Chapter 1 | Corporate Governance: An Overview | 1 |
| Introduction | 1 |
| The Modern Corporation | 2 |
| Civic Republicanism | 3 |
| Liberalism | 5 |
| The Corporation Complicates the World | 6 |
| The Separation of Management and Ownership | 8 |
| The Trustee Approach | 9 |
| Managerial Capitalism and the Managerial Technocracy | 11 |
| The Contractual Shareholder Model | 14 |
Chapter 2 | The Governance Structure of American Corporations | 17 |
| A Schematic Contractual Governance Structure | 17 |
| The Owners | 19 |
| Voting Rights | 24 |
| The Board of Directors | 25 |
| Corporate Executives and Senior Managers | 26 |
| Creditors | 27 |
| Relationships With Suppliers and Customers | 28 |
| An Organic Version of the Modern Corporation | 29 |
| Do Managers Accept the Shareholder Supremacy Model? | 31 |
Chapter 3 | Markets: Can You Trust Them? | 33 |
| Introduction | 33 |
| Financial Market Efficiency | 34 |
| Weak-Form Efficiency (Past Prices) | 35 |
| Semistrong-Form Efficiency (Public Information) | 37 |
| Strong-Form Efficiency | 43 |
| Market Inefficiencies and Anomalies | 45 |
| IPOs | 45 |
| Earnings Announcements | 46 |
| The 2000 NASDAQ Crash | 47 |
| What Market Efficiency Means for Managers and Governance | 48 |
| How Are We Doing? | 48 |
| Don't Try to Outguess or Beat the Market | 50 |
| Don't Try to Fool Investors | 51 |
| Transparency and Market Efficiency | 53 |
Chapter 4 | Valuation | 57 |
| Introduction | 57 |
| Valuing Common Stock | 57 |
| Cash Dividends and Earnings | 59 |
| Investors' Required Rate of Return | 59 |
| The Capital Asset Pricing Model | 62 |
| Does the CAPM Work? | 64 |
| Assets in Place Versus Growth Opportunities | 65 |
| An Expanded Valuation Model | 66 |
| Relative Valuation Using Comparables | 70 |
Chapter 5 | Corporate Governance Issues in Investment Decisions | 73 |
| Introduction | 73 |
| The NPV Rule | 74 |
| A Stylized NPV Example | 75 |
| The Data | 75 |
| The Present Values | 77 |
| Interpreting NPV | 78 |
| Do Investors Behave as Predicted by the NPV Rule? | 79 |
| Implication of the NPV Rule for Internal Allocation of Capital | 81 |
| Legitimate and Illegitimate Criticisms of the NPV Rule | 82 |
| Strategic Options and the NPV Rule | 84 |
| Competitive Analysis Approach | 85 |
Chapter 6 | Corporate Governance Issues and the Financing Decision | 89 |
| Introduction | 89 |
| The Setup | 91 |
| Shareholder/Bondholder Conflicts of Interest | 93 |
| The Events | 94 |
| How Creditors Protect Themselves with Covenants | 95 |
| Shareholder/Manager Conflicts of Interest | 96 |
| The Financing Decision and Customers | 99 |
| The Financing Decision and Employees | 100 |
| Bank Debt Versus Public Debt | 101 |
| Does Where You Raise Funds Matter? | 103 |
Chapter 7 | Corporate Governance Dividend Issues | 105 |
| Introduction | 105 |
| The Setup: Why Pay Cash Dividends? | 106 |
| Solving Informational Asymmetry Problems | 107 |
| Dividends, Free Cash Flow, and Conflicts of Interest | 110 |
| Dividends and Growth Opportunities | 110 |
| Dividends and Legal Systems | 111 |
| Dividends, Taxes, and Share Repurchases | 113 |
| An Example of Disgorging Cash: Ford Motor Company | 114 |
| Explicit Free Cash Flow Dividend/Share Repurchase Policies | 115 |
Chapter 8 | Corporate Governance and Managerial Compensation | 117 |
| Introduction | 117 |
| The Problem | 118 |
| Measuring Effort and Performance | 119 |
| Common Pay and Performance Schemes | 121 |
| Base Salary Examples | 122 |
| Short-Term Incentive Plans | 123 |
| Short-Term Incentive Examples | 124 |
| Problems With Short-Term Incentive Plans | 125 |
| Problems with Accounting Measures | 125 |
| Problems with Budgets | 126 |
| Potential Gaming Behavior | 127 |
| Long-Term Incentive Plans | 128 |
| Examples of Long-Term Incentive Plans | 130 |
| Problems with Stock Option and Restricted Stock Plans | 130 |
| Reported Earnings and Paying Managers with Stock or Stock Options | 132 |
| Abusive Manipulation of Earnings | 134 |
| EVA: A Very Popular Compensation Plan and Corporate | |
| Governance Metric | 136 |
| A Stylized EVA Example | 137 |
| Using EVA to Set Compensation | 140 |
| The Evidence About Pay and Performance | 141 |
| Pay and Performance in 2000 | 142 |
Chapter 9 | The Corporate Control Market | 149 |
| Introduction | 149 |
| Why a Corporate Control Market? | 150 |
| A Restructuring Plan for LeisurePark | 151 |
| A Tender Offer for LeisurePark | 153 |
| Mergers and Acquisitions | 155 |
| United Airlines and US Airways | 156 |
| Hewlett-Packard and Compaq | 158 |
| When Do Mergers Create Value? | 159 |
| How Can Mergers Destroy Shareholder Value? | 161 |
| Divestitures, Spin-Offs, and Carve-Outs | 162 |
| Going Public: IPOs | 164 |
| Why Go Public? | 164 |
| LBOs and MBOs | 165 |
| Why LBOs and MBOs? | 166 |
| Potential Problems for Public Investors | 167 |
Chapter 10 | The Board of Directors and Shareholders Rights | 169 |
| Introduction | 169 |
| A Historical Perspective | 170 |
| From World War II to the 1970s | 170 |
| Boards Again Attract Attention | 171 |
| Composition and Compensation of the Board of Directors | 172 |
| Board Committees | 173 |
| Board Compensation | 174 |
| The CEO and the Board Chair | 178 |
| Shareholder Rights | 178 |
| Voting Rights | 179 |
| How Many Votes for Each Shareholder? | 179 |
| Confidentiality Issues | 180 |
| ERISA and Institutional Investor Voting Responsibilities | 181 |
| Electing the Board of Directors | 181 |
| Cumulative Voting | 181 |
| Staggered Boards | 182 |
| Poison Pills, Supermajority Rules, and Greenmail | 183 |
| A Shareholder Rights Plan at First Virginia Banks (FVA) | 184 |
| Evidence About Antitakeover Devices | 184 |
| Board Governance and Firm Performance | 185 |
Chapter 11 | Alternative Governance Systems: Germany and Japan | 187 |
| Introduction | 187 |
| The German System | 188 |
| German Governing Boards | 189 |
| Absence of Corporate Control Market | 190 |
| Universal Banking: A German Governance Solution | 191 |
| Advantages of Universal Banking | 191 |
| Disadvantages of Universal Banking | 193 |
| Banks May Care About Firm Survival, Not Share Price | 194 |
| Weak Investor Protection Laws | 194 |
| Absence of an Equity Market Hinders Formation of New Firms | 195 |
| What's the Evidence with Respect to Germany? | 196 |
| Why German Firms Adopt an American Governance Structure | 197 |
| The Japanese Keiretsu | 199 |
| Reciprocal and Control-Oriented Share Ownership | 200 |
| Relational Contracting | 202 |
| A Critique of the Keiretsu | 204 |
| Advantages of the Keiretsu | 204 |
| Disadvantages of the Keiretsu | 205 |
| Japanese Reforms | 206 |
| Convergence or Diversity? | 207 |
| OECD Principles of Corporate Governance | 209 |
| Notes | 211 |
| Index | 215 |
| About the Author | 227 |