Chapter 12. Corporate Governance

There has been much discussion of corporate governance in the media over the past decade. Much of this attention has been brought on by accounting scandals such as those that occurred at Enron, Adelphia, and WorldCom. This has led to changes in laws and accounting rules in an effort to achieve more accurate reporting of financial data to markets. However, there has been much less focus on changes in governance related to mergers and acquisitions (M&As). Given the problematic track record of many M&As, there is still a long way to go with this aspect of corporate governance reforms.

In this chapter we discuss how corporations are governed. As part of that process we will examine the role of the board of directors and how they oversee management. We will see how boards are put together and how directors are selected. We will try to identify the characteristics of good boards versus bad boards. We will see that one important factor in differentiating good from bad boards is the extent to which the board is composed of outsiders as opposed to insiders. Abundant research has shown that the makeup of the board, and the director selection process, plays an important role in increasing shareholder value. Such research shows that boards work best when they include more independent directors who are not beholden to the chief executive officer (CEO). By being independent, they are freer to hold management accountable for their decisions and the impact those ...

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