Video Transcript: Corporate Governance

Hello, welcome. We're going to discuss corporate governance. Corporate  Governance, our agency conflicts, can decrease the value of stock owned by  outside shareholders. Corporate governance can mitigate this loss in value.  Corporate governance can be defined as a set of laws, rules and procedures  that influence a company's operations and the decisions its managers make, at  the risk of over simply oversimplification, most corporate governance provisions  come in two forms, like sticks and carrots. The primary stick is the threat of  removal, either as a decision by the board of directors or as a result of a hostile  takeover. If a firm's managers are maximizing the value of the resources  entrusted to them, they need not to fear the loss of their jobs. On the other hand, if managers are not maximizing value, they should be removed by their own  board of directors, talking about managers on a higher level, CEO, CFO CIO,  those types of managers. So they should be removed by their own boards, by  dissident stockholders or by other companies seeking to profit by installing a  better management team. The main carrot is compensation. Managers have  greater incentives to maximize intrinsic value of their stock. If their  compensation is linked to the firm's performance rather than being strictly in the  form of a salary. Give them incentive to maximize the value, show them that they need, that you appreciate them doing a good job by linking their compensation  to their performance, potentially in the form of a bonus, stock options, greater  contribution to the 401K things of that nature. Almost all corporate governance  provisions affect either the threat of removal or compensation. Some provisions  are internal to affirm and are under its control. These internal provisions and  features can be divided into five areas, one, monitoring and discipline by the  board of directors. The board of directors is overseeing the management team,  and they need to keep a close eye on the operations and the motives of the  managers to ensure that they are always seeking to maximize the shareholder  value. Number Two charter provisions and bylaws that affect the likelihood of  hostile takeovers. Make sure that we're putting charters in place to ensure that  the maximization of profit potential and shareholder value is always in place  three compensation plans. So we need to ensure that we can insulate ourselves from these risks by giving positive market proactive compensation plans number four capital structure choices, make sure they have the right mix of debt to  equity. Let's not get over levered, not put ourselves in too many risky situations  so that we can keep our operations intact and maintain our balance on free cash flow. Accounting control systems ensure that we are properly accounting the  operations of our firm. In addition to the corporate governance provisions that  are under a firm's control, there are also environmental factors outside of a firm's control such as the regulatory environment, block ownership patterns,  competition in the product markets, the media and litigation. Shareholders are a  corporation's owners, therefore, they elect the board of directors to act as an  agent on their behalf. In the US, it is the board's duty to monitor senior 

managers and then discipline them if they do not act in the interest of  shareholders therefore by removal or by a reduction in compensation. This is not necessarily the case outside the United States, for example, many companies in Europe are also required to have employee representatives on the board. Also,  many European and Asian companies have bank representatives on the board.  But even in the US, many boards fail to act in shareholders best interest. So let's consider the election process. The board of directors has a nominating  committee. These directors choose the candidates for the open director position, and the ballot for a board position usually lists only one candidate, although  outside candidates can run a write in campaign. only Those candidates named  by the board's nominating committee are on the ballot at many companies, the  CEO is also the chairman of the board and has considerable influence on this  nominating committee. This means that, in practice, it often is the CEO who, in  effect nominates candidates for the board high compensation and prestige go  with a position on the board of a major company. So board seats are prized  possessions. Board members typically want to retain their positions, and they  want and they are grateful to ever helped get them on the board. So therefore  their interests may be influenced by the individuals that place them on the  board. So you can see they may not always be working in the best interest of  the shareholders. Thus, the nominating process often results in a board that is  favorably disposed to the CEO at most companies, a candidate is selected  simply by having a majority of votes cast. The proxy ballot usually lists all  candidates with a box for each candidate to check if the shareholder votes for  the candidate in a box to check if the shareholder withholds a vote on the  candidate. You can actually vote no, or you can withhold you actually can't vote.  No you can only withhold your vote. In theory, a candidate could be elected with  a single four vote if all other votes are withheld. In practice, though most  shareholders vote for or assign to management their right to vote proxies,  defined as the authority to act for another, which is why it is called a proxy  statement. In practice, the nominated candidates virtually always receive a  majority of votes and are thus elected. Voting procedures also affect the ability  of outsiders to gain positions on the board. If the charter specifies cumulative  voting, then each shareholder is given a number of votes equal to his or her  shares multiplied by the number of board seats up for election. For example, the holder of 100 shares of stock will receive 1000 votes if 10 seats are to be filled,  then the shareholder can distribute those votes however he or she sees fit, 100  votes could be cast for each of the 10 candidates, or all. 1000 votes could be  cast for one candidate, if non cumulative voting is used. The hypothetical  stockholder cannot concentrate votes in this way, no more than 100 votes can  be cast for any one candidate