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Chapter 18 Corporate Governance. Mark Hurd. Mark Hurd arrived as the chief executive officer at Hewlett-Packard in 2005 Hurd got along with the board and got results On June 29, 2010, Hurd opened a letter from celebrity lawyer Gloria Allred - PowerPoint PPT Presentation
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Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 18Corporate
Governance
18-2
Mark Hurd
o Mark Hurd arrived as the chief executive officer at Hewlett-Packard in 2005
o Hurd got along with the board and got results
o On June 29, 2010, Hurd opened a letter from celebrity lawyer Gloria Allredo It accused him of sexually harassing an HP
marketing contractor named Jodi Fisher by touching her body suggestively and speaking of intimate personal matters
18-3
Mark Hurd
o Hurd first interviewed Fisher in Los Angeleso Hurd suggested to the board that HP pay
to settle the allegationso The board hired a law firm to investigate
Hurd’s actionso Early in August, Hurd reached an
undisclosed financial settlement with Fisher that prohibited her from discussing the allegations
18-4
Backdating with Dr. McGuire
o SEC regulators told the company they were investigating the matter, but Dr. McGuire seemed untroubled
o Dr. McGuire denied that grant dates were picked with the benefit of hindsight
o Investigators concluded the grants were “likely backdated”
o Dr. McGuire was forced to resign, pay a $7 million fine, and disgorged of wrongful gains
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What is Corporate Governance?
o Corporate governance: The exercise of authority over the members of a corporate community based on formal structures, rules, and processes
o The authority is based on a body of rules defining the rights and duties of shareholders, boards of directors, and managers
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Figure 18.2 - The Power Triangle
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The Corporate Charter
o Corporate charter: A document issued by a state government to create a corporation
o Corporate charters specify the purpose of the corporation and basic rights and duties of stockholders, directors, and officers
o Fiduciary responsibility: The legal duty of a representative to manage property in the interest of the owner
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The Corporate Charter
o Charters include provisions about numbers of shares and classes of stock authorized, dividends, annual shareholder meetings, the size of boards, and procedures for removing directorso Bylaws: Rules of corporate governance
adopted by corporations
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The Corporate Charter
o States compete to attract the incorporation fees and tax revenues of corporationso For more than a century tiny Delaware has
been the victor in this competition
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Figure 18.3 - Flow of Authority in Corporate Governance
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Federal Regulation of Governance
o Corporate governance laws have been primarily the province of states, however, the Supreme Court has said that the Constitution empowers Congress to regulate corporations if it chooses
o Federal intervention generally comes in reaction to conspicuous failures of governance and imposes mandatory rules and restrictions
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Enron Corp.
o Enron enjoyed admiration and respect among investors, managers of other companies, and the public
o Government regulators uncovered multiple instances of :o Juggling accounting records to inflate sales
and profitso Hiding debt, concealing excessive CEO
perks and compensation in vague footnotes
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Enron Corp.
o Ignoring standard accounting and financial practices
o Shredding documents to destroy incriminating records
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Enron Corp.
o The board’s Special Investigative Committee did not place sole blame for Enron’s failure on its directors, but it accused the board of failing to exercise it oversight responsibility
o A fundamental cause of the catastrophe was the culture of the company
o In 2006 a federal jury found Chairman of the Board Lay and CEO Skilling guilty of conspiracy and fraud
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The Sarbanes-Oxley Act
o It holds management responsible for accurate financial reports and strengthens the power and responsibility of board audit committees
o A few of the act’s provisions are:o Creates a five-member oversight board
that has authority over practices of accounting firms
o Prescribes rules to improve auditing
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The Sarbanes-Oxley Act
o Requires the CEO and CFO to sign and certify the accuracy of annual and quarterly financial statements
o Establishes heavy criminal penalties for violating its provisions
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Lehman Brothers
o Lehman Brothers Holdings began in 1850 as a cotton broker and grew into the nation’s fourth-largest investment bank
o Since 1994 it had been run by a CEO named Richard S. Fuld, Jr. Intense, intimidating, and impatient
o In 2006, Fuld decided that the way to keep share prices rising was to make Lehman grow faster
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Lehman Brothers
o To fund its operations, Lehman depended on borrowing tens of billions of dollars each day in financial markets
o Lehman’s bankruptcy caused panic in the markets
o During the year preceding bankruptcy the board met eight times and its members earned between $325,038 and $397,538
o Lehman’s management made serious errors of judgment
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The Dodd-Frank Act
o A statute to reform financial regulation and prevent a recurrence of the 2007–2008 financial crisis
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Boards of Directors
o Directors in large corporations are chosen after being nominated by the board and approved by a majority vote of shareholders
o Directors who are employees of the company are called inside directors; those who are not employed by the company are outside directors
o Boards are divided into committees
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Duties of Directors
o Laws impose two lofty duties on directors:o Represent the interests of stockholderso Exercise due diligence in supervising
managemento Directors do not make day-to-day
decisionso Boards exercise a very broad oversighto Compensation varies substantially among
industries
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Duties of Directors
o Some specific board functions:o Approve the issuance of securities and the
voting rights of their holderso Review and approve the corporation’s goals
and strategieso Select the CEO, evaluate his or her
performance, and remove that person if necessary
o Give advice and counsel to management
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Duties of Directors
o Create governance policies for the firm, including compensation policies
o Evaluate the performance of individual directors, board committees, and the board as a whole
o Nominate candidates for election as directors
o Exercise oversight of ethics and compliance programs
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Board Composition
o The average board has 11 members and this has not changed for many years
o Most state incorporation laws require a minimum of three, but companies typically have between 7 and 15
o Directors are elected by shareholders, usually for terms of one yearo Inside directorso Outside directorso Independent directors
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Board Dynamics
o The average board meets eight times a year, although many meet monthly
o Agendas include committee reports, mandatory governance matters, and presentations by company executives
o The chairman of the board presides over meetings
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Board Dynamics
o Advocates of greater board independence believe that a better solution for strengthening the board is to split the roles of chairman and CEO
o Management opposes separationo One fear is compromising clarity in the
chain of command
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Executive Compensation
o A compensation committee of the board of directors sets the pay and benefits of top executives
o Elements of compensation include a combination of the followingo Base salaryo Annual cash incentives
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Executive Compensation
o Long-term stock-based incentivesoStock optionsoPerformance sharesoRestricted stock
o Retirement planso Perquisites
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Problems with CEO Compensation
o The size of extraordinary payoutso The compensation packages given to
some newly hired CEOso The golden handshakes received by some
CEOs when they leave under fireo An alleged bias in favor of boosting CEO
compensation due to the composition of the compensation committees
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Problems with CEO Compensation
o Nonconformance with the interests of shareholders
o The number and misuse of stock option grants
o The spread between executive pay and that of the average worker
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Concluding Observations
o Despite well-defined legal bonds between share owners, boards of directors, and management, there are many tensions between them
o Scandals revealed lax oversight of financial strategies and reporting by many boards
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Concluding Observations
o Many shareholders believe that boards have allowed management compensation to exceed reason
o The outlook is for more pressures and regulations that tighten board oversight
