Corporate Governance

Of directors executive compensation stock ownership

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: re directly responsible for outcomes outcomes 13 Governance Mechanisms Board of Directors Executive Compensation • Stock ownership (long-term Stock incentive compensation) makes managers more susceptible to market changes which are partially beyond their control beyond • Incentive systems do not guarantee Incentive that managers make the “right” decisions, but do increase the likelihood that managers will do the things for which they are rewarded things 14 Governance Mechanisms Board of Directors Executive Compensation Ownership Concentration • Large block shareholders (often institutional owners) have a strong incentive to monitor management closely • Exit vs. Voice – Cannot costlessly exit due to equity stake (transaction costs) so they press for change (exercise voice) • They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats) 15 Governance Mechanisms Board of Directors Executive Compensation Ownership Concentration • Types of institutional investors ­ Mutual funds, pension funds, foundations, churches, universities, insurance companies • Pressure­resistant versus pressure­ sensitive ­ Mutual and pension funds are pressure resistant • Are Institutional investors the same? ­ Short vs. long term • Components of voice: ­ Pension fund hit lists ­ Shareholder liability suits ­ Investor alliances ­ Proxy contests 16 Governance Mechanisms Board of Directors Executive Compensation Ownership Concentration Market for Corporate Control • Firms face the risk of takeover Firms when they are operated inefficiently inefficiently • Many firms begin to operate more Many efficiently as a result of the “threat” of takeover, even though the actual incidence of hostile takeovers is relatively small relatively • Changes in regulations have made Changes hostile takeovers difficult hostile • Acts as an important source of Acts discipline over managerial incompetence and waste incompetence 17 Managerial Defense Tactics Designed to fend off the takeover attempt Increase the costs of making the acquisitions Causes incumbent management to become entrenched while reducing the chances of introducing a new management team May require asset restructuring Institutional investors oppose the use of defense tactics 18...
View Full Document

This note was uploaded on 03/07/2012 for the course FINANCE 245 taught by Professor Hameed during the Spring '12 term at IMSciences.

Ask a homework question - tutors are online