CHAPTER 2

Corporate
Governance

STRATEGIC MANAGEMENT & BUSINESS POLICY

13TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

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 Corporate Governance

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 Corporate Governance

Corporation
Mekanisme yang dibentuk untuk memungkinkan berbagai
pihak untuk menyumbangkan keahlian dan tenaga kerja
untuk saling menguntungkan mereka
Corporate Governance
The relationship among the board of directors, top
management, and shareholders – determining the direction
and performance of the corporation

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 Corporate Governance

BOD Responsibilities
(200 Directors from 8 countries)
– Setting strategy and overall direction, mission or vision
– Hiring firing CEO and top management
– Controlling, monitoring or supervising top management
– Reviewing and approving use of resources
– Caring for Shareholder interests

(CEO’s surveyed: the four most important issues boards should

address)
– Corporate performance
– CEO Succession
– Strategic planning
– Corporate governance

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 Corporate Governance

BOD Responsibilities
• A 2008 global survey of directors by McKinsey & Company
revealed the average amount of time boards spend on a
given issue during their meetings:
– Strategy (development and analysis of strategies)—24%
– Execution (prioritizing programs and approving mergers and
acquisitions)—24%
– Performance management (development of incentives and
measuring performance)—20%
– Governance and compliance (nominations, compensation,
audits)—17%
– Talent management—11%

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 Corporate Governance

Role of Board in Strategic Management

–Monitor

–Evaluate and influence

–Initiate and determine

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 Board of Directors Continuum

Small Entrepreneur Large Public

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 Board of Directors

MEMBERS OF A BOARD OF DIRECTORS --

–Inside directors
•“management directors”
•Officers or execs employed by the firm

–Outside directors
•“non-management directors”
•Executives of other firms but are not employed by the board’s
corporation
•80% of members in large publicly held firms
•19% in privately held firms

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 Board of Directors

• the board members in large U.S. corporations

have 80% of outsiders boards. Boards in the UK
typically have 5 inside and 5 outside directors,
whereas in France boards usually consist of 3
insiders and 8 outsiders. Japanese boards, in
contrast, contain 2 outsiders and 12 insiders.
• The board of directors in a typical small U.S.
corporation has four to five members, of whom
only one or two are outsiders

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 Agency Theory

Agency Theory
• Agency Problem –
– Objectives of owners & agents in conflict
– Difficult for owners to verify agent performance
– 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

• Risk Sharing Problem –

– Perbedaan perlakukan atas risiko oleh owner dan agent

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 Stewardship Theory

Stewardship Theory
Teori yang berpendapat bahwa CEO (insider)
memiliki tujuan untuk meningkatkan keuntungan
perusahaan sehingga mereka akan fokus pada
pencapaian dan self-actualization.

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 Agency Theory versus Stewardship Theory

Self

Stewardship
Actualization

Esteem

Socialization
Agency Theory

Safety

Physiological

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 Board of Directors

When Outsiders can be considered Insiders

–Affiliated Directors
anggota dewan merupakan pihak yang pernah bekerja
sama secara langsung dengan perusahaan seperti
supplier, lawyer, dan insurance worker. Dimana
mereka tidak mampu bersikap objektif dan perbedaan
kepentingan.
–Retired Directors
Anggota dewan merupakan pihak yan pernah bekerja
ddi perusahaan sepert CEO terdahulu yang berperan
dalam menyusun strategy perusahaan sehingga tidak
mampu dalam mengevaluasi kinerja perusahaan.
–Family Directors
Keturunan pendiri dan pemilik

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 Board of Directors

Nominations & Elections

–Traditional Approach
•CEO invitation to membership
•Shareholders approval in annual proxy statement
•All nominees usually elected

–Staggered Board Approach

•Staggered terms of service/election
•Short term
•Annual Elections
•Opportunity for hostile takeover
•Increased shareholder control
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 Board of Directors

Criteria for a good Director

– Willing to challenge management
– Has special expertise
– Available outside of meetings
– Expertise on global business issues
– Understands key firm’s technologies
– Brings valuable external contacts
– Knowledge of firm’s industry
– High visibility in their field
– Accomplished in representing the firm to stakeholders

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 Sarbanes-Oxley (June 2002)
• Dasar hukum GCG di Amerika sejak juni 2002
• Key elements
– All audit committee members must be outside directors
and receive no additional fee
– Board no longer grants loans to officers
– Formal procedures for individuals to report incidents of
questionable accounting or auditing.
– CEO and CFO must certify all financial info.
– Internal and external auditors may not be from the
same firm
– Must identify if there is a member of the audit
committee with financial expertise
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 Implementation of
the Sarbanes-Oxley Ac
• Improving governance. the U.S. Securities and Exchange
Commission (SEC) required in 2003 that :
– Code of Ethics for CEO and CFO must be disclosed
– Members of the Audit, Nominating, and Compensation
Committees must all be outside directors
• Evaluating Governance
– Business Week, Standard & Poor’s (S&P), Moody’s,
Morningstar, The Corporate Library, Institutional
Shareholder Services (ISS), and Governance Metrics
International (GMI), have established criteria for good
governance.
2-17
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The S&P Corporate Governance Scoring System researches
four major issues:
•Ownership Structure and Influence
•Financial Stakeholder Rights and Relations
•Financial Transparency and Information Disclosure
•Board Structure and Processes

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 Board of Directors

Corporate Governance Trends

–Review & shaping of strategy – active participation

–Pressure for corporate performance from shareholders and
institutional investors
–Demand for executive/director stock ownership with
performance based incentives
–Outside directors increasing
–Impact of Sarbanes-Oxley
–Smaller boards
–Separate CEO/COB and/or Lead Director
–Members with Int’l experience
–Shareholder nominations
–Social responsibility on the rise

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 CEO Responsibilities
– Provide executive leadership and effective
strategic management
– Manage the strategic planning process

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 Board of Directors

1. Executive Leadership and Strategic Vision

• Executive leadership is the directing of activities toward the
accomplishment of corporate objectives.
• A strategic vision is a description of what the company is
capable of becoming.
• Transformational leaders are leaders who provide change
and movement in an organization by providing. The
characteristics of leaders:
– a vision for that change
– Articulate a strategic vision
– Presents a role for others to identify with and to follow
– Communicates high standards of performance and
confidence in followers ability

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2. Managing the Strategic Planning Process
– manage the overall strategic planning process so that
the plans of all the units and functional areas fit
together into an overall corporate plan.
– Identify & analyze company-wide strategic issues
– Generate strategic alternatives
– Facilitate business units in coordinating activities related
to strategic planning process

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 Board of Directors Role in Succession
Planning
• Set criteria for selection based on strategic needs of the
company
• Executive type
• Dynamic industry expert - growth
• Analytical portfolio manager - diversification
• Cautions profit planner - stability
• Turnaround specialist – weak company/active market
• Professional liquidator – company can’t be saved
• Set realistic performance expectations
• Develop a deep understanding of the organization and
conduct thoughtful annual reviews of the CEO
 Tugas kelompok
• Setiap perusahaan memiliki laporan corporate
governance. Berdasarkan laporan mereka:
> sebutkan kriteria dan jumlah insider dan
outsider yang dipilih.
> poin apa saja yang menjadi penilaian dalam
laporan corporate governance.