Business 303 Sheppard

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Business 303 Sheppard

• Business Society Ethics, Week 2
• Can we trust the governance structure?

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BUSINESS, SOCIETY ETHICS WEEK 2 MAIN QUESTIONS

• What are the basic features of the corp.?
• Whats the Received Legal Model?
• Whats the Managerial Domination Model?
• What are ways to increase the corp.'s
  responsiveness to stockholders.
• What are the individual failures
  that lead to corporate problems?

At a minimum shouldnt we be responsible to
at least to the shareholder?
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2. Background on the Corporation

• The necessary legal fiction
• Legal lets pretend England / church 1100 AD
• Incorporate to promote the public good
• The incorporated city England 1500 AD
• Dutch English trading ventures
• Capital pooling Holland / U.K. 1600 AD
• Public works to promote public good
• Govt. Corp.s / canals U.K. / Hol. / U.S. 1700 AD
  
• Incorporation to business ventures
• Private corp. for mfg. U.K., Hol. U.S. 1800 AD
• Incorporation to holding companies
• Co. owns other co. N.J. ? Del. ? Intl. 1900 AD

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3. What is the Corporation? (1/2)

• Characteristics of Corporations
• Legal entity
• Artificial being, invisible, intangible,
• existing only in the contemplation of law
• Creature of the state
• Owes its existence to the government
• Allows for free transfer of ownership
• Limited liability
• Perpetual existence
• Moral Agent?
• CID, Corp. Culture, Imprison-able?

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3. What is the Corporation? (2/2)

• Powers of the Corporation
• Expressed powers in a corp. charter
• Implied powers (free speech)
• Limits legalities the changing face
  of the law
• Responsibilities Corporate Liability
• Civil Liability Corp. has deep pockets
• Criminal Liability The courts would like to
  arrest someone!

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4. Stockholders (1/3)

• Who are they?
• Individual Investors
• Institutional Investors
• Why are they so important?
• As residual claimants, if shareholders needs are
  met then in theory all other stakeholder needs
  are met. Jay Barney
• Fact is, if shareholders needs are not met, few
  other stakeholder needs are likely to be met.
• They may also have a desire for the corporation
  to behave ethically

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4. Stockholders (2/3)

• Shareholders vote on
• Mergers / Consolidations
• Important shareholders
  investment decisions
• Disposing of most corp. assets
• Dissolving the corp. / re-incorporation
• Charter and Bylaw Changes
• Proposals by Stockholders to force corp. to act
• Elections of Directors
• Who should act on corp.s shareholders behalf

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4. Stockholders (3/3)

• Shareholders Legal Rights
• Shareholder Suits
• Individual Suits
• Derivative Suits On the corporations behalf
• Corporate Disclosure
• The Annual Report
• Want More and itll cost!
• Selling the Shares

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5. The Received Legal Model (1/3)

• How the Corporation is run by law

Annuit Coeptis
S h a r e h o l d e r s
B o a r d o f D i r e c t o r s
M a n a g e r s a n d O f f i c e r s
W o r k e
r s
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5. The Received Legal Model (2/3)

• Implications

• Governmental Power to Charter Regulate
• Fiduciary Duty of Directors to
  the company the Stockholders
• Obedience
• Fiduciary Duty of Loyalty
• Liability under some conditions
• Insolvency CDN wages
• Whenever theres a buyout
• Pollution
• Due Diligence
• Oversight which would be used by a
  responsible director in a similar position

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5. The Received Legal Model (2/3)

• The Board of Directors
• Number Type
• Inside Directors in-house directors
• Outside Directors out-house directors
• Election
• Majority takes all the board (this is the slate
  of candidates vote yes or no) OR
• Cumulative Voting
  one vote for
  each share times the number of directors being
  elected such that shareholders with a large
  minority can elect a director
• Staggered Term Boards
  e.g. only elect 2 members
  / year for a 3 year term on a 6 member board for
  continuity

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6. Managerial Domination Model (1/5)

• How the Corporation is really run?

Num Me V e x o
Management
Govern-m e n t
Share-holders
Board of Directors
Workers
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6. Managerial Domination Model (2/5)

• Management Influences on Government
• Competition for chartering
• More a U.S. international problem
• Political influence Lindblom
• Why government must cater to big business
• Capital Mobility
• Ability to pick places for the 'right'
  regulations
• Pick government you want to be regulated by
• Pick several for a range of regulations

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6. Managerial Domination Model (3/5)

• Picking several governments at once
• 11/13/02 A 15m hole opens in the oil tanker
  Prestige,
• Nearby France, Spain Portugal block
  entry.
• 11/19/02 The tanker breaks in half and sinks,
  
• Oil spoils 600km of Spanish French
  coast,
• Est. Damage of about 3 billion.
• Who was responsible?
• Tanker was Japanese built, Liberian owned,
• Bahamian registered, Greek operated,
• Swiss-based Corp. chartered as a sub. of a
  Russian industrial company and
• Classified seaworthy by U.S. shipping auth.s.
• Where do you begin, or end?

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6. Managerial Domination Model (4/5)

• Management Influences on Shareholders
• Information
• Shareholders Lists
• Money
• Proxy Process
• Greenmail
• Disbursed Shareholders
• with little real power
• Berle Means
• Different Classes of Stock
• with Different Voting Rights

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6. Managerial Domination Model (5/5)

• Management Influences on the Board

• The Proxy Process
• Staggered Boards
• Treating Outside Directors
  Like Mushrooms
• Outhouse directors
• Liability Insurance
• Non-Cumulative Voting

• Management Influences on the Workers
• Lack of Access to the Board

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7. The Corp. Governance Critique (1/3)

• So what about the Mgr. Dom. Model?
• Firms behave in inefficiently
• Owners that should rid themselves
  of poor management don't
• (Capital) Market forces that should
  have great influence
  dont
• Uncontrolled managers wield great influence
• The largest corporations and the assent of
  people to the top
• Conflict with democracy? (Lindblom again)

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7. The Corp. Governance Critique (2/3)

• New Issue Summary
• Management autocracy 583-4
• The board as rubber-stamp 585
• Or source of policies 592
• Consent of the governed 588
• Growth of firms
• Berle Means again
• Owner-management decline 595 too
• Rise in social expectations
• The principle agent problem

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Agency Theory
7. The Corp. Governance Critique (3/3)
An agency relationship exists when
Managerial Decision-Making Specialist (Agent)
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596-605
8. How we Control the Corporation

Shareholder Democracy
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9. Shareholder Democracy (1/7)

• Reforming the Board
• Professional, Full Time Directors
• Ethics Public Affairs Committees
• Separate Post of Board Chair Pres.
• Poor idea when fast action is needed
• Increasing Director's Liability
• Barbarians at the gates
• Full Disclosure on Corp. Takeovers.
• Concentrated Ownership
• Annual meetings that allow for real votes on
  shareholder initiatives.

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Adoption of TSE Corp. Governance Guidelines by
TSE listed Companies
8e. Shareholder Democracy (2/7)
From R.M Corbin, 1999, Report on Corporate
Governance, 1999, Five Years to the Dey, Toronto
Stock Exchange,
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Executive Compensation
8e. Shareholder Democracy (3/7)

• They do increase the likelihood that managers
• will do the things for which they are rewarded

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8e. Shareholder Democracy (4/7)

• Corporate Raiders Takeover Artists
• Help get Rid of Bad Management
• Downside Effects
  Management destroying value via
• Management concentrating on short run
  profits to avoid a raid
• Greenmail
• Golden Parachutes
• Poison Pills

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8e. Shareholder Democracy (5/7)

• Sensible Defences against Corporate Raiders
  Takeover Artists
• Restrictions to min. effects of
  Raiders vs. Managers on stockholders
• All anti-takeover devices to be
  approved/renewed periodically
• Board approval for purchase of more than X
  of a company
• If the board doesn't approve,
  buyer must offer to buy
  whole corp.

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8e. Shareholder Democracy (6/7)

• LBOs to address Principle/Agent Prob.
• A Buyout gives former investors cash that can put
  it to productive use
• Managers make efficient resource use due to need
  to meet interest payments
• Management incentives are greater they
  own a bigger slice of the company
• Big Sums in Union Retirement Funds
• These stockholders are forced to take an active
  interest in the corporation

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Ownership Concentration
8e. Shareholder Democracy (7/7)
- In Canada such shareholders account for 65 to
. 70 of publicly traded stocks (59 in the U.S.)
(though financial institutions are legally
forbidden from directly holding board seats)
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B y e B y e