Behavioral Finance Economics 437 Behavioral Finance 2019 Corporate

Behavioral Finance Economics 437 Behavioral Finance 2019 Corporate Governance April 23

Corp Governance n What is it? n Control of a company with a board of directors n Company can be public or private n Board represents “shareholders” (or “stakeholders” n n Behavioral Finance 2019 Stakeholder concept is meaningless in general Shareholder concept can be plagued by principle/agent problems: e. g. pension funds, university endowments, foundations Corporate Governance April 23

Board of Directors Senior Management Business Behavioral Finance 2019 Corporate Governance April 23

Why is there a problem? n Individual directors may have their own agenda Which might be: remaining as a director n Compensation and/or perquisites of office n Selection process inevitably flawed n Political appointments (University, Retirement Boards) n Management effectively appoints corporate boards n Boards are self perpetuating: Madison House, Paramont Theatre, etc. n Practical problems n Board members have other things to do n Have limited information, controlled by management n Behavioral Finance 2019 Corporate Governance April 23

How Can You Tell That Corporate Board’s Are Not Up to the Task? n Management Compensation n Mergers and Acquisitions n “Insurance” Actions: Share offerings at below book prices Behavioral Finance 2019 Corporate Governance April 23

Reforms? n Sarbanes-Oxley – a response to Worldcom and Enron Makes the auditor the policeman n Massive amount of paperwork, which reduces the effectiveness of boards n Mostly “checking the box” n Dodd-Frank n Aimed mainly at financial institutions n “Say on pay” provision (subject to principle/agent problems n “Pay for performance” n But how is performance measured and how controls the measurement? n Is management actually responsible for the performance that is measures or do outside forces control performance that management has no control over? n Behavioral Finance 2019 Corporate Governance April 23

Shleifer and Vishny (1997) n Key question: “How do the suppliers of finance get n n managers to return some of the profits to them? What if there are no rules? Several methods of Corp Governance n US & England: legal: “duty of loyalty” “fiduciary” n Germany: large shareholder n Japan: large creditors What really works: LBOs Four countries are successful: US, UK, Germany, Japan…. everyone else is problematic Behavioral Finance 2019 Corporate Governance April 23

Potential US Reforms n One term directors n Paid in deferred stock n Stock sales prohibited by directors during their terms as directors n Sales permited only after a period (say two years) has elapsed after they are no longer board members. Behavioral Finance 2019 Corporate Governance April 23

The End Behavioral Finance 2019 Corporate Governance April 23