Alignment of Benefits and Corporate Governance Issues - Explained
How Conflicts of Interest give rise to Corporate Governance Issues
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How does the alignment of benefits and interests cause corporate governance issues?
Officers, directors, and shareholders often have competing interests as stakeholders of the corporation. Examples of such conflicts are discussed below.
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How are Officer who serve as Directors an issue with Alignment of Interest?
The board of directors is charged with hiring the chief executive officer (and potentially other executives). An inherent conflict exists when the CEO is also a director of the corporation. This conflict is especially evident when the CEO is chairman of the board or a large shareholder. The responsibilities and interests inherent in each of these roles often times conflict.
Example: Mark is CEO and a director of ABC Corp. He receives several million dollars per year in compensation for his role as CEO. When the corporation receives an offer from a hostile takeover, he opposes the sale of the corporation because he will lose his job. Even though he is charged as director with representing the best interests of shareholders, he votes his personal interest in opposing the merger.
How is Officer-Director Compensation an issue with Alignment of Interest?
The board of directors is charged with hiring and approving the compensation of officers. Further, members of the board set the compensation of other board members. Compensation for these individuals is generally a mixture of money and stock (or stock options). Executives commonly receive bonuses based upon short-term corporate performance. Incentivizing officers and directors in this fashion often creates incentives toward short-term profits, rather than long-term performance. Further, in the current corporate structure, the selection of a CEO is often influenced by the controlling shareholder(s). In turn, the CEO often influences the selection of director candidates. This reality is much of what SOX and Dodd-Frank seeks to remedy.
Example: Dillon is CEO and director of a corporation. He is on the nomination committee, which proposes the names of directors for election to the board. Directors receive extensive benefits and membership on the board is highly desirable. He makes it known to all nominees that he supports that he expects to remain as CEO. When it is time to appoint a CEO and select a compensation package, the directors that Dillon nominated support Dillon and propose and very lucrative compensation package.
How are Inappropriate Relationships an issue with Alignment of Interest?
Officers and directors owe fiduciary duties to the corporation. Particularly, officers and directors owe a duty of loyalty. That is, they cannot usurp corporate opportunities or seek personal gain at the expense of the corporation. Officers and directors are in control of extensive corporate assets and resources. This environment lends itself to the improper receipt of benefits by these individuals.
Examples: Common examples of improper relationships may include: close personal relationships between officers and directors, personal loans from the corporation to officers or directors, improper use of corporate assets, misallocation of corporate funds, corporate donations to political activities, etc.
Do you believe that the alignment of benefits can create conflicts of interest in the corporation? Why or why not? How do you feel about individuals holding multiple stakeholder positions within the corporation? Does this implicate the duty of loyalty? Why or why not?
Tammy is a major shareholder, chairman (director), and CEO of ABC Corp. Can you provide examples of the types of incentives that may conflict in each of her roles?
- Corporate Governance Law (Intro)
- What is Business Governance?
- Berle-Means Thesis
- Corporate Governance Rating Definition
- Who are the members of a corporation?
- Corporate Charter
- Shareholder Register
- Common Stock
- Preferred Stock
- Par Value
- Authorized Shares
- Issued Shares of Stock
- Unissued Shares of Stock
- Outstanding Shares
- Institutional Shares
- Dual Class Shares
- What is a closely-held corporation?
- Close Corporation Plan Definition
- What is a Private Company vs a Public Company?
- What is the role and purpose of the corporation?
- What is the Agency theory of corporate governance?
- Shareholder-Centric Perspective
- Shareholder Value
What is the Stakeholder theory of corporate governance?
What is the role & rights of Shareholders in the corporation?
- Shareholder Democracy Definition
- Quorum Definition
- Information Circular
- Straight and Cumulative Voting
- Cumulative Voting
- Plurality Voting
- Class Voting Shareholders
- Changing the Voting Rules
- Supermajority (Voting)
- Shareholder Sponsored Proposal
- What are the variations on attributes of Ownership structure?
- Stock Split
- What are the fiduciary duties owed by shareholders?
- When is a shareholder personally liable for corporate obligations?
- Appraisal Rights
- Dissenter's Rights
- Say on Pay Rights
- How can shareholder enforce their rights (direct and derivative actions)?
- What is the process for bringing a Derivative action?
- What are corporate vote Proxies?
- Proxy Statement
- Proxy Fight or Contest Definition & Explanation
- What is Shareholder Activism and the significance of Institutional Investors?
- Activist Investor
- Overview of Board of Directors
- Board Decision Making
- Advisory Board (Observer Directors)
- What is the role of the Board of Directors?
- Board of Trustees
- Board of Governors
- What is the composition of the board of directors?
- Chairman of the Board
- CEO as Chairman of the Board
- Outside Director
- Outside Director or Non-Executive Director Definition
- Independent Outside Director
- Budget Committee
- Audit Committee
- Compensation Committee
- Nomination Committee (Corporate Board)
- What standards govern the actions of the board of directors?
- Duty of Candor Definition
- Duty of Care (Board of Directors)
- Duty of Loyalty (Directors)
- Board Evaluation Definition
- What is the Business Judgment Rule?
- What is D&O insurance?
- Codetermination (Foreign)
- What is the role of Managers of the corporation?
- What standards govern manager actions?
- Chief Executive Officer (CEO)
- Chief Financial Officer
- Chief Information Officer (CIO)
- Chief Investment Officer (CIO)
- Chief Legal Officer
- Chief Operating Officer
- Chief Risk Officer
- Chief Security Officer
- Chief Technology Officer (CTO)
- What are the primary state and federal corporate governance laws?
- What is the role of the state in corporate governance?
- What is the role of Securities Laws in corporate governance?
- What is the role of the Foreign Corrupt Practices Act in corporate governance?
- What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
- Sarbanes-Oxley Act (SOX)
- What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
- Corporate Monitors
- What industry organization standards affect corporate governance?
- How do proxy advisory firms affect corporate governance?
- What is the role of ethics in corporate governance?
- What are the major causes of corporate governance issues?
- What are the access to information issues?
- What are decision-making structure issues?
- What are the power struggle or competition issues?
- Holding Company
- What are hostile takeovers and defenses to hostile takeovers?
- Williams Act
- Staggered Board
- Shark Repellent Defenses?
- Poison Pill Defenses?
- Flip Over Poison Pill Definition
Flip In Poison Pill Definition
- Voting Poison Pill Plan
- Delay-Tactic Defenses?
- Legal Lockup Defenses?
- White Knight and Pac Man Defenses?
- Jonestown Defense
- Lady Macbeth Strategy
- Macaroni Defense
- Yellow Knight
- Back-end Plan Definition
- Backflip Takeover Definition
- Dead Hand Provision Definition
- Kamikaze Defense
- Operating Company Property Company Model
- Scorched Earth Policy Definition
- Revlon Rule
- What are benefit-alignment issues?
- Cadbury Rules Definition