Corporate Governance and profit maximazation

Corporate Governance and the Agency Theory.One of the dominant views concerning the goal of the firm and the goal managers should pursue seems to be shareholder wealth maximization.
The argument is that the shareholders are the owners of the business and aim at earning a good return on their investment without undue risk exposure.
The shareholders elect the directors who appoint the managers to run the business on a day to day basis.

1. UNIVERSITY OF ST. THOMAS OF MOZAMBIQUE BUSINESS SCHOOL Strategic Management: Class :

2. Key Topics Stakeholder Type of stake and stakeholders Sustainability as stakeholder Progress of stakeholder involvement based on three views of the firm Corporate Engagement Corporate Governance Board of directors improving governance Alternative Model of Corporate Governance 2

3. Paradigm change of Stakeholder Who own the corporation? Old paradigm: only shareholders and very few stakeholders New paradigm: shareholders and various stakeholders Importance of stakeholder… Increasing due to CSR Boundary  expanding E.g., nonhuman stakeholder 3

4. Origins of the Stakeholder Concept Stake - An interest or a share in an undertaking. Example: Financially, Mr. John Doe holds a 20%  stake  in the company. Parents have a large  stake  in their children's education. Stake can be categorized as: 4 4 4 An Interest A Right Ownership Legal Right Moral Right

5. An interest When a person or group will be affected by a decision, it has an interest in that decision. The plant closing will affect people in the community. This TV commercial demeans women . A Citizen's interest in a national issue E.g., US citizens' interest in NAFTA (North American Free Trade Agreement) negotiation: especially, many business people in California is affected 5

6. A Right A moral right or a legal right It is fair to share equal amount of work among team members and keep the noise down in the office while working. Employment Rights Act 1996, as amended, against suffering any harm because of any reasonable actions they take on health and safety grounds. Consumer rights when you buy goods and services 6

7. Ownership When a person or group has a legal title to an asset or a property This company is almost mine because I have more than 50% of stocks. I own 1,000 stocks out of 10,000 of this corporation. So, I can claim at least 10% of ownership. 7

8. Stakeholders Stakeholder - Any individual or group who can affect or is affected by the actions, decisions, policies, practices, or goals of the organization . 8

9. Shareholder vs. Stakeholder ….is any person, company or other institution that owns at least one share of a company’s stock . Shareholders are stakeholders in a corporation Shareholders are usually not personally liable for the company's debts and other financial obligations.  Stakeholders are not always shareholders 9

10. Who are Business’s Stakeholders? 10 10 Business Stakeholder Groups Media Suppliers Special-Interest Groups Society Competitors Customers Community Stockholders Employees

11. Evolution of stakeholder involvement based on three views 11 Production View Managerial View Stakeholder View Note: The view has changed as the paradigm changes.

12. Production and Managerial Views of the Firm 12 industrial age in-between industrial age and information age

13. Stakeholder View of the Firm © 2015 engage Learning 13 information age and beyond Natural Environment Artificial Intelligence

14. Type of Stakeholders 14 Primary (social ) stakeholders – direct Secondary (social) stakeholders – indirect Shareholders and investors Government regulators Employees and managers Civic institutions Customers Social pressure groups Local communities Media and academic commentators Suppliers and other business partners Trade bodies Competitors

15. Nonsocial Stakeholders 15 Primary nonsocial stakeholders Secondary nonsocial stakeholders Natural environment Environmental interest groups (e.g .,) Future generations Animal welfare organizations (e.g., shelter) Nonhuman species

16. Stakeholders of USTM © 2015 Cengage Learning 16 Primary social stakeholder? Secondary social stakeholder? Primary nonsocial stakeholder? Secondary nonsocial stakeholder?

17. Stakeholder Engagement An approach by which companies successfully implement the transactional level of strategic management capability. Interaction with stakeholders must be integrated into every level of decision-making in the organization. A ladder of stakeholder engagement depicts a continuum from low engagement to high engagement. Transparency : working toward the open corporation. Sustainability is the latest emphasis on engaging stakeholders. 17

18. Key Questions for effective Stakeholder Management Who are our organization’s stakeholders? What are our stakeholders’ stakes ? What opportunities and challenges do our stakeholders present to the firm? What responsibilities (economic, legal, ethical, and philanthropic) does the firm have to its stakeholders? What strategies or actions should the firm take to best address stakeholder challenges and opportunities? 18

19. Corporate Governance CG is the system corporations are directly controlled. What is Corporate Governance ? Is concerned with the relative roles, rights, and accountability of such stakeholder groups as owners, boards of directors, managers, employees, and other stakeholders. 19

20. The Corporation’s Hierarchy of Authority 20 State Charter Shareholders Board of Directors Management Employees Issued by the state - allow right to exist. So, not a major group in a corporation

21. Roles of Four Major Groups - Shareholders - Own stock in the firm, giving them ultimate control (the shareholder-primacy model). Board of Directors - Govern and oversee management of the business. Managers (especially, top management) - The individuals hired by the Board to manage the business on a daily basis . Employees - Hired to perform actual operational work 21

22. Separation of Ownership from Control Contributes to Governance Problems © 22 Pre-corporate Period Owners (ownership, sole & almost unlimited responsibility) Managers (control) Corporate Period Shareholders (multi-ownership) Board of Directors Management (control )

23. The Need for Board Independence 23 The board is responsible for effective corporate governance. Outside directors – are independent from the firm Inside directors – have some tie to the firm Board independence from management is crucial to good governance . If not, below scandal can happen again world famous scandal and motivation for SOX Even today, still not easy……..

24. Red Flags Signaling Board Problems What if you detect below problems? © 2015 Cengage Learning 24 2. Poor employee morale. 1. Company has to restate earnings. 3. Negative risk assessment from auditor. 4. Poor customer satisfaction track record. 5. Management misses strategic performance goals. 6. Company is target of employee lawsuits. 7. Stock price declines. 8. Quarterly financial results miss analysts’ expectations. 9. Low corporate governance quotient rating.

25. Improving Corporate Governance Sarbanes-Oxley – After class especially if your major is Accounting or Finance Amends securities laws to protect investors in public companies Enhances public disclosure to require reporting of off-balance sheet transactions, and personal loans to executives Limits the nonauditing services an auditor can provide to a firm it audits Makes it unlawful for accounting firms to provide services where conflicts of interests exist CEOs and CFOs must certify financials, and are held responsible for financial representations 25

26. Improving Corporate Governance May not be effective unless top management is willing to enforce and strongly implement below…. Changes in boards of directors - More Board diversity A greater ratio of outside board members to inside board members Use of board committees to: Ensure that financials are not misleading Ensure that internal controls are adequate Follow-up allegations of irregularities Ratify the selection of an external auditor 26

27. Corporate Governance Structure Information from SEC www.sec.gov Company’s annual report (Form 10-K) Proxy statement (Form Def 14A). Review these documents to get you a better understanding of the company’s corporate governance structure. Good idea to review your company for the sake of your job security 27

28. Corporate Governance What is it? Codes of Governance Role of the Board of Directors Role of Top Management Team Executive Compensation

29. Corporate Governance System by which a firm’s owners control its affairs. Does it work?

30. Codes of Governance The Cadbury Code: 1992 Sarbanes-Oxley Act: 2002 Public Company Accounting Oversight Board “Triple bottom line” Four major issues: Ownership structure and influence Fianacial Stakeholder rights and relations Financial transparency and information disclosure Board structure and processes (audit)

31. Role of the Board of Directors Monitor Evaluate and influence Initiate and determine Organization of Board Insiders versus outsiders CEO/chair position Committees’ Effectiveness

32. Role of Top Management Team Who is the TMT? Executive Leadership and Strategic Vision Articulates strategic vision for corporation Sets the model for others to identify and follow Communicates high performance standards and builds confidence in followers’ abilities to meet standards Managing strategic planning process

33. Questions