- Corporate governance provides formalized responsibility to stakeholders
- Views of corporate governance
- The role of the board of directors
- Executive compensation


[SLIDE 1]

Traditionally, the role of the board of directors was simply to maximize profits for shareholders. This was known as the shareholder model of corporate governance.

Nowadays, most firms are moving towards the stakeholder model, which requires the board of directors to attempt to balance the interests of all stakeholders. Under this model, directors can be seen as having two duties or obligations.

Duty of care, or duty of diligence, refers to the duty a person in a position of trust has to do due diligence and make informed and sensible decisions to act in the best interests of the organization. This includes avoiding ethical misconduct and providing leadership to prevent ethical misconduct in the organization.

Duty of loyalty is when all decisions made should be in the best interests of the organization and its stakeholders. Directors, for example, may experience a conflict of interest when they have the opportunity to vote for increased compensation for each other. An officer's use of inside information to engage in insider trading would be another example of a violation of their duty of loyalty.


[SLIDE 2]

Corporate governance refers to the formal systems of accountability, oversight, and control developed by most companies.

Accountability refers to the degree to which decisions made by the company line up with the law, a company's objectives, and address ethical concerns.

Oversight refers to a system of checks and balances designed to limit deviations from company policies that prevent illegal and unethical activities.

Control refers to the process of improving and auditing company actions and decisions.


[SLIDE 3]

As we alluded to earlier, there are two main approaches to corporate governance: the shareholder model and the stakeholder model.

The main focus of the shareholder model of corporate governance is maximizing shareholder wealth. This is primarily accomplished through efforts to increase the value of the company's stock. For companies that use this model, corporate governance is focused on meeting the performance expectations of shareholders.

The stakeholder model of corporate governance takes a broader view of a business's purpose. In addition to being responsible for maximizing shareholder wealth, the company must also consider the interests of other stakeholders. The concerns of suppliers, employees, local communities, special interest groups, and others must be considered when business decisions are made.


[SLIDE 4]

The board of directors is a company's governing authority and is responsible for creating its ethical culture. They are ultimately responsible for a company's success or failure.

A company's board of directors is legally responsible for the business decisions made by its leadership and how company resources are used. The board is typically NOT involved in a company's direct management. They usually only meet a few times a year. Instead, they monitor the decisions made by executives to make sure the company's best interests are being served. Boards of directors are responsible for selecting top management and evaluating their performance, setting the company's strategic direction, and making sure systems of oversight, control, and accountability are in place.


[SLIDE 5]

In years past, members of a company's board of directors were often retired company executives or friends of executives. In recent years, however, there has been a greater demand for accountability and transparency. Because of this, many companies are now selecting board members who do not have any vested interest in the company before becoming directors. Rather, they are now being chosen for their expertise and abilities.

An interlocking directorate is when board members are linked to more than one company. The practice is considered legal unless two of the companies are direct competitors. A survey by USA Today revealed that over 1,000 company board members are on four or more corporate boards. The trend is not viewed favorably because it creates a corporate culture that limits the oversight of decisions made by top management.


[SLIDE 6]

Boards of directors are responsible for determining the compensation of top executives. This is one of the biggest issues that boards of directors have to deal with. Executives are often compensated in the form of annual pay, bonuses for meeting objectives, stock options, and in other ways.

Many stakeholders are critical of executive compensation packages that are worth millions each year. They are concerned with the substantial difference in executive compensation when compared to how much the average employee earns. Some believe executives use their positions to influence boards of directors to give them high compensation packages.

An opposing argument to the criticism of high executive pay is that the pay is often warranted because executives make important decisions that determine how successful and profitable a company is. Very few have the talent and abilities to guide corporations, thus justifying their compensation.

Due to stakeholder criticism of high executive compensation packages, many boards of directors are tying bonuses and stock options to the achievement of performance goals.