ICLG - Corporate Governance Laws and Regulations - USA Chapter covers common issues in corporate governance laws and regulations, including management bodies, shareholders &, other stakeholders, transparency &, reporting and corporate social responsibility. Since there is no corporate governance code for companies based in the U.S. In the US, there is no corporate governance code in the U.S. UU.
Corporate laws, regulations, and business lists are governed by federal and state laws. Several “best practice” guidelines in the area of corporate governance are also influential. Do you want to adapt books like this? Learn more about how Pressbooks supports open practices. Strategies Planned and Implemented U.S.
Corporate governance system Purpose and direction of the company The general environment (PESTEL) Analysis of the microenvironment of the organization. Enterprise-Level Strategy Vertical Integration Strategies Strategy Analysis Framework (SAF) Index of Tools and Models Used in Today's United States Textbook. The corporate governance system is best understood as the set of fiduciary and managerial responsibilities that bind the management, shareholders and the board of directors of a company within a broader social context defined by legal, regulatory, competitive, economic, democratic, ethical forces and other social forces. Although shareholders own companies, they generally don't manage them.
Shareholders elect directors, who appoint managers who, in turn, direct corporations. Since managers and directors have a fiduciary obligation to act in the best interest of shareholders, this structure implies that shareholders face two separate problems, called principal-agent, with management, whose behavior will likely be related to their own well-being, and with the meeting, which can be indebted to particular interest groups, including management. Many of the mechanisms that define the current corporate governance system are designed to mitigate these potential problems and align the behavior of all parties with the broadly interpreted best interests of shareholders. The notion that the welfare of shareholders should be the primary objective of the corporation derives from the legal status of shareholders as residual claimants.
Other corporation stakeholders, such as creditors and employees, have specific claims about the corporation's cash flows. On the contrary, shareholders get the return on investment from the waste only after it has been paid to all other interested parties. Theoretically, making shareholders residual claimants creates the strongest incentive to maximize company value and generates the greatest benefits for society at large. Not all shareholders are the same and share the same objectives at one end, the interests of small (minority) investors often conflict with large shareholders (including those with a stock control block and institutional investors) at the other.
Small investors, with only a few shares, have little power to influence the corporation's board of directors. In addition, with only a small part of their personal portfolios invested in the corporation, these investors have little motivation to exercise control over the corporation. As a result, small investors tend to be passive and are only interested in obtaining favorable returns. They often don't bother to vote and simply sell their shares if they're not satisfied.
After years of poor sales and amid rumors of a possible acquisition, billionaire Daniel Loeb, shareholder of 7%, leads an initiative to replace five of the 12 members of the Campbell's Soup board through a proxy vote. Loeb faces uphill battle, investors will have chance to vote on company's future at annual meeting. Loeb will attract other investors who are also upset with the performance and management direction Campbell has taken in the past, and will offer fresh blood and a conversation about whether to sell the company. On the contrary, shareholders who hold a sufficiently large stake in the corporation can easily justify the time and expense required to actively oversee management.
They may have a controlling stock block or be institutional investors, such as mutual funds, pension plans, employee stock ownership plans. Or outside the United States, they may be banks whose participation in the corporation may not qualify as majority ownership, but is large enough to motivate active participation with management. It should be noted that the term “institutional investor” encompasses a wide variety of managed investment funds, including banks, trust funds, pension funds, mutual funds and similar “delegated” investors. Everyone has different investment objectives, portfolio management disciplines, and different investment horizons.
As a result, institutional investors represent another layer of agency problems and an opportunity for oversight. To identify the potential for an additional layer of agency problems, ask why we should expect a bank or pension fund to look after the interests of minority shareholders better than corporate management. On the one hand, institutional investors may have “purer than management” motives, mainly a favorable return on investment. On the other hand, they often make passive and indifferent monitors, partly out of preference and partly because active monitoring may be prohibited by regulations or by their own internal investment rules.
In fact, one of the main principles of the recent governance debate focuses on whether it is useful and desirable to create ways for institutional investors to take a more active role in monitoring and disciplining corporate behavior. In theory, as large owners, institutional investors have a greater incentive to monitor corporations. However, the reality is that institutions did not protect their own investors from managerial misconduct in firms such as Enron, Tyco, Global Crossing and WorldCom, even though they held important positions in these firms. The latest development in capital markets is the increase in private capital.
Private equity funds differ from other types of investment funds mainly in the larger size of their holdings in individual investee companies, their longer investment horizons and the relatively smaller number of companies in individual fund portfolios. Private equity managers tend to have a higher degree of participation in their investee companies compared to other investment professionals, such as mutual fund or hedge fund managers. As a result, these private equity managers are likely to play a greater role in influencing the corporate governance practices of their investee companies. By virtue of their longer investment horizon, direct board participation and ongoing commitment to management, private equity managers play an important role in shaping governance practices.
That role is even stronger in a majority share purchase or acquisition, in which a private equity manager exercises substantial control, not just influence, as in minority equity investments, over a company's governance. Not surprisingly, academics and regulators are closely monitoring the impact of private equity on corporate performance and governance. The existence of a corporation does not depend on who the owners or investors are at any given time. Once formed, a corporation continues to exist as a separate entity, even when shareholders die or sell their shares.
A corporation continues to exist until shareholders decide to dissolve it or merge it with another business. Companies are subject to the laws of the state of incorporation and the laws of any other state in which the corporation conducts business. Therefore, companies may be subject to the law of more than one state. All states have corporate statutes that set the ground rules for how corporations are formed and maintained.
A key question that has helped shape the current mosaic of corporate laws is: “What is or should be the role of law in regulating what is essentially a private relationship? Legal experts often take a “contract-based” or “public interest” approach to this issue. Free market advocates tend to view the corporation as a contract, a voluntary economic relationship between shareholders and management, and see little need for government regulation other than the need to provide a judicial forum for civil lawsuits alleging breach of contract. Public interest advocates, on the other hand, are concerned about the growing impact of large corporations on society and tend to have little faith in market solutions, arguing that the government should force companies to behave in ways that promote the public interest. Proponents of this view focus on how corporate behavior affects multiple stakeholders, including customers, employees, creditors, the local community and environmental protectors.
The stock market crash of 1929 led the federal government to regulate corporate governance for the first time. President Franklin Roosevelt believed that public trust in the stock market needed to be restored. Fearing that individual investors would shy away from stocks and, in doing so, reduce the pool of capital available to boost economic growth in the private sector, Congress enacted the Securities Act in 1933 and the Securities Exchange Act the following year, which established the Securities and Exchange Commission (SEC). This landmark legislation changed the balance between the roles of federal and state laws in regulating corporate behavior in the United States and caused the growth of federal regulation of corporations at the expense of states and, for the first time, exposed corporate officials to criminal penalties.
federal. In 2002, as a result of disclosures of accounting and financial misconduct in the Enron and WorldCom scandals, Congress enacted the Accounting Reform and Investor Protection Act, better known as the Sarbanes-Oxley Act (and often referred to as the SOX). The integrity of our financial markets depends to a large extent on the role played by a range of “gatekeepers”, external auditors, analysts and credit rating agencies in detecting and exposing the types of questionable financial and accounting decisions that led to the collapse of Enron, WorldCom and other “reports wrong”. or accounting fraud.
A key question is whether we can (or should) trust these guardians to perform their duties diligently. It can be argued that we can and should because your business success depends on your credibility and reputation to the end users of your information, investors and creditors, and if they provide fraudulent or reckless opinions, they are subject to private lawsuits for damages. The problem with this view is that the interests of gatekeepers are often more aligned with those of corporate managers than with those of investors and shareholders. After all, guardians are often hired and paid (and fired) by the same firms that evaluate or qualify, and not by creditors or investors.
Auditors are hired and paid by the firms they audit; credit rating agencies are often hired and paid by qualifying firms; lawyers receive payment from firms that hire them; and, as we learned after the 2001 governance scandals, until recently compensation for security analysts (who work primarily for investment banks) was closely tied to the amount of related investments (banking businesses) that their employers (investment banks) make with the companies their analysts evaluate. Therefore, a contrasting view holds that most gatekeepers are inherently conflicting and cannot be expected to act in the interests of investors and shareholders. Proponents of this perspective also argue that the guardians' conflict of interest worsened during the 1990s due to increased cross-selling of consulting services by auditors and credit rating agencies and the cross-selling of investment banking services. Both issues are addressed in recent regulatory reforms; the new rules address the restoration of the “wall” between investment banks and security analysts, and require separation of auditing and consulting services for accounting firms.
Strategic Management by John Morris is licensed under a Creative Commons Attribution-Noncommercial 4.0 international license, except where otherwise noted. Corporate Governance A set of fiduciary and managerial responsibilities that bind the management, shareholders, and board of directors of a company within a broader social context that is defined by legal, regulatory, competitive, economic, democratic, ethical and other social forces. The system is best understood as the set of fiduciary and managerial responsibilities that bind the management, shareholders and board of directors of a company within a broader social context defined by legal, regulatory, competitive, economic, democratic, ethical and other social forces. Other interested partiesNon-shareholder individuals or groups that participate in or are affected by the company's shares.
They include suppliers, creditors, tax authorities, and the community in which the corporation operates. In the corporation, like creditors and employees, they have specific claims about the corporation's cash flows. Not all shareholders are the same and share the same objectives. The Interests of Small (Minority) Investors Individuals or groups who own only a small portion of the outstanding shares of a corporation and who have little power to influence the corporation's board of directors.
Small investors, who own only a small part of the corporation's outstanding shares, have little power to influence the corporation's board of directors. They often don't even bother to vote; they just sell their shares if they're not satisfied. In contrast, large shareholdersIndividuals or groups that often have a large enough stake in a company to justify the time and expense required to actively oversee management. They can have a control action block.
They often have a large enough stake in the corporation to justify the time and expense required to actively monitor management. They can have a controlling stock block or be institutional investors. An organization that brings together large financial resources to invest in stock or bond markets, such as mutual funds or pension plans. As a result, institutional investors represent another layer of agency problems and the opportunity for oversight.
On the other hand, they often make passive and indifferent monitors, partly out of preference and partly because active monitoring may be prohibited by regulations A set of laws or rules established by a governing body. Or by your own internal investment rules. In fact, one of the main principles of the recent governance debate focuses on the question of whether it is useful and desirable to create ways for institutional investors to take a more active role in monitoring and disciplining corporate behavior. The latest development in capital markets is the increase in private equity capital that is not listed on the stock exchange.
Share capital is the money invested in a company in exchange for partial ownership of the company. Private equity managers tend to have a higher degree of participation in their investee companies compared to other investment professionals, such as mutual fund or hedge fund managers, and play a greater role in influencing their companies' corporate governance practices investee companies. Therefore, companies may be subject to the laws of more than one state. Public interest advocates, on the other hand, concerned about the growing impact of large corporations on society, tend to have little faith in market solutions and argue that the government should force companies to behave in ways that promote the public interest.
Fearing that individual investors would shy away from stocks and, in doing so, reduce the pool of capital available to boost economic growth in the private sector, Congress enacted the Securities Act in 1933 and the Securities Exchange Act the following year, which established the Securities and Exchange Commission (SEC), a federal agency whose primary responsibility is to implement regulatory security laws to regulate stock and other stock markets, protect investors and monitor corporate acquisitions. More recently, in 2002, as a result of disclosures of accounting and financial misconduct in the Enron and WorldCom scandals, Congress signed into law the Accounting Reform and Investor Protection Act, better known as the Sarbanes-Oxley ActAN Act passed by the U.S. Congress in 2002 that provides additional rules and enforcement policies to protect investors from the possibility of fraudulent activity. Your enforcement authority is crucial to the SEC's effectiveness in each of these areas.
Each year, the SEC files hundreds of civil actions against individuals and companies for violating securities laws. Typical breaches include insider trading, the illegal use of information available only to those within a corporation to derive financial gain from insider trading. Although he is the principal supervisor and regulator of the U.S. In the securities markets, the SEC works closely with many other institutions, including Congress, other federal departments and agencies, self-regulatory organizations (for example,.
The SEC's specific responsibilities include (a) interpreting federal securities laws; (b) issuing new rules and amending existing rules; (c) overseeing the inspection of securities firms, brokers, investment advisors and rating agencies; (d) overseeing private regulatory organizations in the areas of securities, accounting and auditing fields; and e) coordinating U, S. Securities Regulation with Federal, State and Foreign Authorities. The NASDAQ, the other big U.S. Stock exchange, is the largest in the U.S.
With approximately 3,200 companies, it lists more companies and, on average, trades more shares per day than any other U.S. It is home to leading companies in all areas of business, including technology, retail, communications, financial services, transportation, media and biotechnology. The NASDAQ is commonly referred to as a high-tech market, which attracts many of the companies that deal with the Internet or electronics. As a result, stocks on this exchange are considered to be more volatile and growth-oriented.
While all transactions on the New York Stock Exchange are conducted in one physical location, on the NYSE trading floor, the NASDAQ is defined by a telecommunications network. The fundamental difference between the NYSE and the NASDAQ, therefore, lies in the way securities on exchanges are traded between buyers and sellers. The NASDAQ is a dealer market where market participants buy and sell from a dealer (the market maker). The New York Stock Exchange is an auction market, where people typically buy and sell each other based on the auction price.
Importantly, and as will be discussed later in this chapter, these core institutions are converging towards a vision of corporate governance that is more focused on stakeholders and less on shareholders. Some companies have a board-level risk management committee, which the Dodd-Frank Act requires of certain publicly traded banking holding companies and non-bank financial holding companies, but most boards place the risk management function on the audit committee, in response to a rule of NYSE quote requiring audit committee to review risk assessment and management policies.
corporate lawdeals mainly with the relationship between officials, the board of directors and shareholders and is therefore traditionally considered part of private law. external auditorsIndividuals or a group authorized to review and verify a corporation's financial accounting.
In addition, long-standing for the corporate governance regime in the United States are proxy advisory firms (predominantly Institutional Shareholder Services (ISS) and, with a smaller market share, Glass, Lewis & Co (Glass Lewis)), the influence that these representative advisors have on the investor community institutions, and the prevailing and changing views of the institutional investor community. In fact, U.S. corporate governance practices. UU.
are also strongly influenced by pressures from investors and proxy advisory firms, as well as by specific factors. The training is responsible for implementing and enforcing the legal framework governing securities transactions in the United States. A board of directors should adopt corporate governance guidelines that ensure that the company's media strategy is executed only through approved channels, and with the understanding that analysts and shareholders will often engage in private dialogues in the hope of discovering exactly the type of information that the Regulation FD prohibits company officials from disclosing in such forum. Public corporations are subject to a disclosure regime that generally requires annual and quarterly reports, as well as current reports, to be submitted following the occurrence of certain events, such as the conclusion of material agreements, the completion of significant acquisitions or disposals of assets, and changes in officers or directors and amendments to the statutes or bylaws of the corporation.
The Business Roundtable statement on the purpose of the corporation exemplifies the widespread acceptance by companies and institutional shareholders that corporations should consider the interests not only of shareholders but also those of employees, customers, suppliers, the environment, communities and other constituencies that are critical to the corporation's success. These advisory firms exert pressure on corporations to conform to the governance standards they enact by issuing voting recommendations for the election of director to the shareholders of each publicly traded corporation, based on the corporation's compliance with the standards published by the firm ases. Securities regulations require substantial annual disclosure of compensation awarded to a corporation's five appointed chief executive officers (NEO), who are the CEO, CFO and the other three highest-paid CEOs. Created to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation, the SEC is responsible for implementing and enforcing the legal framework governing securities transactions in the United States.
In many respects, the relentless drive to adopt corporate governance mandates seems to have stalled in the United States, with essentially all the best practices prescribed, including the right to pay, the dismantling of acquisition defenses, majority voting in the election of directors and the declassification of board structures: have been codified in rules and regulations or adopted voluntarily by most companies S&P 500. . .