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MIS 4500 (31)

Chapter 33.docx

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Management Info. Systems
MIS 4500
Pourang Irani

Chapter 33: Corporate Governance Separation of Ownership and Control:  corporate governance: “ways in which suppliers of finance to corps assure themselves of getting return on investment” o consider stakeholders  Moral Hazard: o insufficient effort: allocation of work time to various tasks o extravagant investments o entrenchment strategies: invest in lines of activities that make managers indispensible; manipulate performance measures; excessive or insufficient risk taking; resist hostile takeovers; lobby for limits on shareholder control and set up complex cross-holding structures o self-dealing: perks; pick a friend as successor; select costly supplier based on friendship; finance their political picks; below-market-price asset sales w/ related party; insider trading  Dysfunctional corporate governance: o lack of transparency: levels of comp; stock options; perks; o comp level: “runaway compensation” o tenuous link b/w performance and comp: comp stable or increased despite poor performance; see upside of market rises, but not downside of market falls; “getting out on time”: say selling options before problems surface; golden parachutes o accounting manipulations: off-balance-sheet deals; hide poor performance; prevent violation of bank covenants; continued financing Managerial Incentives:  Sophisticated Mix of Incentives: bonuses and stock options; concern about future; threat of being fired; financial distress; monitoring by large investors (also intrinsic motivation; fairness, horizontal equity, morale, trust, corp culture, social responsibility and altruism, feelings of self-esteem, interest in job; though economists concerned about residual incentives to act in firm’s interest over and beyond absence of rewards and monitoring) o monetary incentives:  comp package: salary, bonus and stock-based incentives  bonuses and shareholdings: substitutes or complements  comp base  straight shares or stock options:  exec comp controversy o implicit incentives: keep job; avoid proxy fight; avoid bankruptcy or reorg; o monitoring: by Boards, auditors, large shareholders, large creditors, investment banks, rating agencies  active monitoring: interfering to increase investors’ claims; exercise of control rights  speculative monitoring: adjust position in firm: invest further, hold, sell (the analyst) o product market competition: beneficial effects; may also create gambling behavior Board of Directors:  watchdogs or lapdogs: o lack of independence: may be hand picked by CEO; may have business relationships; bribes: lucrative consultancy etc; mutual interdependence of CEOs o insufficient attention: unprepared and rely on management info o insufficient incentives: mostly just fees and perks; huge barriers to liability o avoidance of conflict: ongoing relationship  Reforming the Board: o teammates or referees o knowledge versus independence: those closest to firm have knowledge but susceptible to conflicts of interest o Link from performance to board comp:  Cadbury report calls for: 1. nomination of recognized senior outside member where chairman of the Board is CEO; 2. procedure for directors to take independent professional advice at company’s expense; 3. majority of independent directors; 4. comp committee dominated by nonexecutives directors and audit committee conferred to nonexecutive directors most whom should be independent; also recommends against performance- based comp Investor Activism:  Active monitoring requires control: o formal control: majority of voting shares etc. o real control: sufficient ownership to build coalition  proxy fight  Pattern of ownership: o pension funds play minor role in France, Germany, Italy and Japan; ownership concentration in such countries is substantial; also cross-shareholdings o ownership concentration: high in Italy, France, Germany, Sweden, Europe generally, East Asia  extremely dispersed in U.S. dispersed in Anglo-Saxon countries o stability of holdings v. active management: Japan and German stable; Anglo- Saxon reshuffle frequently  Limits of Active Monitoring: o who monitors the monitor: monitors not always acting in interest of their beneficiaries o congruence w/ other investors:  undermonitoring: substantial free-riding by small institutional shareholders  collusion w/ management: quid pro qu
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