Inside Directors and CEO Duality
The "Modern Public Corporation" (MPC)
"...in the corporate system, the 'owner' of industrial wealth is left with a mere symbol of ownership while the power, the responsibility, and the substance...are being transferred to [management]."-Berleand Means (1932) cited in Epstein et al. (2007) "Generally if a corporation has more than four or five shareholders, most shareholders pay virtually no role in making decisions regarding the operation of the business."-Epstein et al. (2007)
EXECUTIVE COMPENSATION
-conflict between managers and BOD regarding executive compensation especially w inside directs Who sets the compensation of the senior management in a corporation? -BOD hires.fires senior management -SHs have advisory vote on executive compensation -BOD decides overall
why go public
-extra burdens- quarterly disclosures, audits advantages- you can raise a ton of money through underwriters
-facebook pledged $1 bil to help California housing crisis. cant they just pay their taxes? -pay little federal taxes by disguising income and now help housing that would earn them a profit
Government Efforts to Limit Executive Compensation
•(1990s) -CEO annual pay must be disclosed-Company's 10-Kand proxy statement -point of this law was to "name and shame" companies w very high CEO salaries -actual outcome- now every CEO knows how much others are paid and demand more or same as their peers
exec compensation in the USA cont
•Staples(Dess et al p. 16)-2014 (earnings fall by 43%) -company did nothit target-No "bonus", but BOD approves "retention cash award" of $300,000 cash on top of $10.8m annual salary -cash award to make sure those people stay w company •Home Depot (Epstein et al p. 262):-2000-2005 (CEO joins)-Stock price falls 12%, competitor Lowes up 175%-BOD gives multiple bonuses; CEO gets $250m+ in compensation during period
The State of Executive Compensation in the USA
(1993-2008) Executive pay multiplied by 4x -(Epstein et al 2010, p. 261) •(2008) Average compensation of S&P 500 CEO : $11.4 million/year -(Epstein et al 2010, p. 261) •(2017) Average compensation was $13.94 million/year(source) •(2013) The average CEO of S&P 500 company was paid 330xthe pay of the average worker (Desset al 2015) -Up from 40xin 1980 -Down from 514xin 2000 Is this pay fair? Can it be justified? •American Express CEO (1993-2000) -Earned $250 millionterm-9 -Net worth of company during tenure: $10b -> $65 b •So is this pay justified? -some would say yes bv of the shareholder value increase -some would say just CEO wasn't sole reason for stock value increase- could be bc of tech boom -some say if company didn't do well- he would take the ehat and get the most scrutiny -some say that is the market salary for CEO
alibaba article
-alibaba wanted to hold IPO in Hong Kong but had issues there and listed on NYSE Alibaba- Chinese company, known for B2B eco policy -can sell shares in US and Hong Kong if they abide by riles in those places I feeling to general public -US and hong kong have their own set of rules -US underwriters thought alibaba would get a good valuation bc of the high US demand for eco internet companies, especially ones operating in china -securities commission didn't let alibaba list in hong kong -alibaba has about 27 managers who can nominate a majority of shareholders -these managers own about 15% of shares but can pick more than half of the decision making body -why an they do this? dual class shares- some votes hold more voting power -jack ma and Thai are class A SHs (more voting power) and SoftBank and yahoo are class B why didn't Hong Kong regulators like this -these managers oversee day to day and can nominate BOD BOD has control over managers -> now now way to change managers unless they want to bc they nominate their own bosses and can replace them
alibabas choice of US IPO
-author respected hong Jong for sticking to its guns and not allowing dual class shares0 idea that you have to pay for more votes has Hong Kong changed?- yes -similar to US- first came NYSE where public dual class companies weren't allowed- then NASDAQ opened and they allowed dual class -more people started to trade w NASDAQ and less w NYSE, until NYSE changed the rule -HK realized it was missing out on international opportunities and changed its rule -overall, power shift from owners to managers in public corps
DUAL CLASS SHARES
-calls for facebook to appoint an independent chair person -this effort wasn't going anywhere bc zuck controls 60% of voting rights- no way to force him to step down
friedman 3
-if you want to take private properly from corps and allocate it for a public purpose it should be through the regular taxation methods of the state -so we should have laws that compel corps to pay a certain amount of their income -it should then be decided through a democratic process where the money goes instead of a single individual deciding •Managers are merely the employeesof the shareholders, who are represented by the Board of Directors •They have no right to use the resources that belong to someoneelsefor a goal that they don't want -They can act as individuals on their own account, but shouldn't spend the resources of others like this
lyfts IPO
-lyft is dual class org (unlike uber)- when they went public, founders maintained control over management of company
calPERS
-managers pensions of cali citizens -people pay into calPERS and they manage retirement funds for people -in 2016, calPERS is no longer invest in tobacco and restricted investment in firearm -if these are both lucrative business, is calPERS doing its members a disservice or should they focus on attaining a social goal -calPERS is not. a corp so it may have some divergent interests, not prioritize SHs like a corp would
mylan
-mylan was a monopoly so it charged whatever the market would pay -inelastic demand $100 (2009) -> $600+ (2016) -author said price increase is immoral- you are exploiting essential needs -Did Mylan's management have a dutyto raise the price of the medication- opposite would be subsidizing society at expense of SHs?
alibaba article cont
-over 250 companies in US have multiple class voting system why banned in Hong Kong? - if a manager should be replaced theres no way to do it -> SHs increasingly separated from control of org -fair?- many dual class orgs have come from the creative Inso of a few people (ex. mark zuck) - so should they be allowed all that control? -ex. yahoo and soft bank contribute more than half of the funding but dont get majority vote- is this fair? should they know what they're getting themselves into
SEC proposes
-proposal- people w intimate knowledge of securities should be able to invest in private companies -if you pledge money toward a kickstarter for a business, you wot be given a stake in that business but you might be offered a prototype Bc of SEC laws- prohibit broad sale of securities to non accredited investors -modern trend of loosening these rules
CEO Duality
-push from institutional investors for separation between roles -against- agency theory -agent- works on behalf of the principal -principles and agents exist in society- Starbucks employee is agent of Starbucks -agency theory ex. mechanic makes unnecessary repairs during inspection to make more money -disaligning incentives w customer
friedman cont
-resources belong to SHs earner than the managers -managers should administer the assets of the corp so the SHs will agree w how those resources are used -how to know what SHs want?- some corps (charitable corps) where SHs know they are buying a share of a company that tries not only to make them a profit but to benefit society at large -some hospitals have this in their articles of incorporation that first priority is to serve community -friedman has no problems w CSR if its an org where SHs know what they're getting themselves into -if a corp has in its articles of incorporation their main priority is to make profit, they all should agree on that -any attempt to divert a companys assets from corp to society at large would get in the way of getting profit and returning value to SHs
bankers begone
-sporify became one of the first corps since SEC and exchange act to go public without investment banks -they weren't raising money in this deal
Friedman Article: "The Social Responsibility of Business is to Increase its Profits"
-written in 1970- during Cold War, call to justify capitalism as best economic system -defines social responsibility- an activity that will cost corp money but will improve society -paper straw CSR?- Friedman wouldn't define this as CSR -friedman argues if you're a corp and you're donating money, you're taking money away from SHs and as managers, wrongfully using the money to advance their own interests -business have social responsibility?- he says no bc business is an idea -he says individual people have social responsibilities -sole proprietorships- if your business wants to donate net income, thats find bc its your funds to spend -what kind of business- his CSR views applies to corporations bc corps should have no CSR, only a responsibility to SHs
Corporate Governance Mechanisms: CEO Duality
Agency Theory: (in favor of) Separation: ▪Safeguards against corruption or incompetence ▪Removes conflict of interest, especially regarding CEO succession ▪Improves perceptions of legitimacy -if someone is leading a chart meeting and has day to day control, who will stop them from pursuing their own goals at the expense of the company (typically BOD would do this) ->in this case, SHs could vote to remove this person as chair and get support from other BOD members -becomes complicated w dual class shares (usually held by company insiders count for more than one vote) -no checks and balances in this case
Corporate Governance: Agency Theory
Agency theorydeals with the relationship between principals & agents Corporate Governance Mechanisms: CEO duality: Unity of Command: (in favor of) DualityAgency Theory: ▪Provides clear focus ▪Eliminates confusion and conflict ▪Enhances a firm's responsiveness ▪Enables quick decisions based on first-hand knowledge -when there is a BOD decision, that inside manager would know how to implement that policy and have more intimate knowledge about companies affairs and key personnel -this manager could hear issues from other managers and bring those issues for BOD to vote on
INSIDE DIRECTORS & CEO DUALITY
BOD and managers are agents of SHs -many owners aren't management -Can a person be on both the BOD and management- yes- common in certain companies Inside Directors- sits on BOD and management -US SEC forced Elon musk to step down from chairperson in sept 2019 -chairperson- leads meetings, decides topics to discuss, decide what is voted on -calhoun- Dual CEO Boeing, buffet- dual CEO birkshire Hathaway (CEO and chariman), zuckerburg- CEO and chariman (dual CEO), also has controlling majority in shares and votes
Corporate Social Responsibility
Business Ethics:Corporate Social Responsibility-> Going beyond legal requirements (Shareholders v Management)(Shareholders v Stakeholders) -CSR- trying to advance societal interest -conflict bc any donation made to society at large costs SHs money ex. Starbucks elininating plastic straws- really care about the cause or to cut costs and say it was for social responsibility reasons
alibaba
alibaba get additional capital? no- the $176 goes to some other person who purchased an Alibaba- when we bought the share we bought it from them -how does a company raise money by issuing shares- upon incorporation (if you start a corp and pool money together from owners and assign shares then)- suitable for smaller comapnies -how do existing companies raise money- initial public offering (usually 2 stages)- corp will work w an investment bank -bought deal- bank will purchase all of the shares of that corp -these banks in the mean time are lining up clients to purchase shares -underwriters- intermediaties (investment banks)
andersons
in order to purchase shares in nonpublic corps (havent filed paperwork w SEC)-> have to be an accredited investor why?- during roaring 20s, there was a lot of speculation about stock market and any company could get listed on NYSE- didn't have to worry about federal oversight or putting out public info about finances, directors, etc. could easily sell shares by telling people about their companys subjective success -now, SE said you have to disclose how well your business is doing assets and liability, etc. if you want to sell to general public -the fact that managers had way more info than SHs contributed to stock market crash bc people bought into companies w bad business models and eventually crashed -these SEC laws protects investors -public info must be timely and accurate
Incentives in Executive Compensation
inside director (ex. elon musk) -> "Compensation committee" of BOD forms without interested director -> Outside consultant:Where does this outside consultant look for answers? -weakness of this model: committee will follow recommendations of consultants. consultants reference other CEOs salaries -if you went against bc frowned upon -> elon musk could vote in another chart person in place of someone who wanted to lower his salary -if someone has a personal incentive during a decision to be made by an entity, they could recuse themselves and let disinterested poeple make the decision ex. determining elon musks salary -Tesla forms compensation committee Warren Buffet:Compensation committees are "tail-wagging puppy dogs meekly following recommendations by consultants...[for a director to oppose a recommendation] would be like belching at the dinner table."
starbucks
makes global commitment to hire 10,000 refugees by 2022
Problem of providing misleading information to the public
remember the role of the SEC for US public companies -elon musk tweeted "am considering taking Tesla private at $420. funding secured" -stock price shot up immediately bc people thought they'd pay out SHs for $420 each -he later said he was joking -SEC was mad bc people are entitled to true info about public stocks -blackrock voted to replace Elon musk with independent chairman - blackjacks votes were blocked and Elon musk wasn't replaced internally -SEC then forced him to step down from chairman -also agreed to have his tweets reviewed before sending -elon musk said "nobodys perfect" after not having BOD review tweets and risk another SEC lawsuit -elon musk handpicked new chair - said "I dont respect the SEC" and the new chair couldn't really control him
Corporate Governance Mechanisms
▪Boards are responsible for managerial rewards and incentives: ▪Boards can require that CEOs become substantial owners of company stock ▪Salaries, bonuses, and stock options can be structured so as to provide rewards for superior performanceand penalties for poor performance ▪Dismissal for poor performance should be a realistic threat -dismissal isnt always realistic (mark zukerberg)