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Contents

Cases in Point xiii Preface xvii Acknowledgments xxvii Introduction How to Use this Book 1 1. What is a Corporation? 3 Defining the Corporate Structure, Purpose, and Powers 5 Evolution of the Corporate Structure 6 The Purpose of a Corporation 9 Satisfying the human need for ambition, creativity, and meaning 9 Social structure 10 Efficiency and efficacy 10 Ubiquity and flexibility 11 Identity 11 Metaphor 1: The Corporation as a Person 12 Metaphor 2: The Corporation as a Complex Adaptive System 12 Are Corporate Decisions Moral ? 14 Are Corporations Accountable? 16 Three Key External Mechanisms for Directing Corporate Behavior: Law, the Market, and Performance Measurement 18 Government: legislation, regulation, enforcement 18 What Does Within the Limits of the Law Mean? 20 When and how do you punish a corporation? 28 Probation of corporations 29 The problem of serial offenders 31 Securities analyst settlement 32 What is the role of shareholders in making this system work? 33 The market: too big to fail 36 The corporation and elections 40 Citizens united 41 The corporation and the law 45 A Market Test: Measuring Performance 47 Long term versus short term 50 Corporate decision making: whose interests does this person /adaptive creature serve? 55 Another (failed) market test: NGOs 61 Measuring value enhancement 62 GAAP 62 Market value 69 Earnings per share 70 EVA(R): economic value added 71 Human capital: It s not what you own but what you know 72 The value chain 73 Knowledge capital 74 The value of cash 74 Corporate externalities 79 Equilibrium: The Cadbury Paradigm 79 ESG: Environment, Social Governance A New Way to Analyze Investment Risk and Value 83 Quantifying Nontraditional Assets and Liabilities 87 Future Directions 92 Summary and Discussion Questions 93 Notes 95 2. Shareholders: Ownership 101 Definitions 105 Early Concepts of Ownership 106 Early Concepts of the Corporation 107 A Dual Heritage: Individual and Corporate Rights 108 The Reinvention of the Corporation: Eastern Europe in the 1990s 110 The Evolution of the American Corporation 111 The Essential Elements of the Corporate Structure 115 The Mechanics of Shareholder Rights 117 The Separation of Ownership and Control, Part 1: Berle and Means 118 Fractionated Ownership 125 The Separation of Ownership and Control, Part 2: The Takeover Era 129 Waking the Sleeping Giant 134 A Framework for Shareholder Monitoring and Response 140 Ownership and Responsibility 141 No innocent shareholder 141 To Sell or Not to Sell: The Prisoner s Dilemma 143 Who the Institutional Investors Are 144 Bank trusts 145 Mutual funds 146 Insurance companies 149 Universities and foundations 149 Executive pay from the consumer side a leading indicator of risk 150 Pension plans 154 The Biggest Pool of Money in the World 154 Pension plans as investors 164 Pension plans as owners 166 Public Pension Funds 169 Divestment initiatives 188 Economically targeted investments 189 AFSCME 195 Federal Employees Retirement System 197 TIAA CREF 199 Private Pension Funds 201 The Sleeping Giant Awakens: Shareholder Proxy Proposals on Governance Issues 206 Focus on the Board 212 Hedge Funds 220 Synthesis: Hermes 221 Investing in Activism 222 New Models and New Paradigms 223 The Ideal Owner 228 Pension Funds as Ideal Owners 233 Is the Ideal Owner Enough? 234 Summary and Discussion Questions 236 Notes 238 3. Directors: Monitoring 251 A Brief History of Anglo-American Boards 255 Who Are They? 256 Size 256 Term 256 Inside/outside mix 257 Qualifications 261 Who Leads the Board? Splitting the Chairman and CEO and the Rise of the Lead Director 261 Agenda 263 Minutes 263 Diversity 264 Meetings 264 Communicating with Shareholders 264 Special Obligations of Audit Committees 265 Ownership/Compensation 266 Post-Sarbanes Oxley Changes 266 Board Duties: The Legal Framework 267 The Board s Agenda 281 The Evolution of Board Responsibilities: The Takeover Era 283 The Fiduciary Standard and the Delaware Factor 284 How did boards respond? 287 Greenmail 287 Poison pills 288 Other anti-takeover devices 290 The Director s Role in Crisis 291 Limits and Obstacles to Board Oversight of Managers 295 Information Flow 295 Practical Limits: Time and Money 301 The Years of Corporate Scandals Boards Begin to Ask for More 302 Director Information Checklist 303 Who Runs the Board? 304 Catch 22: The Ex-CEO as Director 306 Director Resignation 308 CEO Succession 308 Director Nomination 309 Limits and Obstacles to Effective Board Oversight by Shareholders 318 Carrots: Director Compensation and Incentives 319 Sticks, Part 1: Can Investors Ensure or Improve Board Independence by Replacing Directors who Perform Badly or Suing Directors who Fail to Act as Fiduciaries? 324 Can Directors be Held Accountable through the Election Process? 324 Staggered boards 327 Confidential voting 328 Sticks, Part 2: Suing for Failure to Protect the Interests of Shareholders Are the Duties of Care and Loyalty Enforceable? 331 Future Directions 331 Majority voting and proxy access 331 Improving director compensation 333 Increasing the authority of independent directors 333 A market for independent directors 335 Designated director 336 Board evaluation 336 Executive session meetings 336 Succession planning and strategic planning 337 Making directors genuinely independent 337 Involvement by the federal government 338 Involvement by shareholders 339 Summary and Discussion Questions 339 Notes 340 4. Management: Performance 347 Introduction 348 What Do We Want from the CEO? 354 The Biggest Challenge 359 Risk Management 363 Executive Compensation 363 The pay Czar 370 Post-meltdown pay 370 The Council of Institutional Investors 371 Stock Options 374 Restricted Stock 379 Yes, We Have Good Examples 380 Shareholder Concerns: Several Ways to Pay Day 380 The guaranteed bonus the ultimate oxymoron 380 Deliberate obfuscation 381 The Christmas tree 382 Compensation plans that are all upside and no downside 382 Loans 382 Accelerated vesting of options 383 Manipulation of earnings to support bonuses 383 Manipulation of peer groups 384 Huge disparity between CEO and other top executives 384 Imputed years of service 384 Excessive departure packages 384 Backdating, bullet-dodging, and spring-loading options 385 Phony cuts 386 Golden hellos 386 Transaction bonuses 386 Gross-ups and other perquisites 387 Retirement benefits 387 Obstacles to restitution when CEOs are overpaid 387 Future Directions for Executive Compensation 388 CEO Employment Contracts 389 Cause 390 Change of control 391 Half now, half later 391 CEO Succession Planning 391 Sarbanes Oxley 392 Creation of the Public Company Accounting Oversight Board 392 Section 404 393 Other changes 394 Dodd Frank 394 Employees: Compensation and Ownership 395 Employee Stock Ownership Plans 399 Mondragon and Symmetry: Integration of Employees, Owners, and Directors 403 Conclusion 409 Summary and Discussion Questions 410 Notes 411 5. International Corporate Governance 415 The Institutional Investor as Proxy for the Public Interest 429 Norway in the driver s seat 431 The International Corporate Governance Network 433 ICGN: Statement of Principles on Institutional Shareholder Responsibilities 433 The Global Corporate Governance Forum 435 Sweden 435 Canada 437 Singapore 438 Russia 441 Germany 442 China 443 Japan 444 Governance Metrics International (GMI) 445 World Bank and G7 Response 458 Azerbaijan 459 Slovakia 460 Jordan 460 Thailand 461 Poland 461 The Global Carbon Project (GCP) 464 A Common Framework for Sustainability Reporting 465 Towards a Common Language 468 Vision 470 Summary And Discussion Questions 471 Notes 473 6. Afterword: Final Thoughts and Future Directions 475 Beyond the Nation State 477 Government as Shareholder: The Institutional Investor as Proxy for the Public Interest 484 Notes 486 Index 489

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