INDEX

A

abnormal stock price returns, 96–99

absolute performance standards, 126–127

accounting

auditing versus consulting fees, 54, 55

creative accounting practices, 51–53, 134–136

financial reporting rules, 53–54

generally accepted accounting principles (GAAP), 197–198

in short-term compensation plans, 125–126

accounting model, 18–19

agency costs, 98–99

Agribrands International, 167–168

Airbus, 86

Altera Corporation, 47

antitakeover devices, 183–185

antitrust legislation, 7

AOL-Time Warner, 160

ArrowPoint Communications Inc., 46

Arthur Andersen, 52

Arvin Industries, 108

Associates First Capital Corporation, 163

AT&T, 160

auditing fees, 54, 55

Australia, investor protection laws and, 111–112

Aventis, 197

B

Bank of Tokyo-Mitsubishi, 199

banks

financial capitalism and, 8–9

in Germany, 23, 188–189, 191–196, 205

in Japan, 23, 206–207

public debt versus debt of, 101–104

regulation of, 11

syndicates of, 103

base salary, 122–123

Berle, Adolf, 2–3, 12, 14, 29–31

best practices, of board of directors, 171

beta, 62–65

Bethlehem Steel, 101–102

Big Bang (Japan), 205–207

Black-Scholes option pricing model, 128–129

board of directors, 19, 25–26, 54, 169–186

board committees, 173–174

board compensation, 174–178

CEO and, 178

elections of, 181–183

firm performance and, 185–186

in Germany, 13, 189–190

greenmail and, 183–185

historical perspective on, 170–172

independent directors and, 25, 171–173

poison pills and, 183–185

reform of, 171–172

relationship with management, 170–172

role of, 170

shareholder rights and, 178–183

supermajority rules and, 183–185

voting rights of shareholders and, 24–25, 179–183

Boeing, 85–86, 160

book value, 78–79

Boston Chicken, 53

budgets, in short-term compensation plans, 126–127

C

call options, 128–129

Calpers (California Public Employees Retirement System), 172, 185

Campbell Soup, 186

Canada, investor protection laws and, 111–112

capital allocation, 26, 81–82

capital asset pricing model (CAPM), 62–65, 70

described, 62–64

effectiveness of, 64–65

carve-outs, 162–164

cash dividends, see dividends

cash flows

book value and, 78–79

free, 96–99, 110–112, 115–116

incremental, 83

net income versus, 76–77

Chan, Su, 80

chief executive officer (CEO), 19, 26–27, 31–32, 54

board chair and, 178

compensation in 2000, 142–148

long-term incentive plans, 121, 128–142

median pay, 121–122

short-term incentive plans, 121, 123–128

Cisco, 47–48

CIT Group, 177

civic republicanism, 3–4

growth of corporation and, 6–7

liberalism versus, 5

civil-law countries, 111–112

classes of common stock, 24, 180

class warfare, 7

Coca-Cola, 48–50, 52, 98

collateral, 95

common-law countries, 111–112

common stock

classes of, 24, 180

see also dividends; efficient markets; valuation

Compaq Computer Corporation, 158–160

comparables, 70–71

compensation

of board members, 174–178

management, 21, 79, 101, 110, 117–148

competitive analysis approach (CAA), 85–87

Conaway, Charles, 143–147

confidentiality issues, 180–181

conflicts of interest

between banks and public bondholders, 103

of the board of directors, 25–26, 172

corporate social responsibility and, 9, 29–31

between creditors and shareholders, 27, 93–96, 191–193

between management and shareholders, 26, 27, 43–45, 96–101, 107–112, 131

in MBOs, 166

ownership, 23

consensus budgets, 126

constant growth rate policy, 105–106

contracts, 19

contractual shareholder model, 14–16, 18

convergence, 207–209

Cooper Industries, 108

corporate control market, 149–168

carve-outs in, 162–164

defined, 149–150

divestitures in, 162–164

IPOs in, 164–165

in Japan, 200–202

lack of, in Germany, 190–191

LBOs in, 165–168, 171

MBOs in, 165–168

mergers and acquisitions in, 23, 155–162

reasons for, 150–155

spin-offs in, 162–164

corporate governance

American versus German approach to, 197–199

board of directors in, 19, 25–26, 54, 169–186

corporate executives and senior managers in, 26–27

creditors in, 27

dividends and, 105–116

efficient markets and, 48–53

financing decisions and, 64, 89–104

investment decisions and, 48–51, 64, 73–87

management compensation and, 21, 79, 110, 117–148

nature of, 1–2

OECD principles of, 209–213

in other countries, 13

professional managers in, 2, 3–4, 8–16

relationships with suppliers and customers, 25, 28–29

voting rights and, 24–25, 179–183

see also board of directors; governance structure; management

corporate social responsibility, 9, 29–31

corporation

growth of, 6–8

modern, 2–3, 14, 29–31

cost of equity capital, 64–65

covenants, protective, 95–96

C.R. Bard, 38–43, 175

creative accounting practices, 51–53, 134–136

creditors, 27

bank debt versus public debt, 101–104

conflicts of interest between shareholders and, 27, 93–96, 191–193

conflicts of interest between types of, 103

protective covenants of, 95–96

credit ratings, 102–103

Credit Suisse Boston, 136

Critical Path, Incorporated, 52

cross-ownership, 203

cumulative voting, 181–182

customers

financing decision and, 99–100

relationships with, 28–29

D

DaimlerChrysler, 28, 197

debt financing, 27, 98

democratic political process, 7–8

Denne, Karen, 177

depreciation, 76–77

Derrick, James V., Jr., 177

Deutsche Bank, 126–127

Deutsche Telekom, 197, 198

Digital Equipment, 160

discounted cash flow model, 57–62

cash dividends and earnings in, 59

investors’ required rate of return in, 59–62

diversification

of funding sources, 102

of investments, 61, 65, 156–157, 164

diversity, 207–209

divestitures, 162–164

dividend payout ratios, 112

dividends, 105–116

conflicts of interest and, 110–112, 131

discounted cash flow model and, 59

free cash flows and, 110–112, 115–116

information asymmetry problems and, 107–110

legal systems and, 111–112

NPV rule and, 106–107, 110–111, 193

reasons for paying, 106–107

share repurchases and, 113–116

taxes and, 113–116

dividend valuation model, 57–62

cash dividends and earnings in, 59

investors’ required rate of return in, 59–62

opportunity cost of capital and, 66–70

Dondorf, Wolfgang, 197–198

Dow Jones, 24

due diligence, 170

duty of care, 170, 190

duty of loyalty, 170

dynamic competition, 208

E

earnings announcements, 46–47

earnings before interest and taxes (EBIT), 123

earnings guidance, 135

earnings per share

dividend policy and, 109–110

dividend valuation model and, 59

earnings announcements and, 46–47

estimates of, 70

manipulation of, 134–136

opportunity cost of capital and, 66–70

economic self-determination, 4

efficient markets, 33–55

civic republicanism and, 3–4

as class levelers, 4

liberalism and, 6

managers and, 43–45, 48–53

market inefficiencies and anomalies, 45–48

semistrong-form, 37–43

strong-form efficiency, 43–45

transparency and, 53–54

weak-form, 35–37

Electronic Data Systems Corporation, 163

employees

financing decisions and, 100–101

see also management

Enron, 27, 52, 53, 131, 143–147, 170, 177–178

ERISA (Employee Retirement Income Security Act of 1974), 181

EVA (Economic Value Added) model, 79, 136–141

example of use, 137–140

to set compensation, 140–141

event analysis, 38–43

exercise price, option, 128

exit strategy, 164–165, 195–196

expected future returns, 34

F

Federal Deposit Insurance Corporation (FDIC), 11

fiduciary responsibility, 10, 181

Financial Accounting Standards Board (FASB), 53

financial agency theory, 15–16

financial capitalism, 8–9

financial leverage, 90

financial market efficiency, see efficient markets financial plutocracy, 8

financing decisions, 64, 89–104

bank debt versus public debt, 101–104

customers and, 99–100

defined, 89

employees and, 100–101

example of, 91–95

market evaluation of, 50–51

shareholder/bondholder conflicts of interest and, 93–96

shareholder/management conflicts of interest and, 96–100

firm-specific investments, 85

First Bank of the United States, 24–25

First Call, 70

First Virginia Banks, 122, 124–125, 130, 184

Ford Motor Company, 24, 35–36, 58–59, 114–115, 163–164

France

investor protection laws and, 112

ownership of corporations in, 22–23

free cash flow, 96–99, 110–112, 115–116

freedom, 4, 6

Fresenius Medical Care, 197

G

Galbraith, John Kenneth, 11–13

gaming behavior, 127–128

General Electric (GE), 10, 154–155

generally accepted accounting principles (GAAP), 197–198

General Motors (GM), 163

Genuine Parts Company, 108–110, 116, 122, 125

George Mason University, 178

Georgia-Pacific Corporation, 31–32, 98–99, 115–116, 136

Germany, 188–199

bank ownership of stocks, 23, 188–189, 191–196, 205

corporate governance in, 13, 189–190

financial performance versus the U.S., 196–199

governing boards in, 13, 189–190

investor protection laws and, 112

lack of corporate control market in, 190–191

market capitalization in, 188

ownership of corporations in, 22–23

role of banks in, 188–189, 191–196, 205

Ghosn, Carlos, 29

Gillette, 186

Glass-Steagall Act, 11

Global Crossing, 53

globalization, 208

Goldman Sachs, 136

governance structure, 17–32

in foreign corporations, 22–23, 197–199

institutional investors in, 21

moral development and, 29–31

owners, 19–23

in U.S. corporations, 19–22

see also board of directors; corporate governance; management

government bonds, and risk-free nominal interest rate, 61–65

government regulation, 11, 15, 83

GPC, 130

graduated voting, 24–25

Gramm, Wendy, 178

Great Depression, 10–11, 30

greenmail, 183–185

growth

assets in place versus opportunities for, 65–70

constant growth rate policy, 105–106

of corporation, 6–8

dividends and, 110–111

Grumman, 160

H

Hamilton, Alexander, 24–25

Hartmann, Ulrich, 104

Harvard Business School, 10

herding decisions, 86–87

Hertz Corporation, 163

Hewlett-Packard Company, 158–159

H.J. Heinz Company, 31, 80, 175, 176, 182

Hoechst, 197, 198

Honeywell, 154–155

hostile takeovers, 154, 171, 182–183, 184, 190

in Germany, 190–191

in Japan, 201

House of Morgan, 8

I

IBP, Incorporated, 167–168

incremental cash flows, 83

independent directors, 25, 171–173

index funds, 157–158

information asymmetry

dividends and, 107–110

strong-form market efficiency and, 43–45

initial public offerings (IPOs), see IPOs (initial public offerings)

insiders

control by, 9

defined, 15

information asymmetry and, 43–45, 107–110

strong-form market efficiency and, 43–45

institutional investors, 21–22, 170–172, 180, 183

Intel Corporation, 47

interest rates, 51, 59–65

Internal Revenue Service (IRS), 91–93

International Monetary Fund (IMF), 209

Investment Advisers Act of 1940, 181

Investment Company Act (1940), 11

investment decisions, 48–51, 64, 73–87

diversification and, 61, 65, 156–157, 164

exit strategy and, 164–165, 195–196

market evaluation of, 48–50

NPV rule in, 74–87

see also valuation

investor protection laws, 15, 111–112, 167, 194–195

IPOs (initial public offerings), 164–165

of companies with banking relationships, 102–103

reasons for, 164–165

underpricing of, 45–46

J

Japan, 199–207

banking crisis of 1998, 206–207

banks in, 23, 206–207

Big Bang, 205–207

corporate governance in, 13

investor protection laws and, 112

keiretsu system, 28–29, 199–207

ownership of corporations in, 22–23, 200

relational contracting in, 202–204

selective intervention in, 201–202

Johnson, Bill, 31

joint stock companies, 25

K

Kagermann, Henning, 102

keiretsu system, 28–29, 199–207

advantages of, 204–205

cross-ownership of shares in, 203

disadvantages of, 205

nature of, 199–204

reforms and, 205–207

Kellogg, 63, 64

Kensinger, John, 80

K-Mart, 143–147

Krafft Motor Company, 203–204

Kraft, 164

L

large-company stocks, historic returns on, 61, 64–65

Lay, Kenneth, 143–147, 177–178

LBOs (leveraged buyouts), 165–168, 171

potential problems for public investors, 167–168

reasons for, 166–167

Lesley Fay, 52

leverage, 90

leveraged buyouts, see LBOs (leveraged buyouts)

liberalism, 5–6

civic republicanism versus, 5

growth of corporation and, 6–7

liberty, 4

limited liability company, 2–3

Lippman, Walter, 7

Lockheed, 160

long-term incentive plans, 121, 128–142

EVA metrics for, 79, 136–141

evidence about pay and performance, 141–142

examples of, 130

nature of, 128–130

problems with, 130–136

Lucent Technologies, 143, 186

M

MacAvoy, Paul W., 185

Malkiel, Burton, 44

management

compensation of, 79, 101, 110, 117–148

conflicts of interest between shareholders and, 26, 27, 43–45, 96–100, 107–112, 131

in corporate governance, 26–27

creative accounting practices and, 51–53, 134–136

decisions of, and stock valuation, 48–51

efficient markets and, 43–45, 48–53

influence of institutional investors and, 21–22, 170–172, 180, 183

managerial capitalism and, 11–13, 170–171

reasons for corporate control market and, 150–155

relationship with board of directors, 170–172

scientific, 7–8, 10

separation from owners/shareholders, 2, 3–4, 8–16

shareholder wealth maximization and, 14–16, 18, 28, 31–32, 34, 93–96, 98, 161–162

trustee approach to, 9–11, 13, 14

see also board of directors management board, 189–190

management buyouts, see MBOs (management buyouts)

management compensation, 79, 110, 117–148

example of, 118–121

measuring effort and performance for, 119–121

pay for performance systems, 21, 121–148

managerial capitalism, 11–13

board of directors and, 170–171

challenges to, 13

nature of, 11–13

Mannesmann, 190

marginal tax rate, 113–114

market risk, 61–62

market value added (MVA), 137–140

market-value-to-book-value ratio, 79, 141–142

Martin, John, 80

Martin Marietta, 160

Mattel, 186

MBOs (management buyouts), 165–168

potential problems for public investors, 167–168

reasons for, 166–167

McDonnell-Douglas, 160

McGinn, Richard, 143

Means, Gardiner, 2–3, 12, 29–31

Mendelsohn, John, 177–178

mergers and acquisitions, 23, 155–162

creating value with, 159–161

examples of, 156–159

impact of, 155–156

impact on shareholder value, 161–162

Miller, Merton, 90–91

Millstein, Ira M., 185

minority interests, 111, 179

Mitsubishi Corporation, 199

Mitsui & Co., 199

Mitsui Mutual Life Insurance, 199

Mitsui O.S.K. Lines, 199

modern corporation

nature of, 2–3, 14

organic version of, 29–31

Modern Corporation and Private Property, The (Berle and Means), 14

Modigliani, Franco, 90–91

moral development, 29–31

mutual funds, 21, 44–45

N

NASDAQ, crash of 2000, 35–36, 47–48, 142–148

National Labor Relations Act, 11

National Recovery Administration (NRA), 10–11

NCR, 160

negative covenants, 94, 95–96

net income

cash flows versus, 76–77

in long-term incentive plans, 120, 139

net income after taxes, 18–19

net income before taxes, 123

net present value, see NPV rule

Netscape, 46

‘‘new-economy’’ companies, 47–48, 131

New Industrial State, The (Galbraith), 11–13

Nissan Motor, 28, 29, 207

Northeast Utilities, 70

Northrop Corporation, 160

NPV rule, 74–87

competitive analysis approach (CAA), 85–87

criticisms of, 82–87

dividends and, 106–107, 110–111, 193

example of, 75–78

implication for internal allocation of capital, 81–82

interpreting NPV and, 78–79

investor behavior predicted by, 79–81

NPV defined, 74, 136–137

strategic options and, 84–85

NTT, 207

O

OECD principles, 209–213

opportunity cost of capital, 65–70, 74

Oracle, 198

Organization for Economic Cooperation and Development (OECD), 209–213

P

path dependence, 208–209

pay for performance systems, 21, 121–148

base salary in, 122–123

EVA metrics for, 79, 136–141

evidence for, 141–142

long-term incentive plans in, 121, 128–142

short-term compensation in, 121, 123–128

in 2000, 142–148

People’s Heritage Financial Group, Inc., 182–183

perfect capital markets, 90, 106

Pfeiffer Vacuum, 85, 104, 197–198

Philip Morris, 164

plowback ratio, 68–70

poison pills, 183–185

political process, democratic, 7–8

Porter, Michael, 171

positive covenants, 95–96

Powers, William, Jr., 177–178

present value, NPV rule and, 77–78

price-earnings (P/E) ratio, 68–71

Procter & Gamble, 48–50, 186

professional managers, 2, 3–4

profit margins, in long-term incentive plans, 120

property ownership

civic republicanism and, 3–4

concentration of, 6–7

liberalism and, 5–6

unification of security ownership, 166

protective covenants, 95–96

proxy fights, 151, 171, 180–181

proxy voting, 26

public debt, bank debt versus, 101–104

Pujo committee, 8

put options, 128

Q

Quaker Oats Company, 81–82

qualitative factors, 83–84

quasi rents, 85

R

Ralcorp Holdings, 167

relational contracting, 202–204

Renault, 207

required rate of return

in capital asset pricing model, 62–65

in discounted cash flow model, 59–62

residual theory of cash dividends, 107

restricted stock

compensation based on, 128–136

problems with, 130–136

restructuring, 96, 151–153

return on assets

in long-term incentive plans, 120

in short-term compensation plans, 124

return on equity, in long-term incentive plans, 120

Rhone-Poulenc, 197

risk-adjusted required rate of return, 64–70, 74

risk-free nominal interest rate (RF), 59–65

risk management decisions, 50–51, 64

risk premium (RP), 59–63

risk shifting, 94

RJR-Nabisco, 167–168

Rockefeller family, 7–8

Roosevelt, Franklin D., 10–11, 30

S

Sakura Bank, 199

SAP, 100, 102, 103–104, 197, 198

Schoenberger, Robert G., 31

Schrempp, Juergen, 197

Schroeder, Gerhard, 190

scientific management, 7–8, 10

Second Bank of the United States, 24–25

Securities and Exchange Commission (SEC), 11, 15, 54, 177

selective intervention, 201–202

semistrong-form market efficiency, 37–43

SGL Carbon, 197

shareholder rights, 178–183

electing board of directors, 181–183

voting rights, 24–25, 179–183

shareholders

conflicts of interest between creditors and, 27, 93–96, 191–193

conflicts of interest between management and, 26, 27, 43–45, 96–100, 107–112, 131

in governance structure of corporation, 19–23

as irrelevant, 12–13

maximizing wealth of, 14–16, 18, 28, 31–32, 34, 93–96, 98, 161–162

role of, 15–16

separation of management from, 2, 3–4, 8–16

share repurchases, 113–116

short-term incentive plans, 121, 123–128

examples of, 124–125

nature of, 123–124

problems with, 125–128

Sirena Apparel, 52

small-company stocks, historic returns on, 61, 64–65

Smith, Adam, 186

Smith, Clifford W., Jr., 97

social utility, 13

sogo shosha (general trading company), 199

South Korea, investor protection laws and, 112

spin-offs, 162–164

SPX, 140–141

staggered boards, 182–183

standard deviation, 61

Standard Oil Trust, 2

Stern Stewart & Company, 136

stock options

compensation based on, 101, 128–136

problems with, 130–136

repricing, 147–148

strike price, option, 128–129

strong-form market efficiency, 43–45

Sumitomo Bank, 199

supermajority rules, 183–185

supervisory board, 189–190

supplier relationships, 25, 28–29

Sweden, 188

synergies, 158–159, 160–161

T

taking the money and running, 94–95

target company, impact of merger on, 160–161

taxes

dividends and, 113–116

financing decisions and, 91–93

on incentive compensation, 148

tax-efficient distributions and, 115–116

technical default, 96

technocracy, 11–13

tender offers, 151, 153–155

Thatcher, David, 52

TIAA-CREF (Teachers Insurance and Annuity Association—College Retirement Equity Fund), 21, 171–172, 176, 184–185

Toyota, 199, 202

transaction costs, 162

transparency, efficient markets and, 53–54

Trotman, Alex, 163

trustee approach to management, 9–11, 13, 14

Tyco, 38–43, 53, 176–177

U

unique risk, 61–62, 64

United Airlines, 156–158

United Industrial Corporation, 175, 176

United Kingdom

investor protection laws and, 111–112

market capitalization in, 188

ownership of corporations in, 22–23

United States

financial performance of, versus Germany, 196–199

market capitalization in, 188

ownership of corporations in, 19–23, 173

United Technologies, 154–155

Unitil Corporation, 31

universal banking, 23, 188–189, 191–196, 205

advantages of, 191–193

disadvantages of, 193–196

University of Texas, 177–178

US Airways, 156–158

V

valuation, 57–71

assets in place versus growth opportunities, 65–70

capital asset pricing model (CAPM), 62–65, 70

comparables in, 70–71

creative accounting practices and, 51–53, 134–136

discounted cash flow model, 57–62

financing decisions and, 50–51

management decisions and, 48–50

option, 128–129

risk management decisions and, 50–51, 64

see also investment decisions

value creation, 159–161

VEBA, 104, 197, 198

venture capitalists, 164–165, 196

Vodafone Air Touch, 190

volatility, of stock price, 129, 131

Volkswagen, 191

voter registration, 26

voting rights, 24–25, 179–183

confidentiality issues and, 180–181

cumulative voting, 181–182

supermajority rules, 183–185

votes per shareholder, 179–180

W

Wagner Act, 11

Walsh, Frank E., Jr., 176–177

weak-form market efficiency, 35–37

Wellman, Brush, 130

Willamette Industries, 107, 108, 109–110

William M. Mercer, Inc., 143

World Bank, 209

World War II, 11

Y

Young, Owen, 10