Transcript: Corporate Governance Agency vs Stakeholder Theory Officers (Managers) The Agency Theory Possible Improvements Corporate governance refers to the mechanisms and processes by which corporations are controlled. This includes: Determining the company’s goals. Selecting processes and people to pursue this goal. Regular evaluations. Proper communication between those involved. Stewardship Theory Institutional Theory Resource Dependence Theory Managerial Hegemony Theory Stakeholder Once again, groups of 5 Different situation with different criteria. Try and find the optimal solution!!! References Carney, M., Gedajlovic, E., & Sur, S. (2011). Corporate governance and stakeholder conflict. Journal of Management & Governance, 15(3), 483-507. Jensen, M. C. (2010). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 22(1), 32-42. doi:10.1111/j.1745-6622.2010.00259.x Werder, A. (2011). Corporate governance and stakeholder opportunism. Organization Science, 22(5), 1345-1358. Yeh, C., & Taylor, T. (2008). Issues of governance in sport organisations: A question of board size, structure and roles. World Leisure Journal, 50(1), 33-45. Zeitoun, H., Osterloh, M., & Frey, B. S. (2014). Learning from ancient Athens: Demarchy and corporate governance. Academy of Management Perspectives, 28(1), 1-14. Stakeholder Officers (Managers) Other Governance Theories *All possible solutions require some sort of combination of both perspectives. (Zeitoun, Osterloh, & Frey, 2014) Shareholders The Stakeholder Theory Board of Directors (Werder, 2011) (Carney, Gedajlovic, & Sur, 2011) Corporate Governance - A Quick Review Situation #2 Discussion Time The Enlightened Stakeholder Theory The stakeholder theory with the long-term goal of maximizing market value (Jensen, 2010). Dual Boards of Directors One BOD representing the shareholders and the other representing the stakeholders (Zeitoun, Osterloh, & Frey, 2014). Etc... Stakeholder What were the positives and negatives of this decision making process? The Agency Theory Situation #1 (Yeh & Taylor, 2008) Board of Directors We are going to have a simile "Board of Directors meeting". Please pair up in groups of 5 One person will be Chairman of the Board and will be assigned the task of presenting the scenario and ensuring a solution is found. The others will each be assigned a stakeholder to represent with certain criteria to follow. Shareholders Employees Customers Suppliers Government Community The Stakeholder Theory Clearly, more research is needed to optimize the current theories. Sport managers need to understand the importance of corporate governance and the various theories that pervade it. It will be up to us to remain up to date with current research to ensure the efficient operation of our organizations! Relevance for Researchers and Sport Managers (Jensen,2010)
Transcript: Enron History Corporate Governance By Stephen Groves Trey Mason Laura Rodriguez The Godfathers Past and Present - 5000% - Fixed Cost - $75M minimum - IPO / Privatization Did Sarbanes Oxley go too far, was it just right, or not far enough? The Walt Disney Company Skilling Steps Down Enron: The Smartest Guys in the Room Corporate governance broadly refers to the processes by which corporations are controlled and directed. "Brightest people on Earth" What is Corporate Governance? Enron Executives Sentencing Comparable? What Does Corporate Governance Mean to You? Corporate Governance Re-Assessment - First documented Board of Directors - Bank of England (1694) - U.S. adopted these practices in 1791 - First Bank of the United States "I don't want to be rich... I want to be world-class rich." Enron Aftermath Did Sarbanes Oxley go too far, was it just right, or not far enough? - Ken Lay re-assumes CEO position Aug. 2001 - Enron declares bankruptcy Dec. 2001 Sarbanes Oxley & Public Policy Analysis "No bad news allowed" - Oxley - Light regulation - Internal Controls - Improved Efficiency - Cost of Capital $50 million - Forbes' Worlds Most Reputable Company - Dividing CEO and President roles - 1984 - Diversity of Board - Age - Sex - Race - Background 29 Apr 2015 - Civil Suit - Where are they now? - Fastow - Keynote speaker The Collapse of Enron - $60 billion, 2x the size of Vietnam - $90.75 (Aug. 2000) - $00.26 (Nov. 2001) - Owed $38 billion in debt - Board Diversity - Term Limits - Carrying out Duties of Care and Loyalty - Committee Controls - Advocating Majority Voting - Compensation & Size CONS Sarbanes Oxley & Public Policy Analysis Board Best Practices Birth of Sarbanes Oxley The Walt Disney Company Board of Directors History of Corporate Governance What are some characteristics and/or qualities for a model Board of Directors member? What companies stand out in your mind as having sound corporate governance policies? - History - Bad Examples - SEC & Sarbanes Oxley - Learning from Our Mistakes PROS Questions - Signed by President Bush in 2002 - Enforced by the SEC - Key components of Sarbanes Oxley - Section 404 - Financial Statements - Auditor Independence - Accounting Oversight - Increase Penalties on 'White Collar Crime' - Board Liability Enron Shock and Awe
Transcript: the danger that the board of directors may become insulated from shareholders and beholden to managment Corporate Governanace Rights and equitable treatment of shareholders OECD reports present general principles around which businesses are expected to operate to assure proper governance. Corporate Governance Disclosure and transparency Role and responsibilities of the board the principale-agent issue. Interests of other stakeholders United States, United Kingdom Legal documents why do we need corporate governance ? Corporate Governance models around the world Role and responsibilities of the board Rights and equitable treatment of shareholders Continental Europe The Principals of corporate governance India Disclosure and transparency Interests of other stakeholders
Transcript: Major Laws: General Company Law, 1966 New Economic regulations, 2001 Law on Financial Security, 2003 Trust and Modernization of the Economy, 2005 Codes are reccomened guidelines for companies to follow put forthe by national employees associations. MEDEF and AFEP Vienot 1, 1995-Focused on Board of Directors Vienot 2, 1999- Director independance Vienot 3, 6/16/2013 Vienot 3: Stricter reccommendations and shareholder votes on executive remuneration Employee representation at the board level Maximum directorships from 5(law) down to 4 Enhanced compliance: "Comply or Explain" 11.3% of french companies had an institutional investor as the main shareholder compared to over 40% in the US France has a very high percentage of international investors compared to the world Over 60% of founding companies are still under control of the founding family The state controls a measly 2% equity stake Implications: Hostile takeover bids are not uncommon in France, 234 between 2003 and 2005 Different management teams compete to usurp under performing incumbents The "takeover market" becomes a de facto governance mechanism One-tier system: Both executive and non-executive members make decisions together Two-tier system: Separate the two groups in to one management board and one supervisory board Two-tier on the decline: 76% unitary in 2004 This doesn't preclude functional separation of CEO&COB The management board is headed by the CEO and they focus on operational decisions The supervisory board is led by the Chairman and deals with strategic decisions Oversees the management board Used to represent a variety of stakeholders by including various internal and external representatives French Laws regarding Boards: Limit inside directors to 1/3 of seats Maximum of 5 boards per person BoD Committees: Audit Nominating Remuneration Remuneration: Tripled between 1998-2004 to 4.9M Euros average Typically 50% variable (like options) CEO pay has come under fire recently Now limited to 450k Euros for CEOs of companies with high state ownership Applies to companies like: postal service nuclear power giant Areva electric utility EDF railway company SNCF public transport operator RATP Then: Board consisted of 3 French managing partners, two of whom are Michelin family Nearly no scrutiny over decisions One of two companies not to fully implement Vienot 1 standards Only CAC 40 Company that has made no progress to meeting Vienot 2 standards Now: 8 members, including 1 Irishman, and 3 women, E. Michelin died, 2006 Michel Rollier retains 23,276 shares, 8.5 times the rest of the board combined! Takeaways: Guidelines vs. Law and implementation timeline Inside vs. outside directors The importance of international directors Sources: http://virtusinterpress.org/additional_files/book_corp_govern/sample_chapter04.pdf http://studentyard.net/what-are-the-unitary-and-two-tier-board-structures/ https://www.aohub.com/aoos/viewContent.action?uid=JAI3emRuMU4%3D&popup=HxapDW%2FMKd4%3D&nav=FRbANEucS95NMLRN47z%2BeeOgEFCt8EGQTBTrTXtG0BY%3D&fr=&key=Ec8teaJ9VaqqzApvHny0AF7eOOGbnAEFKCLORG72fHz0%2BNbpi2jDfaB8lgiEyY1JAvAvaah9lF3dzoxprWhI6w%3D%3D& http://www.ecgi.org/codes/documents/afep_medef_code_revision_jun2013_en.pdf http://www.france24.com/en/20120613-france-moscovici-hollande-ceo-executive-pay-cap-euros-state-firms/ http://www.michelin.com/corporate/group/corporate-governance/board http://www.economist.com/node/507536 Corporate Governance in Space Shareholders and Ownership Board of Directors Governance Codes From America to France By, The C-Suite OOH-LA-LA! Case Study: Michelin Governance Codes vs. Law Stock Markets and Ownership Board of Directors Remuneration Representation Case Study: Michelin
Transcript: Duty not to misuse information or position LOYALTY and GOOD FAITH The Duties Common Law Duty: Corporate Governance LOYALTY and GOOD FAITH Statutory Duty: Related party transactions Statutory Duty: Statutory Duty: Statutory Duty: Common Law Duty: Common Law Duty: Duty to act with reasonable care and diligence Duty to prevent insolvent trading Requirement to disclose certain interests Duty to act in good faith in the best interests of the company and for a proper purpose Statutory Duty: Statutory Duty: CARE and DILIGENCE Duty to act in good faith in the interests of the company Duty to use powers for a proper purpose Duty to retain discretions Common Law Duty: Duty to avoid conflicts of interest Common Law Duty: Duty to act with reasonable care and diligence
Transcript: 1. Is this in violation of the code of ethics? 2. Is the situation worse since Brooke and Eric are not close friends? What do you think? Code of Business Conduct and Ethics 1. Did Brooke violate the code of ethics? 2. Should Eric report Brooke for violating the code of ethics? Scenario 2 What do you think? What do you think? Brooke is the manager Hayley and Eric are staff members Hayley and Eric did not know each other before starting work one month ago Brooke is in the middle of her morning rounds Brooke is the manager Hayley and Eric are staff members Hayley and Eric just meet when they started work a month ago Eric is the manager Brooke and Hayley are staff members Brooke and Hayley are close friends and have known each other for a long time Brooke and Hayley are sitting in their neighboring cubicles Eric is in the middle of his morning rounds Scenario 4 Keep in mind how things appear Brooke is the manager Hayley and Eric are staff members Hayley and Eric are close friends Corporate Governance Natalie Boyd Scenario 3 Is this in violation of the code of ethics? What do you think? 1. Should Brooke report Eric for violating the code of ethics? 2. Since Hayley and Eric are not friends does that make the joke worse? Scenario 1 Questions NCI Group
Transcript: "The bigger they are, the harder they fall." The pace of manufacturing has increased in the modern era. With technology, companies are able to grow faster than ever before which increases the scale of potential damage of corporate wrong-doing. Globalization and Population Corporate Governance The Basics Free Market Technology A free market economy encourages executives of a company to engage in riskier business behavior in order to have short-term gains. Refers to the policies and practices by which an organization is directed and managed at executive levels. Focuses on accountabilities to shareholders and stockholders and how the business will avoid risk and the competence, ethics and propriety of the leadership. Corporate Governance began in the 1990's with the growth of larger businesses and changing markets. Mostly used by, but isn't limited to, large public businesses to avoid risk and scandals. Gives greater insurance to the stock/share holders. Goals of Corporate Governance Definition With markets growing globally and connecting in new ways, problems grow at a greater scale than ever before. With a higher population, large companies have greater potential of harming the economy at a global level with risk and scandals. Setting the company's strategic aims Providing effective leadership Supervising the management of the business Ensuring transparency for shareholders Factors for Improving Globalization Technology Population Free Market
Transcript: A Corporate Governance system characterized by a controlling shareholder. Corporate Governance structure failed to comply with some of the key existing Italian CG standards: Independent directors Composition of the internal control committee. The role of the external auditor as well as the internal control committee. Ownership and control structure: High level of concentration Presence of a limited number of shareholders, linked by either family ties or agreements of a contractual nature. Strong blockholder (Tanzi family) 13 board members Tanzi is chairman and CEO 4 directors were Tanzi familiy members Only 5 non-executive directors 3 claimend independant directors (itl. avg.: 5) Directors were also part of subsidiary boards Barili allegedly non-executive director belonged to the executive committee, and had been working in Parmalat as senior manager from 1963 until 2000 Failure of Board of Directors to recognize, and to deal effectively with, abuses reflecting what reports identified as a “culture of greed” within the corporation’s top management. Major responsibility on the members of the Board of Directors, especially upon those who served on its audit and compensation committees. Board members exercised little diligence, asked few questions and eventually became a mere rubber stamp for extraordinary loans. The lack of transparency between the management and the Board of Directors (The absence of internal controls). Core Issues Violated: No methodology of control systems in place : absent a strong system of internal controls important for the protection of outside investors Lacked board independence as per SOX, audit committee depended on Tanzi family CFO, Fausto Tonna, depended on internal auditor – no access to company books Lack of monitoring company operation by BOD Wrong disclosure of financial reports 3 internal auditors appointed by company (neither by minority shareholders) Lack of rotation of external auditors (Lorenz Penca chief auditor for 9 years ) Bad Apples & Fraud= Lack of Corporate Governance Chairman Tsuyoshi Kikukawa Directors Michael C. Woodford Haruhito Morishima Hisashi Morl Masataka Suzuki Kazuhisa Yanagisawa Shuichi Takayama Takashi Tsukaya Kazuhiro Watanabe Makoto Natatsuka Shinichi Nishigaki Hironobu Kawamata Yasuo Hayashida Hiroshi Kuruma Junichi Hayashi -Boards in most Japanese companies do not only engage in management at the level of policy formulation or decisions on very significant transactions,but they also remain heavily involved in daily operations of the company.The matters they discuss and approve are often relatively small and the result is more frequent meetings than at a typical U.S. company CONCLUSIONS INTERNAL & EXTERNAL CONTROL MECHANISMS COMPENSATION SCHEMES: WORLDCOM BOARD PROCESS: OLYMPUS -Parmalat was a complex group of companies controlled by a strong blockholder (the Tanzi family) through a pyramidal device. BOARD STRUCTURE: OLYMPUS Quality and effectiveness of board meetings Commitment/availability of non executive directors Degree of differences of opinion at the board level Use of knowledge and skills Size: 13 members. 4 of them, including the Chairman-CEO, were linked by family ties. Board leadership: Statutory auditors External auditing Committee Structure: Executive committee was set up and composed of 7 directors, including 3 Tanzi family members. Internal control committee was composed of 3 members. -The Audit Committee did not engage to the extent necessary to understand and address the financial issues presented by this large and extremely complex business -The Compensation Committee dispensed extraordinarily generous rewards without adequate attention to the incentives they created. BOARD STRUCTURE: PARMALAT COMPENSATION SCHEMES: OLYMPUS -There was little interaction between the outside Directors. 15 board members 12 are company executive officers Board is stacked with insiders (typical Japan) One of its three outside directors failed to pass a test of independence Outside directors were not a majority Lack of independent directors supervising management - board packed with yes-men There had been some hope that Japanese companies would take on not just outside directors but outside managers and that corporate cultures in Japan would be more open and international Commitment/availability of non executive directors Use of knowledge and skills Earlier cases (WorldCom) pushed U.S. Congress to enact the Sarbanes-Oxley Act (“SOX”) while being attributed to two main kinds of failure: Corporate organs relevant to internal controls (external auditors, the management, boards or directors, and audit committees) did not work as designed Their internal control mechanisms, especially standard operating procedures to record, collect and gather internal information, did not function -One of the allegedly non-executive directors (Barili) belonged to the executive committee, and had been working in Parmalat as senior manager from 1963 until 2000. Size: 15 members
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