© The McGraw-Hill Companies, Inc., 2002 All Rights Reserved. McGraw-Hill/ Irwin 14-1 Business and Society POST, LAWRENCE, WEBER Stockholders and Corporate Governance Chapter 14

© The McGraw-Hill Companies, Inc., 2002 All Rights Reserved. McGraw-Hill/ Irwin 14-2 Objectives of stock ownership 1) Economic objective Foremost is the goal of receiving an economic gain or return on investment. 2) Social objective Numerous mutual funds and pension funds use social screens to select companies in which they invest. 3) Mixed objectives Many investors are interested in receiving a good return but also want to invest in socially responsible companies. 4) Corporate control Some investors want control for the purpose of improving efficiency by cutting costs and implementing new strategies, merging with other businesses, or selling assets to buyers who will pay more for the parts than the whole company.

© The McGraw-Hill Companies, Inc., 2002 All Rights Reserved. McGraw-Hill/ Irwin 14-3 Figure 14-1 Individual household versus institutional ownership of stock in the United States, Source: Securities Industry Association, Securities Industry Factbook (New York: Securities Industry Association, 2000). Percent of all stocks owned

© The McGraw-Hill Companies, Inc., 2002 All Rights Reserved. McGraw-Hill/ Irwin 14-4 Figure 14-2 Major legal rights of stockholders To receive dividends, if declared. To vote on Members of board of directors Major mergers and acquisitions Charter and bylaw changes Proposals by stockholders. To receive annual reports on the company’s financial condition. To bring shareholder suits against the company and officers. To sell their own shares of stock to others.

© The McGraw-Hill Companies, Inc., 2002 All Rights Reserved. McGraw-Hill/ Irwin 14-5 Stakeholder groups involved in corporate governance Business firm Stockholders EmployeesCreditors ManagersGovernment Board of directors Legal authority Hold corporate debt Decision making Laws and regulation Affect policies Individuals or institutions

© The McGraw-Hill Companies, Inc., 2002 All Rights Reserved. McGraw-Hill/ Irwin 14-6 Figure 14-3a The best boards of directors The best boards: Evaluate performance of the CEO annually in meetings of independent directors. Link the CEO’s pay to specific performance goals. Review and approve long-range strategy and one-year operating plans. Have a governance committee that regularly assesses the performance of the board and individual directors. Pay retainer fees to directors in company stock. Require each director to own a significant amount of company stock. Source: “The Best and Worst Boards: Our New Report Card on Corporate Governance,” Business Week, November 25, 1996, p. 86.

© The McGraw-Hill Companies, Inc., 2002 All Rights Reserved. McGraw-Hill/ Irwin 14-7 Figure 14-3b The best boards of directors The best boards: Have no more than two or three inside directors. Require directors to retire at 70 years of age. Place the entire board up for election every year. Place limits on the number of other boards on which its directors can serve. Ensure that the audit, compensation, and nominating committees are composed entirely of independent directors. Ban directors who directly or indirectly draw consulting, legal, or other fees from the company. Ban interlocking directorships: “I’m on your board, you’re on mine.” Source: “The Best and Worst Boards: Our New Report Card on Corporate Governance,” Business Week, November 25, 1996, p. 86.

© The McGraw-Hill Companies, Inc., 2002 All Rights Reserved. McGraw-Hill/ Irwin 14-8 Figure 14-4 Traditional and revisionist models of corporate governance Stockholders Top managers Board of directors Stockholders Board of directors Top managers Traditional model Revisionist model elect hire and fire nominate and control dominate through control of annual meetings and proxy elections

© The McGraw-Hill Companies, Inc., 2002 All Rights Reserved. McGraw-Hill/ Irwin 14-9 Current trends on corporate governance The rise of institutional investors Pensions, mutual funds, endowment funds, and the like--have enlarged their stockholdings significantly over the past two decades. Relationship investing occurs when large shareholders form a long-term, committed link with a company. Changing role of the board of directors Some boards have become more assertive. Growing representation by outside directors. Social responsibility shareholder resolutions The SEC allows stockholders to place resolutions concerning appropriate social issues, such as environmental responsibility or alcohol and tobacco advertising, in proxy statements sent out by companies. Employee stock ownership An ESOP is a kind of benefit plan in which a company purchases shares of its own stock and places them in trust for its employees.

© The McGraw-Hill Companies, Inc., 2002 All Rights Reserved. McGraw-Hill/ Irwin Key facts about executive compensation In 1999, the chief executives of the largest corporations in the U.S. earned, on average, $12.4 million, including salaries, bonuses, and the present value of retirement benefits, incentive plans, and stock options. By international standards, this compensation is very high. In the U.S., CEOs in 1999 made about 475 times what the average worker did. Salaries may be so high because they are set by compensation committees of boards of directors. Supporters argue that high salaries provide an incentive for innovation and risk-taking. Critics argue that inflated executive pay hurts the ability of U.S. firms to compete with foreign rivals.