A Primer on Corporate Governance

Abstract

This book is a primer on corporate governance—the system that de? nes the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. Corporate governance also deals with how a company’s objectives are set and the means of attaining those objectives and monitoring performance. The importance of this subject can hardly be overstated. As recent corporate scandals have shown and the current ? nancial crisis reminds us, the ef? cacy 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 ? rm 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 also a moral imperative. This book is designed to help you 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 contains two major parts, an epilogue, and appendices. The ? rst part looks at corporate governance from a macro perspective. It describes the U.S. corporate governance system and its principal actors and brie? y surveys the history of U.S. corporate governance, including the wave of governance scandals that occurred around the turn of the century. The second part focuses on 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 unexpected events and crises, and ? nally, a board’s most dif? cult challenge—managing itself. The epilogue brie? y looks into the future and deals with subjects that are just beginning to appear on boardroom agendas. It assesses the emerging global convergence of governance systems, requirements, and practices; it looks at the prospects of further U.S. governance reform; and it discusses the changing relationship between business and society and its likely impact in the boardroom. Keywords Corporate governance, boards of directors, shareholders, stakeholders, capitalism, Sarbanes-Oxley, regulation, Security and Exchange Commission, New York Stock Exchange, NASDAQ stock exchange, auditors, security analysts, credit rating agencies, CEO succession planning, CEO evaluation, CEO compensation, strategy, management, oversight, audit committee, nominating committee, compensation committee, takeovers, risk management, shareholder activism, corporate social responsibility, global convergence, chairman of the board, lead directo