Corporate Governance

Corporate Governance

Every business should have a set of rules, guidelines, procedures and laws that influence how they process operations and stir the decisions made by managers. This is called their corporate governance, a blueprint for business. Ehrhardt and Brigham (2013) also share managers are directly affected by corporate governance. While they are responsible for conducting business in a manner that allows the company to make a profit they run the risk of being removed when they are not able to maximize their allotted resources to the fullest. Managers also have greater incentive to do better when compensation is attached to performance rather than receiving a salary.

There are external and internal corporate provisions that are used to guide or encourage managers in their duties. External provisions include litigation, the media, the regulatory environment, block ownership patterns, and competition in the product markets. Internal provisions are:

"(1) monitoring and discipline by the board of directors,

(2) charter provisions and bylaws that affect the likelihood of hostile takeovers,

(3) compensation plans,

(4) capital structure choices, and

(5) accounting control systems."

The board of directors has the power to remove a manager who is failing to act in the interest of the shareholders. They can also reduce their actual salary. They act on behalf of the shareholders. When the CEO is the chairman of the board, corporate governance is said to improve. Another positive key is to have majority external board members who bring expertise to the board and keep the board numbers reasonable with reasonable compensation.

In case a manager does not live up to his/her responsibilities and the company does not produce a profit as anticipated, the company must protect itself. This is done by disallowing target share repurchases. This is a procedure that allows a hostile bidder to purchase stock at the going rate but resale it back at an inflated rate. Another protection tool is to allow the shareholders to purchase enough shares to dilute the percentage holdings of the raider is called a poison pill. Restrictive voting rights, the third prevention tools allows voting rights to be cancelled automatically if a specified amount of the stock is owned by any shareholder.

In additional to a regular salary a CEO receives stock-based grants or option grants and cash bonuses. It is hoped the CEO would want to see the company prosper and in turn be compensated for allowing that profit to exist. To prevent themselves from scrupulous individuals companies have developed vesting periods and measures of performance.

Capital structure can sometimes allow a manager to make safe decisions. Their reputation will stand on how well a company performs. There may be a tendency to accept projects that have value adding properties only but