Stockholder Rights and Corporate Governance

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Stockholder Rights and Corporate Governance
Chapter
15

• Stockholders
• Corporate Governance
• Executive Compensation A Special Issue
• Shareholder Activism
• Government Protection of Stockholder Interests
• Stockholders and the Corporation

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Stockholders

• Stockholders (shareholders)
• The legal owners of business corporations.
• Types of stockholders
• Individual stockholders are people who directly
  own shares of stock issued by companies.
• Institutions, such as pension funds, insurance
  companies, and university endowments.

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Individual household versus institutional
ownership in the United States, 1965-2002
Figure 15.1
Percent of all stocks owned
Year
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Major legal rights of stockholders
Figure 15.2

• To receive dividends, if declared
• To vote on
• Members of board of directors
• Major mergers and acquisitions
• Charter and bylaw changes
• Proposals by stockholders
• To receive annual reports on the companys
  financial condition
• To bring shareholder suits against the company
  and officers
• To sell their own shares of stock to others

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Corporate governance

• Corporate governance
• Refers to the process by which a company is
  controlled, or governed. These systems determine
  overall strategic direction and balance sometimes
  divergent interest.
• Board of directors
• An elected group of individuals who have a legal
  duty to establish corporate objectives, develop
  broad policies, and select top-level personnel to
  carry out these objectives and policies.
• Most corporate boards work through committees.
• Board members are elected by shareholders.

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The Business Roundtables statement on good
corporate governance
Exhibit 15.A

• To select and oversee competent and ethical
  management to run the company on a day-to-day
  basis.
• It is the responsibility of management to operate
  the company in company in a competent and ethical
  manner.
• To produce financial statements that fairly
  represent the financial condition of the company
  under the oversight of the board and its audit
  committee.
• To engage an independent accounting firm to audit
  the financial statements prepared by management.
• It is the responsibility of the independent
  accounting firm to ensure that it is in fact
  independent, without conflicts of interest.
• The company has a responsibility to deal with its
  employees in a fair and equitable manner.

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Key features of effective boards

• Select independent directors to fill most
  positions.
• Hold open elections for members of the board.
• Appoint an independent lead director and hold
  regular meetings without the CEO present.
• Evaluate the boards own performance on a regular
  basis.

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Executive compensation

• Stock options
• Represent the right to buy a companys stock at
  a set price for a certain period.
• In 2002, the chief executives of the largest
  corporations in the United States earned, on
  average, 7.4 million, including salaries,
  bonuses, and stock options.
• Top managers in other countries earned much less.
  
• In the U.S., CEOs in 2002 made about 200 times
  what the average worker did.
• Executive pay is set by compensation committees
  of boards of directors.

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Executive compensation Is it justified?

• Proponents of high executive pay say
• Well-paid managers are simply being rewarded for
  outstanding performance.
• High salaries provide an incentive for innovation
  and risk-taking.
• Not many individuals are capable of running
  todays large, complex organizations.
• Critics of high executive pay say
• Inflated executive pay hurts the ability of U.S.
  firms to compete with foreign rivals.
• As many extravagantly compensated executives
  preside over failure as they do over success.
• Multi-million-dollar salaries cause resentment
  and sap the commitment of hardworking lower and
  midlevel employees.

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Social investment

• Social investment
• Refers to the use-of-stock ownership as a
  strategy for promoting social objectives.
• Social investment can be done in two ways
• Social screening of stock
• Some shareholders wish to choose stocks based on
  social or environmental criteria.
• Social responsibility shareholder resolutions
• A resolution on an issue of corporate social
  responsibility placed before stockholders for a
  vote at the companys annual meeting.

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Securities and Exchange Commission

• Established in 1934 in the wake of the Great
  Depression.
• Its mission is to protect stockholders rights by
  making sure that the stock markets are run fairly
  and that investment information if fully
  disclosed.
• Generates revenue to pay for its own operations.

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Sarbanes-Oxley Act
Exhibit 15.C

• Established an independent board to oversee the
  audits of public companies.
• Prohibited accounting firms from providing other
  services at the same time as an audit, if this
  would cause a conflict of interest.
• Required CEOs and CFOs to certify the truth of
  their companies financial statements, in
  writing.
• Required executives to pay back any bonuses or
  profits from stock sales they received after a
  financial report was issued that later had to be
  restated.
• Required full disclosure to shareholders of
  complex financial transactions.
• Required that at least one member of the audit
  committee be a financial expert.

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Insider trading

• Insider trading
• Occurs when a person gains access to
  confidential information about a companys
  financial condition and then uses that
  information, before it becomes public knowledge,
  to buy or sell the companys stock.
• According to the SEC Act of 1934, it is illegal
  to
• Misappropriate nonpublic information and use it
  to trade a stock.
• Trade a stock based on a tip from someone who had
  an obligation to keep quiet.
• Pass information to others with an expectation of
  direct or indirect gain.