Who’s really in charge?

The Agency “Problem”

Agents/managers have one interest and want to minimize the risk of their claim (e.g., they want to diversify the firm).

Principals/owners/stockholders have many interests and want to optimize the risk of their claim (e.g., they resist diversification of the firm).

This results in conflict and tension.

Stockholders

Stockholders occupy a position of central importance in the corporation because:

•They are the company’s legal owners•They expect high levels of economic performance

Stockholders contend with management and the board of directors for control of company policies

Who are stockholders?

IndividualsInstitutional Investors

•401(k)•IRA•58% of value of all stocks

Why do they own stock?

Economic

Social•Social or ethical objectives•Using CSR as investment criteria!•SIF

•Socially screened portfolios provide returns that are competitive with the broad market

•Good ethics = Good business

Social Investment Sidebar

1700s: Religious Groups – Quakers, Jews, Methodists

1960s: Labor-mgmt. issues, gender equality, anti-nuclear

1970s: Apartheid - South Africa divestment begins

1980s: Bhopal, Chernobyl & Exxon Valdez – environment

1994: Tobacco – American Medical Association makes public call to divest from tobacco stocks

T. L. Ceranic

Exclusionary screening

Manufacture of Manufacture of tobaccotobacco

Manufacture of Manufacture of alcohol alcohol

Weapons and Weapons and weapons weapons systemssystems

Environmental Environmental practicespractices

Participation in Participation in gambling gambling industryindustry

Manufacture of Manufacture of nuclear powernuclear power

Positive screening

Environmental/ Environmental/ Climate ChangeClimate Change

Management/Management/labor relations labor relations historyhistory

Consumer Consumer protection issuesprotection issues

Women/family Women/family benefitsbenefits

Equal Equal employment employment opportunityopportunity

IntInt’’l operations/ l operations/ human rightshuman rights

Animal welfareAnimal welfare

Corporate Corporate GovernanceGovernance

More Objectives of Stock Ownership

Mixed objective

•Economic + social objectives

Corporate control

•Take over or just to make improvements

The Board

An elected group of individuals who have a legal duty to establish corporate

objectives, develop broad policies, and select top-level personnel to carry out

these objectives and policies.

Boards should…

Communicate and report accurate info Protect shareholders’ votes Be independent and compensated fairly Promote corporate citizenship Ensure sound corporate governance

Board Committees

AuditCompensationStock OptionsNominatingExecutiveDirectors’ Compensation

Board OrganizationFinanceSuccessionCorporate ResponsibilityInvestment

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.

http://www.theyrule.net/

Executive Compensation

Stock options•In the U.S., CEOs make somewhere between 300-800

times what the average worker does.•Top managers in other countries earn much less. •Executive pay is set by compensation committees of

boards of directors.

2012 CEO Pay

Executive Pay Watch

A Governance Problem: CEO Pay

U.S. corporations will need to disclose how the paychecks of their chief

executive officers compare with those of their workers under a new proposal released on Wednesday by a sharply divided U.S. Securities and Exchange

Commission.(September 18, 2013)

Insider Trading

Securities and Exchange Commission

•Created in 1934 to protect stockholder’s rights by making sure that stock markets are run fairly and investment information is fully disclosed

Some argue it is “ethically appropriate”

•Market-based argument •Efficient means to disseminate accurate

information

NYSE/NASDAQ Listing Rules

Majority of independent directors

Codes of ethics

Independent nominating and compensation committees (NYSE only)

Vermilion Iron Mining: Ely, Minnesota

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