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Chapter 26 - Corporate Governance as an Alternative...

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FINA 4082 - Marquette University Dr. David Krause Corporate Governance as an Alternative Investment Strategy Chapter 26
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FINA 4082 - Marquette University Dr. David Krause Traditional and Alternative Investments Investment Alternatives Traditional Alternatives Modern Alternatives Traditional Investments Private Equity Commodities Real Estate Hedge Funds Managed Futures Credit Derivatives ETFs Corporate Governance Stocks Bonds
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FINA 4082 - Marquette University Dr. David Krause Private Equity, Leveraged Buyouts (LBOs) and Corporate Governance It is clear from the returns earned by private equity firms (especially LBOs), that solid corporate governance initiatives can add value and enhance the wealth of shareholders. Anson, p. 669 (activism / corporate governance)
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FINA 4082 - Marquette University Dr. David Krause Corporate Governance as an Alternative Investment Strategy Actively engaging executive management of public companies can result in improved performance by reducing the agency problem . Active engagement of management can result in strengthened internal financial controls . Corporate activism can positively influence the role of the board of directors (i.e. agenda, composition, committees, independence, etc.) to focus on shareholder rights and firm performance.
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FINA 4082 - Marquette University Dr. David Krause The Timeline of the “Shareholder” Prior to the 1900s, physical assets were defined as an individual’s net worth: “Land Barons” were aptly named as real estate was the primary asset. Over time the global economy changed from an agricultural one to an industrial one. A new denominator of wealth was born: The ownership interest in the production of goods and services. Initially, voting rights of corporations were governed by common law (court decisions), not statutory law—with a per capita rule (one person—one vote). It wasn’t until 1926 that the NYSE adopted a one vote per share rule.
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FINA 4082 - Marquette University Dr. David Krause The Timeline of the “Shareholder” After World War II, banks, pension funds, and mutual funds (institutional investors) became the custodians of wealth accumulation: Initially, they held bonds and mortgages. In the 1960s with the growth of the mutual fund industry they also became holders of shares of common stock. The growth of institutionally managed money has grown Exhibit 26.3 shows the growth institutional equity ownership: 1980: 32% 1990: 53% 2000: 80% 2005: 83% Presently over 85% - Firms have become less concerned with individual shareholders – the result was Enron-like activities.
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FINA 4082 - Marquette University Dr. David Krause Culpability Must be Shared Not all of the blame can be placed at the feet of corrupt corporate managers. Unfortunately, short term investing remains the primary investment paradigm in the US and the UK.
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