Corporate Governance: Conflicts of Interest and Alternative Systems, Slides of Fundamentals of E-Commerce

Download Corporate Governance: Conflicts of Interest and Alternative Systems and more Slides Fundamentals of E-Commerce in PDF only on Docsity! 46 So  this  is  what  can  go  wrong...   46 STOCKHOLDERS Managers put their interests above stockholders Have little control over managers BONDHOLDERS Lend Money Bondholders can get ripped off FINANCIAL MARKETS SOCIETY Managers Delay bad news or provide misleading information Markets make mistakes and can over react Significant Social Costs Some costs cannot be traced to firm Docsity.com 47 TradiKonal  corporate  financial  theory  breaks   down  when  ...   47 ¨  The  interests/objecKves  of  the  decision  makers  in   the  firm  conflict  with  the  interests  of  stockholders.   ¨  Bondholders  (Lenders)  are  not  protected  against   expropriaKon  by  stockholders.   ¨  Financial  markets  do  not  operate  efficiently,  and   stock  prices  do  not  reflect  the  underlying  value  of   the  firm.   ¨  Significant  social  costs  can  be  created  as  a  by-­‐ product  of  stock  price  maximizaKon.   Docsity.com 50 Choose  a  Different  ObjecKve  FuncKon   50 ¨  Firms  can  always  focus  on  a  different  objecKve  funcKon.   Examples  would  include   ¤  maximizing  earnings   ¤  maximizing  revenues   ¤  maximizing  firm  size   ¤  maximizing  market  share   ¤  maximizing  EVA   ¨  The  key  thing  to  remember  is  that  these  are   intermediate  objecKve  funcKons.     ¤  To  the  degree  that  they  are  correlated  with  the  long  term  health   and  value  of  the  company,  they  work  well.   ¤  To  the  degree  that  they  do  not,  the  firm  can  end  up  with  a   disaster   Docsity.com 51 Maximize  Stock  Price,  subject  to  ..   51 ¨  The  strength  of  the  stock  price  maximizaKon  objecKve   funcKon  is  its  internal  self  correcKon  mechanism.  Excesses  on   any  of  the  linkages  lead,  if  unregulated,  to  counter  acKons   which  reduce  or  eliminate  these  excesses   ¨  In  the  context  of  our  discussion,   ¤  managers  taking  advantage  of  stockholders  has  led  to  a  much  more   acKve  market  for  corporate  control.   ¤  stockholders  taking  advantage  of  bondholders  has  led  to  bondholders   protecKng  themselves  at  the  Kme  of  the  issue.   ¤  firms  revealing  incorrect  or  delayed  informaKon  to  markets  has  led  to   markets  becoming  more  “skepKcal”  and  “puniKve”     ¤  firms  creaKng  social  costs  has  led  to  more  regulaKons,  as  well  as   investor  and  customer  backlashes.   Docsity.com 52 The  Stockholder  Backlash     52 ¨  AcKvist  InsKtuKonal  investors  such  as  Calpers  and  the  Lens   Funds  have  become  much  more  acKve  in  monitoring   companies  that  they  invest  in  and  demanding  changes  in  the   way  in  which  business  is  done.  They  have  been  joined  by   private  equity  funds  like  KKR  and  Blackstone.   ¨  Individuals  like  Carl  Icahn  specialize  in  taking  large  posiKons   in  companies  which  they  feel  need  to  change  their  ways   (Blockbuster,  Time  Warner  and  Motorola)  and  push  for   change   ¨  At  annual  meeKngs,  stockholders  have  taken  to  expressing   their  displeasure  with  incumbent  management  by  voKng   against  their  compensaKon  contracts  or  their  board  of   directors   Docsity.com 55 Eisner’s  concession:  Disney’s  Board  in  2003   55 Board Members Occupation Reveta Bowers Head of school for the Center for Early Education, John Bryson CEO and Chairman of Con Edison Roy Disney Head of Disney Animation Michael Eisner CEO of Disney Judith Estrin CEO of Packet Design (an internet company) Stanley Gold CEO of Shamrock Holdings Robert Iger Chief Operating Officer, Disney Monica Lozano Chief Operation Officer, La Opinion (Spanish newspaper) George Mitchell Chairman of law firm (Verner, Liipfert, et al.) Thomas S. Murphy Ex-CEO, Capital Cities ABC Leo O’Donovan Professor of Theology, Georgetown University Sidney Poitier Actor, Writer and Director Robert A.M. Stern Senior Partner of Robert A.M. Stern Architects of New York Andrea L. Van de Kamp Chairman of Sotheby's West Coast Raymond L. Watson Chairman of Irvine Company (a real estate corporation) Gary L. Wilson Chairman of the board, Northwest Airlines. Docsity.com 56 Changes  in  corporate  governance  at  Disney   56 ¨  Required  at  least  two  execuKve  sessions  of  the  board,  without  the  CEO  or   other  members  of  management  present,  each  year.     ¨  Created  the  posiKon  of  non-­‐management  presiding  director,  and   appointed  Senator  George  Mitchell  to  lead  those  execuKve  sessions  and   assist  in  seung  the  work  agenda  of  the  board.     ¨  Adopted  a  new  and  more  rigorous  definiKon  of  director  independence.     ¨  Required  that  a  substanKal  majority  of  the  board  be  comprised  of   directors  meeKng  the  new  independence  standards.     ¨  Provided  for  a  reducKon  in  commiCee  size  and  the  rotaKon  of  commiCee   and  chairmanship  assignments  among  independent  directors.     ¨  Added  new  provisions  for  management  succession  planning  and   evaluaKons  of  both  management  and  board  performance   ¨  Provided  for  enhanced  conKnuing  educaKon  and  training  for  board   members.     Docsity.com