SMG SM 131 Study Guide - Final Guide: Ethical Movement, Insider Trading, Stakeholder Management
11 Dec 2018
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Course
Professor
Exam #2 Study Guide
Corporate Governance
o Purpose of Business
To create sustainable, long-term value for stakeholders including, owners,
employees, customers, communities and suppliers
o Public Company Structure
Owners/shareholders
Board of directors
CEO
Managers
Employees
o Role of Shareholders
No direct involvement in decision-making
Elects the Board, approves terms and executive compensation
Approves external auditors and significant stock transactions
o Role of the Board of Directors
Duty of Loyalty – represent interest of owners
Duty of Care – Understand the companies needs and do what’s best for it
Exercise business judgement – Use experience to make proper decisions
for the company that are in the best interest – diversity is important
Hire and fire CEO
o Role of the CEO
Run the company
Establish strategy
Role model for employees
Sets financial and non-financial goals
o Line and Staff Employees
Lone roles face the customers on a day to day basis
o Problems in Corporate Governance
Board independence
Insiders v.s Outside (independent/nonemployees)
Compensation
CRO pay-firm performance relationship / excessive pay
Exec. Retirement plans and exit packages (golden parachute)
Outside director compensation (avg. $250,000)
Transparency
Insider trading
o Improving Corporate Governance
Enablers of Ethical Culture = People, Processes, and Measurements.
Legislative Measures – Sarbanes Oxley and Dodd Frank
Dodd Frank – disclosure of conflicts, golden parachutes,
independence of directors, CRO compensation (say-on-pay)
Sarbanes Oxley – independent auditor who does not consult with
firm, CEO & CFO must certify financial reports
Change in board of directors
Diversity/outside directors
Board committee action
Nominate, audit, compensation, CSR
Standards, training and monitoring.
o Legitimacy of Corporate Governance
U.S. uses a Anglo-American model with “shareholder primacy”
Shareholders (own)-> Board (govern)-> Management (run)-> Employees
(work)
Agency problem – Management is supposed to be an agent of the owners,
but they have power/control that can be used against owner’s best interest.
Business Forms
o Sole Proprietorship
72% of all business forms
Owners by one person
Unlimited liability
Pass-through taxation (taxed at personal level)
o Partnership
Two or more owners
Each partner responsible for profits, taxes and unlimited liability
Pass-through taxation (taxed at personal level)
o C Corporation
Separate legal entity for tax and liability purposes
Owners not personally liable
Corporate entity is responsible for taxes and debts
Higher tax rate – 21% at federal level and state taxes
Double taxes (business and personal)
High ability to raise money
Can go public
o S Corporation
Tax status of a sole proprietorship/partnership
Limited liability of a C corporation
> 100 shareholders
One form of stock
Pass through taxation (taxed at personal level only)
o Limited Liability Company (LLC)
Tax structure of a partnership
Limited liability of a C corporation
Loses tax status If it goes public (must pay both types and pay backed
taxes)
Corporation can be a partner of an LLC
o Social Benefit Corporation
Created under state law in 31 states
Goal is to make a profit and pursue a social mission
Benefits director and fiduciary duties owed to shareholders
Social mission > profit
Must publish yearly social and environmental impact report
o B Corp
Any for-profit entity given a certification from B-Lab
Accounting
o Accounting
Recording, classifying, summarizing and interpreting of financial events
and transactions in an organization to provide interested parties needed
financial information.
Employees, owners, creditors, unions, investors, and the government will
make use of a firms accounting information.
o Balance sheet
Assets, liabilities and equity
o Income statement
Revenues, expenses and profit (net income)
o Statement of cash flows
Cash inflow (revenue), cash outflow (cost of operation/Production) and
cash on hand
5 Working Areas of Accounting
o Financial Accounting
Provides financial information for people outside organization.
Profitability, debt and performance
o Managerial Accounting
Provides financial information for managers inside the organization to
assist in decision making
Cost of production/marketing
Preparation and control of budget
Minimizing tax liability
o Auditing
Reviews and evaluates the information used to prepare a company’s
financial statements
Independent auditors (Sarbanes-Oxley)
Internal audits (accountants within firm)
o Tax
Tax accountant are trained in tax law and are responsible for preparing tax
returns and developing strategies
Document Summary
To create sustainable, long-term value for stakeholders including, owners, employees, customers, communities and suppliers: public company structure. Elects the board, approves terms and executive compensation. Approves external auditors and significant stock transactions: role of the board of directors. Duty of loyalty represent interest of owners. Duty of care understand the companies needs and do what"s best for it. Exercise business judgement use experience to make proper decisions for the company that are in the best interest diversity is important. Hire and fire ceo: role of the ceo. Sets financial and non-financial goals: line and staff employees. Lone roles face the customers on a day to day basis: problems in corporate governance. Cro pay-firm performance relationship / excessive pay. Enablers of ethical culture = people, processes, and measurements. Legislative measures sarbanes oxley and dodd frank. Dodd frank disclosure of conflicts, golden parachutes, independence of directors, cro compensation (say-on-pay)
