Chapter from: "A Primer on Corporate Governance: Second Edition"
Published by:
Business Expert Press
Length: 35 pages
Topics:
Corporate governance
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Abstract
This chapter is excerpted from ‘A Primer on Corporate Governance: Second Edition'. This book is a primer on corporate governance for large, publicly held companies in the United States - the system that defines the distribution of rights and responsibilities among different participants in a corporation, such as the board, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. As with any complex system, corporate governance functions best when all of its constituent elements work in harmony, when each performs its assigned role, with the right incentives, properly aligned interests, and the right tools for the job. The turbulent history of corporate governance in recent years is testimony that this has not always been the case. The American system of corporate governance has been confronted with significant challenges in the last 25 years. Many of these challenges can be traced to the rapid, often unpredictable changes that have occurred in the global competitive environment which have fundamentally changed - domestically as well as abroad - the opportunities and risks American companies face every day. Others have their roots in broader societal shifts such as changes in attitude toward the value and role of free markets, a growing recognition of the importance of environmental concerns and a clamor for greater transparency and accountability in public as well as private organizations. At the same time, the corporate governance landscape itself continues to evolve. Shareholding has become concentrated through institutional intermediaries who exercise their fiduciary duties with a process of shareholder communications, resolutions, and director elections. The composition of boards of directors continues to evolve as they pursue more independence, greater diversity, and stronger global representation. Newly adopted executive compensation reforms are focused on better aligning the interests and incentives of corporate management with those of long-term shareholders. Some of these changes have occurred organically, many more have been the result of outside forces, including landmark federal legislation, new state rules and codes, and interpretive judicial decisions. The bottom line is that the entire corporate governance process has been under evaluation. This is both healthy and essential for the future of our economy. It signals a widely shared belief - by corporate directors, shareholders, the markets generally and the regulatory community - that corporate governance matters. The importance of this recognition can hardly be overstated. As a wave of corporate scandals in the late 1990s and the recent global financial crisis remind us, the efficacy of corporate decision making and our regulatory systems directly affect our well-being. Sound corporate governance not only pays by producing value for all stakeholders of the firm but also, even more importantly, it is the right thing to do - for investors, other stakeholders, and society at large. In other words, sound corporate governance is not just good business; it is also a moral imperative. A good number of the books written on corporate governance focus on legal issues - the rights and obligations of the various stakeholders under Federal and State laws - or take the perspective of individual or institutional external shareholders. This book is positioned differently, it approaches corporate governance from an executive perspective and is designed to help the reader become a more effective participant in the corporate governance system - as an executive dealing with a board, as a director, or as a representative of a company's other numerous stakeholders. The book is organized in two parts. The first part looks at corporate governance from a macro perspective. It begins with a description of the various components of the US corporate governance system and a brief survey of its history. It then asks the fundamental question 'Who owns the corporation?' to frame a discussion of different schools of thought about a corporation's responsibilities to its shareholders and society at large. Next, we focus on the legal framework that defines a board's basic responsibilities and obligations, and look at current trends regarding board size, composition, and structure. As part of this discussion, we briefly review a number of major governance reforms adopted in recent years such as the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and recent SEC rule changes. The second part of the book focuses on the workings of the board itself and its principal challenges: CEO selection and succession planning, the board's responsibilities in the areas of oversight, compliance and risk management, the board's role in strategy development, the issue of CEO performance appraisal and executive compensation, a board's challenges in dealing with external pressures, unexpected events and crises, and finally, a board's most difficult challenge - managing itself.
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Abstract
This chapter is excerpted from ‘A Primer on Corporate Governance: Second Edition'. This book is a primer on corporate governance for large, publicly held companies in the United States - the system that defines the distribution of rights and responsibilities among different participants in a corporation, such as the board, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. As with any complex system, corporate governance functions best when all of its constituent elements work in harmony, when each performs its assigned role, with the right incentives, properly aligned interests, and the right tools for the job. The turbulent history of corporate governance in recent years is testimony that this has not always been the case. The American system of corporate governance has been confronted with significant challenges in the last 25 years. Many of these challenges can be traced to the rapid, often unpredictable changes that have occurred in the global competitive environment which have fundamentally changed - domestically as well as abroad - the opportunities and risks American companies face every day. Others have their roots in broader societal shifts such as changes in attitude toward the value and role of free markets, a growing recognition of the importance of environmental concerns and a clamor for greater transparency and accountability in public as well as private organizations. At the same time, the corporate governance landscape itself continues to evolve. Shareholding has become concentrated through institutional intermediaries who exercise their fiduciary duties with a process of shareholder communications, resolutions, and director elections. The composition of boards of directors continues to evolve as they pursue more independence, greater diversity, and stronger global representation. Newly adopted executive compensation reforms are focused on better aligning the interests and incentives of corporate management with those of long-term shareholders. Some of these changes have occurred organically, many more have been the result of outside forces, including landmark federal legislation, new state rules and codes, and interpretive judicial decisions. The bottom line is that the entire corporate governance process has been under evaluation. This is both healthy and essential for the future of our economy. It signals a widely shared belief - by corporate directors, shareholders, the markets generally and the regulatory community - that corporate governance matters. The importance of this recognition can hardly be overstated. As a wave of corporate scandals in the late 1990s and the recent global financial crisis remind us, the efficacy of corporate decision making and our regulatory systems directly affect our well-being. Sound corporate governance not only pays by producing value for all stakeholders of the firm but also, even more importantly, it is the right thing to do - for investors, other stakeholders, and society at large. In other words, sound corporate governance is not just good business; it is also a moral imperative. A good number of the books written on corporate governance focus on legal issues - the rights and obligations of the various stakeholders under Federal and State laws - or take the perspective of individual or institutional external shareholders. This book is positioned differently, it approaches corporate governance from an executive perspective and is designed to help the reader become a more effective participant in the corporate governance system - as an executive dealing with a board, as a director, or as a representative of a company's other numerous stakeholders. The book is organized in two parts. The first part looks at corporate governance from a macro perspective. It begins with a description of the various components of the US corporate governance system and a brief survey of its history. It then asks the fundamental question 'Who owns the corporation?' to frame a discussion of different schools of thought about a corporation's responsibilities to its shareholders and society at large. Next, we focus on the legal framework that defines a board's basic responsibilities and obligations, and look at current trends regarding board size, composition, and structure. As part of this discussion, we briefly review a number of major governance reforms adopted in recent years such as the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and recent SEC rule changes. The second part of the book focuses on the workings of the board itself and its principal challenges: CEO selection and succession planning, the board's responsibilities in the areas of oversight, compliance and risk management, the board's role in strategy development, the issue of CEO performance appraisal and executive compensation, a board's challenges in dealing with external pressures, unexpected events and crises, and finally, a board's most difficult challenge - managing itself.