Page 232 -

198 PART 2 • STRATEGY FORMULATION

Governance Issues
A “director,” according to Webster’s Dictionary, is “one of a group of persons entrusted
with the overall direction of a corporate enterprise.” A board of directors is a group of
individuals who are elected by the ownership of a corporation to have oversight and guid-
ance over management and who look out for shareholders’ interests. The act of oversight
and direction is referred to as governance. The National Association of Corporate
Directors defines governance as “the characteristic of ensuring that long-term strategic
objectives and plans are established and that the proper management structure is in place
to achieve those objectives, while at the same time making sure that the structure func-
tions to maintain the corporation’s integrity, reputation, and responsibility to its various
constituencies.” This broad scope of responsibility for the board shows how boards are
being held accountable for the entire performance of the firm. In the Worldcom, Tyco,
and Enron bankruptcies and scandals, the firms’ boards of directors were sued by share-
holders for mismanaging their interests. New accounting rules in the United States and
Europe now enhance corporate-governance codes and require much more extensive
financial disclosure among publicly held firms. The roles and duties of a board of direc-
tors can be divided into four broad categories, as indicated in Table 6-8.
The recession and credit crunch of 2008–2009 prompted shareholders to become
more wary of boards of directors. Shareholders of hundreds of firms are demanding that
11
their boards do a better job of governing corporate America. New compensation policies
are needed as well as direct shareholder involvement in some director activities. For

TABLE 6-8 Board of Director Duties and Responsibilities
1. CONTROL AND OVERSIGHT OVER MANAGEMENT
a. Select the Chief Executive Officer (CEO).
b. Sanction the CEO’s team.
c. Provide the CEO with a forum.
d. Ensure managerial competency.
e. Evaluate management’s performance.
f. Set management’s salary levels, including fringe benefits.
g. Guarantee managerial integrity through continuous auditing.
h. Chart the corporate course.
i. Devise and revise policies to be implemented by management.
2. ADHERENCE TO LEGAL PRESCRIPTIONS
a. Keep abreast of new laws.
b. Ensure the entire organization fulfills legal prescriptions.
c. Pass bylaws and related resolutions.
d. Select new directors.
e. Approve capital budgets.
f. Authorize borrowing, new stock issues, bonds, and so on.
3. CONSIDERATION OF STAKEHOLDERS’ INTERESTS
a. Monitor product quality.
b. Facilitate upward progression in employee quality of work life.
c. Review labor policies and practices.
d. Improve the customer climate.
e. Keep community relations at the highest level.
f. Use influence to better governmental, professional association, and educational contacts.
g. Maintain good public image.
4. ADVANCEMENT OF STOCKHOLDERS’ RIGHTS
a. Preserve stockholders’ equity.
b. Stimulate corporate growth so that the firm will survive and flourish.
c. Guard against equity dilution.
d. Ensure equitable stockholder representation.
e. Inform stockholders through letters, reports, and meetings.
f. Declare proper dividends.
g. Guarantee corporate survival.