Who’s really in charge?

The Agency “Problem”  Agents/managers have one interest and want to minimize the risk of their claim (e.g., they want to diversify the firm).  Principals/owners/stockholders have many interests and want to optimize the risk of their claim (e.g., they resist diversification of the firm).  This results in conflict and tension.

Stockholders  Stockholders occupy a position of central importance in the corporation because : They are the company’s legal owners They expect high levels of economic performance  Stockholders contend with management and the board of directors for control of company policies

Who are stockholders?  Individuals  Institutional Investors 401(k) IRA 58% of value of all stocks

Why do they own stock?  Economic  Social Social or ethical objectives Using CSR as investment criteria! SIF Socially screened portfolios provide returns that are competitive with the broad market Good ethics = Good business

Social Investment Sidebar  1700s: Religious Groups – Quakers, Jews, Methodists  1960s: Labor-mgmt. issues, gender equality, anti-nuclear  1970s: Apartheid - South Africa divestment begins  1980s: Bhopal, Chernobyl & Exxon Valdez – environment  1994: Tobacco – American Medical Association makes public call to divest from tobacco stocks T. L. Ceranic

Today nearly 1 dollar out of every 8 in the U.S.  : During this period assets grew from $639 billion to $2.71 trillion, over five percent faster than all professionally managed investment assets in the United States.  : Broader universe of professionally managed assets increased less than 1 percent while SRI increased more than 13 percent Good Ethics = Good Business

Three dynamic strategies T. L. CeranicBusiness & Society (ETLW 302) Community Investing Shareholder Advocacy Social Screening

Exclusionary screening Manufacture of tobacco Manufacture of alcohol Weapons and weapons systems Environmental practices Participation in gambling industry Manufacture of nuclear power

Positive screening Environmental/ Climate Change Management/labor relations history Consumer protection issues Women/family benefits Equal employment opportunity Int ’ l operations/ human rights Animal welfare Corporate Governance

Growth of SRI  SRI assets rose more than 380 percent from $639 billion in 1995 (the year of the first Report on SRI Trends in the US) to $3.07 trillion in During the same period, the broader universe of assets under professional management increased only 260 percent from $7 trillion to $25.2 trillion.  Since 2005, SRI assets increased more than 34 percent while the broader universe of professionally managed assets increased by only 3 percent.  The 2010 Trends Report identifies 12.2 percent of the $25.2 trillion total assets under management tracked by Thomson Reuters Nelson, is using one or more of the three core socially responsible investing strategies—screening, shareholder advocacy, or community investing.

SRI Funds

More Objectives of Stock Ownership  Mixed objective Economic + social objectives  Corporate control Take over or just to make improvements

The Board An elected group of individuals who have a legal duty to establish corporate objectives, develop broad policies, and select top-level personnel to carry out these objectives and policies.

Boards should…  Communicate and report accurate info  Protect shareholders’ votes  Be independent and compensated fairly  Promote corporate citizenship  Ensure sound corporate governance

Board Committees  Audit  Compensation  Stock Options  Nominating  Executive  Directors’ Compensation  Board Organization  Finance  Succession  Corporate Responsibility  Investment

Features of Effective Boards  Select independent directors to fill most positions.  Hold open elections for members of the board.  Appoint an independent lead director and hold regular meetings without the CEO present.  Evaluate the board’s own performance on a regular basis.

Executive Compensation  Stock options In the U.S., CEOs make somewhere between times what the average worker does. Top managers in other countries earn much less. Executive pay is set by compensation committees of boards of directors.  2012 CEO Pay 2012 CEO Pay  Executive Pay Watch Executive Pay Watch

A Governance Problem: CEO Pay U.S. corporations will need to disclose how the paychecks of their chief executive officers compare with those of their workers under a new proposal released on Wednesday by a sharply divided U.S. Securities and Exchange Commission. (September 18, 2013)

Insider Trading  Securities and Exchange Commission Created in 1934 to protect stockholder’s rights by making sure that stock markets are run fairly and investment information is fully disclosed  Some argue it is “ethically appropriate” Market-based argument Efficient means to disseminate accurate information

NYSE/NASDAQ Listing Rules  Majority of independent directors  Codes of ethics  Independent nominating and compensation committees (NYSE only)

Vermilion Iron Mining: Ely, Minnesota

Next Class