Decision Making and Corporate Governance Issues - Explained
How Decision Making Gives Rise to Corporate Governance Issues
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What corporate decision-making procedures give rise to issues in corporate governance?
The structure and process for decision making within the corporation can lead to conflicts between officers and directors and shareholders. Below we discuss common decisions or processes that give rise to conflict.
Next Article: Power Struggles and Corporate Governance Issues Back to: CORPORATE GOVERNANCE
What are Corporate Approvals?
Certain approval rights for board actions are reserved to shareholders. That is, shareholders must approve the decision of directors. These checks on authority can often cause tensions between shareholders and those in charge of corporate governance. This conflict is exacerbated by the fact that shareholder voting must often be initiated by a proposal from the board of directors.
Example: An attempt by shareholders to amend the bylaws or articles of organization must begin with a proposal from the board of directors. Further, a proposed merger, acquisition or spin-off must be approved by a majority of shareholders.
What is Capital Distribution?
Shareholders, as owners of the corporation, receive a financial benefit through either a distribution of dividends from corporate profits or an appreciation of their ownership interest. As you will learn in finance, appreciation of the value of stock is generally based upon the expectation of future dividends from corporate profits. Directors are charged with the decision of whether, when, and the amount of dividends to distribute to shareholders. This fact often causes conflict between large shareholders and directors.
Example: Adam is a large shareholder who purchased stock in the corporation for the expected dividend. The corporation is going through some strategic transitions and expects to withhold all dividends and retain capital to acquire competitors. These acquisitions are risky and run counter to Adams objectives in holding the stock.
What are Proxy Statements?
The control that the board of directors (and the nominating committee) exercises over proxy material creates a conflict between director preferences and the ability of shareholders to make proposals for approval to shareholders at large.
Note: Directors, even those on a nominating committee, often have loyalty or are indebted to the individuals who assisted them in becoming a part of the board. These directors may feel pressure to nominate potential directors who have the support of the individuals who supported them.
Example: Eric is CEO and a director on the board of ABC Corp. He supported several of the independent board members in their election to the board. These directors typically work at board meetings for 3-5 days per month and receive tens to hundreds of thousands of dollars per year in salary and benefits for their service. As such, the directors owe a significant debt of gratitude to the CEO. It is unlikely that these directors will fail to support the CEOs future nominees to the board.
What are Written Consents?
Directors and shareholders have the ability to act pursuant to written consents instead of holding a formal meeting to take a vote. These votes require either a majority or unanimous vote from directors or shareholders. Taking actions without meeting reduces the level of information distributed and can lead to conflicts between interested parties.
Example: The board of directors for ABC Corp intends to make a decision on a major environmental cleanup project. It submits the proposed project to shareholder vote. Instead of holding a meeting, they accept votes through written consent. The majority of votes cast were adamantly against the proposal and it fails to pass, as it would decrease short-term corporate profits.
What are Supermajority and Unanimity Requirements?
Often shareholders and directors establish governance standards requiring unanimous or super-majority approval of certain corporate actions. These requirements may lead to conflict and stalemates between interested parties with regard to corporate decisions and actions.
Example: Earl is a major corporate shareholder. He strongly supports a proposed corporate merger that has been submitted to shareholders for approval. Several smaller shareholders have decided that they do not support the deal. Because the board employed unanimous shareholder approval rules, the proposed merger will not receive shareholder approval. Earl is now furious and is considering his options for forcing out directors who refuse to support an amendment to the unanimous shareholder approval requirements.
Do you see a common thread among the procedural aspects that give rise to corporate governance issues? Why do you think this is the case? Of the governance procedures listed above, do believe that any should sway in favor of director or shareholder? Why or why not?
What corporate governance rules or procedures for decision making give rise to conflicts between shareholders and directors?
- 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
- 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
- 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
- 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
- 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