A Blueprint for Corporate Governance: Strategy, Accountability, and the Preservation of Shareholder Value

by Fred Kaen

Overview

Recent events have turned the spotlight on the issue of corporate accountability — especially when it comes to protecting shareholder value. In the modern corporation, non-owners commonly manage day-to-day operations, and their decisions have a direct impact on the company's overall value. But what can management do to positively impact share price and protect shareholder investment? A Blueprint for Corporate Governance is unique in that it addresses shareholder value from a managerial perspective. This important book covers all essential corporate governance issues from this angle, providing detailed information and insights on: * Contemporary asset pricing models, and how they can help managers determine optimal returns on shareholder funds * Financial structures and dividend policies designed to advance shareholder interests * Methods for executives, managers and boards of directors to work as one to enhance and increase shareholder value.

Product Details

ISBN-13:	9781400245994
Publisher:	AMACOM
Publication date:	12/03/2024
Pages:	240
Product dimensions:	6.00(w) x 9.00(h) x (d)

About the Author

Fred A. Kaen (Durham, NH) is Professor of Finance and Co-Director of the International Private Enterprise Center in the University of New Hampshire's Whittemore School of Business and Economics. He is a member of the American Finance Association and the Financial Management Association.

Table of Contents

Chapter 1	Corporate Governance: An Overview	1
	Introduction	1
	The Modern Corporation	2
	Civic Republicanism	3
	Liberalism	5
	The Corporation Complicates the World	6
	The Separation of Management and Ownership	8
	The Trustee Approach	9
	Managerial Capitalism and the Managerial Technocracy	11
	The Contractual Shareholder Model	14
Chapter 2	The Governance Structure of American Corporations	17
	A Schematic Contractual Governance Structure	17
	The Owners	19
	Voting Rights	24
	The Board of Directors	25
	Corporate Executives and Senior Managers	26
	Creditors	27
	Relationships With Suppliers and Customers	28
	An Organic Version of the Modern Corporation	29
	Do Managers Accept the Shareholder Supremacy Model?	31
Chapter 3	Markets: Can You Trust Them?	33
	Introduction	33
	Financial Market Efficiency	34
	Weak-Form Efficiency (Past Prices)	35
	Semistrong-Form Efficiency (Public Information)	37
	Strong-Form Efficiency	43
	Market Inefficiencies and Anomalies	45
	IPOs	45
	Earnings Announcements	46
	The 2000 NASDAQ Crash	47
	What Market Efficiency Means for Managers and Governance	48
	How Are We Doing?	48
	Don't Try to Outguess or Beat the Market	50
	Don't Try to Fool Investors	51
	Transparency and Market Efficiency	53
Chapter 4	Valuation	57
	Introduction	57
	Valuing Common Stock	57
	Cash Dividends and Earnings	59
	Investors' Required Rate of Return	59
	The Capital Asset Pricing Model	62
	Does the CAPM Work?	64
	Assets in Place Versus Growth Opportunities	65
	An Expanded Valuation Model	66
	Relative Valuation Using Comparables	70
Chapter 5	Corporate Governance Issues in Investment Decisions	73
	Introduction	73
	The NPV Rule	74
	A Stylized NPV Example	75
	The Data	75
	The Present Values	77
	Interpreting NPV	78
	Do Investors Behave as Predicted by the NPV Rule?	79
	Implication of the NPV Rule for Internal Allocation of Capital	81
	Legitimate and Illegitimate Criticisms of the NPV Rule	82
	Strategic Options and the NPV Rule	84
	Competitive Analysis Approach	85
Chapter 6	Corporate Governance Issues and the Financing Decision	89
	Introduction	89
	The Setup	91
	Shareholder/Bondholder Conflicts of Interest	93
	The Events	94
	How Creditors Protect Themselves with Covenants	95
	Shareholder/Manager Conflicts of Interest	96
	The Financing Decision and Customers	99
	The Financing Decision and Employees	100
	Bank Debt Versus Public Debt	101
	Does Where You Raise Funds Matter?	103
Chapter 7	Corporate Governance Dividend Issues	105
	Introduction	105
	The Setup: Why Pay Cash Dividends?	106
	Solving Informational Asymmetry Problems	107
	Dividends, Free Cash Flow, and Conflicts of Interest	110
	Dividends and Growth Opportunities	110
	Dividends and Legal Systems	111
	Dividends, Taxes, and Share Repurchases	113
	An Example of Disgorging Cash: Ford Motor Company	114
	Explicit Free Cash Flow Dividend/Share Repurchase Policies	115
Chapter 8	Corporate Governance and Managerial Compensation	117
	Introduction	117
	The Problem	118
	Measuring Effort and Performance	119
	Common Pay and Performance Schemes	121
	Base Salary Examples	122
	Short-Term Incentive Plans	123
	Short-Term Incentive Examples	124
	Problems With Short-Term Incentive Plans	125
	Problems with Accounting Measures	125
	Problems with Budgets	126
	Potential Gaming Behavior	127
	Long-Term Incentive Plans	128
	Examples of Long-Term Incentive Plans	130
	Problems with Stock Option and Restricted Stock Plans	130
	Reported Earnings and Paying Managers with Stock or Stock Options	132
	Abusive Manipulation of Earnings	134
	EVA: A Very Popular Compensation Plan and Corporate
	Governance Metric	136
	A Stylized EVA Example	137
	Using EVA to Set Compensation	140
	The Evidence About Pay and Performance	141
	Pay and Performance in 2000	142
Chapter 9	The Corporate Control Market	149
	Introduction	149
	Why a Corporate Control Market?	150
	A Restructuring Plan for LeisurePark	151
	A Tender Offer for LeisurePark	153
	Mergers and Acquisitions	155
	United Airlines and US Airways	156
	Hewlett-Packard and Compaq	158
	When Do Mergers Create Value?	159
	How Can Mergers Destroy Shareholder Value?	161
	Divestitures, Spin-Offs, and Carve-Outs	162
	Going Public: IPOs	164
	Why Go Public?	164
	LBOs and MBOs	165
	Why LBOs and MBOs?	166
	Potential Problems for Public Investors	167
Chapter 10	The Board of Directors and Shareholders Rights	169
	Introduction	169
	A Historical Perspective	170
	From World War II to the 1970s	170
	Boards Again Attract Attention	171
	Composition and Compensation of the Board of Directors	172
	Board Committees	173
	Board Compensation	174
	The CEO and the Board Chair	178
	Shareholder Rights	178
	Voting Rights	179
	How Many Votes for Each Shareholder?	179
	Confidentiality Issues	180
	ERISA and Institutional Investor Voting Responsibilities	181
	Electing the Board of Directors	181
	Cumulative Voting	181
	Staggered Boards	182
	Poison Pills, Supermajority Rules, and Greenmail	183
	A Shareholder Rights Plan at First Virginia Banks (FVA)	184
	Evidence About Antitakeover Devices	184
	Board Governance and Firm Performance	185
Chapter 11	Alternative Governance Systems: Germany and Japan	187
	Introduction	187
	The German System	188
	German Governing Boards	189
	Absence of Corporate Control Market	190
	Universal Banking: A German Governance Solution	191
	Advantages of Universal Banking	191
	Disadvantages of Universal Banking	193
	Banks May Care About Firm Survival, Not Share Price	194
	Weak Investor Protection Laws	194
	Absence of an Equity Market Hinders Formation of New Firms	195
	What's the Evidence with Respect to Germany?	196
	Why German Firms Adopt an American Governance Structure	197
	The Japanese Keiretsu	199
	Reciprocal and Control-Oriented Share Ownership	200
	Relational Contracting	202
	A Critique of the Keiretsu	204
	Advantages of the Keiretsu	204
	Disadvantages of the Keiretsu	205
	Japanese Reforms	206
	Convergence or Diversity?	207
	OECD Principles of Corporate Governance	209
	Notes	211
	Index	215
	About the Author	227

Editorial Reviews

Author Fred R. Kaen has crafted an interesting and highly ambitious book that covers a broad swath of finance and strategy. (May, 2003)

Financial Executive