...policy perspective. To provide a holistic understanding both global as well as Indian Organisations are considered for the analysis. From the economic perspective we look into the following • Executive Compensation and Agency Problem • Executive Compensation and Risk Management • The sensitivity of CEO wealth to firm performance • The relation between CEO incentives and firm value • Explaining CEO compensation: Rent extraction or competitive pay? From the regulatory and legal perspective • Regulatory controls as under o SEC o SEBI • Tax Code Changes o Tax Law 162(m) signed in 1993 of the Federal tax Code • Legal Provisions o Amendments to the Companies Act ,1956 o Natural law • Disclosure Rules • Say On Pay • Clawbacks Further to look into the recent empirical studies to understand the present industry situation. • Disclosure Rules The Securities and Exchange Commission (SEC) has focused its regulatory efforts since the Securities Acts of 1933, including the aforementioned...
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...PAWSON FOUNDATION: AUGUST 2006 Case Study FNCE611 Private Equity and Venture Capital Present to: Professor LIM, MENG ANN Present by: HU, XINYIN LI, LUXI LIU, YUANCHANG RATANASIRIGULCHAI, TEEMAR Compensation Methods: Budget-based vs Flat-Rate Management Fee | | Mayfield charged a budget-based management fee to appeal to potential LPs. Because industry practice was traditionally a 2/20 based fee, Mayfield had a competitive advantage against other VCs as the budget-based fee was attractive because: * Transparency. Budget-based fees encourage transparency by requiring Mayfield to produce an expense list, providing LPs greater information compared to the traditional management fee based on committed capital. * Alignment of Interest. A flat-rate management fee causes misalignment of interest, especially as fund sizes increase; the increase in size is especially notable through the growing Mayfield fund sizes, peaking at $1b (Exhibit 2 to 4a) * Flat-rate fees encourage efforts placed in raising the funds, noted from the fact that a 2.5% fee could reduce the capital for investment by 1 investment project; alternatively, the budget-based fees emphasizes the performance of the fund. * Conceptually, budget-based fees are more justifiable as management fees were meant to solely support the operations of the VCC; as VCs promote alpha returns, alignment of interests is greater with lower management fee and the bulk of compensation geared towards the...
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...1. Francisco Partners was founded by Dave Stanton and he had a vision to create a leading buyout fund which was focused on the technology sector. He previously worked at Texas Pacific Group (TPG) and handled the investments in the technology sector. He started Francisco Partners by assembling a strong team with experienced people in the technology sector. TPG was a generalist buyout firm and they were on track to raise a technology specific fund, and when that did not go through, Dave Stanton decided to start his own firm. He felt that by having a generalist approach the firm was not able to match up the changes and trends in the industry, and by having a technology specific firm he would have a competitive edge over competitors. One of the major strengths for Francisco Partners was that the technology sector had witnessed high growth levels in the 1990s and that had attracted a lot of attention from investors in this sector. The sector had grown by four times the growth of the overall US economy and the average growth for the last fifteen years had exceeded 10% per year. It is shown in Exhibit 2 with commitments to Private Equity rising to a level of $85.3 billion in 1998. The other strong aspect of the firm was the team which Stanton had assembled. The team was highly experienced with an exceptional track record in technology sector investments. Also, Ben Ball and Neil Garfinkel had overseen deal teams that had invested over $298 million in 14 portfolio companies representing...
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...Executive Pay Strategic Issues and Problems: As a result of the current economic crises, many companies are experiencing massive financial losses. These companies are reducing salaries and cutting peoples’ jobs while executives are maintaining high compensations. Using tax payer’s money, the US Government is assisting these financially struggling companies through the Troubled Asset Relief Program (TARP). TARP was created to assist these companies to ultimately allow them to survive and prevent massive job loss. Tax payers are concerned about executives receiving a high and unjust compensation in comparison to other non-executives whom are suffering from layoffs and compensation cuts. Executive compensation is controlled by the companies’ boards that in turn work under the Chief Executives. The US Government is intervening by proposing plans to regulate the compensation of executives in these financially stressed companies. Evaluation and Analysis: Compensation of executives is not regulated or monitored effectively. Executives have the ability to use deceptive and manipulative practices to achieve higher unjust compensations. Boards justify the high compensations as rewarding performance, which is contradicting considering the financial status of these companies. People are becoming outraged as many are losing their jobs and are receiving salary reductions while executives are still making millions. The US government is imposing executive compensation regulations to...
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...After the financial crisis, the executive’s compensation was not as huge as in the video. The highest paid executive in financial industry in 2012 was Kenneth Chenault from American Express. James Gorman, which is the chief executive of Morgan Stanley, got paid $10.4 million in 2012. The JPMorgan’s chief executive-Jamie Dimon got paid by 20 million dollars for 2013 which is 74% more than 2012. However, JPMorgan narrowly escaped a criminal guilty plea and paid more than 20 billion in regulatory fines. The board seemed to think that Mr. Dimon deserves credit for handling all these regulatory matters. The board thought Mr. Dimon deserved credit for navigating the bank through a treacherous regulatory and political environment while continuing to improve the bank’s financial performance. But the board somehow choose to forget he got the company into trouble in the first place. Mr. Raymond, the chairman of compensation and management development committee of JPMorgan said that the compensation committee went through an exhaustive process to determine the right level and the board considered the likely negative reaction. When we take a look to Mr. Raymond’s old job, the 20 million is just a piece of cake. Mr. Raymond is the former long-serving chairman and chief executive of Exxon Mobil. While he was at Exxon Mobil, his compensation was often criticized as excessive, as was his retirement package, valued at nearly 400 million. Wall Street executives are still being lavishly...
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...An explanation of what relationship the Dodd-Frank and Sarbanes-Oxley Acts have to financial markets and what are the similarities or differences between these Acts. The Dodd-Frank Act was proposed by Representative Barney Frank (D-Mass.) in the House of Representatives and former Senator Chris Dodd (D-Conn.), Chairman of the Senate Banking Committee, in response to the financial and economic crisis witnessed from 2007-2010. Sarbanes-Oxley established heightened standards for the boards and management of both public companies and public accounting firms. The law was passed after the myriad scandals that rocked American securities markets, e.g., Enron, WorldCom, Tyco, and others. Sarbanes-Oxley is wide in scope, establishing numerous responsibilities on the part of corporate boards, with compliance closely monitored by the government. While employees commonly discover fraud before other monitors, many are reluctant to report it. In an effort to encourage employees to report wrongdoing, Section 301 of the Sarbanes-Oxley Act of 2002 (SOX) requires audit committees of public companies to establish a reporting channel that allows employees to confidentially and anonymously submit claims involving questionable accounting or auditing matters. Despite these internal whistle blowing programs, there is still concern over employee willingness to report wrongdoing. Recently, the Securities and Exchange Commission (SEC) adopted the Dodd-Frank Wall Street Reform...
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...Diamond Foods Financial Fraud Scandal Adrienne M Somers David F McCormick Acct 320 February 27 2012 In April 2011, Diamond Food Inc (DMND), the nation's largest walnut processor and maker of Emerald nuts announced plans to buy Pringles from Proctor and Gamble for $1.5 billion in stock (Reuters, 2012). This move was part of the company's aggressive growth strategy to become a leader of the snack food industry. Former chief executive officer, Michael Mendes, and former chief financial officer, Steven Neil, spearheaded this effort. However, plans were postponed as questions arose about two large payments that were made to walnut growers in August of 2010 and September 2011 for $20 million and $60 million respectively. An internal audit of the financial records found that these payments were improperly booked into the wrong accounting period, which artificially reduced the company's costs, and boosted earnings in that period making the company look more profitable than it actually was. It is a technique known as earnings management. Because of the probe, Michael Mendes and Steven Neil were removed from their positions as CEO and CFO (Dalai, 2012). The financial records for 2010 and 2011 were found to be unreliable meaning that would have to restate their financial results for both these years. This scandal caused Diamond Foods Inc shares to fall by 40 percent. It seriously damaged the reputation of the company and the trust of their shareholders. It also ruined any chance...
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...primary learning goal of the case is to help students understand the anatomy and motivations of earnings manipulation. Specifically, students will have the opportunity to (1) apply the FASB’s Conceptual Framework to a real-world context, (2) determine the nature of errors and compute their numerical effects on financial statements, (3) understand motivations for earnings management and actions needed for managing earnings of future years, (4) explain the anatomy of financial reporting fraud by reconstructing journal entries, (5) prepare comparative financial statements for retroactive restatements, (6) explain the rationale for clawback provisions in compensation contracts, and (7) understand the difference between the real and accrual-based earnings management. Keywords: earnings management; financial statement fraud; restatements; error correction; clawback provision; Conceptual Framework. This company was on the verge of becoming a real global consumer-product company with Pringlest. I always said if they could make it work, it could be a highflier. And it worked—until it didn’t. —RBC Analyst Edward Aaron (Businessweek, January 12, 2012) Mahendra R. Gujarathi is a Professor at Bentley University and Adjunct Professor at the Indian Institute of Management, Ahmedabad....
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...General Mills’ Acquisition of Pillsbury from Diageo PLC Lauren Sherlock Jason Park JP Zendman 12/9/2009 General Mills’ Acquisition of Pillsbury from Diageo PLC Situation Analysis: In December 2000, management at General Mills (GM) proposed a plan to acquire Pillsbury, a bakedgoods producer, in a stock-for-stock exchange. Pillsbury is currently controlled by Diageo PLC, one of the world’s leading consumer–goods companies. The deal specifies that General Mills is to create and thus issue additional shares of common stock to Diageo in exchange for complete ownership of the Pillsbury subsidiary. If the deal is executed, Diageo will become General Mills’ largest shareholder. The consideration to Diageo would include 141 million shares of the company's common stock and the assumption of $5.142 billion of Pillsbury debt, making the deal worth over $10 billion. In addition, the agreement will contain a contingency, as up to $642 million of the total transaction value may be repaid to General Mills at the first anniversary of the closing, depending on its (20-day) average stock price at that time. Therefore, we must calculate and thus analyze the various costs and savings associated with the transaction to determine whether or not General Mills’ shareholders should vote for the proposed merger. If approved, this will be the biggest takeover in GM’s 136 years of business and General Mills will become the fifth largest food company in the world (Forster, 2002). General Mills Company...
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...General Mills’ Acquisition of Pillsbury from Diageo PLC Lauren Sherlock Jason Park JP Zendman 12/9/2009 General Mills’ Acquisition of Pillsbury from Diageo PLC Situation Analysis: In December 2000, management at General Mills (GM) proposed a plan to acquire Pillsbury, a bakedgoods producer, in a stock-for-stock exchange. Pillsbury is currently controlled by Diageo PLC, one of the world’s leading consumer–goods companies. The deal specifies that General Mills is to create and thus issue additional shares of common stock to Diageo in exchange for complete ownership of the Pillsbury subsidiary. If the deal is executed, Diageo will become General Mills’ largest shareholder. The consideration to Diageo would include 141 million shares of the company's common stock and the assumption of $5.142 billion of Pillsbury debt, making the deal worth over $10 billion. In addition, the agreement will contain a contingency, as up to $642 million of the total transaction value may be repaid to General Mills at the first anniversary of the closing, depending on its (20-day) average stock price at that time. Therefore, we must calculate and thus analyze the various costs and savings associated with the transaction to determine whether or not General Mills’ shareholders should vote for the proposed merger. If approved, this will be the biggest takeover in GM’s 136 years of business and General Mills will become the fifth largest food company in the world (Forster, 2002). General Mills Company...
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...primary learning goal of the case is to help students understand the anatomy and motivations of earnings manipulation. Specifically, students will have the opportunity to (1) apply the FASB’s Conceptual Framework to a real-world context, (2) determine the nature of errors and compute their numerical effects on financial statements, (3) understand motivations for earnings management and actions needed for managing earnings of future years, (4) explain the anatomy of financial reporting fraud by reconstructing journal entries, (5) prepare comparative financial statements for retroactive restatements, (6) explain the rationale for clawback provisions in compensation contracts, and (7) understand the difference between the real and accrual-based earnings management. Keywords: earnings management; financial statement fraud; restatements; error correction; clawback provision; Conceptual Framework. This company was on the verge of becoming a real global consumer-product company with Pringlest. I always said if they could make it work, it could be a highflier. And it worked—until it didn’t. —RBC Analyst Edward Aaron (Businessweek, January 12, 2012) Mahendra R....
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...Running Header: Bear Stearns Corporate Governance Issues at Bear Stearns Article Summary: In the summer of 2008 the global financial crisis swept away trillions of dollars in net worth, wiping out people’s retirement savings, and causing the loss of millions of jobs. As the world slipped into recession, people looked for answers, and a place to rest blame. At Bear Stearns, a venerable financial firm which was brought down by mistakes made by decisions made by management, there is much blame to be shared. This paper seeks to explore the corporate governance decisions which created this crisis, and which ultimately led to the almost complete destruction of shareholder value for Bear Stearns’ investors. In good times, the shareholders at Bear Stearns were handsomely rewarded by the very decisions which would ultimately end the company’s storied 85 year history and send the global economy into the deepest and most painful recession since the great depression. The firm’s stock traded at $160 a share and several key executives held stock valued at almost $1 billion dollars, but it is clear that hubris, greed, and incredible egos and personality conflicts were the cause of the firm’s demise. In May of 2008, The Wall Street journal published a three part series written by Kate Kelly on the last days of Bear Stearns. Kelly’s articles consider all the factors which brought about the company’s demise, and provide insight into the corporate governance issues which helped seal...
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...| Cybernetics Method to Incentive compensation Management | @ TCS | | Amit Sharma ,Jasveen Singh, Rajat Bindlish,Siddharth Tiwari,Vaibhav Attree | | Group 11 | 6/12/2013 | | Contents 1 Introduction: 1 1.1 What is Sales ICM? 1 1.2 What is Cybernetics? 2 2 The Cybernetics Approach to Sales ICM 2 2.1 Cybernetics Influence Diagram (CID) 3 3 Sales ICM CID 4 4 Feedback Loop Analysis 6 4.1 Feedback Loop – Commissions Calculations 7 4.2 Feedback Loop - Clawback Calculations 8 4.3 Feedback Loop – Revenue and Cost of Sales 9 4.4 Feedback Loop – Dispute Management 11 5 Conclusion 12 * Introduction: Sales Incentive Compensation Management (ICM) Model is increasingly becoming the key decisive and motivating factor in influencing sales execution to impact the business performance. As sales models are being re-engineered to incorporate more market dynamics and adversities, sales compensation models are also becoming increasingly complex. In the global market where increasing customer reach is a major challenge, it has become essential to include dealers, partners, distributors, retailers, contractors, buying centers across various sales channels into the business’ Sales ICM model. Accurately measuring and rewarding the performance of the sales force (both internal and external to the business) has become the key to driving desired behavior in achieving the business objectives. Failure to understand Sales ICM as a key...
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...A Snapshot of AXP Management Compensation Overview: Compensation Package Philosophy and Design The idea behind American Express (AXP) executive compensation program is to reward outstanding leadership that drives results and cultivates sustainable shareholder value. Paying awards in various time horizons from short term, medium term, to long term, the company works on aligning the interest of its shareholders and senior executives. A combination of fixed but predominantly variable awards is structured to encourage annual and sustainable performances. To study its executive compensation plan, the composition of payout package can be divided in terms of base salary, annual incentive award, cash portfolio grant award, performance restricted stock award, and stock option award (see Exhibit 1). CEO’s 50% versus other executive’s 59% short-term compensation encourages focus on long-term performances. In fact, “over 84% of the total direct compensation delivered in 2013 was variable and tied to performance, including financial results, strategic initiatives, and stock performance” (AXP Proxy Statement). A detailed description of the performance measurement is shown in Exhibit 2. Analysis: Management Performances versus Management Compensation The executive management at AXP may seem to be excessively over-compensated to some outside analysts but not to the internal board. From 2013 to 2014 (see Exhibit 3), target revenue growth of 8% annually was missed by half and EPS growth was...
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...Topics that are covered to solve this case * Benefit of the acquisition * Present value of cost savings * Deal structure * Contingent payment analysis * Acquisition cost * Recommendation Benefits of the Acquisition * Accelerate sales and earnings growth by acquiring Pillsbury > Product Innovation > International Expansion > Channel Expansion > Productivity Gains * Combined product portfolio would be more balanced * Combined firm would rank 5th in size among competitors based on food sales * Cost savings Present Value of Cost Savings * Weighted Average Cost of Capital (WACC) for General Mills > Cost of Equity = 9.6% > Cost of Debt = 9.5% > Tax Rate = 40% > After Tax Cost of Debt = 5.7% > Weight of Debt (D/V) = 10.8% > Weight of Equity (E/V) = 89.2% > WACC = 9.2% * Expected Cost Savings > 2001 = $25m, PV = $23m > 2002 = $220m, PV = $185m >2003 = $400m, PV = $307m >Total PV = $515 Deal Structure * Payment shares * Assumption of Pillsbury's debt > Existing debt = $142m > New borrowing = $5billion * Contingent payment by Diageo to General Mills Contingent Payment Analysis * What is it? > "Claw-back" or "Contingent Value Right" >>Claw-back is previously given monies or benefits that are taken...
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