Stockholder Rights and Stockholder Rights and Corporate GovernanceCorporate Governance

Stockholders Corporate Governance Executive Compensation: A Special Issue Shareholder Activism Government Protection of Stockholder Interests Stockholders and the Corporation

ChapterChapter

15

StockholdersStockholders

Stockholders (shareholders)

The legal owners of business corporations.

Types of stockholders: Individual stockholders are people who directly own shares of

stock issued by companies. Institutions, such as pension funds, insurance companies, and

university endowments.

Individual household versus institutional Individual household versus institutional ownership in the United States, 1965-2002ownership in the United States, 1965-2002

Figure 15.1

0

20

40

60

80

100

1965 1975 1985 1995 2000 2002

Households Institutions

Year

Per

cen

t of

all

stoc

ks

own

ed

Major legal rights of stockholdersMajor legal rights of stockholders

To receive dividends, if declared To vote on:

Members of board of directors

Major mergers and acquisitions

Charter and bylaw changes

Proposals by stockholders To receive annual reports on the company’s financial condition To bring shareholder suits against the company and officers To sell their own shares of stock to others

Figure 15.2

Corporate governanceCorporate governance

Corporate governance

Refers to the process by which a company is controlled, or governed. These systems determine overall strategic direction and balance sometimes divergent interest.

Board of directors

An elected group of individuals who have a legal duty to establish corporate objectives, develop broad policies, and select top-level personnel to carry out these objectives and policies. Most corporate boards work through committees. Board members are elected by shareholders.

The Business Roundtable’s statement on The Business Roundtable’s statement on good corporate governance good corporate governance

1. To select and oversee competent and ethical management to run the company on a day-to-day basis.

2. It is the responsibility of management to operate the company in company in a competent and ethical manner.

3. To produce financial statements that fairly represent the financial condition of the company under the oversight of the board and its audit committee.

4. To engage an independent accounting firm to audit the financial statements prepared by management.

5. It is the responsibility of the independent accounting firm to ensure that it is in fact independent, without conflicts of interest.

6. The company has a responsibility to deal with its employees in a fair and equitable manner.

Exhibit 15.A

Key features of effective boardsKey features of effective boards

Select independent directors to fill most positions. Hold open elections for members of the board. Appoint an independent lead director and hold regular meetings

without the CEO present. Evaluate the board’s own performance on a regular basis.

Executive compensationExecutive compensation

Stock options

Represent the right to buy a company’s stock at a set price for a certain period.

In 2002, the chief executives of the largest corporations in the United States earned, on average, $7.4 million, including salaries, bonuses, and stock options.

Top managers in other countries earned much less. In the U.S., CEOs in 2002 made about 200 times what the average worker did. Executive pay is set by compensation committees of boards of directors.

Executive compensation: Is it justified?Executive compensation: Is it justified?

Proponents of high executive pay say: Well-paid managers are simply being rewarded for outstanding performance. High salaries provide an incentive for innovation and risk-taking. Not many individuals are capable of running today’s large, complex

organizations.

Critics of high executive pay say: Inflated executive pay hurts the ability of U.S. firms to compete with foreign

rivals. As many extravagantly compensated executives preside over failure as they do

over success. Multi-million-dollar salaries cause resentment and sap the commitment of

hardworking lower and midlevel employees.

Social investmentSocial investment

Social investment

Refers to the use-of-stock ownership as a strategy for promoting social objectives.

Social investment can be done in two ways: Social screening of stock

Some shareholders wish to choose stocks based on social or environmental criteria.

Social responsibility shareholder resolutions A resolution on an issue of corporate social responsibility placed

before stockholders for a vote at the company’s annual meeting.

Securities and Exchange CommissionSecurities and Exchange Commission

Established in 1934 in the wake of the Great Depression. Its mission is to protect stockholders’ rights by making sure that

the stock markets are run fairly and that investment information if fully disclosed.

Generates revenue to pay for its own operations.

Sarbanes-Oxley ActSarbanes-Oxley Act

Established an independent board to oversee the audits of public companies. Prohibited accounting firms from providing other services at the same time as

an audit, if this would cause a conflict of interest. Required CEOs and CFOs to certify the truth of their companies’ financial

statements, in writing. Required executives to pay back any bonuses or profits from stock sales they

received after a financial report was issued that later had to be restated. Required full disclosure to shareholders of complex financial transactions. Required that at least one member of the audit committee be a financial expert.

Exhibit 15.C

Insider tradingInsider trading

Insider trading

Occurs when a person gains access to confidential information about a company’s financial condition and then uses that information, before it becomes public knowledge, to buy or sell the company’s stock.

According to the SEC Act of 1934, it is illegal to: Misappropriate nonpublic information and use it to trade a stock. Trade a stock based on a tip from someone who had an obligation

to keep quiet. Pass information to others with an expectation of direct or

indirect gain.