Lecture 2

Can Investors Influence Managers?  Theoretically, managers work for owners but in reality, firms actually seems to belong to management.  There is a race of win-lose between shareholders and management but most of the time, management has always having the upper hand.

 Different proposals are made by the shareholders but are defeated when it comes in the annual shareholders meeting.  There are normally two types of proposals; . Those relate to governance (e.g. suggesting changes in board structure) . Those relate to social reform (e.g. proposing to stop selling chemicals to rogue countries) etc; etc.

. Without management approval, proposals have little chance of succeeding. . Shareholders have to trust management and must go with their wants which leads to chaos in the firms.

 Example  Carly Fiorina’s Takeover of COMPAQ (2002) ◦ Carly Fiorina (CEO Hewlett-Packard) announce acquisition of Compaq on Sept 4, 2001 for $25.5Billion. ◦ Faced negative reaction by stock market, industry experts and the business media.

 Cont: ◦ Hewlett-Packard stock was down by 18% and Compaq’s stocks by 10% following the announcement. ◦ Two major shareholders i.e David W. Packard and Walter Hewlett were against this decision. ◦ They placed their pressure on other shareholders but all in vain. ◦ Fiorina went ahead with her plan.

Monitoring . Investing public doesn’t know about the firm’s operational level.  . Only managers know. . Consequently managers may not act in the shareholder’s best interest which demonstrates the need for MONITOR.

Monitoring . Investing public doesn’t know about the firm’s operational level. . Only managers know. . Consequently managers may not act in the shareholder’s best interest which demonstrates the need for MONITOR.

Stakeholders Monitors Creditors Stockholders Government SEC IRS Outside Company Auditors Analysts Investment Banks Credit Agencies Within Company BoDs Managers Controllers Society Employees

. Similarly market force is helpful in monitoring. . Stakeholders can also monitor by participating. . Creditors can also check by ensuring that the firm is properly handling its debt processing. . Employees, such as, internal auditors can play a vital role in monitoring. . Society can inject a sense of responsibility at the executive level by acting as a noble corporate citizenship. . Unfortunately, all of these mechanism can fail at one time or another.

 An Integrated System of Governance ◦ The corporate governance system is integrated and complicated. ◦ Every concern stakeholder is keen to get the perks i.e. executives, auditors, boards, banks, analysts and so on.

 MGT Board Regulator s Analyst s Credito rs Accounta nt Auditor Consultants Investment Banks

 Summary ◦ corporate form of business allows firm to have excessive capital ◦ it contributes a lot toward country’s economy ◦ main disadvantage lies in the relationship between the owner and controller

 Cont:- ◦ The shareholders and executives interest can be aligned through incentives involving stock options. ◦ these incentives can’t guarantee to reduce the level of RISK.