Corporate Goverance

Corporate governance denotes the set of mechanisms set up to ensure that managers run firms in shareholders' best interests. Governance became a hot button topic after the high-profile frauds at the end of the dot com bubble, many of which were products of governance failures. Governance is again the topic du jour because its failure is yet again viewed as one cause of the global financial crisis in 2008. Institutional shareholders, managers, boards of directors, and regulators are grappling with how to design, maintain, and evolve effective governance systems for the 21st century.

Governance is a multi-faceted topic that has economic, ethical, legal, regulatory, and sociological dimensions. In this course, we adopt the perspective that governance is a key mechanism to create sustainable value, just as good investment or financing decisions create value. Well-designed governance systems benefit all the stakeholders in a firm, be they shareholders, bondholders, executives, or employees. Thus, good governance should be adopted not merely because it is the "right" thing or because it is what the law requires, but also because it creates value. On the other hand, inattention to governance or a poorly designed system can rapidly dissipate and destroy value. Governance is an increasingly important matter that shareholders and top managers must be sensitive to.

We will focus on several major tools and economic agents for governance: incentive compensation, the board of directors, the takeover market, credit rating agencies, analysts, institutional investors and the government. We will examine what works and what does not work, focusing in particular on lessons from many governance failures that led to regulatory attention to governance. Our class discussions will also cover recent efforts to reform corporate governance practices, e.g. efforts to rein in executive compensation and the Sarbanes- Oxley act of 2002. The goal is to sensitize students to the range of issues and the tools to deal with them.