Own-company stockholding and work effort preferences of an unconstrained executive

We develop a framework for analyzing an executive's own-company stockholding and work effort preferences. The executive, characterized by risk aversion and work effectiveness parameters, invests his personal wealth without constraint in the financial market, including the stock of his own company whose value he can directly influence with work effort. The executive's utility-maximizing personal investment and work effort strategy is derived in closed form, and a utility indifference rationale is applied to determine his required compensation. Being unconstrained byperformance contracting, the executive's work effort strategy establishes a base case for theoretical or empirical assessment of the benefits or otherwise of constraining executives with performance contracting

Promoting Corporate Diversity: The Uncertain Role of Institutional Investors

Two developments are having an impact on corporate decisions. One is the increased engagement by institutional intermediaries and a shift in the focus of that engagement from corporate governance to environmental and social issues. The other is a heightened societal awareness of diversity, equity, and inclusion (DEI) issues, particularly the importance of diversity in corporate leadership. This Article considers the intersection between the two. It describes how institutional investors have focused their attention on increasing diversity in corporate leadership, the potential motivations for that focus, and the impact of that focus, to date. It highlights the tensions that result from relying on institutional intermediaries to promote diversity. Institutional involvement in environmental, social, and governance (ESG) issues, as a general matter, raises a host of questions including the extent to which a fiduciary may appropriately trade off economic and noneconomic considerations in its investment and engagement strategies. Diversity, however, raises distinctive concerns because the justifications for DEI initiatives are multifaceted and extend beyond firm-specific economic considerations to a broad range of societal objectives. This range of objectives creates challenges both in structuring diversity efforts and evaluating their success. While there is little doubt that the societal case for greater diversity in corporate leadership is compelling, to the extent that the rationale for diversity extends beyond demonstrable effects on firm-specific economic value, it is unclear that institutional intermediaries and their agents—those who make engagement and voting decisions on behalf of such institutions—are well-positioned to address those issues in terms of both accountability and institutional competence. This Article highlights the potential costs of existing institutional efforts and concludes by considering the effectiveness of existing tools of corporate governance in addressing those concerns

Portfolio management including real estate investments

The thesis aims to analyse the role that indirect real estate investments can play within a classic multi asset portfolio. The first part describes the instruments available to investors and examines the reference literature. In the second part, a model based on Markowitz portfolio theory that involves stocks, bonds and reits is developed to test the role of the real estate asset clas

Corporate Law and the Myth of Efficient Market Control

In recent times, there has been an unprecedented shift in power from managers to shareholders, a shift that realizes the long-held theoretical aspiration of market control of the corporation. This Article subjects the market control paradigm to comprehensive economic examination and finds it wanting. The market control paradigm relies on a narrow economic model that focuses on one problem only, management agency costs. With the rise of shareholder power, we need a wider lens that also takes in market prices, investor incentives, and information asymmetries. General equilibrium theory (GE) provides that lens. Several lessons follow from reference to this higher-order economic theory. First, the presumption that markets can efficiently coordinate the economy is shown to be unfounded, unless one relies on heroic assumptions. Second, GE shows that shareholders suffer from misaligned incentives, undercutting any normative program grounded in shareholder empowerment. The third lesson is negative, as there are no economically-founded instructions for addressing the trade-offs between agency costs reduction and market inefficiency implied by the new shareholder corporation. Policy implications also follow. Given the lack of a clear normative template, only private ordering can be counted on to address each corporation’s specific tradeoffs between agency costs and market inefficiency. This conclusion leads to an endorsement of Delaware’s equitable adjudication system, the flexibility of which is well-suited to policing the bargaining process between managers and empowered shareholders

The effect of board composition on firm performance in Indonesia

The study investigates the effect of the compositions of board of directors on firm performance in Indonesia. This country offers a specific institutional environment, which provides a natural setting to further examine the effectiveness of the board in mitigating agency conflicts. The conceptual framework is derived from agency theory, assuming that the governance mechanisms affect the behaviour of contracting parties. The theory predicts that a board’s independence determines the effectiveness of its monitoring role and organizational outcome. The study presents a cross-sectional analysis of 190 non-financial companies listed on the Jakarta Stock Exchange during 2002-2004.Indonesian firms exhibit ownership concentrated in the hands of a few wealthy families and this provides them with sufficient voting rights to influence management and control decisions. Accordingly, the agency problems stem from the conflicts between controlling owners and minority shareholders as such ownership enables controlling owners to commit expropriation. The agency problem is further exacerbated by the presence of family members of controlling owners serving in management and on the boards. This study argues that the involvement in management and on the boards creates the absence of separation between management and control decisions that potentially negates the link between governance mechanisms and firm performance. This dissertation is the first to study the impact of such involvement on the association between board composition and firm performance. This provides sufficient justification that the study offers significant contribution to the governance literature as it applies to Indonesia.The Jakarta Stock Exchange officially requires that listed firms’ boards consist of at least 30% independent directors, or that the number of independent directors be proportional to the shareholding by minority investors, whichever is higher. The results show that most of the domestic-listed firms demonstrate a compliance with such regulation. However, the study fails to document a significant relationship between the fraction of outside directors and firm performance. Further testing reveals that the proportion of independent directors is insignificantly related to prior firm performance. This indicates that the inclusion of independent directors is irrespective of the agency problem specific to the firm and is merely driven by the listing requirement.The prevalence of ownership concentration by controlling families has been claimed as providing the rationale to construct a particular framework where the family serves as the unit of analysis. Although Indonesia adopts a two-tier system, such a framework implies that the substance of combined leadership might occur in Indonesia whenever a family member of the controlling owners is assigned as board chairperson. The study shows that most of the Indonesian listed firms have affiliated leadership, where in some instances the family member of controlling owners serves as board chairperson. Using the family as the unit of analysis, this finding provides undeniable evidence that combined leadership exists in the two-tier system. Independent leadership is found to have a positive relationship with firm performance, and such a relationship is robust after controlling for interdependence, measurement, linearity, and endogeneity issues. Governance reform, therefore, should address the board leadership structure that promotes board independence and, accordingly, board monitoring effectiveness.The analysis reveals that the identity of large shareholders needs to be analyzed separately. Shareholding by controlling owners is found to have a negative association with firm performance. This finding suggests that the presence of dominant large shareholdings in the hands of families is more likely to be the source of the agency problem rather than to serve as a governance device that alleviates agency conflicts. The finding implies that governance reform that seeks to reduce dominant control by the family needs to be addressed. Foreign investors demonstrate a positive relationship with firm performance. Further analysis reveals that ownership by foreign investors is the antecedent of independent board leadership. This finding suggests that this type of large shareholder induces better governance as the leadership board independent is positively related to firm performance. This suggests that Indonesia would be better off whenever a friendly foreign investor regulation is in place.This study finds that the controlling owners of Indonesian listed firms typically appoint their family members to serve in management and on the boards. The analysis reveals that such appointments create a different impact on the corporate control and firm performance. This study finds that the entrenchment effect of family involvement on the board is higher than that of such involvement in management. This finding suggests the necessity to disaggregate the family control devices. Nevertheless, such involvements provide supportive evidence that controlling owners engage in excessive control enhancing mechanisms that facilitate the extraction of private benefit with relatively ease. Accordingly, this finding implies that Indonesia needs to establish a corporate system that prevents the dominant owners from engaging in excessive control-enhancing mechanisms

Own-company stockholding and work effort preferences of an unconstrained executive

We develop a framework for analyzing an executive’s own-company stockholding and work effort preferences. The executive, characterized by risk aversion and work effectiveness parameters, invests his personal wealth without constraint in the financial market, including the stock of his own company whose value he can directly influence with work effort. The executive’s utility-maximizing personal investment and work effort strategy is derived in closed-form, and an indifference utility rationale is demonstrated to determine his required compensation. Our results have implications for the practical and theoretical assessment of executive quality and the benefits of performance contracting. Assuming knowledge of the company’s non-systematic risk, our executive’s unconstrained own-company investment identifies his work effectiveness (i.e. quality), and also reflects work effort that establishes a base-level that performance contracting should seek to exceed

Delaware's Politics

Delaware makes the corporate law governing most large American corporations. Since Washington can take away any, or all, of that lawmaking, a deep conception of American corporate law should show how, when, and where Washington leaves lawmaking authority in state hands, and how it affects what the states do. The interest groups and ideas in play in Delaware are narrow, the array in Congress wide. Three key public choice results emanate from this difference. First, interest groups powerful enough to dominate Delaware lawmaking forgo a winner-take-all strategy because federal players may act if they see state results as lopsided. Second, the major state-level players usually want to minimize federal authority in making corporate law, because a local deal cuts in fewer players; a federal deal splits the pie with outsiders. Third, we can delineate the space where the states have room to maneuver from where they risk federal action. Delaware law typically represents the status quo. It's when its law is the first on the ground - as it often is because the federal agenda is large and Delaware's small - that it gains most of its discretion vis-a-vis the federal authorities. When it moves first, especially when its two main players - managers and investors - agree on what to do, it sets the initial content of American corporate law. Federal authorities might then change the state-made result, and players and ideologies absent in Delaware but big in Washington affect the federal result. Those new players and ideas give the original Delaware players reason to resist federal action. Doctrines that limit federal effort are public-regarding justifications for deferring to interests that prevail on the state level. But when Delaware cannot act first - either because media saliency puts the matter on the federal agenda or because its primary players disagree - Delaware loses its dominance. I analogize the relationship between Delaware and Congress to that between federal agencies and Congress. Federal agencies have discretion and first-mover advantages, but their independence even when wide is not without limits, ending when they provoke Congress. So it is with Delaware

Flawed Assumptions: A Corporate Law Analysis of Free Speech and Corporate Personhood in \u3cem\u3eCitizens United\u3c/em\u3e

In the wake of the January, 2010 Supreme Court decision in Citizens United, special interest groups, citizens, and politicians alike have engaged in a rigorous debate about the role of corporate speech within our democratic process. The First Amendment issues raised in Citizens United - to that extent do corporations have a constitutionally protected right to participate in and influence our elections through expenditures - evoke larger questions about the roles, rights, and responsibilities of corporations within our society. This article concludes that the Supreme Court did not reference corporate law principles when analyzing the fundamental First Amendment debate in Citizens United and therefore rested its reasoning upon five flawed assumptions: (1) economic motivation of corporate speech, even corporate political speech, deserves no discount, (2) presence of a singular corporate voice, (3) insignificant threat of compelled speech, (4) lack of regulated speech, based solely on the identity of the corporate speaker, and (5) inapplicability of the equalization rationale to corporate speech. By examining the constitutional questions evoked in Citizens United through a corporate law lens, these assumptions are shown to be false. These flawed assumptions underlying the Court’s reasoning undermine the Court’s conceptualization of corporations and its holding that corporate political speech cannot and should not be treated differently from individual political speech