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Corporate Governance and Performance Analysis

Corporate Governance and Performance Analysis. Professor Sidney E. Harris Lecture 1. Shareholders Board Management Employees. Country/Company Ideology Courts-State/Federal SEC Security Analysts Stock Exchanges Institutional Investors Accountants/Auditors Law Firms.

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Corporate Governance and Performance Analysis

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  1. Corporate Governance and Performance Analysis Professor Sidney E. Harris Lecture 1

  2. Shareholders Board Management Employees Country/Company Ideology Courts-State/Federal SEC Security Analysts Stock Exchanges Institutional Investors Accountants/Auditors Law Firms Corporate Governance Landscape

  3. Historical Perspective • 1814, Henry Cabot Lowell, founded the first public company in U.S. • Within seven years investors had received a 100% return • Is management focused on maximizing shareholder value?

  4. Historical Perspective • After 1929 stock market crash, congressional investigators uncovered widespread insider trading, stock price manipulation, and diversion of corporate funds for personal use • The 1933 Securities Act imposed extensive disclosure requirements on corporations • In 1934, Congress established the SEC to enforce the new regulations

  5. Historical Perspective • After the 34 Act, management became conservative and bureaucratic • In the 1972, Jensen and Meckling proposed the Principal-Agent Problem-”one party employs another to do a job” • By the early1980s, the shareholder value movement began to take shape • LBOs were seen as a principal tool to extract value--”solve the principal-agent problem”

  6. Historical Perspective • Technology firms began to rely on stock options to compensate employees • In the 1990s, widespread adoption of stock options • In the late ‘90s, mega-options grants were introduced • In 2006, stock options are treated as an expense

  7. America’s Governance Model • Role of Government • Purpose of Business • Capital Markets • Customers • Employees

  8. UK Germany France China Japan Korea America’s Rivals

  9. Transition Economy Governance Model • Ownership-families, inter-locking companies (including suppliers), and banks • Role of business-tied to national identity • Banks and capital markets have a closer relationship with government • “Rule of man” versus “rule of law” • Crony capitalism and lack of opacity

  10. Actions Needed • Much greater independence between business and government • Strong foreign presence • Reduction in rules and regulation that favor who you know • Free and investigative press • Strong system of the rule of law

  11. Cycle of Greed • Institutional Investors focus on the short term growth in earnings • Drives Share Price • Alignment of CEO Incentives • Pressure for auditors to allow accounting tricks • Board Oversight

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