1. Behavioral Finance
Economics 437

2. Corp Governance What is it?
Control of a company with a board of directors
Company can be public or private
Board represents “shareholders” (or “stakeholders”
Stakeholder concept is meaningless in general
Shareholder concept can be plagued by principle/agent problems: e.g. pension funds, university endowments, foundations

3. Board of Directors
Senior Management
Business

4. Why is there a problem? Individual directors may have their own agenda
Which might be: remaining as a director
Compensation and/or perquisites of office
Selection process inevitably flawed
Political appointments (University, Retirement Boards)
Management effectively appoints corporate boards
Boards are self perpetuating: Madison House, Paramont Theatre, etc.
Practical problems
Board members have other things to do
Have limited information, controlled by management

5. How Can You Tell That Corporate Board’s Are Not Up to the Task?
Management Compensation
Mergers and Acquisitions
“Insurance” Actions: Share offerings at below book prices

6. Reforms? Sarbanes-Oxley – a response to Worldcom and Enron
Makes the auditor the policeman
Massive amount of paperwork, which reduces the effectiveness of boards
Mostly “checking the box”
Dodd-Frank
Aimed mainly at financial institutions
“Say on pay” provision (subject to principle/agent problems
“Pay for performance”
But how is performance measured and how controls the measurement?
Is management actually responsible for the performance that is measures or do outside forces control performance that management has no control over?

7. Shleifer and Vishny (1997)
Key question: “How do the suppliers of finance get managers to return some of the profits to them?
What if there are no rules?
Several methods of Corp Governance
US & England: legal: “duty of loyalty” “fiduciary”
Germany: large shareholder
Japan: large creditors
What really works: LBOs
Four countries are successful: US, UK, Germany, Japan….everyone else is problematic

8. Potential US Reforms One term directors Paid in deferred stock
Stock sales prohibited by directors during their terms as directors
Sales permited only after a period (say two years) has elapsed after they are no longer board members.

9. The End