1 / 25

Chapter 13 Corporate Governance in the Twenty-First Century

Chapter 13 Corporate Governance in the Twenty-First Century . OBJECTIVES . 1. Explain what is meant by corporate governance. 2. Describe how corporate governance relates to competitive advantage and understand its basic principles and practices . 3.

Samuel
Download Presentation

Chapter 13 Corporate Governance in the Twenty-First Century

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 13Corporate Governance in the Twenty-First Century

  2. OBJECTIVES 1 • Explain what is meant by corporate governance 2 • Describe how corporate governance relates to competitive advantage and understand its basic principles and practices 3 • Identify the roles of owners and different types of ownership profiles in corporate governance 4 • Describe how boards of directors are structured and the roles they play in corporate governance 5 • Explain and design executive incentives as a corporate governance device 6 • Describe how the market for corporate control is related to corporate governance 7 • Compare and contrast corporate governance practices around the world

  3. Results • Costs slashed • Stock doubled in first month • Market cap rises from $1.1billion to $5 billion • Earlysuccess • With R&D budgets cut, newproduct development hampered • Growth fails to meet targets • Company accused of “channel stuffing” • Signsof problems • Board fines Dunlap • He loses his stock options • Sunbeam stock is delisted • Failure SUNBEAM • Al Dunlap’s mgmt. philosophy • Shareholders are most important corporate constituents • Most corporations have bloated bureaucracies • Drastic layoffs are usually neededto save failing companies • Layoffs should be quick,one-time events • CEOs should be rewarded likestars when they perform welland fired when they do not • Board members should have significant personal investmentsin the company

  4. Corporate governance • Share holders • The system by which organizations, particularly business corporations, are directed and controlled by their owners • Board • Management • Corporation • Employees • Society • Environment CORPORATE GOVERNANCE • In a broader perspective, governance determines how all stakeholders influence the corporation:

  5. CORPORATE GOVERNANCE IMPACTS PERFORMANCE • The Italian stock exchange started a new exchange called STAR for small and mid-sized companies that followed strict governance prescriptions • Companies of the STAR exchange consistently out perform their counterparts on the regular exchange (e.g., during 2004 STAR firms achieved returns 24.5% greater than their counter parts)

  6. EARLY WARNING SIGNS OF PROBLEMS WITH KRISPY KREME Source: M. Maremont and R. Brooks, “Fresh Woes Batter Krispy Kreme; Doughnut Firm to Restate Results, Delay SEC Filing; Shares Take a 15% Tumble,” Wall Street Journal (Eastern edition), January 5,2005.p.A3

  7. Agents • Principals • Shareholders of a firm • Act on behalfof principalsin managingthe firm AGENTS AND PRINCIPALS • When interests are virtually identical, the agency problem is small: executives do what is in principals’ best interests • However interests often do not overlap. Then agents may act to detriment of principals and visa-versa (e.g., executives raise salaries and reduce returns)

  8. As many as possible • Split recommended • Not addressed • No • At least one-quarter • Split required by law • Not addressed • No • At least one-third • Split recommended • Not addressed • Yes • Majority • Split recommended • Periodic rotation of lead auditor • Yes • Substantial majority • Separation is one of three acceptable alternatives • Recommended3 • No EXAMPLES OF CODES OF GOVERNANCE • What is the recommendation on director independence? • Can the same executive be both CEO & chairperson? • Is disclosure required if the company does not comply with the recommendations? • Is auditor rotation required? • Country • Brazil CVM Code (2002) • Russia CG Code (2002) • Singapore CG Committee (2001) • United Kingdom Cadbury Code1 • United States Conference Board and CalPers (2003)2 • In 2003, a Combined Code made further additions to the code, but these basic principles remain • Just one of several codes in existence in the United States • The Sarbanes-Oxley Act requires that the lead audit partner be rotated every 5 years; changing audit firm after 10 years of continual relationship or if former audit partner is employed by the company

  9. SOME NEW COMPLIANCE RULES FROM SARBANES-OXLEY • Auditors must list the non-audit services they are unable to perform during an audit • A one-year waiting period for audit-firm employees who leave an accounting firm to become an executive for a former client • Transactions and relationships that are off the balance sheet but that may affect financial status must now be disclosed • Personal loans from a corporation to its executives are now largely prohibited • Research analysts for securities firms must now file conflict of interest disclosures. For instance, analysts must report whether they hold any securities in a company or have received corporate compensation • Brokers and dealers must disclose if the public company is a client • Altering, destroying, concealing, or falsifying records or documents with the intent to influence a federal investigation or bankruptcy case is subject to fines and up to 20 years of imprisonment

  10. OWNERSHIP STRUCTURE VARIES Source: Company annual reports

  11. ROLES AND ACTIONS OF BOARD OF DIRECTORS

  12. EFFECTS OF CEO FIRINGS Firing and outside ‘new’ blood Organized internal succession Source: M.wiersema, “Holes at the Top: Why CEO Firings Backfire,” Harvard Business Review 80;12 (2002), 70-77

  13. Incentivealignment can solvesuch problems • Conflicts of interest can arise • Agents • Principals • Example: • A company receives a buy-out offer • Shareholders (principals) would benefit because price assures a good return on investment • Management (agents) resists because they may lose their jobs • Boards can include “golden parachute” provisions in manager’s compensation packages INCENTIVE ALIGNMENT

  14. HOW WOULD YOU DO THAT? – DENDRITE INTERNATIONAL • Dendrite’s challenge: • Dendrite’s solution: • How can Dendrite better align managementincentives with shareholders? • 20 senior-most executives must own 15,000 to 100,000 shares of stock • Must be common sharesnot options • Must be achieved within 5 years • Executives may elect to receive incentive compensation in stock instead of cash

  15. EXECUTIVE STOCK OWNERSHIP IN 2004 • Largest 250 companies withstock ownership guidelines • Number ofcompanies • Percent ofcompanies • Percent increase from 2001 to 2004 • Executives • 142 • 57 • 58 • Directors • 123 • 49 • 127 Source: Adapted from Fredrick W. Cook & Co., Inc., “Stock Ownership Policies: Prevalence and design of Executive and Director Ownership Policies Among the Top 250 Companies,” www.fecook.com/surveys.html (accessed Nov 29, 2005), Sep 2004

  16. Oldest form of incentive pay. Board can evaluate executives’ performance along multiple dimensions and allocate a year-end cash award • Annual bonus plans • An employee receives the right to buy a set number of shares of company stock at a later date for a predetermined price • Stock options • More recent forms of incentive compensation. Long-term bonuses linked to performance over several years. May help executives avoid short-term myopia and focus on long-term • Other long-termincentives INCENTIVE COMPENSATION

  17. CEO PAY COMPARISON

  18. HIGHEST PAID CEOs Source: Company annual reports and ExecComp Service of Thomson Financial

  19. EXECUTIVE PAY TRENDS Source: U.S. Bureau of Labor Statistics

  20. Share holders • Elect • Example: • Example: • Corporate raiders such as T. Boone Pickens, CarI Icahn, Ted Turner and Michael Milken • Oracle engaged in 18-month battle to gain control of PeopleSoft • Board • Corporate control: • Hires/fires • The right to choose the members of the board of directorsof a company andto control all major decisions madeby a company • Top management • Directs • Corporation THE MARKET FOR CORPORATE CONTROL

  21. POOR CORPORATE GOVERNANCE, A WORLD-WIDE PROBLEM • Recent examples of scandal-ridden non-U.S. multinationals • Netherlands Ahold Group (grocery stores) • Italy’s Parmalat (dairy and food products) • France’s Vivendi (entertainment) • French-Belgian Firm ELF (petroleum)

  22. CORPORATE GOVERNANCE: U.S VS. JAPAN • U.S • Japan • Owner-managerrelationship • Adversarial • Co-operative • Manager andshareholderrelationship • Through a Keiretsu (group of interlockingcompanies) • Through onecompany • Ownershipconcentration • Control function • Monitoring function

  23. Germany • China • Two-tier board system • Only recently started a securities market • Management board manages the enterprise • Majority of listed companies started off as state-owned enterprises • Supervisory board appoints, supervises, and advises members of the management board • ½ shareholders • ½ labor reps • State ownership remains high across all industries CORPORATE GOVERNANCE IN GERMANY AND CHINA

  24. Chiquita • Dole • Del Monte • Sales 2004($ millions) • 2,613 • 4,773 • 2,171 • The Chiquita board set objectives as: • Delivery of quality products to consumers • Quality returns to shareholders • Transform Chiquita into a global player • Net income ($ millions) • 96 • 84 • 134 • CEO salary($ thousands) • 950 • 810 • What is appropriate? • CEO bonus($ thousands) • 1,368 • 870 • CEO total Compensation($ thousands) • 4,387 • 7,394 HOW WOULD YOU DO THAT? – CHIQUITA • How should Chiquita compensate its new CEO? Source: Company annual reports

  25. SUMMARY 1 • Explain what is meant by corporate governance 2 • Describe how corporate governance relates to competitive advantage and understand its basic principles and practices 3 • Identify the roles of owners and different types of ownership profiles in corporate governance 4 • Describe how boards of directors are structured and the roles they play in corporate governance 5 • Explain and design executive incentives as a corporate governance device 6 • Describe how the market for corporate control is related to corporate governance 7 • Compare and contrast corporate governance practices around the world

More Related