Corporate governance: Methods for influencing management's decisions

Corporate governance refers to policies and rules, regulations and laws, and activities that (1) influence both managements decisions and its companys operations, and (2) affect the relationships between a businesss stakeholders. These stakeholders include the companys 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: [Tomato OR Carrot OR Celery] and [Rocks OR Stones OR Sticks] , with the former intended to provide [POSITVE or NEGATIVE] reinforcement for undertaking activities that are beneficial to the firms stakeholders, and the latter intended to [REWARD OR PUNISH OR PROMOTE] management for its undesirable decisions or actions.

These governing forces are both internal and external to the organization, and can either align managements interests with those of their shareholders (a positive outcome) or further entrench the firms management (a not-so-positive outcome). An entrenched management is one that is [LESS OR MORE] likely to be removed, all other things remaining equal.

Internal and external corporate governance provisions and activities can take many forms, including a poison pill provision. Which of the following best describes this element in a firms charter?

a. This provision and anti-takeover strategy attempts to increase, rather than reduce, the number of shares that an acquiring firm must purchase to acquire its target.

b. This provision allows a target firms shareholders to purchase additional shares of the target firms common stock once a shareholder purchases a certain percentage of the firms outstanding shares.

c. This provision and takeover strategy allows the target firms shareholders to sell a given percentage of their shares to an acquiring firm for a specified percentage premium over the market value of the target firms common shares.

If you were designing the composition and acceptable practices for the board of directors of a new corporation, which of the following practices would you suggest be implemented? Check all that apply.

1. The charter should require the elections of board members to be staggered.

2. The firms capital structure should consist of 100% debt financing, because it reduces waste and the making of risky investments by senior management.

3. The board of directors actively monitors the decisions and behavior of senior management.

4. Senior managements compensation should include cash and stock options.