520 Making Key Strategic Decisions
target company lose their jobs. A common accusation, therefore, is that man-
agement resists takeovers in order to entrench itself, even though the deal
would result in a handsome gain for the shareholders.
In these situations, directors must exercise great care in making a deci-
sion that is in the shareholders’ interests. This is not always easy to determine.
What is the intrinsic value of the corporation? What is the real value of the
“junk bonds” being offered to the shareholders? What consideration, if any,
should the directors give to the interests of other parties—employees, commu-
nities, suppliers, and customers?
In an unfriendly takeover attempt, the directors of the target company
must rely on legal advice since takeovers inevitably lead to lawsuits. The board
also depends on expert advice from investment banks about the value of the
company and the true value of offers to acquire it.
In practice, when a hostile takeover is initiated, the target company’s
lawyers, investment bankers, accountants, and other advisers, together with
the board and management, become involved in a hectic struggle that can last
for weeks or months. It is a sixteen-hour-day, seven-day-week effort; nearly
everything else yields to the intense preoccupation with survival or striking the
best possible deal.
BOARD COMMITTEES
Much of the board’s work is done in committees. They meet before board
meetings, hear reports, and prepare summaries and recommendations for full
board action. In this section, we describe the activities of the three commit-
tees—compensation, audit, and finance—that deal with finance and account-
ing matters.
COMPENSATION COMMITTEE
The board determines the compensation of the CEO and the other principal
corporate officers. In many boards, a compensation committee, composed of
outside board members, analyzes what compensation should be and makes its
recommendations to the full board.
The SEC requires that a section of the proxy statement, issued prior to
the annual meeting of shareholders, must describe the work of the compensa-
tion committee, the decisions on compensating senior executives, reasons for
the decision, their compensation for the past three years, and comparisons with
other companies in the industry.
CEO Compensation
When the board sets the CEO’s compensation, it is establishing a compensation
standard for managers throughout the company. Their compensation is integrally