Corporate Governance Report of Google
Submitted To: Course Instructor - Mr. K. B. Manandhar Corporate Governance ACE Institute of Management, New Baneshwor
Submitted By: Nistha Pradhanang EMBA Fall 2015 – Semester Semester III Date: July 2017
INTRODUCTION TO CORPORATE GOVERNANCE:
Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include labor (employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. With globalization, firms must tap domestic and international capital markets in quantities and ways that would have been inconceivable even a decade ago. Increasingly, individual investors, funds, banks, and other financial institutions base their decisions not only on a company's outlook, but also on its reputation and its governance. It is this growing need to access financial resources, domestic and foreign and to harness the power of the private sector for economic and social progress that has brought corporate governance into prominence the world over. Sound corporate governance is important not only to attract long-term foreign capital, but more especially to broaden and deepen local capital markets by attracting local investors-individual and institutional.
From a corporation's perspective, the emerging consensus is that corporate governance is about maximizing value subject to meeting the corporation's financial and other legal and contractual obligations. This inclusive definition stresses the need for boards of directors to balance the interests of shareholders with those of other stakeholders employees, customers, suppliers, investors, communities-in order to achieve long-term sustained value for the corporation.
Corporate Governance as Risk Mitigation
Corporate governance is of paramount importance to a company and is almost as important as its primary business plan. When executed effectively, it can prevent corporate scandals, fraud and the civil and criminal liability of the company. It also enhances a company's image in the public eye as a self-policing company that is responsible and worthy of shareholder and debtholder capital. It dictates the shared philosophy, practices and culture of an organization and its employees. A corporation without a system of corporate governance is often regarded as a body without a soul or conscience. Corporate governance keeps a company honest and out of trouble. If this shared philosophy breaks down, then corners will be cut, products will be defective and management will grow complacent and corrupt. The end result is a fall that will occur when gravity - in the form of audited financial reports, criminal investigations and federal probes - finally catches up, bankrupting the company overnight. Dishonest and unethical dealings can cause shareholders to flee out of fear, distrust and disgust.
Need for Corporate Governance: The need for corporate governance is highlighted by the following factors:
Wide Spread of Shareholders:
Today a company has a very large number of shareholders spread all over the nation and even the world; and a majority of shareholders being unorganized and having an indifferent attitude towards corporate affairs. The idea of shareholders’ democracy remains confined only to the law
and the Articles of Association; which requires a practical implementation through a code of conduct of corporate governance.
Changing Ownership Structure:
The pattern of corporate ownership has changed considerably, in the present-day-times; with institutional investors (foreign as well Indian) and mutual funds becoming largest shareholders in large corporate private sector. These investors have become the greatest challenge to corporate managements, forcing the latter to abide by some established code of corporate governance to build up its image in society.
Corporate Scams or Scandals:
Corporate scams (or frauds) in the recent years of the past have shaken public confidence in corporate management. The event of Harshad Mehta scandal, which is perhaps, one biggest scandal, is in the heart and mind of all, connected with corporate shareholding or otherwise being educated and socially conscious.
The need for corporate governance is, then, imperative for reviving investors’ confidence in the
corporate sector towards the economic development of society.
Greater Expectations of Society of the Corporate Sector:
Society of today holds greater expectations of the corporate sector in terms of reasonable price, better quality, pollution control, best utilization of resources etc. To meet social expectations, there is a need for a code of corporate governance, for the best management of company in economic and social terms.
Hostile Take-Overs:
Hostile take-overs of corporations witnessed in several countries, put a question mark on the efficiency of managements of take-over companies. This factors also points out to the need for corporate governance, in the form of an efficient code of conduct for corporate managements.
Huge Increase in Top Management Compensation:
It has been observed in both developing and developed economies that there has been a great increase in the monetary payments (compensation) packages of top level corporate executives. There is no justification for exorbitant payments to top ranking managers, out of corporate funds, which are a property of shareholders and society. This factor necessitates corporate governance to contain the ill-practices of top managements of companies.
Globalization:
Desire of more and more Indian companies to get listed on international stock exchanges also focuses on a need for corporate governance. In fact, corporate governance has become a buzzword in the corporate sector. There is no doubt that international capital market recognizes only companies well-managed according to standard codes of corporate governance.
Principles of Corporate Governance
Shareholder recognition is key to maintaining a company's stock price. More often
than not, however, small shareholders with little impact on the stock price are brushed aside to make way for the interests of majority shareholders and the executive board.
Good corporate governance seeks to make sure that all shareholders get a voice at general meetings and are allowed to participate.
Stakeholder interests should also be recognized by corporate governance. In
particular, taking the time to address non-shareholder stakeholders can help your company establish a positive relationship with the community and the press.
Board responsibilities must be clearly outlined to majority shareholders. All board
members must be on the same page and share a similar vision for the future of the company.
Ethical behavior violations in favor of higher profits can cause massive civil and legal
problems down the road. Underpaying and abusing outsourced employees or skirting around lax environmental regulations can come back and bite the company hard if ignored. A code of conduct regarding ethical decisions should be established for all members of the board.
Business transparency is the key to promoting shareholder trust. Financial records, earnings reports and forward guidance should all be clearly stated without exaggerati on or "creative" accounting. Falsified financial records can cause your company to become a Ponzi scheme, and will be dealt with accordingly.
Benefits of Corporate Governance
Good corporate governance ensures corporate success and economic growth.
Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively.
It lowers the capital cost.
There is a positive impact on the share price.
It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization.
Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
It helps in brand formation and development.
It ensures organization in managed in a manner that fits the best interests of all.
Introduction to Google. Google is now worth billions and has its own place within the Oxford English Dictionary as a verb, but it took two men with a big dream to turn a small idea into a reality that has made a significant contribution to how the world uses the internet. Larry Page and Sergey Brin were both PhD candidates when they met in 1996 at Stanford and came up with the concept for a search engine that they were going to name BackRub. One year later, in 1997, they renamed it and on the 14th September 1997 Google.com was officially registered as a domain name. A man named Milton Sirotta was responsible for coming up with the term from which Google was derived (googol), and it refers to the number 1 with 100 zeros following it.
Google specializes in Internet-related services and products. These include online advertising technologies, search, cloud computing, software, and hardware. In August 2015, Google announced plans to reorganize its various interests as a conglomerate called Alphabet Inc. Google, Alphabet's leading subsidiary, will continue to be the umbrella company for Alphabet's Internet interests. Upon completion of the restructure, Sundar Pichai became CEO of Google, replacing Larry Page, who became CEO of Alphabet.
Why Google became Alphabet Alphabet Inc is a parent company holding control over different subsidiary companies, with each company being specific to its purpose. Thus, Google as a search engine, and its initiatives like YouTube, Gmail etc, are now under a single umbrella, and other ventures, like Google X, Google Fiber, Calico, and Nest, will be separate subsidiaries. This gives investors a chance to choose for themselves a more profitable and less risky venture, and also keeps Alphabet in a very balanced position, where it can close down dying ventures or open up new options depending on the market situation of each smaller company.
The restructuring is clearly a response to Google’s stagnant share price and investor unease . Google’s current theory of value creation is essentially to funnel its vast profits from the
search and advertising business into the hiring of strong talent, and then to give employees wide latitude to explore and pursue whatever they wish. This is embodied not only in the pattern of rather unrelated investments and acquisitions, but in policies about hiring, salaries, and 20% free time.
Investors have been uneasy about this strategy, but Larry Page and Sergey Brin have also composed a corporate governance regime that insulated them from much shareholder pressure for change. Eventually, with growth in search advertising slowing, investors’ dissatisfaction manifested itself in a stagnant stock price. And in recent months the company has taken steps to rein in some of its investments, slowing growth in expenses, and also tightening the reins on the 20% free time policy. These were the beginnings of a shifting direction at Google. Analysts had their own problem with Google’s structure: its bundle of businesses was
extremely difficult for them to evaluate. The primary challenge for analysts has been that the performance of the main business was not transparent — the financial returns of the search engine and advertising business could not be observed separately from the investments in all of the new businesses. The new structure ensures that there will be, at a minimum, independent accounting numbers produced for the Google business, and perhaps for the others as well. Investors will inevitably push for more. The market’s response has s o f ar been positive, with
the stock price up 6%. There will also be a longer-term performance impact, as greater transparency of both its cash flows and investments prompts greater discipline and accountability. This move may not fully pacify the uneasy investor. While this new organizational form increases transparency, that transparency only further illuminates the disconnect between Alphabet’s various businesses.
CORPORATE GOVERNANCE AT GOOGLE INC.
These Corporate Governance Guidelines are established by the Board of Directors of Alphabet to provide a structure within which our directors and management can effectively pursue Alphabet’s objectives for the benefit of its stockholders. The Board intends that these
guidelines serve as a flexible framework within which the Board may conduct its business, not as a set of binding legal obligations. These guidelines should be interpreted in the context of all applicable laws, Alphabet’s charter documents and other governing legal documents
and Alphabet’s policies. These corporate governance guidelines were adopted from April 20,
2016.
I.
Board Structure and Composition
1.
Size of the Board . The authorized number of directors will be determined from time to time
by resolution of the Board, provided the Board consists of at least five members. 2.
Board Membership Criteria . The Nominating and Corporate Governance Committee will
evaluate candidates for membership on the Board, including candidates nominated or recommended by stockholders, in light of criteria established by the Board, and recommend to the Board the slate of nominees for election at the Annual Meeting of Stockholders or nominees for election to fill interim vacancies on the Board. 3.
Director Independence . A majority of directors on the Board will be independent as
required by the NASDAQ Stock Market. The Board also believes that it is often in the best interest of Alphabet and its stockholders to have non-independent directors, including current and (in some cases) former members of management, serve as directors. Each independent Director who experiences a change in circumstances that could affect such Director’s independence should deliver a notice of such change to Alphabet’s Secretary.
4.
Director Tenure. Directors are re-elected each year and the Board does not believe it should
establish term limits because directors who have developed increasing insight into Alphabet and its operations over time provide an increasing contribution to the Board as a whole. To ensure the Board continues to generate new ideas and to operate effectively, the Nominating and Corporate Governance Committee shall monitor performance and take steps as necessary regarding continuing director tenure. 5.
Directors Who Change Their Present Job Responsibility . Any Director who experiences a
material change in his/her job responsibilities or the position he/she held when he/she came on the Board should deliver a notice of such change in status to the Executive Chairman of the Board and/or the Lead Independent Director. The Nominating and Corporate Governance Committee will then evaluate whether the individual continues to satisfy the Board’s
membership criteria in light of his/her new occupational status and shall recommend to the Board the action, if any, to be taken with respect to such individual.
II.
1.
Principal Duties of the Board of Directors To Oversee Management and Evaluate Strategy . The fundamental responsibility of the
directors is to exercise their business judgment to act in what they reasonably believe to be the best interests of Alphabet and its stockholders. It is the duty of the Board to oversee management’s performance to ensure that Alphabet operates in an effective, efficient and
ethical manner in order to produce value for Alphabet’s stockholders. The Board also evaluates Alphabet’s overall strategy and monitors Alphabet’s performance against its
operating plan and against the performance of its peers. Additionally, the Board has responsibility for risk oversight, with reviews of certain areas being conducted by the relevant board committees. The Board is responsible for oversight of strategic, financial and execution risks and exposures associated with Alphabet’s business
strategy, product innovation and sales road map, policy matters, significant litigation and regulatory exposures, and other current matters that may present material risk to Alphabet’s or its subsidiaries’ or controlled affiliates’ financial performance, operations, infrastructure,
plans, prospects or reputation, acquisitions and divestitures. Directors are expected to invest the time and effort necessary to understand Alphabet’s
business and financial strategies and challenges. The basic duties of the directors include attending Board meetings and actively participating in Board discussions. Directors are also expected to make themselves available outside of board meetings for advice and consultation. 2.
To Select the Chair and Chief Executive Officer. The Board will select the chairman of the
Board and the chief executive officer in compliance with Alphabet’s Ce rtificate of
Incorporation and Bylaws, which provides that the chairman of the board will not be a current employee of Alphabet or any of its subsidiaries, or someone employed by Alphabet or any of its subsidiaries any time within the prior three years, unless the appointment is approved by two-thirds of the disinterested directors. 3.
To Evaluate Management Performance and Compensation. At least annually, the
Leadership Development and Compensation Committee will evaluate the performance of the chief executive officer and the other officers. It will review and approve the compensation plans, policies and arrangements for executive officers and other officers. It will also evaluate the compensation plans, policies and programs for officers and employees to ensure they are appropriate, competitive and properly reflect Alphabet’s objectives and performance.
4.
To Review Management Succession Planning . The Leadership Development and
Compensation Committee will review at least annually and recommend to the Board plans for the development, retention and replacement of executive officers of Alphabet and its subsidiaries. 5.
To Monitor and Manage Potential Conflicts of Interest . All members of the Board must
inform the Audit Committee of the Board of all types of transactions between them (directly or indirectly) and Alphabet or any of its subsidiaries or controlled affiliates as soon as reasonably practicable even if these transactions are in the ordinary course of business. The Audit Committee of the Board will review and approve all related party transactions for which audit committee approval is required by applicable law or the rules of the NASDAQ Stock Market. The Board will also ensure that there is no abuse of corporate assets or unlawful related party transactions. 6.
To Ensure the Integrity of Financial Information. The Audit Committee of the Board
evaluates the integrity of Alphabet’s accounting and financial reporting systems, including the audit of Alphabet’s annual financial statements by the independent auditors, and that
appropriate disclosure controls and procedures and systems of internal control are in place. The Audit Committee reports to the Board on a regular basis and the Board, upon the recommendation of the Audit Committee, takes the actions that are necessary to ensure the integrity of Alphabet’s accounting and financial reporting systems and that such controls are
in place. 7.
To Monitor the Effectiveness of Board Governance Practices. The Nominating and
Corporate Governance Committee of the Board will annually review and evaluate the effectiveness of the governance practices under which the Board operates and make changes to these practices as needed.
III.
Board Procedures
Directors are expected to prepare for, attend, and contribute meaningfully in all Board and applicable committee meetings in order to discharge their obligations. Consistent with their fiduciary duties, directors are expected to maintain the confidentiality of the deliberations of the Board and its committees. 1.
Frequency of Board Meetings. Regular meetings of the Board shall be held at such times and places as determined by the Board. There will be at least four regularly scheduled meetings of the Board each year but the Board will meet more often if necessary.
2.
Attendance at Board Meetings. To facilitate participation at the Board meetings, directors may attend in person, via telephone conference or via video-conference. Materials are distributed in advance of meetings.
3.
Other Commitments. Each member of the Board is expected to ensure that other existing and future commitments, including employment responsibilities and service on the boards of other entities, do not materially interfere with the member’s service as director. The members of the Board cannot have more than five (5) public company board memberships, including membership on the Alphabet Board.
4.
Board Membership Limits of the Chief Executive Officer. The chief executive officer cannot have more than three (3) public company board memberships, including membership on the Alphabet Board.
5.
Executive Sessions of Independent Directors. NASDAQ rules require independent Board members to regularly meet in executive session. The independent Board members shall meet in executive session at each regularly scheduled Board meeting, and at other times as necessary. Committees of the Board may also meet in executive session as deemed appropriate.
6.
Board Access to Management. Members of the Board will have access to Alphabet’s management and employees as needed to fulfill their duties. Furthermore, the Board encourages management to, from time to time, bring managers into meetings of the Board who: (a) can provide additional insight into the items being discussed because of personal involvement in these areas, and/or (b) are managers with future potential that senior management believes should be given exposure to the Board.
7.
Code of Conduct. Alphabet has adopted a Code of Conduct to provide guidelines for the ethical conduct by directors, officers and employees. The Code of Conduct is posted on Alphabet’s website.
8.
Engaging Experts. The Board and each committee of the Board will have the authority to obtain advice, reports or opinions from internal and external counsel and expert advisers and will have the power to hire, at the expense of Alphabet, legal, financial and other advisers as they may deem necessary or appropriate, without consulting with, or obtaining approval from, management of Alphabet in advance.
9.
Minimum Stock Ownership Requirement. In an effort to more closely align the interests of our directors and senior management with those of our stockholders, each director and senior officer will be required to meet the following minimum stock ownership requirements: (i) each director shall own shares of Alphabet stock equal in value to at least $750,000 (Seven
Hundred and Fifty Thousand Dollars); (ii) the Founders of Google Inc., the Chief Executive Officer of Alphabet, our Executive Chairman, and the Chief Executive Officer of Google Inc. shall own shares of Alphabet stock equal in value to at least $14,000,000 (Fourteen Million Dollars); and (iii) Senior Vice Presidents of Alphabet or Google Inc. shall own shares of Alphabet stock equal in value to at least $4,000,000 (Four Million Dollars). Our directors shall have five years from the earlier of the date they became a director of Alphabet or Google Inc. to come into compliance with these ownership requirements. The Founders, our Chief Executive Officer, our Executive Chairman, the Chief Executive Officer of Google Inc., and Senior Vice Presidents of Alphabet or Google Inc. shall have five years from the later of (x) March 12, 2012 or (y) the earlier of the date they assumed such roles at Alphabet or Google Inc. to come into compliance with these ownership requirements. Alphabet advisors who don’t receive annual equity grants and the CEOs of Alphabet’s Other Bets a re
exempt from the minimum ownership requirements for Senior Vice Presidents set forth above. Compliance with the minimum stock ownership level will be determined on the date when the grace period set forth above expires, and annually on each December 31 thereafter, by multiplying the number of shares held by each director and senior officer and the average closing price of those shares during the preceding month.
IV.
1.
Board Committees
Number and Composition of Committees. The Board currently has the following standing committees: an Audit Committee, a Leadership Development and Compensation Committee, a Nominating and Corporate Governance Committee and an Executive Committee. From time to time the Board may form a new committee or disband a current committee depending on the circumstances. Each committee complies with the independence and other requirements established by applicable law and regulations, including SEC and NASDAQ rules.
2.
Committee Appointments. Members of all standing committees are appointed by the Board. The Board determines the exact number of members and can at any time remove or replace a committee member.
3.
Committee Proceedings. The Chair of each committee of the Board will, in consultation with appropriate committee members and members of management, and in accordance with the committee’s charter, determine the frequency and length of committee meetings and develop the committee’s agenda.
V.
Director Orientation and Continuing Education
Alphabet provides an orientation program for new directors that includes written materials, oral presentations, and meetings with senior members of management. The orientation program is designed to familiarize new directors with Alphabet’s business and strategy. The
Board believes that ongoing education is important for maintaining a current and effective Board. Accordingly, the Board encourages directors to participate in ongoing education, as well as participation in accredited director education programs. The Board will reimburse directors for expenses incurred in connection with these education programs.
VI.
Board Performance
The Board develops and maintains a process whereby the Board, its committees and its members are subject to annual evaluation and self-assessment. The Nominating and Corporate Governance Committee oversees this process.
VII.
Board Compensation
The Leadership Development and Compensation Committee of the Board has the responsibility to review and recommend to the Board compensation programs for nonemployee directors.
VIII.
Auditor Rotation
The Audit Committee of the Board will ensure that the lead audit partner and the audit review partner be rotated every five (5) years as is required by SEC rules.
IX.
1.
Communications with Stockholders
Stockholder Communications to the Board. Stockholders may contact the Board about bona fide issues or questions about Alphabet by sending an email to: Alphabet Inc. Attn: Corporate Secretary 1600 Amphitheatre Parkway Mountain View, CA 94043 Email:
[email protected]
Each communication should specify the applicable addressee or addressees to be contacted as well as the general topic of the communication. Alphabet will initially receive and process communications before forwarding them to the addressee. Alphabet generally will not forward to the directors a communication that it determines to be primarily commercial in nature or related to an improper or irrelevant topic, or that requests general information about the company. 2.
Annual Meeting of Stockholders. Each director is encouraged to attend the Annual Meeting of Stockholders.
X.
Periodic Review of the Corporate Governance Guidelines
These guidelines shall be reviewed periodically by the Nominating and Corporate Governance Committee (together with the Leadership Development and Compensation Committee, as necessary) and the Board will make appropriate changes based on recommendations from the Committee(s).
Google is no. 5 in the list of the most reputable companies on the planet in 2017. The 2017 Corporate Accountability Index – a company ranking put together by a non-profit chaired by Alphabet’s Eric Schmidt – has ranked Google top dog in the technology sector, while Apple
sits at no. 7 with a little over half Google’s score. A major factor for that has been the focus on corporate governance practice which has made it possible for the company to be ranked above many other big companies. Startups who like to study Google for tips on how to emulate its success may wonder what all the fuss was about. But companies would do well to look closely at how seriously the tech giant takes vanilla business issues like corporate structure and public policy. Overlooking them can be fatal. But getting it right can be a major point of differentiation and springboard for success. It’s worth remembering that Google, despite being one of the most valuable
companies in the world, is still only 16 years old. Hence, it is clear that with good governance practices, a company can be successful in building its standards and sustaining in this competitive business world. Google’s effective corporate governance under their parent company Alphabet has ensured that there is transparency in the company and the company continues to do good job, increase its reputation and be out of trouble.
