Case Study Lakeland Mining Corporation

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CaseStudy: Lakeland Mining Corporation

Corporategovernance focuses on processes, mechanisms, and relations throughwhich corporations are directed and controlled by a few individualswho are given the responsibility of overseeing their operations. Thestructure of corporate governance gives a clear description ofresponsibilities as well as rights of different participants(including the directors and the chairpersons) in the process ofcorporate governance. This paper will address two key issues(including the lack of a recruitment policy and appropriate CEO’scompensation plan) affecting the governance of the Lakeland MiningCorporation. The paper will also offer recommendations that canaddress the two corporate governance issues. The Lakeland MiningCorporation is a public corporation that was previously held andmanaged by the Bofred Investment before selling its stock to thepublic. The company headquarter is located in Toronto, Canada with atotal asset value of about $ 600. The company has been facing seriousconflicts between its chairperson, Philip Scott, and the CEO, PeterSevko. It is evident that the conflicts between the two heads of thecompany are caused by the lack of independence among the members ofthe board of directors and lack of appropriate CEO’s compensationplan.

Keyissues

Lackof independence

Independenceof the members of the board of directors is an important factor thatdetermined whether the board members will act and make decisions thatare in the best interest of the stakeholders. Although there are nofamily relations among the directors of the Lakeland MiningCorporation, the case shows that there are some factors reducing thecapacity of board members to make independent judgments on issuesaffecting the company. This is one of the key factors heightening theconflict between the CEO and the chairman of the company. This isbecause the two heads of the firm are has a number of the boardmembers that they influence and make them to take sides.

Theprimary cause of this problem is the lack of an effective process forthe selection of directors. This increases the risk of selection ofdirectors on the grounds of friendship instead of their competenceand capacity to make rational decisions for the benefit of theshareholders. For example, the chairman, Philip Scott, suspects thatthe CEO (Peter Sevko) insists that he must be a member of theselection committee in order to ensure that only the directors whowill support his ideas in the board are recruited. The inclusion ofdirectors on the basis of their friendship with the senior managementis a threat to the independence of the board members and a betrayalof the shareholders. Similarly, the CEO is unhappy with the way thechairman recruited Firestone into the board. This increases theprobability of either the CEO or the chairman pursuing their personalinterests by manipulating the decision making process, which is anunethical practices in corporate governance.

Compensationof the director

TheCEO, Mr. Sevko, seems to be unsatisfied with the current compensationas well as the recognition he is receiving from the present board ofdirectors. Scott (the chairman) states that the board rewarded Sevkowith a cash bonus of $ 60,000 after his first year of service.However, this bonus was lifted and replaced with a 15 % salaryincrement. In addition, the board has rewarded Sevko with a stockoption worth $ 2.1 million. Scott acknowledges the fact that thestock option cannot be equated with a specific cash reward that wouldhave made Sevko feel appreciated for his outstanding performance inthe company. This set of decisions by the board regarding the CEO’srecognition and remuneration coincided with his drastic change ofattitude coupled, which in turn increased the conflict between theCEO and the chairman. This suggests that the level of CEO’srecognition and compensation was not up to his satisfaction. However,Sevko attributed his under-recognition a low compensation to thepresence of Scott as the chairman of the Lakeland Mining Corporation.The ultimate effect of the change in CEO’s attitude and thesubsequent disagreements with the chairman is a reduction in theefficiency of the entire board of directors, which is likely tojeopardize the performance of the organization as a whole.

Recommendations

Thiscase study offers four major recommendations that can help inresolving the two issues affecting the Lakeland Mining Corporation.First, the board of directors should set the CEO’s compensation ina way that demonstrates the recognition of his contribution to theremarkable performance of the corporation since he joined theorganization. The level of compensation determined by the boardshould reflect the commitment made by the CEO and theresponsibilities given to him. In the case Lakeland’s CEO, theboard’s decision to increase his salary was appropriate, while thewithdrawing the bonus unnecessary. This means that the board shouldnot deny the CEO the benefits he is already getting, but should focuson introducing more benefits as a way of motivating him and ensuringthat he works for the best interest of the shareholders. However, theissue of compensation cannot justify his drastic change of attitudes,implying that he should address his concerns in a professionalmanner. The board should realize that one of its primary roles is toset the compensation of the CEO and other executive officers in a waythat promotes appropriate behavior, minimize the shareholder risk,and reduce the possibility of the CEO engaging in activities thatseem to entrench himself. This should be accomplished by giving theCEO a market competitive salary and reviewing other benefits(including the bonus and stock option) every year depending on hisperformance.

Secondly,the board of directors should set up the selection process and anindependent selection committee that will oversee the recruitment ofnew directors. The active participation of the CEO in the process ofselecting new directors reduces their capacity to make rationaldecisions and to act independently, but rather serves the interestsof the CEO. The selection committee should be made up of outsidedirectors in order to ensure that it recruits candidates on the basisof their experience, competencies, and skills. The recruitment ofindependent directors will protect the image of the firm by ensuringthat the board character is strong. For example, a board that iscomposed of directors who were selected on the basis of theircompetence is likely to be active as opposed to passive, and thus ithas the capacity to make rational and independent decisions. This isbecause the independent directors derive their authority to act andmade decisions from the shareholders and not from the management ofthe organization. An independent selection committee and appropriateselection procedures will reduce chances for Sevko to manipulate thedecisions of the directors and persuading them to support him in aneffort to settle his personal matters, such as his conflict with thechairman.

Third,the separation of roles played by different individuals andcommittees within the organization is necessary. The currentsituation indicates that the CEO of Lakeland Mining Corporationretains a lot of control over the board of directors. For example, heis able to influence decisions regarding the selection of newdirectors who should join the board. This is inappropriate withrespect to the best practices in the corporate governance. The CEOshould act as the senior manager whose main responsibility is topursue the goals that have been approved by the board of directors,instead of influencing the formation of those goals. An effectiveseparation of roles played by the chairman, the CEO, and the board ofdirectors should be accomplished through a corporate governancepolicy that will assign different responsibilities to the threeoffices. This will reduce the conflict between the CEO and thechairman as well as the possibility of the CEO interfering with thefunctions of the board of directors.

Conclusion

Corporategovernance is an important field that set out the processes andmechanism used for the management and control organizations. Althoughthe performance of the Lakeland Mining Corporation has improved withtime, it is evident that the organization has not embraced the bestpractices in terms of corporate governance. This is the major causeof the key governance challenges (such as lack of independence amongthe members of the board and inappropriate compensation of the CEO),which have affected the efficiency of the board. These issues can beaddressed by setting up effective selection procedures and anindependent selection committee, compensating the CEO and otherexecutives in a way that is commensurate with their contribution andresponsibilities in the organizations, and separating theresponsibilities of the CEO, chairman, and the board.