a. Explain in detail why corporate governance fails. b. List some of the \"indul
ID: 2666610 • Letter: A
Question
a. Explain in detail why corporate governance fails.b. List some of the "indulgences" other than golden parachutes and poison pills (which are given to managers by the BOD) some managers have given to themselves.
c. What do you think should be a reasonable spread between the earnings of a firm's CEO and its lowest paid hourly workers and why? Provide your detailed explanation on this volatile issue. I expect for you to suggest a reasonable spread, using either a dollar amount or percentage amount, and to not simply tell me that it isn't possible to do so!
Explanation / Answer
a. corporate governance fails because of something called the agency problem. The owners of a corporation are shareholders not management or the Board of Directors. We call the shareholders the principals and the management and the BoD are the agents, who work on behalf of the shareholders. While often times mgmt and BoD try to work to better the shareholders, they often work to better their own self interest. This is the agency problem and the main focus on why corporate governance fails. b. Management teams in the past have done some questionable things in the past. For example, the heavy use of expensive private jets, large corporate expense accounts, overcompensation from the BoD, among other things. Some actions by management were also criminal and fraudulent in nature. Some CEOs were found to be illegally taking private loans and cash from companies. c. This is a very difficult question since often times the labor market for the lowest paid hourly worked and the labor market for CEOs is MUCH different. While it might be noble to offer compensation to a CEO similar to that of the lowest hourly worker, the responsibilities of a CEO as compared to that hourly worker are pale in comparison. The CEO must make very difficult and very thorough decisions about the direction of the firm. These get even larger as the firm grows. Imagine if you put in a subpar CEO at Coke and they ran the firm into bankruptcy. Imagine the job loss, the shareholder losses, and just the destruction of firm value. This shows you that CEOs must be of the highest talent in order to prevent these things from happening. And if you want the best talent, the firm must offer competitive salaries. If I were on the BoD and the lowest paid worker earned 50k I would want my CEO to earn 5-10x that amount with a similar amount in vested stock (company stock that he doesn't get until some time period) so that he has incentive to run the company well, longer term. Hope this helps.
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