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Corp Governance

Corp Governance. Adding It All Up. Using a tool called "tally sheets," boards discover how much their CEOs really make. The #’s are shocking directors -- and changing pay practices - By Joann S. Lublin, WSJ Online Apr06

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Corp Governance

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  1. Corp Governance • Adding It All Up. Using a tool called "tally sheets," boards discover how much their CEOs really make. The #’s are shocking directors -- and changing pay practices - By Joann S. Lublin, WSJ Online Apr06 • When the board at Conseco drew up a new contract for their 5th CEO 5 years, they wanted to avoid past mistakes. "The history of this company was excessive pay not based on performance," says Michael Shannon, compensation committee chair. This time around, the directors used an increasingly popular board tool: a tally sheet. • 50 of 350 tracked corps. disclosed tally-sheet usage in their latest proxy statements. Pfizer supplied among the fullest disclosure. CEO Henry A. McKinnell could have gotten $83 million if he retired last Dec and will receive $6.5 million / year for life when he does. • Q’s • Who hires board? What do they do? What are characteristics of a good board?

  2. AGENCY THEORY IN CALIFORNIA BANKS AND PRIVATE COLLEGES

  3. Characteristics of Early Business Ownership • Risk personal wealth in search of profit • Management of enterprise responsibilities

  4. Shift to a Modern Organization • Growing reliance on management • bigger firms (economies of scale) • division of labor (specialization-A. Smith) • new technologies (productivity) • vertical integration (value added)  Need for Managerial Specialists

  5. Shift to a Modern Organization • Growing Needs of Ownership • more plant and equipment • more employees • new technologies • vertical integration  dispersion of ownership

  6. Owner/Manager Complications • Goal Incongruity • principal goals differ from agent goals • Information asymmetry • manager knows more than owner • Risk aversion • manager more risk-averse than owner

  7. Agency Relationship, Agency Theory, Agency Costs • Hiring another to perform a service • Conflict between self-serving managers and owners means firm value isn’t maximized • Monitoring & control + other agency costs (BOD)

  8. http://www2.coca-cola.com/investors/annualreport/2002/boardmgmt.htmhttp://www2.coca-cola.com/investors/annualreport/2002/boardmgmt.htm

  9. Method • Archival data - 132 California Banks • Pooled cross-sectional time-series regression • IV’s = Stock ownership • DV’s = ROA, Loan Losses

  10. Descriptive Statistics - Bank • Management Tenure Mean = 5.7 S.D. = 4.4 • Board Tenure Mean = 8.4 S.D. = 4.8 • Mgmt Stock Ownership Mean = 38% S.D. = 16.1% • Board Size Mean = 7.6 S.D. = 2.6

  11. Results • Increased Stock Ownership Led to: • increased ROA • higher loan losses

  12. Method • Questionnaire sent to 420 CIC Institutions • Pooled cross-sectional time-series regression • IV’s  Board Demography, Pres. Tenure • DV’s  Revenue, Gift Income

  13. Descriptive Statistics - Colleges • Presidential TenureMean = 8.6 S.D. = 6.2 • Board Tenure Mean = 6.4 S.D. = 3.2 • Board SizeMean = 28.9 S.D. = 7.5 • Bus Exec Experience Mean = 24% S.D. = 14.2%

  14. Time Series Regression - College • Large Board Size (T)  incr gift inc (T+1) • Presidential Tenure (T)  incr gifts (T+1)

  15. Conclusion • Boards matter in not-for-profits • Agency theory • Resource dependence • Board / Presidential interests may be more aligned in not-for-profits • Common ownership

  16. Kiplinger’s Article • Joseph McCabe – President of Coe College • Earned $458,616.67 over 40 years • Donated $458,616.67 to Coe • “a small college has the intense advantage of being like a family”

  17. Overall Conclusions • Financial Ownership  Better Performance • Psych Ownership  Better Performance Therefore, • GIVE PEOPLE OWNERSHIP

  18. Governance Presentations • Report • Cover • Summary • Appendices • Research • Results • Rating • Presentation (11 minutes) • Intro • Overview • Body • Conclusion

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