Boards and Shareholders

Boards of Directors

Corporate governance: The processes, policies, and laws that govern an organization (often corporations) to establish accountability and try and eliminate conflicts of interest associated with principle-agent problems

Board of directors: A group of individuals, either elected or appointed, that oversees the activities of an organization or corporation.

Board of Directors

• Agency problem: Exists when the interest of the individuals that act as agents to manage the company, that may not align with the interest of the firm’s stockholders

• Board insiders: Members of the board of directors that are generally employed inside of the organization

• Board outsiders: Members of the board of directors that are generally employed outside of the organization

• CEO duality: Occurs when the chief executive officer is also the chairman of the board of directors

Board of Directors• What does a Board do?

• Fire the CEO• Selecting the new CEO (relay? Hier apparent? Interim?)• Performance evaluation of the CEO• Vote on acquisitions• “Approve” the annual budgets• Set CEOs compensation• Interface with largest owners• Advice. Provide external input to the firm’s strategic direction• Maintains image (following scandal)• Protect shareholders• Stock decisions, Declaring dividends• Strategic decision approval, Approve plans• Establishing R&D direction, Hold accountability• Make changes in board• Legal obligation, Signal• ADVICE, RESOURCES, MONITORING

Directionless Directors

• What are some potential problems with Boards as a mechanism of corporate governance?

• Information asymmetry• Skin in the game• Micromanagement• Voting their own pay• Conflict of interest• Mismatch in talent• It’s people. • Power vs CEO• Beholden to the CEO• Subject to cognitive biases• Lack of diversity.

The Interlocking Directorate

Institutional Investors

• Organizations that invest large sums of money into a broad portfolio of holding• Banks• Retirement funds• Mutual funds• Pension funds• Sovereign Wealth Funds

Institutional Investors

• How can shareholders affect firm outcomes?• Vote board members in or out• Hostile takeovers• Threat of exit, Afford the firm potential opportunities for

more capital• Letters to management• Generate shareholder proposals• Try to extract capital (through dividends)• Lobby other shareholders• Pressure for quarterly earnings• Class action lawsuits