Stakeholder Analysis Paper
ghtyui52000
OwnerStakeholder1.pptOwner as Stakeholder
I Corporate Governance
* traditional vs. revisionist model
II Ethical Issues in Corporate Governance
* executive accountability & control
* mergers & acquisitions
* financial markets & insider trading
* financial professionals & market intermediaries
* private equity & hedge funds
* executive pay
III Enron film
The CORPORATION
Defined and Explained
In business, corporate organization has a number of advantages:
- a corporation exists independently of its owners
- in U.S. law, the corporation is recognized as a legal person with many legal rights
- the corporation is an enormously successful device for raising vast amounts of capital
- the owners of the corporation (stockholders) are not liable for the corporation’s debts beyond their investment
CORPORATE GOVERNANCE is the overall control of activities in a corporation.
- It is concerned with the formulation of long-term objectives and plans and the proper management structure to achieve them.
- It entails making sure that the structure functions to maintain the corporation’s integrity, reputation and responsibility to its various constituencies.
Traditional and revisionist models
of corporate governance
Stockholders
Top managers
Board of directors
Stockholders
Board of directors
Top managers
Traditional model Revisionist (current) model
elect
hire and fire
nominate and control
dominate through
control of annual
meetings and
proxy elections
Stakeholder groups involved in
corporate governance
Business firm
Stockholders
Employees
Creditors
Managers
Government
Board of
directors
Legal
authority
Hold
corporate debt
Decision
making
Laws and
regulation
Affect
policies
Individuals
or institutions
Governance Mechanisms
Ownership Concentration
Boards of Directors
Executive Compensation
Market for Corporate Control
Multidivisional Organizational Structure
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Global Governance Differences
| Ownership structure | Dispersed | Concentrated, interlocking pattern of ownership between banks, insurance companies, and corporations | Concentrated in either the hands of owner-mangers or the wider circle of employees in joint-stock corporations | Highly concentrated; recent tendency to more dispersed ownership | Highly concentrated in state-owned companies; fairly concentrated in private enterprises | Highly concentrated ownership by family owned business groups; wave of privatization since 1990 has reduced state ownership |
| Ownership identity | Individuals Pension and mutual funds | Banks Corporations State | Owner-managers Employees State | Families Foreign investors Banks | State Families Corporations | Family owned business groups State |
| Changes in ownership | Frequent | Rare | Frequent, but decreasing tendency | Traditionally extreme rare, but recently changing | Rare, but increasingly dynamic | Rare Increasing influence of foreign investors |
| Goals of ownership | Shareholder value Short term profits | Sales, market share, headcount Long term ownership | Profit for owners Long term ownership | Long term ownership Growth of market shares | Long term ownership Sales, market share | Long term ownership Profit for owners |
| Board controlled by | Executives Shareholders | Shareholders Employees | Owner-managers Other insiders | Owners Other insiders | Owners Party/the state | Owners/ shareholders |
| Key stakeholders | Shareholder | Owners Employees (trade unions, works councils) | Owners State | Owners Customers in overseas markets | Owners Guanxi-network of suppliers, competitors and customers (mostly) in overseas markets | Owners Customers in overseas markets |
Ethical issues in corporate governance
Executive accountability & control
- A separate body of people that supervises and controls management on behalf of shareholders
- Dual structure of leadership
- executive directors: are actually responsible for running the corporation
- non-executive directors are supposed to ensure that the corporation is being run in the interests of the shareholders
- Anglo-Saxon model: single-tier board
- European model: two-tier boards, lower tier = executive directors, and upper tier = ‘supervisory board’
The best boards of directors:
- Evaluate performance of the CEO annually.
- Link the CEO’s pay to specific performance goals.
- Require each director to own a significant amount of stock.
- Have no more than two or three inside directors.
- Require directors to retire at 70 years of age.
- Place the entire board up for election every year.
- Place limits on number of other boards on which directors can serve.
- Ban directors who draw consulting or legal fees from company.
- Ban interlocking directorships: “I’m on your board, you’re on mine.”
Mergers & acquisitions
- Acceptable if results in transfer of assets to owner who uses them more productively
- Central concern is managers who pursue interests not congruent with shareholder interests
- Executive prestige vs. profit and share price
- Two ethically-questionable options for managers (Carroll and Buchholtz, 2008)
- Seduced with golden parachute for cooperation
- Greenmailing to secure post-merger job
- Hostile takeovers – concern when shareholders do not want to sell
- Intentions and consequences of mergers and acquisitions
- Restructuring and downsizing
Financial markets & insider trading
- Speculative ‘faith stocks’
- ‘dot-com’ bubble (companies not made any profit but worth billions on the market)
- Ethical issue: bonds based entirely on speculation without always fully revealing amount of uncertainty
- Insider trading
- Insider trading occurs when securities are bought and sold on the basis of material non-public information (Moore, 1990)
- Ethical arguments (Moore, 1990)
- Fairness
- Misappropriation of property
- Harm to investors and the market
- Undermining of fiduciary relationship
- Insider trading can erode trust in the market in the long term; hence its illegality
Financial professionals & market intermediaries
Two crucial professions: Accountants & credit ratings agencies
- Task is to provide a ‘true and fair view of the firm – i.e. bridge informational asymmetry
- Five main problematic aspects of financial intermediary’s job:
- Power and influence in markets
- Conflict of interest (e.g. cross-selling)
- Long-term relationships with clients
- Size of the firm
- Competition between firms (danger of corner-cutting)
Private equity & hedge-funds
Rise of private equity and hedge funds exacerbate issues around transparency and shareholder control
- Most general concern:
- There are no longer many obligations for public information about a company once it has been taken private
- Hedge funds do not have to report to regulators in the same way as other investment firms
- Don’t even have to report fully to own investors
- Suggestion is this lack of transparency hides systemic risk
Executive remuneration
- ‘Fat cat’ salary accusations
- average CEO salary in Britain £6.5m (highest CEO salaries in 2008: Europe, €77m, USA, $84m)
- average annual pay rise for CEOs 11%
- CEO increases outstrip shareholder returns
- Ethical problems with executive pay:
- Performance-related pay leads to large salaries that cause unrest within corporations
- Influence of globalization on executive pay leads to significant increases
- Board often fails to reflect shareholder (or other stakeholder) interests
CEO Pay, Stock Prices, Corporate Profits, Worker Pay, & Inflation
Enron: A corporate governance debacle
In just 15 years, Enron grew from nowhere to be America's seventh largest
company, employing 21,000 staff in more than 40 countries.
But the firm's success turned out to have involved an elaborate scam.
Enron lied about its profits and stands accused of a range of shady dealings,
including concealing debts so they didn't show up in the company's accounts.
As the depth of the deception unfolded, investors and creditors retreated, forcing
the firm into Chapter 11 bankruptcy in December. 2001
Issues emerging from Enron that have led to reform:
The need for employee pension (401k) plans to be diversified.
The role of business funds in political campaigning.
The extent of energy companies' influence on national energy policy.
Potential conflicts of interest between consultancy and auditing work.
The need for tighter regulation on financial derivatives trading.
Andrew Fastow, former CFO,
sentenced to 6 years in prison
Ken Rice, former co-CEO of
Enron Broadband Services,
plead guilty to security fraud
Cliff Baxter, former Vice Chairman,
shot himself in May 2001
Jeffrey Skilling and Kenneth Lay convicted of fraud and conspiracy on May 25, 2006
Skilling, after being arrested for public intoxication
on September 9th, was sentenced to
24 years in prison on Oct. 23rd 2006.
Lay died of a heart attack on July 5th, 2006
Current trends on corporate governance
The rise of institutional investors
- Pensions, mutual funds, endowment funds, and the like--have enlarged
their stockholdings significantly over the past two decades.
- Relationship investing occurs when large shareholders form a long-term,
committed link with a company.
Changing role of the board of directors
- Some boards have become more assertive.
- Growing representation by outside directors.
Social responsibility shareholder resolutions
- The SEC allows stockholders to place resolutions concerning appropriate
social issues, such as environmental responsibility or alcohol and tobacco
advertising, in proxy statements sent out by companies.
Employee stock ownership
- An ESOP is a kind of benefit plan in which a company purchases shares
of its own stock and places them in trust for its employees.
Individual household vs
institutional ownership of stock
in the US, 1965-1999
Percent of all stocks owned
Sarbanes-Oxley Act of 2002
Federal Law passed in response to a number of major corporate and accounting
scandals.
The legislation is wide ranging and establishes new or enhanced standards for all U.S.
public company Boards, Management, and public accounting firms.
The Act contains 11 titles, or sections, ranging from additional Corporate Board
responsibilities to criminal penalties, and requires the SEC to implement rulings on
requirements to comply with the new law.
The first and most important part of the Act establishes a new quasi-public agency,
the Public Company Accounting Oversight Board, which is charged with overseeing,
regulating, inspecting, and disciplining accounting firms in their roles as auditors of
public companies.
The Act also covers issues such as auditor independence, corporate governance and
enhanced financial disclosure. It is considered by some as one of the most significant
changes to United States securities laws since the New Deal in the 1930s.
Rethinking corporate ownership: alternative models?
- Government ownership:
- Part of the landscape in many parts of the world. Resurgent in the wake of the late-2000s financial crisis (esp. banks and cars).
- Family ownership
- Families may have longer-term goals, but may not treat stakeholders any better than MNCs
- Co-operative ownership
- Hybrid businesses, not owned by investors or managers
- Owned and democratically controlled by workers or customers
- Not set up to make profit but to meet the needs of members
- Spanish Mondragon co-operative has made a striking contribution to sustainability while staying highly profitable
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196519851995
Households
Institutions
