Corporate Governance

On the other side of the scale, the task of controlling how much community involvement and charitable contributions a company should make is left to the firm's own control. The role of Corporate Governance is to exercise this control. Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.

By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance3 To summarize, Corporate Governance is the set of rules that dictate how a company is to operate in order to meet its goal of increasing shareholder wealth. For Ben and Jerry's Homemade, Inc. in the late 1990's, the case study leads us to believe that corporate governance was constructed in a manner that is not in line with what one would normally think of for a company that has profit maximization as its goal.

We believe this was the case not because of a lack of care for profits, but rather because profit maximization was not the main emphasis. An example of this comes from the company's own mission statement as presented in the case. Product: To make, distribute, and sell the finest quality all-natural ice cream and related products in a wide variety of innovative flavors made from Vermont dairy products. Economic: To operate the company on a sound financial basis of profitable growth, increasing value for our shareholders, and creating career opportunities and financial rewards for our employees.

Social: To operate the company in a way that actively recognizes the central role that business plays in the structure of society by initiating innovative ways to improve the quality of life of the broad community – local, national, and international. 4 Although the mission statement includes three different types of goals, namely Product, Economic and Social, one can't help but notice an imbalance on the emphasis with which these goals seem to be placed on the statement.

The use of terms such as "finest quality", and "wide variety of innovative flavors" demonstrates the high level of expectation for the process of creating its products. On the Social side, by highlighting businesses as playing a "central role … in the structure of society … " and by hoping to "… improve the quality of life of the broad community – local, national, and international. " the ground is laid for decisions to be made in the future that puts the good of the community above all else.

In contrast, when looking at the economic portion of the mission statement we see lukewarm enthusiasm towards reaching profit goals. "To operate the company on a sound financial basis of profitable growth … " doesn't elicit the same level of urgency to reach the economic goals of the firm. It seems to indicate that as long as the company is not losing money, any actual performance on the financial sphere is acceptable. Asset Control Further yet, the case shows us that the founders were careful to put mechanisms in place that allowed them to maintain close control of the company and its assets.

These takeover defense mechanisms are used to discourage, make difficult or sometimes make it impossible for one firm to take over another. Different companies do this in a variety of ways ranging from deflating cash reserves and increasing debt (making the financial ratios unattractive for a possible suitor) to putting in place rules and regulations, such as "poison pill" clauses that make them unattractive to corporate raiders. For management at Ben and Jerry's, the latter approach was the one followed.

The company's charter contained amendments "… that gave the board greater power to perpetuate the mission of the firm. "5. By staggering the board of directors into three different layers, and placing restrictions on the conditions under which a director could be removed, the firm aimed to maintain the status quo. In addition to these amendments, there were three classes of equity and different voting rights for each class. This arrangement gave "The company's principals – Ben Cohen, Jerry Greenfield, and Jeffrey Furman …

47 percent of the aggregate voting power, with only 17 percent of the aggregate common equity outstanding. "6 Further yet, "The class A preferred stock was held exclusively by the Ben and Jerry's Foundation, a community-action group. " Unlike what you normally see in the market, this preferred class A stock also had voting power, that went as far as limiting "… the voting rights of common stockholders in certain transactions such as mergers and tender offers, even if the common stockholders favored such transactions.

"7 Finally the Vermont Legislature gave the power to decide if a merger was in the best interest of the company's stakeholders (minus the shareholders) to the directors of any Vermont corporation. The combination of these three factors creates an incredibly strong defense mechanism against possible takeovers. In essence, unless the board members are entirely supportive of the decision, a takeover becomes nearly impossible. The existence of defense mechanisms has both positive and negative consequences for corporations.

On the positive side, they allow a young company to grow without having to worry about losing its independence by means of a merger. They also provide management with the flexibility to implement measures that may be in the best interest of the firm in the long run, but may negatively impact the stock price on the short term. On the negative side, these mechanisms protect the management team even if they are not working in the best interests of the shareholders. Corporate Valuation When valuing a company, there are few different ways to determine what a business is worth.

One of the most common and accepted measures is a technique called "Benchmarking. " Much like the word states, benchmarking is a way for any business to compare itself to other, similar enterprises in the same industry by using financial ratios as yard sticks for goals and success. How well a company uses its resources and assets can be measured in this manner, as well as the efficiency of its inventory and disposal of its equity. Here is how Ben & Jerry's stacked up against some of its main competitors towards the end of the 1990's using some common ratios.