Chapter 2 A
Chapter 2 A
Chapter 2 A
Chapter 2
Corporate
Governance
15e
• Corporate governance
- refers to the relationship among the board of directors,
top management, and shareholders in determining the
direction and performance of the corporation.
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved.
2-2
Responsibilities of the Board
1. Effective board leadership including the processes, makeup, and
output of the board
2. Strategy of the organization
3. Risk vs. initiative and the overall risk profile of the organization
4. Succession planning for the board and top management team
5. Sustainability
• Due care
– the board is required to direct the affairs of the corporation but not to
manage them.
– If a director or the board as a whole fails to act with due care and, as
a result, the corporation is in some way harmed, the careless
director or directors can be held personally liable for the harm done.
• Agency theory
– states that problems arise in corporations because the agents (top
management) are not willing to bear responsibility for their
decisions unless they own a substantial amount of stock in the
corporation
• Stewardship theory
– proposes that, because of their long tenure with the corporation,
insiders (senior executives) tend to identify with the corporation
and its success
• Staggered boards
– only a portion of board members stand for re-election when directors
serve more than one-year terms
• Lead director
– consulted by the Chair/CEO regarding board
affairs and coordinates the annual evaluation of
the CEO