Figure 15 2 Major legal rights of stockholders

Figure 15. 2 Major legal rights of stockholders To receive dividends, if declared n To vote on: n 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 n To bring shareholder suits against the company and officers n To sell their own shares of stock to others n

Key features of effective boards Select independent directors to fill most positions. n Hold open elections for members of the board. n Appoint an independent lead director and hold regular meetings without the CEO present. n Evaluate the board’s own performance on a regular basis. n

“Boards More Independent, Study Says” n Corporate boards grew more independent from mngt in 2004 n Percentage of S&P 500 companies with a presiding, or lead, director grew to 84%, up from 36% in 2003 Women made up nearly one-quarter of all new outside directors, now 16% of all directors n Average annual retainer fee for directors of S&P 500 companies rose 14% to $50 k from $43. 7 k in 2003 (excludes meeting fees and equity-based pay) n n Median total cash pay for S&P 500 directors up 22%, to $67. 6 k n Stock awards up 35%, to $69. 6 k n Source: Los Angeles Times, 1/12/05

Executive Compensation n Two factors contributed to pay scales that now have CEOs earning more than 300 x pay of average American worker n Advent of giant stock option grants, form of compensation made more attractive by 1993 change to tax law that maintained corporate tax deductions for executive pay over $1 m if pay was tied to performance n Widespread practice of linking pay to levels at companies of similar size n Has effect to raise average that everyone will use as baseline n Source: New York Times, 4/5/09

Executive Compensation (Wall Street Journal study) n Median total compensation, 2008, $7. 6 m, down 3. 4% from 2007 (includes salary, bonuses, value of restricted stock at time of grant, gains from options exercises, other long-term incentives) n Median salaries and bonuses down 8. 5%, to $2. 24 m n n Median salaries increased 4. 5% to $1. 08 m, but bonuses fell 10. 9% to $1. 24 m as profits declined by 5. 8% Most equity granted early in year, before stock prices declined significantly, suggesting that CEO compensation may have declined further by year’s end n Source: Wall Street Journal, 4/3/09, based on analysis of 200 major U. S. corporations by Hay Group

Putting a Ceiling on Pay Growing number of shareholder activists pushing Cos to establish maximum ratios between what their executives earn and what their average- or lowest-paid workers earn n Average CEO in U. S. earned 282 x salary of average worker in 2002, cf. 42 x in 1982 n Whole Foods Market (leading organic food retailer) limits any executive’s pay to no more than 14 x pay of average worker (current cap is $409 k) n Ben & Jerry’s had capped pay at 7 x pay of lowest worker, but dropped policy in 1994 n Herman Miller had capped pay at 20 x, but dropped policy in 1996 n n Critics argue that such practices that exclude stock options are of little value n Source: Wall Street Journal, 4/12/04

Executive compensation: Is it justified? Proponents of high executive pay say: Well-paid managers are simply being rewarded for outstanding performance. n High salaries provide an incentive for innovation and risk-taking. n Not many individuals are capable of running today’s large, complex organizations. n Critics of high executive pay say: Inflated executive pay hurts the ability of U. S. firms to compete with foreign rivals. n As many extravagantly compensated executives preside over failure as they do over success. n Multi-million-dollar salaries cause resentment and sap the commitment of hardworking lower and midlevel employees. n

Social investment Refers to the use-of-stock ownership as a strategy for promoting social objectives. Social investment can be done in two ways: n Social screening of stock n Some shareholders wish to choose stocks based on social or environmental criteria. n Social responsibility shareholder resolutions n. 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. n Its mission is to protect stockholders’ rights by making sure that the stock markets are run fairly and that investment information is fully disclosed. n Generates revenue to pay for its own operations. n

Sarbanes-Oxley Act n n n 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.

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: n Misappropriate nonpublic information and use it to trade a stock. n Trade a stock based on a tip from someone who had an obligation to keep quiet. n Pass information to others with an expectation of direct or indirect gain.

“How to Fix Corporate Governance” n n n Executive Pay n Expensing stock options Board of Directors n Ban on stock sales by directors for duration of term Accounting n Criminal liability Analysts n Change in compensation practices Regulators n More transparency Leadership n Challenge is to create corporate cultures that encourage and reward integrity as much as creativity and entrepreneurship n Source: Business Week, 5/6/02