Upload
agnes-fox
View
216
Download
2
Embed Size (px)
Citation preview
ECON 308
Week 15
Corporate Governance Chapter 18
1
Learning Objectives
• Describe the nature of publicly-traded organizations
• Identify and assess issues related to separation of ownership and control
• Describe the top-level architecture of US corporations
• Assess the role of Sarbanes-Oxley in correcting architecture failures
• Appendix: Identify advantages and disadvantages of alternative organizational forms
2
Corporate structure
• Corporations have the legal standing of an individual
• Shareholders elect a board of directors with primary decision control rights
• Shareholder-owners have limited liability
• Corporations may establish governance procedures within legal boundaries
3
Corporate ownershippublicly-traded versus closely-held
• Stock in closely-held corporations is not freely traded
• Stock of publicly-traded corporations may be freely bought and sold
4
Corporate governance objectives
• Maximizing value
• Protecting assets
• Meeting legal requirements
5
Separation of ownership and control
• Incentive issues– Are executive interests aligned with those of
stockholders?
• Survival of corporations– Despite governance concerns, the corporate form
seems both productive and resilient
• Benefit of publicly-traded corporations– Ability to raise large amounts of capital
6
Top-level architectureUS corporations
• Decision rights divided among selected stakeholders– Shareholders– Governing board– Top management– External monitors
• Distinction between decision rights and decision control
7
Government impacts on decision rights
• State regulations affect firms incorporated within those states
• Federal laws and regulations further stipulate decision rights
• Courts have impact through interpretations of laws
8
Shareholders
• Ultimate owners
• Limited participation in management– Elect board– Board oversees management– Some ratification rights
9
Shareholder incentives
• Small shareholders (individuals) have incentive to free ride rather than be actively involved
• Institutional investors (e.g. pension funds) differ in incentives to challenge management
• Blockholders internalize more of the benefits of active involvement
10
Board of Directors
• Delegates legal authority to professional managers
• Primary function is top-level decision control
• Other responsibilities– Hire, monitor, fire CEO– Authorize strategic directions– Approve large capital outlays
11
Board composition and work
• Size can vary from 4 to 33+• Over half are outside directors• CEO usually sits on board
– Frequently chairs the board
• Much work done in committees– Audit– Compensation– Nominating
12
Board member incentives
• Some stock ownership aligns financial interests with other shareholders
• High-profile board members have reputational concerns
• Are members independent of top management?
13
Top management
• CEO’s decision authority flows from the board
• More decision rights are delegated as firm size and complexity increase
• Senior management retains important decision rights– Shape strategic direction– Establish overall architecture– Recruiting and retaining key personnel
14
Top management incentives
• Straight salary
• Performance-based compensation– Bonuses– Stock options– Stock ownership
15
External monitors
• Public accounting firms
• Stock market analysts
• Commercial banks
• Credit-rating agencies
• Regulatory authorities
16
International corporate governance
• Historical emphasis on broader set of stakeholders– Employees– Lenders– Affiliated companies– Broader public
• Gradual shift toward US architecture
17
Monitoring effect of market forces
• Management failure opens door to hostile takeover
• Management failure closes door to further professional opportunities
• Inefficiency places firm’s products at competitive disadvantage
18
Sarbanes-Oxley Act of 2002
• Establishes Public Companies Accounting Oversight Board
• Prohibits certain transactions between companies and managers
• Holds CEOs and CFOs accountable for financial statements
• Establishes civil and criminal penalties for violations
19