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U.S. Corporate Governance

U.S. Corporate Governance

Donald H. Chew
Stuart L. Gillan
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  • Book Info
    U.S. Corporate Governance
    Book Description:

    Corporate governance constitutes the internal and external institutions, markets, policies, and processes designed to help companies maximize their efficiency and value. In this collection of classic and current articles from the Journal of Applied Corporate Finance, thought leaders such as Michael Jensen and Robert Monks discuss the corporate mission of value maximization and the accomplishments and limitations of the U.S. governance system in achieving that end.

    Essays address the elements driving corporate value: the board of directors, compensation for CEOs and other employees, incentives and organizational structure, external ownership and control, role of markets, and financial reporting. They evaluate best practice methods, challenges in designing equity plans, transferable stock options, the controversy over executive compensation, the values of decentralization, identifying and attracting the "right" investors, the evolution of shareholder activism, creating value through mergers and acquisitions, and the benefits of just saying no to Wall Street's "earnings game." Grounded in solid research and practice, U.S. Corporate Governance is a crucial companion for navigating the world of modern finance.

    eISBN: 978-0-231-51998-4
    Subjects: Business, Finance

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Introduction
    (pp. ix-xxii)

    Writing in the wealth of nations in 1776, Adam Smith was skeptical about the future of the publicly traded corporation, or what back then was called the “joint stock company.” Given the role of self-interest in human affairs, the proposition that a faceless and uncoordinated group of outside investors could be brought to entrust their savings to professional corporate managers—people whose interests were almost sure to diverge from their own—was doubtful at best. Faced with the challenge of controlling this divergence of interests, Smith argued that joint stock companies would end up being well suited only to “turnkey...

  4. Part I: Broad Perspectives on Corporate Governance

    • CHAPTER 1 Value Maximization, Stakeholder Theory, and the Corporate Objective Function
      (pp. 3-25)

      In most industrialized nations today, economists, management scholars, policymakers, corporate executives, and special interest groups are engaged in a high-stakes debate over corporate governance. In some scholarly and business circles, the discussion focuses mainly on questions of policies and procedures designed to improve oversight of corporate managers by boards of directors. But at the heart of the current global corporate governance debate is a remarkable division of opinion about the fundamental purpose of the corporation. Much of the discord can be traced to the complexity of the issues and to the strength of the conflicting interests that are likely to...

    • CHAPTER 2 The State of U.S. Corporate Governance: What’s Right and What’s Wrong?
      (pp. 26-47)

      To a casual observer, the United States corporate governance system must seem to be in terrible shape. The business press has focused relentlessly on the corporate board and governance failures at Enron, WorldCom, Tyco, Adelphia, Global Crossing, and others. Top executive compensation is also routinely criticized as excessive by the press, academics, and even top Federal Reserve officials.¹ These failures and concerns in turn have served as catalysts for legislative change—in the form of the Sarbanes-Oxley Act of 2002—and regulatory change, including new governance guidelines from the NYSE and NASDAQ.

      The turmoil and the responses to it suggest...

    • CHAPTER 3 U.S. Corporate Governance: Accomplishments and Failings: A Discussion with Michael Jensen and Robert Monks
      (pp. 48-76)
      Ralph Walkling, Michael Jensen and Robert Monks

      Ralph Walkling: Good morning, I’m Ralph Walkling, current president of the Financial Management Association. Both in this role, and as Director of the Center for Corporate Governance at Drexel University’s LeBow School of Business, I’m excited—and indeed honored—to be moderating this panel on U.S. corporate governance with Robert Monks and Michael Jensen, two of the most prominent authorities on the subject. The original title for this event, as proposed by Mike Jensen, was just “Failings of the U.S. Corporate Governance System.” But we later decided that, given Mike’s and Bob’s reputations for plain speaking, we could change the...

  5. Part II: Internal Governance:: Boards and Executive Compensation

    • CHAPTER 4 The Director’s New Clothes (or, The Myth of Corporate Accountability)
      (pp. 79-89)

      A scene in barbarians at the gate frames the question of accountability of corporate management perfectly. Ross Johnson, the man who somewhat impetuously initiated the leveraged buyout of RJR-Nabisco, meets with Henry Kravis and George Roberts of Kohlberg, Kravis, Roberts to discuss it. There is a brief discussion of the business before Johnson’s central questions come up. “Now Henry, if you guys get this, you’re not going to get into chicken-shit stuff about planes and golf courses, are you?” (Johnson’s perquisites included corporate jets and membership fees at twenty-four country clubs.)¹ Kravis is eager to gloss over this question, but...

    • CHAPTER 5 Best Practices in Corporate Governance: What Two Decades of Research Reveals
      (pp. 90-112)

      Investor, regulatory, and public concern about corporate governance has prompted most companies to reassess the quality and structure of their governance systems. In this chapter, we survey a broad range of research (including our own) conducted over the past two decades on a variety of corporate governance topics. Our summary of the key findings is based on the most important and influential studies in this area. The sheer volume of the literature dictates that we focus on a few critical areas and emphasize the principal findings in each:

      What is the appropriate mix of inside, independent, and nonindependent outside directors...

    • CHAPTER 6 Pay without Performance: Overview of the Issues
      (pp. 113-143)

      In our recent book, pay without performance,¹ and in several accompanying and subsequent papers,² we seek to provide a full account of how managerial power and influence have shaped executive compensation in publicly traded U.S. companies. Financial economists studying executive compensation have typically assumed that pay arrangements are produced by arm’s-length contracting—contracting between executives attempting to get the best possible deal for themselves and boards trying to get the best deal for shareholders. This assumption has also been the basis for the corporate law rules governing the subject. We aim to show, however, that the pay-setting process in U.S....

    • CHAPTER 7 Is U.S. CEO Compensation Broken?
      (pp. 144-158)

      Critics of u.s. executive pay practices have raised four major concerns: (1) executive pay is too high; (2) CEO contracts do not provide strong enough incentives to increase value (that is, there is too little pay for performance); (3) options and other equity-based pay provide “windfalls,” or large payoffs that reflect good luck more than good performance; and (4) CEOs have too much freedom to unwind their incentives.¹ This negative, and increasingly mainstream, assessment of the state of U.S. executive compensation has led many observers to conclude that executive pay practices are fundamentally flawed and that systemic reform is needed....

  6. PART III: External Governance:: Ownership Structure

    • CHAPTER 8 Just Say No to Wall Street: Putting a Stop to the Earnings Game
      (pp. 161-169)

      First there were whispers and informal advisories to favored analysts of what to expect in coming earnings announcements. Then the conversations became more elaborate, engendering a twisted kind of logic. No longer were analysts trying to understand and analyze a company so as to predict what it might earn; instead the discussion revolved around the analysts’ forecasts themselves. Will expectations be met? What will management do to ensure that? Rather than the forecasts representing a financial by-product of the firm’s strategy, the forecasts came to drive those strategies. While the process was euphemistically referred to as “earnings guidance,” it was,...

    • CHAPTER 9 Identifying and Attracting the “Right” Investors: Evidence on the Behavior of Institutional Investors
      (pp. 170-183)

      The entry of google inc. into the public equity market has rekindled the debate over the extent to which U.S. capital markets encourage short-sighted decisions by corporate managers. In the above statement from their “ ‘Owner’s Manual’ for Google’s Shareholders,” the company’s founders declared their intent to avoid the “numbers game” in which companies guide and then try to meet Wall Street’s quarterly earnings projections, in many cases by “managing” earnings.³ The second statement reflects the widespread skepticism that Google can simply opt out of the numbers game. But there are several recent examples of companies trying to do just...

    • CHAPTER 10 U.S. Family-Run Companies—They May Be Better Than You Think
      (pp. 184-201)

      The conventional wisdom is that effective control of large U.S. corporations has largely passed from the active owner-managers of old, like Henry Ford, to today’s professional managers. What’s more, many investors may have viewed the recent scandals at Adelphia and Parmalat as further confirmation of their suspicion that family firms are run primarily for the benefit of family members at the expense of the other shareholders. But recent research, some of it done at Morgan Stanley, suggests that the conventional wisdom about family-run firms may be wrong or in need of some important qualifications.

      First of all, although studies have...

    • CHAPTER 11 The Evolution of Shareholder Activism in the United States
      (pp. 202-240)

      Shareholder activism in the U.S. is by no means a new phenomenon. In the early 1900s, American financial institutions such as insurance companies, mutual funds, and banks were active participants in U.S. corporate governance. In many cases, the representatives of such institutions—among them J. P. Morgan and his associates—served on corporate boards and played major roles in the strategic direction of the firm.

      But over the next three or four decades, laws passed with the aim of limiting the power of financial intermediaries also prevented them from having an active role in corporate governance.¹ The Glass-Steagall Act prohibited...

  7. Part IV: External Governance:: The Market for Corporate Control

    • CHAPTER 12 Corporate Control and the Politics of Finance
      (pp. 243-279)

      The U.S. market for corporate control reached the height of its activity and influence in the last years of the 1980s. Among its many accomplishments, mergers and acquisitions, LBOs, and other leveraged restructurings of the past decade sharply reduced the effectiveness of size as a deterrent to takeover. The steady increase in the size of the deals throughout the 1980s culminated in the $25 billion buyout of RJR-Nabisco in 1989 by KKR, a partnership with fewer than thirty professionals.

      The effect of such transactions was to transfer control over vast corporate resources—often trapped in mature industries or uneconomic conglomerates—...

    • CHAPTER 13 Where M&A Pays and Where It Strays: Survey of the Research
      (pp. 280-306)

      How you assess a particular M&A deal or even the whole flow of M&A activity depends on your frame of reference, on beliefs that help you decide whether specific deals represent the average outcome or instead lie in what statisticians call the “tail of the distribution.” This frame of reference is a powerful filter for decision-makers and their advisers, and it typically arises from a blend of personal experience, anecdotes, conventional wisdom, and facts. The aim of this chapter is to enrich your frame of reference about success and failure in M&A with the findings of scientific research.

      I have...

    • CHAPTER 14 Private Equity, Corporate Governance, and the Reinvention of the Market for Corporate Control
      (pp. 307-336)

      The second half of 2007 saw the end of the second wave of U.S. private equity and the beginning of a credit crunch that continues to work its way through the system. The volume of private equity transactions has dropped dramatically. In the first half of 2007, global buyout volume totaled $527.7 billion. Through mid-June of 2008, total buyouts were down to $124.7 billion, less than a quarter of the prior year’s volume. Buyouts over $1 billion in the first half of 2007 numbered 93; in the first half of 2008 there were 32. And the buyouts that are getting...

  8. About the Contributors
    (pp. 337-338)
  9. Index
    (pp. 339-362)