tenure with the corporation, insiders (senior executives) tend to identify with the corporation and its success. Rather than use the firm for their own ends, these executives are thus most interested in guaranteeing the continued life and success of the corporation. Q- Explain the difference between a direct and indirect interlocking directorate. Answer: A direct interlocking directorate occurs when two firms share a director or when an executive of one firm sits on the board of a second firm. An indirect interlock occurs when two corporations have directors who also serve on the board of a third firm. Q- What are the criteria for selecting a good director? Answer: Some of the top criteria provided by a survey for selecting a good director includes the following: Willing to challenge management when necessary. Special expertise important to the company Expertise on global business issues Available outside meetings to advise management. Understand firm's key technologies and processes. Brings external contacts that are potentially valuable to the firm. Detailed knowledge of the firm's industry High visibility in his or her field Accomplished at representing the firm to stakeholders. Q- Explain the impact of the Sarbanes-Oxley Act on corporate governance. Answer : In response to the many 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 failures at Enron, Tyco, WorldCom, Adelphia Communications, Qwest, Global Crossing, among other prominent firms. Several key elements of Sarbanes-Oxley were designed to formalize greater board independence and oversight. For example , the act required that all directors serving on the audit committees be independent of the firm and receive no fees other than for services as a director. Additionally, boards may no longer grant loans to corporate officers. The act also established formal procedures for individuals to report incidents of questionable accounting or auditing. Firms are prohibited from retaliating against anyone reporting wrongdoing. Both the CEO and CFO must certify the corporation's financial information. The Act banned auditors from providing both external and internal audit services to the same company. The bill also required that firms identify whether they have a "financial expert" serving on the audit committee who is independent from management.

Q- What are the responsibilities of top management? Answer: Top management responsibilities involve getting things accomplished through and with others in order to meet the corporate objectives. Top management's job is thus multidimensional and is oriented toward the welfare of the total organization. Specific top management tasks vary from firm to firm and are developed from an analysis of the mission, objectives, strategies, and key activities of the corporation. Tasks are typically divided among the members of the top management team. The CEO, with the support of the rest of the top management team, must successfully handle two primary responsibilities crucial to the effective strategic management of the corporation (1) provide executive leadership and a strategic vision, and (2) manage the strategic planning process. Q- Why is corporate governance important to the shareholders of a firm? Shareholders: An individual, or organization that has invested their money in any corporation's shares is regarded as a stockholder or shareholder. After purchasing shares, they become owners of the company as per the percentage of shares they have bought. They get benefits if the organization performs well, as it increases the value of its shares. Answer and Explanation: In an organization, it is a must to have good corporate governance because it is corporate governance that is responsible for the creation of rules and policies. These rules or policies determine how the organization has to operate, which should align with the interests of the shareholders. Therefore, if corporate governance is good, long-term shareholder value can be ensured, which will lead to financial viability. If the company's performance is not good, then the shareholders have the right to ask a question that will affect the company negatively, and accordingly, investors will not get attracted to the company's shares.