UNIT 3

KEY CORPORATE GOVERNANCE

ACTORS
Key Corporate Actors
• Effective corporate governance requires a clear understanding of the
respective roles of the board, management and shareholders; their
relationships with each other; and their relationships with other
corporate stakeholders.
• Before discussing the core guiding principles of corporate governance,
Business Roundtable believes describing the roles of these key
corporate actors is important.
Board of Directors
• The board of directors has the vital role of overseeing the company’s management and
business strategies to achieve long-term value creation.
• Selecting a well-qualified chief executive officer (CEO) to lead the company, monitoring and
evaluating the CEO’s performance, and overseeing the CEO succession planning process are
some of the most important functions of the board.
• The board delegates to the CEO—and through the CEO to other senior management—the
authority and responsibility for operating the company’s business.
• Effective directors are diligent monitors, but not managers, of business operations. They
exercise vigorous and diligent oversight of a company’s affairs, including key areas such as
strategy and risk, but they do not manage—or micromanage—the company’s business by
performing or duplicating the tasks of the CEO and senior management team.
• The distinction between oversight and management is not always precise, and some
situations (such as a crisis) may require greater board involvement in operational matters.
In addition, in some areas (such as the relationship with the outside auditor and executive
compensation), the board has a direct role instead of an oversight role.
Management
• Management, led by the CEO, is responsible for setting, managing
and executing the strategies of the company, including but
not limited to running the operations of the company under
the oversight of the board and keeping the board informed
of the status of the company’s operations.
• Management’s responsibilities include strategic planning,
risk management and financial reporting.
• An effective management team runs the company with a
focus on executing the company’s strategy over a meaningful
time horizon and avoids an undue emphasis on short-term
metrics.
Shareholders
• Shareholders invest in a corporation by buying its stock and receive economic
benefits in return.
• Shareholders are not involved in the day-to-day management of business
operations, but they have the right to elect representatives (directors) and to
receive information material to investment and voting decisions.
• Shareholders should expect corporate boards and managers to act as long-
term stewards of their investment in the corporation.
• They also should expect that the board and management will be responsive to
issues and concerns that are of widespread interest to long-term shareholders
and affect the company’s long-term value.
• Corporations are for-profit enterprises that are designed to provide sustainable
long-term value to all shareholders.
• Accordingly, shareholders should not expect to use the public companies in
which they invest as platforms for the advancement of their personal agendas
or for the promotion of general political or social causes.
Key Responsibilities of the Board of Directors and Management

•An effective system of corporate governance

provides the framework within which the
board and management address their key
responsibilities
Board of Directors
A corporation’s business is managed under the board’s oversight. The board
also has direct responsibility for certain key matters, including the relationship
with the outside auditor and executive compensation. The board’s oversight
function encompasses a number of responsibilities, including:
Selecting the CEO. The board selects and oversees the performance of the
company’s CEO and oversees the CEO succession planning process.
Setting the “tone at the top.” The board should set a “tone at the top” that
demonstrates the company’s commitment to integrity and legal compliance.
This tone lays the groundwork for a corporate culture that is communicated to
personnel at all levels of the organization.
Approving corporate strategy and monitoring the implementation of
strategic plans. The board should have meaningful input into the company’s
long-term strategy from development through execution, should approve the
company’s strategic plans and should regularly evaluate implementation of the
plans that are designed to create long-term value. The board should
understand the risks inherent in the company’s strategic plans and how those
risks are being managed.
Setting the company’s risk appetite, reviewing and understanding the major
risks, and overseeing the risk management processes. The board oversees
the process for identifying and managing the significant risks facing the
company. The board and senior management should agree on the company’s
risk appetite, and the board should be comfortable that the strategic plans are
consistent with it. The board should establish a structure for overseeing risk,
delegating responsibility to committees and overseeing the designation of
senior management responsible for risk management.
Focusing on the integrity and clarity of the company’s financial reporting
and other disclosures about corporate performance. The board should be
satisfied that the company’s financial statements accurately present its
financial condition and results of operations, that other disclosures about the
company’s performance convey meaningful information about past results as
well as future plans, and that the company’s internal controls and procedures
have been designed to detect and deter fraudulent activity.
Allocating capital. The board should have meaningful input and decision-
making authority over the company’s capital allocation process and strategy
to find the right balance between short-term and long-term economic returns
for its shareholders.
Reviewing, understanding and overseeing annual operating plans and
budgets. The board oversees the annual operating plans and reviews annual
budgets presented by management. The board monitors implementation of
the annual plans and assesses whether they are responsive to changing
conditions.
Reviewing the company’s plans for business resiliency. As part of its risk
oversight function, the board periodically reviews management’s plans to
address business resiliency, including such items as business continuity,
physical security, cybersecurity and crisis management.
Nominating directors and committee members, and overseeing effective
corporate governance. The board, under the leadership of its
nominating/corporate governance committee, nominates directors and
committee members and oversees the structure, composition (including
independence and diversity), succession planning, practices and evaluation of
the board and its committees.
Overseeing the compliance program. The board, under the leadership of
appropriate committees, oversees the company’s compliance program and
remains informed about any significant compliance issues that may arise.
CEO and Management

• The CEO and management, under the CEO’s direction,

are responsible for the development of the company’s
long-term strategic plans and the effective execution
of the company’s business in accordance with those
strategic plans.
• As part of this responsibility, management is charged
with the following duties.
Business operations. The CEO and management run the company’s business
under the board’s oversight, with a view toward building long-term value.
Strategic planning. The CEO and senior management generally take the lead
in articulating a vision for the company’s future and in developing strategic
plans designed to create long-term value for the company, with meaningful
input from the board. Management implements the plans following board
approval, regularly reviews progress against strategic plans with the board,
and recommends and carries out changes to the plans as necessary.
Capital allocation. The CEO and senior management are responsible for
providing recommendations to the board related to capital allocation of the
company’s resources, including but not limited to organic growth; mergers
and acquisitions; divestitures; spin-offs; maintaining and growing its physical
and nonphysical resources; and the appropriate return of capital to
shareholders in the form of dividends, share repurchases and other capital
distribution means.
Identifying, evaluating and managing risks. Management identifies, evaluates and
manages the risks that the company undertakes in implementing its strategic plans
and conducting its business. Management also evaluates whether these risks, and
related risk management efforts, are consistent with the company’s risk appetite.
Senior management keeps the board and relevant committees informed about the
company’s significant risks and its risk management processes.
Accurate and transparent financial reporting and disclosures. Management is
responsible for the integrity of the company’s financial reporting system and the
accurate and timely preparation of the company’s financial statements and related
disclosures. It is management’s responsibility—under the direction of the CEO and
the company’s principal financial officer—to establish, maintain and periodically
evaluate the company’s internal controls over financial reporting and the company’s
disclosure controls and procedures, including the ability of such controls and
procedures to detect and deter fraudulent activity.
Annual operating plans and budgets. Senior management develops annual
operating plans and budgets for the company and presents them to the board. The
management team implements and monitors the operating plans and budgets,
making adjustments in light of changing conditions, assumptions and expectations,
and keeps the board apprised of significant developments and changes.
Selecting qualified management, establishing an effective
organizational structure and ensuring effective succession planning.
Senior management selects qualified management, implements an
organizational structure, and develops and executes thoughtful career
development and succession planning strategies that are appropriate
for the company.
Business resiliency. Management develops, implements and
periodically reviews plans for business resiliency that provide the most
critical protection in light of the company’s operations.
• Risk identification. Management identifies the company’s major business and
operational risks, including those relating to natural disasters, leadership gaps,
physical security, cybersecurity, regulatory changes and other matters.
• Crisis preparedness. Management develops and implements crisis
preparedness and response plans and works with the board to identify
situations (such as a crisis involving senior management) in which the board
may need to assume a more active response role.