A Blueprint for Corporate Governance

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A Blueprint for Corporate Governance

Fred R. Kaen

AMACOM AMERICAN MANAGEMENT ASSOCIATION

A Blueprint for Corporate Governance

This Page Intentionally Left Blank

A Blueprint for Corporate Governance
Strategy, Accountability, and the Preservation of Shareholder Value

Fred R. Kaen

American Management Association
New York • Atlanta • Brussels • Buenos Aires • Chicago • London • Mexico City San Francisco • Shanghai • Tokyo • Toronto • Washington, D. C.

Special discounts on bulk quantities of AMACOM books are available to corporations, professional associations, and other organizations. For details, contact Special Sales Department, AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019. Tel.: 212-903-8316. Fax: 212-903-8083. Web site: www.amacombooks.org This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Library of Congress Cataloging-in-Publication Data Kaen, Fred R. A blueprint for corporate governance : strategy, accountability, and the preservation of shareholder value / Fred R. Kaen. p. cm. Includes bibliographical references and index. ISBN 0-8144-0586-X 1. Corporate governance. 2. Corporate governance—United States. I. Title. HD2741 .K327 2003 658.4—dc21 2003 Fred R. Kaen. All rights reserved. Printed in the United States of America. This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019. Printing number 10 9 8 7 6 5 4 3 2 1 2002014162

CONTENTS

Chapter 1: Corporate Governance: An Overview
Introduction The Modern Corporation Civic Republicanism Liberalism The Corporation Complicates the World The Separation of Management and Ownership The Trustee Approach Managerial Capitalism and the Managerial Technocracy The Contractual Shareholder Model

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Chapter 2: The Governance Structure of American Corporations A Schematic Contractual Governance Structure The Owners Voting Rights The Board of Directors Corporate Executives and Senior Managers Creditors Relationships With Suppliers and Customers An Organic Version of the Modern Corporation Do Managers Accept the Shareholder Supremacy Model?

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Chapter 3: Markets: Can You Trust Them?
Introduction Financial Market Efficiency Weak-Form Efficiency (Past Prices)

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CONTENTS

Semistrong-Form Efficiency (Public Information) Strong-Form Efficiency Market Inefficiencies and Anomalies IPOs Earnings Announcements The 2000 NASDAQ Crash What Market Efficiency Means for Managers and Governance How Are We Doing? Don’t Try to Outguess or Beat the Market Don’t Try to Fool Investors Transparency and Market Efficiency

37 43 45 45 46 47 48 48 50 51 53

Chapter 4: Valuation
Introduction Valuing Common Stock Cash Dividends and Earnings Investors’ Required Rate of Return The Capital Asset Pricing Model Does the CAPM Work? Assets in Place Versus Growth Opportunities An Expanded Valuation Model Relative Valuation Using Comparables

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Chapter 5: Corporate Governance Issues in Investment Decisions Introduction The NPV Rule A Stylized NPV Example The Data The Present Values Interpreting NPV Do Investors Behave as Predicted by the NPV Rule? Implication of the NPV Rule for Internal Allocation of Capital

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CONTENTS

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Legitimate and Illegitimate Criticisms of the NPV Rule Strategic Options and the...
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