MNGT 482 Chapter 14 Stockholder Rights & Corporate Governance

True

T/F: giving stockholders more and better company information is one of the best ways to safeguard investor interests

Board of directors

an elected group of individuals 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 lawsuits

can be initiated if: 1. if owner think they or their company have been damages by actions of company officers or director 2. to check abuses (insider trading, inadequate stock buyout price)

Social screens

stock purchasers choose stocks based on social or environmental criteria (In 2010, $3.1 trillion in the U.S. was invested in mutual funds or pensions)

Social investment (social responsibility investment)

the use of stock ownership as a strategy for promoting social objectives

Insider trading

when a person gains access to confidential information about a company's financial condition and then uses that information, to buy or sell the company's stock

Dividends

when stockholders receive their share of the company's earnings

Security and Exchange Commission (SEC)

-Mission is to protect stockholders' rights by making sure that the stock markets are run fairly and investment information is fully disclosed -Government agency charged with protection of stockholder interests -Established in 1934 in the wake of the Great Depression

Improving Corporate Governance Worldwide

-OECD representing 30 nations, issued a revised set of principles of corporate governance in 2004 to serve as a benchmark for companies and policy makers worldwide

Board of Directors Characteristics

-vary in size and structure to best serve the interest of the corporation and shareholders -typically outside directors -board members are elected by shareholders at the annual meeting, where absent owners vote by proxy (process is not truly democratic)

Stockholder trends

.In 2010, institutions accounted for 63% of the value of all U.S. stocks, worth $15 trillion .At all ages, equity ownership is higher as income and education rises

Key Features of Effective Boards

1. select outside directors to fill most positions 2. hold 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

Objectives of Stock Ownership

1. to produce a return greater than they could receive from alternative investments 2. some investors use stock ownership to achieve social or ethical objectives (social investment) -stock prices can be volatile, but have produced higher return over the long run

Major legal Rights of Stockholders

1. to receive dividends, if declared 2. to vote on: -members of board of directors -major mergers and acquisitions -charter and bylaw changes -proposals by stockholders 3. to receive annual reports on the company's financial condition 4. to bring shareholder suits against the company and officers 5. to sell their own shares of stock to others

Executive Compensation

.executive compensation in the U.S., by International standards is very high (in 2011 median 9.6 million) .mechanism for aligning the interests of the corporation and its stockholders with those of its top managers

(4) Types of committees (Work of Board is done through these)

1. Compensation 2. Executive 3. Nominating 4. Audit: review financial reports

Types of Stockholders

1. Individual stockholders: are people who directly own shares of stock issues by companies 2. Institutional investors: (pension funds, mutual funds, insurance companies, university endowments)

Stockholders provide

1. Provide capital 2. monitor corporate performance 3. assure the effective operation of stock markets 4. bring new issues to the attention of management

Proxy

A legal instrument giving another person the right to vote the shares of stock of an absentee stockholder.

Is Executive Compensation Justified?

Arguments of proponents (advocates) of high executive pay: well-paid managers are simply being rewarded, it provides an incentive for innovation Critics:

True

T/F: Insider trading is illegal under SEC Act of 1934 (steal nonpublic information and use it to trade stock, trade stock based on a tip, pass information for gain)

Stockholders (shareholders)

The legal owners of business corporations

Corporate Governance

refers to the process by which a company is controlled, or governed

Dodd-Frank Act (2011)

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

Capital appreciation

stockholders make money when the price of the stock rises