Managerial Economics Report: Corporate Governance in Business

This report on managerial economics delves into various aspects of corporate governance. It examines the challenges arising from a single person holding both CEO and Chairman roles, highlighting potential for tyrannical behavior and biased decision-making. The report further discusses the roles of non-executive directors, their importance in risk management and strategy implementation, and the potential downsides of a more active board, such as dysfunctional group dynamics and disengagement. Executive sessions are analyzed for their role in providing a platform for directors to review CEO performance and address legal issues. The influence of institutional investors in shaping corporate governance is also explored, along with a comparative analysis of corporate governance practices in countries like France and Italy. The report concludes by emphasizing the significance of ethical conduct and mechanisms for accountability within corporate structures.

Running head: MANAGERIAL ECONOMICS
MANAGERIAL ECONOMICS
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Answer 1
One of the corporate practices, which is also common in America, is the acting of a single
person as both the CEO and the Chairman. This has led to certain problems. Firstly, a single
person, having powers of both the positions becomes tyrannical towards all the other executives
and non-executives of the company (Wheelen et al., 2017). For example, the boss of NCR fired
an under-performing executive by throwing his chair and desk in front of the factory and burned
them in front of him. Secondly, this tyrannical attitude leads to the mocking of the board of
directors by such person, acting as both. Thirdly, giving responsibility of both the positions to the
same person leads to egomaniacal strategies and wasteful personal rewards. For example,
recently, IBM’s board gave a reward to their retiring chairman with $100 worth company stock
and not with a stereotypical gold watch and fourthly, the merger of the two roles also leads to
biased election of candidates for the board of directors as the CEO usually choose the candidates
for election.
Answer 2
The non- executive directors in the European concerns are equivalent to the independent
directors of the American concerns. Derek Higgs, in one of his consultative documents,
mentioned that the non-executive directors (independent American directors) play a very
important role and the best people must be recruited for such roles (Goh & Gupta, 2016). The
independent directors or the non-executive directors have the following roles to play in a
business organization:
 Providing entrepreneurial leadership to a company with effective and prudent
control for managing and assessing risks.

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 They ensure the company’s strategies and are responsible for management of
human and financial resources for meeting the company objectives and for
management and review of performance.
 Setting values and standards of the company and meeting its obligations to the
Association Members and others.
 Apart from these, they are responsible for promoting the all round success of a
company, collectively.
Hence, their role is vital in running an organization and for it all round success.
Answer 3
Although the independent and a more active board of directors plays an effective role in
playing an important role for effective and better functioning of a company, there are certain
problems as well, with a more active board of directors (Hambrick, Misangyi & Park, 2015). The
three most critical issues are:
 A more active board results in dysfunctional group dynamics, which creates rivalries,
domination of many by few, bad chemistry and bad communication.
 A more active board means too many board members and too many board members
result in their disengagement. They usually don’t have any idea of what is going on in an
organization and they also don’t show any desire to find it out.
 Most importantly, the board members are very often, uncertain about their roles and
responsibilities and that makes them unable to perform in the desired manner because
they don’t know what their job is.

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Answer 4
Usually, an executive session is held without the CEO being present (Parsons & Feigen,
2014). It is so because an executive session usually deals with the following:
 The annual audit`
 Annual performance and review of CEO.
 Discussion of CEO compensation.
 Legal issues related to the CEO.
 Board practices, performance issues and behavior.
Therefore, an executive session is mostly concerned about issues relating to the CEO, his
performance review and compensation. The purpose of having executive sessions without the
boss is to give the directors a chance for escaping the perils or dangers of ‘group thinking’,
intimidation and a ‘progressive loss in collective grasp of reality’ (Jones & Keevil, 2015). These
sessions are usually confidential and it allows the directors to criticize and review the
performance of the boss (CEO) and also allows them to raise legal and other issues against the
boss, without any hesitation or without any kind of fear. Companies usually hate these sessions,
which indicates that it actually works. These sessions are very effective for smooth corporate
governance.
Answer 5
The institutional investors could play an important role in changing the corporate
governance as they act as a powerful catalyst. It is so because they have a fiduciary duty of their
own to protect their investors. At present, these institutions play an important role as they keep
finding the wrongs of the boards and blame it for its recent wrongs. Moreover, institutional

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investors like the NYSE play an important role in making ways for the shareholders to be a part
of the corporate governance by participating in it. This has led to the allowance of the
shareholders in voting on the stock and the stock option plans for bosses, and to make the bosses
disclose business codes, ethics and conduct on their official websites (McCahery, Sautner &
Starks, 2016). Thus, the institutional investors are paving the way for the shareholders in
becoming a participant in the corporate governance, which can result in the change or
reformation of the corporate governance structure.
Answer 6
In countries like France and Italy, issues of corporate governance has not yet been seen
because many of the large and reputed public companies of in Italy and France, are still having
large family shareholdings, strong family representations in their board and family
representatives among their senior management.
In France, it has been claimed that only one director in five on the boards of public
companies is truly independent, which helps is reducing conflicts between the managers and
owners, but it limits the check on management by the board (Neubauer & Lank, 2016). It also
results in greater comfort among the top most businessmen, who love appointing each other as
external directors of their board.
The scenario is similar in Italy and hence, these two countries have not faced the issues of
corporate governance yet.

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Answer 7
The burning of chairs and desks of an executive in front of the factory, by the boss of
NCR is definitely a spiteful act. The tyrannical attitude, given by the two powerful positions of
CEO and Chairman is obviously one reason for such behavior. But there are also certain other
motivations behind this. Where a single person acts as both the CEO and Chairman, the other
executives becomes afraid to speak against his spiteful acts. There is no mechanism like the
executive sessions to review his performance or criticize them and as the ultimate control and
power is bested in that single person (Almeida, 2015). A boss, who is aware of such powers and
conditions, will get more motivated to do spiteful act and continue his tyranny.

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References
Almeida, A. F. A. D. (2015). Spiteful Strategies. The ontogeny and the practice of spite in
human interaction: an experimental game theory approach and empirical applications.
Goh, L., & Gupta, A. (2016). Remuneration of non-executive directors: Evidence from the
UK. The British Accounting Review, 48(3), 379-399.
Hambrick, D. C., Misangyi, V. F., & Park, C. A. (2015). The quad model for identifying a
corporate director’s potential for effective monitoring: Toward a new theory of board
sufficiency. Academy of Management Review, 40(3), 323-344.
Jones, T. M., & Keevil, A. A. (2015). The subject of corporate governance—defined by Ryan,
Buchholtz, and Kolb as “the roles, responsibilities, and balance of power among
executives, directors, and shareholders”(2010: 673)—presents management scholars with
a number of vexing problems. These problems have included such issues as executive
com-pensation, the adoption of poison pills, the payment of greenmail, the
estab. Shareholder Empowerment: A New Era in Corporate Governance, 103.
McCahery, J. A., Sautner, Z., & Starks, L. T. (2016). Behind the scenes: The corporate
governance preferences of institutional investors. The Journal of Finance, 71(6), 2905-
2932.
Neubauer, F., & Lank, A. G. (2016). The family business: Its governance for sustainability.
Springer.
Parsons, R. D., & Feigen, M. A. (2014). The boardroom's quiet revolution. Harvard business
review, 92(3), 98-104.

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Wheelen, T. L., Hunger, J. D., Hoffman, A. N., & Bamford, C. E. (2017). Strategic management
and business policy. pearson.