Managerial Economics: Today’s Agenda. Chapters 10 and 18 (p. 503-513) Incentive Conflicts and Contracts eBay Case, P. 275 Schmidt Brewing Company Sarbanes-Oxley Review Assignment 3. Managing with Economics. “traditional managerial economics”
Chapters 10 and 18 (p. 503-513)
(attributed to Steve Cheung)
A refined British lady is taking a boat ride in China. A mean-looking man is yelling at the rowers and whips them when they fail to work hard. The lady comments to her guide that the British would not allow this cruel treatment of workers. Indeed, the owner of the boat would be put in jail for violating labor laws. The guide is amused by her statement and indicates that the people rowing the boat are the owners. The mean-looking man is an employee.
Explain what is going on!
= monitoring/bonding cost + any residual cost due to agency problem
CEO utility function, C is compensation, P is perquisites: U=f(C,P)
Owners have precise knowledge of profit potential: p
Realized profits are: R=p-P
Therefore offer CEO compensation contract:
Incentive problems generate costs that reduce value. It is in the interests of all parties to a contract to develop efficient solutions to agency problems. More value is created (gains to trade), which can be shared among the contracting parties.
How does this apply to corporate governance?
Schmidt Brewing Company is family-owned and -operated. The family wants to raise some capital by selling 30 percent of the common stock to outside shareholders. The company has been profitable and the family indicates that it expects to pay high dividends to shareholders. The family will maintain 70 percent ownership of the common stock and continue to manage the firm. The rights of shareholders are specified in the company's corporate charter. The charter specifies such items as voting rights (procedures and items subject to a vote), meeting requirements, board size, rights to cash flows, and so on. Once adopted, a charter can only be changed by a vote of the shareholders.
What types of provisions in the corporate charter of Schmidt Brewing might motivate minority shareholders to pay higher prices for the stock? Explain.
Giving Until it Hurts, WSJ
Recycling Corporate Responsibility, WSJ