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    Governance Assignment

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    Anonymous xtuM4x
    This document summarizes key aspects of corporate governance reform proposed in response to financial scandals in the early 2000s. It outlines issues such as excessive CEO compensation, lack of board independence, weak shareholder rights, and questionable accounting practices. Reforms suggested include increasing SEC funding and oversight of public companies, regulating CEO pay, strengthening board independence, empowering shareholders, and improving transparency. Activist investors are also discussed as a force for positive change in pressuring companies to improve governance.

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    Governance Assignment

    Uploaded by

    Anonymous xtuM4x
    41 views11 pages
    This document summarizes key aspects of corporate governance reform proposed in response to financial scandals in the early 2000s. It outlines issues such as excessive CEO compensation, lack of board independence, weak shareholder rights, and questionable accounting practices. Reforms suggested include increasing SEC funding and oversight of public companies, regulating CEO pay, strengthening board independence, empowering shareholders, and improving transparency. Activist investors are also discussed as a force for positive change in pressuring companies to improve governance.

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    This document summarizes key aspects of corporate governance reform proposed in response to financial scandals in the early 2000s. It outlines issues such as excessive CEO compensation, lack of board independence, weak shareholder rights, and questionable accounting practices. Reforms suggested include increasing SEC funding and oversight of public companies, regulating CEO pay, strengthening board independence, empowering shareholders, and improving transparency. Activist investors are also discussed as a force for positive change in pressuring companies to improve governance.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    41 views11 pages

    Governance Assignment

    Uploaded by

    Anonymous xtuM4x
    This document summarizes key aspects of corporate governance reform proposed in response to financial scandals in the early 2000s. It outlines issues such as excessive CEO compensation, lack of board independence, weak shareholder rights, and questionable accounting practices. Reforms suggested include increasing SEC funding and oversight of public companies, regulating CEO pay, strengthening board independence, empowering shareholders, and improving transparency. Activist investors are also discussed as a force for positive change in pressuring companies to improve governance.

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    of 11

    John Carver on Board Leadership,

    foreword by Sir Adrian Cadbury, (2001)


    John Wiley & Sons, Inc.

    solid theory of governance for Boards to perform well:


    1-represents a specialized form of ownership, not
    management;
    2-governs as a body, not as individual members;
    3-provides management with a free choice of bounded
    means;
    4-specifies the nature and cost of results;
    5-monitors & evaluates ends & means systematically &
    rigorously;
    6-involves itself in meetings to accomplish learning,
    debate, resolution;
    7-has primarily a long-term view of all decisions
    concerning the institution.

    Other resources from John Carver


    John Carver & Miriam Carver, Basic Principles of Policy
    Governance, The Carver Guide Series on Effective
    Board Governance, No. 1, San Francisco: Jossey-Bass,
    1996
    John Carver & Miriam Carver, Reinventing Your Board:
    step-by-step guide to implementing Policy Governance,
    John Wiley & Sons, 1997
    Basic Principles of Policy Governance,
    PolicyGovernance.com, A Theory of Corporate
    Governance, Finding a New Balance for Boards & their
    CEOs, http://www.carvergovernance.com/pg-corp.htm
    Boards That Make A Difference: a new design for
    leadership in non-profit and public organizations, third
    edition, 2006.

    An expression of the ideals the


    Board should endeavor to achieve.

    The Board, with its members treated as professionals,


    provides guiding principles, discipline, and respectful
    leadership focused on the institutional mission and
    goals. The Board adopts a Policy Orientation that
    provides a process to guide, examine, select, and
    evaluate both actions and results. The Board enables a
    Structured Decision Making System that effectively
    analyses data, assesses goals, examines views, and
    provides efficient measures. The Board requires a Factbased Management style to solicit data from broad
    sources, to demand appropriate Board committee
    assignments, to improve the expertise of its members,
    and to set parameters for ethical, appropriate behaviors.

    Fortune (July 1 2002)


    Restore Confidence With Reforms

    1-trust and verification - state earnings and profits in a


    meaningful, simple, standard way subject to reliable audit,
    less to manipulation;
    2-support the SEC staff too small to watch 17000 public
    companies, multitude of mutual funds and brokerages, the
    exchanges, market manipulations, insider trading,
    accounting transgressions, all suspicious behavior, and a
    market covering roughly $12 trillion.
    staff is paid 25%-40% less than staff of the FDIC or Office of
    Controller
    turnover is 30% versus the 15% at other U.S. Government
    positions
    vacancy rate is twice that at other government agencies
    SEC has collected $2 billion in fees in a given year, 5x its budget
    Congress uses $$ elsewhere; LOC staff has grown 4x faster than
    SEC.

    Reforms

    3-regulate Chair/CEO compensation. Consider the following examples of


    CEO earnings from the first half of the first decade of this current century
    for those leading their firms just prior to the firm declaring bankruptcy or
    the individual being charged with misappropriation of funds.
    Person

    Firm

    Jeff Skilling
    Enron
    Gary Winnick Global Crossing
    Dennis Kozlowski
    Tyco
    Joe Nacchio
    Quest

    Compensation
    Event Year
    [Bankruptcy or Charges]
    $240 million
    2001
    $735 million (3 years) 2002
    $240 million
    2004
    $232 million
    2005

    CEO compensation

    Although it may now be more closely linked to firm performance


    Amount is grossly out of sync with normal merit reward.
    Institute for Policy Studies reports to match the increase in CEO
    compensation over 20 years and to maintain the ratio between
    worker salaries and CEO compensation

    average productive worker in the U.S. would need to earn $120,500


    annually
    minimum wage should be $25.50. In contrast, current minimum
    wage in the US is $7.25 per hour, with Wal-Mart paying $8.23 on
    average per hour and $22.41 as the average per hour wage in the
    U.S. labor market.

    CEO compensation in 1980 was 40 times the average employee


    salary; by 2000, CEO compensation was 600 times average
    worker salaries.

    Reforms

    5-improve the Board increase both the number and independence of


    the independent members, require education and training, and
    remove the CEO as Chair of the Board.[1]
    (Duality: common in US, restricted by GB)
    6-involve Owners- empower the owners: the stockholders.
    Consider: Board members receive special benefits, top executives
    receive perks such that Stockholder Value Maximization is not the
    primary concern.
    Individual compensation is a combination of stock value plus perks
    (plus salary & compensation): willing to receive these at other
    stockholders expense
    [1] http://www.directorship.com/separation-anxiety/.
    [2] Disney

    separate audit and compensation committees


    each with independent directors
    outside directors meet separate from insiders and management
    outsider directors are restricted on the number of other boards to which
    they are appointed and still serve on Disneys

    primary keys of responsible


    governance are undermined:

    Consider:
    - largest portion of NYSE is held by institutional investors
    - these institutions then represent the individual in the monitoring of
    the performance
    - Institutional Investors rely heavily on the management and boards of
    the firms
    - Institutional investor may very well feel a reduction in scrutiny is
    appropriate
    - result in rubber-stamping
    - About 7% of institutional investors own 44% of the stock market.
    - How do they vote, when do they vote, do they vote, do their votes
    reflect the desires of the stockholders for whom they are the agent?
    - If the institutions do not report how they vote and/or routinely vote
    with management, then stockholders are not exercising control.
    Board unresponsive, Institutions uninvolved, Management
    irresponsible: Crisis

    Robert A.G. Monks


    a shareholder activist

    CEOs have too much power


    Boards of Directors are not minding the store
    Corporate Democracy is a myth.
    institutional investors routinely vote with management
    empower institutional owners

    LENS, a mutual fund that targeted lackluster firms, and then agitated for
    change
    funds performance is reported to have outperformed the S&P 500 Index
    throughout the life of the fund

    1985, Institutional Shareholder Services (ISS) to sell research and advice


    concerning Proxy votes.
    ISSs support for the Hewlett-Packarad/Compaq merger led to its completion..

    Activists have impact:

    1942, the Gilbert Brothers encouraged SEC to pass the first rules
    concerning shareholder proposals.
    1960s, Ralph Nader and Saul Alinsky encouraged individual shareholders
    to pressure firms on social issues causing significant changes.
    1980s, corporate raiders changed poorly run firms either by taking control
    or forcing current investors to pay attention!

    Questionable Practices

    CEO selects Board composition


    true dialog among the Board membership due to privacy issues
    independent members being allowed to meet in closed session
    financials reported with minimum explanation, dialog or discussion
    Board routinely rubber stamps the presentations by management
    fraudulent accounting practices and poor management decisions
    outsiders or independents should not be ex-employees, family
    members, or anyone whose livelihood derives monetary benefit
    under-qualified directors
    increasing awareness of Social investing, concentrating on
    sustainability issues
    removing lax standards for audits and for Board membership
    use of super majority voting (80%) instead of majority voting (51%).

    Investor Responsibility Research Center reports that in 1990, two-thirds


    (2/3 or 67%) of shareholder resolutions passed when stockholders
    voted, but in 2000 only 17% passed due to the restrictive nature of
    supermajority voting.

    2004 CalPers
    examples of Governance lapses

    Gateway requires no independent audit.


    Quest Communication International allows for a conflict
    of interest in dealings
    with the Anschutz Corp, since the Quest chair and founder
    is Phillip Anschutz who is also a director of the Anschutz
    Corp.
    NTL approved a re-capitalization using a Debt for Equity
    Swap that, in their
    estimation, will negatively impact on stockholders, such as
    themselves.
    Lucent Technology will not agree or act with the simple
    majority vote about the
    composition of the Board, requiring instead a super
    majority.
    Cincinnati Financial one half of the Board membership is
    insiders.

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