Corporate%20governance

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Chapter 11

• Corporate governance

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Businesses in the United States
Number of businesses in the United States?
22.7 mill. in 2003 (SBA)
5.66 mill. in 2001 (SBA)
Number of employers in the United States?
4.5 in 1995 (usinfo.state.gov)
Number of corporations in the United States?
1/5 of U.S. corporations account for 95 percent
of the sales of all corporations (textbook)
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Corporate governance

• Relation between owners and managers
• Owners
• Owners have the rights of ownership which means
  that they have a legal claim to the firms
  residual assets (those that remain after paying
  off creditors)
• Owners have limited liability for the actions of
  corporations.
• Managers have a FIDUCIARY responsibility towards
  owners
• Managers face moral hazard They are tempted to
  serve their own interests over their FIDUCIARY
  responsibility towards shareholders.
• Legal problems Salaries are too large, too many
  perks
• Illegal problems insider trading and
  misrepresentation of company information (after
  Sarbanes Oxley Act)
• In the 1990s there was a major move towards
  paying managers with shares so as to place them
  closer to the needs of shareholders.
• This change misfired Managers became very
  concerned with short term gains.

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Corporate governance

• Two types of corporations
• Privately held
• Owners maintain a higher level of control.
• There is private exchange of shares.
• Conditions are usually specified in the corporate
  charter
• Publicly held The focus of our discussion.
• Exchange is public stock exchanges NYSE, NASDAQ,
  regional.
• They have to follow strict information guidelines
  by the SEC.

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Corporate Governance mechanisms and strategies

• Mechanisms
• The stock market
• Annual meetings
• Board of directors
• Strategies (Hirschman)
• Exit
• Voice

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The stock market Exit mechanism

• Conditions for the stock market to work properly
• It is wide enough There are enough number of
  companies so an unhappy investor can sell and buy
  shares in a different company.
• It is deep enough There is enough number of
  shares of one particular company so there is
  enough number of people willing to buy or sell
  one the investor wants to sell or buy.
• Good information from company reporting,
  auditors, stock analysts, and credit rating
  agencies.

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Changes in the market for corporate control
mechanism

• Growth of institutional investors is changing the
  system from exit to voice.
• Growth of pension and mutual funds
• Because of their size the market becomes more
  narrow and less deep. Hence they are forced to
  engage in relationship investing becoming
  involve in management decisions.
• Growth of social investment (on the trillions of
  ).

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Annual meeting Voice mechanism

• Annual gathering of shareholders to discuss the
  firms performance and strategy
• They can be easily co-opted by management
• Proxies have been used by managers and
  shareholders to impose their positions.
• Proxy the vote that an absentee shareholder has
  transferred to someone. Most commonly a manager.
• After the 1992 reforms it became easier for other
  shareholders to get proxies. This reform
  facilitated communication among shareholders.

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Shareholder Activism

• Shareholders use of annual meetings to affect
  management through shareholder resolutions
• serve a social cause
• limit executive compensation and even force top
  management out.

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Board of Directors Voice mechanism

• Shareholders control corporations by picking the
  BOD.
• Voting is proportionate to the of shares owned.
  
• Whoever controls over 50 of the shares gets to
  name the board of directors.
• Profile
• Size
• Insiders and outsiders
• Close knit networks.
• Functions
• Hiring and firing on top managers
• Major strategic decisions
• Fiduciary responsibility
• Advisory responsibility

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Shaping up the board

• Suits against negligent directors.
• Companies provide liability insurance to their
  boards but the threat of legal action should keep
  members on their toes.