CHATER 2 (CORPORATE GOVERNANCE)
management directors) may be executives
Role of the Board of Directors
- has an obligation to approve all decisions
that might affect the long-run performance of the
corporation.
- means that the corporation is
fundamentally governed by the board of directors
overseeing top management, with the concurrence
of the shareholder.
Corporate Governance
-refers to the relationship among these three
groups in determining the direction and
performance of the corporation.
Responsibilities of the Board
Laws and standards defining the responsibilities of
boards of directors vary from country to country.
Specific requirements of directors vary, depending
on the state in which the corporate charter is
issued.
Five board of director responsibilities
1. Setting corporate strategy, overall direction,
mission, or vision
2. Hiring and firing the CEO and top management
3. Controlling, monitoring, or supervising top
management
4. Reviewing and approving the use of
resources
5. Caring for shareholder interests
Four most important issues boards should
address are:
 Corporate performance
 CEO succession
 Strategic planning
 Corporate governance
Role of the Board in Strategic Management
 Monitor
By acting through its committees, a board can keep
abreast of developments inside and outside the
corporation, bringing to management’s attention
developments it might have overlooked.
• Evaluate and influence
-A board can examine management’s proposals,
decisions, and actions; agree or disagree with
them; give advice and offer suggestions; and
outline alternatives.
• Initiate and determine
-A board can delineate a corporation’s mission and
specify strategic options to its management.
MEMBERS OF A BOARD OF DIRECTORS
• Inside directors (sometimes called
management directors) are typically officers
or executives employed by the corporation.
• Outside directors (sometimes called non-
of other firms but are not employees of the
board’s corporation.
Those who question the value of having more
outside board members point out that the term
outsider is too simplistic because some outsiders
are not truly objective and should be considered
more as insiders than as outsiders.
For example, there can be:
1. Affiliated directors, who, though not really
employed by the corporation, handle the legal or
insurance work for the company or are important
suppliers (thus dependent on the current
management for a key part of their business).
2. Retired executive directors, who used to work
for the company, such as the past CEO who is partly
responsible for much of the corporation’s current
strategy and who probably groomed the current
CEO as his or her replacement.
3. Family directors, who are descendants of the
founder and own significant blocks of stock (with
personal agendas based on a family relationship
with the current CEO).
AGENCY THEORY VS. STEWARDSHIP THEORY
IN CORPORATE GOVERNANCE
 Agency theory is concerned with analyzing
and resolving two problems that occur in
relationships between principals
(owners/shareholders) and their agents (top
management):
1. The agency problem that arises when (a) the
desires or objectives of the owners and the
agents conflict or (b) it is difficult or
expensive for the owners to verify what the
agent is actually doing.
2. The risk-sharing problem that arises when
the owners and agents have different
attitudes toward risk.
 Stewardship Theory. In contrast,
stewardship theory suggests that executives
tend to be more motivated to act in the
best interests of the corporation than in
their own self-interests.
Interlocking Directorates
• 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.
• Indirect interlock occurs when two
corporations have directors who also serve
on the board of a third firm, such as a bank.
NOMINATION AND ELECTION OF BOARD
MEMBERS
• All nominees were usually elected.
• The CEO might select only board members
who, in the CEO’s opinion, will not disturb
the company’s policies and functioning.
• Many corporations whose directors serve
terms of more than one year divides the
board into classes and staggers elections so
that only a portion of the board stands for
election each year. This is called a staggered
board.
• When nominating people for election to a
board of directors, it is important that
nominees have previous experience dealing
with corporate issues. For example,
research reveals that a firm makes better
acquisition decisions when the firm’s
outside directors have had experience with
such decisions
ORGANIZATION OF THE BOARD
The average small, privately held company has
four to five members.
- Outside directors should elect a lead
director.
- The Chairman schedules board meetings
and presides over the annual shareholders’
meeting.
- Critics of having one person in the two
offices ask how the board can properly oversee top
management if the Chairman is also a part of top
management.
- Research indicates that an increase in board
independence often results in higher levels of CEO
ingratiation behavior aimed at persuading directors
to support CEO proposals.
- Long-tenured directors who support the
CEO may use social pressure to persuade a new
board member to conform to the group.
- Directors are more likely to be
recommended for membership on other boards if
they “don’t rock the boat” and engage in low levels
of monitoring and control behavior.
- Even in those situations when the board has
a nominating committee composed only of
outsiders the committee often obtains the CEO’s
approval for each new board candidate.
The Role of Top Management
The top management function is usually
conducted by the CEO of the corporation in
coordination with the COO (Chief Operating
Officer) or president, executive vice president, and
vice presidents of divisions and functional areas.
RESPONSIBILITIES OF TOP MANAGEMENT
- especially those of the CEO, involve getting things
accomplished through and with others in order to
meet the corporate objectives.
- 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.
- In addition, highly diverse teams with some
international experience tend to emphasize
international growth strategies and strategic
innovation, especially in uncertain environments,
to boost financial performance.
Two primary responsibilities that are crucial to the
effective strategic management of the
corporation:
(1) provide executive leadership and a
strategic vision
(2) manage the strategic planning process
Executive Leadership and Strategic Vision
 Executive leadership is the directing of
activities toward the accomplishment of
corporate objectives.
 Strategic vision is a description of what the
company is capable of becoming. It is often
communicated in the company’s mission
and vision statements. People in an
organization want to have a sense of
mission, but only top management is in the
position to specify and communicate this
strategic vision to the general workforce.
Transformational Leaders
- Leaders who provide change and movement in an
organization by providing a vision for that change.
These transformational leaders have been able to
command respect and to influence strategy
formulation and implementation because they tend
to have three key characteristics:
1. The CEO articulates a strategic vision for the
corporation
2. The CEO presents a role for others to identify
with and to follow
3. The CEO communicates high performance
standards and also shows confidence in the
followers’ abilities to meet these standards
Managing the Strategic Planning Process
 Strategic planning initiatives can come from
any part of an organization.
 However, unless top management
encourages and supports the planning
process, strategic management is not likely
to result.
 If a company is not organized into business
units, top managers may work together as a
team to do strategic planning.
Strategic planning staff  Home Depot’s shareholders are not the
-charged with supporting both top only ones who are concerned with
management and the business units in the strategic questionable
planning process. top managers and weak boards of directors. A
-This staff may prepare the background record 1,169 shareholder resolutions
materials used in senior management’s off-site were proposed in the U.S. during 2007.
strategy workshop.

The staff’s major responsibilities are to:

1. Identify and analyze companywide strategic
issues, and suggest corporate strategic
alternatives to top management.
2. Work as facilitators with business units to
guide them through the strategic planning
process.
--------------------------------------------------------------------
On paper, Robert Nardelli, seemed to be doing
everything right. Selected
personally by the founders, Arthur Blank, Kenneth
Langone, and Bernard Marcus,
the board of directors felt that the company was
lucky to have hired Nardelli from
General Electric to be CEO of Home Depot in
December 2000.

 According to Nardelli, the company

had the strongest balance sheet in the industry and
tremendous potential for future
growth. The board loved Nardelli and had been
happy to support his decisions.

 The stockholders, however, were not as

satisfied with Nardelli’s performance.
 Stockholders were unhappy with Nardelli’s
tendency to manipulate negative
performance
data.
 Since Nardelli saw little growth opportunity
in the company’s retail stores, he pushed to
make the stores run more efficiently. Importing
ideas, people, and management concepts from
the military was one way to reshape an increasingly
unwieldy Home Depot into a more centralized and
efficient organization.
 Former Home Depot executives reported
that a “culture of fear” had caused
customer service to decline. The once-
heavy ranks of full-time store employees
had been replaced with part timers to
reduce labor costs.
 The University of Michigan’s American
Customer Satisfaction Index, compiled in
2005, revealed that Home Depot, with a score of
67, had slipped to last place among major U.S.
retailers.
 Nardelli did not react well to criticism.
 Pushed by the shareholders to reduce the
CEO’s large compensation package, the
board of directors finally asked Nardelli to accept
future stock awards being tied to increases
in the company’s stock price. Nardelli flatly refused
and instead quit the company in January 2007—
taking with him a $210 million retirement package.