Corporate Governance Dilemmas Watchdog vs. Co-Pilot

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Corporate Governance DilemmasWatchdog vs.
Co-Pilot

• Lecture 3

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Role of the Board

• Watchdog
• Observe, and act only if something is amiss
• Replace the CEO if necessary
• Oversees compliance
• Co-Pilot
• Engaged in the discussions and decisions about
  strategy and execution
• Add value based expertise and experience

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Minimum Duties of the Board

• Hire and fire the CEO
• Approve Executive Compensation
• Approve the Strategic Plan
• Acquisitions, Divestitures, Capital Structure
• Oversight for Compliance
• SEC reporting requirements
• NYSE/NASDAQ listing requirements
• Special requirements (e.g., environmental)

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Dilemma Watchdog vs. Co-Pilot

• Pros
• Cons

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Boards Respond to Circumstances

• Monitoring, advising, and deciding will be
  affected by
• The companys financial condition
• Size of the business
• Business complexity and industry turbulence
• Relationship with CEO and top management
• Relationship with shareholders
• Shareholder expectations (e.g., resolutions)
• Philosophy of the shareholder base
• Board dynamics (make-up and culture)

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Best Board-Management Combinations

• Best Companies exhibit
• Clearly-stated, focused strategy
• Flawless operational execution
• Performance-oriented culture
• Fast, Flexible, Flat organization

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Best Board-Management Combinations

• At least 2 of the 4 attributes
• Talent Hold on to talented employees
• Leadership Keep CEO and board members on
  value-creation
• Innovation Make innovations that are industry
  transforming
• Partnerships Make growth happen organically and
  with mergers and partnerships

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Corporate Purpose

• WHAT is the purpose of the enterprise?
• WHY is the purpose worth achieving?
• HOW will the purpose be achieved?
• WHAT are the objectives?

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Intels Mission Statement

• Delight our customers, employees, and
  shareholders by relentlessly delivering the
  platform and technology advancements that become
  essential to the way we work and live.

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Intels Core Values

• Customer orientation
• Results orientation
• Risk taking
• Great place to work
• Quality
• Discipline

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Intels Objectives

• Extend our silicon technology and manufacturing
  leadership
• Deliver unrivaled microprocessors and platforms
• Grow profitability worldwide
• Excel in customer orientation

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Johnson Controls Mission Statement

• Continually exceed our customers increasing
  expectations

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Johnson Controls Values Statement

• Integrity
• Customer Satisfaction
• Diversity and engagement of employees
• Improvement and Innovation
• Safety and Environment

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Johnson Controls Objectives

• Customer Satisfaction -will exceed customer
  expectation
• Technology -apply world class technology
• Growth -build upon existing businesses
• Market Leadership -operate where are or have the
  opportunity to recognized leader
• Shareholder Value -exceed after tax median return
  on equity (ROE) of the SP Industrials

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More Governance Dilemmas

• Stakeholder Perspective
• For whose benefit does the enterprise exist?
• To what extent are the expectations of all
  stakeholders being met?
• What is the priority among the stakeholders?
• Which stakeholder is number 1?

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Board Dilemmas-Ken Lay

• Who should appoint members to the Board? to the
  Board committees?
• What should the CEOs role be in the process?
• What is meant by independence?
• What factors drive the size of the board?

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Board Dilemmas-Alan Greenspan

• Is the CEO conflicted in representing the
  interests of shareholders? When?
• Who should appoint the outside auditors?
• Can brokerage firms be both securities
  underwriters and objective securities evaluators?
• How do shareholders want to be paid?

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Board Dilemmas-Alan Greenspan

• What is the right balance between short-term
  earnings focus and long-term earnings focus?
• What factors affect an auditors decision on how
  to handle an accounting transaction?
• Should stock options be expensed? Why? And Why
  not?