Environment

• Characteristics of a Commons:– Free– Finite– Costs go to community, Benefits to Individual

• Carrying Capacity: The ability of a system to sustain a certain usage without degradation.

• Threshold Level: The level at which a carrying capacity is first exceeded.

Cost-Benefit Analysis

• Advantages:– Forces methodical consideration of each impact

a policy will have on social welfare.– Injects rational calculation into emotional

arguments– Helps regulators find the most efficient cost of

regulation

Cost Benefit Analysis: Criticisms

• Fixing precise values of costs and benefits is difficult and controversial

• They risk compromising ecosystems deserving absolute, not conditional protection

• The costs and benefits may fall to separate parties

Control Options

• Command and Control Regulation

• Market Incentive Regulaton– Environmental Taxes– Emissions Trading (Cap and Trade)– Information Disclosure

• Voluntary Regulation

The Corporate Charter• The corporate charter is a document issued by a

government that brings a corporation into being and defines its scope of authority.

• All states have general incorporation laws and compete with one another to attract the tax revenues of large corporations.

• Corporate charters specify the rights and responsibilities of:– Stockholders– Directors– Officers

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Flow of Authority in Corporate Governance

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CompensationHow Much Are CEOs Paid?

• Accurately calculating the exact pay and benefits of a chief executive is difficult.

• Nearly all corporations have compensation committees that set the pay and benefits of top executives.

• Perceptions of excessively generous pay and benefits for CEOs inspire widespread popular outrage.

• Average pay of CEOs in 2003 was $7.8 million.– Steven P. Jobs, Apple Computer, $74.8 million– George David, United Technologies, $70.5 million– Henry R. Silverman, Cendant, $54.4 million

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Criticisms of CEO Compensation

• Critics deplore the size of “farewell” gifts to some CEOs fired for poor performance (Golden Parachutes)

• Boards have been lavish in retirement packages.

• Critics charge that in too many compensation committees, the members are CEOs of other corporations, cronies of the CEO, or consultants who have profited from the company.

• The basic complaint is that there is no correlation between executive pay and performance.

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In Defense of CEOs• Executives defend high pay on several grounds.

– Stock options have become a larger part of their compensation in recent years.

• Issue: size not form of compensation

– Many large compensation packages were justified by the gains of stockholders during their tenure.

• Market gains are often not the result of CEO actions

– Boards of directors point out that if they do not pay their CEOs what executives in comparable companies get, they stand to lose them.

• Not supported by data

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To Whom Are Directors Accountable?

• The laws are clear that directors are accountable to stockholders.

• In response to unfriendly takeovers in the 1980s, 25 states enacted laws that broaden the legal authority of boards to consider in their deliberations stakeholders other than shareholders.

• This legal position focuses the accountability of directors on the overriding role of the corporation in society.

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The Composition and Size of Boards

• In 2004 the average corporate board had 11 members.– Typically 8 outside members and 2 inside members.– The number varies by industry.– 82% have at least one woman.– 76% have one or more ethnic minority directors.– 15% have noncitizens.

• Boards are divided into committees.

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Shareholder Options

• Sell Your Shares -- Wall Street Rule

• Vote – Proxy fights– Shareholder resolutions

• Sue -- Take management/directors to court

Forces for Change in Corporate Governance

• Shareholder Activism– Institutional Investors (Pension Funds)

• Takeovers

• Changes in the Board of Directors– Composition (Inside/Outside)– Board Committees– Federal Chartering