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corporate governance and social responsibility: all material
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Table of ContentsCorporate Governance and Social Responsibility ............................................................................ 3
Corporate governance introduction .......................................................................................................... 3
Live session ................................................................................................................................................................ 5
Executive compensation ............................................................................................................................. 6
ARE CEOS REWARDED FOR LUCK? THE ONES WITHOUT PRINCIPALS ARE - Marianne Bertrand and
Sendhil Mulainathan .................................................................................................................................................. 8
DUAL CLASS SHARES – Anita Anand ................................................................................................................ 10
Live session 3 ........................................................................................................................................................... 12
Payout policy ............................................................................................................................................. 12
Board of directors ..................................................................................................................................... 18
Jenter, D., Schmid, T. and Urban, D., 2018, Does Board Size Matter? .................................................................. 19
The Changing of the Boards: The Impact on Firm Valuation of Mandated Female Board Representation ........... 21
Live session ................................................................................................................................................ 23
Assignment 1 ........................................................................................................................................................... 24
Assignment 2 ........................................................................................................................................................... 25
Shareholder activism I.............................................................................................................................. 26
Gantchev, N. and Giannetti, M., 2020, The Costs and Benefits of Shareholder Democracy: Gadflies and Low-
Cost Activism (Links to an external site.), Review of Financial Studies, forthcoming. ......................................... 29
Shareholder activism II ............................................................................................................................ 33
Governance for innovation: measures and hypotheses ............................................................................................ 37
Brav, A., Jiang, W., Ma, S. and Tian, X., 2018, How Does Hedge Fund Activism Reshape Corporate
Innovation? (Links to an external site.) Journal of Financial Economics 130, 237-264. ........................................ 39
Lecture discussion and self-study : Schmid, C. and Fahlenbrach, R., 2017, Do Exogenous Changes
in Passive Institutional Ownership Affect Corporate Governance and Firm Value? (Links to an
external site.) Journal of Financial Economics 124, 285-306. ............................................................... 44
Passive ownership: Empirical evidence I ................................................................................................................ 45
Passive ownership: Empirical evidence II ............................................................................................................... 48
Common ownership: Intro and measurement ....................................................................................... 48
Common ownership and managerial incentives .................................................................................... 49
Anton, M., Ederer, F., Gine, M. and Schmalz, M., 2020, Common Ownership, Competition, and Top
Management Incentives (Links to an external site.), Working Paper. ..................................................................... 49
Corporate scandals and financial misconduct: CG gone wrong .......................................................... 52
Introduction to CSR ................................................................................................................................. 56
Husted, B. W., 2015, Corporate social responsibility practice from 1800–1914: Past initiatives and current
debates (Links to an external site.). Business Ethics Quarterly, 25(1), 125-141. .................................................... 58
, Shareholder and stakeholder model ....................................................................................................... 60
Friedman, M., 1970, A Friedman doctrine: The social responsibility of business is to increase its profits. The New
York Times Magazine, 13(1970), 32-33.................................................................................................................. 61
Live session ................................................................................................................................................ 62
CSR and Shareholder’s interest .............................................................................................................. 63
Ferrell, A., Liang, H., & Renneboog, L., 2016, Socially responsible firms (Links to an external site.). Journal of
financial economics, 122(3), 585-606. .................................................................................................................... 65
Hart, O., & Zingales, L., 2017, Companies should maximize shareholder welfare not market value (Links to an
external site.). ECGI-Finance Working Paper, (521). ............................................................................................. 66
CSR-Firm Value: Investors ..................................................................................................................... 66
Chava, S., 2014, Environmental externalities and cost of capital (Links to an external site.). Management Science,
60(9), 2223-2247...................................................................................................................................................... 69
CSR-Firm Value: Customers and employees ......................................................................................... 69
Servaes, H., & Tamayo, A., 2013, The impact of corporate social responsibility on firm value: The role of
customer awareness (Links to an external site.). Management science, 59(5), 1045-1061. .................................... 71
Impact of CSR ........................................................................................................................................... 71
Naaraayanan, S.L., Sachdeva, K. and Sharma, V., 2019. The Real Effects of Environmental Activist
Investing (Links to an external site.). Available at SSRN 3483692. ....................................................................... 75
Guest lecture David Rohrmann: Business and Ethics: really?............................................................. 75
Guest lecture Marta Ciszewska ............................................................................................................... 76
2
,Corporate Governance and Social Responsibility
Corporate governance introduction
Principal-Agent problem
Both principal and agent maximize their own utility.
Moral hazard: once a contract is signed, it may be in the interest of the agent to behave badly/less
responsibly. This is after the contract is signed.
- Insufficient effort, entrenchment, self-dealing, lack of transparency.
How to mitigate moral hazard?
- Complete contracts! Should specify?
o What the manager must do in each possible future contingency of the world.
o What distribution of profits will be in each contingency.
§ Williamson (1984) – not possible. Why?
• Impossible to predict all future contingencies of the world.
• If it would be possible, the contracts would be too complex to write.
• They would be difficult or even impossible to monitor and reinforce by
outsiders such as court of law.
o You would not even need a highly paid manager if complete
contracts are possible. You can put all algorithm there or even a
kid, because the contract covers every possible scenario.
A necessary condition for moral hazard to exist and for complete contracts to be an impossibility is the
existence of asymmetric information. The agent has more information. The principal can’t keep track of
the agent’s action at all times due to the cost.
Separation of ownership and control
Jensen and Meckling (1976) – Principle-Agent problem
- Owner-manager
o No conflict of interest arising from non-pecuniary benefits.
o Maximum incentive to work harder.
o Additional revenue will always be accrued by her.
When the firm grows, the owner/manager becomes the agent.
- Agent
o She has only alpha% of the shares.
o Conflict of interest starts.
o Less incentive to work harder.
§ If she works harder, the fruits will go to the shareholders.
Problems from both sides
1. The agent knows how to run the firm and has more info, but lack of funds to finance operations.
2. The principal, on the other hand, has the funds, but not qualified to run the firm.
What if the manager runs the company in her interest rather than the principal? – agency costs.
3 components of agency costs:
1. Monitoring costs: when the principal has to observe what the agent is doing and keep a record of
the agent’s behavior.
a. Also intervening in various ways to constraint the agent’s behavior to avoid unwanted
actions.
3
, 2. Bonding costs: the costs incurred by the agent to signal credibly to the principal that she will act in
the interest of the principal.
a. E.g. buy shares of the firm.
3. Residual costs: incurred by the principal. Agent may not make the decision that maximize firm
value.
a. Sum of the three is agency cost.
2 flavors of agency problems:
1. Perquisites: consumption by the management on the job.
a. Benefit: accrue to the mgt.
b. Cost: borne by the shareholder.
i. e.g. CEO mansions, corporate jets.
2. Empire building: FCF problem - Management pursuing growth rather than shareholder
maximization.
a. Management should only invest in positive NPV values.
b. NPV<0 – destroys SH value.
c. Why would you enjoy increase size of the firm?
i. Power and status
ii. Managerial compensation grows with company size.
Classical agency problems vs. expropriation of minority shareholders
- Most stock exchange listed firms have large shareholders that have a substantial degree of control
over the firm affairs.
- Two different SHs
o Controlling shareholders
o Minority shareholders.
§ Expropriations of the monitor shareholders by the large SHs can be in the form of:
• Tunneling: asset sales at a deflated price.
•
o Firm A loses 1 dollar.
o Large shareholder loses 51 cents.
o Minority shareholder loose 49 cents.
o Firm B’s gain = 1 euro
o Large shareholders’ gain is 1 euro.
§ So total gain of large SH is 49 cents.
• Transfer pricing: overcharge for the services and products.
o Example: leveraging control and increasing the potential for
expropriation.
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