978-1259535437 Chapter 5 Part 2

Unlock access to all the studying documents.

View Full Document

Chapter 05 – Corporate Governance

5-14

4. What steps should the new president of FIFA take to restore corporate governance?

Frontline Focus

“Incriminating Evidence”—Marco Makes a Decision Questions

1. What could Marco have done differently here?

Student answers will vary. Marco could have gone public with this news and been

2. What do you think will happen now?

3. What will be the consequences for Adam, David Collins, and Chemco Industries?

Key Terms

Audit Committee: An operating committee staffed by members of the board of directors plus

independent or outside directors. The committee is responsible for monitoring the financial

policies and procedures of the organization—specifically the accounting policies, internal

controls, and the hiring of external auditors.

Chapter 05 – Corporate Governance

5-15

Board of Directors: A group of individuals who oversee governance of an organization. Elected

by vote of shareholders at the annual general meeting (AGM), the true power of the board can

vary from institution to institution from a powerful unit that closely monitors the management of

the organization, to a body that merely rubber-stamps the decisions of the chief executive officer

(CEO) and executive team.

Compensation Committee: An operating committee staffed by members of the board of

directors plus independent or outside directors. The committee is responsible for setting the

compensation for the CEO and other senior executives. Typically, this compensation will consist

of a base salary, performance bonus, stock options, and other perks.

“Comply or Else”: A set of guidelines that require companies to abide by a set of operating

standards or face stiff financial penalties.

“Comply or Explain”: A set of guidelines that require companies to abide by a set of operating

standards or explain why they choose not to.

Corporate Governance: The system by which business corporations are directed and

controlled.

Corporate Governance Committee: Committee (staffed by board members and specialists) that

monitors the ethical performance of the corporation and oversees compliance with the

company’s internal code of ethics as well as any federal and state regulations on corporate

conduct.

Review Questions

NOTE: Some questions allow for a number of different answers. Below are some suggestions.

1. Why do corporations need a board of directors?

2. What is the value of adding “outside directors” to your board?

Chapter 05 – Corporate Governance

5-16

Education.

outside skills or knowledge to the organization. Outside directors can also eliminate bias in

an organization.

3. Which is more important to effective corporate governance: an audit committee or a

compensation committee? Why?

Student responses will vary. Some of them may say that both the committees are effective

4. Many experienced senior business executives serve on multiple corporate boards. Is this a

good thing? Explain your answer.

Student responses will vary. A senior business executive that serves on multiple corporate

5. Many of Enron’s “independent” directors were affiliated with organizations that benefited

directly from Enron’s operations. How would you address this clear conflict of interest?

6. Outline the corporate governance structure of the company you work for (or one you have

worked for in the past).

Chapter 05 – Corporate Governance

5-17

Review Exercises

1. Who would most likely have intervened to terminate the senior team over issues of conduct?

2. Give some examples of the kind of ethical misconduct that could have led to the termination

of the entire senior leadership of GlobalMutual.

3. Was it a good idea to fire them all at the same time with no detailed explanation?

4. How are the stakeholders of GlobalMutual likely to react to this news? Explain your answer.

Student responses will vary. The stakeholders are most likely to be concerned and confused

Internet Exercises

1. Review the website of the International Corporate Governance Network (ICGN) at

www.icgn.org.

a. What is the ICGN’s stated mission?

Chapter 05 – Corporate Governance

5-18

Education.

According to the website, the ICGN is a global membership organization of around

600 leaders in corporate governance based in 50 countries with a mission to raise

standards of corporate governance worldwide.

b. How can this organization affect corporate governance in the business world?

The ICGN’s mission is to raise standards of corporate governance worldwide. In doing

c. The ICGN offers “policy” guidance in several areas. Select one, and summarize how

that guide contributes to the general discussion on corporate governance.

Students’ responses are expected to vary. Some of the ideas areas are corporate

2. Review the annual report of a Fortune 100 company of your choice. Who serves on the

board of directors for the company? Are there any designated “outside” directors? On how

many other boards do those “outside” directors serve? What does the company gain from

having these “outside” directors on the board?

Chapter 05 – Corporate Governance

5-19

Team Exercises

1. Chairperson and/or CEO.

Divide into two teams. One team must prepare a presentation advocating for the separation

of the roles of chairperson and CEO. The other team must prepare a presentation arguing

for the continued practice of allowing one corporation executive to be both chairperson and

CEO.

Student responses will vary. Advocating the separation of the roles of chairperson and CEO,

students will need to emphasize that this allows the CEO to focus on his/her duties to the

2. Compensation.

You serve on your organization’s compensation committee, and you are meeting to negotiate

the retirement package for your CEO who is retiring after a very successful 40-year career

with your organization—the last 20 as CEO, during which time the company’s revenues

grew more than fourfold and gross profits increased by over 300 percent. Divide into two

teams, arguing for and against the following compensation package being proposed by the

CEO’s representative:

• Unlimited access to the company’s New York apartment.

• Unlimited use of the corporate jet and company limousine service.

• Courtside tickets to New York Knicks games.

• Box seats at Yankee Stadium.

• VIP seats at the French Open, U.S. Open, and Wimbledon tennis tournaments.

• A lucrative annual consulting contract of $80,000 for the first five days and an

additional $17,500 per day thereafter.

• Reimbursement for all professional services—legal, financial, secretarial, and IT

support.

• Stock options amounting to $200 million.

Chapter 05 – Corporate Governance

5-20

Student responses will vary. Arguments for the recommended compensation package may

include the point that the successful career and dedication that this CEO has had with the

3. An appropriate response.

You sit on the board of directors of a major airline that just experienced a horrendous

customer service event. A severe snowstorm stranded several of your planes and caused a

ripple effect throughout your flight schedule, stranding thousands of passengers at airports

across the country and keeping dozens of passengers as virtual hostages on planes for

several hours as they waited for departure slots at their airport. The press has covered this

fiasco at length and is already calling for a passenger bill of rights that will be based

primarily on all the things your airline didn’t do to take care of its’ passengers in this

situation. Your CEO is the founder of the airline, and he has been featured in many of your

commercials raving about the high level of customer service you deliver. The board is

meeting to review his continued employment with the company. Divide into two teams and

argue the case for and against terminating his employment as a first step in restoring the

reputation of your airline.

Student responses will vary. Arguments for the CEO’s termination may include the points

that the unhappy and unsatisfied customers have tarnished the reputation of the organization,

Chapter 05 – Corporate Governance

5-21

Education.

career.

4. Ideal corporate governance.

Divide into groups of three or four. Each group must map out its ideal model for corporate

governance of an organization—for example, the number of people on the board of

directors; separate roles of chairman and CEO, inside and outside directors, and employee

representation on the board. Prepare a presentation arguing for the respective merits of

each model and offer evidence of how each model represents the best interests of all the

organization’s stakeholders.

Student responses will vary. Students will need to justify the number of people on the board

Thinking Critically

1. In what way does this scandal demonstrate a lack of corporate governance on Tesco’s part?

Students’ responses will vary. Effective corporate governance depends on a proactive

2. Were the actions taken by newly appointed chief executive Dave Lewis sufficient to address

that lack of governance? Explain.

Students’ responses will vary. The actions taken by Lewis do seem to be appropriate given

Chapter 05 – Corporate Governance

5-22

Education.

However, the true test will come in responding to the findings of the multiple investigations

to ensure that the same mismanagement will not be repeated.

3. Does the fact that the actions that led to the overstatement of profits had been going on for

over a year make the lack of governance any worse? Why or why not?

4. Does PwC bear some responsibility here? Why or why not?

5. Lewis identified three immediate priorities in turning the Tesco situation around. What are

they and will they be enough? Explain.

6. What else should Tesco do to restore investor confidence in their business ethics?

Chapter 05 – Corporate Governance

5-23

5.2 – SocGen

1. Who are the stakeholders in this case?

2. What did Kerviel do wrong?

3. What did SocGen do wrong?

4. Identify the ethical violations that occurred in this case.

5. Would the outcome have been different if Kerviel’s trades in European futures had worked

out?

6. What actions could SocGen have taken to prevent such large losses?

Chapter 05 – Corporate Governance

5-24

Education.

an inexperienced midlevel trader to trade without supervision. In all cases, whether Kerviel

was experienced or not, SocGen should have had the proper controls in place over all

transactions. Had they had these controls, Kerviel would have been caught and this loss

would have never become an issue.

5.3 – Valeant: The Pharmaceutical Enron

1. Identify three examples of poor corporate governance in this case.

Students’ responses will vary. Many of them will say that such aggressive predatory pricing

2. Why do you think Bill Ackman has remained so supportive of Valeant?

3. Critics have described the Valeant board of directors as weak. Is that a fair assessment? Why

or why not?

4. Is the release of negative research information by a company that is actively shorting the

shares of that company an unethical business practice? Why or why not?

Chapter 05 – Corporate Governance

5-25

Education.

information to support your short position would be both unethical and illegal.

5. Does the fact that Citron Research was proven right in its accusations about Valeant validate

its short-selling tactics?

6. How can the newly staffed board of directors begin to restore investor confidence in

Valeant?