Leadership Issues:
Corporate Governance and
Corporate Accountability
Professor Sidney E. Harris
Lecture 1
Corporate Governance Landscape
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Shareholders
Board
Management
Employees
• Country/Company
Ideology
• Courts-State/Federal
• SEC
• Security Analysts
• Stock Exchanges
• Institutional Investors
• Accountants/Auditors
• Law Firms
Historical Perspective
• 1814, Henry Cabot Lowell, founded the
first public company in U.S.
• Within seven years investors had received
a 100% return
• Is management focused on maximizing
shareholder value?
Historical Perspective
• After 1929 stock market crash, congressional
investigators uncovered widespread insider
trading, stock price manipulation, and diversion
of corporate funds for personal use
• The 1933 Securities Act imposed extensive
disclosure requirements on corporations
• In 1934, Congress established the SEC to
enforce the new regulations
Historical Perspective
• After the 34 Act, management became
conservative and bureaucratic
• In the 1972, Jensen and Meckling proposed the
Principal-Agent Problem-”one party employs
another to do a job”
• By the early1980s, the shareholder value
movement began to take shape
• LBOs were seen as a principal tool to extract
value--”solve the principal-agent problem”
Historical Perspective
• Technology firms began to rely on stock
options to compensate employees
• In the 1990s, widespread adoption of
stock options
• In the late ‘90s, mega-options grants were
introduced
• In 2006, stock options are treated as an
expense
America’s Governance Model
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Role of Government
Purpose of Business
Capital Markets
Customers
Employees
America’s Rivals
• UK
• Germany
• France
• China
• Japan
• Korea
Transition Economy
Governance Model
• Ownership-families, inter-locking
companies (including suppliers), and
banks
• Role of business-tied to national identity
• Banks and capital markets have a closer
relationship with government
• “Rule of man” versus “rule of law”
• Crony capitalism and lack of opacity
Actions Needed
• Much greater independence between
business and government
• Strong foreign presence
• Reduction in rules and regulation that
favor who you know
• Free and investigative press
• Strong system of the rule of law
Cycle of Greed
• Institutional Investors focus on the short
term growth in earnings
• Drives Share Price
• Alignment of CEO Incentives
• Pressure for auditors to allow accounting
tricks
• Board Oversight