JMU COB 487 Rutherford Final Exam

Corporate Governance

Examines the relationships between 3 groups of people:

Stockholders, boards of directors, and managers

Corporate Governance Structure

Shareholders

Board of Directors

CEO

Top Management Team

Middle Management

Technical Core

Agency Theory

In corporations, ownership is separated from control, assumes:

- Diffusion of corporate ownership

- Divergent Interests

- Information Asymmetry

Which may lead to opportunism arising

Overcoming Agency Problems 1:

Align the interests of CEO with the interests of stockholders thereby overcoming the divergent interests assumption:

CEO PAY

CEO Pay

Consists of guaranteed (salary) and non-guaranteed pay (bonus and stock options/restricted stock)

Overcoming Agency Problems 2:

Institutional Investors: Overcome the diffusion of ownership assumption

Market For Corporate Control

Board of Directors: Legal duty to ensure managers are acting in the interests of stockholders

Board of Directors: What they do

- Set CEO pay

- Hire/Fire CEO

- Provide advice/vote on key strategic decisions

Board of Directors: Who they are

Usually nominated because they posess one or more of four qualities:

- Expertise

- Access to key resources

- Legitmacy

- Representative of a blockholder

Division of Labor

A process of splitting up a task into a series of smaller tasks, each of which is peformed by a specialist

Vertical Linkages

used to coordinate activities between the top and bottom of an organization and are designed primarily for control of the organization

Unity of Command

The principal that each person within an organization should only report directly to one supervisor

Horizontal linkages

Relationships between equals in an organization

Matrix Structures

An organizational arrangement that relies heavily on cross-functional teams that each work on a different project

Clan Control

Relying on shared traditions, expectations, values, and norms to lead people to work toward the good of their organization

Stakeholders

Individuals and groups that have an interest to stake a claim in an organization

Board insiders

Members of the board of directors who are generally employed inside of the organization

CEO Duality

When the chief of executive officer is also the chairman of the board of directors

Leveraged Buyout (LBO)

A company that is purchased through significant debt

Anchoring and Adjustment Bias

Individuals react to arbitrary or irrelevant numbers when setting financial or other numerical targets