ROLE OF THE BAORDD LESSON 7

Corporation

A mechanism established to allow different parties to contribute capital, expertise, and labor for their mutual benefit.

Governed by the board of directors that oversees top management with the concurrence of the shareholders.

Corporate Governance

The relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation.

Due Care

The board of directors are responsible for ensuring that the corporation is not harmed by members of the board. Directors can be held liable.

Responsibilities of the Board of Directors

1. Sets corporate strategy, overall direction, mission, or vision

2. Hires and fires the CEO and top management

3. Controls, monitors, or supervises top management

4. Reviews and approves the use of resources

5. Cares for shareholders’ interests

6. Assures that the corporation is managed in accordance with state laws, security regulations, and conflict of interest situations.

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.

Phantom

Never knows what to do, if anything; no degree of involvement.

Rubber Stamp

Permits officers to make all decisions. It votes as the officers recommended on action issues.

Minimal Review

Formally reviews selected issues that officers bring to its attention.

Nominal Participation

Involved to a limited degree in the performance or review of selected key decisions, indicators, or programs of the management.

Active Participation

Approves questions and makes final decisions on mission, strategy, policies, and objectives. Has active board committees. Performs fiscal and management audits.

Catalyst

Takes the leading role in establishing and modifying the mission, objectives, strategy, and policies. It has a very active strategy committee.

Inside Directors

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.

Affiliated Directors

Not employed by the corporation, handles legal or insurance work.

Retired Executive Directors

Used to work for the corporation, partly responsible for past decisions affecting current strategy.

Family Directors

Descendants of the founder own significant blocks of stock.

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.

Stewardship Theory

As a 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.

Interlocking Directorates

Useful for gaining both inside information about an uncertain environment and objective expertise about potential strategies and tactics.

Direct Interlocking Directorate

When two firms share a director or when an executive of one firm sits on the board of a second.

Indirect Interlocking Directorate

When two corporations have directors who serve on the board of a third firm.

Nomination and Election of Board Members

97% of U.S boards use nominating committees to identify potential board members

Staggered Boards

Only a portion of board members stand for re-election when directors serve more than one-year term.

Lead Director

Is consulted by the Chair/CEO regarding board affairs and coordinates the annual evaluation of the CEO.

96% of the U.S companies that combine the Chairman and CEO positions had a lead director.

Sarbanes Oxley Act 2002

Designed to protect shareholders from excesses and failed oversight of boards of directors

• Whistleblower procedures

• Improved corporate

Responsibilities of Top Management

Executive leadership is the directing of activities toward the accomplishment of corporate objectives. Sets the tone for the entire corporation.

Strategic Vision

Description of what the company is capable of becoming.

Transformational Leaders

Provides a change and movement in an organization by providing a vision for that change.

• CEO articulates a strategic vision for the corporation

• CEO present a role for other to identify with and to follow

• CEO communicates high performance standards and also show confidence in the followers’ abilities to meet these standards.

Strategic Planning Staff

Supports both top management and the business units in the strategic planning process

• Identifying and analyzing company-wide strategic issues, and suggesting corporate strategic alternatives to top management

• Work as facilitators with business units to guide them through the strategic planning process.