MGMT Ch. 13

Types of Shareholders

1. Individual shareholders are people who directly own shares of stock issued by companies. 2. Institutions Examples: pension funds, mutual funds, insurance companies, and university endowments Also called institutional investors

Key Features of Effective Boards

1. Select outside directors to fill most positions 2. Hold more open elections for members of the board 3. Appoint an independent lead director and hold regular meetings without the CEO present 4. Align director compensation with corporate performance 5. Evaluate the Board's performance on a regular basis

Social Responsibility Shareholder Resolutions

A resolution on an issue of corporate social responsibility placed before shareholders for a vote at the company's annual meeting Securities and Exchange Commission (SEC) allows shareholders to place resolutions concerning appropriate social issue on the proxy ballot Resolutions can be about social issues, not company's ordinary business

Board of Directors

An group of individuals, elected by shareholders, who have a legal duty to establish corporate objectives, develop broad policies, and select top level personnel to carry out these objectives and policies

Shareholder/Stockholder

An individual or institution (including a corporation) that legally owns a share of stock in a public or private corporation. Shareholders buy shares which represent part ownership of a company

Election of B. o. D. 's

Board members are elected by shareholders at the annual meeting, where absent owners vote by proxy. Process is not truly democratic; board membership tends to be self-perpetuating The board nominating committee, working with the CEO and chairman, develops a list of candidates. Once approved by the board, the names of these individuals are placed on the proxy ballot. Because alternative candidates are often not presented, the vote has little significance

Government Rules on Exec Comp

Due to shareholder pressure, reform Under U.S. rules, corporations must disclose top five executives compensation and the rationale for it

Objective of Pay-for-Performance Approaches

Executives will work hard to improve the company's results Because this will increase the stock price and therefore the value of their compensation

Arguments Against High Executive Pay

Inflated executive pay hurts the ability of U.S. firms to compete with foreign rivals Multimillion dollar salaries cause resentment, sap the commitment of hardworking lower and midlevel employees Empirical evidence finds weak relationship between executive pay and company success

Executive Compensation

Key board function, align the interests of the corporation and its stockholders with those of its top managers

Problems w/ Exec Comp

Many critics feel that this system is not working and executive pay has become excessive Agency problem: as hired agents, managers might act to benefit themselves, rather than owners

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 for a profit

Corporate Governance

Process by which the company is controlled

Shareholders and the Corporation

Provide capital § Monitor corporate performance § Assure the effective operation of stock markets § Bring new issues to the attention of management § Play a very important role in making the business system work

OECD to Improve Corporate Governance

Representing 34 nations, issued a revised set of principles of corporate governance to serve as a benchmark for companies and policy makers worldwide

The Say-on-Pay Provisions of the Dodd-Frank Act 2011

Require public companies to hold shareholder votes on executive compensation at least once every three years

Social Screening of Stock

Some stock purchasers choose stocks based on social or environmental criteria, called social screens

Critics of Pay-for-Performance

That unscrupulous executives may become so fixated on their performance pay that they will do anything to increase the stock price, even if this involves unethical actions

Securities and Exchange Commission (SEC)

The major government agency charged with protection of stockholder interests. § Established in 1934 in the wake of the Great Depression. § Mission: to protect shareholdersrights by making sure that the stock markets are run fairly and that investment information if fully disclosed. § Unlike more government agencies, generates revenue to pay for its own operations. § Government regulation is justified on the basis of shareholders can be damaged by abusive practices.

Bull and Bear Markets

They alternate, Bull- (in which share prices rise overall) Bear- (in which share prices fall overall)

Objective of Stock Ownership

To produce a return greater than they could receive from alternative investments Achieve social or ethical objectives

Legal Rights of Shareholders

To receive dividends, if declared To vote on: members of the board of directors, major mergers and acquisitions, charter and bylaw changes and 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 the stock to others

Social Investment

Use of stock ownership as a strategy for promoting social, environmental, and governance objectives

Characteristics of Board of Directors

Vary in size, composition, and structure to best serve the interests of the corporation and shareholders Average board size was 12 members-typically 10 or 11 of these are outside directors (not managers of the company) Work of the Board is done through committees: Typical committees: Compensation, Executive, Nominating, Audit Audit has key role to review financial reports, recommend outside auditors, and oversee integrity of internal financial controls

Arguments in Favor of High Executive Pay

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

Shareholders Make Money

When the price of the stock rises (capital appreciation) When they receive their share of the companys earnings (capital dividends)

Stockholder Lawsuits

§ If owners think they or their company have been damaged by actions of company officers or director, they have a right to bring lawsuits. § Can be initiated to check abuses, for example insider trading, inadequate stock buyout price, or timely disclosure of material information. § The outcome can be very expensive for companies

Council of Institutional Investors

§ Represents institutions and pension funds with investments collectively exceeding $3 trillion in holdings § Developed a Shareholder Bill of Rights

Illegal Under SEC Law of 1934

§ Steal 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 gain