Corporate governance: Methods for influencing management's decisions Corporate governance refers to policies and rules, regulations and laws, and activities that (1) influence both management’s decisions and its company’s operations, and (2) affect the relationships between a business’s stakeholders. These stakeholders include the company’s executives and managers, shareholders, creditors, current and former employees, competitors, and local and global communities.
In simple terms, corporate governance provisions can take two forms: Carrots, Tomatoes, or celery and stones, rocks, or sticks, with the former intended to provide positive or negative reinforcement for undertaking activities that are beneficial to the firm’s stakeholders, and the latter intended to punish, reward, or promote management for its undesirable decisions or actions.
These governing forces are both internal and external to the organization, and they can either align management’s interests with those of their shareholders (a positive outcome) or further entrench the firm’s management (a not-so-positive outcome). An entrenched management is one that is likely to be removed, all other things remaining equal.
Internal and external corporate governance provisions and activities can take many forms, including a targeted share repurchase provision. Which of the following best describes this technique?
A. This procedure for facilitating a takeover and changing a firm’s management involves repurchasing, for a fraction of their market value, the shares owned by the firm’s board members.
B. This method of resisting a takeover involves the repurchase of shares from a firm threatening a hostile takeover.
C. This anti-takeover tactic requires the firm to automatically confiscate and sell the shares of an individual shareholder who owns more than a specified amount of a target company’s stock.
According to financial and management theory, which of the following practices are reasonably expected to align the behaviors of a corporation’s management with those of the firm’s shareholders?
A. The CEO should sign the company’s financial statements without reviewing them—provided that the CFO has already signed them—since he or she knows that the CFO’s signature means the statements are accurate and in good form.
B. The board should have a true majority of outside members who bring business experience to the board and are not too busy to give sufficient attention to the board’s responsibilities and activities.
C. The firm’s capital structure should consist of 100% debt financing, because it reduces waste and the making of risky investments by senior management.
D. The charter should require the inclusion of a poison pill provision.