Corporate Governance Fundamentals PDF

# Corporate Governance ## Corporate Governance Fundamentals **Concept and Vision of Corporate Governance (CG)** * **Definition**: A mechanism by which business corporations are directed and controlled. * **Focus**: The roles, rights, and accountability of stakeholder groups such as: * Owners...

# Corporate Governance ## Corporate Governance Fundamentals **Concept and Vision of Corporate Governance (CG)** * **Definition**: A mechanism by which business corporations are directed and controlled. * **Focus**: The roles, rights, and accountability of stakeholder groups such as: * Owners * Boards of Directors * Managers * Employees * Other stakeholders * **Vision**: Ensure that businesses conduct ethical operations. ## Elements of Corporate Governance * **Board of Directors**: Governs and oversees management. * **Code of Ethics** / **Conduct**: Guidelines for ethical behavior. * **Top Management Team**: Individuals hired by the Board to manage daily operations. * **Strategy**: Vision and mission of the organization. ## Major Groups and Committees 1. **Shareholders**: * Own stock in the firm, giving them ultimate control (shareholder-primacy model). 2. **Board of Directors**: * Govern and oversee management. * Composed of inside and outside directors. 3. **Committees**: * **Compensation Committee**: Sets compensation for the CEO and senior executives. * **Audit Committee**: Monitors financial policies and procedures. * **Corporate Governance / Ethical Committee**: Ensures compliance with the code of ethics and regulations. 4. **Top Managers (C-Suite)**: * Hired by the Board to manage the business. 5. **Employees**: * Perform operational work ## The Corporation's Hierarchy of Authority * **Operating Committees**: Staffed by board members and independent directors. * **Audit Committees**: Responsible for financial oversight. * **Compensation Committees**: Determine executive pay. * **Corporate Governance Committees**: Ensure ethical compliance. ## The Board and the CEO * **Responsibilities**: * Hire, monitor, and dismiss the CEO if necessary. * **Trends**: * Increased firings of underperforming CEOs. * Movement towards separating CEO and Board functions. ## Merging the Chairman and CEO Roles * **Advantages**: * Minimizes potential conflicts. * Provides leadership from someone familiar with the organization. * **Disadvantages**: * Eliminates checks and balances. * May lead to a focus on short-term goals. * Compromises board independence and stockholder power. ## Signals of Board Problems 1. Company has to restate earnings. 2. Poor employee morale. 3. Poor customer satisfaction. 4. Management misses strategic performance goals. 5. Company is targeted by employee lawsuits. 6. Stock price declines. 7. Quarterly financial results miss analysts' expectations. ## Improving Corporate Governance * **Properly Constituted Boards**: Ensure diverse and competent board members. * **Separation of Chairperson and CEO Functions**: Maintain checks and balances. * **Audit Committees**: Ensure financial integrity. * **Vigilant Shareholders**: Active participation in governance. * **Financial Reporting and Auditing Systems**: Provide full and timely disclosure.