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A Blueprint for Corporate Governance

Book Description

Transparency has become a key objective of corporations and a pressing demand of shareholders, many of whom have seen their fortunes slip away because of financial irregularities and hyperinflated stock prices.

And the best way to ensure that shareholders have a clear, accurate picture of a corporation's financial health is to ensure the soundness of its corporate governance--the complex policies and procedures that dictate the relationships between shareholders, boards of directors, CEOs, managers and employees, customers, suppliers, creditors, and more.

Advocating a market-based corporate governance system based on maximizing shareholder wealth--but packed with safeguards to counter the effects of greed and incompetence--A Blueprint for Corporate Governance helps link each activity, whether it's pricing models, financial reporting, or dividend structure, to the crucial question: Does it increase shareholder wealth?

Packed with real-world examples, academic research, and statistical data, A Blueprint for Corporate Governance is the first complete, authoritative guide to bring together a state-of-the-art overview of governance practices with a detailed plan for helping managers, executives, and boards of directors focus their activities on building value for the shareholder.

Table of Contents

  1. Cover
  2. Title
  3. Copyright
  4. Contents
  5. Chapter 1: Corporate Governance: An Overview
    1. Introduction
    2. The Modern Corporation
    3. Civic Republicanism
    4. Liberalism
    5. The Corporation Complicates the World
    6. The Separation of Management and Ownership
      1. The Trustee Approach
      2. Managerial Capitalism and the Managerial Technocracy
      3. The Contractual Shareholder Model
  6. Chapter 2: The Governance Structure of American Corporations
    1. A Schematic Contractual Governance Structure
      1. The Owners
      2. Voting Rights
      3. The Board of Directors
      4. Corporate Executives and Senior Managers
      5. Creditors
      6. Relationships With Suppliers and Customers
    2. An Organic Version of the Modern Corporation
    3. Do Managers Accept the Shareholder Supremacy Model?
  7. Chapter 3: Markets: Can You Trust Them?
    1. Introduction
    2. Financial Market Efficiency
      1. Weak-Form Efficiency (Past Prices)
      2. Semistrong-Form Efficiency (Public Information)
      3. Strong-Form Efficiency
    3. Market Inefficiencies and Anomalies
      1. IPOs
      2. Earnings Announcements
      3. The 2000 NASDAQ Crash
    4. What Market Efficiency Means for Managers and Governance
      1. How Are We Doing?
      2. Don’t Try to Outguess or Beat the Market
      3. Don’t Try to Fool Investors
    5. Transparency and Market Efficiency
  8. Chapter 4: Valuation
    1. Introduction
    2. Valuing Common Stock
      1. Cash Dividends and Earnings
      2. Investors’ Required Rate of Return
    3. The Capital Asset Pricing Model
    4. Does the CAPM Work?
    5. Assets in Place Versus Growth Opportunities
      1. An Expanded Valuation Model
    6. Relative Valuation Using Comparables
  9. Chapter 5: Corporate Governance Issues in Investment Decisions
    1. Introduction
    2. The NPV Rule
      1. A Stylized NPV Example
        1. The Data
        2. The Present Values
      2. Interpreting NPV
    3. Do Investors Behave as Predicted by the NPV Rule?
    4. Implication of the NPV Rule for Internal Allocation of Capital
    5. Legitimate and Illegitimate Criticisms of the NPV Rule
      1. Strategic Options and the NPV Rule
      2. Competitive Analysis Approach
  10. Chapter 6: Corporate Governance Issues and the Financing Decision
    1. Introduction
    2. The Setup
      1. Shareholder/Bondholder Conflicts of Interest
        1. The Events
        2. How Creditors Protect Themselves with Covenants
      2. Shareholder/Manager Conflicts of Interest
      3. The Financing Decision and Customers
      4. The Financing Decision and Employees
    3. Bank Debt Versus Public Debt
    4. Does Where You Raise Funds Matter?
  11. Chapter 7: Corporate Governance Dividend Issues
    1. Introduction
    2. The Setup: Why Pay Cash Dividends?
    3. Solving Informational Asymmetry Problems
    4. Dividends, Free Cash Flow, and Conflicts of Interest
      1. Dividends and Growth Opportunities
      2. Dividends and Legal Systems
    5. Dividends, Taxes, and Share Repurchases
    6. An Example of Disgorging Cash: Ford Motor Company
    7. Explicit Free Cash Flow Dividend/Share Repurchase Policies
  12. Chapter 8: Corporate Governance and Managerial Compensation
    1. Introduction
    2. The Problem
    3. Measuring Effort and Performance
    4. Common Pay and Performance Schemes
      1. Base Salary Examples
      2. Short-Term Incentive Plans
      3. Short-Term Incentive Examples
      4. Problems With Short-Term Incentive Plans
        1. Problems with Accounting Measures
        2. Problems with Budgets
        3. Potential Gaming Behavior
      5. Long-Term Incentive Plans
      6. Examples of Long-Term Incentive Plans
      7. Problems with Stock Option and Restricted Stock Plans
        1. Reported Earnings and Paying Managers with Stock or Stock Options
        2. Abusive Manipulation of Earnings
    5. EVA®: A Very Popular Compensation Plan and Corporate Governance Metric
      1. A Stylized EVA Example
      2. Using EVA to Set Compensation
    6. The Evidence About Pay and Performance
    7. Pay and Performance in
  13. Chapter 9: The Corporate Control Market
    1. Introduction
    2. Why a Corporate Control Market?
      1. A Restructuring Plan for LeisurePark
      2. A Tender Offer for LeisurePark
    3. Mergers and Acquisitions
      1. United Airlines and US Airways
      2. Hewlett-Packard and Compaq
      3. When Do Mergers Create Value?
      4. How Can Mergers Destroy Shareholder Value?
    4. Divestitures, Spin-Offs, and Carve-Outs
    5. Going Public: IPOs
      1. Why Go Public?
    6. LBOs and MBOs
      1. Why LBOs and MBOs?
      2. Potential Problems for Public Investors
  14. Chapter 10: The Board of Directors and Shareholders Rights
    1. Introduction
    2. A Historical Perspective
      1. From World War II to the 1970s
      2. Boards Again Attract Attention
    3. Composition and Compensation of the Board of Directors
      1. Board Committees
      2. Board Compensation
    4. The CEO and the Board Chair
    5. Shareholder Rights
      1. Voting Rights
        1. How Many Votes for Each Shareholder?
        2. Confidentiality Issues
        3. ERISA and Institutional Investor Voting Responsibilities
      2. Electing the Board of Directors
        1. Cumulative Voting
        2. Staggered Boards
    6. Poison Pills, Supermajority Rules, and Greenmail
      1. A Shareholder Rights Plan at First Virginia Banks (FVA)
      2. Evidence About Antitakeover Devices
    7. Board Governance and Firm Performance
  15. Chapter 11: Alternative Governance Systems: Germany and Japan
    1. Introduction
    2. The German System
      1. German Governing Boards
      2. Absence of Corporate Control Market
    3. Universal Banking: A German Governance Solution
      1. Advantages of Universal Banking
      2. Disadvantages of Universal Banking
        1. Banks May Care About Firm Survival, Not Share Price
        2. Weak Investor Protection Laws
        3. Absence of an Equity Market Hinders Formation of New Firms
    4. What’s the Evidence with Respect to Germany?
      1. Why German Firms Adopt an American Governance Structure
    5. The Japanese Keiretsu
      1. Reciprocal and Control-Oriented Share Ownership
      2. Relational Contracting
    6. A Critique of the Keiretsu
      1. Advantages of the Keiretsu
      2. Disadvantages of the Keiretsu
      3. Japanese Reforms
    7. Convergence or Diversity?
    8. OECD Principles of Corporate Governance
  16. Notes
  17. Index
  18. About the Author