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Rethinking MBA Curriculum in the Finance Discipline II: Sustainability and Stakeholders in the Finance Curriculum Presented by: John R. Becker-Blease, Ph.D. Assistant Professor – Finance Oregon State University Moderated by Dr. Elizabeth K. Keating, CPA Lecturer in Accounting, Boston University The Aspen Institute Corporate Governance and Accountability Project
Incorporating Stakeholders into the Corporate Finance Curriculum
Overview of Todays Discussion Review Problems in Finance course material. http://www.caseplace.org/d.asp?d=2853 Offer lessons learned through three years of teaching this course. Describe strategies for adopting elements of course into other curricula. Share ideas.
Guiding Quotes Teaching Finance correctly integrates ethics into the business curriculum naturally, without self- consciousness or embarrassment Stuart Greenbaum in Corporate Governance and the Reinvention of Finance We cannot maximize the long-term market value of an organization if we ignore or mistreat any important constituency Michael Jensen in Value Maximization, Stakeholder Theory, and the Corporate Objective Function
Genesis of Course Washington State University, Vancouver. Stakeholder-based MBA Curriculum. The MBA Program at WSU Vancouver emphasizes a stakeholder focus that drives sustained business success. –Stakeholder-focused leadership requires: understanding the vital interdependence between businesses and critical stakeholders such as employees, investors, customers, suppliers, and public constituencies, –adopting an executive level perspective in making decisions and taking actions that build strong long-term relationships with stakeholders, –and applying theory to solve practical problems.
WSU MBA Curriculum Mktg 565Managing for Long-Term Performance Acct 533Administrative Control and Managerial Accounting MgtOp 590Strategy Formulation and Organizational Design MgtOp 591Statistical Analysis for Business Decisions MIS 580Information Systems Management FIN 526Problems in Financial Management MgtOp 593Managerial Leadership and Productivity Mktg 506Marketing Management and Administrative Policy MgtOp 589Managing Value-Chain Partnerships MgtOp 585Negotiations MgtOp 587Business Ethics MgtOp 702Final Oral Exam
Objective of Course Review critical core finance topics such as time-value, capital budgeting, the risk-reward relation, and cost of capital. Present advanced corporate topics Advanced valuation techniques Capital structure theory Payout Policy Agency conflicts Governance policies Mergers & Acquisitions Corporate Structure
Limitations One 15-week course. Students are almost exclusively part-time with full-time jobs. Resulting Course Predominantly lecture-based (80%). Reading list is substantial. Cases are discussed but typically not formally prepared.
Course Modules Module 1: Review Module 2: Goal of the Corporation Module 3: Valuation Module 4: Capital Structure Module 5: Agency Theory & Governance Module 6: Payout Policy Module 7: M&A and Corporate Structure
Module Contents Available at Caseplace.org Learning Goals Required and Optional Readings Additional Materials Pedagogical Purpose & Notes Additional Talking Points References
Module 1: Review Learning Goals Review basic concepts of time value, project and firm valuation, capital budgeting, risk-reward, market efficiency. Review market structures, short and long-term equilibrium, competition, normal and excess profit, barriers to entry, monopolies and monopsonies. Readings Brealey, Myers, and Allen (BMA) CHs 1-12. (review of intro finance course) Goodwin, Neva. The limitations of markets: background essay. Graham and Harvey (2001) The theory and practice of corporate finance: evidence from the field (particularly pages 187-209).
Module 2: Goal of the Corporation Learning Goals Describe shareholder/stakeholder models Describe perfect market assumptions Long-term vs. Short-term view of the firm. Legal framework for managerial decision making. Readings Winkler, Adam, Corporate laws or the law of business?: Stakeholders and corporate governance at the end of history. Stout, Lynn, 2002, Bad and not-so-bad arguments for stakeholder primacy. Clement (2005). The lessons from stakeholder theory for U.S. business leaders Barry, Norman, 2002. The stakeholder concept of corporate control is illogical and impractical. Jensen, Michael, Value Maximization, Stakeholder Theory, and the Corporate Objective Function. Bird, Ron, A.D. Hall, F. Momente, and F. Reggiani What corporate social responsibility activities are valued by the market?
Module 3: Valuation Learning Goals Cover assumptions of adjusted weighted average cost of capital Introduce Adjusted Present Value (APV) Internalization of externalities. Overview of financial options including binomial and Black-Scholes valuation techniques. Fundamentals of Real Option Valuation Required Readings BMA CH 19-22. Luehrman, Timothy A., Using APV: A better tool for valuing operations. Luehrman, Timothy A., Investment Opportunities as real options: getting started with the numbers. Luehrman, Timothy A., Strategy as a portfolio of real options
Module 4: Capital Structure Learning Goals Understand how the choice of capital structure can affect the value of assets. Begin to identify the pervasive nature of information asymmetries and their impact on decision-making. Trade-Off and Pecking Order theories of capital structure Identify how choice of capital structure can affect various stakeholders and these stakeholders response. Readings BMA Chs 17-18. Graham and Harvey (2001) The theory and practice of corporate finance: evidence form the field (pages 209-243). Wruck (1990) Financial distress, reorganization, and organizational efficiency. Patrick, Steven C. Three pieces to the capital structure puzzle: The cases of Alco Standard, Comdisco, and Revco. Bronars, S. and D. Deere, 1991. The threat of unionization, the use of debt, and the preservation of shareholder wealth Noronha and Singal (2004) Financial Health and Airline Safety
Module 5: Agency & Governance Learning Goals Understanding the nature of a principal-agent conflict and identify the various conflicts that exist among the stakeholder of a firm. Understand the role of contracting and monitoring in addressing the agency issue and the challenges that exist for efficient contracting. Readings BMA Ch 12. Jensen (1986), Agency costs of free cash flow, corporate finance, and takeovers. Brewer, Chandra, and Hock (1999) Economic Value Added (EVA): Its uses and limitations Hall (2003), Six challenges in designing equity-based pay. Jensen (2003) Paying people to lie: the truth about the budgeting process. Bryne, John The best and worst boards BusinessWeek Dec, 1997. McCafferty, Joseph 2008 Building an exceptional board BusinessWeek 4-17-2008. Stout, Lynn. 2007. The mythical benefits of shareholder control
Module 6: Payout Policy Learning Goals Payout Policy relevance and irrelevance Readings BMA: CH 16. Brav, Graham, Harvey, and Michaely (2005) Payout policy in the 21st century.
Module 7: M&A and Corporate Control Learning Goals Description of the various forms of restructuring and the importance of the market for corporate control. Coverage of traditional economic rationales for M&As, both compelling and not so compelling. Understand the motivations for corporate diversification and the nature of the evidence surrounding this issue. Understand the term managerial entrenchment, how this is accomplished, and good and bad economic rationales for entrenchment. Readings BMA Ch 32-34. Holmstrom and Kaplan (2001) Corporate governance and merger activity in the United States: Making sense of the 1980s and 1990s. Jensen (1986), Agency costs of free cash flow, corporate finance, and takeovers Fee and Thomas (2004) Sources of gains in horizontal mergers: evidence from customer, supplier, and rival firms. Strine (2002), The social responsibility of boards of directors and stockholders in change of control transactions: is there any there there?. Harford (2003) Takeover bids and target directors incentives: the impact of a bid on directors wealth and board seats. Gompers, Ishii, and Metrick (2003) Corporate governance and equity prices
Lessons Learned Very time intensive for both faculty & students. Importance of system buy-in Presenting stakeholder model. Students discussion of consequences of diversification. Importance of student buy-in Non-business majors vs. business majors. Managers vs. non-managers. Framing course around market-failures. Success of student project.
Student Project Students track a single firm (typically their current employer). During semester, students must: Prepare a 3-5 pages description of company, its markets, industry, and workforce. For Modules 3-7, students must analyze their firms environment and strategic decisions related to each topic. For example, What is your firms capital structure? How has it evolved through time/conditions? Is its structure similar to industry-peers? What challenges or opportunities does its current structure present?. Stress the importance of describing impact on all stakeholders, not simply shareholders.
Modifying for Other Curricula Oregon State University Traditional MBAs (full-time, younger, more limited experience compared to WSUV). Wider range of electives offered. Larger classes. Quarter-system. Sustainability-focused
Course Content (caveat) This course is a work-in-progress until winter quarter. Modules 1-5 Omit payout policy, corporate structure, and mergers and acquisitions. More thorough coverage of Modules 1 & 2. Greater emphasis on core concepts of valuation, cost of capital, and capital budgeting. More careful articulation of stakeholder view.
Questions & Sharing Ideas Experiences teaching finance with a CSR, sustainability, stakeholder, or ethical framing? Particular coursework that draws students interest? How to integrate lessons from the global economic & financial crisis?
Rethinking MBA Curriculum in the Finance Discipline Presented by: John R. Becker-Blease, Ph.D. Assistant Professor – Finance Oregon State University Moderated by Dr. Elizabeth K. Keating, CPA Lecturer in Accounting, Boston University The Aspen Institute Corporate Governance and Accountability Project