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Corporate Governance, Disclosure, and Executive Compensation

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Presentation on theme: "Corporate Governance, Disclosure, and Executive Compensation"— Presentation transcript:

1 Corporate Governance, Disclosure, and Executive Compensation
& Marketing, Truth, and Advertising

2 Corporate Governance Corporate scandals at the start of the century were principally scandals about corruption at the top. In many cases, management was not responsible to their boards, & boards were not accountable to shareholders. The reaction of the government was not only to condemn the abuses but to attempt to legislate remedies. In the U.S. the Sarbanes-Oxley Act (SOx) served as a start to addressing issues of corporate governance. Since Canadian securities are regulated provincially, national adjustments to the U.S. law are more difficult (more on this later). TSX / NYSE cross listed companies would be impacted.

3 In Canada 1/2 In 2003 the Canadian Securities Administrators (CSA), & the Ontario Securities Commission (OSC), drafted a series of instruments to cover most SOx provisions. CSA rules, Multilateral Instruments or MIs, were adopted by all jurisdictions in Canada. Most provisions are now in force & investors will receive more consistent disclosure on a more timely basis, & they can be more confident in the quality of the info. they get. In 2004, the OSC published proposals that describe best corp. governance practices & require issuers to make disclosures relating to these best practices. These include measures related to the composition of a board, its mandate & its committees; director education & assessment; and codes of business conduct and ethics.

4 In Canada 2/2 1st set of rules proposed by CDN regulators requires CEO/CFO certification of annual & quarterly reports. Canadian companies will also have to adopt disclosure controls and procedures with regard to financial reporting. 2nd set of rules proposes new standards and an expanded role for the audit committee. Major Canadian public companies will be required to have fully independent and financially literate audit committees. Certain exemptions are provided for venture issuers, controlled companies and U.S.-listed issuers. 3rd set of rules relates to internal controls. Companies will be required to perform detailed tests of all internal accounting processes, and their external auditors will have to examine and give an opinion on those tests.

5 Top Management Frequently members of top management have acted as if their corp. ethics codes applied to those in the lower echelons in the firm, but not to them. U.S. Law requires that a company disclose whether it has a code of ethics for its senior financial officials. If it does, the company must disclose the contents of the code, and any change in the code that it may make. If it does not have a code, it must explain why it does not.

6 Managerial Domination Model of Corp. Governance(1/5)
How the Corporation is really run? Num Me V e x o Management Govern-m e n t Share-holders Board of Directors Workers 10 10 10 10 10

7 Managerial Domination Model (2/5)
Management Influences on Government Competition for chartering More a U.S. & international problem Political influence: To keep a healthy econ., gov. caters to business Capital Mobility Ability to pick places for the 'right' regulations Pick government you want to be regulated by Pick several for a range of regulations 10 10 10 10 10

8 Managerial Domination Model (3/5)
Picking several governments at once: 11/13/02 A 15m hole opens in the oil tanker Prestige, Nearby France, Spain & Portugal block entry. 11/19/02 The tanker breaks in half and sinks, Oil spoils 600km of Spanish & French coast, Est. Damage of about $3 billion. Who was responsible? Tanker was Japanese built, Liberian owned, Bahamian registered, Greek operated, Swiss-based Corp. chartered as a sub. of a Russian industrial company and Classified seaworthy by U.S. shipping auth.s. Where do you begin, or end? 10 10 10 10 10

9 Managerial Domination Model (4/5)
Management Influences on Shareholders Information Shareholder’s Lists Money Proxy Process Greenmail Disbursed Shareholders with little real power Berle & Means Different Classes of Stock with Different Voting Rights 10 10 10 10 10

10 Managerial Domination Model (5/5)
Management Influences on the Board The Proxy Process Staggered Boards Treating Outside Directors Like Mushrooms Outhouse directors Liability Insurance Non-Cumulative Voting Management Influences on the Workers Lack of Access to the Board 10 10 10 10 10

11 Corporate Board Corporate boards vary considerably from company to company. One job of the board is to oversee the manage-ment of the corporation by its executives. Under new U.S. rules, independent members of the board are required to hold regularly scheduled meetings without management.

12 Corporate Disclosure Info. that a corp. is morally obliged to disclose coincides with much that is legally required. The moral basis for disclosure of corp. info. rests primarily on two moral principles: Each person has the right to access the info. he or she needs to enter into a transaction fairly, and Each person has the right to know those actions of others that will have a serious & adverse impact. A transaction is fair if those who are a party to it have access to the appropriate info. & freely enter into it.

13 Parties Entitled to Disclosure
A corp. has a moral obligation to disclose appropriate info. to those with whom it enters into transactions & those whom its actions affect seriously & adversely. In broad terms, those affected are: Shareholders and potential shareholders (have the right to financial info., board member info. significant policies), The board of directors (has access to critical info.), The workers (have a right to know the conditions of work, including their rights, benefits, and obligations), Government (has the right to enforce regulations), Suppliers & agents (need info. to make fair contracts), The consumer of products (need info. on potential hazards), The general public, and communities.

14 Form of Disclosure Appropriate channels for reporting info. concerning the moral dimensions of some corp. actions have yet to be decided upon, much less standardized. Corporations have typically been reluctant to disclose information about their activities. If left to themselves, some of them would consider all their internal operations trade secrets. Shareholders’ meetings are only one forum for raising and discussing these questions.

15 Insider Trading Insider info. is info. that someone within a firm has but that is not available to those outside the firm. This includes not only trade secrets, but strategy & plans. The moral problems connected with insider info. Concerns the use individuals may make of such info. while they are still members of a firm. Two aspects of the question raise special problems. Someone in the firm may use info. for their private gain at the expense of the firm. This is called conflict of interest. OR use of insider info. by someone within a firm to secure personal advantage over those not in the firm.

16 Debate 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Timer Started 1 2 1 2 3 1 2 3 Click to start Timer 1 2 3 4 5

17 Executive Compensation 1/3
One of the responsibilities of a corporate board is the appointment and evaluation of the corporation’s CEO, & the determination of his/her compensation. We should ask what institutions are appropriate to keep income differentials from skewing society in undesirable ways, robbing those less well off of their dignity and personal or social esteem.

18 Executive Compensation 2/3
The term “golden parachute” refers to a practice of guaranteeing chief officers of a company are given a certain set of benefits in the case of voluntary or involuntary severance. The justifications are: It makes it easier to hire a new CEO in a climate of corporate takeovers, where one may lose one’s job through no fault of his or her own. It increases the cost to the predator company. It gives chief executives an incentive to work toward the interests of the shareholders in case of a takeover threat.

19 Executive Compensation 3/3
Critics of the “golden parachute” object that this is an inappropriate use of a company’s money. Many doubt that well-paying CEO positions would go begging without golden parachutes. Given the scale of large takeovers, the cost of golden parachutes is unlikely to prevent a takeover. Importantly, CEOs are already very well compensated, & they are paid precisely to manage the company as best they can for the benefit of, among others, the share- holders, even at some possible detriment to themselves.

20 Case Analysis CASE ANALYSIS

21 Marketing, Truth, and Advertising
Once a manufacturer produces a certain product, its aim is to sell it. Marketing is the process by which it does so?

22 Competition Competition tends to produce efficiency in the market and benefits the general consumer by resulting in a variety of goods at the best prices. But the competitive market works to the advantage of the buyer only when the competitive process is fair. Competition can be undermined by: The creation of monopolies.   A small group of producers collude for their common good. For example, they may agree on the prices to charge, a practice known as price fixing. Such collusion is generally illegal because it undermines the competitive system to the detriment of the buyer.

23 Pricing Generally, the competitive system should preclude the possibility of overpricing. Where this means charging much more than the producer knows the product is worth, yielding an excessive profit. There are some who claim that overpricing is a misnomer because there is no specific limit of justifiable profit. But this claim assumes that prices are always competitive. Excessive rates can arise in money lending. For those unable to borrow in the conventional, competitive way, sharks charge usurious rates. 465% A deceptive practice is claiming a price higher than that at which it was ever sold, & claiming a discount (to sell at a discount implies one from its real price).

24 Price Gouging Price gouging refers to the practice of a seller putting a much higher price on the item for sale than is considered fair or reasonable. Price gouging usually refers to pricing, not of luxuries or optional items, but of practical necessities – fuel, food, water, and shelter – in times of emergency.

25 Bidding 1/2 Not all bidding is secret, but much of it is.
Secrecy tends to produce fairer bids and lower prices for the purchaser. This happens in two ways. If the process were open, a firm that could make a profit at a price considerably less than the competition would make a bid only just enough less to win the contract. If the competition were open, a firm might start out at a bid low enough to scare off, even though the bid is not the lowest he would offer if forced to make a secret bid. In addition to fraud, using materials inferior to those specified in the bid, and perpetrating other obvious violations of justice, honesty, and fairness, bidding has led to other questionable practices.

26 Bidding 2/2 One difficulty many governments encounter is that there are only a few construction firms capable of handling a given locale’s large construction needs. In the defense industry ethical issues include cost overruns & locking government into a single supplier. Several pitfalls are also common in the purchase of goods by a government or large firm. There is always the possibility of leaking information to a potential supplier – an unfair practice. There is also the possibility of writing specifications in so detailed & narrow a way that only one supplier can fill the order, thereby undermining the purpose of bidding.

27 Questionable Products
Consumer Marketing The opportunities for fraud, deception, & unethical practices are endless, but most such practices are clearly immoral and so raise no ethical problems. A few of the issues of current concern, including truth in lending, unit pricing, & labeling & dating. All of these have become items of consumer concern & the focus of attention by the consumers’ movement. Questionable Products It’s often assumed what’s legal to mfg., is legal to sell. There are some questionable products in this regard. E.g., small, cheap handguns: Saturday night specials.

28 Advertising There are five areas in which the moral dimension of advertising is of central importance: The immorality of untruthful, misleading, or deceptive ads; The immorality of manipulation and coercion through advertising, including the question of audience; The morality of paternalism with respect to advertising; The immorality of preventing some kinds of advertising; & The allocation and distribution of moral responsibility with respect to advertising.

29 Truth and Advertising ½ (X/3)
A major function of advertising is to sell goods. Advertising may educate or mold public opinion.   The terms true & false are properly predicates of sentences. Only a proposition can be true or false. A statement is true if the stated relation between subject & predicate corresponds to the actual relation in the world between what are referred to by the subject & predicate. Lying consists, not simply in stating a falsehood. Lying consists in making a statement, which one believes is false, to another person, whom one has reason to think will believe the statement to be true. Whether a statement is true or false depends on the world; whether a statement is a lie depends on speaker’s intent.

30 Truth and Advertising 2/2
Some ads contain express propositions that are appropriately evaluated in terms of truth and falsity. Without making any false statements, an ad might be misleading or deceptive. A misleading ad is one where the ad doesn't misrepresent or make false claims but makes claims in such a way that many ordinary people reading it quickly & without great attention & thought, will make a false inference. A statement made about a product may be true, may not mislead or deceive, but be morally objectionable. It is immoral to advertise and sell a dangerous product without indicating its dangers.

31 Manipulation and Coercion
Persuasion in itself is not immoral. In Kantian terms, both coercion and manipulation treat another person only as a means to one’s own end and deny respect for his or her freedom. Coercion involves force or the threat of force, either physical or psychological. Manipulation does not use force; It involves playing upon one’s will by trickery or by devious, unfair, or insidious means. Coercion & manipulation in advertising are thus immoral.

32 Prevention of Advertising
The prevention of advertising, in some cases, comes up against free speech rights. Until recently, many professionals were restricted from advertising by their professional associations. Ads were considered poor taste, vulgar & unprofessional. Arguments in favor of changing the rules were: Essentially, the good gained by the lawyers & doctors & their respective professions was less than the evil suffered by their potential & actual clients & patients. Other arguments rest on the right of the practitioner to make known his or her services and to compete, in price and in kinds of services provided, for potential clients.

33 Allocation of Advertising Moral Responsibility
Prime responsibility for advertising rests on the one who initiates and directs the advertising. Ad agencies handle promotion of a many goods. They have a responsibility not to lie, or misrepresent. They have an duty to investigate suspicions of falsehoods. Once an advertisement or ad program has been produced it can be presented in a variety of forms. All TV stations, magazines, & newspapers have the moral responsibility for what they publish. Members of the public perform a public service by making concerns about an ad’s accuracy known. Government has a role in regulating & monitoring advertising. Their role is to protect the public interest.


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