Corporate Governance

•Agency conflicts can decrease the value of stock owned by outside shareholders. Corporate governance can mitigate this loss in value.
•Corporate governance can be defined as the set of laws, rules, and procedures that influence a company’s operations and the decisions its managers make.
•At the risk of oversimplification, most corporate governance provisions come in two forms, sticks and carrots. The primary stick is the threat of removal, either as a decision by the board of directors or as the result of a hostile takeover.
•If a firm’s managers are maximizing the value of the resources entrusted to them, they need not fear the loss of their jobs.
•On the other hand, if managers are not maximizing value, they should be removed by their own boards of directors, by dissident stockholders, or by other companies seeking to profit by installing a better management team.
•The main carrot is compensation. Managers have greater incentives to maximize intrinsic stock value if their compensation is linked to the firm’s performance rather than being strictly in the form of salary.

•Almost all corporate governance provisions affect either the threat of removal or compensation. Some provisions are internal to a firm and are under its control.
•These internal provisions and features can be divided into five areas:
(1) monitoring and discipline by the board of directors
(2) charter provisions and bylaws that affect the likelihood of hostile takeovers
(3) compensation plans
(4) capital structure choices
(5) accounting control systems.
•In addition to the corporate governance provisions that are under a firm’s control, there are also environmental factors outside of a firm’s control, such as the regulatory environment, block ownership patterns, competition in the product markets, the media, and litigation.

•Shareholders are a corporation’s owners, and they elect the board of directors to act as agents on their behalf.
•In the United States, it is the board’s duty to monitor senior managers and discipline them if they do not act in the interests of shareholders, either by removal or by a reduction in compensation. This is not necessarily the case outside the United States.
•For example, many companies in Europe are required to have employee representatives on the board. Also, many European and Asian companies have bank representatives on the board. But even in the United States, many boards fail to act in the shareholders’ best interests. 

•Consider the election process. The board of directors has a nominating committee. These directors choose the candidates for the open director positions, and the ballot for a board position usually lists only one candidate.
•Although outside candidates can run a “write-in” campaign, only those candidates named by the board’s nominating committee are on the ballot.
•At many companies, the CEO is also the chairman of the board and has considerable influence on this nominating committee. This means that in practice it often is the CEO who, in effect, nominates candidates for the board.
•High compensation and prestige go with a position on the board of a major company, so board seats are prized possessions. Board members typically want to retain their positions, and they are grateful to whoever helped get them on the board. Thus, the nominating process often results in a board that is favorably disposed to the CEO.

At most companies, a candidate is elected simply by having a majority of votes cast. The proxy ballot usually lists all candidates, with a box for each candidate to check if the shareholder votes “For” the candidate and a box to check if the shareholder “Withholds” a vote on the candidate—you can’t actually vote “No”; you can only withhold your vote.
•In theory, a candidate could be elected with a single “For” vote if all other votes were withheld. In practice, though, most shareholders either vote “For” or assign to management their right to vote (proxy is defined as the authority to act for another, which is why it is called a proxy statement). In practice, then, the nominated candidates virtually always receive a majority of votes and are thus elected.

•Voting procedures also affect the ability of outsiders to gain positions on the board. If the charter specifies cumulative voting, then each shareholder is given a number of votes equal to his or her shares multiplied by the number of board seats up for election.
•For example, the holder of 100 shares of stock will receive 1,000 votes if 10 seats are to be filled. Then, the shareholder can distribute those votes however he or she sees fit. One hundred votes could be cast for each of 10 candidates, or all 1,000 votes could be cast for one candidate.
•If noncumulative voting is used, the hypothetical stockholder cannot concentrate votes in this way—no more than 100 votes can be cast for any one candidate.

•Voting procedures also affect the ability of outsiders to gain positions on the board. If the charter specifies cumulative voting, then each shareholder is given a number of votes equal to his or her shares multiplied by the number of board seats up for election.
•For example, the holder of 100 shares of stock will receive 1,000 votes if 10 seats are to be filled. Then, the shareholder can distribute those votes however he or she sees fit. One hundred votes could be cast for each of 10 candidates, or all 1,000 votes could be cast for one candidate.
•If noncumulative voting is used, the hypothetical stockholder cannot concentrate votes in this way—no more than 100 votes can be cast for any one candidate.









Last modified: Tuesday, August 14, 2018, 8:53 AM