...Regulation of Executive Compensation and its impact on the stability of the financial system | | Introduction In corporate circles, the financial crisis and its effect on companies is sometimes illustrated as a systematic phenomenon in which there is no individual responsibility. Public discussion, on the contrary often assigns the blame of the crisis to bankers or managers, and suggests conclusions of salary reductions or individual liability in terms of losses. In this paper the implications of executive compensation surrounding the financial crisis will be debated. Firstly, the types of executive compensation will be discussed and the implications of them. Secondly, how executive compensation contributed to the financial crisis will be conferred and thirdly the legal improvements and current process will be analysed. To aid understanding, articles and examples will be used to emphasise the various views of economists regarding executive compensation. Non-Regulation of Executive Compensation Executive Compensation can be described as the monetary bonus, or the non-monetary benefits which an executive receives for their work in an organisation. Executive Compensation can be a highly motivating incentive to work more efficiently, thus benefiting the organisation and keeping the executive content with his contribution and performance. However, this compensation can have adverse effects where the executive does not have the organisations best interest in mind, but...
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... These series of articles were published by Alexander Hamilton, James Madison, and John Jay between October 1787 and May 1788. The overall intention of the Federalist Papers was to explain the advantages of the proposed Constitution over the prevailing Articles of Confederation. The Federalist Papers impacted the ratification of the Constitution by making some of their most important objections, including the significance of having a Constitution, acknowledging to the disagreements made by the Antifederalists, and defending conflicting arguments made against the attributes of the executive and judicial branch as specified in the proposed Constitution. Before the ratification of the Constitution, the central government under the Articles of Confederations was very weak and in jeopardy of falling apart. Alexander Hamilton, James Madison, and John Jay, who were Federalists believed as well that the Articles of Confederation was too weak to maintain a powerful central government and needed to be restored by the U.S Constitution. The fundamental goal of the U.S constitution was to secure the rights of the U.S citizens and for the federal government to strive for the common good of the individuals. The Federalist Papers illustrates how the federal government is divided into three distinct, separate branches and each branch of government has the authority to govern or control the power of the other branches. The idea, which came to be called Federalism, granted the best protection for the ...
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...Too Big to Fail The financial collapse of 2008 was something all of us felt in one way or another. At the time, this author’s employer kept itself intellectually honest by acknowledging the fact that it may have turbulent waters ahead due to the credit crisis. Much of this author’s employer’s day-to-day operations was funded by credit – or, borrowing money. When credit was frozen, there was serious concern that operations of this author’s firm could halt. Worse, the organization confirmed a resonant fear that its next payroll could be in jeopardy. If that were to happen, a multi-billion dollar company could be brought to its knees in a matter of days. The book Too Big to Fail highlights the seriousness of this epidemic when it speaks of General Electric, the world’s largest company, and its concerns about the credit freeze. This report will highlight numerous points in the financial crisis of 2008. This author will attempt to educate the reader with a firm and academic understanding of business ethics. It will attempt to highlight the turning points in the economic crisis and bifurcate back to the ethicality issue. A brief history of the stock market and Securities and Exchange Commission will be offered. This author will then identify the various ways the crisis could affect a business in the private enterprise. Lessons of the crisis will be presented along with managerial recommendations. Business Ethics Enron, Arthur Andersen, WorldCom, Adelphia, Martha Stewart…these are...
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...Investment Analysis UNDERSTANDING THE BAILOUT Understanding the bailout The turmoil in the mortgage and financial markets, but also fears of recession, have pushed the government to act in order to prevent further worsening of the crisis. As the situation was getting worse month by month, government bailing out one financial firm after another (Bear Stearns in March, AIG in September), and letting fail some (Lehman Bros), a more global approach to address the problem was needed. The bailout proposal, initiated by the Secretary of the Treasury, Henry Paulson, a former executive of Goldman Sachs, was intended to create an entity whereas the government was going to buy those mortgage backed securities from the banks in order to provide liquidity to the banks and clear their balance sheets of these unmarketable assets. Although nobody understands exactly what the plan is and how it will help the economy, since it has changed since the legislation was passed by the U.S. Congress (angering investors in the meantime), there is a consensus that the government will have to step in to clear up the mess on “wall street” and on “Main Street”. In order to understand why there is a need for a bailout, I will retrace the roots of the crisis up to the point where the government decided to intervene. Also, I will address the issue of how the measures undertaken will impact on the banks, the credit markets, mortgage markets and the overall economy. Finally, I will...
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...Confirming Pages 3 Walmart, the world’s largest retailer, has gone green. Since 2005 it has worked to plan and execute a sustainability strategy that includes using renewable energy sources, reducing its waste, and selling sustainable products. A packaging scorecard helps Walmart’s 60,000 suppliers learn about Walmart’s expectations and guides the firm in making its purchasing decisions. The company has built energy-efficient stores and retrofitted others, and it offers reusable shopping bags made of recycled materials. Although Walmart doesn’t disclose financial details on the green initiative, it says the program is already saving money and resources, and it projects billions in savings over time.1 Ethics and Corporate Responsibility Hear the True Story of how today’s managers do the right thing. Listen to what Derrick and Elaine have to say. “Ethics are crucial in the property management business. We are obligated to abide by fair housing laws in our dayto-day operations. Not only do we have an obligation as a company but also a social obligation to make sure our vendors and contractors are aware of these practices.” “The very nature and mission of my project is that of social responsibility. We are trying to do our part to help out developing countries in a way that an agricultural library is best equipped to do. Good workplace ethics translates into a better product for our subscribers. The better I and my employees perform, the better...
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...Confirming Pages 3 Walmart, the world’s largest retailer, has gone green. Since 2005 it has worked to plan and execute a sustainability strategy that includes using renewable energy sources, reducing its waste, and selling sustainable products. A packaging scorecard helps Walmart’s 60,000 suppliers learn about Walmart’s expectations and guides the firm in making its purchasing decisions. The company has built energy-efficient stores and retrofitted others, and it offers reusable shopping bags made of recycled materials. Although Walmart doesn’t disclose financial details on the green initiative, it says the program is already saving money and resources, and it projects billions in savings over time.1 Ethics and Corporate Responsibility Hear the True Story of how today’s managers do the right thing. Listen to what Derrick and Elaine have to say. “Ethics are crucial in the property management business. We are obligated to abide by fair housing laws in our dayto-day operations. Not only do we have an obligation as a company but also a social obligation to make sure our vendors and contractors are aware of these practices.” “The very nature and mission of my project is that of social responsibility. We are trying to do our part to help out developing countries in a way that an agricultural library is best equipped to do. Good workplace ethics translates into a better product for our subscribers. The better I and my employees perform, the better...
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...of Corporate Governance (iv) The Pakistani Corporation (v) The Origins of Corporate Governance in Pakistan THE NEED FOR CORPORATE GOVERNANCE THE STAKEHOLDERS (i) General (ii) Shareholders (iii) Directors (iv) Employees (v) Creditors PROMOTING REFORM AND SHAREHOLDER ACTIVISM ROLE AND RESPONSIBILITIES OF DIRECTORS AND MANAGERS (i) Directors and Managers Distinguished (ii) Appointment and Proceedings of Directors (iii) Fiduciary Duties (iv) Powers and Responsibilities of Directors (v) Liability of Directors (vi) Executive and the Non-executive Directors (vii) The CEO 1 3 3 4 7 8 10 12 17 17 19 20 20 21 22 26 26 26 32 38 42 42 45 III. IV. V. VI. (viii) (ix) (x) (xi) The Company Secretary The CFO Internal Control System Reporting Requirements 47 49 49 50 VII. SCRUTINIZING FINANCIAL STATEMENTS - WHAT EVERY DIRECTOR SHOULD KNOW (i) General (ii) Liability of Directors (iii) Preparation of Financial Statements (iv) Tools for Directors' Review (v) How to Prevent Misleading and Fraudulent Financial Statements (vi) External Auditors (vii) Role of the Audit Committee (viii) Role of Internal Audit CONCLUSION 54 54 54 55 60 61 65 75 79 81 VIII. APPENDIX A DIFFERENCES BETWEEN DIRECTORS AND MANAGERS 82 MANUAL OF CORPORATE GOVERNANCE CORPORATE GOVERNANCE IN PAKISTAN I. 1.1 INTRODUCTION In March 2002, the Securities and Exchange Commission of Pakistan (the...
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...political controversy. The main concerns have centred on the apparent lack of effective control of directors of public listed companies which have manifested themselves in perceived excessive remuneration packages and mismanagement leading to a number of high-profile corporate collapses. Public listed companies employ thousands of employees and are the recipients of billions of pounds in investment by individuals and institutional investors such as pension funds. It follows that all governments, in the UK, in Europe and throughout the world, consider it crucial that public confidence in such companies is maintained. The attempts to effectively control the remuneration of directors and the activities of directors in their management of public companies so as to avoid high profile scandals are known as corporate governance. It should be noted that corporate governance is not static, but rather develops to meet the urgent issues of the day. Thus, for example, the effect of corporate activities upon the environment now falls to be included within the ambit of corporate governance. What is Corporate Governance? The term “corporate governance” is not defined by legislation neither has it been defined by the courts. As Farrar notes in his text book on company law “corporate governance is a term which has been much in vogue in the last 10 years. It suffers, nevertheless, from a lack of precision.” The Cadbury Committee defined corporate governance in its Report on the...
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...The Role of Corporate Law in Preventing a Financial Crisis: Reflections on In re Citigroup Inc. Shareholder Derivative Litigation Franklin A. Gevurtz* TABLE OF CONTENTS I. INTRODUCTION .................................................................................................. II. CITIGROUP AS A CASE STUDY IN EXCESSIVE RISK-TAKING .............................. III. TOOLS FOR CURBING EXCESSIVE RISK-TAKING AND THE ROLE OF CORPORATE LAW ............................................................................................... A. The Tools for Curbing Excessive Risk-taking ............................................. 1. Regulation of Business Activities .......................................................... 2. Capital Requirements ........................................................................... 3. Compensation Rules ............................................................................. 4. Liability for Unreasonable Risks .......................................................... 5. Selection of Management (Rules of Corporate Governance) ............... B. Dividing the Tools Between Banking and Corporate Law .......................... IV. WHY IT MATTERS: CITIGROUP AS AN ILLUSTRATION OF THE LIMITATIONS OF STATE CORPORATE LAW ........................................................ A. Citigroup As a Case Study In Weak Corporate Law................................... 1. Overview ..................................................
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...09-093 July 22, 2009 The Global Financial Crisis of 2008 – 2009: The Role of Greed, Fear and Oligarchs Cate Reavis Free enterprise is always the right answer. The problem with it is that it ignores the human element. It does not take into account the complexities of human behavior. 1 —Andrew Lo, Professor of Finance, MIT Sloan School of Management The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. 2 —Simon Johnson, Professor of Entrepreneurship, MIT Sloan School of Management, Former Chief Economist, IMF On October 9, 2007 the Dow Jones Industrial Average set a record by closing at 14,047. One year later, the Dow was just above 8,000, after dropping 21% in the first nine days of October 2008. Major stock markets in other countries had plunged alongside the Dow. Credit markets were nearing paralysis. Companies began to lay off workers in droves and were forced to put off capital investments. Individual consumers were being denied loans for mortgages and college tuitions. After the nine day U.S. stock market plunge, the head of the International Monetary Fund had some sobering words: “Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.” 3 1 2 3 Interview with the case writer...
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...operating system and the Microsoft Office suite of productivity software. They cover Operation System (Vista and Windows 7), Server and Tools Division (Windows server 2008, VB and SQL), Online Services Business division (MSN and the search engine Bing), Microsoft Business Division (Microsoft Office), and Entertainment Devices Division (smart phones, XBOX and MSN TV). Microsoft mission is to enable people and businesses throughout the world to realize their full potential. It develops software, hardware, service and solution to achieve this goal since it established at 1975 by Bill Gates and Paul Allen in Albuquerque. In 1980, Microsoft formed a partnership with IBM that allowed them to bundle Microsoft’s operating system with IBM computers, paying Microsoft a royalty for every sale. With a real big range of service IT service, we can say the client of Microsoft is unlimited, from OEM, business, and individuals. And the competition is all over from every division, such as Apple in PC Market and Google in Online Service Market. [pic] Yahoo! Was started at Stanford University in January 1994 by Jerry Yang and David Filo. Both of them were Electrical Engineering graduate students when they created a website named “Jerry and David’s Guide to the World Wide Web”. The Guide was a directory of other websites, organized in a hierarchy, to a searchable index of pages. In April 1994, Jerry and David’s Guide to the World Wide Web was then renamed to “Yahoo!”. Unlike Microsoft...
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...Shareholders Watchdog, Inc. 777 Wall Street New York, NY 10005 December 7, 2011 RE: Is CEO Compensation Fair? Dear employee, Accompanying this letter is our completed report that discusses the issue of the fairness of current CEO compensation. Although there are two sides of this argument, recent legislation and regulations for reform tend to support those who believe it is unfair. We have evaluated the current standards of CEO compensation and examined why both sides think they should prevail. There are some advantages that strongly support CEO’s huge salaries, including the following: * Provides incentives and motivates the CEO to obtain or surpass corporate objectives * Retains key-value leaders for the long-term, resulting in consistent corporate success * Creates a strong CEO confidence for him/her to reinvest in the corporation (bonds) Our overall research indicates that CEO compensation does not reflect actual performance in most cases. Many CEO’s are grossly over compensated (including stock options, bonuses, hedge funds, and other benefits). The “Golden Parachute” guarantee adds insult to injury. Based on our research, conducted from the UNLV Library periodicals database and online sources, we recommend the following: * Require corporations to adhere to sections 951, 953, 955 and 956 of the Dodd-Frank Bill * Maintain a collective (“Esprit de corps”) work force environment for all employees * Consult third party professional...
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...Money & Business Reading Financial Reports • Navigate through the sections of an annual report published by Barnes & Noble Spot the next Enron a mile away. Even the most experienced investor can get lost in the jungle of a company’s financial statements. But basic knowledge of the balance sheet, cash flow statement, and income statement go a long way. With just a little effort, you can: • Calculate basic ratios to measure profitability, liquidity, and solvency • Make better, more informed investment decisions Financial Report Basics Financial reports, or financial statements, are documents that summarize a company’s financial performance. All publicly traded U.S. companies that have more than 500 investors and $10 million in net assets, or that are listed on a major national stock exchange such as the New York Stock Exchange (NYSE) or the NASDAQ, are required by law to issue financial statements on both a quarterly and annual basis. This regulation is enforced by the Securities and Exchange Commission (SEC), the U.S. government agency that regulates the investment industry. Financial reports are meant to create transparency and accountability by making companies’ financial results vis ible to investors and the market as a whole. The reports are standardized, meaning that the annual and quarterly reports from various companies contain comparable (though not necessarily the same) financial information. • Balance sheet: A snapshot of the company’s financial...
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...development, including education, in South Asian countries. Human resource development is one of five areas of cooperation agreed on by the member countries. In terms of population, the SAARC region covers nearly 1,500 million people, one of the largest such regional organizations. SAARC countries share certain common social and economic problems, including those related comparison between wage rate and living-standards of workers. Raising wages: an urgent imperative A wage that's enough to meet basic needs and to provide some discretionary income - what's not to like? In the past decade, retailers and brands have made some progress in getting their suppliers to pay their workers their statutory entitlements - in other words, the prevailing minimum wage plus any pension contributions, sickness or holiday pay they are entitled to. But in many countries, government-set minimum wages fall far short of what many estimate to be a living wage. The reality is that the vast majority of the people in emerging economies making the products we consume struggle to survive on wages that are barely enough to cover their daily subsistence needs. Consequently, living wage continues to be a...
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...Economist readings 1. It pays to give Allowing consumers to set their own prices can be good for business; even better if the firms give some of it to charity http://www.economist.com/whichmba/it-pays-to-give?fsrc=nlw|mgt|01-12-2011|management_thinking [pic]IN OCTOBER 2007 Radiohead, a British rock group, released its first album in four years, “In Rainbows”, as a direct digital download. The move drew a fair bit of attention (including from this newspaper) not only because it represented a technological thumb in the eye to the traditional music industry, but also because the band allowed listeners to pay whatever they wished for it. Some 60% of those who seized the opportunity paid nothing at all, but the band seemed pleased with the result; one estimate had it earning nearly $3m from the experiment. One group outside the music industry taking an interest was a trio of professors then at the Rady School of Management at the University of California, San Diego: Ayelet Gneezy, Uri Gneezy and Leif Nelson (who is now at the Haas School of Business at the University of California, Berkeley). Inspired, they designed a series of experiments to gauge whether pay-what-you-want pricing would work for other businesses. Their most recent experiment, co-authored with Amber Brown of Disney Research and published in Science, also stirred in a new element: would it make any difference if firms donated some of the pay-what-you-want fee to charity? The authors set up their pricing experiment...
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