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Major legal rights of stockholders

Figure 15.2. Major 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 To receive annual reports on the company’s financial condition

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Major legal rights of stockholders

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  1. Figure 15.2 Major 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 • 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 stock to others

  2. Key features of effective boards • Select independent directors to fill most positions. • Hold open elections for members of the board. • Appoint an independent lead director and hold regular meetings without the CEO present. • Evaluate the board’s own performance on a regular basis.

  3. “Boards More Independent, Study Says” • Corporate boards grew more independent from mngt in 2004 • Percentage of S&P 500 companies with a presiding, or lead, director grew to 84%, up from 36% in 2003 • Women made up nearly one-quarter of all new outside directors, now 16% of all directors • Average annual retainer fee for directors of S&P 500 companies rose 14% to $50k from $43.7k in 2003 (excludes meeting fees and equity-based pay) • Median total cash pay for S&P 500 directors up 22%, to $67.6k • Stock awards up 35%, to $69.6k • Source: Los Angeles Times, 1/12/05

  4. Executive Compensation • Two factors contributed to pay scales that now have CEOs earning more than 300x pay of average American worker • Advent of giant stock option grants, form of compensation made more attractive by 1993 change to tax law that maintained corporate tax deductions for executive pay over $1m if pay was tied to performance • Widespread practice of linking pay to levels at companies of similar size • Has effect to raise average that everyone will use as baseline • Source: New York Times, 4/5/09

  5. Executive Compensation (Wall Street Journal study) • Median total compensation, 2008, $7.6m, down 3.4% from 2007 (includes salary, bonuses, value of restricted stock at time of grant, gains from options exercises, other long-term incentives) • Median salaries and bonuses down 8.5%, to $2.24m • Median salaries increased 4.5% to $1.08m, but bonuses fell 10.9% to $1.24m as profits declined by 5.8% • Most equity granted early in year, before stock prices declined significantly, suggesting that CEO compensation may have declined further by year’s end • Source: Wall Street Journal, 4/3/09, based on analysis of 200 major U.S. corporations by Hay Group

  6. Putting a Ceiling on Pay • Growing number of shareholder activists pushing Cos to establish maximum ratios between what their executives earn and what their average- or lowest-paid workers earn • Average CEO in U.S. earned 282x salary of average worker in 2002, cf. 42x in 1982 • Whole Foods Market (leading organic food retailer) limits any executive’s pay to no more than 14x pay of average worker (current cap is $409k) • Ben & Jerry’s had capped pay at 7x pay of lowest worker, but dropped policy in 1994 • Herman Miller had capped pay at 20x, but dropped policy in 1996 • Critics argue that such practices that exclude stock options are of little value • Source: Wall Street Journal, 4/12/04

  7. Executive compensation: Is it justified? Proponents of high executive pay say: • 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. Critics of high executive pay say: • Inflated executive pay hurts the ability of U.S. firms to compete with foreign rivals. • As many extravagantly compensated executives preside over failure as they do over success. • Multi-million-dollar salaries cause resentment and sap the commitment of hardworking lower and midlevel employees.

  8. Social investment Social investment Refers to the use-of-stock ownership as a strategy for promoting social objectives. Social investment can be done in two ways: • Social screening of stock • Some shareholders wish to choose stocks based on social or environmental criteria. • Social responsibility shareholder resolutions • A resolution on an issue of corporate social responsibility placed before stockholders for a vote at the company’s annual meeting.

  9. Securities and Exchange Commission • Established in 1934 in the wake of the Great Depression. • Its mission is to protect stockholders’ rights by making sure that the stock markets are run fairly and that investment information is fully disclosed. • Generates revenue to pay for its own operations.

  10. Sarbanes-Oxley Act • Established an independent board to oversee the audits of public companies. • Prohibited accounting firms from providing other services at the same time as an audit, if this would cause a conflict of interest. • Required CEOs and CFOs to certify the truth of their companies’ financial statements, in writing. • Required executives to pay back any bonuses or profits from stock sales they received after a financial report was issued that later had to be restated. • Required full disclosure to shareholders of complex financial transactions. • Required that at least one member of the audit committee be a financial expert.

  11. Insider trading 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. According to the SEC Act of 1934, it is illegal to: • Misappropriate 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 direct or indirect gain.

  12. “How to Fix Corporate Governance” • Executive Pay • Expensing stock options • Board of Directors • Ban on stock sales by directors for duration of term • Accounting • Criminal liability • Analysts • Change in compensation practices • Regulators • More transparency • Leadership • Challenge is to create corporate cultures that encourage and reward integrity as much as creativity and entrepreneurship • Source: Business Week, 5/6/02

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