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Business Policy and Corporate Governance

a. Explain why corporate governance fails.

b. List some of the "indulgences" other than golden parachutes and poison pills (which are given to managers by the BOD) some managers have given to themselves.

c. What do you think should be a reasonable spread (either a dollar or percentage spread) between the earnings of a firm's CEO and its lowest paid hourly workers and why?

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a. Corporate governance fails because of several reasons. First, there is a conflict of interest between the management and the shareholders. The management continues to make bad decisions if they feel that these will lead to a higher compensation, a faster promotion, or a better career. There is little alignment of management's interests with that of the shareholders. In most companies, Board members are appointed by and serve until the CEO wishes them to serve. The result is that the Board members approve the decisions of the CEO. The board members are protected from liability by past court decisions and liability insurance.

Corporate governance fails because there is an excessive use of stock options or rewards linked to short-term share prices. The rewards package of management is designed in such a way that the interests of the ...

Solution Summary

Corporate Governance is discussed in great detail in this solution.