Mgt. 211 - The Board, The Ceo, & Corporate Governance

Front 1

Why are corporations the back-bone of the western business model and capitalist system?

(5 part answer)

Back 1

1. Limited liability for investors

2. Free transferability of investor interests

3. Legal personality (entity-attributable powers, life span, and purpose)

4. Centralized management

5. Multiple sources of capital

Front 2

What does "Limited Liability" do for investors?

Back 2

– Limits the potential loss by investors to only what they have contributed.

–Encourages investments.

Front 3

What is "Free Transferability of Investor Interests"?

Back 3

– Ability to transfer one’s holding freely using stock, which is almost as liquid as cash.

– Ability to manage one’s own risk by selling at any time.

Front 4

What is a "Legal personality" (entity-attributable powers, life span, and purpose)?

Back 4

– A corporation lives on as long as it has capital, since it is a separate entity from its owners.

– Also has First Amendment rights (can promote political agendas).

– Can own property.

Front 5

Define "Centralized management."

Back 5

Directors of the corporation are given power to determine the company’s overall direction, whereas control of day-to-day operations is given to managers.

Front 6

Define "Multiple sources of capital."

Back 6

A corporation can not only issue debt but also common and preferred stock, options, warrants, and convertible securities.

Front 7

What is the cost of the benefits of the western business model and capitalist system?

Back 7

The investor has no involvement in management of the enterprise other than voting on specific issues, such as the election of directors.

Front 8

What are the 3 main parts of the corporate structure?

Back 8

• Shareholders

• Directors

• Management

Front 9

What are the 5 responsibilities of Directors?

Back 9

1. Hire and fire the CEO

2. Pay the CEO (but not too much)

3. Oversee strategy

4. Monitor risk

5. Act in the best interests of the shareholders

Front 10

What is the “cloud over the corporate system?”

Back 10

Agency Costs

Front 11

What are Agency costs?

(3 things)

Back 11

The costs associated with:

1. Monitoring the behavior of the agent.

2. Incentivizing the agent to act in the best interest of the principal.

3. The residual loss of utility that results from the agents inability to always act in the best interest of the principal.

Front 12

What are the 3 direct agency costs?

Back 12

1. Audit Committee

2. Compensation Committee

3. Corporate Governance Committee

Front 13

What is an example of an indirect agency cost?

Back 13

Executive percs (the CEO who had the fireplace installed in his office for over a million dollars).

Front 14

What are the 4 illustrations cited in class of agency costs?

Back 14

1. Excessive compensation

2. Poison pills

3. Proxy access

4. Entrenched management or boards

Front 15

What is a "Poison Pill"?

Back 15

– A poison pill is a device that is used to make a hostile takeover prohibitively expensive to the bidder.

– The most common poison pill is one whereby, upon a hostile bidder acquiring a pre- determined percentage of the target company's shares (say 10%), the target company effectively issues a large number of its own shares to its own shareholders at a significant discount to the current market price, thus significantly increasing the number of shares outstanding which the hostile bidder would be required to purchase in order to gain control of the target – aka a “flip-over” pill.

Front 16

What does it mean when management is "entrenched"?

Back 16

– Management is considered to be entrenched, i.e., not easily removed or changed even if shareholders press for it, when the board is considered too closely affiliated with the CEO (a common word used is “beholden”), or

– If the company has in place a poison pill, multiple classes of voting shares, or other devices which make it difficult to change the make-up of the board.

Front 17

What is the problem of agency costs?

(quote)

Back 17

The problem is trying to "...induce an agent to behave as if he were maximizing the principal’s welfare.”

Front 18

What are the 2 key fiduciary duties for directors and what is the 1 rule they are also responsible to adhere to?

Back 18

1. Duty of Loyalty

2. Duty of Care

3. Business Judgement Rule

Front 19

What is the Duty of Loyalty?

Back 19

The duty to act in good faith effort to advance the best interests of the corporation and its stockholders.

Front 20

What is the Duty of Care?

Back 20

- The duty to act with the care that an ordinarily prudent person would reasonably be expected to exercise in a like position and under similar circumstances.

- It does NOT mean "due diligence."

Front 21

What is the Business Judgement Rule?

Back 21

A decision made by a loyal and informed board will not be overturned by courts unless it cannot be attributed to any rational business purpose

Front 22

It is important (and generally required) that directors be ________________________ of management.

Back 22

Independent

Front 23

What makes a director "Independent"?

Back 23

No material relationship with the Company.

Front 24

What is the SOX definition of "Independent"?

Back 24

- No material relationship with the Company.

- May not receive ANY payment other than as a director and may not be affiliated with company in any way.

Front 25

What are the NYSE, NASDAQ & AMEX definitions of "Independent"?

Back 25

- No material relationship with the Company.

- Similar to SOX but allows minimal payments for services other than as a director - $100K/year or affiliated company does more than $1M or 2% of its business with company.

Front 26

Boards do most of their work through ____________________?

Back 26

Committees

Front 27

What is the role of the Audit Committee?

Back 27

1. Hire and monitor auditor.

2. Financial and accounting oversight (the whole process).

Front 28

What is the role of the Governance Committee?

Back 28

1. Nominate director candidates.

2. Establish governance guidelines.

Front 29

What is the role of the Compensation Committee?

Back 29

1. Establish compensation programs (specifically for the CEO).

2. CDA report for proxy.

Front 30

Corporate Governance is ________ and rapidly ______________.

Back 30

FLUID and CHANGING.

Front 31

What did the Dodd-Frank Act of 2010 establish?

(2 things)

Back 31

1. Say-on-pay.

2. Proxy access.

Front 32

What does "Say-on-pay" do in the Dodd-Frank Act?

Back 32

It is a non-binding advisory vote on approval of executive compensation programs.

Front 33

What does "Proxy access" do in the Dodd-Frank Act?

Back 33

It permits CERTAIN shareholders to nominate their own candidates for director in the company’s proxy statement.

Front 34

What is the difference between Plurality and Majority voting?

Back 34

1. Majority requires 50% +1 vote.

2. Plurality is the top number of vote getters for the number of open positions even if only one vote.

Front 35

What does Lafley believe is the role of the CEO?

(4 things)

Back 35

1. Determine the meaningful outside (who matters most).

2. Determine what business we are in and are not in.

3. Balance objectives between long-term and short-term gains.

4. Shape value and standards–culture counts!

Front 36

What is the main issue today?

Back 36

CEO compensation, but the link is weak or broken.

Front 37

Is CEO compensation tied to performance?

Back 37

Not really.

Front 38

Shareholders are not ___________ and have _______________ that differ from each other and the company.

Back 38

FUNGIBLE and AGENDAS

Front 39

For startups, private companies, and VC & Private Equity Boards, what is the focus on?

(3 things)

Back 39

1. People

2. Capital

3. Execution

Front 40

When selecting Directors you want...

(4 people)

Back 40

1. People who can make introductions.

2. People who are industry experts.

3. People who are technology experts.

4. At least one who is financially oriented.

Front 41

For a "startup board," what are the 8 key people you need?

Back 41

1. CEO

2. Accountant – independent CPA.

3. Finance person – who brings capital markets experience/contacts to the table.

4. Attorney – with no relationship to the company

5. Industry knowledge – someone for marketing who is educated.

6. Product knowledge – an engineer, or retired competitor.

7. HR professional – for people sourcing/development.

8. Entrepreneur – who has experience with startups.

Front 42

How does a "Advisory Board" differ from an actual Board of Directors?

Back 42

The "startup board's" purpose is purely to advise – they havenno actual director duties.

Front 43

How do you maintain commitment from the members of a startup board?

(5 things)

Back 43

1. Have clear written goals & objectives.

2. Choose people who have the ability & time to make a contribution to the company.

3. Give them some sort of compensation.

4. Create an annual calendar for your meetings.

5. Do an annual performance evaluation.

Front 44

Give an example of who would be on an Advisory Board.

(4 people for this example)

Back 44

1. Technical Specialist (i.e. IT person)

2. Marketing/Business Development Specialist

3. Industry Specialist

4. Academic, writer, or scientist – "See of the future."

Front 45

What is the #1 way to become a CEO?

Back 45

Clean your shoes.

Front 46

Define "performance."

Back 46

You need to establish up-front:

1. A mechanism for the process.

2. A standard to measure achievement – write down goals and give them to someone you don't want to let down.

3. A threshold of acceptability (a.k.a. define what constitutes "achievement")

Front 47

How do you define "success"?

Back 47

1. Customer surveys

2. Employee satisfaction

Front 48

Is bad performance ever a cause for termination of the CEO?

Back 48

No.

Front 49

What is a "Zombie Director"?

Back 49

Someone who gets less than 50% vote but still stays.

Front 50

If a company waives their internal ethics policies, how soon do they have to notify their shareholders?

Back 50

24 hours

Front 51

What are Revlon Duties?

Back 51

When a company makes the decision that they are going to sell themselves, the duty changes to maximize the sale price of the enterprise.

Front 52

Freidham says "performance" equals:

Back 52

1. Building the franchise, and

2. Achieving long-term financial results and strength.

Front 53

In evaluating a CEO's performance, Freidham says the three financial categories that should be measured are...

Back 53

1. Earnings – ones that demonstrate the effectiveness of the CEO in directing all of the companies' capital without the muddying effects of accounting changes, and which produce what we want: cash.

The best of these could well be CASH FLOW ON INVESTMENT. The second financial measure is simply GROWTH IN EQUITY BEFORE DIVIDENDS...The final financial measure focuses on financial strength...the balance sheet."

2. Growth in the financial base

3. Financial strength