Select Issues in Corporate Governance

Prof Harvey Poniachek

Spring 2014
Corporate Organization
BOD
Sub 1
Sub 2
Sub 3
Management
3
The Agency Problem

1. In the US, corporations have limited liabilities,
and publicly listed firms ownership is widely
dispersed among individual shareholders
2. Shareholders elect a board of directors to
represent their interest, but sometime
management (agents of the board) might pursue
their own objective, thus causing an agency
problem
3. If the BOD is ineffective in caring about SHs
interest, several outside mechanisms are
available to address the challenge
4
Outside Mechanisms
1. The stock market penalizes poorly
performing corporations by reducing their
stock prices
2. Institutional investors play an increasing role
in monitoring companies performance and
conduct, e.g., CalPERS and TIAA-CREF, others
3. Proxy contests allow dissenting shareholders
to challenge board and attempt to change its
directors
5
Outside MechanismsCont.
1. The M&A market (for corporate control)
could be the ultimate mechanism for the
application of corporate governance
2. Misconduct of corporate management was
addressed by Congress in July 2002 through
the Sarbanes-Oxley Act

6
The BOD
1. The composition of the BOD could have a
significant role in monitoring management
2. Outside director are deemed to be more
effective than inside director in controlling
and monitoring management
3. Is compensation of directors playing a role in
their responsibilities and accountability?
4. Is the size of the BOD significant?

7
Corporate Governance & M&A

1. What are the responsibilities of the BOD in
the event of an imminent change of
corporate ownership?
2. How to respond a friendly or hostile offer?
3. Need to maximizing shareholders equity, but
are there exceptions?



8
Corporate Governance & M&ACont.

1. How to assure that an offer is at the right
level?
2. How long should the BOD defend the target
against a hostile takeover attempt?
3. How to avoid conflict of interest in the event
of a forthcoming change of control?

9
References
J. Fred Weston et al, Takeovers, Restructuring, and
Corporate Governance, 4
th
Ed., Pearson / Prentice
Hall 2004, Ch. 20
Robert A.G. Monks et al, Corporate Governance, 3
rd

Ed., Blackwell Publishing, 2004