Chapter 2

CHAPTER 2: THEORIES OF
ORGANIZATIONAL
ADAPTATION & CORPORATE
GOVERNANCE
Role of Board of Directors
CORPORATION
 a mechanism established to allow different parties to contribute capital,
expertise, and labor for their mutual benefit.
 The investor/shareholder participates in the profits (in the form of
dividends and stock price increases) of the enterprise without taking
responsibility for the operations.
 The board of directors has an obligation to approve all decisions that
might affect the long-term performance of the corporation.
Role of Board of Directors
 CORPORATE GOVERNANCE
 The relationship among board of directors, top management and shareholders.
 Effective board leadership including the processes, makeup, and output of the board
 Strategy of the organization
 Risk vs. initiative and the overall risk profile of the organization
 Succession planning for the board and top management
Responsibilities of the Board
1. Effective board leadership including the processes,
makeup, and output of the board
2. Strategy of the organization
3. Risk vs. initiative and the overall risk profile of the
organization
4. Succession planning for the board and top management
team
5. Sustainability
Role of the Board in
Strategic Management
•MONITOR
•EVALUATE AND INFLUENCE
•INITIATE AND DETERMINE
Board of Directors’ Continuum
Boards of Directors Composition
Inside directors - (sometimes called management

directors) are typically officers or executives employed
by the corporation.
Outside directors - (sometimes called non-
management directors) may be executives of other
firms but are not employees of the board’s corporation.
NOMINATION & ELECTION
OF BOARD MEMBERS
 Traditionally, the CEO of a corporation decided whom to invite to
board membership and merely asked the shareholders for approval
in the annual proxy statement. All nominees were usually elected.
There are some dangers, however, in allowing the CEO free rein in
nominating directors. The CEO might select only board members
who, in the CEO’s opinion, will not disturb the company’s policies
and functioning. When nominating people for election to a board of
directors, it is important that nominees have previous experience
dealing with corporate issues. For example, research reveals that a
firm makes better acquisition decisions when the firm’s outside
directors have had experience with such decisions.
ORGANIZATION OF THE
BOARD
 CEO - supposed to concentrate on strategy, planning, external
relations, and responsibility to the board.
 CHAIRMAN- responsibility is to ensure that the board and its
committees perform their functions as stated in the board’s charter.
 LEAD DIRECTOR - this person is consulted by the Chair/CEO
regarding board affairs and coordinates the annual evaluation of the
CEO.
 EXECUTIVE COMMITTEE - This committee acts as an extension of the
board and, consequently, may have almost unrestricted authority in
certain areas
TRENDS IN CORPORATE
GOVERNANCE
BETTER GOVERNANCE WOULD LEAD TO:
• good governance leads to better performance over
time
•good governance reduces the risk of the company
getting into trouble
• governance is a major strategic issue
TRENDS FOR CORPORATE
GOVERNANCE
• Boards are getting more involved not only in reviewing and evaluating company strategy
but also in shaping it.
• Institutional investors, such as pension funds, mutual funds, and insurance companies,
are becoming active on boards and are putting increasing pressure on top management
to improve corporate performance. This trend is supported by a U.S. SEC requirement
that a mutual fund must publicly disclose the proxy votes cast at company board
meetings in its portfolio. This reduces the tendency for mutual funds to rubber-stamp
management proposals.
• Shareholders are demanding that directors and top managers own more than token
amounts of stock in the corporation. Research indicates that boards with equity
ownership use quantifiable, verifiable criteria (instead of vague, qualitative criteria) to
evaluate the CEO.83 When compensation committee members are significant
shareholders, they tend to offer the CEO less salary but with a higher incentive
component than do compensation committee members who own little to no stock.8
GOVERNANCE
• Non-affiliated outside (non-management) directors are increasing their numbers and
power in publicly held corporations as CEOs loosen their grip on boards. Outside
members are taking charge of annual CEO evaluations.
• Women and minorities are being increasingly represented on board
• Boards are establishing mandatory retirement ages for board members—typically
around age 70.
• Boards are evaluating not only their own overall performance, but also that of
individual directors.
• Boards are getting smaller—partially because of the reduction in the number of
insiders but also because boards desire new directors to have specialized knowledge
and expertise instead of general experience.
GOVERNANCE
• Boards continue to take more control of board functions by either splitting the
combined Chair/CEO into
two separate positions or establishing a lead outside director position.
• Boards are eliminating 1970s anti-takeover defenses that served to entrench current
management. In just one year, for example, 66 boards repealed their staggered boards
and 25 eliminated poison pills. (A
poison pill is a term that refers to a dramatic event that empowers the current owners
which will take place upon receiving an unwanted attempt at acquisition.)85
• As corporations become more global, they are increasingly looking for board
members with international experience.
GOVERNANCE
Instead of merely being able to vote for or against directors nominated by the board’s
nominating committee, shareholders may eventually be allowed to nominate board
members. This was originally proposed by the U.S. Securities and Exchange
• Commission in 2004, but was not implemented. Supported by the AFL-CIO, a more
open nominating process would enable shareholders to vote out directors who ignore
shareholder interests.86
• Society, in the form of special interest groups, increasingly expects boards of directors
to balance the economic goal of profitability with the social needs of society.
ROLE OF TOP MANAGEMENT
 The top management function is usually conducted by the CEO of the
corporation in coordination with the COO (Chief Operating Officer) or president,
executive vice president, and vice presidents of divisions and functional areas.
 Top management responsibilities, especially those of the CEO, involve getting
things accomplished through and with others in order to meet the corporate
objectives.
 Top management’s job is thus multidimensional and is oriented toward the
welfare of the total organization. Specific top management tasks vary from firm
to firm and are developed from an analysis of the mission, objectives,
strategies, and key activities of the corporation. Tasks are typically divided
among the members of the top management team. A diversity of skills can thus
be very important.
CHARACTERISTICS OF A
CEO
EXECUTIVE LEADERSHIP - the directing of activities toward the
accomplishment of corporate objectives.
STRATEGIC VISION - a description of what the company is capable of
becoming.
TRANSFORMATIONAL LEADERS - leaders who provide change and
movement in an organization by providing a vision for that change.
• The CEO articulates a strategic vision for the corporation.
• The CEO presents a role for others to identify with and to follow.
• The CEO communicates high-performance standards and also shows
confidence in the followers’ abilities to meet these standards
STAFF’S MAJOR
RESPONSIBILITIES
1. Identify and analyze companywide strategic
issues, and suggest corporate strategic
alternatives to top management.
2. Work as facilitators with business units to
guide them through the strategic planning
process.

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CHAPTER 2: THEORIES OF

Inside directors - (sometimes called management

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