1. Environment Characteristics of a Commons: –Free –Finite –Costs go to community, Benefits to Individual Carrying Capacity: The ability of a system to sustain a certain usage without degradation. Threshold Level: The level at which a carrying capacity is first exceeded.

2. Cost-Benefit Analysis Advantages: –Forces methodical consideration of each impact a policy will have on social welfare. –Injects rational calculation into emotional arguments –Helps regulators find the most efficient cost of regulation

3. Cost Benefit Analysis: Criticisms Fixing precise values of costs and benefits is difficult and controversial They risk compromising ecosystems deserving absolute, not conditional protection The costs and benefits may fall to separate parties

4. Control Options Command and Control Regulation Market Incentive Regulaton –Environmental Taxes –Emissions Trading (Cap and Trade) –Information Disclosure Voluntary Regulation

5. The Corporate Charter The corporate charter is a document issued by a government that brings a corporation into being and defines its scope of authority. All states have general incorporation laws and compete with one another to attract the tax revenues of large corporations. Corporate charters specify the rights and responsibilities of: –Stockholders –Directors –Officers McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 19-5

6. Flow of Authority in Corporate Governance McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 19-6

7. Compensation How Much Are CEOs Paid? Accurately calculating the exact pay and benefits of a chief executive is difficult. Nearly all corporations have compensation committees that set the pay and benefits of top executives. Perceptions of excessively generous pay and benefits for CEOs inspire widespread popular outrage. Average pay of CEOs in 2003 was $7.8 million. –Steven P. Jobs, Apple Computer, $74.8 million –George David, United Technologies, $70.5 million –Henry R. Silverman, Cendant, $54.4 million © 2006 The McGraw-Hill Companies, Inc. All rights reserved. 19-7

8. Criticisms of CEO Compensation Critics deplore the size of “farewell” gifts to some CEOs fired for poor performance (Golden Parachutes) Boards have been lavish in retirement packages. Critics charge that in too many compensation committees, the members are CEOs of other corporations, cronies of the CEO, or consultants who have profited from the company. The basic complaint is that there is no correlation between executive pay and performance. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 19-8

9. In Defense of CEOs Executives defend high pay on several grounds. –Stock options have become a larger part of their compensation in recent years. Issue: size not form of compensation –Many large compensation packages were justified by the gains of stockholders during their tenure. Market gains are often not the result of CEO actions –Boards of directors point out that if they do not pay their CEOs what executives in comparable companies get, they stand to lose them. Not supported by data 19-9

10. To Whom Are Directors Accountable? The laws are clear that directors are accountable to stockholders. In response to unfriendly takeovers in the 1980s, 25 states enacted laws that broaden the legal authority of boards to consider in their deliberations stakeholders other than shareholders. This legal position focuses the accountability of directors on the overriding role of the corporation in society.. 19-10

11. The Composition and Size of Boards In 2004 the average corporate board had 11 members. –Typically 8 outside members and 2 inside members. –The number varies by industry. –82% have at least one woman. –76% have one or more ethnic minority directors. –15% have noncitizens. Boards are divided into committees. McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. 19-11

12. Shareholder Options Sell Your Shares -- Wall Street Rule Vote –Proxy fights –Shareholder resolutions Sue -- Take management/directors to court

13. Forces for Change in Corporate Governance Shareholder Activism –Institutional Investors (Pension Funds) Takeovers Changes in the Board of Directors –Composition (Inside/Outside) –Board Committees –Federal Chartering