Professional Documents
Culture Documents
CORPORATE
GOVERNANCE
• CEO paid a salary of $4.0 million, cash bonus of $6.5 million, and granted
1.2 million stock options during fiscal 2001.
• CEO sold 2.5 million shares back to the company (94% of his holdings) just
weeks before the firm revealed that regulatory changes would hurt
earnings, battering its stock price.
HEALTHSOUTH CORPORATION
Perhaps not surprisingly, the CEO repeatedly received stock options dated at
low points in the company’s stock price (“backdating”).
HEALTHSOUTH (HRC)
$30
CEO Stock Option Grant Date:
August 14, 1997
$28
$26
$24
$22
JUN 97 JUL 97 AUG 97 SEP 97 OCT 97
WeWork
• Nine-year old company had $47 billion valuation prior to IPO filing in 2019.
The filing included unusual provisions:
– High number of senior positions held by family and friends.
– Contractor owned by family members built company office space.
– Company paid founder $6 million to purchase the trademark “We.”
– Company issued founder $760 million personal loan, backed by his shares.
– Founder had 20 voting rights per share, giving him near-total control.
– Company granted founder’s wife sole authority to name his successor.
• Following this disclosure, company reduced IPO price then pulled filing.
• Founder sold stake for $1.7 billion and left the company.
THESE ARE NOT ISOLATED INCIDENTS
U.S. Companies
AIG, Countrywide, Enron, Fannie Mae,
General Electric, Lehman Brothers, Theranos, U.S. and
WorldCom
Non-U.S.
etc… Companies
Both plagued
by scandals
Non–U.S. Companies
Equally likely to
Olympus, Parmalat, Petrobras, Royal Dutch Shell, restate earnings
Royal Bank of Scotland, Satyam, Volkswagen
etc…
THE ROOT OF THE PROBLEM
“Self-Interested Executives”
– The owners of the company are separate from the management of the company.
– Agency problem. Management takes self-interested actions that are not in the
interest of shareholders.
– Agency costs. Shareholders bear the cost of these actions.
Creditors Unions
Analysts Media
• Investors say they are willing to pay a premium for a “well governed” company.
WHAT PREMIUM WOULD YOU BE WILLING TO PAY FOR A WELL-GOVERNED COMPANY IN:
40%
30%
20%
10%
0%
RUSSIA CHINA BRAZIL INDIA SOUTH UNITED GERMANY UNITED
KOREA STATES KINGDOM
McKinsey & Co. (2002)
… IT’S JUST NOT ALWAYS CLEAR WHAT THAT IS
• To get the story straight, we must look at the evidence. Sometimes the
evidence is inconclusive.
John Graham, Campbell Harvey, and Shiva Rajgopal. Value Destruction and Financial Reporting Decisions. Financial Analysts
Journal. 2006.
Paul Coombes and Mark Watson. Global Investor Opinion Survey 2002: Key Findings. McKinsey & Co. 2002.