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Recent Trends in Corporate Governance.doc

4 Pages
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Department
Political Science
Course Code
Political Science 2211E
Professor
Adam Harmes

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Feb 6 - Recent Trends in Corporate Governance Today’s Topics 1) The Impact of Institutional Investors on Corporate Governance 2) The 1980s Takeover Wave 3) The 1990s Shareholder Activism Wave Corporate Governance - How corporations are governed - Nature of relationship between owners and managers - Technical issues such as board organization, management pay, company charter, etc The Berle-Means Model - Larger number of small, individual shareholders - CEO/management runs company - Board oversees management - Shareholders vote on key decision/board - 1) Individual Shareholders - 2) Board of Directors - 3) CEO and Mangement - Reality was that modern corporation was characterized by “managerial autonomy” - Shareholders had little influence over management for 3 reasons: o Unconnected shareholders don’t organize votes o Own shares in many companies- therefore “exit” rather than “voice” o Compliant Boards rubber-stamp CEO The Rise of Institutional Investors - Mutual funds and pension funds as key financial actors - Invest heavily in stocks - Replace individual shareholders - Change nature of corporate governance The Decline of Managerial Autonomy - Centralization of share ownership - Firms now owned by a smaller number of large investors - Fund managers pay attention and vote - Lead to decline in managerial - 1) Individual Investors - 2) Fund Managers - 3) Board of Directors - 4) CEO and Management Short-Term Pressures on CEOs - Fund managers under pressure to boost fund in short-term - Quarterly evaluations - Short-term contracts - Fund managers pressure CEOs to quickly boost stock price - “Shareholder value” - CEOs had to listen to large shareholders Takeover Wave of the 1980s - Hostile Takeover: o ‘Corporate raider’ attempts to accumulate a controlling block of a firm’s shares against the wishes of the firm’s management o Raider offers to pay shareholders a ‘premium’ for their shares  I.e. higher than market value o Management would promise profits over long-term o If the market values a share at $20, raider will offer premium price of $25 for say that allows an instant profit for shareholders because they want to take over control of company o Once raider acquired company, would often sell it off into parts o Realize an immediate profit Junk Bonds - Growing use of ‘junk bonds’ - High-risk bonds with low credit ratings - Many junk bonds together could be less risky - Allowed high risk ventures to raise money Junk Bonds and Takeovers - Allowed raiders to raise money for hostile takeovers - Done through a ‘leveraged buyout or LBO - Takeover funded by debt Institutional Investors and Takeovers - 1) Undervalued stocks making takeovers more profitable o Short-termism meant market price was less than break-up
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