The Recurrent Crisis in Corporate Governance PDF
Preview The Recurrent Crisis in Corporate Governance
The Recurrent Crisis in Corporate Governance Paul W. MacAvoy and Ira M. Millstein The Recurrent Crisis in Corporate Governance The Recurrent Crisis in Corporate Governance Paul W. MacAvoy and Ira M. Millstein © Paul W. MacAvoy and Ira M. Millstein 2003 Softcover reprint of the hardcover 1st edition 2003978-1-349-51295-9 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2003 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 978-1-349-51295-9 ISBN 978-1-4039-4688-1 (eBook) DOI 10.1057/9781403946881 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data MacAvoy, Paul W. The recurrent crisis in corporate governance/Paul W. MacAvoy, Ira M. Millstein p. cm. Includes bibliographical references and index. 1. Corporate governance. I. Millstein, Ira M. II. Title. HD2741.M196 2003 658.4—dc21 2003048290 10 9 8 7 6 5 4 3 2 1 12 11 10 09 08 07 06 05 04 03 To Kay MacAvoy and Diane Millstein said by close observers to be two of a special kind And to John Smale who showed us how it can be done as non-executive Chairman of General Motors Contents List of Figures and Tables ix List of Appendix Tables x Preface xi List of Abbreviations xiii 1 Introduction and Summary 1 Ira M. Millstein and Paul W. MacAvoy 2 The Current Crisis 6 Ira M. Millstein and Paul W. MacAvoy 3 The Emergence and Development of the Governance Problem 11 Ira M. Millstein and Paul W. MacAvoy Conglomeration as an example of managerial self-interest 13 Other Sources of accelerated change 20 The emergence of the full role of the board of directors 27 Has the emergence of ‘new’ governance, in terms of board diligence and focus, become observable? 30 4 The Ambivalent Results of Extant Research on the Impact of Strong Governance on Corporate Performance 32 Ira M. Millstein and Paul W. MacAvoy 5 A New Approach for Determining the Effect of Strong Governance on Corporate Performance 43 Paul W. MacAvoy Metrics for board independence and professionalism 45 Metrics for performance 47 Methodology 53 Estimation and analysis of the governance/corporate performance relationship 56 vii viii Contents The calculation of economic value added 57 Superior performance after a change in governance 63 Conclusion 65 6 ‘Where Was the Board?’ Share Price Collapse and the Governance Crisis of 2000–2002 66 Paul W. MacAvoy The status quo in corporate governance in the 1990s 67 Incremental change 68 The collapse of Enron and the others 76 The nine largest companies investigated for fraudulent financial reporting 83 Where was the board of directors? 86 A second look at management out of control 89 7 Proposals for Reform of Corporate Governance 95 Ira M. Millstein and Paul W. MacAvoy New expectations for improved performance in boards of directors 102 Recommendations 113 Appendix A: Technical Implementation Issues in the Analysis of EVA™ for CalPERS-rated Companies 120 Appendix B: Database of EVA™ Estimates 125 References 133 Index 143 List of Figures and Tables Figures 2.1 The focus of decisions 8 5.1 Economic value added, by company CalPERS grade 58 5.2 Differential spread, by company CalPERS grade 59 5.3 Economic value added, by company CalPERS grade, accounting for industry effects 61 Tables 3.1 Net merger-acquisitions announcements 13 5.1 Equation for single company economic value added versus CalPERS grades on board activity 61 5.2 Comparative economic value added in the better- versus worse-governed stylized company (spreads in percentages; capital and returns in $ millions) 62 5.3 Regression equation for single company economic value added versus board change 64 6.1 Economic value added at Enron, WorldCom and Global Crossing 77 6.2 Management and corporation changes in valuation at Enron, Global Crossing and WorldCom 82 6.3 Performance of the nine largest corporations under investigation in 2001 83 6.4 Economic value added at nine corporations under investigation 84 6.5 Shareholder returns for nine corporations under investigation 85 ix
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