MNGT 482: Chapter 14

Executive Compensation Reform

- has been subject of shareholder pressure - some companies have changed the way they structure executive pay by tying pay more directly to company performance - government regulations under US rules, corporations must disclose top 5 executives' compensations and rationale for it say-on-pay provisions of the Dodd-Frank Act went into effect in 2011 that require public companies to hold shareholder votes on executive compensation at least once every 3 years

Shareholder Activism - Rise of institutional investors

- holdings have increased significantly; have become more assertive in promoting interests of their members have large blocks of stock so not easy to sell if become dissatisfied, therefore strong incentive to work to change management policy - council of institutional investors represents institution and pension funds with investments collectively exceeding $3 trillion in holdings developed a shareholder bill of rights - research shows involvement of institutional investors can improve company performance

Arguments of critics of high executive pay

- inflated pay hurts ability of US firms to compete with foreign rivals - multimillion dollar salaries cause resentment, sap commitment of hardworking lower and midlevel employees - many preside over failure as they do over success

Key features of Effective Boards

- select outside directors to fill most positions - hold open elections for members of the board - appoint independent lead director and hold regular meetings without CEO present - align director compensation with corporate performance - evaluate Board's performance on a regular basis

Objectives of stock ownership

- to produce a return greater than they could receive from alternative investments - Capital appreciation - make money when stock price rises - receive dividends - their share of company earnings - bull markets - share prices rise - bear markets - share prices fall - invest in stock ownership to achieve social or ethical objectives

Legal Rights of Stockholders

- to receive dividends if declared - to vote on: members of board of directors major mergers and acquisitions charter and bylaw changes proposals by stockholders - receive annual reports on the company's financial condition - bring shareholder suits against the company and officers - sell their own shares to others

Arguments of proponents of high executive pay

- well paid managers are simply being rewarded for outstanding performance - high salaries provide incentive for innovation and risk taking - not many are capable of running today's large complex organizations

SEC - Information Transparency and Disclosure

-giving stockholders more and bette company information is best way to safeguard investor interests - management tended to disclose more information than ever to stockholders and other interested people - some observers felt that a lack of disclosure about complex financial instruments that became common in mid-200s may have lead investors to underestimate their risk

Types of stockholders

1. Individual stockholders - people who directly own shares of stock issues by companies 2. Institutions - pension funds, mutual funds, insurance companies and university endowments

Board Committees

Compensation - staffed by outside directors, admins and approves salaries and other benefits of high-level managers Nominating - charged with finding and recommending candidates for officers and directors Executive - works closely with top managers on important business matters *Audit - key role to review financial reports, recommend outside auditors and oversee integrity of internal financial controls

Securities and Exchange Commission (SEC)

Government agency charged with protection of stockholder interests - established in 1934 in wake of the great depression - mission is to protect stockholder's rights by making sure that stock markets are run fairly and investment information is fully disclosed - unlike more gov agencies, generates revenue to pay for its own operations

Shareholder Activism - Shareholder Lawsuits

If owners think they or their company have been damaged by actions of company officers or directors, they have right to bring lawsuits - can be initiated to check abuses (insider trading, inadequate stock buyout price or timely disclosure of information) - outcome can be very expensive

How are Directors selected?

board members are elected by shareholders at the annual meting, where absent owners vote by proxy - process is not truly democratic but tends to be self-perpetuating board nominating committee, working with CEO and chairman develops a list of candidates. once approved by Board, names are placed on proxy ballot. Bc alternative candidates are not presented, vote has little significance

Board of Directors

elected group who have legal duty to establish corporate objectives, develop broad policies, and select top-level personnel to carry out these objectives - vary in size, composition, and structure to best serve interests of the corporation and shareholders -avg 12 members (10/11 are outside directors - not managers of company)

Executive Compensation

important mechanism for aligning interests of corporation and its stockholders with top managers - many critics feel this system is not working and executive pay has become excessive - in the US,by international standards is very high

SEC- 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 company's stock - illegal under SEC Act of 1934 means it is illegal to 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 quit pass information to others with an expectation of gain

Corporate governance

process by which a company is controlled

Shareholder Activism - Social Investment

refers to the use of stock ownership as a strategy for promoting social objectives; social responsibility investment. can be done in 2 ways: 1. social screening of stock - stock purchasers choose stocks based on social or environmental criteria (social screens) 2. social responsibility shareholder resolutions

Shareholder Activism - Social Responsibility Shareholder Resolutions

resolution on an issue of corporate social responsibility placed before stockholders for a vote at the company's annual meeting significant rise in recent years, can be about social issues not ordinary business

Stockholders and the Corporation

stockholders have become increasingly powerful and vocal stakeholder group in corporations - provide capital - monitor corporate performance - assure effective operation of stock markets - bring new issues to attention of management

Stockholders

the legal owners of business corporations - also called shareholders