Stockholder Rights and Corporate Governance Stockholders Corporate Governance Executive Compensation: A Special Issue Shareholder Activism Government Protection of Stockholder Interests Stockholders and the Corporation Chapter 15

Stockholders Stockholders (shareholders) The legal owners of business corporations. Types of stockholders: Individual stockholders are people who directly own shares of stock issued by companies. Institutions, such as pension funds, insurance companies, and university endowments.

Individual household versus institutional ownership in the United States, Figure 15.1 Year Percent of all stocks owned

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

Corporate governance Refers to the process by which a company is controlled, or governed. These systems determine overall strategic direction and balance sometimes divergent interest. Board of directors An elected group of individuals who have a legal duty to establish corporate objectives, develop broad policies, and select top-level personnel to carry out these objectives and policies. Most corporate boards work through committees. Board members are elected by shareholders.

The Business Roundtable’s statement on good corporate governance 1. To select and oversee competent and ethical management to run the company on a day-to-day basis. 2. It is the responsibility of management to operate the company in company in a competent and ethical manner. 3. To produce financial statements that fairly represent the financial condition of the company under the oversight of the board and its audit committee. 4. To engage an independent accounting firm to audit the financial statements prepared by management. 5. It is the responsibility of the independent accounting firm to ensure that it is in fact independent, without conflicts of interest. 6. The company has a responsibility to deal with its employees in a fair and equitable manner. Exhibit 15.A

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 board’s own performance on a regular basis.

Executive compensation Stock options Represent the right to buy a company’s stock at a set price for a certain period. In 2002, the chief executives of the largest corporations in the United States earned, on average, $7.4 million, including salaries, bonuses, and stock options. Top managers in other countries earned much less. In the U.S., CEOs in 2002 made about 200 times what the average worker did. Executive pay is set by compensation committees of boards of directors.

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 today’s 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.

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 company’s annual meeting.

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 if fully disclosed. Generates revenue to pay for its own operations.

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. Exhibit 15.C

Insider trading Occurs when a person gains access to confidential information about a company’s financial condition and then uses that information, before it becomes public knowledge, to buy or sell the company’s 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.