Corporate Governance
Spring/Summer 2004, Volume 16.2-3
Alignment Exposed: How CEOs Are Paid, and What Their Shareholders Get For It
For many companies, there is a significant “disconnect” between how managers are paid and what they achieve for shareholders. Cash bonuses and performance-based equity grants (rather than outright stock or option grants) create better alignment between manager and shareholder goals. High-alignment companies outperform their low-alignment peers by 5% per year in total shareholder returns.
Best Practices in Corporate Governance: What Two Decades of Research Reveals
The structure, composition, and compensation of corporate boards affect shareholder value. Empirical evidence suggests that board independence, independent nominating committees, and incentive comp for directors add value. But there is little support for CEO/board chair separation or repealing poison pills. Companies should implement value-adding governance proposals in a firm-appropriate way.
Control Premiums and the Effectiveness of Corporate Governance Systems
Control premiums in block sales reflect the effectiveness of corporate governance systems in different countries. These premiums are less than 10% in the U.S. and U.K. but more than 60% in countries like Brazil. Better accounting standards, legal protection of minority shareholders, and law enforcement promote effective governance, as do product competition, independent media, and tax compliance.
Corporate Governance, EVA, and Shareholder Value
The founding partner of Stern Stewart discusses the objective of the public corporation and how boards of directors can achieve it. He emphasizes EVA and its offshoot, Market Value Added, as measures that encourage value-adding growth. He also argues for EVA-based compensation in the private sector and in state-owned enterprises to bring about the employee capitalism that ESOPs failed to deliver.
Creating Value With Mergers and Acquisitions
The “right” M&A transaction can create substantial value for acquirers. Cash-financed transactions, acquisitions of private companies or assets, and deals within the same industry generally lead to shareholder gains. EPS dilution or accretion, however, does not drive stock market reaction to a deal or subsequent performance.
Does International Financial Contagion Really Exist?
When financial crises occur in neighboring countries in rapid succession, it is tempting to think that financial distress is contagious. But most “contagion” is really attributable to common errors in domestic financial policy. Reform proposals have been directed at the international level, but governments may need to reevaluate how they regulate access to their own financial service sectors.
Economics of Corporate Governance Reform
There are three basic principles for effective governance: information accuracy and timeliness, management accountability, and auditor independence. Key issues are how well recent legislative initiatives conform to these principles and the appropriate scope of and interaction between private and public efforts to promote strong governance.
Foreign Exchange and Cross-Border Valuation
The conventional wisdom among economists is that it is irrelevant whether a company analyzes an overseas investment’s NPV in the home currency or the foreign currency, provided consistent cross-border conversions are used. But this article demonstrates how managers’ FX forecasts can affect their investment, hedging, and financing decisions and offers appropriate adjustments.
Product Costing and Inventory Accounting: A New Approach to an Old Problem
Traditional accounting methods can hurt corporate performance and the ability to compete globally because of the core conflict between external compliance and the need for value-relevant reports for internal management purposes. A new approach called Value Added Accounting addresses GAAP distortions and supports Lean Manufacturing, Just-In-Time, and other process improvement initiatives.
Some Design Guidelines for Equity-Based Pay
Equity-based incentive compensation can be important for increasing shareholder value, but there is disagreement as to the extent of its use and how it should be packaged. For most companies, equity-based pay should be significant only for a handful of employees; performance-based cash bonuses provide better “line of sight” for operating managers. Internal and external disclosure is critical.
The Discount Rate in Emerging Markets: A Guide
The correct discount rate is particularly important in emerging markets given the growing need to evaluate privatizations and greenfield investments throughout the world. Country risk premiums are problematic because country risk is not the same for all projects, nor is it totally systematic. The extent to which the investor is locally or globally diversified matters more than market segmentation.
University of Rochester Roundtable on Preserving Value in Chapter 11
In this roundtable, bankruptcy authority Thomas Jackson discusses the current state of Chapter 11 with a financial economist, a practicing bankruptcy attorney, and a corporate executive who recently helped lead his firm (Global Crossing) through a reorganization.
Voluntary Disclosure Practices: The Use of Pro Forma Reporting
77% of S&P 500 companies report pro forma results, and corporate press releases generally give pro forma measures greater prominence than GAAP earnings in an effort to influence investor perception of corporate performance. The SEC has recently issued rules to ensure that pro forma disclosure is not misleading, and the authors present disclosure guidelines to help forestall further regulation.
The views and opinions expressed in the Journal do not necessarily represent those of Morgan Stanley or its affiliates.
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For close to 20 years, the Journal of Applied Corporate Finance has distinguished itself as a unique forum for addressing the topics that drive corporate value. Featuring articles by top academic thinkers and financial practitioners, this quarterly publication presents the practical application of the best current research in finance.
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