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MGMT 1040 (37)


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York University
MGMT 1040
William(bill) Woof

Corporate Governance: Foundational Issues Legitimacy and Corporate Governance (pg 130) • Downfall of Enron, WorldCom, Parmalat -> investors lose trust • Components of modern corporate governance system o Corporation's charter, shareholders, board of directors, management, employees • Legitimacy: condition that prevails when there is congruence between the organizations' activities and society's expectations • Legitimation: dynamic process through which business seeks to perpetuate its acceptance • Micro level = company level • Macro level = business institution level • At micro level ways to achieve legitimacy: o Company adopts methods that society accepts (discontinue door-to-door if society doesn't like it) o Company will try to change society's norms to conform to its own through advertising and other forms o Company tries to identify itself with society through other organizations, people, places, or values • At macro level o Business exists solely because society gave that right o Business = public institution + private entity • When legitimacy is questioned social/political factors > economic factors Purpose of Corporate Governance • Governance -> way a company is steered • Corporate governance -> way a firm is governed, directed, administered, controlled and its goals Components of Corporate Governance • Focus on Anglo-American model which most of the world is converging to because investors who, invest more globally, seek governance mechanisms which they are more comfortable/familiar with o Roles of Four Major Groups • Shareholders, board of directors, managers, employees • Charter: issued by state giving corporation right to exist and its basic terms of existence • Shareholders: owners of the corporation, larger the share - larger the vote • Board of directors: small elected group that governs management and is responsible for seeing that managers put shareholders interest first • Management: top (establish policy) middle (daily supervision) low (operational work) • Employees: hired by company to perform the actual operational work o Separation of Ownership from Control • Ethics arise: intended vs actual role • First managers were owners, now too many owners (shareholders), so now the owners elect board of directors to do the work • Most shareholders/owners view themselves as investors • Power, authority, and control flows upward from management (they just tell the like-minded board of directors what they want and they do it) rather than the intended downward flow • Agency problems: interests of shareholders not alighted with interest of manager and manager began to pursue self-interest not shareholder interest Problems in Corporate Governance (pg 134) • For coproate governance to function, board of directors must assign roles/responsibility to management that is carried out in the best interest of the shareholders (not the other way around) • Conflict of interests from external sources (auditing and consulting firms being the same) The Need for Board Independence • Crucial for board of directors to be independent from management • Inside directors: somehow related to the firm • Outside directors: independent from firm, variety of backgrounds, no relationship to the firm • Sometimes CEOs control board perks so if any director speaks out, they will face consequences Issues Surrounding Compensation • The extent of which CEO pay is tied to firm performance • The overall size of CEO pay The CEO Pay-Firm Performance Relationship • CEOs keep increasing alarming salaries whereas performance o the firm decreases • Use of stock options to strengthen the relationship • Designed to motivate the recipient to improve value of the firm's stock • Option - allows recipient to purchase stock in the future at the price is it today • Stock option backdating - when recipient given the option of buying stock at yesterday's price, resulting in an immediate and guaranteed wealth increase. • Spring loading: granting of a stock option at today's price but with the inside knowledge that something good is about to happen • Bullet dodging: delaying of a stock option grant until right after bad news Excessive CEO Pay • Plato proposed that the highest earning shouldn't be 5x higher than the lowest earning man • Now the CEO to common work pay ratio is 531:1 • Say on Pay: movement started in UK in 2002 that required remuneration report to a shareholder vote at each annual meeting • Shareholders have right to recover funds if CEO high pay was from financial misconduct or exercising of options in questionable way • Clawback provisions: compensation recovery mechanisms that enable company to recoupe compensation funds Executive Retirement Plans and Exit Packages • CEOs receive lucrative retirement packages that unrelated to the firm's performance o Access to corporate jets, country club memberships, luxurious housing • Some workers don’t even receive retirement packages • Worker retirment affected by stock market and CEOs not Outside Director Competition • Directors receiving payment is a new concept • Directors are representations of shareholder, so if they receive money it is like self- dealing • However, they have endured increased responsibility over the years and thus their pay has increased Transparency • Push for greater transparency leads to more opacity since disclosure forms are so long • Tax gross up: • Debate over CEO compensation (is it worth the responsibilities they have?) The Governance Impact of the Market for Corporate Control • Merger, acquisition, and hostile takeover motivate top manager to pursue shareholder interest rather than self-interest Poison Pills • Discourage/prevent hostile takeover • When company tries to acquire (swallow the pill) the company becomes difficult (hard to ingest) • Several forms but most common: when hostile suitor aquires more than a certain percentage of a company's stock, the pill provides that other shareholder be bale to purchase shares (dilutes suitors share/power) and makes takeover expensive • Fall out of favour Golden Parachutes • Contract in which a corporate agrees to make payments to key officers in the event of a chane in control of the corporation • Intent is to provide incentive for top executives to not fight a shareholder wealth- maximizing takeover in order to preserve employment • Studies shows it has no effect of resistance Insider Trading Scandals • Insider trading: practise of obtaining critical info from inside a company and using the info for one's own personal financial gain • Allegations cause public to lose faith in stability of financial industry Improving Corporate Governance (pg 141) Sarbanes-Oxley Act •
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