CORPORATE GOVERNANCE IN M&A GLOBAL CORPORATE GOVERNANCE Professor Anthony Palma

Jacopo Lorenzi | jlorenzi@fordham.edu Davide Vioto | dvioto@fordham.edu MSGF - 2015

Jacopo Lorenzi – Davide Vioto

OVERVIEW

I.  THE ROLES OF BOARD OF DIRECTORS

II. BOARD STRUCTURE AND EXTERNAL TIES

III. CONFLICT OF INTERESTS

IV.  CEO’S COMPENSATION

Jacopo Lorenzi – Davide Vioto

THE ROLES OF BOARD OF DIRECTORS

The Board of Directors should represent shareholders, hence act in their best interest by monitoring management’s activity and through their role as advisors.

MONITORING ROLE

•  Internal Governance procedures - Use performance based compensation - Make sure management is c o r r e c t l y e x e c u t i n g t h e previously planned strategy

ADVISORY ROLE

•  Directors should be able to provide an addition of value to the firm through their expert advice

•  The Board of Directors should establish the Governance mechanism to minimize undesired effects of arising conflict of interests during takeover

•  Due to the limited amount of time and resources, Board of Directors needs to choose between one of these two functions

- Focusing on the Monitoring role lower return for the shareholders of the acquiring firm

Jacopo Lorenzi – Davide Vioto

BOARD STRUCTURE AND SOCIAL TIES

Effects on near deal announcement date return for shareholders:

Tighter social ties between the CEO and the board can make communication more efficient and complete, leading to sounder acquisition decisions.

When the Target and acquirer’s share some board members (i. e. are connected) acquirer shareholders have higher return. The duration of the negotiation is shorter.

Independent Board members have minimal economic ties with their firms, that’s why they are viewed as more objective and effective in their monitoring function. Studies shows target firm shareholders receive higher bid premium when the Board as a greater composition of independent directors.

The investment banker financial expertise usually favors the number of acquisition that the board approves; this could lead to inefficient decisions.

Acquiring Board and Management

Acquiring Board and Target Board

Investment Banker on the acquiring

board

The presence of independent board

directors

Jacopo Lorenzi – Davide Vioto

CONFLICT OF INTERESTS M&As tend to intensify the conflict of interest between management and shareholders of large companies:

•  Some CEOs receive bonuses on the completion of acquisitions

•  Due to the fact that there is a greater turnover in the target’s acquired management, its likely that this will induce target CEOs to turn down favorable deals for target shareholders

•  When the CEO is powerful enough to appoint board members this might lead him to choose directors with whom he has strong social ties.

There could conflict of interest also between shareholders and employees:

•  This doesn’t occur if the employees detain some of the firm’s equity, as it would lead to their goals being aligned.

•  After the take-over the acquirer could enforce downsizing and turnover of pre-deal employees. In Continental Europe this risk is partially alleviated by the strong presence of Unions.

Jacopo Lorenzi – Davide Vioto

CEO’S COMPENSATION

PERFORMANCE BASED COMPENSATION

EQUITY BASED COMPENSATION

When firms are characterized by intense acquisition activity, it often occurs that one of the CEO’s performance measures is the amount of take-over deals carried to completion.

•  Quantity oriented vs. Quality oriented

•  Equity based compensation helps to align managerial interests with those of shareholders.

•  Higher long-term stock performance and positively related to the firm’s announcement return.

•  On the flipside, high equity based compensation incentivizes management to seek takeovers of riskier and higher growth potential targets, to obtain a higher return.

THANK YOU FOR YOUR ATTENTION!

Jacopo Lorenzi | jlorenzi@fordham.edu Davide Vioto | dvioto@fordham.edu MSGF - 2015