Faculty
Professor B Espen Eckbo
Objectives
We discuss how firm value depends on corporate governance practices and investor protection around the world. Greater investor protection lowers the cost of capital and results in greater financial development and economic growth. Thus, countries are searching for a set of governance practices, rules and regulations that will promote private sector development. In Europe, Asia and Latin-America, much of the governance debate focuses on protecting small investors from the actions of large, controlling shareholders. In the US, the debate focuses in particular on the failure of many boards to protect outside investors from powerful corporate managers. The course keys into this debate, covering areas such as asset tunneling in corporate pyramidal structures, hostile takeovers and the failure of the market for corporate control, mutual fund governance, executive compensation policies, corporate transparency and the value of the shareholder vote. Students research governance issues in selected countries, and debate to what extent the increasing international capital flows causes governance systems to converge towards a global standard.
Requirements
Active class participation based on the readings is expected. The course requires two group projects. One due on the date the topic is scheduled to be discussed in class. The second is due in combined class sessions 17 & 18, on Tuesday 5/17/05. Details of the projects will be given in the first class.
Materials
Required Readings
The required readings for this course are listed under each session below. Professor Eckbo's lecture notes are bound and handed out as a "book" at the beginning of the course. Several articles are chapters in the following collection of readings (which should be purchased from the bookstore):
Chew, Donald and Stuart L. Gillan, (eds.), 2005 Corporate Governance at the Crossroads: A Book of Readings, (McGraw-Hill Irwin), henceforth CG.
The remaining articles are provided in the course packet.
Grading
Class participation 30%
First Group Project - 30%
A 15-minute presentation of a single recent governance case related to one of the class topics (topics selected on a first-come first-serve basis). Due in the class where selected topic is scheduled to be discussed.
Second Group Project - 40%
In-depth case study of a governance controversy set against the background of the governance system in the country of origin. Due for presentation in classes 17-18.
Schedule
Monday 03/28
What's unique about outside investors and why do they need legal protection?
How do different legal traditions afford investor protection?
What are recent governance reforms and what are they meant to achieve?
Eckbo-Lecture Notes: "Introduction to Law and Finance"
Jensen, Michael C., "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems", CG-chapter 2.
La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, 2000, "Investor Protection and Corporate Governance", Journal of Financial Economics 58, 3-27.
Tuesday 03/29
The "shareholder supremacy" model
Contractarian vs. communitarian perspectives on the firm
What does stakeholder maximization mean for investment policy?
Are non-profit organizations different?
Eckbo - Lecture Notes: "Corporate Objectives: What Should the Firm Maximize?"
The contractarian (shareholder) perspective: Jensen, Michael C., 2001, "Value Maximization, Stakeholder Theory, and the Corporate Objective Function," CG-chapter 1.
The communitarian (stakeholder) perspective: Blair, Margaret M., 2002, "Shareholder Value, Corporate Governance, and Corporate Performance: A Post-Enron Reassessment of the Conventional Wisdom", working paper, Georgetown University Law Center.
Some empirical evidence from (communitarian) Germany: Bradley, Michael and Anant Sundaram, 2004, "The Emergence of Shareholder Value in the German Corporation", Working Paper, Duke University and Thunderbird University.
Monday 04/04
What are the pros and cons of requiring companies to include shareholder-nominated board candidates in their proxy material (shareholder access to the ballot)?
Why is the Business Roundtable so opposed to Director Nomination Reforms?
What are alternative reform solutions?
Eckbo - Lecture Notes: "SEC and Director Election Reform"
Eckbo, B. Espen, 2004, "CEO Elections out of Shareholders Control", Financial Times (August 17).
The ABA Task Force Report
Task Force on Shareholder Proposals of the Committee on Federal Regulation of Securities, Section of Business Law of the American Bar Association, 2003, "Report on Proposed Changes in Proxy Rules and Regulations Regarding Procedures for the Election of Corporate Directors", The Business Lawyer 59, 1, 109-143.
Pros of election reform:
Bebchuk, Lucian A., 2003, "The Case for Shareholder Access to the Ballot", The Business Lawyer 59, 1, 43-66.
Warnings against reform:
Lipton, Martin and Steven A. Rosenblum, 2003, "Election Contests in the Company's Proxy: An Idea whose Time has Not Come", The Business Lawyer 59, 1, 67-94.
Institutional investor perspectives:
Pozen, Robert C., 2003, "Institutional Perspective on Shareholder Nominations of Corporate Directors", The Business Lawyer 59, 1, 95-108.
Tuesday 04/05
The proxy solicitation process
Lessons from the HP-Compaq Case
Wealth Effects of proxy contests
Class Visitor: David Drake, Managing Director, Georgeson Shareholder
Case (cursory reading only):
"Koito Manufacturing, Ltd." (HBS 9-291-027)
Research on the wealth effects of proxy contests:
Mulherin, Harold J. and Annette B. Poulsen, 1998, "Proxy Contests and Corporate Change: Implications for Shareholder Wealth," Journal of Financial Economics 47, 279-313.
Monday 04/11
Principal-agent pardigm and optimal contracting
Pros and cons of bonus systems
Options: Accounting and repricing issues
Eckbo - Lecture Notes: "Executive Compensaton"
Michael C. Jensen and Kevin J. Murphy, "CEO Incentives: It's not How Much You Pay, but How", CG-chapter 15
Hall, Brian J., "Six Challenges in Designing Equity-Based Pay", CG-chapter 22.
Hall, Brian J. and Kevin J. Murphy, 2003, "The Trouble with Stock Options", Journal of Economic Perspectives? 17, 49-70.
Tuesday 04/12
Class Visitor: Stephen F. O'Byrne, President
Shareholder Value Advisors, Inc.
The class will be devoted to the controversy over whether observed compensation practices reflect principles of optimal contracting or self-dealing arising from agency problems
Eckbo-Lecture Notes: "The Compensation Controversy"
Arguments in favor of the self-dealing hypothesis:
Bebchuk, Lucian Ayre and Jesse M. Fried, 2003, "Executive Compensation as an Agency Problem," Journal of Economic Perspectives 17, 71-92.
Counterarguments:
Murphy, Kevin J., 2002, "Explaining Executive Compensation: Managerial Power vs. the Perceived Cost of Stock Options", University of Chicago Law Review 69(3), 847-869.
Monday 04/18
What are the commonly used takeover defenses?
Case precedence for the use of defensive actions
Should we require CEOs of target firms to remain passive during hostile bids?
Class Visitor: John Gorman, Luse Lehman Gorman Pomerenk & Schick Pc
Eckbo-Lecture Notes: "Board Fidiciury Duties"
A survey of defensive charter provisions:
Danielson, Morris and Jonathan Karpoff, 1998, "On the Uses of Corporate Governance Provisions", Journal of Corporate Finance 4, 347-371.
Tuesday 04/19
What is the role and impact of poison pills?
What is the role and impact of termination fees?
Case precedence for use of defensive actions
Eckbo-Lecture Notes: "Hostile Takeovers"
Comment, Robert and G. William Schwert, 1995, "Poison or Placebo? Evidence on the Deterrence and Wealth Effects of Modern Antitakeover Measures," Journal of Financial Economics 39, 3-43.
Monday 04/25
The Circon case
The experience of a "raider" (T. Boone Pickens, Jr.)
Case Study:
Circon Case (HBS 9-801-3 A)
(HBS 9-801-404 B)
Pickens, T. Boone, Jr., 1986, "Professions of a Short-Termer", Harvard Business Review 64, 75-79
Tuesday 04/26
What are key provisions of the 2002 Sarbanes-Oxley Act
Why did we need to strengthen auditor independence?
How do we promote accounting transparency?
How servere is the risk exposure of a Director post S&O?
Class Visitor: Art Lindenauer T'59, Chairman, Schlumberger Technology Corporation and former EVP and CFO of Schlumberger Limited.
"The Sarbanes-Oxley Act of 2002", Cooley Alert, August 2002, 1-11.
Fuller, Joseph and Michael C. Jensen, "Just Say No to Wall Street: Putting a Stop to the Earnings Game", CG-chapter 40.
Agrawal, Anup and Mark Chen, 2003, "Analyst Conflicts and Research Quality", Working Paper, University of Alabama and University of Maryland.
Monday 05/02
Why do boards fail?
What is the evidence on board composition, structure and performance?
What characterizes an effective director?
Class
Visitor: Frank C. Herringer, retired CEO of TransAmerica Corp, named Outstanding Director for 2004.
Eckbo - Lecture Notes: "Board Composition and Effectiveness"
Monks, Robert and Nell Minnov, "The Director's New Clothes (or the Myth of Corporate Accountability)", CG-chapter 12.
MacAvoy, Paul and Ira M. Millstein, "The Active Board of Directors and its Effects on the Performance of the Large Publicly Traded Corporation", CG-chapter 14.
Note: Special Class time: Noon-1:15pm in Alperin. Lunch will be provided
Monday 05/02
Class Visitor: George Battle, Independent Director, PeopleSoft, Inc.
Hermalin, Benjamin and Michael S. Weisbach, 2003, "Boards of Directors as an Endogenously Determined Institution: A Survey of Economic Literature", Federal Reserve Bank of New York Economic Policy Review 9, 7-26.
Note Special Class time: Class will start 15 minutes later at 1:30pm to allow a short break between visitors. Class will remain in Alperin.
Tuesday 05/03
Current issues in mutual fund governance
Do funds justify their fees?
Hedge funds verus mutual funds
Class Visitor: Meyrick Payne, Senior Partner, Management Practice, Inc.
Payne, Meyrick, 2004, "Managed Fund Governance", in George Dallas (ed.), Governance and Risk: An Analytical Handbook for Investors, Managers, Directors & Stockholders, (McGrawHill), chapter 13, 251-268.
Hedge funds:
Ackerman, Carl, Richard McEnally and David Ravenscraft, 1999, "The Performance of Hedge Funds: Risk, REturn adn Incentives", Journal of Finance", 833-874.
Monday 05/09
The role of the board in financial distress
The Chapter 11 process
The Polaroid Bankruptcy
Class Visitor: William T. Flaherty T'71, Executive VP and CFO, Polaroid Corporation
Eckbo - Lecture Notes: "Bankruptcy"
A practical guide to Chapter 11 and Chapter 7 proceedings:
"Note on Bankruptcy in the United States", (HBS 9-292-062)
Tuesday 05/10
What do institutional shareholders do?
How do we measure performance?
Are governance indicators correlated with firm performance?
Eckbo - Lecture Notes: "Pension Fund Activism"
Del Guercio, Diance and Jennifer Hawkins, 1999, "The Motivation and Impact of Pension Fund Activism", Journal of Financial Economics 52, 291-340
Gompers, Paul A., Joy L. Ishi and Andrew Metrick, 2003, "Corporate Governance and Equity Prices", Quarterly Journal of Economics"
Monday 05/16
Derterminants of financial development
Dual-class shares, pyramids, and the value of the vote
Evidence on tunneling
Eckbo - Lecture Notes: "Concentrated Ownership, Pyramids, and Asset Tunneling"
Eckbo - Lecture Notes: "Financial Development in China"
How the size of financial markets across countries have changed over the last century:
Rajan, Raghuram and Luigi Zingales, 2003, "The Great Reversals: The Politics of Financial Development in the 20th Century", Journal of Financial Economics 69, 5-50.
Examples of tunneling:
John, Simon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, 2000, "Tunneling", American Economic Review" 90, 22-27.
Recent Developments in Europe:
"The EU's 13th
Directive on Takeover Bids: Unlucky for Some?" (HBS 9-703-014)
"Czech Mate: CME adn Vladimir Zeleszny (A) (HBS 9-904-023).
Franks, Julian and Colin Mayer, "Corporate Ownership and Control in the U.K., Germany and France", CG-chapter 29.
Tuesday 05/17
What are useful measures of financial development?
Who have incentives to resist financial developments?
The great developments of the 20th century
Eckbo-Lecture Notes: "Financial Development China"
How a country's governance system contrains corporate capital acquisitions and growth:
Demirguc-Kun, Asli and Vojislav Maksimovic, 1998, "Law, Finance, and Firm Growth", Journal of Finance" 53, 2107-2137.
Developments in Europe:
Case study:
The EU's 13th Directive on Takeover Bids: Unlucky for Some?" (HBS 9-703-014)
Tuesday 05/17
