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Major%20legal%20rights%20of%20stockholders

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Executive Compensation. Median total compensation, 2005, $6.0m, up 16% from 2004 (includes salary, ... Executive compensation: Is it justified? Proponents of ... – PowerPoint PPT presentation

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Title: Major%20legal%20rights%20of%20stockholders


1
Major legal rights of stockholders
Figure 15.2
  • 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 companys
    financial condition
  • To bring shareholder suits against the company
    and officers
  • To sell their own shares of stock to others

2
Key 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 boards own performance on a regular
    basis.

3
Boards More Independent, Study Says
  • Corporate boards grew more independent from mngt
    in 2004
  • Percentage of SP 500 companies with a presiding,
    or lead, director grew to 84, up from 36 in
    2003
  • Women made up nearly one-quarter of all new
    outside directors, now 16 of all directors
  • Average annual retainer fee for directors of SP
    500 companies rose 14 to 50k from 43.7k in
    2003 (excludes meeting fees and equity-based pay)
  • Median total cash pay for SP 500 directors up
    22, to 67.6k
  • Stock awards up 35, to 69.6k
  • Source Los Angeles Times, 1/12/05

4
Executive Compensation
  • Two factors contributed to pay scales that now
    have CEOs earning more than 300x pay of average
    American worker
  • Advent of giant stock option grants, form of
    compensation made more attractive by 1993 change
    to tax law that maintained corporate tax
    deductions for executive pay over 1m if pay was
    tied to performance
  • Widespread practice of linking pay to levels at
    companies of similar size
  • Has effect to raise average that everyone will
    use as baseline
  • Source New York Times, 4/5/09

5
(No Transcript)
6
Executive Compensation (Wall Street Journal study)
  • Median total compensation, 2008, 7.6m, down 3.4
    from 2007 (includes salary, bonuses, value of
    restricted stock at time of grant, gains from
    options exercises, other long-term incentives)
  • Median salaries and bonuses down 8.5, to 2.24m
  • Median salaries increased 4.5 to 1.08m, but
    bonuses fell 10.9 to 1.24m as profits declined
    by 5.8
  • Most equity granted early in year, before stock
    prices declined significantly, suggesting that
    CEO compensation may have declined further by
    years end
  • Source Wall Street Journal, 4/3/09, based on
    analysis of 200 major U.S. corporations by Hay
    Group

7
Putting a Ceiling on Pay
  • Growing number of shareholder activists pushing
    Cos to establish maximum ratios between what
    their executives earn and what their average- or
    lowest-paid workers earn
  • Average CEO in U.S. earned 282x salary of average
    worker in 2002, cf. 42x in 1982
  • Whole Foods Market (leading organic food
    retailer) limits any executives pay to no more
    than 14x pay of average worker (current cap is
    409k)
  • Ben Jerrys had capped pay at 7x pay of lowest
    worker, but dropped policy in 1994
  • Herman Miller had capped pay at 20x, but dropped
    policy in 1996
  • Critics argue that such practices that exclude
    stock options are of little value
  • Source Wall Street Journal, 4/12/04

8
Executive compensation Is it justified?
  • Proponents of high executive pay say
  • Well-paid managers are simply being rewarded for
    outstanding performance.
  • High salaries provide an incentive for innovation
    and risk-taking.
  • Not many individuals are capable of running
    todays large, complex organizations.
  • Critics of high executive pay say
  • Inflated executive pay hurts the ability of U.S.
    firms to compete with foreign rivals.
  • As many extravagantly compensated executives
    preside over failure as they do over success.
  • Multi-million-dollar salaries cause resentment
    and sap the commitment of hardworking lower and
    midlevel employees.

9
Social investment
  • Social investment
  • Refers to the use-of-stock ownership as a
    strategy for promoting social objectives.
  • Social investment can be done in two ways
  • Social screening of stock
  • Some shareholders wish to choose stocks based on
    social or environmental criteria.
  • Social responsibility shareholder resolutions
  • A resolution on an issue of corporate social
    responsibility placed before stockholders for a
    vote at the companys annual meeting.

10
Securities and Exchange Commission
  • Established in 1934 in the wake of the Great
    Depression.
  • Its mission is to protect stockholders rights by
    making sure that the stock markets are run fairly
    and that investment information is fully
    disclosed.
  • Generates revenue to pay for its own operations.

11
Sarbanes-Oxley Act
  • Established an independent board to oversee the
    audits of public companies.
  • Prohibited accounting firms from providing other
    services at the same time as an audit, if this
    would cause a conflict of interest.
  • Required CEOs and CFOs to certify the truth of
    their companies financial statements, in
    writing.
  • Required executives to pay back any bonuses or
    profits from stock sales they received after a
    financial report was issued that later had to be
    restated.
  • Required full disclosure to shareholders of
    complex financial transactions.
  • Required that at least one member of the audit
    committee be a financial expert.

12
Insider trading
  • Insider trading
  • Occurs when a person gains access to
    confidential information about a companys
    financial condition and then uses that
    information, before it becomes public knowledge,
    to buy or sell the companys stock.
  • According to the SEC Act of 1934, it is illegal
    to
  • Misappropriate nonpublic information and use it
    to trade a stock.
  • Trade a stock based on a tip from someone who had
    an obligation to keep quiet.
  • Pass information to others with an expectation of
    direct or indirect gain.

13
How to Fix Corporate Governance
  • Executive Pay
  • Expensing stock options
  • Board of Directors
  • Ban on stock sales by directors for duration of
    term
  • Accounting
  • Criminal liability
  • Analysts
  • Change in compensation practices
  • Regulators
  • More transparency
  • Leadership
  • Challenge is to create corporate cultures that
    encourage and reward integrity as much as
    creativity and entrepreneurship
  • Source Business Week, 5/6/02
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