Yale School of Management 1 Emerging Market Finance: Lecture 5: Corporate Governance Issues Separation between ownership and control How can property rights be protected for all shareholders? Incentive issues: how to ensure that managers will make the “right” decisions?
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Yale School of Management 1 Emerging Market Finance: Lecture 5: Corporate Governance Issues Separation between ownership and control How can property rights.
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Yale School of Management
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Emerging Market Finance:
Lecture 5: Corporate Governance Issues
Separation between ownership and control
How can property rights be protected for all shareholders?
Incentive issues: how to ensure that managers will make the
“right” decisions?
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Historically Speaking
Back in 1700 or even 1800, corporate governance was not a big problem, and necessary institutions were not demanding yet
Because ……there were mostly “family businesses”
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Ownership structures of public companies:which form is the “best”?
Diverse ownership with many small shareholders: extreme separation between ownership and control
Family-controlled: some separation between ownership and control, with a family being the controlling shareholder.
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Problems with Dispersed Ownership
The Enron example
The case of “Investment Privatization Funds” (IPF) in the Czech Republic and Russia
Key reason: it may not be worth any shareholder’s efforts to mind the firm’s business, because each shareholder holds too small a stake.
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Investors: Millions
Public Corp.Stock market
Regulators (SEC)
The Court
The Press & Mkt Partic.
Auditors & Others
The Board
But, the scale and scope of modern corp. requires large financing, even arm’s-length financing. It takes “a lot” to support publicly traded corporations or stock market!
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Internal governance design issue:Positive Incentives to Resolve Conflicts between
Management & Shareholders
Design 1: performance-based bonus
Design 2: give shares to CEO and other top executives
Design 3: stock options
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In the U.S., how much did the CEO get for each $10,000 of Shareholder Value Increase?
7. 5
25
36. 6
69. 1
0
40
80
Bonus Shares owned by
CEO
Stock Options owned by CEO
In Total
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Do Executive Incentives Make any Performance Difference?
1.20%
5.70%
0%
2%
4%
6%
Diff in ROE Diff in Stock Returns
Two groups of companies used: (1) public companies for which the board required the CEO to hold a minimum level of shares and (2) firms in the same
industry but without minimum shareholding requirement for CEO
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Absent of Reliable Institutions
What can the shareholders do?
---- One way is to have large shareholders or concentrated ownership, so that someone “cares”!
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Problems with concentrated ownership: The case of Long-Fa Corp in China
On May 25, 2000, there were two Legal-Person Share transfers:
10.7 million shares from the largest shareholder to Nan-Du Group at $4.38 per share (to become 3rd largest shareholder)
12.87 million shares to another firm at $2.19 per share (to become 2nd largest shareholder)
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Question: Why Pay More on Same Day?
Nan-Du Largest Shareholder
10.7 million shares @ $4.38
Another shareholder
Past 3rd Shareholder
12.87 million shares @ $2.19
(Paid $23.43 million more)
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The first related-party asset swap: Sept. 2000
Nan-Du Long-Fa Corp.
Sell 49.5% of Nan-Du Network: @ assessed value: 117.1 million.