9.1 Corporate Governance Structures and Mechanisms

Corporate governance structures and mechanisms are essential for ensuring companies operate ethically and in shareholders' best interests. These systems include board composition, shareholder rights, and regulatory frameworks that shape how businesses are run and overseen.

From audit committees to insider trading prevention, these governance elements work together to promote transparency and accountability. Understanding these structures is crucial for grasping how modern corporations balance stakeholder interests and maintain integrity in their operations.

Board Structure and Composition

Roles and Responsibilities of the Board of Directors

Top images from around the web for Roles and Responsibilities of the Board of Directors

• 

  Stages and Types of Strategy | Principles of Management View original

  Is this image relevant?

• 

  Free Roles & Responsibilities Matrix PowerPoint Template - Free PowerPoint Templates ... View original

  Is this image relevant?

• 

  The Decision Making Process | Organizational Behavior and Human Relations View original

  Is this image relevant?

• 

  Stages and Types of Strategy | Principles of Management View original

  Is this image relevant?

• 

  Free Roles & Responsibilities Matrix PowerPoint Template - Free PowerPoint Templates ... View original

  Is this image relevant?

1 of 3

Top images from around the web for Roles and Responsibilities of the Board of Directors

• 

  Stages and Types of Strategy | Principles of Management View original

  Is this image relevant?

• 

  Free Roles & Responsibilities Matrix PowerPoint Template - Free PowerPoint Templates ... View original

  Is this image relevant?

• 

  The Decision Making Process | Organizational Behavior and Human Relations View original

  Is this image relevant?

• 

  Stages and Types of Strategy | Principles of Management View original

  Is this image relevant?

• 

  Free Roles & Responsibilities Matrix PowerPoint Template - Free PowerPoint Templates ... View original

  Is this image relevant?

1 of 3

• Board of Directors is a group of individuals elected by shareholders to represent their interests and oversee the management of a company
• Responsible for setting the overall strategy and direction of the company, making major decisions, and ensuring the company is operating ethically and legally
• Hires and oversees the CEO and other senior executives, determines their compensation, and holds them accountable for the company's performance
• Approves major financial decisions such as mergers and acquisitions, capital expenditures, and dividend payments

Importance of Audit Committees

• Audit Committees are a subcommittee of the Board of Directors responsible for overseeing the company's financial reporting process and ensuring the accuracy and integrity of financial statements
• Composed of independent directors with financial expertise who are not involved in the day-to-day management of the company
• Reviews and approves the company's financial statements, selects and oversees the external auditor, and ensures compliance with accounting standards and regulations
• Plays a critical role in preventing financial fraud and protecting the interests of shareholders (Enron scandal)

Role of Independent Directors

• Independent Directors are board members who do not have any material relationship with the company or its management, such as being an employee, supplier, or major shareholder
• Provide objective oversight and bring an outside perspective to the board, helping to prevent conflicts of interest and ensure decisions are made in the best interests of shareholders
• Required by many corporate governance codes and stock exchange listing rules to have a majority of independent directors on the board and key committees (audit, compensation, nomination)
• Help to improve the quality of board decision-making and increase investor confidence in the company's governance (WorldCom scandal)

Fiduciary Duty of Board Members

• Fiduciary Duty is a legal obligation of board members to act in the best interests of the company and its shareholders, rather than their own personal interests
• Requires board members to exercise reasonable care and diligence in their decision-making, avoid conflicts of interest, and maintain confidentiality
• Duty of Care requires board members to be informed and prudent in their decision-making, while Duty of Loyalty requires them to put the company's interests ahead of their own
• Failure to fulfill fiduciary duties can result in legal liability for board members (Enron and WorldCom scandals)

Shareholder Rights and Activism

Importance of Shareholder Rights

• Shareholder Rights are the legal rights and powers granted to shareholders as owners of a company, including the right to vote on important matters, elect directors, and receive dividends
• Protect the interests of shareholders and ensure they have a say in how the company is governed and managed
• Include the right to access information about the company's financial performance and governance practices, and to file shareholder resolutions to propose changes
• Vary depending on the jurisdiction and the company's bylaws, but are generally stronger in countries with well-developed capital markets and legal systems (US, UK)

Role of Proxy Voting

• Proxy Voting is the process by which shareholders can vote on corporate matters without attending the annual general meeting in person
• Allows shareholders to exercise their voting rights by appointing a proxy (another person or entity) to vote on their behalf
• Commonly used for matters such as electing directors, approving executive compensation, and voting on shareholder resolutions
• Can be influenced by proxy advisory firms (Institutional Shareholder Services, Glass Lewis) that provide voting recommendations to institutional investors

Preventing Insider Trading

• Insider Trading is the illegal practice of trading securities based on material, non-public information that is obtained through a relationship with the company
• Prohibited by securities laws and regulations (Securities Exchange Act of 1934 in the US) to ensure fairness and integrity in the capital markets
• Companies must have policies and procedures in place to prevent insider trading, such as restricting trading by insiders during certain periods and requiring pre-clearance of trades
• Violations can result in civil and criminal penalties for individuals and companies (Martha Stewart, Raj Rajaratnam)

Understanding Agency Theory

• Agency Theory is a framework for understanding the relationship between principals (shareholders) and agents (managers) in a company
• Suggests that there is an inherent conflict of interest between shareholders and managers, as managers may pursue their own interests rather than those of shareholders
• Gives rise to agency costs, such as monitoring costs (audits, board oversight) and bonding costs (executive compensation, contracts) to align the interests of managers with shareholders
• Underlies many corporate governance mechanisms, such as independent boards, performance-based compensation, and shareholder activism, that aim to reduce agency costs and protect shareholder interests

Governance Regulations and Policies

Impact of Sarbanes-Oxley Act

• Sarbanes-Oxley Act (SOX) is a US federal law passed in 2002 in response to high-profile corporate scandals (Enron, WorldCom) that aims to improve corporate governance and financial reporting
• Requires companies to have independent audit committees, CEO and CFO certification of financial statements, and internal controls over financial reporting
• Imposes stricter penalties for corporate fraud and enhances the oversight role of the Securities and Exchange Commission (SEC)
• Has had a significant impact on corporate governance practices and has been emulated in other countries, but has also been criticized for increasing compliance costs and burdens on companies

Importance of Corporate Bylaws

• Corporate Bylaws are a set of rules and procedures that govern the internal management and decision-making of a company
• Typically cover matters such as the roles and responsibilities of the board and management, the conduct of meetings, and the rights and obligations of shareholders
• Serve as a contract between the company and its shareholders and can be amended by a vote of the shareholders or the board
• Provide a framework for the company's governance and help to ensure that decisions are made in a consistent and transparent manner

Role of Governance Codes

• Governance Codes are voluntary or mandatory sets of principles and best practices for corporate governance that are developed by regulators, stock exchanges, or industry groups
• Aim to promote transparency, accountability, and effective governance practices among companies and to protect the interests of shareholders and other stakeholders
• Examples include the UK Corporate Governance Code, the OECD Principles of Corporate Governance, and the International Corporate Governance Network (ICGN) Global Governance Principles
• Companies are often required to disclose their compliance with governance codes or explain any deviations (comply or explain approach)

Controversies around Executive Compensation

• Executive Compensation refers to the pay and benefits received by senior executives of a company, including base salary, bonuses, stock options, and other perks
• Has been a controversial issue in corporate governance due to concerns about excessive pay levels, lack of alignment with company performance, and inequity with other employees
• Shareholder activists and regulators have pushed for greater transparency and accountability in executive compensation, such as say-on-pay votes and clawback provisions
• Poorly designed compensation plans can create perverse incentives for executives to take excessive risks or engage in fraudulent behavior (Enron, WorldCom)