Week 8 - 2011 - FINA 4370 701 Advanced Investment...

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FINA 4370 701 Advanced Investment Management, Ethics and Society Christopher K. Merker, CFA Adjunct Professor, Marquette University College of Business, Department of Finance AIM Program Week 8 – March 9, 2011 Christopher K. Merker ©2010
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Agenda Mid-Term Exam Lecture – Introduction to Corporate Governance Assignment Christopher K. Merker ©2010
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Mid-Term Exam 1 hr. 30 min. Christopher K. Merker ©2010
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Module 3: Investing in Companies with Good Corporate Governance Practices Topic 1: Introduction to Corporate Governance Christopher K. Merker, CFA Adjunct Professor, Marquette University College of Business, Department of Finance AIM Program Week 8 – March 10, 2010 Christopher K. Merker ©2010
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(c) 2008 Sarah W. Peck Corporate Governance 5
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(c) 2008 Sarah W. Peck CG (Bankruptcy) Failures Enron - $63.4 billion net World Com - $100 billon in assets Adelphi - $24 billion in assets Fannie Mae (Fannie, Freddie own 56.8% of mortgage market - $12 trillion) - $125 billion to bail out. Lehman - $691 billion (assets) Citi – uncertain, but received $45 billion in bailout funds, could raise $33 billion when govt sells stake (total cost of TARP about $100 billion) 6
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(c) 2008 Sarah W. Peck CG Failures - types • Bankruptcy (Enron) • Shareholder lawsuits (Fannie Mae) • Class action lawsuits (W.R. Grace – asbestos) • Hostile takeovers (Pacific Lumber) • Failed mergers and acquisitions (Time Warner/AOL) • Environmental disasters (BP, Love Canal) 7
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(c) 2008 Sarah W. Peck What is corporate governance? • Internal checks and balances that prevent the expropriating of wealth from one group (shareholders) to another (managers and directors). • Agency theory is the basis for both explaining what we observe in practice. 8
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(c) 2008 Sarah W. Peck INTERNAL CONTROLS Board of Directors Incentive Compensation EXTERNAL CONTROLS Takeover Market When internal controls fail, strong shareholder rights allow The takeover market to work to discipline market. Takeover occurs when another firm or group of investors acquires the firm and fires current management team. 9 How it all fits together….
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Agency Theory - Issues • Explicit versus implicit incentives • Problems (moral hazard): – Insufficient effort – Extravagant investments – Entrenchment strategies – Self-dealing 10 Christopher K. Merker ©2010
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Board of Directors • Board of Directors consists somewhere between 4 and 24 individuals. • Both insiders (executives) and outsiders (non- executives). • CEO is almost always on the board. • Outside directors are “captains of industry”, ex- government officials, accountants, lawyers, bankers, professional investors, etc. 11
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Week 8 - 2011 - FINA 4370 701 Advanced Investment...

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