The firm divided : manager-shareholder conflict and the fight for control of the modern corporation PDF
Preview The firm divided : manager-shareholder conflict and the fight for control of the modern corporation
the firm divided ................................................................................................................................................................................................................................... The Firm Divided MANAGER–SHAREHOLDER CONFLICT AND THE FIGHT FOR CONTROL OF THE MODERN CORPORATION Graeme Guthrie 1 1 OxfordUniversityPressisadepartmentoftheUniversityofOxford.Itfurthers theUniversity’sobjectiveofexcellenceinresearch,scholarship,andeducation bypublishingworldwide.OxfordisaregisteredtrademarkofOxfordUniversity PressintheUKandcertainothercountries. PublishedintheUnitedStatesofAmericabyOxfordUniversityPress 198MadisonAvenue,NewYork,NY10016,UnitedStatesofAmerica. ©OxfordUniversityPress2017 Allrightsreserved.Nopartofthispublicationmaybereproduced,storedin aretrievalsystem,ortransmitted,inanyformorbyanymeans,withoutthe priorpermissioninwritingofOxfordUniversityPress,orasexpresslypermitted bylaw,bylicense,orundertermsagreedwiththeappropriatereproduction rightsorganization.Inquiriesconcerningreproductionoutsidethescopeofthe aboveshouldbesenttotheRightsDepartment,OxfordUniversityPress,atthe addressabove. Youmustnotcirculatethisworkinanyotherform andyoumustimposethissameconditiononanyacquirer. CIPdataisonfileattheLibraryofCongress ISBN978–0–19–064118–4 9 8 7 6 5 4 3 2 1 PrintedbySheridanBooks,Inc.,UnitedStatesofAmerica ................................................................................................................................................................................................................................... Contents Preface vii part one monitor 1. Agadflyintheointment:Theconsequencesofseparatingownershipandcontrol 3 2.Whosesideareyouon?Theroleoftheboardofdirectors 14 3.Overseeingtheunseeable:Theconflictbetweenmanagersandshareholders 28 part two motivate 4.Narrowingthegap:Theincentivesgeneratedbymanagerialownership 43 5. Aprimeronpay:Executivecompensationandefficientcontracting 58 6.Hidinghighpay:Executivecompensationandmanagerialpower 80 7. Separatingthewheatfromthechaff:Incentivesgeneratedbyexecutives’ careerconcerns 99 part three delegate 8.Withonehandtiedbehindtheirback:Delegatingmonitoringtoexternal capitalmarkets 121 9.Noskininthegame:Delegatingmonitoringtofinancialanalysts 139 10. Crashingtheparty:Delegatingmonitoringtolargeshareholders 159 part four sell 11. Anewbroom:Themarketforcorporatecontrol 181 12.Bypassingtheboard:Offensivetacticsinhostiletakeovers 198 13.Fightingback:Defensivetacticsinhostiletakeovers 218 v v...i....................C....o...n...t..e..n....t..s............................................................................................................................................................................................... part five the rules of the game matter as well 14.Caughtinthemiddle:Reformingthelegalandregulatoryenvironment 241 epilogue 250 acknowledgments 252 notes 253 bibliography 291 index 331 ................................................................................................................................................................................................................................... Preface shareholders at america’sbest-knownfirmsarerevolting.In2015,shareholders atMacy’swantedthedepartmentstore’srealestateassetssoldandtheproceedspaidout asadividend.1AtYahoo,theywantedacashstockpilepaidouttoshareholderstostopit beingspentonmorewastefulacquisitions.2DoleFoods’formershareholdersweresaying, “Wetoldyouso.”ADelawarejudgehadjustruledthatthefirm’schiefexecutiveofficer (CEO)haddeliberatelydrivendownthesharepricesothathecouldbuythecompany back from shareholders more cheaply.3 Shareholders at eBay and FedEx demanded a greater say in their firms’ affairs.4 At Ford and Google, they just wanted their shares tohavethesamevotingrightsasthoseownedbythefirms’founders.5 Shareholdersat StarbucksandTargettriedtostriptheCEOofsomeofhispower.6 Atmattressmaker TempurSealy,theyjustwantedhimfired.7 ThesurveysofCEOpaythatappearinthebusinesspresseachyearaddfueltothefire. IntheWallStreetJournal’s2015survey,thehighestpaidCEOreceived$112m;according to the New York Times, a different CEO was paid more, $156m; Bloomberg gave top prizetosomeoneelse,with$285m.8 Eachoutlethasitsownranking,whichjustserves tosowconfusioninthemindsofshareholders.However,theunderlyingmessagesent toshareholdersisconsistent:CEOpayishigh,probablytoohigh,gettinghigher,and not closely linked to firm performance. At some firms, shareholders appear powerless to do anything about it. The tech firm Oracle is a good example. Every year for four years,morethanhalfofthevotescastatOracle’sannualshareholdermeetingrejectedthe firm’sexecutivecompensationpolicies.9 ThevoteswerenotbindingonOracle’sboard, vii v...i..i.i....................P....r..e...f.a...c..e................................................................................................................................................................................................. soexecutivesgottheirpay.However,thevotesrevealshareholderoppositiontothefirm’s paypracticesandtheirinabilitytodoanythingaboutit. Shareholders get angry when executives do not seem to have their best interests at heart.Theygetangrierwhentheybelieveexecutivesarebeingpaidexcessivelyandangrier still when they feel powerless to do anything about it. Shareholders’ power is limited because they do not appoint the CEO directly. Instead they elect the firm’s board of directors, which does have the power to fire the CEO. However, even board power is limited. It does not help that boards are chaired by the firm’s CEO at 84% of large corporations.10 Making matters worse, shareholders are offered the same number of candidates as there are vacancies at most annual board elections—and the candidates arechosenbytheboarditself!Unsurprisingly,theyarereelectedalmosteverytime.11To manyshareholders,CEOsseemuntouchable. Ifthereisonethingthatmakesshareholdersevenangrieritisthefactthatmostofthe behaviortheydislikeislegal.Infact,allofthebehaviordescribedinthisbookisentirely legal.Therearenoaccountingscandalsinthepagesthatfollow;thereisnoinsidertrading. Instead,thereisacollectionofindividualsoperatingwithintherulesandstructuresthat directors,politicians,regulators,andshareholdershaveputinplace. Theultimatesourceofshareholderangerisaconflictwithinthemoderncorporation. Manager–shareholder conflict has been around for as long as there have been public corporations.Scholarshavestudieditsconsequencessincetheearly1930s,whenAdolf BerleandGardinerMeanspublishedTheModernCorporationandPrivateProperty.12 Berle and Means showed how control of the largest U.S. corporations had become separatedfromtheirownershipandraisedtheawkwardquestionofwhethercorporations werebeingrunforthebenefitofownersormanagers.Thisquestionisatleastasrelevant nowasitwasintheearly1930s.Indeed,withcorporationsgrowingeverlargerandcontrol seemingtobeheldinfewerhands,thequestionisevenmorerelevantnow.13 FinancialandlegalscholarshavespentthedecadessinceBerleandMeanspublished theirbookinvestigatingcorporategovernance,whichisthetermtheyusetodescribethe arrangementsthataresupposedtobetteraligntheinterestsofmanagersandshareholders. In this book I describe the causes and consequences of manager–shareholder conflict, andthegovernancearrangementsthathaveevolvedinresponsetothisconflict.Idoitby tellingthestoriesofsomeofthefirmsthatmakeupcorporateAmericaandofsomeofthe individualsthatmakethosefirmsoperateinthewaytheydo.Alongthewaywewillfollow theanticsofaseptuagenarianshareholderwhotraveledthecountrytormentingCEOs, learnhowanactivisthedgefundwasabletodislodgeoneCEOinjustafewweeksafter buyingonly1.3%ofafirm’sshares,andseehowaself-mademanoncedescribedbyaU.S. federaljudgeasa“snakeinsheep’sclothing”managedtoseizecontroloftheworld’smost valuablesportsteam. Therearemanypartialsolutionstomanager–shareholderconflict,butnoneofthem workperfectly.Infact,evenwhentheyareallcombined,theoutcomeisfarfromperfect. ....................................................................................................................................................................................................P...r...e..f..a..c...e....................i..x. However,theyallmakeacontributiontoreducingtheconflictbetweenafirm’sexecutives anditsshareholders.Thisbookworksitswaythroughthesesolutions,onebyone.In some solutions, shareholders and directors play a hands-on role, taking responsibility themselvesforkeepingmanagersinline.Inshort,theymonitor.Shareholdersdosome monitoringthemselves;theresttheyleavetoaboardofdirectors,whichtheyelect—but everyoneisinvolvedinmanagingthemanagers.Directorsplaymoreofahands-offrolein thenextsetofsolutions.Theysetafewgroundrulesthatexecutivesmustfollow,create afewincentives,andthenstepbackandalloweventstounfold.Thatis,theymotivate. However,directorscannotdoeverythingthemselves,sointhethirdsetofsolutionsthey enlistoutsidepartiestodosomeofthemonitoringandmotivatingontheirbehalf.They delegate. These outsiders have their own selfish reasons for getting involved, but their presencecanstillbenefitshareholders.Asalastresort,andthelasttimethatshareholders areevenindirectlyinvolvedinthegame,shareholderscansell,orthreatentosell,their sharestoanotherfirm.Sellingistheultimatehands-offpolicy.Alloftheseapproaches to corporate governance occur in a world of rules and regulations. That is why there is a final solution to manager–shareholder conflict, of which shareholders are entirely passivebeneficiaries:thefighttochangetherulesofthegame.Thesearethekeystepsto effectivecorporategovernance:monitor,motivate,delegate,sell.Therulesofthegame matteraswell. We start our journey at the epicenter of manager–shareholder conflict, the annual shareholders’ meeting where executives and shareholders eyeball each other. Each new solution to manager–shareholder conflict takes us slightly further afield, first to the boardroom, where directors are supposed to work on shareholders’ behalf, doing some eyeballing of their own, and then to the executive labor markets, where executives are matched with firms. Our next steps take us further away still, to the capital markets where those firms try to raise the funds they need to survive and prosper, and then to the market for corporate control that puts fear into executives’ hearts. We will finish our journey in Washington, DC, in congressional committee roomsandathearingsoftheSecuritiesandExchangeCommission(SEC).Itisabout as far away from the annual shareholders’ meeting as possible, but decisions made in Washington profoundly influence what happens at shareholder meetings across the country. Beforewebegin,anoteabouttheroleofeconomics.Thisisabookaboutcorporations and what economists think about how they are run. Economists look at individuals operatingwithinasetofrulesandtrytounderstand thebehaviortheyobserve.They trytounderstandwhatdrivesthatbehaviorandtopredictthebehavioralchangesthat wouldoccuriftheruleswerechanged.Mainstreameconomistsdothisbyassumingthat, ateveryturn,individualsactinwaysthatadvancetheirownbestinterests.Thatisthe economicframeworkadoptedinthisbook.Wetrytounderstandindividuals’decisions byimaginingwhattheywoulddoiftheywereinterestedonlyinlookingafternumber
The list of books you might like
