Page 128 - Introduction to Business

102 PART 1 The Nature of Contemporary Business

Officers. While a corporation’s board of directors has EXHIBIT 3.2
ultimate policy-making power over the business, the day-
Typical Corporate
to-day affairs of most larger corporations are handled by Governance
corporate officers hired by the board. The corporation’s top Structure
chief executive officer (CEO) The top officer is usually its chief executive officer (CEO), who is
officer of a corporation responsible to the board for the firm’s overall performance. Board of
The CEO is generally given authority to hire other executives directors
for the corporation. Virtually all major corporations also
chief financial officer (CFO) The top have a chief financial officer (CFO), who is responsible for
corporate financial officer accounting and general financial matters at the firm. See Chief executive
officer
Exhibit 3.2 for the typical organization of a corporation.
reality Does anyone you know serve on a corporate
CH ECK board, like the board of your local bank? How Chief financial and
other top officers
does he or she view that role?

Shareholder Model of Business Governance

LEARNING OBJECTIVE 3
Discuss the basic dynamics of the shareholder model of business governance, and the problems
engendered in major corporations today because of the separation of ownership and control.

shareholder model of business The shareholder model of business governance operates from the basic premise
governance The business governance that the purpose of a business is to maximize financial returns for its owners, or in
model operating from the premise that
the case of corporations, shareholders. Of course, many other groups of individuals
the purpose of the business is to
maximize financial returns to (and indeed society as a whole) may tangentially benefit from the running of a suc-
shareholders cessful corporation (e.g., the local community collects property and other taxes,
suppliers get paid, employees earn wages), but pursuant to this model of gover-
nance, a corporation exists for the benefit of its shareholders. The Nobel laureate
economist Milton Friedman, a proponent of this viewpoint, has noted that the role
of corporate officials is simply “to make as much money for their shareholders as
possible.” 10
For example, under this model of governance, if it is legal for a corporation to
reincorporate from, say, California to Delaware, Bermuda, or the Cayman Islands,
and such a move will clearly help the pocketbooks of the company’s shareholders,
the corporation should make such a move. The fact that the state of California will
lose some tax revenues or even that some employees may lose their jobs because of
this action is not really relevant under this governance model. The purpose of the
corporation is to legally maximize profits for its shareholders. Similarly, if laws are
changed and it becomes harmful to company shareholders for a company to be
incorporated in Bermuda, the Cayman Islands, and so on, the corporation then has
a responsibility to change its place of incorporation.
However, what if the overall impact of a company’s reincorporation in Bermuda
is neutral or even slightly negative for company shareholders (this actually may be
the case in some situations, since such reincorporation may trigger some addi-
tional shareholder taxes that offset shareholder benefits from increased company
profits or stock price gains) but extremely beneficial for the corporation’s CEO who
likes to vacation in that country and who recently purchased a vacation home there
right on the ocean? In such a situation, the corporation’s CEO may by pursuing
Bermuda reincorporation be acting in her or his own self-interest but not neces-
sarily in the best interests of the company’s shareholders. This example highlights
the key issue and problem in the shareholder model of governance—potential con-

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