1. Corporate Governance and Performance Analysis
Professor Sidney E. Harris
Lecture 1

2. Corporate Governance Landscape
Shareholders
Board
Management
Employees
Country/Company Ideology
Courts-State/Federal
SEC
Security Analysts
Stock Exchanges
Institutional Investors
Accountants/Auditors
Law Firms

3. Historical Perspective
1814, Henry Cabot Lowell, founded the first public company in U.S.
Within seven years investors had received a 100% return
Is management focused on maximizing shareholder value?

4. Historical Perspective
After 1929 stock market crash, congressional investigators uncovered widespread insider trading, stock price manipulation, and diversion of corporate funds for personal use
The 1933 Securities Act imposed extensive disclosure requirements on corporations
In 1934, Congress established the SEC to enforce the new regulations

5. Historical Perspective
After the 34 Act, management became conservative and bureaucratic
In the 1972, Jensen and Meckling proposed the Principal-Agent Problem-”one party employs another to do a job”
By the early1980s, the shareholder value movement began to take shape
LBOs were seen as a principal tool to extract value--”solve the principal-agent problem”

6. Historical Perspective
Technology firms began to rely on stock options to compensate employees
In the 1990s, widespread adoption of stock options
In the late ‘90s, mega-options grants were introduced
In 2006, stock options are treated as an expense

7. America’s Governance Model
Role of Government
Purpose of Business
Capital Markets
Customers
Employees

8. America’s Rivals UK
Germany
France
China
Japan
Korea

9. Transition Economy Governance Model
Ownership-families, inter-locking companies (including suppliers), and banks
Role of business-tied to national identity
Banks and capital markets have a closer relationship with government
“Rule of man” versus “rule of law”
Crony capitalism and lack of opacity

10. Actions Needed
Much greater independence between business and government
Strong foreign presence
Reduction in rules and regulation that favor who you know
Free and investigative press
Strong system of the rule of law

11. Cycle of Greed
Institutional Investors focus on the short term growth in earnings
Drives Share Price
Alignment of CEO Incentives
Pressure for auditors to allow accounting tricks
Board Oversight