the objective of corporate finance and corporate governance：企業(yè)財(cái)務(wù)目標(biāo)與公司治理

TheObjectiveofCorporateFinanceandCorporateGovernance

04/03/08Ch.21Whydoweneedanobjective?Anobjectivespecifieswhatadecisionmakeristryingtoaccomplishandbysodoing,providesmeasuresthatcanbeusedtochoosebetweenalternatives.Whydoweneedauniqueobjective?AllowsforsystematicdecisionmakingAtheorydevelopedaroundmultipleobjectivesofequalweightwillcreatequandarieswhenitcomestomakingdecisions.2CharacteristicsofagoodobjectivefunctionItisclearandunambiguousItcomeswithaclearandtimelymeasurethatcanbeusedtoevaluatethesuccessorfailureofdecisions.Itdoesnotcreatecostsforotherentitiesorgroupsthaterasefirm-specificbenefitsandleavesocietyworseoffoverall.3Intheory,whatservesasagoodobjectiveforus?Whenthestockistradedandmarketsareviewedtobeefficient,theobjectiveistomaximizethestockprice(andfirmvalue).Why?ItiseasilyobservableconstantlyupdatedIfinvestorsarerational,itreflectsthewisdomofdecisions,shorttermandlongterm,instantaneously.Itisarealmeasureofstockholderwealth,sincestockholderscanselltheirstockandreceivethepricenow.4TheclassicalobjectivefunctionSTOCKHOLDERSMaximizestockholderwealthHire&firemanagers-Board-AnnualMeetingBONDHOLDERSLendMoneyProtectbondholderInterestsFINANCIALMARKETSSOCIETYManagersRevealinformationhonestlyandontimeMarketsareefficientandassesseffectonvalueNoSocialCostsCostscanbetracedtofirm5Wedon’tliveinaUtopianworldAgencycostsrefertotheconflictofinterestthatarisebetweenthedifferentpartiesandthusmakepartiesactinamannerthatisinconsistentwithstockpricemaximization.STOCKHOLDERSManagersputtheirinterestsabovestockholdersHavelittlecontrolovermanagersBONDHOLDERSLendMoneyBondholderscangetrippedoffFINANCIALMARKETSSOCIETYManagersDelaybadnewsorprovideMisleadinginformationMarketsmakemistakesandcanoverreactSignificantSocialCostsSomecostscannotbetracedtofirm6I.Stockholdervs.ManagementPracticeMostsmallstockholdersdonotattendmeetingsIncumbentmanagementstartsoffwithaclearadvantagewhenitcomestotheexercisingofproxies.Forlargestockholders,sometimes,whenconfrontedbymanagersthattheydonotlike,istovotewiththeirfeet.TheoryThestockholdershavesignificantcontrolovermanagement.Themechanismsfordiscipliningmanagementaretheannualmeetingandtheboardofdirectors.7TheproblemwiththeboardofdirectorsTheboardofdirectorsisthebodythatoverseesthemanagementofapubliclytradedfirm.Theboardofdirectorsaresupposedtorepresenttheshareholdersanddisciplineandguidemanagementifnecessary.Historically,however,mostdirectorsinthepastwerehand-pickedbyCEOsmanyhaveinsufficientknowledgeofthebusinessattimes,managementistooheavilyrepresentedontheboardtheremaybeinsufficientinterestormotivationforthedirectorstotakeanactiverolesomeboardsaretoolargetobeeffectiveinadministration8VisiblemanagerialactionsthatprovidenobenefittotheshareholdersGreenmail:The(managersof)targetofahostiletakeoverbuyoutthepotentialacquirer'sexistingstake,atapricemuchgreaterthanthepricepaidbytheraider,inreturnforthesigningofa'standstill'agreementGoldenParachutes:Provisionsinemploymentcontracts,thatallowsforthepaymentofalump-sumorcashflowsoveraperiod,ifmanagerscoveredbythesecontractslosetheirjobsinatakeover.PoisonPills:Asecurity,therightsorcashflowsonwhicharetriggeredbyanoutsideevent,generallyahostiletakeover,iscalledapoisonpill.Overpayingontakeovers.Thistransferswealthfromthestockholdersoftheacquiringfirmtothoseoftheacquiredfirm.Howwouldweknow?Lookatmarketreactionstotakeoverbids.Perks:BenefitsprovidedtotheCEOandmanagement.9DennisKoslowski’s(TYCO)fauxpas…In1992,Dennisindicatedthat..Perkssuchascountry-clubmembershipsandexecutivediningroomsaretabooEarly2000srevelationsofassetembezzlement$17,100travelingtoiletbox$15,000dogumbrellastand$16.8millionapartmentonFifthAvenue$3millioninrenovations$11millioninfurnishings$7millionapartmentonParkAvenueforhisformerwife.A$72,000feetoGermán

Frers,ayachtmakerA$6,300sewingbasketA$6,000showercurtain$5,960fortwosetsofsheetsA$2,900setofcoathangersA$2,200giltmetalwastebasketA$1,650notebookanda$445pincushion10II.Stockholdervs.BondholderPracticeStockholdersmaymaximizetheirwealthattheexpenseofbondholdersby:Takingriskierprojectsthanthoseagreedtoattheoutset.Borrowingmoreonthesameassets:Iflendersdonotprotectthemselves,afirmcanborrowmoremoneyandmakeallexistinglendersworseoff.TheoryThereisnoconflictofinterestbetweenstockholdersandbondholders.11

Unprotectedlenders?ThecaseofNabisco

12III.FirmsandFinancialMarketsPracticeManagementsuppressinformationManagementdelaythereleasingofbadnewsManagementsometimesrevealfraudulentinformationSomearguethatmarketsareshort-sightedAnalystrecommendationsarenotalwaysunbiasedTheoryFinancialmarketsareefficient.ManagersconveyinformationhonestlyandtruthfullytofinancialmarketsFinancialmarketsmakereasonedjudgmentsof'truevalue'.13

Evidencethatmanagersdelaybadnews..

14Aremarketsshort-sightedandthusinefficient?Someevidencethattheyarenot..Therearehundredsofstart-upandsmallfirms,withnoearningsexpectedinthenearfuture,thatraisemoneyonfinancialmarketsThemarketresponsetoresearchanddevelopmentandinvestmentexpenditureisgenerallypositive15IV.FirmsandSocietyPracticeFinancialdecisionscancreatesocialcostsandbenefitswhere,AsocialcostorbenefitisacostorbenefitthataccruestosocietyasawholeandNOTtothefirmmakingthedecision.Thesecosts/benefitstendtobedifficulttoquantifyTheoryTherearenocostsassociatedwiththefirmthatcannotbetracedtothefirmandchargedtoit.16Ahypotheticalexample AssumethatyouworkforTheHomeDepotandthatyouhaveanopportunitytoopenastoreinaninner-cityneighborhood.Thestoreisexpectedtoloseabout$100,000ayear,butitwillcreatemuch-neededemploymentinthearea,andmayhelprevitalizeit.Questions:Wouldyouopenthestore?YesNoIfyes,wouldyoutellyourstockholdersandletthemvoteontheissue?YesNoIfno,howwouldyourespondtoastockholderqueryonwhyyouwerenotlivinguptoyoursocialresponsibilities?17Giventheseagencyissues,isstockpricemaximizationreallythebestobjective?AlternateobjectivesmaximizingearningsmaximizingfirmsizemaximizingmarketshareDoanyofthesebetterservethepurpose?18Maximizestockprice,subjectto..Thestrengthofthestockpricemaximizationobjectivefunctionisitsinternalselfcorrectionmechanism.Excessesonanyofthelinkageslead,ifunregulated,tocounteractionswhichreduceoreliminatetheseexcesses.19Management,boardofdirectors,andactiveinvestorsExchange-specifiedrequirementsforboardofdirectorsIncreasedawarenessofthedeficienciesofandqualityofboardsResearchhasshownthatboardsizemattersPubliclistsofbestandworstboardsIncreaseininstitutionalactivismex.,CALPERSChangingcompensationstructures20BondholdersprotectionMorerestrictivecovenantsoninvestment,financinganddividendpolicyhavebeenincorporatedintobothprivatelendingagreementsandintobondissuesNewtypesofbondshavebeencreatedtoexplicitlyprotectbondholdersagainstsuddenincreasesinleverageorotheractionsthatincreaselenderrisksubstantially.RatingsSensitiveNotes,wheretheinterestrateonthenotesadjuststothatappropriatefortheratingofthefirmMorehybridbonds(withanequitycomponent,usuallyintheformofaconversionoptionorwarrant)havebeenused.Thisallowsbondholderstobecomeequityinvestors,iftheyfeelitisintheirbestintereststodoso.21FinancialmarketresponseRegulatorychangesRegulationFairDisclosure(2000)–developsstandardsbywhichinformationistobereleasedtothepublicandfinancialcommunitybyfirms.Sarbanes-Oxley(2002)–setsregulationsforthebehaviorandcharacteristicsoftheboardandfirm,specificallyasitrelatestoauditing.IncreasedimportanceofethicalbehaviorIncreasedavailabilityofinformationandeaseoftrading22SocietalresponseIffirmsconsistentlyfloutsocietalnormsandcreatelargesocialcosts,thegovernmentalresponse(especiallyinademocracy)isforlawsandregulationstobepassedagainstsuchbehavior.Forfirmscateringtoamoresociallyconsciousclientele,thefailuretomeetsocietalnorms(evenifitislegal)canleadtolossofbusinessandvalueFinally,investorsmaychoosenottoinvestinstocksoffirmsthattheyviewassocialoutcasts.Growthof“sociallyresponsible”funds23Counter-reactiontoagencycosts..STOCKHOLDERSManagersofpoorlyrunfirmsareputonnotice.1.Moreactiveinvestors2.ChangingListingRequirementsBONDHOLDERSProtectthemselves1.Covenants2.NewTypesFINANCIALMARKETSSOCIETYManagersFirmsarepunishedformisleadingmarketsInvestorsandanalystsbecomemoreskepticalCorporateGoodCitizenConstraints1.Morelaws2.Investor/CustomerBacklash24ThemodifiedobjectivefunctionForpubliclytradedfirmsinreasonablyefficientmarkets,wherebondholders(lenders)areprotected:MaximizeStockPrice:ThiswillalsomaximizefirmvalueForprivatefirms,maximizestockholderwealth(iflendersareprotected)orfirmvalue(iftheyarenot)25Corporategovernancedefined

"Corporategovernanceisthesystembywhichbusinesscorporationsaredirectedandcontrolled.Thecorporategovernancestructurespecifiesthedistributionofrightsandresponsibilitiesamongdifferentparticipantsinthecorporation,suchas,theboard,managers,shareholdersandotherstakeholders,andspellsouttherulesandproceduresformakingdecisionsoncorporateaffairs.Bydoingthis,italsoprovidesthestructurethroughwhichthecompanyobjectivesareset,andthemeansofattainingthoseobjectivesandmonitoringperformance,"OECDApril1999.

26ThevalueofgoodcorporategovernanceStudieshavefoundthatfirmswithbettercorporategovernancecharacteristicstendtoperformbetter.Stockreturnsoffirmswith“good”corporategovernancepracticesaresignificantlygreaterthanreturnsforfirmswith“bad”corporategovernancepracticesReducedexpropriationofcorporateresourcesbymanagersLendersandinvestorsmorewillingtoprovidefundsleadingtolowercostsofcapital.InstitutionalShareholderServices(ISS)providesarelativemeasureofcorporategovernancequalityknownastheCorporateGovernanceQuotient(CGQ).27Howdowedefine“good”corporategovernance? Boardmembersactinthebestinterestofshareholders.Thecompanyactsinalawfulandethicalmannerinalltheirdealings.AllshareholdershavethesamerighttoparticipateincompanygovernanceandaretreatedfairlybytheBoardandmanagement.TheboardandcommitteesactindependentlyofmanagementAllrelevantcompanyinformationisprovidedinatimelymanner28Howdoweevaluatethecorporategovernancestructureofafirm?BoardofdirectorsWhatisthecompositionoftheboardandcommittees?Istheresufficientindependentdirectorrepresentation?Dotheboardmembershavethenecessaryexpertisetomakeinformeddecisions?Doestheboardhavetheauthoritytohireoutsideconsultantswithoutmanagementapproval?Arethereindependentdirectorsthatareactiveindecisionmakingandthatarecompensatedbasedonfirmperformance?Doesthecompanyengageinoutsidebusinessrelationships(related-partytransactions)withmanagementorBoardmembersandrelations?Doesthecompanymeetorsurpassexchangeguidelines?29Howdoweevaluatethecorporategovernancestructureofafirm?ManagementDoesthecompanyhaveaformalcodeofethics?Howismanagement’scompensationstructured?Doesthecompanyallowmanagementpersonaluseofcompanyassets?Aremanagerssignificantstockholdersinthefirm?HasthecompanybeenlistedonCALPERS?30Howdoweevaluatethecorporategovernancest