Governance & Operations of a Corporation

Unit 1, Lesson 1-6

Objectives1. Analyze the corporation governance and management structure, and examine the role/duties of the shareholders, board of directors, and management.

2. Distinguish between the types of corporation stock, and define dividend.

3. Identify major U.S. and worldwide stock exchanges, and describe their role.

4. Describe how to purchase stock in a publicly traded company.

Terms•Callable stock

•Chairman

•Chief executive officer

•Chief financial officer

•Chief operations officer

•Common stock

•Dividends

•Governance

•Inside directors

•Management team

•No-load stock

•Outside directors

•Preferred stock

•Stock

•Stockbroker

•Stock exchanges

Governance is the relationship between all the stakeholders in a company.

The corporation governance is defined by the corporate charter, bylaws, formal policy, and rule of law.

A. Governance involves: 1. Shareholders 2. Directors 3. Management

B. Governance exists for the interests of stockholders or shareholders.

C. Many corporations have a two-tier corporate hierarchy. 1. The first tier is the board of

directors, and they are elected by shareholders of the corporation.

2. The second tier is the upper management, and they are hired by the board of directors.

D. Board of directors 1. The board of directors is elected by the shareholders. 2. It is composed of two types of representatives.

a. One representative may be a chief executive officer, chief financial officer, manager, or any other person who works for the company on a daily basis.

b. The other representative is chosen externally and is considered independent from the company.

3. The role of the board a. The board monitors the managers of a corporation. b. The board acts as an advocate for stockholders.

In essence, the board of directors tries to make sure that shareholders’ interests are well served.

4. Board members can be divided into three categories. a. The chairman is technically the leader of the corporation.

(1) He or she is responsible for running the board smoothly and effectively.

(2) The chairman is elected from the board of directors.

(3) Duties typically include: (a) Maintaining strong communication with the chief

executive officer and high-level executives (b) Formulating the company’s business strategy (c) Representing management and the board to the general

public and shareholders (d) Maintaining corporate integrity

b. Inside directors are the second tier, upper managers who are responsible for approving high-level budgets prepared by upper management. (1) They implement and

monitor business strategy. (2) They approve core corporate

initiatives and projects. (3) They usually are shareholders or high-level management

from within the company. (4) They help provide internal perspectives for other board

members. (5) They are referred to as executive directors if they are part

of the company’s management team.

c. Outside directors are the second tier, upper managers, but they are not directly part of the management team. (1) They have the same responsibilities as

the inside directors in determining strategic direction and corporate policy.

(2) They are not usually shareholders. (3) They are not directly part of the

management team. (4) They are to provide unbiased and

impartial perspectives on issues brought to the board.

E. The management team is the second tier of the company and is responsible for the day-to-day operations. 1. The chief executive officer (CEO) is the top manager

and is responsible for the entire operations of the corporation; he or she reports directly to the chairman of the board of directors. a. The CEO is responsible to implement the board decisions

and initiatives. b. The CEO often times is the company president. c. The CEO is considered one of the inside directors. d. The CEO may also be chairman of the board.

2. The chief operations officer (COO) is a top manager related to marketing sales, production, and personnel. a. The COO is responsible for day-

to-day activities. b. The COO provides feedback to

the CEO. c. The COO is also referred to as the

senior vice-president.

3. The chief financial officer (CFO) is the top manager related to financial data and performance. a. The CFO reports to the CEO. b. The CFO prepares budgets and monitors

expenditures and costs. c. The CFO presents information directly to

the board of directors. d. The CFO checks the corporation’s financial

health and integrity. e. The CFO is also referred to as a senior vice-president.

Stock is a way to measure the claim or ownership position on a corporation’s assets and profits.

A. Common stock is ownership in the corporation and a claim on dividends.

Dividends are profits made by the corporation, which are then paid to stockholders. 1. Common stock allows for one vote per share to elect

the board of directors and variable dividend shares. However, dividends are never guaranteed.

2. Common stocks entail the most risk because if a company goes bankrupt, the common stockholders are the last people to receive their money.

B. Preferred stock is ownership in a company that has fixed dividends forever. 1. This stock usually does not come

with the same voting rights. 2. In the event of a corporation bankruptcy, preferred

shareholders are paid before the common shareholders (but after debt holders).

3. Preferred stock may also be callable. With callable stock, the corporation has the option to

purchase the shares from the shareholders at any time (usually for a premium).

There are more than 60 stock exchanges around the world.

North American stock exchanges 1. New York Stock Exchange (NYSE)—most popular 2. Alberta Stock Exchange 3. Montreal Stock Exchange 4. Toronto Stock Exchange 5. Vancouver Stock Exchange 6. Winnipeg Stock Exchange 7. Canada Stockwatch 8. Mexican Stock Exchange 9. AMEX, United States 10. NASDAQ, United States

11. The Arizona Stock Exchange, United States 12. Chicago Stock Exchange, United States 13. Chicago Board Options Exchange, United States 14. Chicago Board of Trade, United States 15. Chicago Mercantile Exchange, United States 16. Kansas City Board of Trade, United States 17. Minneapolis Grain Exchange, United States 18. Pacific Stock Exchange, United States 19. Philadelphia Stock Exchange, United States

G. Role of stock exchanges 1. Stock exchanges are

organizations that provide the trading of corporation stocks and dividends.

2. Stock exchanges can set the prices of commodities.

3. The role of all exchanges is to set the price of commodities or to set the worth of corporations in the free market system.

Ways to purchase stock A. Stock can be purchased

directly from the company. Several companies offer

no-load stock, which refers to the consumers’ ability to purchase stock directly from the company.

Campbell Soup Company has a direct stock option as do many agricultural corporations.

B. Stock can be purchased through a dividend re-investment plan (DRIP). The purchaser is able to enroll dividends into more stock.

C. Stock can be purchased from a broker service. An example is Scot Trade. Companies like these allow for the purchase of any

corporation stock over the Internet for a flat fee. The company then buys stock on the buyer’s behalf and

sends the owner the certificate.

D. Stock can be purchased from a broker firm or stockbroker. A stockbroker is a regulated

professional who buys and sells shares from corporations or in exchanges on behalf of the investor.

An advantage is that stockbrokers often provide advice and monitor the investments.

Stockbrokers will charge a flat fee or require a percentage of the money invested.

REVIEW•How does the corporation governance and management structure incorporate the roles of shareholders, a board of directors, and a CEO?•What are the types of stock, and what is a dividend?

REVIEW•What are the major stock exchanges, and what are their roles?•How do you purchase stock in a publicly traded company?