Week 9

Management: PerformanceFaisal AlSager

MGT 427 - Corporate Governance

Objectives

✤ To highlight the rising importance of managers

✤ To clarify what shareholders want from managers

✤ To raise some of the shareholders’ concerns

Manager’s Influence

✤ In the 1990’s, managers have become more noticeable

✤ CNN’s Ted Turner, Intel’s Andy Grove, Amazon’s Jeff Bezos, and GE’s Jack Welch

Issues with Managers

✤ Shareholders and employees share concerns about managers

✤ Mainly, the tens of millions of dollars they receive

✤ Also, how long will the manager positively impact the share price? Usually, it’s on short-term only

✤ And as we know, many CEOs have not set a good example of responsible share ownership

What Do We Want from the CEO?✤ Change is the only certainty in business

✤ Thus, we want a CEO who is able, by virtue of ability, expertise, resources, motivation, and authority, not just to keep the company ready for change but ready also to benefit from changes

✤ The CEO must be powerful enough to do the job

✤ BUT he/she must be accountable enough to make sure the job is done correctly

✤ CEO decisions must be in the long-term interests of shareholders rather than in his/her own interests

How Do We Achieve that Balance?

✤ Answer: Executive Compensation

✤ Shareholders prefer a compensation plan with maximum variability

✤ Management prefer a compensation plan with maximum security

Measuring CEO’s Performance?

✤ Question: How Can we measure a CEO’s performance?

✤ Answer: we usually use same measures we use for measuring the company’s performance

Challenge

✤ The biggest challenge a company faces is not failure, but success!

✤ Giants of the 1960s became problems of the 1980s and 1990s (Xerox, Kodak, General Motors)

✤ Giants of the 1990s became problems of the 2000s (Enron, Tyco, Global Crossing, WorldCom)

What Caused Failures?

✤ Company’s failure was the effect of bad governance

✤ Same person held the following positions:

✤ CEO

✤ chairman of the board

✤ CEO of the largest operating division

✤ chairman of the nominating committee of the board

✤ trustee of the 25 percent of the company’s stock

Executive Compensation✤ One important issue of governance is excessive CEO

compensation

✤ This issue was the first corporate issue to be the focus of the press

✤ This issue has the most direct impact on shareholder value

✤ To the shareholder, compensation represent an investment opportunity:

✤ how much will the return on investment be?

✤ Is it going to sustain?

References

✤ Corporate Governance (4th Edition): Monks, R. and Minow, N. 2004. (Publisher: Wiley-Blackwell)