A. Does incompetence by top management and corporate boards of directors invalidate the value-maximization theory of the firm?
B. Many shareholder groups prefer to split the chairman and CEO posts, and install an outsider as chairman of the board of directors. From the shareholder viewpoint, discuss some of the advantages and disadvantages of an “outside” chairman.
C. Shareholders often want change when corporate performance is poor, top executive pay is excessive, and/or management is unresponsive. However, removing corporate directors by shareholder vote remains almost impossible. In annual proxy contests, shareholders are generally offered only one slate of candidates, and they can express their dissatisfaction only by withholding votes from would-be board members. Does this mean that the current shareholder voting process is an ineffectual means of corporate control? How might this process be improved?
D. In addition to casting their vote in annual proxy contests, shareholders “vote with their feet” when they sell the stock of poorly performing companies. How is this likely to influence inferior performance by top management and the board of directors?
Is the large publicly traded corporation in eclipse? Some say yes. Harvard financial economist Michael Jensen, for example, argues that the experience of the past 2 decades indicates that corporate internal control systems have failed to deal effectively with economic changes, especially slow growth and the requirement for exit from declining industries. In some parts of the economy, new and smaller organizations are emerging to take the place of giant corporations. Although corporate in form, these agile organizations eschew public shareholders. Their major source of capital is public and private debt rather than publicly traded equity. In analyzing the late 1980s trend toward leveraged buyouts (LBOs), Jensen observed that LBOs differ from publicly held conglomerates in at least four important respects: management incentives are closely tied to performance, decentralization is common, a heavy reliance on leverage is typical, and obligations to creditors and residual claimants are clearly specified. In suggesting ways for public corporations to “heal” themselves, Jensen advised that public companies should become more like LBOs by decentralizing, borrowing to repurchase stock or pay large dividends, or increasing equity ownership among corporate directors, managers, and other employees.
Of course, given recent experience it is quite valid to express concern with respect to the adaptive capability of some large corporations. Still, pronouncements concerning the “death” of the modern corporation may be premature. The corporate form has endured because it is a useful and effective means for gathering and deploying economic resources. Questions about corporate effectiveness are ultimately questions about what is referred to as “corporate governance.” Corporate governance is the system of controls that helps the corporation effectively manage, administer, and direct economic resources.