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1、Chapter 13Corporate Governance in the Twenty-First Century OBJECTIVES Explain what is meant by corporate governance1Describe how corporate governance relates to competitive advantage and understand its basic principles and practices 2Identify the roles of owners and different types of ownership prof
2、iles in corporate governance 3Describe how boards of directors are structured and the roles they play in corporate governance4Explain and design executive incentives as a corporate governance device5Describe how the market for corporate control is related to corporate governance6Compare and contrast
3、 corporate governance practices around the world71SUNBEAM Al Dunlaps mgmt.philosophy1.Shareholders are most important corporate constituents2.Most corporations have bloated bureaucracies 3.Drastic layoffs are usually neededto save failing companies4.Layoffs should be quick,one-time events 5.CEOs sho
4、uld be rewarded likestars when they perform welland fired when they do not6.Board members should have significant personal investmentsin the company Results Board fines DunlapHe looses his stock optionsSunbeam stock is delistedWith R&D budgets cut,newproduct development hamperedGrowth fails to meet
5、targetsCompany accused of“channel stuffing”Costs slashed Stock doubled in first monthMarket cap rises from$1.1billion to$5 billionEarlysuccessFailure Signsof problems2CORPORATE GOVERNANCE Corporate governanceThe system by which organizations,particularly business corporations,are directed and contro
6、lled by their owners In a broader perspective,governance determines how all stakeholders influence the corporation:BoardEmployeesShare holdersCorporationEnvironmentManagementSociety3CORPORATE GOVERNANCE IMPACTS PERFORMANCE The Italian stock exchange started a new exchange called STAR for small and m
7、id-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)4EARLY WARNING SIGNS OF PROBLEMS WITH KRISPY KREME So
8、urce: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.A35AGENTS AND PRINCIPALS When interests are virtually identical,the agency problem is small:executives do what
9、 is in principals best interestsHowever interests often do not overlap.Then agents may act to detriment of principals and visa-versa(e.g.,executives raise salaries and reduce returns)Agents PrincipalsShareholders of a firmAct on behalfof principalsin managingthe firm 6EXAMPLES OF CODES OF GOVERNANCE
10、Country United Kingdom Cadbury Code1 Singapore CG Committee(2001)Russia CG Code(2002)Brazil CVM Code(2002)United States Conference Board and CalPers(2003)2Can the same executive be both CEO&chairperson?Split recommendedSplit recommended Split required by lawSplit recommendedSeparation is one of thre
11、e acceptable alternatives Is auditor rotation required?Periodic rotation of lead auditorNot addressed Not addressed Not addressed Recommended3Is disclosure required if the company does not comply with the recommendations?Yes Yes No No No What is the recommendation on director independence?Majority A
12、t least one-third At least one-quarter As many as possibleSubstantial majority 1.In 2003,a Combined Code made further additions to the code,but these basic principles remain2.Just one of several codes in existence in the United States3.The Sarbanes-Oxley Act requires that the lead audit partner be r
13、otated every 5 years;changing audit firm after 10 years of continual relationship or if former audit partner is employed by the company7SOME NEW COMPLIANCE RULES FROM SARBANES-OXLEY Auditors must list the non-audit services they are unable to perform during an auditA one-year waiting period for audi
14、t-firm employees who leave an accounting firm to become an executive for a former clientTransactions 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 ana
15、lysts 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 compensationBrokers and dealers must disclose if the public company is a clientAltering,destroying,concealing,or falsif
16、ying 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 8OWNERSHIP STRUCTURE VARIES Source:Company annual reports 9ROLES AND ACTIONS OF BOARD OF DIRECTORS 10EFFECTS OF CEO FIRINGSSource:M.wiersema,“Holes
17、 at the Top:Why CEO Firings Backfire,”Harvard Business Review 80;12(2002),70-7711INCENTIVE ALIGNMENT Conflicts of interest can arise Agents PrincipalsIncentivealignment can solvesuch problemsA company receives a buy-out offerShareholders(principals)would benefit because price assures a good return o
18、n investmentManagement(agents)resists because they may lose their jobsExample:Boards can include“golden parachute”provisions in managers compensation packages12HOW WOULD YOU DO THAT?DENDRITE INTERNATIONAL Dendrites challenge:Dendrites solution:How can Dendrite better align managementincentives with
19、shareholders?q20 senior-most executives must own 15,000 to 100,000 shares of stockqMust be common sharesnot optionsqMust be achieved within 5 years qExecutives may elect to receive incentive compensation in stock instead of cash 13EXECUTIVE STOCK OWNERSHIP IN 2004Largest 250 companies withstock owne
20、rship guidelinesExecutivesDirectorsNumber ofcompanies142123Percent ofcompanies5749Percent increase from 2001 to 200458127Source:Adapted from Fredrick W.Cook&Co.,Inc.,“Stock Ownership Policies:Prevalence and design of Executive and Director Ownership Policies Among the Top 250 Companies,” Nov 29,2005
21、),Sep 200414INCENTIVE COMPENSATION Annual bonus plansOldest form of incentive pay.Board can evaluate executives performance along multiple dimensions and allocate a year-end cash awardStock optionsAn employee receives the right to buy a set number of shares of company stock at a later date for a pre
22、determined priceOther long-termincentives 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-term15CEO PAY COMPARISON 16HIGHEST PAID CEOsSource:Company annual reports and ExecComp Servic
23、e of Thomson Financial17EXECUTIVE PAY TRENDS Source:U.S.Bureau of Labor Statistics 18THE MARKET FOR CORPORATE CONTROL Share holders Board Top management Corporation DirectsHires/firesElect The right to choose the members of the board of directorsof a company andto control all major decisions madeby
24、a companyCorporate control:Example:Corporate raiders such as T.Boone Pickens,CarI Icahn,Ted Turner and Michael MilkenOracle engaged in 18-month battle to gain control of PeopleSoftExample:19POOR CORPORATE GOVERNANCE,A WORLD-WIDE PROBLEMRecent examples of scandal-ridden non-U.S.multinationalsNetherla
25、nds Ahold Group(grocery stores)Italys Parmalat(dairy and food products)Frances Vivendi(entertainment)French-Belgian Firm ELF(petroleum)20CORPORATE GOVERNANCE:U.S VS.JAPANOwner-managerrelationshipManager andshareholderrelationshipOwnershipconcentrationU.SAdversarialThrough onecompanyControl functionJ
26、apanCo-operativeThrough a Keiretsu(group of interlockingcompanies)Monitoring function21CORPORATE GOVERNANCE IN GERMANY AND CHINA Germany Two-tier board systemManagement board manages the enterpriseSupervisory board appoints,supervises,and advises members of the management board China Only recently s
27、tarted a securities marketMajority of listed companies started off as state-owned enterprisesState ownership remains high across all industries 22HOW WOULD YOU DO THAT?CHIQUITA The Chiquita board set objectives as:1.Delivery of quality products to consumers2.Quality returns to shareholders 3.Transfo
28、rm Chiquita into a global player How should Chiquita compensate its new CEO?Source:Company annual reports Chiquita DoleDel MonteSales 2004($millions)2,6134,7732,171Net income($millions)9684134CEO salary($thousands)950810CEO bonus($thousands)What is appropriate?1,368870CEO total Compensation($thousan
29、ds)4,3877,39423SUMMARY Explain what is meant by corporate governance1Describe how corporate governance relates to competitive advantage and understand its basic principles and practices 2Identify the roles of owners and different types of ownership profiles in corporate governance 3Describe how boar
30、ds of directors are structured and the roles they play in corporate governance4Explain and design executive incentives as a corporate governance device5Describe how the market for corporate control is related to corporate governance6Compare and contrast corporate governance practices around the world724